Is being called into question. They say they cant keep up with the s p 500. Investors in this market may need to think outside of the box, invest in areas like private markets, maybe even areas like cryptocurrencies. Joe this is a huge question right now even prior to this crisis, we probably had a million discussions about what is the future of the 6040 portfolio. Treasury yields are so paltry. Limit. S sort of a hard if 0 yield is through a radically the farthest it can go. That being said, they do phenomenally well i cant think of any other portfolio where you are like, is this the end . It is doing phenomenally well up until now. The question is, can it go further . Romaine i guess the big debate here, when the 6040 portfolio was conceived, you have this sense that bonds and stocks were representative of the free market. Look, the question then becomes what is the alternative. Cryptocurrency, gold. What do you replace bonds with . Or do you wait for stocks to revert to the mean . At the end of the day, the 6040 portfolio continues to outperform. Once you start going into that alternative space, while that can generate some potential returns, it also creates a heightened level of risk. Thatresult, you can see divergence sometimes can work against you right here. Is,line also, the question can you get diversification inside that 40 . Looking in the small caps versus of the large caps, that will hurt you big time in the past couple of months. Increase,t to see an a sign of economic progress. Today, whether it comes from the u. S. , europe, china. It kind of weird that we are talking so much, everyone is talking about death of 6040, when it is doing so phenomenally well. It is strange. There is a great breakdown this week in the magazine. You have to think about why the 6040 portfolio has done so well. So just 8 this year, one percentage point or so less the s e snp less than p. If you were to look at march, we fallsaw a 6040 portfolio about 20 . However, you look at the performance,the this year you have stocks up and bonds up. Long bond etf up about 20 . The nasdaq up cap 40 . The reason that we do have solid returns this year is because, one, yes it works. But also because you have stocks and bonds rising. You have highly valued stocks and bonds at the same time. Then what happens if that flips and all of a sudden you have stocks and bonds falling together . Romaine that is a hypothetical. There is not really historical precedent that we can rely on. We always talk about the idea of fear of missing out. But you could point to ponder Portfolio Managers and say that the same issue lies there. Absolutely. You look at real yields, continuing to see them trend lower this year at 1 . Now 1. 1 . That means not just stock investors but Bond Investors are continually pushed out on the risk spectrum to find more yields. I will say, we constantly hear about this concern about stocks and bonds falling together. Could tipar what they the scales for the markets, we do hear about rising interest rates. That would be a scenario in which stocks and bonds are than falling together. Caroline the diversification you are hearing at the moment. The etf spectrum continues to diversify, get into the areas less trodden. That sort of access is coming with more risk. Are you seeing people take on these new products . It was just earlier this year that Janus Henderson filed with plans to launch a high quality have beenxample there more real estate etfs coming to market. It does seem that we have not investorsny lehmans investing in these types of products. They were little more esoteric. There is a growing set of alternative investment, even for alternative investors. With allproblem even these other things, sort of like private credit, more complicated financial instruments, maybe they give a little more yield than a treasury. Maybe they are a little bit less diversified. If it is the middle of march 2020 and you are scared to death , that is not really what you want to be holding. You are really sacrificing the safe haven that comes through. Sure, you get a higher yield, but you are not getting it for nothing. You getting it because you are taking on more risk. At exactly the time that a 6040 portfolio is to shine is in times of risk. Havef all of a sudden you , the areask profile of your portfolio that is supposed to provide that safe haven is not necessarily giving you exactly what you need. Romaine always great reporting from our very own sarah ponczek. Coming up, we will continue this conversation. It does not have to be 6040. It could be 3030 or something else. Joe 30 tesla allocation. Romaine this is bloomberg. Classic 6040 portfolio. , has been, 40 bonds a winner for a long time. With yields as low as they are, there is concern that there will be a floor under those yields. That is a lot of folks looking for other areas to may be taking that 40 . Gold andtegists say others point to crypto. Joe when i think about what do i want to hold instead of the safest asset class in the entire world, u. S. Treasuries, i think cryptocurrencies sounds like a good substitute. Seriously, there is this hunt for alternative assets. This year, bitcoin specifically fifth it really rising is interesting to see evidence that perhaps bitcoin is starting to take on a greater role in institutional diversified folios. Caroline we are seeing this continued promising of very low borrowing costs. This sort offor preservation, this inflation edge. Starting to hear the drumbeat of more and more institutional players. Other players nibbling at the edges. N will they take a fight take a bigger bite . , thank you so much for joining us. For years, somebody people are like, the institutional money is coming any day now. Is it here . As it arrived . Great to be on the program. Fan of whatd you miss . I think to answer your question, for years, we have been hearing about institutional adoption, institutional money. Particularly amongst the locals, there has been a big misunderstanding of what that means. Be oneill not be not big event. I think instead what has really been happening is that there has been a slow, steady, and consistent increase. We have seen that, a little more like this summer. Thislittle bit more public summer. Caroline microstrategy starting to get in on the Playing Field as well. Thatare also hearing is there starts to be people who want to make a quick buck or two. Coming intoncies the Playing Field. Teddy there certainly is concerned about scams and people need to be careful with that. Institutions dipping nato and the water, we dipping a toe anthe water, we suggest index approach. Arbitrage funds that can go anywhere and do anything, those have been one of the largest growing categories particularly since the pandemic broke out. There are other institutions , themarketmaking firms big marketmaking firms that are the most active in traditional markets. Equities, fixed income, commodities. Jane street, susquehanna. Those guys have been very involved in the cryptocurrency markets for a number of years now. Romaine when you talk about sort of the classic 6040 portfolio, the correlations or at least anticorrelation between stocks and bonds. Something like crypto, is there a reliable way to create correlations with crypto and other more traditional assets like equities, commodities . Reliable ithe word we did some interesting work on adding bitcoin to a 6040 portfolio under as many different regimes as we contested under. The reason i laugh at reliable is the earliest was Something Like 2014. Such lower correlation over that longerterm horizon. Over every period that we measure, adding a very small amount of bitcoin had positive impacts on an otherwise balanced portfolio. That is even at the time that bitcoin had its massive drawdown. We see that as a compelling argument. , do think that you are right and joes initial point, that the correlation at least recently has increased particularly when it comes to gold. Joe in march, when the entire world was falling apart and Asset Classes were plunging, we saw cryptocurrencies collapse. Then they repented with other risk assets. We have started to see this fairly tight with gold specifically. , as you say, there will not be an event where the institutions come in. It is sort of a moderate process. But i wonder if the emergence of some of these players, that might have a futures position, that might have a bitcoin position, are contributing to this. Contributing to this tighter and tighter correlation between going and other s between bitcoin and other assets. Teddy they absolutely are. Clearoming out, it is not what will win the day longerterm. Isike to joke that bitcoin like the myth of the blind people touching the elephant, where everyone who touches it thinks that the elephant is something else. You have a lot of players. The macro theme is dominating now with large players coming in to treat it like a digital gold. How right of research is fond of saying, when you prepare it to gold, you just cannot add enough gold to a portfolio to get the same kind of portfolio impact. That is no question what is happening on the macro backdrop. I think you will have others participating in this market over time that will impact its longterm trajectory. You have people coming here to send transactions over the internet, particularly with all of the social unrest. You have a a lot of hard money people, almost a religious group of people. Whom it have people for is a straight up risk assets. Youre going to put a little more into this high volatility asset. It is not clear what relationship will hold out. But it has definitely been trading like a digital gold over the past few months. ,bitwise assetaro management chief operating officer, thank you. Coming up, how the runaway stock it is affecting diversified portfolios. This is bloomberg. Caroline today, we are examining the traditional 6040 portfolio and if its better days are behind it. The s p 500 as outpaced most other investments. The more they diversify their portfolio, the more they lag the main benchmark. P haslly in the s and been pulled by the faang names. At record highs. But it has got to be a little stressful knowing that unless you own zoom, apple, tesla. Look at the yeartodate performance on some of these. Apple, that is the laggard. It has to be stressful being an investor and saying if you are not super heavy into a handful of stocks, you could be doing phenomenally well this year and still be down. Romaine it kind of raises the issue, how you structure a portfolio, whether you are an individual investor or portfolio manager. When you have such concentration. There is a disincentive i guess to diversify. At the same time, you have to put some sort of safety, some sort of hedge into those portfolios. Zoom, 40 esla and apple. More on thisth runaway market, Bloomberg Opinion columnist, the founder of unison advisors. How stressful is it for the diversified investors to know that they are lagging this market badly unless they are committed to a few names . I think it is very stressful for a lot of investors. Investors in theory, when you talk to them about a diversified portfolio, they say, i understand, i want to protect my money, i want to grow it but also protected. I think all of that goes out the window in periods where the s p 500 index is surging like now. Over the last five years or so, even the last 10 years depending on what you look at, the s p 500 index has killed Everything Else inside. That means if you have a diversified portfolio, you lag the s p badly. Romaine going forward, a lot of concern was the idea that inflation would show up and rear its ugly head. That means that a lot of folks need to start finding diversification of some sort. That inflation would really be a killer to some of those more balanced portfolios . Problems inwo thinking about inflation. There is no reliable gauge for when inflation will show up. There is a lot of fiscal stimulus. A lot of people thought inflation would surge. Now we have more stimulus on both ends. For other reasons, supply chains have been hampered by the pandemic and all that. Lets assume that we knew it was going to come. The question becomes, what will you do about it . Become al, stocks decent inflation hedge. The 1970 stocks did ok but they were not a great inflation hedge. If you buy bonds with yield on the floor, already negative real yield. What do you do . It is not clear. My answer would be you have stocks and shortterm bonds. Bonds,a is shortterm hopefully inflation goes up, the short end of the curve goes up, and you are investing in that yield. Caroline everyone has been hurting, even those deemed the darlings of the market, the smartest people in the room. Endowmentsat the have not been working. Is this forcing others to launch different types of funds . To 6040 . Ing an end there is a little bit of evidence that managers are starting to get itchy. There were reports that Hedge Fund Managers are net long as much as they have ever been. Also some model portfolios coming out now that are pushing 7080. 40 closer to to compensate for lower bond yields, possibly keep the market. In general, so far, Money Managers are sticking to their guns. We could be in the early stages of this. In 1998, a lot of people were yelling that markets were overvalued and that no one could keep up with the s p 500. From december of 1998 to march of 2001, the nasdaq doubled and the s p 500 took off along with it. Then the question becomes, what do managers do about it . Caroline over in china, i think it is even more focused on only three stocks if you want to outperform the market overall. Six or seven here in the u. S. Thank you for joining us. Voluptuous hair, we love it. Technology is next. Romaine this is bloomberg. Welcome to bloomberg technology. U. S. Stocks hitting new records with tech shares leading the way. Apple again driving markets higher. Apple and google unveiling an update to their covid tracking partnership. Iphones will have the ability to contact tracer without an app today. Android phones will be ready
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