SmarterMarkets™: Setting Course Episode 4 | Bob Elliott, CEO & CIO, Unlimited
Release Date: January 27, 2024
In the fourth episode of "Setting Course," part of the SmarterMarkets™ series by Abaxx Technologies Inc., host Dave Greely engages in an insightful discussion with Bob Elliott, CEO and CIO of Unlimited. The episode delves into the current macroeconomic landscape, investment strategies, and the democratization of institutional investment tools for individual investors.
1. Macroeconomic Outlook: Assessing Recession Risks
Bob Elliott opens the conversation by addressing the looming question of a potential recession in the U.S. economy. Contrary to widespread predictions at the beginning of 2023, Elliott suggests that the probability of an imminent sharp recession is low.
“The real question is, what's the probability that we see an all out sharp recession in the US economy over the course of the next six or nine months? It's hard to see the set of dynamics that would align with that, given what we're seeing in the real economy.” [00:00]
Elliott attributes the unexpected economic resilience to a shift in economic cycles post-Covid. Unlike prior cycles characterized by rapid booms and busts, the current cycle exhibits a slow-moving, income-driven expansion. This has led to persistent inflation driven by supply shocks and elevated wage growth, prompting a typical central bank response. Despite aggressive interest rate hikes by the Federal Reserve, the economy has shown remarkable insulation, with unemployment rates remaining steady for 18 months.
“The economy's slow moving, there's good reasons to believe that the economy is probably more insulated from short term interest rate moves than it had been in previous cycles.” [02:14]
2. Understanding Policy Responses: Beyond the Surface
Elliott emphasizes the complexity of assessing the impact of various policy measures—monetary, fiscal, and regulatory—on the economy. He criticizes the simplistic approach of treating these policies as isolated factors and advocates for a comprehensive, quantitative analysis to understand their true effects.
“You have to translate that into a concrete and numerical understanding of the magnitude of the influence of those activities.” [07:58]
He underscores the danger of confirmation bias, where investors and analysts might selectively focus on data that aligns with their preconceived notions, ignoring the broader economic indicators that offer a more accurate picture.
“Don't just look at, say, the employment report, don't just look at payrolls... but also look at the 10 or 15 other data points that are available around the same time.” [10:19]
3. Global Economic Perspectives: The Case of China
Shifting focus to the global stage, Elliott discusses China's economic transition, highlighting the shift from technocrat-led policymaking to a more politically driven approach under the Xi administration. This change has led to a less proactive stance in stimulating the economy, resulting in economic stagnation despite China's capacity to recover.
“Politicians are at the head of the PBOC and the other economic policy-making engines, they're deciding what should happen... they've done it in the past, particularly because the debts are primarily denominated in their own currency.” [14:31]
Elliott notes that China's reluctance to actively stimulate its economy is a policy choice, contributing to the current economic malaise.
4. Investment Opportunities and Market Dynamics
Elliott provides a nuanced view of the current investment landscape, particularly contrasting the bond and equity markets. He observes that despite significant financial market stimulation, bond yields have fallen more sharply than stocks have risen, suggesting lower growth expectations.
“We've seen stocks have risen, but so have long end bonds in terms of their return. And if anything, actually long end bonds have rallied more than stocks have rallied.” [25:29]
When discussing the equity market, Elliott expresses caution regarding high-valuation tech stocks, such as the "Magnificent Seven." He argues that historically, stocks with extreme price-to-earnings (P/E) ratios often fail to meet the lofty earnings growth expectations embedded in their valuations.
“The odds are certainly against these stocks with extremely high PEs delivering significantly positive returns over the long term.” [28:55]
5. Democratizing Institutional Investment Strategies
A significant portion of the conversation focuses on Elliott's mission to make institutional-grade investment strategies accessible to individual investors through his firm, Unlimited. He critiques the traditional limitations faced by retail investors, such as high fees and lack of access to diversified alternative investments.
“What we're trying to do at Unlimited is to say more fees are not the solution... We think with our combination of decades of experience... and modern machine learning, we're able to replicate what those managers are doing in close to real time.” [29:14]
Elliott advocates for a more diversified and holistic approach to personal investing, moving beyond the conventional 60/40 stock-bond portfolio. He emphasizes the importance of incorporating alternative strategies that offer low-cost alpha to enhance the risk-return profile of individual portfolios.
“It's really about 60/40 and all the lessons we've learned in optimizing the 60/40 portfolio. Let's expand those lessons to diversify your beta portfolio and let's find those low cost sources of alpha...” [32:00]
6. Recommendations for Individual Investors
Concluding the discussion, Elliott provides actionable advice for individual investors. He recommends maintaining a diversified, low-cost index portfolio while exploring accessible alternative strategies to achieve better risk-adjusted returns.
“The story for the everyday investor in many ways hasn't changed, which is diversified, low cost indexing, that is the solution for the Everyday investor.” [32:00]
He encourages investors to leverage modern financial instruments and platforms that democratize access to sophisticated investment strategies traditionally reserved for large institutions.
Conclusion
In this episode of SmarterMarkets™, Bob Elliott offers a comprehensive analysis of the current economic environment, highlighting the resilience of the U.S. economy amidst challenging conditions and the nuanced interplay of various policy measures. He provides valuable insights into global economic shifts, particularly in China, and underscores the importance of a diversified investment approach for individual investors. Elliott's vision of democratizing institutional investment strategies aims to empower everyday investors with the tools and access needed to optimize their portfolios effectively.
Notable Quotes:
- “The real question is, what's the probability that we see an all out sharp recession in the US economy over the course of the next six or nine months? It's hard to see the set of dynamics that would align with that, given what we're seeing in the real economy.” [00:00]
- “Don't just look at, say, the employment report, don't just look at payrolls... but also look at the 10 or 15 other data points that are available around the same time.” [10:19]
- “What we're trying to do at Unlimited is to say more fees are not the solution... We think with our combination of decades of experience... and modern machine learning, we're able to replicate what those managers are doing in close to real time.” [29:14]
- “The story for the everyday investor in many ways hasn't changed, which is diversified, low cost indexing, that is the solution for the Everyday investor.” [32:00]
For more insights and detailed discussions, listeners are encouraged to tune into the full episode of "Setting Course Episode 4" on their preferred podcast platform.