David Rosenberg critiques the market’s post-election bullish sentiment, analyzes geopolitical challenges for Trump, and debunks the feasibility of dismantling the Fed. Jonathan Wellum highlights persistent inflation risks and unsustainable government deficits while calling for pro-growth policies. Adam Johnson shares optimism about GDP growth and consumer spending, identifying strategic opportunities in nuclear energy and oil services. Bob Elliot presents innovative ETFs that democratize hedge fund strategies, offering low-cost and tax-efficient solutions for everyday investors. Finally, a look back at Justin Nugent’s bold prediction in June of this year for the S&P 500 hitting 6000, underscoring the power of contrarian perspectives.
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Andrew Brill 0:00
New Economic Indicators are in and it appears inflation is under control, but still not at the 2% the Fed is looking for. If you need help navigating your financial future, you can head to wealthion.com/free, for a free, no obligation financial review. I’m your host. Andrew brill, let’s see what our experts had to say this week. You this week, speak up with Anthony Scaramucci. Featured David Rosenberg of Rosenberg research, he gave us a post election look at the current market sentiment. He also analyzed whether or not President Trump can remove the Fed. David also took a look at geopolitics under the Trump administration.
Anthony Scaramucci 0:44
But let me ask you about the market. Though, the market’s saying tilt up, bullish, bullish, bullish. That’s the when I hit the slot machine on the morning of November the sixth, that’s what I got. I got the rocket ship emoji. Is the market Correct? Well,
David Rosenberg 1:02
I would say that whatever the market has embedded in its valuation, whatever it’s pricing in, is probably not going to come to fruition. But look, I was saying that before the election. I mean, before the election, you had like a 40 basis point equity risk premium, and now we’re down to like 10 basis points. So we’ve gone from an egregious equity market price bubble to something that is more like flying Over the Cuckoo’s Nest. So firstly, congratulations on your portfolio. So your heart was telling you one thing and your wallet was telling you the other thing. So I would say that you were obviously perfectly hedged. But the question is, you know, what is the market really pricing in here? And there’s no doubt that there’s a lot of things that Donald Trump can do on his own through executive order and more deregulation. Clearly positive. You could point to the financials were the one sector that was really ripping from the outset. But you know, if the market is pricing in massive tax cuts, and of course, we also have the visceral reaction of the bond market to, you know, visions of an $8 trillion incremental debt balloon over the next four years. I think both of those have question marks in front of them, and I think that what nobody’s talking about is the wide divide between what happened top ballot and what happened down ballot. And I’m not talking about the fact that the Senate flipped moderately towards the Republicans, but as you and I are sitting here talking right now, they’re still counting the votes for the house, and the chances are that the Republicans will reclaim their majority in the House, but we’re not going to know For sure earliest until probably the same time next week. And the one thing that we know is that when Trump won in November 2016 and even though he didn’t win the popular vote like he did this time, the Republicans absolutely smoked the Democrats in the House of Representatives, where the GOP had a 47 seat majority. This time around, no matter what, if they take control once again of the house, it’s going to be razor thin. So the question is, how do you explain that? How do you explain a president that beat his rival by three percentage points in the national poll, but yet, there was not a similar landslide, or even something close to that in the House of Representatives. And what it’s telling me is that this was not really as much a pro Trump vote as it was an anti Harris vote, like I’m stunned Anthony by the fact that Harris got less of a share of the national vote than Hillary Clinton did. And we know what America mostly thought about Hillary Clinton. It was obvious a very negative vote against her, and I would say also a negative vote against the ongoing leftward leaning movement within the Democratic Party. So I think that’s a big part of it. This was not as much pro Trump as Pete. Think, and I’m not even convinced it’s actually a vote for Trump’s policies. So what happened is that the market believes is going to be one party rule, ruled by this pro business party called the Republicans. And so what everybody did at the outset was take out the 2016 to 2018 playbook, where equities ripped and bonds sold off until we got the split government in the midterms in 2018 Interestingly enough, the peak in Treasury yields in 2018 happened in the November midterms that very same day. So I don’t think a lot of people really expected there was going to be a clean sweep. Now we don’t know if there’s going to be a clean sweep, but chances are that that’s what it’s going to be. But the house is not the Senate. The house is a fractious group, and it’s replete with fiscal conservatives on both sides of the aisle, including 38 Freedom Caucus members and the Republicans so people that think she asked me, Do I think the market is wrong? I think the market is way premature and expecting that we’re going to be seeing at least when it comes to fiscal policy, the tax cuts that were being promoted during the campaign, I think that that is probably not going to happen. You
Anthony Scaramucci 6:23
know, Trump is calling for either ending the Fed, ending the Fed, or taking control of the Fed, meaning that the independence of the Fed and its Board of Governors in terms of setting the interest rates would be controlled by the president united states take it out of the hands of the Federal Reserve Chairman. He’s going to do that. Well,
David Rosenberg 6:49
I don’t think that he really can, as powerful a man as he is. I think that he would definitely need to have congressional approval. I mean, the Fed the Federal Reserve Act, is a congressional act. The President like how he appoints judges, does appoint or nominate the Fed chairman, but the Senate has to confirm it, and so I think that there’s a lot of lot of bluster here. I don’t think that he’s going to be able to replace Powell. And Pelham made that very clear at his press conference. I think that what Donald Trump will probably end up doing is using the bully pulp pulpit and his ex account to try and pressure the Fed. We saw him do that in the past, but actually interfering directly, creating the shadow fed or having his own personal, you know, Fed Chairman rivaling the actual Fed Chairman. I think that’s just pure fantasy, and I think it was, it’s going to the reason he won’t do it is because it’s going to work against his goals of maintaining financial market stability, that would be a policy prescription of triggering instability. And when we know about financial market instability is that’s that’s what leads to recessions. So I’m going to assume that there’s a certain degree of rationality and that all the bluster during the campaign is not going to lift her fruition, and that includes what he wants to do about the Federal Reserve.
Anthony Scaramucci 8:45
We have a couple of wars going on. We have the Ukrainian war. We have a war between Israel and Hamas. Donald Trump pledges he’s going to end that war in 24 hours. What do you think have? Let’s start with the Ukraine war. And then the third piece of this thing, I want to talk about US China, but let’s go Ukraine war, Hamas, Israel, and then US China relations. Well,
David Rosenberg 9:08
the easy one is that I do believe that he will be able to get a resolution to Russia, Ukraine. And, of course, maybe this is an instance where his relationship with Putin might help foster that. And I don’t think any of the two parties are going to be very happy with the resolution, but probably Zelensky is going to be a lot less happy, so there will be territorial concessions, but I do believe that that is a strong possibility. It’s not, you know, when you’re talking about Israel, it’s not just Hamas, but it’s Hezbollah. You can argue the hooties and all lines go back to Tehran. So it’s really more about Iran than it is necessarily about Hezbollah. And Hamas, which are proxies of of Iran. So my comment there is, I do believe, compared to Harris, that he’s going to give Netanyahu a longer lifeline. I don’t think that he’s going to expect that the conflict with Hamas, for example, is going to end that quickly until Hamas surrenders, which maybe that never happens, but I think he’s going to give BB a longer lifeline. I think he’ll first settle what’s easier, which is Ukraine, Russia and in terms of China, I don’t think that. I don’t think Z is going to be doing anything to get Trump rattled. You know, that’s the thing about Trump, is he’s not a pacifist and but he’s not from the military industrial complex. He’s not really a warmonger, but people are scared of him. Nixon was not a warmonger. People were scared of him. He ended the Vietnam War, and the next thing you know, establishes relations with China, and people were scared. In 1980 the big knock against Ronald Reagan running against Carter was that he’s gonna start world war three. You certainly remember that, and he’s labeling the Soviet Union the evil empire. And the next thing you know, several years later, we have pestroica, and then under George H W Bush, the Berlin wall comes down. We couldn’t have predicted that in 1980 but people were scared of Nixon, and people were scared of Reagan. And I think it’s probably a good thing for the rest of the world to be scared of the president United States. And so I think that there’s a reason why, even though his White House was chaotic, as you full well would know. But who cares about that? When in those four years, the world was relatively more trouble free, that’s for sure, than it’s been over the course of the past four years. To me, what’s most important is how he deals with Iran. Iran is the greatest threat China. You could argue? Could you argue China’s an economic threat any longer, as they continuously deal with their property sector deflation, they’re in a structural growth slowdown. This is not the China of 10 or 20 years ago, so I see that as less of a threat, and China is not going to do anything with Taiwan, certainly not with Donald Trump in power. To me, the most important geopolitical risk is what happens with Iran. And the one thing we know about Trump is that he was a lot harder on Iran Iran and the sanctions and so on and so forth. And my hope is that he realizes that this war in the Middle East is just broader than just Gaza and the West Bank and Hezbollah and Lebanon, but it’s really about Iran and Islamic Jihad and extreme fundamentalism. So to me, that’s going to be the most important geopolitical hot potato that he’s going to have to handle all roads lead to Tehran in the next four years. From that say, geopolitical aspect,
Andrew Brill 13:41
are you concerned about your financial future or think your investments could be doing better? I’m Andrew brill, one of the hosts here on wealthion, and I’ve been there, not sure my money was in the right places. It’s why I’ve gotten help from a financial advisor. Maybe it’s time you think more about your financial future or get a second opinion about your investments. We’ve made that process easy. Simply go to wealthion.com/free to speak with one of wealthions registered investment advisors for a free, no obligation, portfolio review. Again, that’s wealthion.com/free I’m now less anxious and confident I can achieve the financial goals I’ve set for me and my family. Jonathan Wellum, of our partner, Ra rocklink, joined us this week. It’s Jonathan’s belief that the debt has reached historic levels, and together with inflation, remains a grave concern. The government continuing to print money to meet debt obligations is a recipe for disaster. He also disagrees with the Fed’s economic outlook. It points to labor costs as an indication of persistent inflation.
James Connor 14:50
What’s your take on the US economy? Do you have any concerns?
Jonathan Wellum 14:53
Well, the typical concerns you’re going to have is that the overall indebtedness of the economy so the. Deficits, the deficit 6% plus of GDP in a time where you actually have economic growth. So this is a big concern. This has been a concern, of course, for quite some time. And so that would be the major concern, just the overall deficit that they’re running and the accumulated debt, you know, 35 $36 trillion is a huge number. Now, I’m very much thrilled that Donald Trump was elected vis a vis another four years of the democratic regime, which I don’t think is could have been good for the capital markets. They were talking some of the policies that Kamala Harris was talking about increasing taxation, in fact, even talking about taxing unrealized capital gains, that would have been just a nightmare if something like that would ever put in place. So I’m certainly happy that they’re going to have a government that’s more geared to growth, less regulation, lower energy costs, because they’re going to sort of open up more more drilling and so forth. So I think those are going to be positives. And clearly the market has responded post election with a little bit more enthusiasm in terms of much more growth oriented agenda back in the United States, having said that. I mean, it’s going to be, you know, Trump’s going to have to be careful. I mean, they have a large budget deficit. He does want to continue to cut taxes that could cause, you know, again, more problems from a fiscal perspective, so we’ll have to see how, how things emerge. But there’s some good people there. There’s some good ideas, and I think that’s going to put a little bit more pressure on other countries like Canada. Would be a little harder for Trudeau to continue sapping us with more taxes when our when our neighbors sell to the border getting tax relief.
James Connor 16:39
So the other big news recently was the Fed, and they cut by another 25 basis points after cutting 50 in September. And Jay Powell said the economy is in great shape. Inflation pressures have eased. But I have to be honest, I take issue with anybody who says inflation is under control, because I don’t think it is. And we recently saw some economic data out of the US unit, labor cost increased by 1.9% versus expectations of 1.1% labor productivity was 2.2% versus expectations of 2.6% so costs are going up. Labor productivity is going down. It’s the same thing that’s happening here in Canada, and it’s been going on for quite some time, and then when you look at the number of unions that have negotiated some very excessive pay raises, the Longshoremen on the West Coast, they got a 32% pay increase. East Coast longshoremen got 60% but what are your thoughts on what Jay Powell said about inflation and any other comments he said about the economy, yeah,
Jonathan Wellum 17:41
I mean, I’m skeptical. I mean, I hope he’s I hope he’s accurate, but we certainly are not betting on it or investing based upon what Jay Powell is saying. I mean, we’re being very, very careful. I think you what you’ve pointed out. You’ve got these labor costs going up, unit costs, what we need to do, and hopefully, again, a new administration in the United States will help this. We must free up the private sector to be able to make more things, produce more things, to be more efficient. Again, productivity has to continue to increase in the United States right now under the again, Biden Harris regime. I mean, private sector jobs are practically non existent. I mean, they’re very, very weak. It’s been the government jobs that have been growing. Same thing here in Canada. And so I’d argue that the economy is weaker than what Jay Powell is suggesting, certainly much weaker in Canada. But even in the United States, you’ve got housing prices that come down. You’ve got weakness in the job market. People’s discretionary income is low. They’ve been borrowing more money on the credit cards and so forth. So these are all indications of an economy that’s under some stress. And of course, that’s why I think Powell dropped the rates another 25 basis points. But I think he’s, he’s maybe not being 100% honest in terms of some of the challenges underneath the surface. But Well, I mean, some of this might be helped by a better government that starts to cut regulations and get costs down, but that, again, will take a number now, that’s obviously going to take a number of months. That’s not going to happen overnight, and so no, I don’t really share Jay Powell’s enthusiasm for the for the for the overall economy.
James Connor 19:13
So Stanley Druckenmiller recently did an interview. If you haven’t seen it, I would suggest everybody check it out. It was a great interview. Lots of interesting insights. Anyhow, he thinks one of the biggest threats to 2000 or one of the biggest threats we’ll see in 2025 is re acceleration of inflation. And he actually said this time that we’re living through right now. He compared it to the early 1970s where inflation took off. I think it got up to 8% and they were able to pull it back. It got down to 3% and then it just reignited again, and it went into double digits. And he said, there’s a threat of that happening in 2025 any comments on that? Did you see that interview by chance?
Jonathan Wellum 19:56
I didn’t see that interview, but Stan Druckenmiller, as you pointed. Out is exceptional. He’s a great thinker, and he’s certainly worth listening to, so I’ll absolutely listen to that. Yeah. I mean, look, it’s all see the inflation or whether it’s high or lower, it’s going to be a lot of policy. It’s going to be policy driven, and that’s why it’s difficult. So I think if you’re taking standard druckenmiller’s position, if you’ve got governments continue doing what they’re doing, expanding and making more difficult and pushing green agendas and making energy more expensive and spending more money and so forth, then I think that’s all inflationary and but I guess the the issue will be, is that, what is that? What’s going to actually happen in 2025 we’ll see our view when it comes to again, when it comes back to investing, is trying to find businesses that can push on their costs and are a little bit more of an inflation hedge, and can protect our investors as best as possible, because I’m not sure exactly how it’s all going to pan out. We’ll have to see. I mean, when you look around the world, you look at Europe, it’s it’s really low growth, and you’ve got incredible, incredibly mismanaged governments over there, over the Germany, France. Now you’ve got Britain, you’ve got a socialist government there. It’s a nightmare. If you look at Japan again, you’ve got very little growth out of Japan. China, as you know, is just starting to put more stimulus in there, and they’re trying to protect themselves, again, from maybe a more aggressive US policy. And so a lot of when you look around the world, there’s not a lot of growth and a lot of activity going on. So again, we’re just trying to be cautious, careful, making sure that you know that we our investments, will respond well and and be able to continue growing and adding value to our shareholders, our investors. So
James Connor 21:31
you touched on interest rates and bond yields earlier, and the 10 year has ripped from 360 up to 440 in a relatively short period of time. What are your thoughts on that? Why do you think we’ve seen the yield increase the way it has in the last couple of weeks?
Jonathan Wellum 21:47
Well, I think, well, there’s probably a couple of reasons, and one reason why we’d be careful about going out the yield curve, and that is just these massive deficits. And I mean, they’re huge all around the world. It’s not just the US. You’ve got a lot of deficits, and those have to ultimately, not only are paying for the deficits, but you also have a lot of debt that’s coming due. Because, you know, if you take the American situation, a lot of their debt is very short term. So you have trillions and trillions of dollars rolling over constantly. If the Fed’s not going to pick it up, it’s got to go into the market. And the market’s looking at this and saying, Hey, wait a second, we’re not going to absorb this unless we’re going to get paid more for it. So I think that’s the concern. And with Trump, certainly in the early days, it could lead to larger deficits depending on tax changes and so forth. I think there’s some concern that that could, you know, could cause, again, a blowing out of the yields. So I think that’s what’s getting embedded in the yield curve. And yeah, I mean, who’s going to buy all this stuff? Who’s Who’s going to absorb all this debt that we’ve created over the last 2030, years? It’s insane the level of debt that’s out there. So, and then if the Fed steps in and starts buying it, then we’re just printing money. We’re depreciating our currency. We’re back to inflation again. So, you know, we’re in this bit of a tug of war here, and it’s going to be quite interesting to see how it all emerges. It’s not going to be, it’s not going to be easiest put it that way.
James Connor 23:06
And where are you allocating capital? Now, I know every client is different, depending on age and risk tolerance, but maybe you can give us some sectors where you’re investing, or some specific names. Yeah,
Jonathan Wellum 23:16
okay, in terms of, we think some of the names, some of the as we’re looking at, the results that are coming in, some of the infrastructure, companies. So we’re just looking at the results from Brookfield infrastructure and very attractive company, five and a half percent dividend yield, trading at a nice multiple, great growth opportunities. They’ve got some really interesting opportunities for growth, including their parent company, also Brookfield Corporation, which we think is undervalued and trading at very attractive prices. We’ve We’ve also continued to invest in, we just had the results yesterday for Burford capital, and they again, are litigation finance, and it’s doing very well. Things are going very well in that business. They’re really generating a lot of cash. We think that’s undervalued. And they also have an opportunity for some large litigation solutions that are coming through, especially in Argentina. They’ve got a big, big one outstanding there, but that’s a neat business that will continue to can prop, you know, move along, and it’s also trading at very attractive prices in the in the technology, we’re always trying to look at the technology space, because that is a large, long term growth area. And so software companies in particular are great places to be. We’ve got positions in in Autodesk, which is just, you know, incredible business in terms of CAD and, you know, be used for engineers and anything anyone that’s doing construction, also Roper technologies. And we have added, I mean, it’s just jumped more recently, but over the last number of months, is going back a little bit. We will pick away a little bit on Amazon. We think of all of the big guys. We still like Amazon. It doesn’t trade at a ridiculous multiple and they continue to grow their business and do amazing things with their AWS and also their cloud business and also their retail business. This. So, yeah, there’s some areas. So infrastructure, financial technology, just, you know, hammering, hammering through name after name a lot of our company. So it’s very name specific, business specific, in terms of it, where we invest and, yeah, just to continue to ferret out opportunities.
Andrew Brill 25:22
Friend of wealth. And Adam Johnson, author of the bullseye brief, and portfolio manager of the bullseye American ingenuity fund, joined us this week. He discussed the economy now under the new president. He also outlined the GDP and what concerns there may be. He also laid out some investment strategies, giving a couple of stock picks, and how nuclear power could be one of them. I want to get your take we have a new president. We have, you know, not unexpectedly, because, as James Carville said, I think during the Clinton years, it’s the economy stupid. And I think that a lot of people voted with their pocketbook and with how they’re actually doing. But I want to get your take on the present economy and and where you think it’s headed. Yeah, well, let’s
Adam Johnson 26:09
start with the economy, because that’s ultimately what it boils down to, as you point out, right? James Carville, it’s the economy, stupid. GDP is growing. It’s growing somewhere between two and a half and 3% that’s consistent with the long term average. So that baseline is very positive. We also have very strong employment. There are a lot of people working. Granted, there have been a few more who’ve been laid off over the past several months. But, you know, unemployment is down around 4% that’s extremely low, which is good, because when people are making money, they are spending money, and when they’re spending money, that’s generating sales for US companies, and that’s why we see earnings growth of somewhere between eight and 10% and I think actually that’s going to accelerate into next year. I think we’re going to see 10 to 12% earnings growth. So the macro backdrop is very positive from, you know, all the stuff we can actually measure, and then there’s the stuff we can’t quite measure, like what’s happening politically. And, you know, very positive in that we now have an administration that is likely to cut taxes, an administration that is likely to cut regulations, and an administration that is likely to unleash drilling on federal land that makes cheaper oil more available. So all that stuff, even though we can’t quite quantify it, that’s directionally positive. So you add the stuff we can quantify with the stuff we can’t quite but we kind of think we can, and that argues for being long stopped. So I’m fully invested. I’ve done some more buying since the elections, and I think we’re going to see a strong run up into year end.
Andrew Brill 27:44
You say that the GDP is growing is does it? Are we worried at all that it’s growing at that rate because of government spending? Okay,
Adam Johnson 27:53
so that’s a very interesting point. Andrew, you know, there’s all this talk about Elon Musk and Vivek Ramaswamy coming in and slashing inefficiency in government, and that will inevitably lower government expenditures. And yes, you’re right, government expenditures are about a quarter of GDP gross domestic product. So you know, there is this notion that, hey, wait a minute, if the government stops spending enough, and actually could slow GDP growth. Yes, that is an absolutely fair argument. But I would also argue that that’s going to be offset by what I think will be tax cuts, and that means more money for people to spend. And actually two thirds of GDP is personal consumption. You know, people going out and buying stuff from cars to houses, clothes, dinners, out, insurance, doctors, expenditures, et cetera. So if the government is a quarter of GDP and the consumer is two thirds of GDP, by definition, the consumer matters more. And I think this administration is very focused on doing what’s best for consumers. So yes, you raise a valid point about not wanting to cut government spending too much, but I think there is a far larger offset on the consumer side.
Andrew Brill 29:08
I’ve asked a bunch of people about nuclear power, which, here in the United States, we kind of because of nuclear waste and all this stuff. I think there’s big, been some massive advancements here. Is nuclear power something we should be keeping an eye on. Look, Microsoft went and bought Three Mile Island, and that’s not far from where I grew up, and I remember some of the problems that we had there. But is nuclear power something that the United States, here in the States, will start getting back into?
Adam Johnson 29:38
I think so. I think the answer is yes, that we will start relying more on nuclear power. The thing is, it’s a very hard theme nuclear energy. It’s a very hard theme to invest in, because these plants take years to permit and then build. So it’s not as though you can buy a stock that has exposure to nuclear and say, Well, you know. So things should kick in by next quarter. I mean, probably not. And you hope by next year, or the year after that, or the year after that. Now, some of my stocks are long cycle socks that I intend to own for many years, if I’m right, you know, they will double and triple earnings every few years. And the stocks will, you know, follow higher but yeah, nuclear is a very, very hard, very hard theme where you can try to make money. It’s a lot easier to make money in oil because there’s so many oil stocks. But you know, the irony is that we may be going into a golden age of production, right? If, if the Trump administration loosens drilling on federal land, there’ll be access to more wells, but more access means more supply, which will lower the price. You know, that’s not necessarily good for the earnings of oil companies, so don’t buy, you know, an EOG, the greatest producer out there, or Chevron, I think the best run major simply because there’s going to be more oil production. It might actually hurt them in the long run. What you could do is buy an oil services company like a Halliburton or Schlumberger, though I prefer Halliburton, because those guys are paid to go in and drill on behalf of the companies that are producing it. So I would bet on on service companies, but I wouldn’t bet on producers, because I do think we’ll see lower oil prices, which, again, is good for consumers, and that’s good for the economy and the market as a whole. And
Andrew Brill 31:24
I like your philosophy of taking some money off the table, and again, in the bullseye brief, you lay it out for your subscribers. Hey, look at this price. You should buy a little more. And at this price, you should take a little bit off the table, because it may continue to grow, but it may not. So take some off the table, take some profits. Maybe take your initial investment out of it and continue to let it ride. So, great advice and a great investment strategy.
Adam Johnson 31:51
Yeah. Thank you. Well, you know, every person has a different sort of chemical makeup that you know causes you to respond differently to, you know, good news and bad news. And you know, risk is a part of that. So I have clients who have as a buddy of mine, who’s a Navy pilot, likes to say, no apparent fear of death, and they just want to be long stocks 100% of the time. And if the market trades down, they’ll go on margin and borrow more to, you know, buy the dip. I have other clients who say, Well, you know, I’ve made all this money. I don’t want to lose it. I still want to grow, but I’d much rather just have most of my money in safe, dividend paying stocks or bonds or even government bonds, knowing that, you know, I’m going to earn four or 5% per month and and it lets me sleep at night. Totally fine. I get it. Most people have a little bit of each of those two sort of inclinations, and that’s good too. You know, you want balance. So we, as I say, we all have different personalities, different chemical makeup, different risk tolerances and different ways of approaching how we like to manage our money. And the key is knowing who you are as person, and then finding someone who can help you recognize that vision, or if you’re lucky enough to be able to do it on your own, do it on your own.
Andrew Brill 33:16
Wealthion CEO Steven Feldman, had a talk with Bob Elliot this week. Bob is the CEO and CIO of unlimited funds. Bob explained how its unlimited funds goal to democratize hedge fund strategies by offering low cost ETFs, which are accessible to everyday investors and how to make use of tax efficiency and AI for hedge fund replications. Bob also talked about long term portfolio health.
Steven Feldman 33:45
One question jumps off the page. I saw in your bio that you did go to Harvard, but you were not a business major, so but then you end up in a hedge fund, which is a bit of a stretch for it says here a science major and a history major. How does that happen? Yeah, well,
Bob Elliot 34:04
I think there’s sort of two things that intersected with each other. The first was, I think my background in sciences and the sciences, and I’m a botanist, actually, by academic training, really brought me to think about the world and sort of, you know, a scientific lens, cause, effect, relationships, and particularly in the botanical sciences, thinking about systematic so how do all the different elements of plant development, for instance, intersect with each other to get the plant that you see, you know, in the ground? So that, I think it was a way of thinking, and that way of thinking, you know, you could, can apply to the pure sciences, but also can apply to the world around you. And in many ways, macro economy is just the world around you that intersected with during my time at Harvard, I spent a lot of time on global public health issues and development issues, particularly around political advocacy, and that that was some i. I sort of learned over time there’s the political realm of what drives, you know, good global public health outcomes. But the reality is, a lot of what drives health outcomes is, is the macroeconomic environment, wealth, you know, access to public health facilities and things like that. And so I sort of increasingly realized that, you know, macroeconomics drives a lot of the things that I was interested in. And so I went to Bridgewater, mostly because I was like, they’re going to pay me pretty well, and I’ll go for like, a two year paid master’s program, and then we’ll see what I do. And I fell in love with markets and macro, and I’m still doing it today.
Steven Feldman 35:39
Now you have an opportunity tell us about unlimited funds, because you just didn’t leave. You left for something right, that had to be a pull, not just a push. Yeah.
Bob Elliot 35:47
And so, you know, I when I was at Bridgewater, and also after I left, I spent a little time in the in the venture side of two and 20, and sort of increasingly realized that two and 20 managers and strategies, they’re good for the managers, they’re not great for the investor. And the reason why that is is that hedge funds, venture capitalists, they generate pretty good returns, and they also charge very high fees, and they take it for themselves, and that means that the everyday investor isn’t necessarily that much better off than they would be on their own. And so that got me to thinking, starting, heck, I guess, about five years ago, six years ago, about whether there was a way to bring concepts of diversified, low cost indexing, but bring it to the world of two and 20. Obviously it’s totally changed stock and bond investing, but when it comes to hedge fund investments. It’s basically today looks the same as it did 40 years ago. It’s doing 20 managers, highly paid portfolio managers, et cetera. And my co founder Bruce and I started to think about whether we could take our five decades of experience in the hedge fund business paired with modern technology, modern machine learning approaches, and basically build technology that allows us to see and understand how hedge fund managers are positioned and close to real time. And then take that, package it, you know, translate it into longitude positions and liquid securities, and package it into products that are available to everyone, because we’re doing it with technology. Rather than paying star, you know, portfolio managers, we do it a lot lower cost. And so I a lot of ways, I’d say I’m a reformed, a reformed two and 20 asset manager. I was, I was on the two and 20 asset management side for a long time, and today I’m back in the Challenger seat, basically taking on, you know, big two and 20 manager.
Steven Feldman 37:35
And okay, so let’s project out for a second. You know, it’s always interesting to me that even for an S and p5 100 fund, there are different fees. And if everybody were rational, they would own all likelihood, by Vanguard it has the lowest fee, or find some Schwab fund that had the lowest fee. So in essence, at a high level, what you’re saying is, I can give you a hedge fund performance, and I can give it to you at 90 or 95 basis points, and you don’t have to have two and 20 and by the way, it’s probably even more tax efficient. Tax efficiency for taxable investors is a big deal, right? Because when you know, as a hedge fund, and I’ve been an active hedge fund private equity investor, I find that what ends up happening is there’s a lot of drag for taxes, and there’s also a lot of drag for capital calls. So you get your money back, or you need to have it in waiting there for the capital call. So you’re making cash returns, and you weren’t making up until a year and a half ago. That was zero. And so you were weighing your 17% return in private equity to the zero that you have making your capital calls. Then it was you got gains tax, K, ones, whatnot. Here you can invest it, wait, decide what you want to do, and you can hold it forever and never pay a tax. So long winded way of saying that it would be very efficient for people if they can get the same return to pay 95% tax efficient, than two and 20 tax inefficient. But you have a modest fraction of the of the funds under management of Bridgewater. What’s going to change that? Well,
Bob Elliot 39:03
I think for for for a lot of folks, they see the world of ETFs, which, you know, an ETF is basically a tax loophole, and they see that as low cost index products, which is right for a lot of the assets under management. And ETF space of where low cost are still low cost index products. But there’s been basically two important shifts that have happened over the course of the last couple of years. One, there was a regulatory change in 2019, and 2020, which no one paid attention to, because we were dealing with COVID, that allows active managers to run more, much more sophisticated strategies in that ETF wrap. And that’s very interesting, because in a lot of ways, the ETF structure is actually most efficient for multi asset moderate turnover portfolios by washing away those capital gains. So instead of running it in an SMA or running it in a fund structure, if you run in an ETF, basically every time you’re shifting. Positions in the structure you don’t have to pay, you know, incremental short term capital gains on those positions. And so that’s been a big change, and that paired with the fact that there is now a set of white label providers, basically building an infrastructure to execute that in a much more efficient way, basically at, you know, at Wisdom Tree, which the 100 billion dollar ETF issuer, Wisdom Tree level costs for funds that are much smaller. Those two things are combining together to create a unique opportunity to run these strategies in that ETF wrap. I think we’re early days in terms of investors recognizing the promise, honestly, of active ETF products. You know, really, it’s basically like Kathy woods, the only one, and she hasn’t done all that, right?
Steven Feldman 40:49
You need a gain. You need
Bob Elliot 40:50
shelter. That’s right, that’s right. And so I think, slowly but surely, when we go out and talk to advisors, when we talk to institutional investors, they’re increasingly saying, Oh, now I see and understand this product, this structure, is really effective at running these sophisticated asset strategies. And we’re starting to get more and more flows. You know, many more flows are going on a on a percent growth basis, orders of magnitude, higher flows into active ETFs than in passing.
Steven Feldman 41:18
I’m going to stop and for a second, I’m going to make a public service announcement, and I’m going to expound on something that Bob said and something that I do in my own personal account. The ETF is a tax loophole. So if, even back in the old mutual fund days, you were actually getting a statement that gave you your gains and losses from the mutual fund, and if you bought in on a mutual fund on the day before the end of the year, you got the gains and losses from the mutual fund, the ETF can trade within the fund, and you don’t get the underlying gains or losses that are in the positions in the ETF. You only get the gain or loss from when the time you buy the ETF or you sell the ETF. So Moreover, if you were in a private equity fund or a venture fund or a hedge fund, you have a k1 and you have to manage that the ETF, you don’t get a k1 it’s in a 1099 and so the 1099 only comes when you sell. And so you could sit there and you can compound tax free in an ETF, where you can’t in a mutual fund, and you certainly can’t in a private equity. I’m going to say this with probably controversial but a good short to make out of this, as a graduate of the merchant bank and doing a lot of private equity investing, as the asset manager it is there is a real quote tax pun intended on the system for somebody who’s getting the gains managed by the manager versus by your tax lawyer or your tax accountant. So anyway, another reason why these unlimited funds are on a after tax basis are better than hedge funds is because if you’re getting the hedge fund return, you’re getting tax efficiency, and you can decide when you’re going to pay your tax, as opposed to letting the asset manager decide when you’re paying your tax. So how would you position somebody who’s high net worth, mass affluent, they’ve got money to it. They’re not trying to pay their credit card bill this month? How should people generally position, or at least be tilted today versus where they might have been four years ago?
Bob Elliot 43:23
Yeah, well, I mean, it kind of dovetails to the conversation we just had, which is that the first thing I’d say is, if you’re holding sort of a traditional 6040, portfolio, and in particular, you don’t have any gold in your portfolio, that is, there’s the one most efficient improvement in your portfolio diversification is is moving up to 10% allocation. What’s second? The second, I’d say, is recognizing that in an environment of overly easy monetary policy, there’s really two things to keep in mind. One is it favors stocks and gold, gold relative to bonds. The second is it will likely favor those stocks that those companies that have been under performers. And so it’s easy to chase the high flying, you know, very elevated expectations of those you know, of the mag seven, the equivalent. And I think the challenge is, at some point you see the expectations are so elevated that it’s very hard to meet them, and the types of things that are priced into essentially the AI trade today are incredibly implausible. For instance, the expectation would be that margins would double from here. That’s very, very hard to see how that’s going to happen over the course of a few years without you know, the flip side of the margin expansion is actually paying people less. So you can’t It’s not magic, right? You if you’re going to pay people less, then that’s got to be made up somehow. And that’s likely not going to happen. And so. So I think moving away from those high flying stocks and finding other other areas of the market that are less loved. So for instance, you know commodity stocks that are trading in at 10x Yes, right? Those are boring. Those are boring companies. They don’t make for good cocktail party conversation. But if you’re starting to think about, how do I invest in a way that’s going to compound wealth over a five or 10 year time frame, you’re going to do better buying stocks that are, you know, trading at 10x Yeah, you know, on healthy margins and decent earnings growth than those that are trading at, you know, 40x with unbelievable expectation.
Andrew Brill 45:38
We added an extra episode this week, our experts are experts for a reason. Back in June, our guest, Justin Nugent, made a prediction that seemed far fetched for the S P, but he nailed it this week, when the S P hit 6000 take a look.
Justin Nugent 45:56
I have something to say that is going to be unpopular and a little crazy, but flies in the face of what I think every hedge fund on the street is predicting right now, and it is a long term prediction in the spy and spoiler alert, that’s going to be my winner for this week. And
Andrew Brill 46:18
explain to us why you think this is going to be the winner right now? It’s trading the low five hundreds. And I know you thought this is going to go to about 600 bucks in the longer term, maybe by the end of the year, which is really only six months away. So that’s still a pretty nice gain. You’re talking about almost a 15% gain on that stock. Absolutely. I
Justin Nugent 46:39
know it sounds crazy.
Andrew Brill 46:40
Thank you for watching this week’s recap. If you need help planning your financial future, head over to wealthion.com/free for a free no obligation, financial review, and please follow us on social media. All the links are below in the description. If you haven’t done so already, please make sure to like and subscribe to our channel, and don’t forget to turn on notifications so you never miss a video. Thanks again for watching if you like this content and are looking for more ways to keep growing your investments. Watch this video next until next time. Stay informed. Be empowered and may your investments flourish.
