Prof. Lubos Pastor: Equilibrium Models vs. Intuition (EP.124)

Professor Lubos Pastor’s brilliant and varied research has been consistently referenced on this podcast. From how politics impacts stock returns to measuring the skill of active fund managers, Lubos joins us today as we explore some of the ‘greatest hits’ of his research. With Lubos’s position on the board of the Slovakian Central bank, we ask him about how quantitative easing can be used to strengthen the economy. His answers highlight how easing can prop up asset prices and raise inflation — and why inflation is the “least bad” option to deal with post-pandemic debt. We then discuss Lubos’s research on how political cycles affect stock returns and why stock returns are higher when a Democrat is in the White House. After diving into how stock prices respond to political uncertainty, we look at why green assets tend to generate higher stock prices but low expected returns. While talking about his research on measuring volatility, Lubos argues against the conventional wisdom that stocks are stable, in the long run. We touch on how this can affect your retirement asset allocation before chatting about whether young people should use leverage. With so many people moving from active to passive and index fund investing, we analyze the relationship between the scale of active funds and the skill of active managers. Near the end of the episode, we talk about the effect that market-wide liquidity has on stock prices and why you cannot diversify away from liquidity risk. Our conversation with Lubos is filled with insights, each of which could inspire hours worth of discussion. Tune in to hear more from our discussion with Professor Lubos Pastor.

Key Points From This Episode:

• Introducing Professor of Finance and today’s guest, Lubos Pastor. [0:0:15]
• The role of central banks and the goal of quantitative easing. [0:05:06]
• Whether quantitative easing props up asset prices. [0:07:58]
• Exploring different findings on quantitative easing by central banks and academics. [0:08:51]
• Why inflation may be the “least bad” option to deal with post-pandemic debt. [0:10:27]
• How increased inflation helps shift the burden of debt from those who are most impacted by lockdowns. [0:11:17]
• Lubos explains the relationship between political cycles and stock returns. [0:13:39]
• Hear how political uncertainty affects stock returns. [0:18:46]
• Why green assets tend to generate higher stock prices and low expected returns. [0:20:38]
• What factors would cause green assets to perform well, and how long this might last. [0:25:22]
• The link between sustainable investing and firms pushing to turn green. [0:27:48]
• Dispersions among ESG rating organizations and issues related to ESG scoring. [0:29:45]
• Why green assets will, most likely, never outperform in the long-term. [0:32:37]
• Exploding the conventional wisdom that stocks are less volatile in the long run. [0:34:26]
• How long-term stock volatility affects your retirement fund asset allocation. [0:38:30]
• How human capital and mean reversion should factor into a young person’s decision to use leverage. [0:39:54]
• Analyzing the skill and scale of active fund management. [0:42:49]
• Why consumers moving towards passive investing will increase active fund performance. [0:46:37]
• Answering the question: Did active funds do well over the pandemic? [0:52:39]
• Ways of selecting a good active fund manager. [00:54:28]
• Buffett’s alpha strategies of replicating the decisions of top fund performers. [00:56:55]
• How market-wide liquidity impacts stock prices. [01:10:42]
• Whether current liquidity betas can predict future liquidity betas. [01:02:32]
• Lubos shares how he defines success in his life. [01:05:18]