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Nothing Is Priced In | Bob Elliott on Why Investors Are Misreading the Oil Shock
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- [00:06]
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- [01:18]
Bob
So we were coming into 2026. Essentially every sector of the economy was set to the savings. It creates a fragility because to the extent that the savings is driving your your spending or your investment to anytime that there is a shock that quickly pulls back. Gas prices are not that complicated. March 1st it was 299 at the tank. Today it's 399 at a tank. It will probably be 450 at the tank in a week or two if oil prices stay where they are. Like it's an immediate effect on the economy. And I just look at what's priced in. Nothing is priced. That is what's priced in. Nothing. Okay, so we start with nothing priced in and we have a relatively sizable oil shock. This is one of the most challenging things in trading markets, particularly from a macro perspective, is like none of the data is worth a hill of beans right now. Right? Like telling me what spending was in January doesn't mean any of it.
- [02:15]
Podcast Host
Bob, welcome back to Excess Returns.
- [02:17]
Bob
Thanks so much for having me. Anything going on?
- [02:20]
Podcast Host
Hey, there's a lot going on. There's a lot to talk about. There always seems like there's a lot to talk about. But I think today we wanted to have you back on to really focus on three things. First, we want to sort of hear how you're currently framing this macro Environment, particularly around sort of oil and oil shocks, inflation and growth dynamics. Secondly, we wanted to talk through with you, which we've talked to you in the past, but again get your latest thinking on AI and it's you know, impact on the economy and productivity and other things. And then third, how investors should think about global macro strategies in today's environment. And we'll kind of wrap up with, you know, the approach that Unlimited is taking to building a macro strategy and how it fits into a broader portfolio. For those that want to learn more about Unlimited and the, and the ETFs that the firm offers, you can go to unlimitedfunds.com or the ETF Only site which is unlimited ETFs com. So Bob, as always, we really appreciate the time and it's a real interesting time to have you on. So I wanted to start with sort of how maybe the dynamics have changed a little bit from the last time we had you on. And maybe to start by explaining this idea of a savings driven economy versus where we were, you know, even up until a few months ago from, from your perspective?
- [03:42]
Bob
Yeah, I mean coming into the year, as I like to describe, we were sort of in the desavings driven economy, which is different for many years. We were in what I'd call an income driven expansion in many years post Covid. And I think that surprised a lot of people, the economy's resilience, that it wasn't all that sensitive to interest rate rises because so much of the spending was related to income and income growth either by corporates or by households. But coming into this year that had really changed. It had been almost two years since households spending had been in line with their fading income growth. And so what those households had to do was they had to just save in order to maintain nominal spending growth because you know, employment growth was so soft and wage growth was easing. And then on top of it, those companies that had done a lot of CapEx, which is essentially how companies do, you know, economic activity, had started to shift from mostly financing out of their cash flows and now financing increasingly out of borrowing. And so, and then on top of it you had a government that in 2025 was closing its deficit modestly as a function of the tariffs and to a small extent doge to one that was likely to be expansionary. Your initial thought is to pull back onto savings, right? To jack up your savings rate. I mean, it's like what happens if, you know, you as a household, you see the stock market go down 20%, you're not out at the fancy dinner anymore. If you're a company, you see your stock go down 20%, you're not doing building the next capex investment that you're doing. And so that vulnerability to a shock, I think, nice, you know, intersects with what we've seen over the course of the last four weeks or so related to this oil shock, which, you know, in many ways is just an orthogonal pressure on the, on the economy, you know, one that wasn't really expected to start off the year and one that in many ways radically transforms the outlook ahead because it puts so much pressure on both reduction in real spending power on the growth side as well as increasing inflationary pressures on inflation.
- [05:59]
Podcast Host
What would you be looking. So it sounds like this sort of shift from income driven to savings driven, you know, that's sort of has been happening. But is there anything that you would be particularly paying attention to that would accentuate this fragility that you're sort of seeing in the data?
- [06:16]
Bob
Well, I think for households in particular, you had such a gap coming into this year where if you looked at their nominal spending growth, you saw it growing at about five and a half percent nominal, which is pretty good, all things considered. You know, that's a, if inflation's too and nominal spending is five and a half, we've got a great economy, right? That, that's the reality. The problem was that there that household income growth had slowed a lot. You know, basically labor market growth or job growth has been zero for the last nine months with some wiggles and wage growth for workers about three and a half percent. And so three and a half percent is not nearly as attractive as five and a half percent when you think about their real spending power. And so the question I had was basically how durable was that persistent savings? And you know, it's one thing when you just save when stock markets are going up, you know, a ton, when they're going up double digits plus every year, of course it makes sense to disable Housing markets were going up double digits per year. But we had already started to see at the end of the year, if you look through the data that actually went through January, you started to see that leveling out of, you know, U.S. asset prices, whether it be homes or whether it be the equity market. You started, you know, basically have leveled out for the last six months or so and you started to see households pull back on their to savings. And so that, that was a really important indication that if they were to see more asset market weakness, you know, their, their general effort would not be to come in and plug the gap in terms of keeping up their spending. It might be to retreat in that environment. And so, you know, the jury's still out. We're, you know, this, this is one of the most challenging things in trading markets, particularly from a macro perspective, is like none of the data is worth a hill of beans right now. Right. Like telling me what, you know, spending was in January doesn't mean anything. Right. The world has totally changed.
- [08:14]
Co-Host / Interviewer
Yeah.
- [08:14]
Podcast Host
And it seems to change day by day. So it's, you know, that can be also challenging to some extent for, for macro. But let me ask you about oil. So there's two different ways I wanted to go with oil first. You know, you mentioned it before. It clearly, you know, results in sort of higher inflation and certain things. But I just from a first principles perspective, can you kind of talk through when you see sort of an oil shock like this and a large spike, like, you know, how investors should be thinking about it, I guess in general. And then just what are the linkages? When we go to the gas pump, we know that, you know, the price of gas now is a lot more expensive than it was even a few weeks ago. But just talk about the first principles, linkages to sort of economic activity.
- [08:55]
Bob
Yeah, well, the first, the first thing I start with is how do you think about an oil supply shock in general? The first thing to keep in mind is essentially there's very, very little demand destruction when it comes to oil. If you go back, go back and look at the financial crisis, very minimal. I mean that was like a terrible economic crisis or the COVID crisis, very, very little demand destruction, which means that they're, you know, every time you take even a modest amount of oil off the market, you get relatively acute price moves. And so that's basically what we've seen. I mean, the old rule of thumb and this, you know, this is, this is like what the griggled oil trader will tell you is, you know, take a million barrels off the, off the market and you get about a five to seven dollar move in oil, which is essentially what we've gotten, give or take. Like if you look at Brent know, we've taken maybe 8ish million barrels off and we've gotten a price move of 50 bucks. And you know, that's basically what you'd expect in the near term. And so I don't have a particularly strong view beyond that. Like seems largely in the ballpark of what you'd expect. I think the challenge then is now we've Got oil and we got oil inputs that then flows through in terms of the real economy to all sorts of different things. And one of the key things to keep in mind is it's not a one for one. So for instance, if you look at things like heating oil, jet fuel and gasoline, traded gasoline, those prices have actually gone up more than oil prices have gone up in part because refiners are taking a better margin on it. It's exactly what we saw in 2022. And so actually if everyone focuses on WTI, it's actually a bit misleading in terms of what the pass through effect is to the trade in prices. Now what the consumer then sees is not just the traded prices, but of course taxes and issues and various things, delivery costs and things like that on top of it. And so you have to adjust for that as well. I think the overall, you know, the pure basic rule of thumb here is you typically are going to see something like 20 to 30 basis points of headline inflation increase for every 10% rise in oil prices in that order of magnitude. Right. And that's because that's, that reflects sort of the direct faster effect of oil prices and, and, and products. But then of course, like, you know, my fresh direct guy now had now just added, you know, a 299 surcharge on top of it for his delivery. So you know, that also flows through as well. And so, and so that's sort of the overall economy effect. And so what, oil prices are up 50 or 60% on WTI depending on exactly what you're looking at. And so you'd see 150 basis points, maybe to 200 basis points of inflation pressures flow through to the economy when we were starting at somewhere between two and a half and three. And so that's actually a pretty significant flow through because not only is that a pretty meaningful rise in overall prices ahead, but that also means that that is essentially the flip side of that is the immediate hit to real spending power for households. Right. You go to the gas pump, we were paying 299 three weeks ago here in New Jersey and now 399. And that just means less money available to spend on other things. And so it's almost mechanical in that sense that deterioration in real spending.
- [12:25]
Podcast Host
Yeah, so that kind of flows all the way through to the underlying sort of growth of the economy. And to your point about this sort of savings driven, you know, that could result in the savings maybe continuing to come down.
- [12:37]
Bob
Yeah, I think that's a big question. Like if you look back in 2022, the labor markets were relatively tight. Asset prices were going up. Households were flush with cash, in part because of government transfers, and their response to rising oil prices and gas prices was to disave and to save relatively meaningfully in the beginning of that period, a couple percent on the savings rate. The situation we're in today is a bit different in the sense of asset prices. Labor markets are much softer, wage growth is much softer. There aren't nearly the government transfers that we had before, and asset prices are softer. And so I think the key question when you think about the overall economic effect is are household going to disable in response to this, or are they going to retrench in response to this? And it often can be different depending on where you are in terms of the cyclical economy. In many ways, this is a lot closer to where we were standing in the summer of 2008 when we saw a relatively sizable price rise in oil. It was not the thing that caused the financial crisis. I think people get that confused. But you can look at the mechanics of how households responded to that rise in oil prices, and there was some retrenchment which softened growth ahead of then what became a relatively acute crisis afterwards. And so I think that that timeframe is probably more indicative of how households respond than what we saw in 2022.
- [14:04]
Podcast Host
One of the things that I kind of find interesting more on a global stage, I guess, is that, you know, coming into this year, you know, international markets and emerging markets had been, you know, relatively outperforming the US After a long period of, of underperforming. And, you know, now here we are, since this whole thing has gone on, you've seen outperformance in the US versus international. And I think some of these international countries, you know, they're larger importers of oil than we are. And so they're. They're affected, maybe more negatively affected more than us, perhaps. But I mean, do you have any feeling, feelings on just more globally, like how this translates into US versus other markets?
- [14:44]
Bob
Well, I think one of the challenges when you think about sort of global asset markets as we've gone through the shock period, is that basically all the winning trades, if you just look at a chart I wrote about this on my substack a couple days ago, if you just did a chart of all the winning macro trades, gold, silver, foreign stocks, Japan, Europe, emerging markets, even the yield curve. Even the yield curve is a trade or the dollar, and you just draw a line on March 1, what you see is basically all these winning trades reversed on March 1st. And I think that is, and trades that you know, are related to each other from, from a fundamental perspective, like you're saying. But like as an example, in the emerging world there's lots of countries that are benefit from rising commodity prices, right? So you know, it's not, it's not an obvious thing that kind of everyone outside the US loses. There's some winners and some losers. And so when you sort of look through all that, what it looks like is basically the hot, the, the oil shock, which is really driven by a war shock has created a higher sense of volatility in the market. And what we're seeing is basically a lot of levered macro investors and then a lot of sort of follow ons from those levered macro investors are basically engaged in a relatively acute deleveraging of their books in response to the higher volume. Look, before this warshock happened, we were running at like you know, 10 to 10 to 15 volume and now we're running at 25 to 30 volume. It's just a totally different volatility environment which is basically forcing everyone to cut their books and close positions regardless of whether it was a good trade or not. And of course the thing that you, that you, you often will cut are the winners in such a circumstance since you know, accumulated some gains. And so that's kind of how I see it across the board. I think we're probably about 2/3 of the way through that deleveraging approach in response to the higher volatility. I think it's, you know, when you think about wars or you think about deleveraging, I like to say they, they have a momentum of their own in the sense of, you know, policy can wiggle those things around on a day to day basis, but once they get going, they can continue far longer than people expect. And so that's been a big driver of the dynamics that we've seen and probably will persist for a little while here Once sort of all these lever players get their books in order.
- [17:13]
Co-Host / Interviewer
So is that dynamic what explains why gold's down? Because you've seen a lot of people saying I don't understand why gold's down so much on this. Is that the dynamic, is it just what's going on behind the scenes?
- [17:22]
Bob
Yeah, that's exactly right. And interestingly, I mean first of all, just keep in mind, even with gold selling off, it's up 50% in a year, right? So just keep, you know, that's an important thing to keep in mind. So it has been a Huge winner and under the hood. Actually what you see in terms of the timing of the market action is while initially you saw a lot of the deleveraging in equities, right. Draw that chart. On March 1, basically everyone started to close their positions on European, Japanese and emerging market stocks had all been winners. Macro investors held onto gold positions for good fundamental reasons, meaning like rising global risk premium reasons really up until last week. And then gold has been in many ways the sort of the last piece of the book that has been asked to delever. And I think that that is, and that's what we've seen really over the course of, you know, in the course of several days, basically everyone taking, you know, booking their profits, everyone deeply in the money on gold, booking their profits and closing out those positions. And, and the result has been, you know, if you look at the flows, like some of the most negative ETF flows that you've ever seen in the gold market and that not just in the US you're seeing that globally among traders that, you know, that's not, you know, random retail people trading on Robinhood trying to figure out their gold positions. Those are big institutional investors who held gold ETFs as part of their portfolio who are basically closing out their gains and booking them.
- [18:47]
Co-Host / Interviewer
In terms of the sequencing here and how we're going to see this in the data, so should our expectation be we're going to see inflation first, right? We're going to see inflation data ticking up and then although the economy is not as resilient as it once was, as an income driven economy, it's going to take a while, right, before we start seeing this in sort of economic weakness side of it.
- [19:04]
Bob
Yeah, I think that's, I think that's right. And whether it be businesses, look, look, if we have an oil shock, you know, as a simple example, view an oil shock for like a week, who cares? You know, people just move on with their lives. You pay, you know, pay the pump high for one week and then you move on. It's really about the time of the shock effect and the duration of it essentially is what determines how long or how persistent the savings is. The longer the shock is in place, the less likely folks are to look through it and to save and the more likely they are to start to reduce their spending on other goods other than oil. And also to be clear, the longer that the oil shock is elevated. Oil shock, oil prices are in place and gas prices and other things also. This is somewhat a mechanical point, but it also takes time to shift Menu costs. Right? Like, it literally takes time to put fuel surcharges onto your deliveries. It takes time for, you know, the cafe on the corner to raise their prices. Like these things take time. And so, and so that's where the price effect, we're going to see a very immediate price effect on the, on the goods, on gas and other related prices. It'll take on the order of a few months to start to flow in through to other, to other prices in the economy. And then, you know, you'd expect to see a slowing of real demand in the, in the medium term as a function of, of the shock being in place.
- [20:34]
Co-Host / Interviewer
And that sort of gets into my question which is like, how much is the, of the damage has been done here? Like, is this thing so, for lack of a better word, taco right now? Like, can you, you know, with tariffs it was easy, it was more easy to taco the thing. Like here it seems a little bit more difficult. Like how much of the economic damage has been done if they, this somehow gets resolved tomorrow and how much, you know, how should we think through that?
- [20:53]
Bob
Yeah, I think it's, it's an excellent question. And one of the things that was always interesting about the tariffs, that is more subtle point that no one really talks about, is the actual collected tariffs, even to this day have meaningfully trailed the, the statutory tariffs or the, or the sort of promoted tariff rate, if anything. Actually, tariffs sort of gradually moved up from February last year to where they peaked actually in November and then have since slowed, you know, gone down a little bit. And so the actual economic effect was far more gradual. There's all sorts of reasons why that is. I mean, down all the way down to the point of like imagine you've had a total transfer, a total change in terms of the tariff regime and you literally need people to figure out what to charge people. There had to be a whole infrastructure developed. There was not the paperwork to charge the tariffs. If you talk to the actual CBP people, they didn't know which forms to fill in. And so anyway, the point is that's a riff on tariffs and how that obfuscated the effect or that slowed the effect on the real economy. Frictions. Gas prices are not that complicated. March 1st it was 299 at the tank. Today it's 399 at a tank. It will probably be 450 at the tank in a week or two if oil prices stay where they are. Like it's an immediate effect on the economy. And you're right, that part of the thing that we also Learned through the 2022 shock is it also takes time. Even if oil prices start to fall, it actually takes time for gasoline prices. It goes up much faster than it comes down. And in part, there's refiner margins that start to spike. And also just people get used to higher prices and people can delay the reset of prices as well. And so in this thing, we definitely will have a meaningfully higher inflation environment for the next six months versus tomorrow. Inflation will be meaningfully higher than it was expected to be for the next six months. And it's kind of like that, like every one month of this going on, we probably have, you know, at this point, a couple more months of elevated prices.
- [23:08]
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- [23:24]
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- [23:55]
Co-Host / Interviewer
I know this doesn't impact you on your strategies because you run systematic strategies, but like as a macro strategist, how do you think about it analyzing an environment like this? Like where one day where it's like one tweet changes everything. One day we're bombing power plants, then the next day we're in talks and then Iran says we're not in talks. It's like the market's just going crazy. Like, how do you think about analyzing an environment like that?
- [24:14]
Bob
No, it's such a good question. I think the most important thing when you're thinking about analyzing an environment like this is recognizing that you don't have a clue what's likely to happen from a policy perspective. Right? That's good. That's a good place to start. You have no idea. And I will tell you, I have no idea. Certainly no edge relative to the market in understanding the mind of the fella at Mar a Lago. Um, okay, so given that and given that, that those efforts, those policy shifts are creating a lot of volatility, you basically, you know, if you, if you're targeting a 10% volume book, like your Sharpe ratio for instance, is down by 50%, let's just say, let's just assume that your Sharpe ratio, meaning, like if you under, if you have a great understanding of all the macro linkages of how everything's working down 50%. Okay, well that means you should take a lot less risk than you would have taken in a different environment. And that's okay. That's part, part of being a good asset manager is recognizing the variance in your conviction. This is a low conviction environment and so you gotta trade it that way. Like you don't really know exactly what's going on. And that's why if we just tie back to what we were talking about earlier, why is there so much deleveraging from lever players? For this exact reason conviction has gone down in this environment. That's step number one, Summer two is make sure you're betting on things that you can actually know and understand. So for instance, if I look at oil prices right now, I don't have much of a strong view why, like from a macro perspective, I don't know, taking 8 million barrels off, it should be something like 100 to 120. The price is basically under 220. I don't really have much conviction beyond that. I certainly don't have much forward conviction on exactly how all this stuff's going to play out, what you can have more conviction on. And I think the thing that markets in general provide in terms of medium term alpha from a macro perspective is those market linkages. And so if I go and look at what's priced into the bond market, well, the one year inflation rate, the one year inflation swap is mostly reasonable. Maybe it could be a bit higher. But I'm not, you know, but who, but who's really going to, going to tweak that. But then you look at, you know, maybe we're in a more elevated inflation environment or maybe we should have more risk premium in bonds given what's going on. Those are things that you could look at and you could say those are probably not reflecting it or I think one of the more interesting things is look at what's going on with stocks versus bonds right now. Stocks versus bonds from a macro person's perspective is a really good indication of forward growth expectations. Stocks have actually gone up relative to long term bonds since the, the Iranian war began. Okay, well that's odd. You have a huge oil shock going on in the economy and a huge erosion of real spending power. And you're telling me that growth expectations are actually better today than they were on March 1st. That's what's priced into the market. Those are the sorts of things like do I think, you know, do I know it's going to, the growth is going to fall to 2 or 1 or 0 or negative 1, I don't really know. But I know that the skew of that trade, even if oil prices normalize tomorrow, is mispricing the likely economic hit as a result of what's already occurred. And so those are the sorts of things you have to sit, you have to look at is really look cross asset, really look macro fundamental and at the same time be really humble about what you could know because basically, you know, Washington has eroded a lot of your Sharpe ratio.
- [27:47]
Co-Host / Interviewer
That thing you said about like know where you have edge is such an important thing. Like I probably figured out which countries are which on which side of the street of Hormuz like last week. And now I'm suddenly like, all right, I need to update my process based on flows through the Strait of Hormuz. So it is important to understand like what you can, what you know, what you don't.
- [28:02]
Bob
Exactly. I don't think anyone knew, you know, any normal investor knew much about the east west pipeline in Saudi Arabia until we started getting out the maps and looking at the east, right, and we're like up 7, 7 million barrels a day. Well, that's good to know. Didn't expect that to knock in, but you know, that's, that's the reality. So that's a good example. Like leave the oil trading to the oil traders who understand all these nuances and really, you know, your, your opportunity is around the second and third order effects and that often I think that is a very common thing with macro trading, which is, you know, the, the juice is not in predicting the policy or predicting the, the essentially the market that's driving the impulse into the economy. The real juice is around how do you understanding the second and third, all those second and third consequences and where they might be mispriced globally.
- [28:57]
Co-Host / Interviewer
So what does the Fed do with this? Like, I've been overusing the Feds in a tough spot for like the last three years. But it does seem like this puts the Fed in a tough spot, Bob. I mean you've got near term inflation problems, you know, in the longer term it's bad for the economy. Like it seems like maybe they do nothing. But I want to get your opinion, like what do they do with something like this?
- [29:15]
Bob
Well, if there's one thing central bankers are good at, is in a time of volatility doing nothing. And that is what they will do nothing. For a long time, they will do nothing. At least in the US Case where the balance of the mandate, right, the oil stock basically cuts, pushes both sides of the mandate in the opposite direction and where they've sort of outlined a principle of accepting elevated inflation for an extended period of time. Now, of course, we're already five years into elevated inflation, inflation above their mandate, and so this probably might push another two years beyond that. So it's not great. But they've made it pretty clear, the Fed's made it pretty clear that they don't care so much about inflation being moderately above their mandate. There's other central banks for whom that is not an acceptable bet. The ecb, it is an inflation targeting central bank. It basically has no other choice but to tighten if inflation gets up above the three level and it's likely to do that and markets are pricing that in. And so it really comes down to what's the mandate, what are the trade offs of each central bank. And you'll likely see them respond accordingly. But with a tendency in all of this to be far more slow moving than I think a lot of people might expect. The Fed isn't going to cut aggressively immediately. They're not going to tighten aggressively. Even the ECB or the BOE are going to. They're going to take their sweet time to figure out what the heck's going on before they get a move on. It really only seems like the RBA is the one that is really in the mood to tighten the screws though. As they highlighted in the last meeting, just on the economic data alone prior to the oil shock, it would have made sense to continue to tighten policy in Australia. So you're in a bit different position since they already had sort of a tailwind of tightening that made sense.
- [31:22]
Co-Host / Interviewer
Putting aside what the Fed will do, how do we think about what they should do? Like how do you handle an oil shock? I would think it's probably a mistake to hike into the initial inflation. Right. Because you've got the economic problems down the road. Is doing nothing the right policy?
- [31:34]
Bob
Well, I think it comes down to what you value in terms of short term pain versus medium and long term stability. Like, you know, the Fed's probably not going to take any advice from me on, on what they should be doing with policy.
- [31:55]
Co-Host / Interviewer
But look, they're watching, Bob.
- [31:57]
Bob
I don't. Maybe you've got some, some sleepers watching on YouTube, some anonymous accounts. I hear Chairman Powell quotes around Twitter with an anonymous account. We still haven't figured it out, I guess, but I, you know, I think if I was sitting in the Fed's shoes, I would be really concerned about the fact that we've had Inflation above expectations and above their mandate for an extended period of time. And the reason why that is is because letting inflation like we're seeing the consequences, like if you let inflation stay at 3, the probability that you get to 4 is actually reasonably high. And then if you get to 4, the probability that you get to 5 is, is actually pretty high. Right. And that's the problem with inflation. That's the problem with sort of accepting a elevated inflation regime. So what would I be doing in this circumstance? I would be tightening into this oil shock. But you know, that's not going to win any votes certainly from the man in charge since it would run afoul of his rate preferences.
- [33:07]
Co-Host / Interviewer
How do you think about comparing this to 2022? On one hand, that seemed to be more across everything, the inflation, not a specific commodity. It also seemed to be more demand driven than supply driven. But how do you think about the difference between the two and how that affects how we react to it?
- [33:20]
Bob
Yeah, in some ways the mechanics are similar in the sense of you have a supply shock there, you had a bigger supply shock in the sense of you had Covid related supply problems. And then on top of it you began, you experienced an oil shock. And so in those circumstances, if you just look back to 2022, what happened was inflation persisted for a while. Central banks had to tighten in response because it was so persistent. Stocks sold off and bonds sold off and they sold off a lot. Just to be clear, they sold off a ton like long term and bonds and stocks sold off 25 plus percent depending on exactly what you're looking at. What I'd say in relation to that is, look, this isn't nearly as an extreme environment as 2022, but it is still in that direction. And so if we just compare that to what's going on with global, let's just say what's going on with global stock markets right now. What's been the price change or the return on global stock markets since the beginning of the year down to what has been the global return of bond markets since the beginning of the year? Zero. Okay, well, maybe it's not going to be down 25% on both, but it sure looks like we are underrepresenting what could plausibly be the effects with a zero return on both assets to begin the year. And so that's what I'd say is directionally it's probably indicative magnitude wise, it's probably not. And kind of regardless of exactly what you think the specific magnitude is, it sure seems like we're Mispricing this across the market.
- [35:03]
Co-Host / Interviewer
Yeah. So just to close up this section, your general feeling is neither stocks nor bonds, you're not loving them relative to this, even if this thing gets resolved quickly.
- [35:11]
Bob
Yeah, I think there's just when you're trading markets from a macro perspective, just you always have to keep in mind that you're trading relative to what's priced in. And so if I just look at what's priced in, nothing is priced. That is what's priced in. Nothing. Okay, so we start with nothing priced in and we have a relatively sizable oil shock. I would think at a minimum, some or a moderate amount would get priced in or it would have the effect on the real economy. And that that looks underpriced right now. If markets change, then that might, that view might change relative to what's priced in. But for now, it looks like both stocks and bonds are underpricing the economic consequences of the shock.
- [35:55]
Co-Host / Interviewer
So I want to shift to AI because this is something I've just been trying to learn about. And I'm sure you read this treaty piece and I've just been thinking a lot about the contrast of that. This idea that AI is going to cause tons of job loss with the VC people on the other side with the world of abundance that's coming. And I can't, I'm not good enough at economics to like, settle this idea as I think about, like, what the AI impacts on the economy will be. So just before we get into it, like at a high level, like, how do you think about, like that contrast between those two different things and how this might play out as it moves forward?
- [36:25]
Bob
Well, one of the key challenges that I think folks have when they think about this question is they disconnect labor from spending. And so just this is like a very, you know, a simple macro person's perspective on how to think about. How to think about a productivity shock, let's say positive. This would be a positive productivity shock in terms of its effect on the economy and spending. All spending in the economy is the flip side of labor income. Think about that. Even if you talk about government spending, right? They're just taxing labor's income and like a little bit of capital, but mostly taxing labor's income. So if that's the case, you can't have a significant reduction in labor income and also have a continued strength in nominal sales. Those two things are inconsistent with each other. They cannot exist. The only way that they can exist is through desaving. Right? That's the lever. Right? It's very simple. Like if you fire people, they don't have money to spend. And so the only way you don't at an economy wide level don't get a hit to top line revenue. And to be fair, top line revenue is just GDP at an economy level is that they have to decide. So the only way that you get this story where you have like a positive economic outcome and you have terrible job creation and widening profitability is in an environment where you have massive to savings. So who's going to do that? Like our household is going to do that. They're going to massively desave as they're all losing their jobs. Not how it works. Is the government going to disable, what are they going to do? They're going to borrow a ton. At some point interest rates rise to the point where that's actually a drag on the economy. And you can, that creates a negative effect on the economy. So that's probably not going to happen. Alternatively, what you could totally different view of this is you could draw on the perspective of how productivity gains have flowed through in every positive productivity environment since the beginning of recorded history. And you could say labor receives, you know, labor becomes more productive and they receive higher incomes as a, as a part of that. And of course the, the capitalists get some of that income and the labor gets some of that income and we all become better off associated with it. And no one, you know, we don't wipe out all the jobs. What happens is people do other jobs, you know, and you know, they spend less time on one thing and they spend more time on something else. And so that's probably, you know, that's probabilistically the most likely scenario is that you know, productivity gains enhance labor's productivity and therefore they become more valuable and therefore they get paid more and therefore they spend more. And overall GDP in the economy.
- [39:25]
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- [40:26]
Co-Host / Interviewer
Just to decide how well can we measure productivity? Like we've had other guests on who were talking about this idea that in like a technology driven age, it's very, very difficult to measure productivity. And I was like, I was looking at Fred the other day at the productivity chart, it kind of just goes up and down and just kind of stays in the same place. Like, are we mismeasuring productivity like in a world of technology?
- [40:43]
Bob
Well, I think actually productivity, it's very important when you're thinking about technology to not confuse consumer surplus with productivity. And this, people confuse this stuff all the time. So very simple example, the fact that I can connect with, you know, my high school friends on Facebook is consumer surplus, right? It makes me happier, right? Similarly, the fact that I can, you know, ask questions about the 1947 World Series to ChatGPT and get an interesting, you know, quick response also improves my quality of life, but it does not make me any richer. Does not make me any richer. Productivity. In order to have productivity gains, you have to be wealthier, meaning you have to make money per hour work. And there's a big difference between those two things. And so as an example, like people kind of think of, let's say the transition to mobile or social media, things like that as being productivity enhancing. No, they're consumer surplus enhancing. But actually what's going on is the same old thing that's happening in the economy that has happened for a long time, which is there's advertisers. Those advertisers are advertising to you where your eyeballs are. And that's basically it, you know what I mean? Like Facebook is the local newspaper of 2015, right? And similarly, you know, we might have ads and you know, spending or something in ChatGPT. And that would be the same thing as newspapers from, for maybe it's a little more efficient, et cetera, but basically all the benefit, a lot of the benefit, a lot of the perceived benefit in the day to day is consumer surplus. Very simply, if you're not making more money using the technology, you are not being more productive. You may feel better, you may be happier, you may feel more enriched, but unless you are making more money you are not more.
- [42:47]
Co-Host / Interviewer
This is a question I ask myself all the time because I'm making like better YouTube thumbnails and YouTube video titles and stuff. I'm like, hey, is that, is that really teaching?
- [42:53]
Bob
And the question, the question is, right, that's, that's, that's a, that's a. You might perceive it as being better, but, like, literally, is your root YouTube revenue going up as a function of doing that? I think the answer is probably not. I mean, I have nothing against the show.
- [43:09]
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- [43:10]
Co-Host / Interviewer
The problem is here too is everybody else is also making better YouTube videos than is my YouTube revenue actually going up.
- [43:17]
Bob
Right. Such a good example. Right? You're all doing it and you're basically. And you know, there's consumer surplus in the sense of like, the thumbnails look better. And, you know, it's. Maybe it feels easier to engage with as a consumer or something like that, or they're just prettier, I guess. YouTube thumbnails aren't really pretty, but you get the point. But the question, it just comes down to it. Is there more money being made or not? And I think that is such a critical component because I hear all sorts of people talking about, oh, I'm so much more productive. I can create more reports, I can do this, I can do that. I'm like, are you making more money? And they're like, not really. Okay, okay, if you're not making more money, you're not more productive.
- [44:00]
Co-Host / Interviewer
I was thinking, like, I've been trying to think of like the micro informing the macro. When I think about AI and going back to what you talked about the beginning, I was thinking about, like, if I use the example of like, say you have Bob's law firm and you've got like four associates, and you realize, all right, I can do the same work and I can get rid of three of the associates. Now I've got a problem for the economy in terms of I've laid off the associates. But also there's another way I could go with this in which I could say I'm just going to lower my prices and I'm going to do way more volume and I'm going to keep all the associates. And from my perspective as a consumer, like, legal services are probably going to get cheaper now. And so I don't know if that's a great example. I'm just thinking about the push and pull of all those different things. Things as we like using one business as an example of how this all impacts the economy.
- [44:39]
Bob
Yeah, that's Right. I mean, I think that's the trade off here, Is how those various pieces work through. And I think one of the challenges, just a simple example that you're giving is like, I think the first order that you're saying, which is, if I fire all the people who are doing it, then they don't have any income to spend on legal services and other things. And that will, you know, be a drag on the economy. So that doesn't really help anyone. The sort of second order of saying, well, I could, you know, do more, increase the supply of legal services. Although there's a question about, you know, how many more legal services do you need? You know, I prefer to have less legal services, not more, but I got more than enough legal services.
- [45:26]
Co-Host / Interviewer
Also, like cheap people like me, you don't want to pay $600 an hour. If it's $100 an hour, maybe I'll use a little bit more.
- [45:31]
Bob
Maybe you will, maybe you will, or maybe you won't. And maybe you'll just do it yourself again, even there, that's a good example. Maybe you'll just pop the contract into chat CPT and say, hey, chat gbt. Can you tell me, you know, how to think about this contract? Are you making more money? Like, no, not really. You wouldn't have done it before because you wouldn't have paid 600. And now, like, you're getting a review that you think is better than, you know, doing nothing, but it's not clear that it's better. It's not clear that you're making any more money as a function of it. Like, you might have a better contract in some intuitive sense, or you might catch some things, but, you know, it's not clear that it's actually. Is there a person spending more on goods and services in the economy when you've done that? The answer is probably not.
- [46:19]
Co-Host / Interviewer
I was trying. Because what I'm trying to get at is I'm trying to figure out. I always try to think about, like, even something I don't believe, like, how do we get there? And so I'm thinking about the tech guys in their world of abundance and, like, how do we get there? And the way you have to get there, I guess, is, like, prices have to come down across the board, but, like, without the layoff part of it, like, is that right? I mean, is that a conceivable place we could actually get to, like, knowing what you know about economic principles?
- [46:40]
Bob
Yeah. I mean, it's possible that we enhance real spending power. Right. In terms of. In terms of overall consumption because prices go down. Like you could see a world where essentially nominal incomes remain flat, but we have a supply, an increased supply of legal services or whatever. And so you have better real demand as a function of that and better real demand in many ways sort of feels better in terms of you're getting more bang for your buck. Although even there it's not really clear that doesn't, that's real demand. That doesn't actually improve nominal demand. And ultimately what drives GDP is really around nominal demand. And so it's not what that drives incomes and profits and things like that is nominal demand. And so it's not actually clear that that savings or, sorry, that that deflationary environment again, it's more consumer surplus. It's more sort of real feeling that you have more real spending power than it really is like improving incomes in that case. And so that's the challenge is like now you could argue, okay, well things are cheaper then, you know, then you know, the inputs to other things become cheaper and that maybe then like there's a broader set of goods available and therefore the economy spend, you know, expands that way. But it's not the line of, of abundance to increases in nominal incomes is not obvious.
- [48:21]
Podcast Host
So hard pivot here from AI to AI to unlimited global macro fund and how you think about that's a hard pivot. I mean, we, honestly, for me, like this is the fun part. So I want to get into the investment process and the investment strategy here and how, you know, a lot of this, a lot of what we've talked about, you know, doesn't go into the strategy because you're really a systematic manager. But I think still it's, it's good to sort of talk about this macro stuff and think about how it's coming down the pipe and. But yeah, so your new, one of your newer strategies, the unlimited global macro etf, it actually is nominated as one of the best new alternative ETFs through this etf.com voting that is either going on or ended. But that's cool to have, you know, be part of that group. So congratulations. But what I think we wanted to just start is, you know, when you explain the layman like a global macro strategy, what are the core building blocks that go into a traditional global macro portfolio?
- [49:24]
Bob
Yeah, when you think about global macro strategies and investors, what you see, you know, what they're trading is a whole range of different global stock market, bonds, currencies, commodities, credit markets long and short, basically finding the best, most mispriced opportunities across asset markets. And I think a lot of the, a lot of the conversation we had here was around sort of some of the pressures on global assets that are coming from essentially a macro macro pressures on global assets in one form or another. I guess you call it a policy to have a war, which is typical. And in a lot of ways, what we've seen over the course of the last couple years is macro has been driving macro dynamics, macro policy and macroeconomic pressures have been driving assets significantly. Now the question is, how do you take advantage of this environment where macro pressures are driving things so significantly? The natural inclination is to try and make tilts and bets on your own. And I think the challenge with that is that there are many people who spend billions and billions of dollars to create insightful views on what's going to happen in the macro economy. And so our idea at Unlimited was rather than rely on one individual person or manager's views on the macroeconomy, let's gather the wisdom of the crowd, particularly of the hedge fund community, and understand how they're positioned in aggregate and draw on that wisdom of the crowd to create views that we use in our ETFs. And if you look through time, what you see is actually, in many ways, the wisdom of the crowd, of the aggregate hedge fund community is actually a more consistent set of views, generates more consistent returns than solely relying on any one individual manager who might be right or wrong in any one particular point. And so part of the success of our global macro strategy that you've seen over the last year is really a reflection of the fact that macromanagers in aggregate have generated a lot of alpha. Now, on top of it, we do two things that don't exist in a lot of other manager diversified approaches. The first is, instead of targeting institutional risk levels, like bond like risk, we target equity index risk. So we essentially are doubling the target return. So you're getting a higher expected return than what you typically see with macro managers. We just basically use the same views and just make them larger to do that. And then the second thing is we're cutting the fees a lot. So instead of paying 2 and 20, we're cutting the fees down to 95 basis points on a product that has essentially twice the expected return. And so if you think about that, that's basically cutting the fees by, you know, 1 8. And so you put that all together and it's what turns what has been a good period for macro hedge fund managers. And you go look at the reported index returns of macro Managers, it's been a good period for them of, you know, mid to high double digit returns over the last year and transforms that to something that is a relatively extraordinary outcome over the same time frame.
- [52:53]
Podcast Host
Well, I'm stating the obvious here, but you get, you know, super great tax efficiency within the ETF wrapper and you get, you know, basically daily liquidity, which.
- [53:03]
Bob
Exactly. The daily liquidity, the tax efficiency. And also the thing that I think a lot of folks that I talked to find compelling about it is you go look at the position like this isn't a black box. You have no idea what this person's doing, you have no idea what their views are. You go to the product websites and that's true for every ETF that's in the market. You go to the product website and with a one day lag you can see the positions that are being held by the portfolio. And so you go look at these things and say, does it make sense that, you know, macro managers held substantial long gold positions up until recently? Does it make sense that you know, they were able to identify, you know, go, go into this war long oil and then cut that position as oil prices went up a lot like do those things make sense? And you know, intuitively stress test whether what you're seeing in the portfolio is actually consistent with what you'd expect.
- [53:59]
Podcast Host
The fund is actually having a very good year and it's had actually very good, you know, past couple quarters here. What are the contributing, you know, rather than, we don't have to focus too much on the specific holdings but you know, what have been the contributors to that level of performance?
- [54:17]
Bob
Yeah, I mean it's been relatively broad based, I mean starting even Post Liberation Day with, with nice trading first underweight duration and then overweight duration, long gold positions in the Post Liberation Day period that then transitioned over the summer to start to pick up on some of the broader macro pressures from the Fed shifting towards an easier environment. So if you look at returns in late August, September and October, essentially when all asset prices were going up, macromanagers really leaned into that. And as you turn your attention to this year, the advantage has really been to start the year holding long positions in things like gold and metals as well as long positions in global asset prices and then being smart about locking in those gains as we've moved to a more volatile environment and so taking profits as those positions rallied. Plus getting the oil call right coming into the war, picking up positions in oil. I remember distinctly we were talking at, we review the positions all the time. But we were talking, it was about five days before the war started. We were looking at the positions, we were saying, wow, it's interesting, you've seen these macro managers really pick up their long oil positions. Isn't that interesting? That that's happened was certainly to the benefit of the portfolio coming into the war. So it's been, you know, look, I wouldn't necessarily expect such a high win rate on positions over time. You know, macromanagers in general, the sort of managers themselves generate sort of high single digit returns, which means that a 2x target return, you're looking at sort of mid teens returns with equity index like volatility over time. This has been a particularly good period. And I think in part it's because so much of what's going on in the day to day is macro policy and macroeconomic driven in a way that you know, if you go back post financial crisis, there was a lot more, a lot more to sort of micro trading between specific securities.
- [56:33]
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- [57:28]
Podcast Host
But I could see how this could be appealing from like an advisor's perspective in that know if a client wants to know like how their portfolio maybe on the edges is you know, being adjusted to reflect this new macro environment or what's going on. You know, somebody could turn to a strategy like this and you know, look like you said, look at the holdings and see, okay, what is being reflected through these macro strategies that you're, you're replicating. But I guess where I want to go is like how would you describe where this type of strategy fits in a broader, you know, portfolio allocation for you know, high net worth individual or someone like that that is, you know, allocating to something like this?
- [58:13]
Bob
Well the main thing I'd start with is basically all portfolios are long only assets Right. That's everyone's portfolio. So if you, whether you're a 6040 or a more traditional 6040, which you know the vast majority of folks are, or you're a even transition to a 50, 30, 20 where you have some alternative assets like you know, private credit or private equity or venture in your portfolio. Basically everything is long only. And part of the advantage of a macro strategy is you can be both long and short, which means that you can, you have the opportunity to generate alpha in a wide range of different market environments. I like to highlight what global macro managers the best two periods in the post GFC period for macromanagers were 2022 when all assets went down and actually the the end of 2025 and early 2026 when all assets went up. Isn't that interesting? Like two radically different environments from an asset market perspective. And that's because these managers, when the markets are driven by these macro forces can go short and they can go long. Right. And that flexibility is really valuable. And so in your fifth, you know, if you're, if you're looking at alternatives, I know it's, it's, everyone is enamored with the next Cliffwater fund or Aries fund or things like that for your private credit. Maybe you'll get your money back someday. Good luck. Maybe you want to diversify to something that isn't one of those illiquid long only products and find something that can work in a wide range of different environments. And that's really where these strategies shine.
- [59:51]
Podcast Host
That's great, Bob. We look forward to continuing to follow this strategy and all your strategies actually. But sort of in closing, I mean, how are you thinking about just the opportunity set with global macro going forward? Do you think it's going to still be to your point? I mean, you kind of said, you know, the returns in the last few months have been nothing short of exceptional. So that might not be, you know, the hit rate going forward. But how are you thinking about just global macro as you look out on the horizon?
- [60:20]
Bob
Well, my main thought is that it's been really even post gfc. It's been an environment where just being long, anything that you could find has been an incredible trade and preferably the riskier the thing, the better. Right. And the thing that the last couple years have taught us is that that may not be the case forever. And so if that's not the case forever, you have to start to think about what are the types of strategies and approaches that you can put into your portfolio that can make money in a wider range of environments where it's not just all assets are going up. You know, you can make money in a war inflation or, or in a bond sell off or all those different environments or, or a debasement environment. All of those different environments, because we're likely to face a cone of plausible outcomes ahead is probably much wider than what most of us have experienced in our careers, particularly those folks who have only been in the industry post gfc. And so part of the idea of bringing macro macro strategies into a portfolio is basically hiring the smartest, most sophisticated asset managers in the world who do this for a living and putting that in your portfolio so you don't have to do it entirely yourself. And I think that is, that's really where the benefit is. It's draw on the wisdom of the crowds without paying them the type of money they normally demand. And that can be very beneficial to your portfolio.
- [61:52]
Podcast Host
Good stuff, Bob. Thank you very much.
- [61:54]
Bob
Thanks for having me.
- [61:55]
Podcast Host
Thank you for tuning in to this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube. You can also follow all the podcasts in the Excess returns network@excessreturnspod.com if you have any feedback or questions, you can contact us@xsreturnspodmail.com no information on this podcast
- [62:15]
Bob
should be construed as investment advice. Securities discussed in the podcast may be holdings of the firms of the hosts
- [62:23]
Podcast Host
staring at your screen.
- [62:24]
Co-Host / Interviewer
Take a break.
- [62:25]
Podcast Host
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