Ep. 52: Wasif Latif | Co-Founder & CIO of Sarmaya Partners

Wasif: I will say one last parting thought. I've told you this before. If there's an award for the best name of a company, you guys should get it.

Evan: We appreciate it.

Wasif: Because, you know, having lived in Texas for 15 years, I love the place. And when I first heard the name, I was like, this is perfect. Y'all Street. I mean, you can't beat that. It's just a phenomenal name.

Evan: We're very pro-Texas.

Intro: Welcome to Y'all Street. Today I speak with Wasif Latif, president and co-founder of Sarmaya Partners. He's the machine of the day. The machine that smashes. 100% legit. So, Chris, you want a cup of coffee? I just want to be the best. Thank you, sir.

Evan: Wasif, you want a cup of coffee?

Wasif: I sure do.

Evan: All right, I got you this Is It Monday coffee mug.

Wasif: Perfect.

Evan: Because us traders love some Mondays.

Wasif: Yeah. And I love the candlestick chart on there.

Evan: That's fantastic.

Wasif: Yeah. Between a lot of green and red. That's great.

Evan: Exactly. So you have been in the financial space for pretty much your whole career?

Wasif: Yep.

Evan: So where did you start? What got you interested in markets and finance when you were young? Kind of tell me about your early life.

Wasif: So I've been in this business for almost 30 years now. I've been told that I don't look that age.

Evan: You don't. No, you don't.

Wasif: But I've been doing this for a long time. And I remember, so I'm an X-er. And I remember in the 1980s, growing up, watching *Trading Places*, watching *Wall Street*. And that just made me intrigued and interested. Like, this is fascinating stuff. Obviously, the reality is it's not as exciting as the movies are, but it still is a very, very fascinating business. So I've been doing this for almost 30 years. Started out of grad school, worked at Deutsche Bank right here in New York City. Worked there for many years, did bottom-up equity security selection, managed portfolios, did asset allocation, top-down stuff, did a lot of manager due diligence. And then I got recruited from there to go to Texas, to San Antonio.

Evan: Greatest place in the world.

Wasif: Yeah, it absolutely is. I loved it there. My family, I have two boys, my wife and I, and our two boys, we moved there when they were little babies. So they're New Yorkers who were born in New York, but they grew up as Texans in San Antonio. So I was in San Antonio for about 15 years. I worked 13 of those years at USAA, managing their equity mutual funds and their multi-asset mutual funds. And while I was there, I also built up their ETF platform as well.

Evan: Awesome. So tell people a little bit when you say managing their equity funds, that means you're a portfolio manager, which is doing what specifically? Kind of paint the picture a little bit.

Wasif: Now, that's a really good question because in our business, when people say they're in the investment space, it can mean a lot of things.

Evan: A thousand different things.

Wasif: Yeah. So you talk to people who are really smart, really good, but they've never managed any money. They're really good strategists. They know what they're talking about. They understand the space, but they never really manage money. I've had skin in the game from a professional standpoint, whereas I've been managing actual portfolios with stocks in the early days. And then when I say multi-asset and asset allocation, it was full-blown portfolios, individual portfolios, and then mutual funds and ETFs that were multi-asset class portfolios that had both stocks and bonds and alternatives, things like commodities and things like real estate, liquid portfolios as well. And then in some cases, hedge funds in certain portfolios and whatnot. So pretty much runs the gamut of you name it. I've had ways of either analyzing it or buying it or selling it or trading it. There was a period when I was at Deutsche Bank, I also did a lot of currency trading, currency forward trading, not for profit necessarily, but more for hedging purposes of our equity and primarily fixed income portfolios. So we had fixed income books for clients who were non-US residents and they had different currencies and you needed to hedge them. So I did a lot of currency forward trading for primarily hedging purposes, as I said. And then at USAA, one of the products we launched was a global hedged equity portfolio where it was global equity, but then it was hedged by options and collars and stuff. So I had experience in a lot of different things managing a lot of those types of portfolios.

Evan: I mean, that touches pretty much everything, at least in the major public markets, at least. Who were the clients for USAA? Was it USAA policy holders? Was it endowments? Who were the clients that you were managing those portfolios for?

Wasif: All of the above. So I was part of the investment management company where we managed the mutual funds and those were for anybody who owned the mutual funds and then eventually ETFs as well that we launched them. And our team also managed the company money as well. So I wasn't specifically part of the fixed income team. They sat in the same area. We worked very closely together, especially because I was managing multi-asset portfolios. So I needed to interact with them and talk to them all the time. The world class team, they manage the bulk of the insurance pool because insurance pool assets are generally fixed income. But my team and I, we manage the equity part of the insurance pool. So earlier I mentioned the different asset classes in terms of portfolio types and client types. I've managed individual accounts for high net worth individuals. I've managed mutual funds for a large pool of investors, which runs the gamut of sophistication. And then I run money for insurance portfolios as well. So the institutional side as well.

Evan: Okay. And so on USAA, you're talking to these multi-asset portfolios. That's a whole portfolio. So people would typically think about like a 60-40 portfolio, which would be 60% equities or stocks and companies, 40% fixed income or bonds that are paying a fixed coupon to hedge out the equities. Were you doing more than a 60-40, including alternatives and commodities and even possibly currencies a long time ago when 60-40 was still popular? Or how long have you done further or more than just the 60-40 portfolio?

Wasif: Sure. So the 60-40 experience for me started when I was at Deutsche Bank in New York. I worked in the asset management and the private banking division. And in the private banking division, we had the 60-40 strategies, which ran the entire models from the spectrum of risk. So the fixed income only with a little bit of equities, so call it the 80-20. And then all the way to the 100% equity and no fixed income and everything in between. And those are pretty common across the industry where major teams or major companies will have these risk models or risk portfolios. And 60-40 generally sits in the middle, even though 50-50 you would say is the one that is mathematically in the middle. What ends up happening is the 60-40, because it has a higher tilt towards equity and historically we know equities have had a higher return than fixed income in general. So people generally tend to tilt a little bit more towards the risk side and that's why 60-40 has become such a behemoth in the industry. So I managed those at Deutsche Bank and then at USAA. I did the same thing primarily in the shape of mutual funds. And we had the whole spectrum of mutual funds as well, managing those type of portfolios. And then lastly to your question, within those portfolios we had stocks, individual stocks. We had ETFs to represent some of the smaller asset classes like emerging market exposure or real estate exposure. We had alternatives in there. We had commodity exposure. And those are generally through other vehicles like an ETF because it made it easier to own a broad basket of securities through a single vehicle in the portfolio as opposed to having thousands of securities in the portfolio. Although one of my funds did have thousands of securities because we had the entire US equity market in there. We had small caps in there. We had international in there. And then for the smaller stuff, like EM, we had mutual funds and ETFs. But we also had some alternatives in the portfolio as well.

Evan: And so when you're doing this, explain to people just a little bit of the background behind who buys a mutual fund. So you're creating these mutual funds, let's say pre-ETF time or pre-super popularity of ETFs. You're creating these mutual funds and individuals, wealth managers, institutions on behalf of say a pension or an endowment fund are buying these mutual funds. And really what they're doing at that time is they're entrusting the portfolio management what to buy, what to sell, when to buy, when to sell to you and to your team is really what's happening. And so that was really popular for a long time with mutual funds. And then ETFs came in. Talk a little bit about the difference between a mutual fund and an ETF and how ETF has taken a lot of the popularity over from mutual funds.

Wasif: No, absolutely. And that's a really, really good question. And by the way, I'm a history nerd. So I tend to go a little bit into history because I want to explain some of the foundational reasons of why things are the way they are today. So the mutual fund essentially started in the 1920s, which was one way of legally creating a pooled vehicle for people to put their money in collectively. And I say pooled because in the 1920s, you know, before the Great Crash, there was these investment pools where on a private basis, people would say, hey, I can manage the money and I can run these portfolios. So people will get together and give that person or that team, that group their money and they would manage it as one single unit, giving them more purchasing power and investment power.

Evan: Because the idea is that they know better than me. I'm a construction worker. I'm in academics or something else. You're a full-time professional. And so I'd rather give my money to you and allow you to invest it. And then economies of scale just come in with that.

Wasif: Yeah, that's exactly right. So it's a combination of this person has the expertise or this group has the expertise because not necessarily because they're smarter, but because they're spending all their time on it. That's their job, right? That's their day job. They understand a little bit more of the nuances. And then the other piece to your point is the economies of scale, which is really important because if you have, let's say, you know, we fast forward to today, you have $10,000 to invest or $20,000 to invest. In order to create a fully diversified portfolio of individual securities, it might not be doable because you won't get the appropriate diversification that you need in order to get the, you know, because the share counts, you've got to allocate this much and you might not have enough money to do it. So with the economies of scale, with a larger pool of money, you can buy more securities, get a little bit more diversification in the portfolio. So those two elements are the key reasons for the success of pooled vehicles. Now, forward from the, in the aftermath of the Great Depression, because of the regulations, the '40 Act regulations that were passed, the mutual fund really came into its own, and the industry blossomed and continued to grow. And because there was the only game in town, they were able to charge more. And the idea back then was that it's all actively managed, it's all skill, everybody's managing and finding the right ideas. Teams of people are rolling up their sleeves, they're analyzing companies, and they're, you know, trying to find the differentiation edge and invest and generate returns. And in, you know, sometime in the 80s, this new thing came around, which was this indexing, popularized by Bogle, as we know. And indexing, what it said was, well, why don't I just invest in the market, and I will just allocate according to whatever the weight of each stock is in the index that I'm tracking. By then, the S&P, you know, was the popular one, and it still is, obviously. And so you would appropriately weight and create a portfolio out of that, it was still in the shape of mutual funds. And then eventually the ETF came around. And the ETF, you know, was the newer vehicle. In the early days, the ETF was primarily an indexing vehicle to recreate those indices and offer them on a really cheap basis. And I think it's because ETFs are, and here's a little bit of differences, as you asked, ETFs are transparent. So from a regulatory standpoint, you have to report what you own in that ETF on the close of every day. So the world sees every day what you own in the portfolio.

Evan: And what percentage.

Wasif: And what percentage it was, you get full transparency. And so I think there's always been this hesitancy of the active community to say, well, we're not going to share our secret sauce, we're not going to, you know, tell everybody what we own, they'll see the results of it. And we'll publish the holdings a month or a quarter later when we have to do a regulatory, from a regulatory standpoint. And so the ETF predominantly in the beginning, in fact, exclusively in the beginning, was indexing, because the index providers didn't care, because the index is already public information. And so that really started the ETF journey. And because active management is a difficult thing, you know, I'm sure you've seen the stats, we've all seen the stats that on average, most active managers underperform the index, which makes sense, because this is hard work, this is hard business. And you shouldn't expect the majority of people to actually beat the market, you should expect, actually, a smaller percentage of the people to be able to beat the market, because of the intense competitiveness, and you're competing against each other, and the alpha is hard to generate. And so indexing became popular, and the ETF did and the prices came down. What the world missed was that the ETF is actually just a legal wrapper, it's a legal structure, like the mutual fund, but it has its differences. It doesn't mean that an ETF cannot have non-indexing stuff in there, i.e. active management. And it took the industry a long time. And I think it was because of this transparency issue, people were hesitant, and I experienced this firsthand with, you know, some folks that had been hesitant to share what they own in their portfolios. In fact, when we launched our ETF, I had friends tell me, why are you doing this? The world's gonna see what you own every day. And I'm like, look, if the world wants to look what I own every day and wants to copy me and match that or go against it, that's fantastic, because that's what makes a market, number one. I'm doing what I have high conviction, and I think it will win. And if that's happening to me, then that means I've made it, because people are seriously paying attention to my ETF and looking at it from that standpoint. So I think that's what sort of started that journey. So now we're at a point where, as compared to mutual funds, ETFs are transparent, as I mentioned. They are liquid. By and large, you can trade them at any time during the day. And they're actually tax efficient because of the creation and redemption process. And that's a little bit wonky and a little bit technical, but the bottom line is, the way I describe it is, mutual funds are a way of socializing the taxable impact. So it's like a social group. And so if somebody sells a big chunk of their mutual fund holding, that security group gets sold in the mutual fund, and they get to leave, everybody else that stays in the mutual fund gets stuck with the capital gains of that fund, because it's inside the fund.

Evan: Yeah, they distribute the capital gains.

Wasif: Exactly.

Wasif: So it's socialism as far as I'm concerned from that standpoint. Whereas on the ETF side, what they do is if somebody wants to redeem, they'll yank out the appropriate number of securities, do a transfer out, and then sell the securities outside of it, and then put the money back for whoever wants to redeem and give it to them.

Evan: So you're not getting bad tax consequences for someone else's decision to sell.

Wasif: Yeah. So that creates an inherent tax advantage. That doesn't mean that ETFs are completely tax beneficial, because they're still subject to cap gains and things of that nature. But it just creates a little bit of an advantage at the margin that over time can make a meaningful difference. And so over the last, I would say, 10, 15 years, we've seen an explosion of launches within the ETF space. And a lot of them now are in the active space. But even within active, there's a lot of different ones. There's the ones that are the hot ETFs that are chasing the trend du jour. And they're characterized as active because they're doing something that's different from the market or the index. But they're doing something that's very, very short term, in my opinion, and sort of trendy and doing well and has some momentum tied to it. And then there are the ones that are managing an active portfolio with some kind of a view. And we fall into that space where we are managing an actively managed ETF. It's a thematic ETF. And so it's an ETF, but it's managing the old style way of looking at stocks and investments from a bottom up perspective.

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Evan: I want to get into the ETF and to Sarmaya, but before that, I am really curious. You are a career portfolio manager in massive institutions, very large institutions that comes with a lot of certainty, job security, a good paycheck. You know it's coming in every other Friday. And now you are the co-founder and CEO of Sarmaya Partners. That's a pretty big switch. Not even just having to go work at a smaller firm and maybe take a piece of equity, but a full ground up push. What has that been like and really what was the genesis of that? What made you make that big jump into being a co-founder?

Wasif: Thanks for that question. A little bit of origin story here. I've always had an entrepreneurial streak in me and I think that comes from my mom and my mom's side of the family. Family full of entrepreneurs, a lot of successful businesses, a lot of failed businesses, runs the gamut. And then on my father's side, it was very much you get a degree, you get a job and you live a stable life. And so it was a bit of both from my family background. And right out of college, I got a great, great job at Deutsche Bank and it was a tremendous experience. And so there's two things that have really been running parallel. I learned a lot in every place that I have been. So at Deutsche Bank, I learned the basics. You come out of grad school, you think you know a lot until you start your job and you're like, okay, I really don't know much at all.

Evan: Trust me, I know.

Wasif: I'm sure everybody can relate to that. And so I learned so much on the job in my first job, but that was more about the technical things like the mechanics, how to trade, how to trade a forward, how to invest in a stock, how to do this. And obviously you learn how to analyze a stock, you learn how to analyze a bond, you learn how to understand asset allocation and the risks and rewards and sort of the correlations of things. So that was really, really formative and really helpful. And then when I went to USAA, that really taught me the importance of how to be a bigger picture risk manager, how to understand how things are connected and really dig into asset allocation. Because those were the years where asset allocation was transforming from just an accommodation. Because people are like, hey, can you manage all my money? And they basically gave a full portfolio to a bond guy or a stock guy and he had to buy the other stuff as well. And so it was a combo. And to a point where it became a full blown discipline on its own. And as it became a discipline, I was part of that sort of journey alongside within the industry where you started thinking of it as a science, as a full blown understanding of the risks and everything that's entailed in there. And so I learned a lot about risk management, a lot about like portfolio management and the big picture standpoint at USAA. And then also USAA being USAA, you know, an amazing, amazing company that's always focused on doing the right thing. You do the right thing because it's the right thing to do, even when nobody's looking. So the ingrained, you know, what was ingrained in me is like, you're just going to, no matter what happens, you're just going to do right by your clients.

Evan: The level of integrity.

Wasif: So, yeah, absolutely. And so those two experiences were just very, very formidable. And then from there, I went to a couple of other companies where I learned the importance of marketing, the importance of selling, the importance of telling a story through communications. And so when it came time to launch the company, it was the right time and it felt like the right place and time to do it because all of these experiences gave me all of the tools and all of the advantages, if you will, of launching it at the right time. Understanding mechanics, understanding risk reward, having the right, you know, focus on client service and the end goal. And then ultimately, you need to sell, you need to know how to market your product, and then how do you tell that story through communications? It all came together. One last thing I'll add is every job that I've had, even in grad school, when I was a TA for a professor, I would always find myself getting into trouble with my boss because I would want to do something different or I want to go a little bit outside of my job description and do a little bit, you know, something off the reservation, if you will, because there was a new idea, new product or new innovation. And every time in my career where I found success in those jobs was where my boss allowed me the space and gave me the rope to go do and find whatever the outcome would be. And almost every instance, it was a huge success. The company benefited, and obviously I benefited from that learning and growth and sort of the growth that came with the company's growth. But those are formidable experiences because they taught me the importance of taking risk. You know, you're not going to, you're going to miss 100% of the shots you don't take. So those all things came together and it just felt like the right time to do it.

Evan: So you feel like you have enough arrows in your quiver to be able to go out and be successful as an entrepreneur overall because of the business skill that you've learned. But I'm sure that you also had a view on the markets that you felt like the market was not allocating towards correctly a way that you can make alpha or, you know, another way of saying beat the S&P 500, to put it simply. What was that theory that you had? What was that idea from a market standpoint, from a portfolio management standpoint? And second question to that is, why don't you or why didn't you think that the overall market was kind of pricing in what you were saying or what were they missing that you think you saw?

Wasif: That's a really, really good question. And I think that that goes to the core of one of the reasons why I wanted to launch this business with my co-founder, Carl, and the company. And I think it goes back to after having managed professional portfolios for so long, tied to a benchmark, I think our industry, and this is a controversial take, so I'm sure there'll be some industry veterans who would not agree or might see differently. But in my view, what has happened to our investment management industry is that we have become too focused on the consultant-driven style boxes. And I understand that. Being an asset allocator, I understand you need to have asset classes and understand how things fall within each bucket and all those things. But what has happened is everybody has gone in that direction and has continued to optimize to an index, optimize to a benchmark, and trying to turn it into a much more scientific type of a thing. And what that has done is everybody's trying to do the same thing. And I've managed many quantitative portfolios. I'm not a quant by training, but I know enough to be dangerous in overseeing people who are doing it or managing those types of portfolios. And even on the fundamental roll-up-your-sleeve, analyze companies portfolio as well, the industry generally tends to just focus on, what is my benchmark? How do I beat it? Because those are the incentives. So Charlie Munger famously has said, show me the incentives and I'll show you the results. And I think that's what we've ended up with. And so what my thought process was, and this is the origin story of the strategy that we manage. When I left USAA, I rolled my 401k into a self-managed IRA. And I said, well, how do I want to manage my own money? And that kept on bringing me to the idea that I really don't care about a benchmark. I really don't care about what the market does. I know that's a gauge over time that I do want to beat, but it isn't something that's going to tether me to it on a persistent basis where I need to make sure my tracking error is tight or anything like that. When you're managing your own account, people don't really think in that way. And so when I started the strategy, that was sort of the core philosophical approach. And then the other thing was, again, thinking about in terms of Warren Buffett's approach of, if you know what you're doing, if you have the time, if you have the discipline, then it's okay to run a concentrated portfolio that's focused on something that you believe in.

Evan: Well, and you have what Stanley Druckenmiller is super popular for saying, you know, I put all my eggs in one basket.

Wasif: Yeah. And I watch that basket real closely.

Evan: Absolutely.

Wasif: Yeah. Yeah. And so that was sort of the structural framework. And then the question was, well, what am I really going to invest in? And we'll get into that a little bit, like what our commodities focus and the return to tangibles thesis is. But that was the origin of what we wanted to do. And so the essence of what we're doing is that we are managing a portfolio that is focused on an outcome and it isn't tied to a benchmark or benchmark agnostic. And I think all future products that we're going to create are going to be like that. Because in an industry where you still have a lot of passive stuff and a lot of focus on just trying to target a benchmark, we think that in order to outperform, in order to stand out in a very, very tough and crowded industry, you have to be different. You have to be good and you have to be right, but you have to be different.

Evan: Yeah. And so explain to people a little bit the background of the incentives for a person, a human being who is a portfolio manager at a large company. You know, that person has a wife or a husband, that person has children, and that person has incentives within their job. And those incentives are very tied to a portfolio. And if you dissent, if you go away from it, even if you had a lot of conviction behind it, you kind of have to keep the guardrails in because that's just the incentives. Explain the incentives a little bit more behind how that works and what you meant by the consultant-driven kind of style boxes.

Wasif: Yeah. And again, I'm not disparaging. I'm just saying that that is the reality of where the industry is. And there are valid reasons for that at the institutional level because you're running large asset allocation buckets as an allocator for an endowment or a foundation or a pension. And even for high net worth individuals, you're running these asset allocation buckets and you're hiring managers or buying their ETFs or their funds specifically to those buckets. So let's go through an example to bring it to light. So let's say you allocate to U.S. large cap and you need to have a vehicle that's going to be managing to that. So you don't want the manager to be going out and buying international equity. You don't want the manager to be going out and buying micro cap. You are hiring them to be in large cap, which makes sense. And that's sort of the consultant approach. What that does on the other side is it tells the portfolio manager and their team, this is your benchmark and your goal is to solely beat that benchmark. That's it. And that's how they're compensated. That's how I was compensated. And it's generally sometimes it's tied to the benchmark. Sometimes it's tied to the peer group that is managing to that benchmark. Are you better than the rest of your peers? So it depends on the company. But what that does is it creates this incentive to just focus on the benchmark. And in a year where the index is down 20 percent and you're down 18.

Evan: Good year.

Wasif: That's a great year.

Evan: Yeah.

Wasif: You beat the market by 2 percent. And to me that's, you know, and again that's just the function of how the industry is structured. And it makes sense from an asset allocation standpoint, from a top down standpoint. But I think if for investors who in this day and age are also interested in outcomes and then to see how different portfolios can perform differently and fit into the different strategies or different allocations, I think there's a strong case to be made for and a strong place for strategies like ours, which are purely focused on, in our case, a secular theme, which is an outcome. And because we're focused on an outcome, we're not tied to a benchmark. And it just shows up very, very differently in a portfolio. So I think that's where the diversification element comes in and the advantage comes in. But those incentives, if you will, have moved the industry in a way, in a place where it's, it might not be completely to the advantage of the underlying or the end shareholder.

Evan: Whereas you have the complete and utter freedom to make the decisions that you feel are best at any point in time, given the expertise that you have and that your whole team at Sarmaya has and the time that you put in, that you have, you were able to kind of take all the shackles of corporate America off of you and make the best decisions. Let's talk a little bit about specifically that portfolio of your ETF, LENS, and the thematic investing of what you believed. I would love to go through a little bit of the history. What do you think has happened over the last five to 10 years? When did you first see this trend that you now really strongly believe in happen? And what do you think the history was that led up to your strategy? And I guess you can start with what exactly is the strategy.

Wasif: Sure. So the strategy is a secular thematic portfolio.

Evan: Explain that.

Wasif: And so I'm emphasizing the word secular because thematic strategies are all over the place. And there are themes slicing and dicing down to a very, very narrow space and very short term in nature. So there can be themes that are maybe a year long or a couple of years. Hey, this is a trend. It's more trendy, if you will. A secular theme is one that lasts for a very, very long time. So think of a market regime. So market regime or a secular theme is going to last 7, 10, maybe 12 years. And if you can identify earlier on what that is going to be and build a concentrated portfolio that's only focused on that, history shows that if you can identify that in the past, you can do pretty well, not only in absolute terms, but especially in relative terms to the broader market, like the S&P, for example. I'll give you a couple of examples. And this goes back since the dawn of investing. But we only have data that shows the last several decades, at least in the broader equity space and broader global markets. So in the 1970s, the big secular theme, because of the underlying macro environment was oil and gold. If you allocated to oil and gold, you did extremely well versus the broader market. In the 1980s, that shifted to Japan. Japanese equities did extremely well. In the 1990s, it was the Internet stocks, especially in the second half of the 1990s. And in the 2000s, it was everything tied to emerging markets and commodities. And we can talk a little bit about that. That was the last commodity supercycle. And in the 2000s, sorry, in the 2020s, ever since the great financial crisis, we've been in the secular theme of big tech. Mega cap tech can't do anything wrong. It's infallible. It'll always be, you know, there and grow to the moon. And when we built out this history and looked at it and analyzed it, two things really stood out. One, no secular theme lasts forever. Every one of them eventually declines. And that's, you know, law of large numbers. You can't expect trees to grow to the moon. You know, growth rates eventually decelerate and slow down. And then in turn, asset prices decline to reflect those declining growth rates. So no secular theme lasts forever. Each one of these that I mentioned in the past declined eventually, some by a large, large amount. The other important thing is as the prevailing or the current theme is approaching its peak or maturing, the next one generally begins in its shadow and the world doesn't even recognize it. So that brings me to the story of why we ended up with the commodity super cycle. So the, you know, commodities are a cyclical asset class. They tend to have these big booms and bust cycles that tend to last several years in each direction. The last one we had was in the 2000s. And then we followed up that a little bit more with the energy side, with the shale guys in the 20-teens, post the financial crisis. But eventually that went through a bust and, you know, nobody wanted to invest in them for a prolonged period of time.

Evan: And you would say that was that original commodity super cycle, most people would say, was until about 2011, starting around when, in the early 2000s?

Wasif: Yeah.

Wasif: So 2002 is a good starting point, even 2001, if you'd like. And it's also tied to emerging markets doing well. And it was really because the driver or the catalyst. And there's always unique catalysts, by the way, and we can talk about the catalyst for this one, but unique catalysts. And what drove that one was China joining the WTO in '99, I think it was, late '99. And that made China the factory of the world. And as China began to get more and more manufacturing, initially it was because cheap labor, they had a cost advantage, they had an efficiency advantage because of the top down way, the way they implemented production. So many countries around the world began to outsource and give them the production capabilities. So they became the factory of the world. And in so doing, they began to import for commodities, not only for that production, but also for building their own infrastructure. Because as they were selling, they were accumulating wealth. And that wealth was also being used to build their own infrastructure. So now we know very well, everybody knows that that's the era when China built out its infrastructure, and that was the last commodity boom. So it started in roughly around 2002-ish time frame, 2001. And it ended up usually, I think it ended up around 2012 when it peaked. And that coincides with the EM boom and the commodity boom. And it also coincides with a lot of macro things tied to the US dollar and interest rate policy, and how in the post-financial crisis, if you may recall, the Ben Bernanke Fed at that time was, you know, they started lower interest rates and kept interest rates low in order to provide liquidity, which makes sense at that time, because the world was fighting a massive deflationary bust. You know, we went through the crisis and animal spirits were crushed, asset prices were low, and nobody really wanted to invest. And so in order to reinvigorate the animal spirits, they kept interest rates low, arguably, I would say, too low for too long, because now we're seeing the opposite side of that. But what happened was in 2013, the Fed at that time, they rolled out the idea, they didn't even start it. So Ben Bernanke said, you know, we might want to start to taper our buying of treasuries and reduce the balance sheet, which was QE effectively. And the market had convulsions. It's now known as the taper tantrum from the market. And they quickly backed off because they were like, OK, maybe we're not ready yet, we're still trying to recover and whatnot. And then in 2014, I still remember, July of 2014, by now it was Janet Yellen. And she said, you know, now is time to begin to normalize our balance sheet. And now it's importantly time to begin to normalize the interest rate environment that we have, our interest rate policy. And that's what started a rise in the dollar. And that was, in my opinion, those two years were the triggers where the growth side of the U.S. equity began, especially on large cap tech and large cap growth. And everything else began to underperform in its face because the dollar rallied and it coincided with technology coming to the forefront. So as I said, catalysts are really important. So it was the confluence of the digitization of things, the Internet of Things and the iPhone and the smartphone coming around. And now we have it on our hands and social media companies coming onto the scene. So all of those things sort of coalesced together to create this boom in large cap growth and large cap equity tied to technology. And at the same time, it was a period where the Fed was normalizing rates. So rates went up, the dollar went up, which is bad for non-U.S. equities and commodities. And so that sort of began that shift. So you fast forward that benefit, that period to me, the undergirding factors that drove that period is cheap to free money and cheap energy.

Evan: Cheap to free money because interest rates are so low, so you can borrow at really low interest rates.

Wasif: Exactly.

Wasif: Yeah. And that's known as the ZIRP, Zero Interest Rate Policy, ZIRP period. And it wasn't just the U.S. In fact, Japan had negative rates.

Evan: Yeah, crazy.

Wasif: Even European bonds at some certain point had negative yields. And the whole idea was we were fighting deflation, man. We got to do whatever we need to fight this sucker and bring inflation back to the 2% target. And it was pedal to the metal and they did that. So liquidity was everywhere, money was free. And because of the change in the policy, and you might know this, that the oil price war between the shale producers in the U.S. and the Saudis, we had the bust in energy. So energy was cheap. So when you get a combination of cheap money and cheap energy, that just creates this mix.

Evan: Invest, invest, invest.

Wasif: It just creates this mix that growth assets do well. And now here's a little bit of sort of technical wonkiness tied to interest rates, which is what I think is very important. When interest rates are low, like they were, longer duration, higher growth assets get rewarded. Why? Because this is something that has a high growth potential, but the payoff isn't happening for years. Because the payoff isn't happening for years, you need to wait. But because money is cheap or free, you can wait.

Evan: Easy to wait.

Wasif: Right. And so that is in effect the equivalent of bond duration. So the interest rate sensitivity is different. And so generally speaking, growth equities tend to have, especially even technology companies, tend to have longer duration experience. So in other words, they respond more positively to lower interest rates and they respond negatively to higher interest rates. And so you had a lower rate environment, growth did well, and you kept on, we stayed in that period. And during that period, because of that growth and because of cheap energy, the world was focused on everything digital and the virtual world. And I believe, this is sort of my phrase, that the world was lulled into thinking that we don't need these ugly, dirty, grimy commodities anymore. That we're in this post-physical world, it's all digital, and this cheap stuff will be there forever.

Evan: It's all in the cloud.

Wasif: Yeah, exactly. And I think when you think about it, take a step back, the common knowledge among the general public, they really don't know where the stuff that they use every day comes from. There's a famous concept that you are sitting in any room, we're in this amazing space by the way, I love this space, but you look around you, everything in this room, everything that we're using, everything that we're wearing, came from the ground. Everything. And so the world thought you know what, we took it for granted. And so what happened was in 2020 when COVID happened, so it coincided with my period, as I mentioned earlier, of me thinking about how to manage my own money and building a portfolio. So at that time, we're in lockdown, this is the summer and approaching the fall of 2020, and oil has had its bust. It's very, very cheap, it's very attractive from a fundamental standpoint, because at that time, the world before COVID consumed about on average 100 million barrels of oil per day. In the depths of COVID, when nobody was flying, kids weren't going to school, we weren't going to our jobs, the world was still consuming 85 million barrels a day. But prices for oil change at the margin, so 15 million is huge. And so that had a big impact on the price for sure. But the market was pricing in these equities in the energy space as if they were going to go away, that we're not going to ever use this stuff, we're just going to be holed up in our homes. And even if we were holed up in our homes, we would still need a decent amount of energy. And so at that time, that looked very attractive to me. And so because of my asset allocation work, looking at the world from a top-down perspective, and looking at the fundamentals from a bottom-up perspective, my conclusion was that we are on the cusp of a new commodity super cycle. And the ingredients were the following. You had a fiscal stimulus in pandemic that was the equivalent of a bazooka, monetary bazooka from, sorry, fiscal bazooka from the government.

Evan: Which was them giving a bunch of money.

Wasif: Yeah, the stimmy checks, right, the stimmy checks, the PPP loans, all that stuff. So all of that money comes into people's accounts. And at the same time, the Fed is full throttle, you know, pedal to the metal monetary stimulus.

Evan: Just drop the interest rate.

Wasif: Yeah, right. They cut rates, they're re-engaging on QE, they're buying bonds in the market and providing liquidity. All of that did was it created the double barrel effect of launching inflation. So when you think about it, in 2012, I still remember in 2012, in the industry, there were so many product launches around hedging inflation. Because everybody's like, the Fed is doing QE, they're buying bonds, they're printing money, this is sure going to lead to inflation, so we need to hedge. And all those products, for the most part, ended up closing down because inflation didn't show up. There was no inflation. Why? Because that money that was being created by QE was staying in the financial system, staying in the banks. And through the bank channel, it was going into the markets, but it wasn't going into the real economy. But when you did the double barrel stimulus of fiscal stimulus and monetary stimulus in the pandemic, then people got money in their accounts. And that's what spurred the inflationary impulse because people went out to spend. More importantly, it was the same time where you had the supply chains disrupted. So all of a sudden, stuff at the grocery store is running out. Remember the toilet paper scare?

Evan: Yeah, it's crazy.

Wasif: And all of a sudden, there's not enough chips, so cars are getting expensive, but people have money and they want to buy. So what ended up happening was people were like, okay, I'm going to remodel my kitchen, I'm going to remodel my bathroom. And that started this inflationary impulse that went from one part of the economy to the other part of the economy and just has continued to meander. And so I was sitting there in the summer of 2020, and I said, this is inflationary. And if you recall, at that time, populism was picking up, you know, the whole MMT movement, which we now is pretty much dormant now. But populism is even stronger than it was then. That's not going away. It's just manifesting in different ways. And ultimately, populism means the government will figure out a way of pleasing the populace, which is spending, which is inflationary.

Evan: Kicking the can down the road.

Wasif: Yeah, exactly. And from a bottom-up standpoint, all these companies and sectors, whether it was energy, whether it was mining in just industrial metals or precious metals, gold for that matter, all of it was being discounted as if we never needed that stuff. So that's where I said, okay, this is going to be the next big thing.

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Evan: At that time, the secular theme was tech and really starting maybe '23, AI stocks, which can be aligned with tech in a lot of ways. Did you see that in the need for the commodities, the building of that infrastructure to further your view that this was the beginning of a commodity super cycle? Talk about the tech super cycle and how that actually leads to a commodity super cycle.

Wasif: Sure. I think that is one ingredient among many catalysts. So I mentioned catalysts. So for the commodity super cycle, which by the way, we're calling the return to tangibles. We've been calling it that for a few years now. I hope people can start using it. Just give us credit if you want to use it. It's called the world is returning to tangibles, whether the world likes it or not. And the catalysts were several along the way. And I think AI is one additional catalyst among the others. So really quickly in the list of catalysts, the pandemic, the lockdowns as we went through, the Russian invasion of Ukraine was a surefire catalyst for gold.

Evan: Why is that?

Wasif: So when Russia invaded Ukraine, they had reserves in U.S. dollars and in euros.

Evan: That their central bank held.

Wasif: Yes.

Wasif: And they were held by other central banks because central banks, the Fed holds money for other banks and whatnot. And the allied forces, the Europeans and the U.S. said, well, how do we punish Russia? And instead of outright waging war, a kinetic war, obviously we funded and helped the Ukrainians. But the way we, the other thing we did was we, and it's a popular common phrase now, we weaponized the U.S. dollar. And the way we weaponized the U.S. dollar was by confiscating those reserves that the Russians had. And we basically said, you know what? Your money is not your money. We keep it.

Evan: Froze their assets.

Wasif: Yeah. And so that sent a message to foe and friend alike around the world that should the U.S. or any of the allies want, they can take your dollars away. And I think that's what started the idea that we need to diversify. So I'm not a proponent of de-dollarization. We're not saying that, you know, the world is going to completely abandon the dollar where we think that the dollar is going to stick around. I mean, you know, in previous superpowers or empires, their currency is still around. The pound is still around. So I don't think that's ever going to happen. But what will happen is, is a good old fashioned dollar bear market. And what the central banks of these countries did was they started to diversify away from their U.S. treasury holdings, from the other U.S. dollar based holdings into gold. And you can see that bifurcation. We have a chart in a presentation that shows the central bank buying of gold is at a certain level and it literally jumps immediately in 2022.

Evan: And it stayed pretty high.

Wasif: And it's still around those levels.

Evan: Well, and it's I mean, it's a logical conclusion, I think, of diversification is one of the core tenets of any kind of success of a portfolio. Hey, if this could happen to them, we just need to make sure we have a diversified asset that we can hold. And, you know, I think gold is clearly, you know, the asset of choice for those central banks and other governments.

Wasif: Yeah. And from their vantage point to your point, it makes sense. Right. It's good risk management. It's good diversification. And that's what they're doing. So that was a catalyst. And then we had the tariffs and tariffs are generally inflationary. So there was an inflationary impulse that still came into the system and the economy from the tariffs. And now we've had the Iranian war, which I think is the catalyst for energy. We had the first catalyst back in 2022 because alongside gold, oil jumped as well in 2022 because of the market's concerns around, OK, all of a sudden the Russian oil is off limits. And so that started oil. We had a huge run up in 2022, which was really beneficial to us in the portfolio because we were very overweight energy at that time. So I think in these series of catalysts, we've had this movement towards commodities and now AI, especially with the data center build out, is another catalyst along the way, which is saying you're going to need all these data centers. Well, how do you build data centers? You're going to need copper. You're going to need, you know, all of this natural gas to run these data centers. So that's creating another sort of catalyst in our opinion. I do call that the data center and the AI trade is like a vortex. And it started with just the semis and NVIDIA, and it's continuing to grow and subsume other parts of the market. And I think the latest, not the latest, but the recent stuff is, you know, the nuclear story, the uranium names and some of the copper names. So we're a little bit lighter on those in the portfolio right now because we think that's a little bit of froth in there. But we have those in our portfolio to take advantage of that as well.

Evan: It seems like, you know, a lot of people have an idea of people who are bullish commodities as like doomsdayers. Everything's, you know, going crazy and it's going to hit the fan. And it seems, you know, very not. It's another asset class that has, you know, reasons fundamentally and macroeconomically and geopolitically that can create a logical conclusion that, hey, this is something that you should have in your portfolio for these reasons. We are filming today at September 16th and the Fed is about to come out with an interest rate decision. I think I saw like 95 percent chance. You're saying they're going to raise it 25 basis points. Do you think that that's bearish commodities in the short term? What's what's your view on what the Fed will do with interest rates?

Wasif: Yeah, I think I think number one, I think they will raise because right now it's more about a credibility. So this could be the credibility raise, if you will.

Evan: Why do you say that?

Wasif: Like just to say like, hey, the president. Well, because Warsh, Chair Warsh, since his appointment has continued to to communicate and telegraph that he's very hawkish and that he's very serious about inflation. And the markets more or less priced that in. So, you know, the market has done the job for him. And I think at this point, if he doesn't raise, he would have another situation like we had in July where they didn't raise. And then with the press conference, it was a lot of double talk, miscommunication, just word salads of stuff going on. And so I think now it's more about if you're if you're going to talk the talk, then you have to walk the walk. And so I think I think it's more of a credibility raise, in my opinion. What they do beyond that, I think it'll be driven by the data as it comes out. And I think it'll be good for commodities because what's happened in the market since Chair Warsh was even nominated and confirmed, the market has continued to give the Fed the hawkish credibility nod. And because of that, assets like gold and some of the precious metals have been under pressure every time there's, you know, data or an indication that inflation may be running higher. And the market's given credence to the Fed. And in our opinion, ultimately, in the long run, the Fed will show that it still is a political animal. And and I think as a result, they will not raise as much as they're talking. So one of the one of our underlying, I guess, thesis is that we are reliving the 70s. And a joke that I have internal in the team and all my teammates roll their eyes when I say it, but I'll still say it anyway, is that you better get your bell bottoms out. We're back in the 70s. And I think there's a lot of similarities to that era. And I'm not saying it's going to be exactly the same, but there are very, very similar components of that. I'm sure you've seen the charts tracking CPI of 70s versus now. We have our own version of it. It looks eerily similar. But then there's other elements of, you know, labor perking up, more populism among elected officials. And another thing that was there was that the Fed, Chair Martin, he was very not Martin, Chair Burns in the 70s. He was a hawk in talk. He talked a tough talk, but ultimately he didn't raise as much because of pressure from Nixon. So I think the Fed raises today and I will be glad because they will get it done, get it out of the way so the market can move forward from it. And so I'm really hoping that they do it and be done with it. But I think what will be important is what is the messaging going forward? And maybe the messaging is still going to be a hawkish message, but I think it will be data dependent hawkish message. And so I think that still remains to be seen. Ultimately, the commodity story, I think is going to be driven by two things. One, the demand, because the government, not only in the US, but even Europe is now beginning to do it, at least through the defense side. But the policy has been, let's have a run it hot 1950 style economy. So pro-growth, pro-stimulus.

Evan: It's the Scott Bessent, outgrow the debt, right? So if we can grow faster, then we can make debt to GDP a better margin, better percentage.

Wasif: That is a strategy. A strategy is like a 1950 style run it hot pro-growth strategy. We can grow our way out of the debt levels that we have. And even if it's nominally, that's fine, we're going to do it. I think the risk is that we end up with a 1970 style stagflationary shock, because what I think will continue to push commodities higher is there will be demand for stuff, whether it's through the data centers, whether it's through the rearmament of the world. And then one thing that doesn't get as much discussion is the de-globalization that still is taking place. We're not getting a lot of reshoring, but we're definitely getting a lot of friend-shoring. So that means we have been in a multipolar world now for a few years. And in a multipolar world, you have two competing or multiple competing spheres of influence. And when you have competing spheres of influence, you're not necessarily going to rely on the other sphere to trade, which means you're going to have to build your own capabilities. So China will build its own semi plants, its own capabilities. The US is going to do that. Europe might have to do that as well, although they might seem to be in the middle and they might trade a little bit. But the point is, we're going to have duplication of capacity around the world, and that will require even more commodity. So I think the demand side is going to be there, but also this fiscal impulse that we're dealing with, the unsustainability of the deficits, not only in the US, but also this is a developed world issue. So developed nations around the world, their sovereign debt levels are on a path of unsustainability. You can look at France, you can look at the UK. They're all doing that. And even the Germans, you know, the really staid and steady, we're not going to spend too much. They are also increasing their spending because they have to on defense. And that's a starting point. I think they'll do more as well. So all of the governments have the pressure to spend, but their finances aren't as strong as they used to be. So I think we're looking down the barrel of some kind of a fiscal scare at the very least, if not a fiscal crisis. And that is also going to be good for commodities, because that means that the only way out of it is they're going to have to inflate their way out of it. And when you inflate your way out of it, currencies decline. And when currencies decline, commodities do well.

Evan: What would have to change in the world for you to change your opinion and become bearish commodities long term?

Wasif: Probably another stagflationary bust. Like, you know, a crisis level situation where it would... Sorry, I shouldn't say stagflationary, I said deflationary bust. I misspoke. A deflationary bust. But I don't see that because in order to get a deflationary bust, you would need to have a part of the market that is very, very frothy, that would need to collapse. And you could argue that the tech story and the AI and data center is ripe for that. And I think that could be a catalyst. What I do see, even if that does happen, so let's say, let's say CapEx spending drops. And, you know, like we had the dot-com bust, and these tech companies, their prices declined, their spending declines, and in turn, their profits begin to decline, which seems unfathomable right now. But believe me, I was managing money in the late 90s, and it seemed unfathomable back then as well. And I think this is still something that can definitely happen. But when you have that happen, I think in turn, the response from the authorities will be, what's our formula? Drop rates. Stimulus. Stimulus, stimulus, stimulus. And when that happens, I think this time around, you will probably get a bigger rebound in the commodity and the real asset side, because the market has woken up to the realities of inflation. And we now have a deficit level that we didn't have in the past. So one important thing is, historically, governments tend to spend more and extend and run deficits when the private sector recedes, generally in a recession. We've been spending at recessionary levels without even a recession. So our capacity to take on more debt and create more deficits in the face of a recession is going to be challenging. And I think we'll do it, which I think will be the reason for that. So to answer your question, I think the scenario is a deflationary bust tied to the AI data center trade, which could maybe be a three month to six month type of an environment. And that is where you could see bonds rally and commodity prices decline because the market is going to say, well, the demand is going to drop for all of these. But I think quickly in response to that, when we see the policy response, you're going to see everything rally, especially gold, because I think gold will be leading the charge up whenever that stimulus comes.

Evan: And so the way that you have allowed people or the vehicle that you have created for people to invest in your beliefs and to have you and your team manage their portfolio or manage a portion of their portfolio is through your ETF. Publicly traded, where can they find it and where can they learn more about Sarmaya Partners?

Wasif: Yeah. So the ETF is LENS, L-E-N-S, pretty simple name. We look through the lens of our analysis and to look around the corner and try to figure out where the market in the world is going and invest accordingly. And we invest in secular themes and we think the next big secular theme that is already here is this commodity super cycle. The portfolio is primarily equities because there's an advantage in our opinion of owning equities over the full cycle because companies generate cash by selling that commodity, mining that commodity, servicing companies that are in the commodity space. So it opens up a wider aperture for us to buy different things. But then companies, because they're generating cash flow and they have operating and financial leverage, their returns over that cycle actually tend to be better than the commodity itself. The commodity itself has elements of volatility to it. Investing it through derivatives like futures has its own challenges and issues and there are many folks who do it and more power to them. But we think our strategy is better suited to focus on the equity side. We do own a little bit of gold and silver in the portfolio directly through ETFs. And that's because gold to me is like its own anchor and it provides like this stable, yes, it's volatile, but so are stocks. But it provides this stability in the portfolio of having this sort of foundation or ballast against the monetary stuff that's going to happen. And we own gold mining stocks and we own silver mining stocks because they tend to perform even more than gold. They have a 1.2, 1.5, almost two times the return sometimes depending on the company or the environment. So we have those in the portfolio. We also have a lot of energy stocks in the portfolio. We own oil companies, major integrated oil companies, oil service companies that tend to do really well when the bull market is in place. In fact, just like the gold miners, oil service companies perform better than the actual oil companies during the run up in the bull market. We own natural gas companies. We own uranium mining companies. And then we also own copper mining companies and platinum companies and iron ore companies and some industrial companies. So our big theme is called the return to tangibles. As I mentioned earlier, we break that down into three sub themes. Energy is, we call it the energy is life. No matter how, which way you cut it, the world cannot survive without energy. And it still relies mainly on oil, gas, and we still need it. And the companies that are in that space, they're generating cash flow. They actually are better stewards of their capital right now than the hyperscalers and the tech side. Because hyperscalers of the tech side, which used to be, you know, benefiting from software and just having intangible assets in their balance sheet, no extra heavy CapEx, are now CapEx heavy companies because of all the spending they're doing on the data center side. So those are the primary components of our portfolio. One thing I'll add is we intentionally pick the name return to tangibles because it's a double play on words. As I mentioned from an accounting, you usually have an accounting term in your balance sheet called a tangible asset versus an intangible asset. And for the longest period, for the last 10, 15 years, the world has focused on companies with intangible assets. And now we think that the world is focusing back on tangible assets.

Evan: And if people want to read your research or reach out to you, where do they go?

Wasif: Our website, it's a great place to go. sarmayapartners.com. They can contact me. I'm pretty active on both LinkedIn, Twitter, and on Substack. And we publish a lot. We write a lot. And we're always out there trying to share our thoughts with the world.

Evan: Awesome. Well, thank you for coming on as a little parting gift. I got you a one ounce silver Y'all Street round.

Wasif: Oh, my goodness.

Wasif: Thank you so much.

Evan: It's one ounce of silver from Texas Precious Metals. And we appreciate you coming on. And I'm sure that people will go check out Sarmaya Partners if they have a similar view of the world and the markets.

Wasif: Thank you so much, Evan. This is really precious. I appreciate it. And thank you for having me. I will say one last parting thought. I've told you this before. If there's an award for the best name of a company, you guys should get it.

Evan: We appreciate it.

Wasif: Having lived in Texas for 15 years, I love the place. And when I first heard the name, I was like, this is perfect. Y'all Street. I mean, you can't beat that. It's a phenomenal name.

Evan: We're very pro-Texas. So it's worked out. But thanks for coming on.

Wasif: Yeah, my pleasure. Thank you for having me.

Evan: Awesome.

Outro: How do y'all drink this? That's the Y'all Street.