How the Big Beautiful Bill’s Passage Will Reshape the Economy

Summary

Prof G Markets: Episode Summary
Title: How the Big Beautiful Bill’s Passage Will Reshape the Economy
Release Date: July 7, 2025
Host/Guest: Ed Elson and Robert Armstrong

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Introduction

In this episode of Prof G Markets, co-host Ed Elson welcomes guest host Robert Armstrong to discuss the recent passage of the "Big Beautiful Bill" through Congress and its multifaceted impacts on the U.S. economy. The conversation delves into deficit spending, job market dynamics, the generational wealth transfer, and the broader implications for investors and society.

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Passage of the Big Beautiful Bill

Overview of the Bill: The "Big Beautiful Bill," recently signed into law by President Trump after a narrow House vote of 218-214, includes significant policy changes:

• Tax Cuts: Extension of the 2017 tax cuts, primarily benefiting the wealthy.
• Deficit Spending: Projected to increase the federal deficit by $3.4 trillion over the next decade (00:38).
• Program Cuts: Major reductions to SNAP (food assistance) and Medicaid (Ed Elson).

Critique and Market Impact: Ed and Robert express concerns over the bill's approach to deficit spending and its long-term economic sustainability.

• Robert Armstrong: "We're just playing chicken with the national debt... Maybe we're like Japan and we can get away with this irresponsibility indefinitely. But what if we're not?" (04:52)
• Economic Projections: A Yale Budget Lab chart predicts a short-term GDP bump of 0.5%, followed by a decline to -2% by 2050 due to escalating deficits (06:19).

Market Reactions: Despite the negative long-term outlook, Wall Street responded positively with NASDAQ and S&P hitting record highs, reflecting immediate corporate benefits from government spending.

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Jobs Data and Economic Pulse Check

June Jobs Report: The U.S. added 147,000 jobs in June, surpassing the expected 110,000 (32:05). This robust job growth suggests economic resilience but comes with mixed signals.

Sector Analysis:

• Increases: Government (71,000), Education and Health (51,000), Hospitality (20,000).
• Decreases: Business Services (-7,000), Manufacturing (-7,000).

ADP vs. Official Data: ADP reported a loss of 33,000 private sector jobs in June, contrasting with the government’s positive report. Ed notes, "These little bits of variation wash out when you look at the three or six-month averages" (35:12).

Economic Indicators:

• Strengths: Strong job creation and steady GDP growth.
• Weaknesses: Declining manufacturing activity, a falling dollar, and contracting GDP revised lower in Q1.

Federal Reserve Implications: The strong job market diminishes the likelihood of a rate cut in July, with Robert emphasizing, "He [Fed Chair Jerome Powell] is going to stick with it... We're not getting a cut in July" (40:59).

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Impact on Investment Sectors

Winners:

• Oil and Gas: Benefiting from reduced investment in clean energy.
• Luxury Stocks: Reflecting increased wealth among the ultra-wealthy.
• Gold and Bitcoin: Seen as hedges against inflation and economic uncertainty, though Robert notes Bitcoin has been relatively flat compared to other assets (18:06).

Losers:

• Clean Energy: Despite some resilience, the sector faces significant challenges due to reduced tax credits.
• Healthcare: Major cuts to Medicaid are projected to result in 51,000 preventable deaths annually and leave up to 16 million Americans without health insurance by 2034 (15:46).

Investment Strategies: Robert advises re-evaluating traditional portfolio allocations (e.g., 60/40 splits) in light of persistent inflation and higher debt burdens, suggesting a move towards real assets like real estate (19:06).

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Generational Wealth Transfer and Inheritocracy

Wealth Transfer Statistics:

• Current Transfer: $6 trillion set to be inherited this year.
• Future Projections: Over $83 trillion to be passed down in the next 25 years.
• Estate Tax Changes: The exemption increased to $15 million for individuals and $30 million for couples, allowing large inheritances tax-free (58:37).

Implications of Inheritocracy: Robert highlights the economic and societal impacts of wealth concentration:

• Economic Growth: "Wildly unequal societies grow less quickly than they otherwise could" (60:04).
• Consumer Behavior: The wealthy tend to invest or save rather than spend, reducing overall economic dynamism.

Social and Psychological Effects: Ed and Robert discuss the potential for reckless spending among heirs, comparing it to the Gilded Age's excesses. They explore the challenges of redistributing wealth without impeding economic incentives.

Potential Solutions:

• Wealth Tax: Challenges in measuring and enforcing but seen as a possible way to mitigate inequality.
• Borrowing Tax: Proposed by Ed as a method to tax wealth indirectly through borrowing against holdings (73:05).

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Future Predictions and Closing Thoughts

Inflation Outlook: Robert believes that sustaining the 2% inflation target is unlikely, anticipating a persistent 3% inflation rate that will continue to challenge traditional investment strategies (50:19).

Luxury Market Trends: Predicting a reconsolidation in the luxury industry, Robert expects a shift towards more understated luxury as extravagant spending habits peak and consumer preferences evolve (75:55).

Final Insights: Both hosts emphasize the importance of adapting investment strategies to the changing economic landscape, characterized by increased deficits, persistent inflation, and significant wealth transfers.

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Notable Quotes

• Robert Armstrong on Deficit Spending:
  "We're just playing chicken with the national debt... Maybe we're like Japan and we can get away with this irresponsibility indefinitely. But what if we're not?" (04:52)

• Robert Armstrong on Wealth Inequality:
  "Wildly unequal societies grow less quickly than they otherwise could." (60:04)

• Robert Armstrong on the Fed's Independence:
  "We're having this great civic lesson in why an independent Fed is good and how an independent Fed should behave." (43:51)

• Robert Armstrong on Inflation:
  "We're never getting sustainably to 2% in the foreseeable future. We're going to go along and it's going to be bad one month and it's going to be kind of in that 3% range and bouncing around." (50:19)

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Conclusion

The episode provides a comprehensive analysis of the recent legislative changes and their broader economic implications. Ed Elson and Robert Armstrong offer critical insights into how deficit spending, job market strength, and generational wealth transfers are shaping the current and future economic landscape. Investors are advised to reconsider traditional strategies and prepare for a more complex economic environment characterized by persistent inflation and significant shifts in wealth distribution.

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Connect with Prof G Markets:
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Transcript

[Ed Elson]

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[Robert Armstrong]

If you went on a road trip and you didn't stop for a Big.

[Ed Elson]

Mac or drop a crispy fry between.

[Robert Armstrong]

The car seats or use your McDonald's bag as a placemat, then that wasn't a road trip.

[Ed Elson]

It was just a really long drive at participating McDonald's. This episode is brought to you by Progressive Insurance. Fiscally responsible financial geniuses, monetary magicians.

[Robert Armstrong]

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[Ed Elson]

Who switch their car insurance to Progressive and save hundreds. Visit progressive.com to see if you could save Progressive Casualty Insurance Company and affiliates.

[Robert Armstrong]

Potential savings will vary.

[Ed Elson]

Not available in all states or situations. Today's number, $2,380. That's how much a single meal costs at Sublimation, the world's most expensive restaurant located in Ibiza. A very specific number to start the show, but not without because as we speak, my co host Scott Galloway is partying in Ibiza. That's right, Profji is still on vacation. I don't know if he'll be dining at Sublimation tonight, but I do know that with all these groons ads I'm selling, he certainly can. Welcome to profit markets. I'm Ed Elson and today we have got the one and only Robert Armstrong on as my guest host. Robert, great to have you on.

[Robert Armstrong]

It's great to be here. I'm just trying to imagine what a $2,800 meal is like. Is it just. Is it everything just covered in gold?

[Ed Elson]

I've heard it's 20 courses. It probably lost seven hours.

[Robert Armstrong]

I mean, it's just such a crazy number. I just don't know what happens. I mean, I must include wine. The wine must be just outrageous.

[Ed Elson]

Certainly a great, great wine program. Well, I hope that Scott is enjoying it. Maybe he'll get to dine at Sublimation. We'll see.

[Robert Armstrong]

Yeah.

[Ed Elson]

Today though, we will be discussing the big beautiful bill and its passage through Congress. We'll also be discussing some new jobs data, what that means for the economy and also the great generational wealth transfer and I just want to say, Rob, this is the very first time on this program that I am wearing a tie. And I did it for you because I know that you love ties. I do know that you are upset that people aren't wearing ties anymore. But here you are on the podcast and you're not wearing a tie.

[Robert Armstrong]

I know it's casual Thursday because Friday's a holiday and so casual. And I also just got out of the car and was in a rush to get started. So I'm sorry that I'm dressed up as you and you are dressed up as me.

[Ed Elson]

That's a good dynamic. It feels good to be dressed up as you.

[Robert Armstrong]

Okay.

[Ed Elson]

I love it.

[Robert Armstrong]

So there's so much to talk about today. I feel like it's, it's been amazingly busy holiday week in some way.

[Ed Elson]

Exactly. And we don't like holidays here at Profg Media. We like to work all the time. So that's what we're going to do today. Let's start with our first story.

[Robert Armstrong]

Now is the time to buy.

[Ed Elson]

I hope you have plenty of the wherewithal. President Trump has signed the GOP tax bill into law after the House narrowly passed it with a final count of 218 to 214. The bill will fund several of Trump's top priorities and include an extension of his 2017 tax cuts. It also includes major cuts to SNAP and Medicaid. According to the CBO, it will increase the deficit by $3.4 trillion over 10 years.

[Robert Armstrong]

The motion is adopted.

[Ed Elson]

Rob, this big beautiful bill which we've discussed for many weeks now and which Scott and I have at least been very critical of, critical of the deficit spending, critical of the tax cuts, which as we look at it, will only make rich people richer, critical of how those tax cuts will be paid for with the deficit spending, as I said, but also all these cuts to these programs that primarily help poor people like snap, like Medicaid. And now here we are, your initial reactions.

[Robert Armstrong]

You know, the most consequential feature of the bill is the deficit part. The relationship between budget, government budget deficits and markets is really interesting. And it's really interesting because it's nonlinear in general markets like deficit spending, when the government borrows money, especially money from abroad and pushes it into the economy in whatever way, that money, just as a causal regularity, tends to end up on the balance sheet of American companies and it tends to end up in investors pockets and they put it in the stock market and the stock market goes up. But, and I think we've talked about this on the show before. It's a matter of markets liking deficit spending until they really, really don't, which you get to some point where the debt becomes unwieldy, the government's interest rates go up, the government is a force into either austerity, into inflating its way of its trouble, and then the wheels completely come off all at once. So there's a kind of game of chicken aspect to deficit spending like this. You always want to do a little more. You always want to do a little more. But then at some point, you know it's all going to go terribly wrong. You just hope that point happens when someone else is in office and you are retired and, you know, keeping bees or doing whatever retired senators do.

[Ed Elson]

I saw this great chart from the Yale Budget Lab which basically just maps out what this will do to GDP growth and it perfectly summarizes what you said. Basically just to describe it, you initially have this little bump where GDP goes up 0.5%. And if you were to just look at that little time frame of a couple of years, you'd think, okay, this is a good thing. But they extend it over a long period. They extend it to 2050. And after that bump, suddenly the line starts to go down and down and down. And by 2050, you've got negative 2% GDP growth.

[Robert Armstrong]

Yes. And any projection like that, a huge amount of assumptions goes into. And the most important assumption is what is the interest rate on the debt going to be? Do you know what I mean? So at what point. So there's two actually moving pieces here. One is when the interest on the DEB becomes just a drag on the economy. Right. That you're just, it's, it's like a slow burn thing where the, the interest payments get higher and higher and it's just like a household, at some point you're just spending all your time maintaining your debts and not like buying things that are fun or useful or interesting or make you happier. The second point is that the tendency of these things to turn into a crisis, which is you're the. Suddenly the deficit and the debt spiral out of control, the bond market rebels and you have a financial crisis and those wouldn't happen. And I'm often asked by readers when I talk about this, well, how do we know when it's going to happen? And the whole point of it is that we don't know when it's going to happen. If we knew where the line was, where it was too much debt, then we just wouldn't cross that line and life would be easy. We would know what to do. But because you don't know crises, the biggest part of the thing that makes a crisis a crisis is that it's unpredictable. Right. And you don't know when you're going to hit it. So we're just, you know, we're just playing chicken with the national debt. And, you know, some countries can get away with it for quite a long time. Japan, as a percentage of GDP has much more debt than they do, and they just keep cruising along fine. So maybe we're like Japan and we can get away with this irresponsibility indefinitely. But what if we're not?

[Ed Elson]

And it seems that that is. I mean, if you just look at the stock market's reaction, Wall street kind of likes this and that. I mean, NASDAQ S and P both climbed last week. They both hit record highs. And I think that sort of reflects your point there, which is actually, yeah, we're playing this game of chicken or kicking the can down the road or whatever we're doing to the debt. But in the short and medium term, what this basically means is trillions of dollars in spending that's going to be injected into the balance sheets of those U.S. corporations. And so for Wall street, it seems like, I mean, correct me if I'm wrong, but for Wall street, they kind of go, maybe we're a little frightened by this whole debt situation and we know that it's real and we understand how financials work, but ultimately this is going to be a good thing for XYZ company And so we're okay with it.

[Robert Armstrong]

I think I agree with you all the way, except that word ultimately.

[Ed Elson]

Right?

[Robert Armstrong]

Right. I think you have to always be thinking about. Markets are thinking. And although in our finance textbooks we're told that financial markets discount infinitely into the future, we know that that's not true.

[Ed Elson]

Not at all.

[Robert Armstrong]

As my friend Al Husseini, Ed Al Husseini of Columbia Threadneedle likes to say, ultimately, you have to remember markets exist to satisfy people's greed. And you know, and greed goes up and down and ebbs and flows and you know, sometimes fear is stronger and sometimes greed is stronger. But we are at a greed moment right now.

[Ed Elson]

Yes.

[Robert Armstrong]

And there's just. We're in that. We're in that. We're in greed mentality, not fear mentality right now. And that stuff can change quickly. And, you know, we've been in greed mentality ever since kind of mid the middle of April, which was when we were. We were in the beginning of April. We were really in Fear World Hard, which was, you remember, that was Liberation Day. And the president comes out with the insane poster board number thingy in the Rose Garden and is like, we're taxing the penguins.

[Ed Elson]

The most expensive poster board in history.

[Robert Armstrong]

In history. And it's like everybody's like, this person is insane. There is no adult supervision, you know, cats and dogs living together, everything else happily. In the following weeks, there was an incredible amount of walking all that stuff back. And ever since the massive walking back or taco wing of everything, however you want to describe it, the Wall street vibe has been. The bark is not as bad as a bite. Everything is cool. He's not going to do anything stupid. Scott Bessant is sensible. He is going to get us out of trouble. And it's been in greed times. I mean, the, the run we have had since April has been incredible.

[Ed Elson]

Historic. Yeah.

[Robert Armstrong]

My favorite way to measure how, how greedy a run is is to look at Cathy woods etf. The, the Ark etf, which is like.

[Ed Elson]

Is it on, it's on a tear right now, R.I.P.

[Robert Armstrong]

It'S at a three year high. People are loving it. And that's like your spec tech or junk tech or whatever you want to call it. It's the bleeding edge of tech stocks and it's been roaring and outperforming the market. And it's a three year, it's at a three year high. And what that's telling you is greed's in the driver's seat right now.

[Ed Elson]

We'll be discussing that more in our next segment where we'll talk about the economy. But just to break down some of the winners and losers here of this bill, I mean the, the sectors that will be directly impacted, I'm just going to go through some winners and losers that I've compiled and let's get your reaction. You can say disagree, agree, or chime in. So first off, clean energy, obvious loser.

[Robert Armstrong]

I'll disagree already.

[Ed Elson]

Okay.

[Robert Armstrong]

I don't know the details, but the very worst stuff, the very worst adjustments to the tax credits were taken out at the last minute.

[Ed Elson]

Yes.

[Robert Armstrong]

So like I'm looking right now at the stock of first solar and it's up 8% today. I mean, it was down before, but it's recovering some because the very worst didn't happen. Like, I think the rule now is like, if you start your project before 2027, don't quote me on this anyone, but the date at which you can still take advantage of the tax credits was pushed back, et cetera, et cetera so it wasn't as awful as it could be. But on net, of course, negative for green energy infrastructure, all of that stuff.

[Ed Elson]

I think the reality being the markets were pricing in such an obvious feeling of pain in the industry. I mean, we, we had people on who said, this is going to basically kill the industry. That, that's not going to happen. But certainly this is going to cripple the industry in a, in a material way.

[Robert Armstrong]

No question.

[Ed Elson]

So I think what's happening is now that the markets are kind of like ripping, well, correcting back up as they realize, okay, this maybe isn't gonna be as bad.

[Robert Armstrong]

Yeah, we're being hit in the head with a slightly smaller hammer than we thought before, is how I would describe it. Yeah.

[Ed Elson]

Moving along here, oil and gas winner. Less investment to clean energy, which is obviously gonna be a boon for fossil fuels. You're gonna have looser regulations on fracking and drilling. Healthcare is a loser because of the Medicaid cuts. And you, you wrote about what is happening in, in Healthcare Land in a recent newsletter. Do you have any. Anything you'd want to chime in on there?

[Robert Armstrong]

There is a small subset of healthcare companies that specialize in serving Medicaid patients. Centene is one of them. Molina Health is another one. These are insurers that have programs that help people with, who are on Medicaid benefits. I mean, in general, though, the larger health care problem is not just Medicaid, but like, this administration's whole approach to health care. So, like, in the long run, the cuts to the National Institutes of Health are probably more detrimental to the country's health than anything in this bill. You know, I mean, but look, yes, you know, they're making it so that the poorest have less access to health care. You know, the market aspects of that are, of course, the least important.

[Ed Elson]

I always struggle with this because, you know, we're a markets show and we're supposed to be covering, okay, what happened to stocks. But then, you know, we have this other data here on what these Medicaid cuts are going to do. Nearly a trillion dollars are going to be cut over the next decade. But here are some pretty crazy stats. Up to 16 million Americans by 2034 are expected to lose their health insurance. And then the damning stat is that this is projected to result in 51,000 preventable deaths in America per year. So those are the kinds of things where I hear that. And it's like we're busy talking about, oh, what happened to United Health?

[Robert Armstrong]

Yeah, no, it's absolutely right Maybe we're.

[Ed Elson]

Focused on the wrong thing.

[Robert Armstrong]

But I mean sometimes, sometimes, you know, you gotta realize, you know, like I often joke with my, you know, we're kind of in the toy section, right? That's the part of the, you know, it's like obviously the stock market isn't important part of our capitalist economy. And our capitalist economy has created incredible human prospering and so forth. But there is a point at which you can't, you, you do take the stock market too seriously. But if you wanted to be totally cold hearted and sort of money focused about this, you know, we want a workforce that's well enough to go to work. Right. You know, and especially if we're going to turn off the immigration flows, we're going to want, you know, prime aged American men and women to be able to show up to work and if they're too sick, they ain't going to do that. And that doesn't seem like a very good bargain to me.

[Ed Elson]

Well, this is the great thing about AI is it doesn't get sick.

[Robert Armstrong]

Well, you know, we'll see.

[Ed Elson]

You don't have to pay for the health insurance. That's why I love AI Just going through the list here. So defense, another winner. We're going to have increased defense spending by $150 billion. Also have luxury stock, just general rule. Rich people are getting a lot richer from this. You're going to have a lot more money to play with. And then I've also got gold and bitcoin down here as winners. And I'd like to get your thoughts on this because my personal view is that these are actually quite useless assets ultimately. But I think the reality here is that the story that drives the value of gold and bitcoin, that story is very much aligned with what is happening right now. And that is increased deficit spending, a general erosion in faith in American credit, increased debt burdens, possible runaway inflation, all the things that the bitcoin maxis warn about and talk about. I don't think bitcoin is an actual solution to these things, but, but that's the thesis and therefore I would think that this is kind of a win for bitcoin, at least in the medium term.

[Robert Armstrong]

I think that's probably true. Although it's interesting. We were talking about how greed is in charge in Wall Street. Bitcoin's actually been going sideways for a while, which I think is kind of interesting. I'm really interested at those moments where Cathie Wood is going north and bitcoin is going sideways. I don't know why that is. I don't understand Bitcoin very well. I'm just pointing that out. Fact. But where I strongly agree with you is we're entering a world not just in the United States, but I think globally where and I think we're going to talk about inflation later. I don't get to into it where you need to take inflation more seriously in building your portfolio.

[Ed Elson]

Right.

[Robert Armstrong]

And you know how you want to express that view that inflation is going to be a bigger risk to your wealth in the next 20 years than it was in the last 20. You're going to want to express that view somehow. And whether that's by owning precious metals or some weird bit of code in a computer somewhere, I wish you the best of luck. But you got to think about it.

[Ed Elson]

What awesome ways to express that. Because I feel like this is what has been, this is what has made gold and Bitcoin for the past few years such a winner is it feels like those are the two assets that specifically tell that story. But it seems to ignore the possibility that if we live in this world of runaway inflation and you know, massive debt to GDP and you know, interest payments are, you know, taking up the largest share of the federal budget, there are just a lot of other what ifs that you have to answer that can't just be solved with oh, bitcoin.

[Robert Armstrong]

The beautiful thing about the low inflation regime we la we lived in for most of the last 20 years is that in a low inflation regime if your stocks in your portfolio are going down, your bonds are probably going up. In other words, if the economy looks bad then your people are going to be going to Treasuries and your treasury holdings are going up. So you have your bog standard 7030 portfolio and you have negative correlation between those two chunks of your portfolio and you rebalance. And it is a machine that works beautifully. When you are in a high or higher inflation regime, that trick no longer works. In a high inflation regime you can have economy bad and nobody wants to own Treasuries because they don't want to take the inflation risk. So you don't have that negative correlation. So the first thing you have to do is take a long hard look at the fixed income part of your portfolio. Maybe you want to own tips inflation protected Treasuries. Instead they have. That's a problematic asset class in its own way. But maybe you need to do that. Maybe you want to own less bonds altogether. Maybe you want to own real assets. Like maybe you need to think seriously about the real estate kind of part of your portfolio. Right. You know, I was always jealous of my, my sort of stepfather in law, I guess he was because he inherited an apple farm in Ohio. And I always thought who gets to have an apple farm? And what a great asset.

[Ed Elson]

It's a great asset.

[Robert Armstrong]

You know what I mean? You can grow whatever there, it's always going to be there. Ohio farmland is brilliant. And so maybe part of the solution is like, you know, have a little cornfield somewhere.

[Ed Elson]

Nothing realer than real estate.

[Robert Armstrong]

Yeah, yeah, yeah, yeah, exactly.

[Ed Elson]

So just, I mean you mentioned that the, the bond allocation obviously like 60, 40 has been the way people have done it. I mean if we were to run with this thesis about American debt and maybe we should ground this in some numbers and some projections. We recently had the president of the CRFB on the program and they put out some numbers and they found that this new bill will actually be worse in terms of deficits than the original House bill. Which is already crazy considering the fact that the House bill was proposed to your point. You had all of these Republicans, or not all of these, a few Republicans saying this is a terrible idea. Look what it's going to do to the deficit. It went to the Senate, they rejiggered it and now it's even worse, which is just hilarious in and of itself and scary.

[Robert Armstrong]

Yeah, it tells you something about our process, that these things get worse as they go.

[Ed Elson]

Exactly. And then only as you budge up against the deadline, suddenly all the people who said no to it, the Thomas Massey's of the world, they say, okay, well I don't really have a choice here. But regardless of the politics, it's going to increase debt to GDP to more than 125%. We're currently at 100%. It's going to increase interest payments as a percentage of GDP from 2.5%, that's where we're at today, to 6%. So if we were to just run a long way with this thesis that this is unsustainable.

[Robert Armstrong]

Yeah, yeah, this is unsustainable. So let's deal with the non crisis circumstances first. I mean, let's just say we're in a world where not only the US government, but a lot of governments do this, that we're in a spendier world in terms of governments. I mean we already see, we see this for example in Germany is loosening the belts. The famously austere Germans are in like God, we, we need some tanks over here, you know, etc. So that's one aspect of it. We're also in an aging world, which means we have a sm like the, the workforce as a percentage of the total population is getting smaller. That's inflationary too. Right. You're gonna have to pay. There's gonna be more competition for workers, higher wages, we're cutting down on immigration. Right. For in our case that will be inflationary. So let's just imagine, crisis or no crisis, the world of one and a half percent inflation. Let's just say that's over.

[Ed Elson]

Is it over? Can we say that?

[Robert Armstrong]

I want to say it's over. We're in a world where governments spend more, we're getting older. And also here's another very important. When you're talking about the end of deflation, there was a massive exporting of deflation from China to the rest of the world in the last 30 years. Right. As they like became the factory of the world and made all this cheap stuff. And we, we spent less on everything. That's kind of over now too. Right. Globalization is kind of ending and it's also just kind of a one time effect in general. Right. We don't get to have China again. So I mean my core, my main hypothesis would be we're going to be in a higher inflation world. We ain't, we ain't going home again. But the example of Japan always bugs me. They have really high deficits, they're a really aging society, et cetera, et cetera, et cetera. And if anything, they've had deflation problems. They may be the exception that proves the rule. Their situation is very special. They have a special kind of economic culture there. But they're the one that bugs me that like maybe we will get into a deflationary slump. And of course the easiest way to kill inflation is just to have a huge recession. So if you really care about inflation, just tank the economy and problem solved.

[Ed Elson]

Maybe that's what we need. Maybe that's all part of the Powell plan.

[Robert Armstrong]

Yeah. So anyway, in that world, I think you still want to own bonds in your portfolio. Government bonds. I think they still have a special role in a portfolio, but I think you probably want to have you mix in some other stuff. And just in general, anybody who had anything in a portfolio in the last 20 years has done awesome. And for planning purposes, don't plan on that keeping on going. Right. We have probably just lived through the good old days. And it's not to say that the future is going to be bad, but we're not going to be ripping off tickets at 10% on the equity markets and like 4 1/2% on the bond markets and just laughing our way to the bank and moving to Florida. It's going to be more normal. It's going to be more historically normal returns in the next 20 years than in the last 20 years.

[Ed Elson]

Do you think that the US versus foreign markets story has a part to play here? I mean, we're sort of framing it as if we're living in an inflationary world, but it could be, you know, we might be living in an inflationary America.

[Robert Armstrong]

It's true.

[Ed Elson]

And the historical returns in the US will look more like what they looked like, you know, in Europe and the rest of the world.

[Robert Armstrong]

American returns have been so good, most foreign markets haven't had returns nearly as good. And just because it's simple enough for me to understand, I'm really into mean regression. You know, if something is really high, it'll probably get a little lower next and vice versa. Right? So, and I like that as a, as a, as a justification for the international strategy. The other side of me, though, is that the plain, hard fact, you and I can sit here and moan all we want about the dysfunctionality of the American political process and our addiction to debt and everything else, but the fact is our economy grows faster than the other developed economies. We are still, I think, a more innovative economy. We are a more flexible economy. You know, people move more easily here. People change, more jobs here. We have a great job system. So, like part of US outperformance is undergirded by the fact that we have a superior, a structurally superior economy to most of the rest of the developing world. And I don't see that. I mean, barring stupidity on a previously undiscovered level, I don't see that changing.

[Ed Elson]

We'll be right back after the break with a pulse check on the economy. If you're enjoying the show so far, be sure to give Profit Markets a follow. Wherever you get your podcasts.

[Scott Galloway]

Support for the show comes from Vanta. Are you a startup founder or security professional? If so, you're going to want to listen up. Navigating vendor security requirements can be challenging. Facing your first security compliance audit can be downright scary. With Vanta, it doesn't have to be. Vanta is a trust management platform that helps businesses automate security and compliance, enabling them to demonstrate strong security practices and scale. Simply put, your company can't grow if it can't prove that it's meeting security standards, including SoC2, ISO 27001 and HIPAA. Vanta can get you audit ready in weeks instead of months, saving you up to 85% of associated costs. And Vanta scales with your business, helping you continuously monitor compliance, unify risk management, and streamline security reviews all in one place. More than 10,000 global businesses trust Vanta to achieve compliance and save them time while they're at it. Starting and running a business is hard. Let Vanta help make it a little bit easier. Go to vanta.com markets to meet with a Vanta expert about your business needs. That's vanta.com markets foreign.

[Ed Elson]

This episode is brought to you by On Investing, an original podcast from Charles Schwab. I'm Kathy Jones, Schwab's Chief fixed income Strategist. And I'm Liz Ann Saunders, Schwab's Chief Investment Strategist. Between us, we have decades of experience studying the indicators that drive the economy and how they can have a direct impact on your investments. We know that investors have a lot of questions about the markets and the economy and we're here to help. Join us each week as we explore questions like how do you evaluate corporate bonds? And what sectors of the stock market are outperforming? So Kathy will analyze what's happening in the bond market and at the Fed and I'll give you our latest analysis of the equities market and the U.S. economy. And we often interview prominent guests from across the world of investing and business. So download the latest episode and [e-mail] oninvesting or wherever you get your podcast. Support for this show comes from Quince. Their lightweight layers and high quality staples can become a part of your everyday essentials. Quints has the kind of stuff you'll actually wear on repeat, like breathable Flowknit Polos, crisp cotton shirts and comfortable lightweight pants that somehow work for both weekend hangs and dressed up dinners. And the best part? Everything with Quint is half the cost of similar brands. I've tried out Quints. I got a very nice linen shirt. I think every guy needs to make sure they have a linen shirt, especially going into the summer. Plus, Quint says they only work with factories that use safe, ethical and responsible manufacturing practices, which is great. Stick to the staples that last with elevated essentials from Quince. Go to quince.commarkets for free shipping on your order and 365 day returns. That's Q-U-I-N-C-E.com markets to get free shipping and 365 day returns. Quints.com markets we're back with property markets. Let's take a pulse check on the U.S. economy. The employment report came in stronger than expected last week with the US adding 147,000 jobs in June. But other indicators suggest that the broader economic picture looks more mixed. Manufacturing activity contracted for the fourth straight month in June and the dollar is hovering near a three year low. So Rob, let's just start with this jobs data because this surprised all of us, I think me for sure.

[Robert Armstrong]

I was like, it's gonna be 75 and everyone's gonna freak. And it was twice that.

[Ed Elson]

You had your takes read? Yeah, gotta shift em. Exactly. So 147,000 new jobs in June. Economists expected 110,000. I think it's fair to say that this kind of blew past expectations.

[Robert Armstrong]

Yeah.

[Ed Elson]

So going off of that, the economy maybe is in pretty good shape. But there are also just these other signs floating around that would, you know, be contradictory.

[Robert Armstrong]

Almost every indication of the job market shows this incredible resilience and steadiness. All we've had all these shocks and it's tariffs and it's this and that and whatever. And the job market just churns along, creating jobs, beating expectations in an incredibly steady way. And if you look at other job market indicators, how many people are quitting jobs, how many people are getting fired from jobs, how many, you know, et cetera. All, all the sort of sub indicators are also this incredibly steady picture. If you want to nitpick, however, about the jobs market, here is what you say about it. It is not very dynamic. Not a lot of people are getting fired. That is good. Also not a lot of people are getting hired. That is not good. So you might, you might like more of both of those things at the same time. Right. Because that means people are like, oh, but there's a better job over here. There's different opportunities. I can afford to quit or the company can afford to let me go because I'm, you know, and it's all. So there's something a little bit static about it. And the one official statistic that does not look good right now is continuing jobless claims. That means people, not people who are just entering the ranks of the unemployed applying for unemployment insurance. It is people who have entered and are staying.

[Ed Elson]

Right. They still can't find a job.

[Robert Armstrong]

And the trend in that number looks notably bad. However, the numbers are low. So it's not been enough of those people to make the overall kind of sum numbers. The aggregate numbers look bad, but the trend in people who have lost work and can't find new work is a bit alarming. So there is, there is something. Again, it feels slightly stiff, the job market, you know, so don't get fired, Ed. That's my. Don't make, don't make too many of those jokes about the professor.

[Ed Elson]

Disparaging jokes. I can't help myself.

[Robert Armstrong]

Yeah, yeah. So that's a thing. Yeah.

[Ed Elson]

We also saw this other data from the adp, which, and I can't really figure this out, it said the exact opposite. I mean, ADP measures private payrolls. And I found that the private sector lost 33,000 jobs in June. And that came out a day before we got that official government data which found that we added 147,000.

[Robert Armstrong]

There was a lot of state and local employment in the plus number on the official payrolls report. So that helped, but it wasn't the whole story. People in general like to hate on the ADP report. They think it's not very reliable and very volatile.

[Ed Elson]

Okay.

[Robert Armstrong]

And. But I don't think the differences are particularly easy to understand. I guess it's just a good point to remember that we are measuring something very big and very dynamic and very hard to measure. Right. So it's not like some person has gone out there and literally counted every single job in the economy. It's sampling and you're depending on the quality of the data and you know, you're using, you know, different information sources and so, you know, you can't one month is just one month, as we like to say. And the reliable thing is to look at the three month moving average, the six month moving average. So these little bits of variation wash out, as it were.

[Ed Elson]

Just to go through the jobs data by sector, as you said, we saw this big increase in state and local jobs. Government added 71,000 jobs and that was the biggest increase of any sector is government jobs, which is so interesting. After we've seen this, you know, we're going to make the government smaller.

[Robert Armstrong]

Yeah, but state and local though.

[Ed Elson]

Yes.

[Robert Armstrong]

Yeah.

[Ed Elson]

Other big increases were in education and health. We added 51,000 jobs and also hospitality, 20,000 jobs. Where did we see decreases? We saw decreases in business services minus 7,000 jobs. And also, and I think this is probably the most important, manufacturing down 7,000. So I'd like to get your views on what this says about the tariff inflationary environment in general. Because a lot of people look at this data and they say, oh, we're great, unemployment's down, we're ripping. You know, tariffs aren't going to be a problem. And my whole Thing has been, well, tariffs aren't here yet and we're only going to start to see signs very slowly. And the first place you'd see those signs would be manufacturing.

[Robert Armstrong]

Okay, I do not want to join you and the President, by the way, in the general fetishization of manufacturing. Right there is we all have sort of romantic feelings about the good job, the good union job down at the mill kind of stuff. And like, you know, we live in a technological world. We don't. I don't want to get all misty eyed about manufacturing, manufacturing important, you want to make stuff, et cetera, et cetera. It's one sector among many. I would rephrase your point slightly to say where are the cyclical industry jobs? Where are the jobs for industries that are economically sensitive? Where are those jobs? So that's, you know, hospitality, that's manufacture, that's construction, that's et cetera, energy industry, et cetera, et cetera. So if the economy was great, you would see people in cyclical industries adding jobs, not just health care and government and et cetera, et cetera. And I don't see a lot of that here. So it's hard to argue that this report screams that we're in a cyclical upswing. I think the kind of consensus view that we are in a very, we are in a kind of slowdown from a very extreme cyclical high still holds and is totally consistent with what we see in this report. You know, if I'm worried about anything in this economy, it's not manufacturing. It's like housing and construction. The housing market is a bit of a shambles right now. And that is a super cyclical part of the economy. And it's not a huge part of the economy, but it's like a big swing factor for the economy. It's really bad when the economy is bad and it's really good when the economy is good. So it can have a big influence on the cycle. And the housing looks bad and that has to do with high rates and a lot of other stuff.

[Ed Elson]

It feels like one of the things we're grappling with here is can you make any conclusions from this report?

[Robert Armstrong]

Correct.

[Ed Elson]

And a lot of what you're saying is not really because it's kind of soft. You really want to look at the three month averages. You know, some of these things are more cyclical, but. But yet it's Jerome Powell's job to look at this data and draw a conclusion and then come up with a decision.

[Robert Armstrong]

Look, it does rule out the worst scenarios like there's no way to make this report look awful. Right. And if the number had been 50, we'd all be having kittens. And that didn't happen. And once again, despite all the uncertainty and the bad sentiment reports and everything else, the number is fine. It is solid. So we cut the sort of horrible right tail off and that's a good thing to do. Where we are to the left of that in the good tail is definitely very much open to debate. I mean, there's no question, I mean, if you look at the odds the futures market is putting on a rate cut in July after this report, those odds just fell through the floor. We're not getting a cut cut in July. And by the way, we shouldn't. The economy just created 150,000 jobs in a month. You know, we are worried, we should be worried about tariff inflation and we shouldn't have a rate cut. With economy's doing pretty good, we don't need to be in a rush to cut. Powell is right and Trump is wrong.

[Ed Elson]

Exactly.

[Robert Armstrong]

It's like not, not a complicated situation at all, you know, and if, and if things slow down next month, there's always the next September meeting or whatever.

[Ed Elson]

We should talk about what this means for the Fed and for Jerome Powell because, yeah, as you say, the probability of a July rate cut, which by the way, a couple months ago it was at around 80%. We're down to 5% after this. Everyone agrees this isn't going to happen because to your point, the boogeyman for Jerome Powell is low. Employment and employment numbers are fine. But if you're Trump and you see this data, which, I mean, it's a tough thing because for Trump, he probably wants to say everything's great, therefore stop freaking out Jerome Powell. But at the same time there's the argument of everything's great, therefore why should we cut rates?

[Robert Armstrong]

He wants to celebrate how great his America is and he wants rate cuts. And he cannot have, he cannot have both in this circumstance. You know, I have a bit of. Of course, as you, I'm sure have talked about on the show, we've had a lot of noise from the White House and its allies. Jerome Powell is screwing us all. He's doing a lot of damage. You know, the guy who runs Fanny and Freddy is like going after the chair of the Fed. Besson is on TV going after him. And I actually think this is fine because the superpower of Jerome Powell is being dull. And he's like this guy who sits there and says we're following the data. Here's what the data says and here's what we're going to do. Matt, see you next month. Right. And you have these. You have Trump and everybody else. He cannot do our job. We are not, we're not going to be replaced by him. And, you know, he just is like, you know, and, you know, you can say, oh, he screwed up at the beginning of inflation, Fine, we can have that argument. Maybe he did great. But at this time, he's just saying, we have a job to do. It's to balance our two mandates. Here's how we're doing it. And the more Trump and his minions scream and yell it, to me, it underlines the independence of the Fed, rather than. It's like, oh, that's the reason we have to have an independent Fed. Fed because of those guys. Right. And I'm sure other people don't have the reaction. I do. I'm a markets nerd. I'll look at it differently than Joe or Jane public will, but I just feel like we're having this great civic lesson in why an independent Fed is good and how an independent Fed should behave. You know, Jerome is not out there. Jerome Powell is not out there being like, oh, Trump is stupid and this is an outrage. He's like, it's really not my job to think about what the President says. I just follow the data.

[Ed Elson]

I guess the thing that, that kind of upsets me about the Powell bashing is the possibility that people hear what Trump is saying and they agree with him. And maybe fewer people than I think are actually in agreement with him. But for me, it's upsetting because I'm like, this is the guy who, a few years ago, everyone was saying was going to crash the economy with his high rates. I mean, I remember, I remember vividly reading this Bloomberg article which said that the odds of a recession in the next 12 months were 100%. And it was a survey. And everyone said, I mean, he was getting criticism not just from Trump, but from everyone. And he said, no, we're gonna stick with it. People said, soft landing, not possible. He got the soft landing. Here we are. And I guess it just upsets me to then have of the President saying, this guy's doing a terrible job. He's too late.

[Robert Armstrong]

If Jerome Powell, superpower is being boring, Trump's superpower is not being boring. Right. And his superpower is, like, making you feel strong emotions, the yin and yang of boredom.

[Ed Elson]

Yeah, right.

[Robert Armstrong]

He like, he. Whether you like him or you hate him or whatever, he draws these powerful emotions out of us. And so my attitude is like, it's my job as a citizen and as a journalist to just be cool. I'm not going to be emotional about stuff the President says because that's, you know, we need more people being cool on all parts of the political spectrum.

[Ed Elson]

I just want to shift us to how the markets are reacting to all of this because, you know, we've got all these underlying economic indicators which to be honest are not great. I mean, you've got GDP contracting and it was just Revised lower in Q1. You've got got all these manufacturing indexes which are shrinking. You would argue whatever, but I would argue that's the first place you look for inflationary impact in terms of tariffs. You also got the dollar which is falling. It had its worst starts of the year since 1973. And yes, we got this jobs report, but aside from that, it doesn't look incredible. And you know, you could also add on the wars that are exploding all over the world as a reason to be worried. And yet to your point from the previous segment, stocks and riskier assets are exploding and you've got all of that happening. Meanwhile, the underlying indicators are telling you this is a little bit scary. What do you make of that?

[Robert Armstrong]

I'm slightly more glass half full on the economy than you are.

[Ed Elson]

Okay.

[Robert Armstrong]

Job creation is there and gdp, although it's, it's decelerating, it's still growing and at a pretty good clip the, the economy of the United States, you know, I don't know where like the Atlanta fence GDP now is right now, but we're in, I think we're above 1 1/2% anyway and we might be a kind of 1 1/2% real GDP growth economy. So we might actually be growing above potential a little bit here. So I think the economy is actually okay. Now there is the bad stuff that you're talking about. But here and I think we may have discussed this on earlier parts of the show, one of the most salient and interesting features of the economy we have right now is the big division between hard data and soft data. So if you look at hard data, which is like actual transactions, who got hired, fire, who got hired, what profits are companies reporting and so forth, real facts, economy looks like just, I said pretty good. But if you ask people how they feel, they tell you they feel bad. And that goes for investors, consumers, CEOs, everybody there, we're dealing with this uncertainty. And so the factory contraction you're talking about that I assume you're Talking about the isms.

[Ed Elson]

Yes.

[Robert Armstrong]

And what that is, is you go to the factory manager and you say, do you think business is expanding or contracting and do you expect it to expand in the next three months or to contract? And the factory guys have been saying, I expect it to contract. I expect to hire less, I expect to do less capital expenditures. But output is not as bad. It's not great, but it's not as bad. So it's almost like the tariff thing. When does this bad sentiment come to roost? And I think we know why there's bad sentiment. There's two reasons. One, within the last five years we had an incredible economic shock, which was the pandemic and then the inflation. And so people are still finding their feet. And number two, we don't know what the heck the President's economic policies are from day to day, tariffs being the most important one. So you're like, I don't know what's going to happen to my business. You know, what am I going to have to pay for? Inputs like factories in America import tons of shit and they're, you know, we know for a fact that people who run factories, to say nothing of farms or whatever, are worried about immigration and tariffs and they're feeling like crap. But for now, the factories are still cranking stuff out, people are still buying stuff. Consumption is good. But, but, you know, it's weird that the sentiment is so poor across the board. And while the sentiment is somewhat partisan, in other words, if you ask a Republican how things are going there, they are going to be a little bit happier sounding. They're still trending the wrong way too. Right. And so I don't know, like at some point, if this cloud of uncertainty doesn't clear, I would have to imagine that bad soft data turns into bad hard data.

[Ed Elson]

That's exactly, that's the question that when does the soft data become the hard data? I'm convinced it, it's, I'm convinced it's coming. And the Fed would agree with their projections, specifically with inflation too.

[Robert Armstrong]

Right.

[Ed Elson]

So let's get your prediction, if you're willing, on inflation, I keep on saying it's coming. Do you think it's coming?

[Robert Armstrong]

No, I don't think we're going to get another spike. My prediction is we're never getting sustainably to 2% in the foreseeable future. We're going to go along and it's going to be bad one month and it's going to be kind of in that 3% range and bouncing around. It's Going to be basically just high enough to make your bond portfolio not work. I mean, but because I think we just had this terrible experience. So Trump rattles on about how he's a low rates guy and the chair of the Fed is selling out the country. I don't think he's going to screw around. Right. Whoever his guy is in the Fed, if this happens after maybe if we get an inflation spike, I don't think the President is going to stop, stand in the way of the Fed snuffing that shit out because he just saw inflation destroy Joe Biden's term and his legacy. I don't think he's going to touch the stove. Right. I mean, unless he's. Yeah, unless he's a lot stupider than I think he is. I just don't think he's going to do that. So. But I think for the kind of systemic, long term grinding reasons we have, have, we're going to be kind of, it's going to be like having a low fever where you're like, well enough to go to work, but you're like, I don't know, I'm like feeling kind of cruddy. And it's going to be like that.

[Ed Elson]

Sort of like how we all feel all the time.

[Robert Armstrong]

So. And you know, that'll have some upsides. Like the economy is going to be a little bit hot. Employment will probably stay good. But I think we're going to be struggling with this because of low immigration, because of tariffs, and also like, tell me what the tariff policy is. We had this experience yesterday. I was working with one of the young people. I work with Hakyung Kim who we just hired. He's great. And we were just, I was like, hakyung, all I want you to do in this piece you're writing for tomorrow is give me a general sense, give the reader a general sense within an order of magnitude what the tariff on the average American car is going to be when this happens. And I thought, yeah, you need to.

[Ed Elson]

Hire like a team of analysts.

[Robert Armstrong]

Yeah, I thought we'd be able to get within five or $10,000 one way or the other. Like, you know, close enough for hand grenades.

[Ed Elson]

Well, the US Government couldn't do that. They tried to do it with the billboard and they couldn't do it themselves.

[Robert Armstrong]

And it's like, okay, it's the steel and aluminum and then the tariffs aren't stacked. So does the steel and aluminum count against the imported parts? Do those net out? But how would that work? Because where does the aluminum get imported. And then there's this other thing and the, the trade deal with Canada and Mexico. How do those adjustments play in?

[Ed Elson]

And you're like, how is a store manager supposed to figure it out?

[Robert Armstrong]

Yeah, yeah. And I wonder if the people are running, the car companies are like, I don't know. And if that's true, that helps to actually explain why we're not seeing the inflation yet.

[Ed Elson]

Because they don't know that's what I think it is.

[Robert Armstrong]

Yeah. So they're not going to raise prices when they don't know if there really are tariffs yet. Yet. Because they don't want to lose market share.

[Ed Elson]

That's why My view on this is this is going to take a long time. You know, you need everything to funnel through and you also need, I mean, Jerome Powell needs to have enough data to make an informed decision, which is why I predicted July rate cut would not come. But I think the same thing is true of every business. You're not going to raise your prices, especially after we've already had such massive inflation. You're not going to do it until you absolutely know what the hell is going on. And yeah, this is the question we're all arguing about. When is that going to happen?

[Robert Armstrong]

And all my predictions have been wrong up until now, so I'm going to abstain from predicting. But I agree the logic that you lay out, Ed, I think is the right logic.

[Ed Elson]

We'll be right back after the break with a look at the great wealth transfer. If you're enjoying the show so far, hit follow and leave us a review on profg markets.

[Scott Galloway]

Support for the show comes from Adobe Express. With social media, email and a growing variety of online ads, there are more touch points than ever between your business and its customers. Adobe Express is here to make sure your smallest touchpoint is as perfect, polished, impactful and on brand as the biggest. The brand kits and Express make following design rules a breeze. Templates for flyers, banners, emails, social posts and more have all the professional quality Adobe is known for. And generative AI that's safe for business gives everyone the ability to make images, rewrite texts and produce effects. Using simple text prompts. You can create campaigns, resize ads with a click and even translate content automatically. Work that used to take weeks now takes minutes or even seconds. Adobe Express also makes collaboration, approval and sharing easier so any team can become a well oiled content machine. And if you're leading your team, you can monitor it all from your admin console. That means you have one centralized place where you can ensure that every asset is right and that everyone is synced. Go from fragmented to business friendly Switch to the quick and easy app App to create on brand content Adobe Express learn [e-mail] Express Business True story. I've actually used Adobe Express and I was genuinely impressed with how easy it is to create professional content that you can immediately push out.

[Ed Elson]

Support for the show comes from Mint Mobile if you're looking for ways to save money this summer, you're not alone. You can start by saving on something, something you might be overpaying for anyway. Your phone bill. Mint Mobile offers premium wireless service at an affordable price. All of their plans include high speed data delivered on the nation's largest 5G network, plus unlimited talk and text. And you won't need to give people a new number either. When you switch, you can bring your existing phone number plus all of your contacts. With Mint Mobile, you can say goodbye to your overpriced wireless plans. Jaw dropping monthly bills and units unexpected overages get three months of unlimited service from Mint Mobile for 15 bucks a month this year. Skip breaking a sweat and breaking the bank. Get this new customer offer and your three month unlimited wireless plan for just 15 bucks a month at mintmobile.com markets. That's mintmobile.com markets upfront payment of $45 required, equivalent to $15 a month limited time. New custom customer offer for first three months only. Speeds may slow above 35 gigabytes on unlimited plan. Taxes and fees extra. See Mint Mobile for details. Don't miss Blinds.com's 4th of July mega sale happening now. Save up to 50% plus get a free professional measure. Blinds.com invented a better way to shop for window treatments with upfront pricing, no showroom markups and no salespeople in your home. Choose from classic shutters to outdoor shades and more, all backed by our 100% satisfaction guarantee. Don't miss blinds.com's 4th of July mega sale. Save up to 50% plus get a free measure. Rules and restrictions may apply. We're back with property markets. We are in the middle of the largest generational wealth transfer in history with $6 trillion set to be inherited this year. Al In 2023, 53 new billionaires emerged just through inheritance, and in the next 25 years, more than $83 trillion will be passed down through inheritance as well. Meanwhile, the big beautiful bill includes a provision that will make it even easier for ultra wealthy families to pass down their wealth tax free. The estate tax exemption will be increased to $15 million for individuals and $30 million for couples. In other words, you can give your kid $30 million and you pay nothing in taxes. So, Rob, this is a sort of larger, more generational story that Scott and I have talked about for a while, but that is now starting to appear in headlines.

[Robert Armstrong]

Baby boomers are dying. That's the summary. Baby boomers dead. Right.

[Ed Elson]

Exactly. That is actually. Yeah, that is what is happening. The baby boomers are dying. And as we know, the baby boomers have done very well. The richest people in America are, generally speaking, the baby boomers. And the wealth inequality has gotten insane. And just to go through some of the Numbers, the top 10% of Americans own 93% of all U.S. stocks. The top 1% control $25 trillion worth of equities. That is roughly half of the market cap of the entire S&P 500. There are now 902 billionaires in the US up 800% since 1990. In sum, a handful of extremely rich people. And the majority of them are quite old. And just about now, they're dying and they're giving it to their kids. And it is creating what some people are calling the inheritocracy. Yes, all of that wealth that was collected by this small handful of individuals is now being passed on to their children. So, Rob, just very general reactions. If America's becoming an inheritocracy, what does that mean? What does that mean for the economy, for society, and for investors?

[Robert Armstrong]

The rich have a lower marginal propensity to consume than the poor. So you give a rich person the next dollar, they invest it or save it. You give a poorer person the dollar, they spend it. And without going through all the mathematics or whatever that means, wildly unequal societies grow less quickly than they otherwise could. Right. Because you're not feeding the real economy. You're feeding the financial economy at some point. And in theory, the financial economy should feed the real economy, but for reasons that are not well understood, the savings in America in particular doesn't go to productive investment in America. It becomes debt of poorer people or whatever. So that is bad and agnostic to how you think we ought to solve this problem. I think it's important. Like, I'm. I feel uneasy about redistribution. I'm a real capitalist. I'm agreed as good guy. But massive inequality makes our economy less healthy than it otherwise would be. It reduces opportunity and dynamism and all of that stuff. So it's bad on a psychological point. Point. I don't think it's fun to be the kid who inherits all the money and then never has to do anything for the rest of their life. Like, I know a couple of those people, and it's actually not that cool a situation to be, you know? You know what I mean? Like, you want to be rich enough so, like, your parents pay for your college.

[Ed Elson]

Exactly.

[Robert Armstrong]

And maybe get you your first car, but you get a lot richer than that. And it's like, you know, therapy and drug rehab and as Scott would say.

[Ed Elson]

A Range Rover and a cocaine habit.

[Robert Armstrong]

Exactly. So I don't think it's socially all that good. Now, one interesting question, and I'd be interested what you feel about this. Are the baby boomers, they. The money goes from them to my generation, the exes. Or maybe it skips a generation and goes to the millennials or something. Do they behave differently as rich people than the boomers did?

[Ed Elson]

That is the question.

[Robert Armstrong]

And I have no idea. I mean, that's. I have never really thought about that.

[Ed Elson]

I mean, let's just put. Put some numbers to it. So, as I said, in advanced economies, $6 trillion will be inherited. As I said, 53 people became billionaires in 2023 because of inheritance. My favorite stat, by the way. Those people represented 40% of the newly minted billionaires in that year. So if you ever meet someone who just became a billionaire, basically, now, the chances that they got that money from their parents is 40%.

[Robert Armstrong]

Well, all of them are gonna be in that restaurant that Scott is eating tonight, and so he'll be able to do a sort of sociological study, talk to them all, you know, Exactly. See what they're all about. Yeah, yeah.

[Ed Elson]

And to that point, that is what I think will likely happen. It'll be like the Gilded Age, where these people who inherited the money, they don't actually understand the value of the money because they didn't earn it, and they'll be spending it at sublimation buying $3,000 dinners.

[Robert Armstrong]

Yeah.

[Ed Elson]

I think that the money, just based on those psychological reasons that you just described, the money is going to be spent completely recklessly. It'll be crazy. Crazy spending, which, in a way, maybe that's a good thing, because that's your redistribution mechanism.

[Robert Armstrong]

Look, somebody has to build the yacht. Somebody is the welder who builds the yacht or flies the helicopter to the yacht or whatever. Or is the person with the fan fanning the person while they're eating grapes.

[Ed Elson]

Yes, exactly. Someone has to hold the grapes. I'm not holding them.

[Robert Armstrong]

God, no. It's not exactly the society we dream of.

[Ed Elson]

Right, exactly.

[Robert Armstrong]

You know, it is. There's these two sides for Me, I think that, you know, I'm a big believer that capitalism is kind of the best idea anybody ever had and that it just like, you know, if you go back to pre industrial times, we were all dead at 35 and we had bad teeth and everything sucked. Right. And what got us out of that is two things. The idea of constitutional democracy and the idea that you ought to leave people alone and let them be greedy and get after it. Right? So. And I feel great about that stuff. I love commerce, I love success stories. You know, it's like I could sum this up in one person. Like, I think Jeff Bezos, what he has done with that business is so awesome. Like, the way he thought about it, the way he built that investor base, the way he thought about how to finance it, the way he talks about the business, what it's achieved in terms of, like, helping people and making our, like, lives better. I love all of that.

[Ed Elson]

I totally agree.

[Robert Armstrong]

And then he, like, rents Venice and like, has the biggest. And it's just like the vulgarity of it all is just like his wife was basically married in a dress made of diamonds. You know what I mean? And it's like, what are you doing, dude?

[Ed Elson]

You know?

[Robert Armstrong]

Come on, you know, So I love the Jeff Bezos who built Amazon and thought about Amazon and, you know, I could talk for hours about the different choices he made. And then it's like, this is how you act.

[Ed Elson]

He lost all of his sophistication in a heartbeat.

[Robert Armstrong]

Yeah. On the way out the door, it's like, what are you doing, man? You know, you're acting like a clown here, you know, and so that sort of sums up my split. Thinking about this loving capitalism and thinking away, there's gotta be some kind of golden mean or balance or something that we can achieve.

[Ed Elson]

You know, I love your point and it is true about what happens when the rich people get really rich is. I mean, it's sort of the lie of trickle down economics where you're so rich that actually you don't spend. And maybe you say, oh, you're investing in businesses that maybe will become productive. But as you say, the stock market is becoming so incredibly financialized, it's often not actually an investing event. This is just trading events. And meanwhile you've got things like bitcoin and gold which are skyrocketing. If your money's sitting in bitcoin, that's not doing anything productive for society, no value is being created.

[Robert Armstrong]

It's negative value because of its environmental impact.

[Ed Elson]

Exactly. And it's just Wasting all the energy to keep it on. Exactly. I mean, gold is better because you can just put it in the vault and it doesn't take away. But I think that is very true. And just some data here from the IMF which validates that point.

[Robert Armstrong]

Point.

[Ed Elson]

An increase in the income share of the bottom 20% is associated with higher GDP growth. An increase in the income share of the top 20% is actually associated with a GDP decline over the medium term, which I think really proves that point. So that's sort of the issue. And to me, it's all about how do you unleash the greed of human beings to create more value and expand the pie? That's sort of the question. And the trouble for me is when all of that value is being plowed into massively unproductive ventures, I would say that that's why I don't like gold. I think gold is an unproductive venture. I don't like bitcoin. I think it's unproductive for similar reasons. I also think a $47 million wedding in Venice is an unproductive venture. I think a yacht and taking apart a bridge to get the yacht through the bridge. Unproductive. And so this big question is, like, how can you unleash all of that capital to be put to productive ends? And is it a problem that all of that money's gonna go to these young people who will, let's face it, spend it on drugs and yachts and champagne?

[Robert Armstrong]

I think it's a really hard question. And the only, you know, I don't know what to do about it systemically, like, do we need a new tax regime or do we need a different treatment of things or a new way of accounting for this stuff? I'm not sure about any of that, but I was actually talking about this very topic with my wife as we were driving out to where we are now. And we were talking about, as a person, we all kind of fight this battle within ourselves. Shelves. And what I mean by that is, you have to know when is enough, or you're never going to be happy. Right? You can. We all get caught on what they call the hedonic treadmill, which is like, if only I get one set of nicer things, if I go on one more nice vacation or I have one more pair of shoes than the pairs of shoes I have now, or one more picture to hang on the wall, then I'll finally have enough and I'll be happy. And then you get the next thing and you start running towards the Next thing. And at some point, each of us has to step off the hedonic treadmill and be like, look, things are cool. You know, my family's cool, I'm cool. I've got books to read. I've got plenty to eat. I got a warm, dry place to sleep. I live in a beautiful city. It's enough, right? And that's a hard thing. That's a psychological challenge. That's kind of an analog to the economic challenge that you just described. I feel a little sappy even saying that out loud. Here I am, I've said it now, and out there in the world.

[Ed Elson]

Let'S just talk about the. I mean, in terms of what could be done about it, my view is you go after the inheritance tax. I mean, that's why I was so shocked to see in this new bill that has just passed in the House that we are. Are increasing the estate tax exemption. We're saying that $27 million tax free to your children, that actually isn't enough. And what's hilarious is the reasons they've ascribed to increasing it to 30 million is farmers.

[Robert Armstrong]

Right? They always talk about the farmers.

[Ed Elson]

Sorry, yes, farmers. But also because farmers need to pass on their businesses. Okay, Inflation, they say, well, inflation has happened, so now we need to compensate for that by, you know, know, upping it from 27 to 30. It's like, hold on. Inflation's also happened to the poor people.

[Robert Armstrong]

And it's happened to the financial assets that the rich people have.

[Ed Elson]

That's why they're doing this. And to me, when I think about, how do you address this problem? How do you redistribute without pissing people off too much? The best time to do it is when the guy's dead and you do it and it goes to their children.

[Robert Armstrong]

I think you have a very good case there. But the right to pass on what we've earned to our children, like, really strikes at people's emotions and their heart. And they're not thinking when they hear it about what the number is and how it will never apply to them. Like, you get to the point about it was 27 million, now it's 30 million. That's like, rah, rah, rah. What they hear is they want to take your money away that you want to leave to your kids. So it's very politically a tough one. One, you know, a lot. What a lot of people economists talk about is a wealth tax rather than an income tax. Because what we're talking about is not differences in income. We're really talking about differences in wealth. And if you could tax wealth, that would be, that would solve part of the problem. And I think that you could maybe sell that politically more like we're not going to increase your income tax. We're going to say, you know, people who have over $10 million are going to pay a little bit more. And if you don't have $10 million, you're, you're pay, maybe your paycheck will get bigger because we're going to lower the marginal income tax rate and we're going to do the wealth tax. The problem is that wealth is hard to measure. You know, the, the, your income is right there on your pay stubs. And the government like, okay, 35 of that. No, no, no wealth. It's like, where is it? How do you value stuff? How do you, you know, where, where, how do you prevent people from hiding it or putting it somewhere else or putting it in some weird tax structure? It's like a technical problem of instituting a wealth tax.

[Ed Elson]

One solution that I've thought about is a borrowing tax where a lot of these people, the way that you subsidize your lifestyle with cash is you just borrow against your holdings and that's sort of how they don't pay taxes because there's no liquidity event. But if there was some sort of tax where it's like, okay, if you're going to borrow this amount, which you're literally going to use to buy your car and consume, then we're going to force you to pay a little bit more in tax and maybe that results in you get to borrow less cash than you had originally hoped. Does that work for you?

[Robert Armstrong]

Yeah, no, I like that. And I mean, again, questions of structure, but it's very sensible. You know what of course you wish as a capitalist is that organically somehow you built companies where the wealth, it expanded wealth at more strata of society. Like it's always. By the time you're talking about redistribution, I'm already cringing a little bit. Not to say that I'm against it at the end of the day, but you just wish that the economy itself was structured so that more workers got a bigger share of it. But I don't know, I mean, it seems like with technology we have a very technologized economy and technology is set up, up to provide extreme rewards to a small number of people who own equity in a piece of intellectual property, basically. And so it's not, you know, that's, I don't know how you get to the economy that is organically redistributive, as it were. You know, that would be the dream.

[Ed Elson]

Well, maybe the answer is that we need to just let the kids have it and let them spend it like idiots. And that's how you do it.

[Robert Armstrong]

Yeah, maybe that's the best we can do. You know, we got to get into the limousine business and the helicopter business and the yacht business and all of that.

[Ed Elson]

I'm telling you.

[Robert Armstrong]

You and me, Ed, we're going to sell it. We're getting into luxury goods business. We're giving up the podcasting game, and we're going into luxury goods.

[Ed Elson]

I am very bullish. Okay, Rob, let's take a look at the week ahead. We will see the minutes from the Fed's May meeting. We'll also see the monthly US Federal budget. Rob, this is the moment in the show where I ask Scott if he has a prediction. Do you have a prediction that you would like to share as we wrap up this show?

[Robert Armstrong]

I've already made one, which is that life back at the 2% inflation target is over for the foreseeable. I will actually take the other side of your luxury goods trade. I think the luxury industry has pushed their luck a little far. And, you know, I look at the luxury industry quite a bit. At the ft, we have the big. I go to the big FT luxury conference every year, and this was actually a topic of conversation there, like, have we pushed prices too far? And they. The industry is really reckoning with that. Have we. Have we gone? Are we too vulgar now? And I actually think maybe the Bezos wedding in Venice was like the conspicuous spending peak, and now people are like, ew, we got to try something else. So I don't know. I'm gonna predict that there's reconsolidation in the luxury industry.

[Ed Elson]

I like that take. I would only amend that. The question is, was Bezos wedding true luxury? Was the leopard print skin tight dress trend, the Dolce and Gabbana dress, Is that luxury? Or are we gonna see, like, a rise of the lower piano and the more tasteful, elegant sense of luxury?

[Robert Armstrong]

Like, three years ago, everything you would read in the style section of the FT was about quiet luxury.

[Ed Elson]

Quiet luxury.

[Robert Armstrong]

Yeah. Yeah. And that trend seems to have stopped for now, but I think it's coming back.

[Ed Elson]

It's coming roaring back. Okay.

[Robert Armstrong]

Coming roaring back. Yeah. Quietly.

[Ed Elson]

Rob, this was wonderful. I think Scott is gonna get a little anxious is my guess.

[Robert Armstrong]

Yeah, man. Yeah. Maybe he's the one who. Maybe he's the one who's gonna be unemployed.

[Ed Elson]

Good luck.

[Robert Armstrong]

To him. That'll show him.

[Ed Elson]

That'll show him. Rob, thank you. Thank you so much. And let's direct or listen to some of your stuff Unhedged newsletter in the ft. Unbelievable newsletter. I highly recommend it. And you also have your podcast Unhedged.

[Robert Armstrong]

The Unedged podcast twice a week. That's free. You can find it wherever you find your podcast coverage.

[Ed Elson]

Rob, thank you so much. This was a lot of fun and I can't wait to have you back again soon.

[Robert Armstrong]

It's always fun being on the show.

[Ed Elson]

This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Mia Silverio is our research lead. Isabella Kinsel and Dan Shalon are our research associates. Drew Burrows is our technical director and Catherine Dillon is our executive producer. Thank you for listening to Property Markets from the Vox Media Podcast network. Tune in tomorrow for a fresh take on the markets.

[Robert Armstrong]

You at the Water and the.