EPOL

Mike is concerned that US stocks could be a bubble, as are many others:

if we take parallels to the past seriously, there arises the question of whether a 40 year old with a 100% index fund portfolio should consider hedging/reallocating their portfolio a decade sooner than they planned on becuase, well, just look at that [CAPE] chart.

But what to do about it?

So, seriously. Are we hedging? And what are we hedging into? Asking for a friend. Who is an economist. And also me.

My answer: I’m diversifying into global stocks, which tend to be much lower-priced:

*Source: The Idea Farm, Global Valuations Update July 2026*

But how do you practically do this?

A simple and cheap way to get a highly diversified basket of global stocks is VEU (Vanguard ex-US). Over 3000 stocks from around the world, P/E of 19, rock-bottom fees. One disadvantage for diversification purposes is that its biggest 5 holdings make up 12% of the index and they are all AI-related.

If you’re willing to make more concentrated and specific bets in order to get even cheaper, here are some other foreign indices I like:

FRDM (Freedom 100 Emerging Markets ETF): Invests in emerging markets with the highest economic freedom ratings. I love the theory & it’s performed very well for me & its overall PE is a reasonable 17, though it’s largest holdings are in Taiwan and South Korea, so not a good way to get away from AI.
ILF (iShares Latin America 40): Invests in large Latin American companies. P/E 11 with low AI exposure.
FYLD (Cambria Foreign Shareholder Yield ETF): Invests in high-yielding companies in developed countries outside the US. Measures yield using stock buybacks in addition to dividends. This serves as a value screen that keeps PE low (currently 13) and avoids expensive sectors like AI.
EYLD (Cambria Emerging Shareholder Yield ETF): Same idea as FYLD but for emerging markets. Current PE 12

I also hold single-country indices for Japan (FLJP, PE 20), Poland (EPOL, PE 13), and India (EPI, PE 17). These are probably riskier than the broad indices above, but still fairly diversified across companies.

While foreign stocks are my preferred hedge, there are many others. For US stocks there are small-cap or value indices, or just buying individual stocks you like (not necessarily crazy). The 20- and 30-year US treasury bonds are intriguingly yielding over 5%, though between my age and my inflation concerns I don’t own any. TIPS are much more attractive, yielding 2-3% over inflation, I don’t own any yet but I’m considering it. Gold indices like IAUM are another good hedge.

Of course this isn’t necessarily a bubble that will pop any time soon, or at all- AI is a real technological advance- so between that & general efficient market principles I don’t think the answer is to sell everything & go to cash, much less short the market. But Mike is right to ask how to hedge, and I think anyone holding ~100% US stocks should consider diversifying.

Disclaimers: Not investment advice, I hold some of the indices named.

The latest Global Valuation update this week shows that Poland (along with Colombia) has some of the world’s cheapest stocks. Their overall Price to Earnings ratio is 8, compared to 28 for the US:

Does this mean Polish stocks are a good deal, or that investors are rationally discounting them as being risky or slow-growing? After all, they had a low P/E ratio last time I wrote about them too.

Stocks can rise either based on higher investor expectations (higher P/Es) or improved fundamentals (earnings rise, investors see this and bid up the price, but only enough to keep the P/E ratio roughly constant). Over the past year Polish stocks have done the latter; I bought EPOL (the only ETF I know of that focuses Poland) a year ago because its P/E was about 6. Since then its up 70% and the P/E is still… about 6.

Why haven’t investors been excited enough about this earnings growth to bid up the valuation? I think the biggest concern has been political risk, given that the ruling Law and Justice party has been alienating the EU and arguably undermining the rule of law and finding pretexts to arrest businessmen critical of the government.

The recent Polish election promises to change all this. A coalition of ‘centrist’ opposition parties won enough votes to oust the current government, and Washington, the EU, and business seem relieved:

As Europe’s sixth-largest economy, a revitalised pro-EU attitude in Poland would be particularly welcome.

“It will be a positive development for sure because it will unlock the (EU) money that has been withheld and reduce a lot of the tension that has been created with Brussels,” said Daniel Moreno, head of emerging markets debt at investment firm Mirabaud.

Some 110 billion euros ($116 billion) earmarked for Poland from the EU’s long-term budget and the post-pandemic Recovery and Resilience Facility (RRF) remain frozen due to PiS’ record of undercutting liberal democratic rules.

The case for optimism is an influx of EU funds, less risk for business, and an appetite for higher valuations among Western investors who no longer dislike the government.

Being an economist I also have to give you the “other hand”, the case for pessimism: the new government hasn’t actually formed yet, meaning the current one still has the chance for shenanigans; population growth has been strong recently with the influx of Ukrainian refugees, but it is likely to go negative again soon; and EPOL is almost half financial services, which have relatively low P/E even in the US right now.

Nothing is guaranteed but this is my favorite bet right now. I find it amusing that this “risky” emerging market has had a great year while “safe” US Treasury bonds are having a record drawdown (easy to be amused when I don’t own any long bonds and they have done surprisingly little damage in terms of blowing up financial institutions so far). I emphasize the investing angle here but hopefully this signals a bright future for the Polish people.

Disclaimers: Not investment advice, I’m talking my book (long EPOL), I’ve never been to Poland and I’m judging their politics based on Western media reports