Is your portfolio ready for alpha in today’s market? Steven Feldman, co-founder and CEO of Wealthion, welcomes Bob Elliot, co-founder, CEO, and CIO of Unlimited Funds and formerly of Bridgewater, for an in-depth look at pro-level investing strategies within everyone’s reach. Bob and Steven reveal hedge fund tactics designed for protection and growth, including tax-efficient ETFs, democratized hedge fund-level strategies, and the importance of intelligent stock selection and minimizing downside risk. They also share their economic and market outlook, exploring how income-driven cycles and fiscal dynamics impact today’s investment landscape. Discover how the pros manage risk, allocate capital, and strategically use assets like gold to shield and grow wealth.
Investment Concerns? Get a free portfolio review with Wealthion’s endorsed financial advisors at https://bit.ly/3CmtVhX
Hard Assets Alliance – The Best Way to Invest in Gold and Silver: https://www.hardassetsalliance.com/?aff=WTH
Bob Elliot 0:00
It would take very tiny amounts of desire to diversify out of sovereign bonds and into gold to create a heck of a squeeze on gold on a forward looking basis. This
Steven Feldman 0:09
time, when rates go up, interest outlays will go up, and it’s going to make the US government, if you think of it as a company, as a worse credit this
Bob Elliot 0:18
has been an income driven cycle, and that’s confusing to folks.
Steven Feldman 0:27
Hi. My name is Steve Feldman, and I am the founder and CEO of wealthion. You may have seen me on the wealthion channel as a guest on Anthony’s Speak Up Show. This is my maiden voyage as a host for wealthion. So be gentle. I have as my first guest, Bob Elliott. You’d probably have seen Bob is internet and YouTube famous, and we’re going to help with that fame. He is the founder CIO and CEO of unlimited funds, and he is a graduate of Bridgewater, and he’s also a graduate of Harvard, which makes me want to know why he isn’t wearing a Harvard sweatshirt. Nice to meet you and nice to Nice
Bob Elliot 1:07
to be here. I’m happy I can be here on the maiden voyage. Yes, hopefully we don’t get lost.
Steven Feldman 1:13
You know, I look forward to the criticism in the comments. That’s
Bob Elliot 1:17
the best thing about coming on a wealthy and podcast is the charitable interpretations of one, right? It’s
Steven Feldman 1:24
going to be so nice to hear all the little things wrong with me. So 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?
Bob Elliot 1:47
Yeah, well, 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 you know, in many ways, macroeconomy 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, 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 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 3:24
So most of our audience is here to understand about investing. It’s primarily self directed investors, but I have to say there’s always a fascination with the hedge fund, right? It’s for 99.9% of people and everyone outside of New York City. It’s a it’s a black box. And so what is, what does a day in the life of a hedge funder look like? It’s probably
Bob Elliot 3:48
a lot more boring than what you see on billions. I’ll tell you, yeah. I mean, a lot of what I did was create Systematic Investment Strategies. And so in many ways, my life was similar to that people might think of as a quant, in terms of what I was doing, and basically what I was doing every day was looking at the markets, looking at the macro economy, looking at how we were positioned in those markets, and seeing, you know, what were the sort of insights that were driving that macro economy On a day to day basis, and whether there was a way to basically take those insights and translate them into quantitative assessments of, you know, markets and economies that could be used to trade on and so the interesting thing about that process is that that you get wrong a lot. You want a lot. In fact, like a great batting average for an incremental, Systematic Investment Strategy that actually, if you go back and test across countries and across time, the odds that you have come up with a decent idea is probably 10 or 15% in terms of all the different ideas that you come up with. We. Is interesting, because when people, people often have intuitions, they often say to themselves, I think this is what’s driving markets. I think that’s what’s driving markets. If you actually stress test those ideas through time and see whether or not they’re actually good ideas across markets, across time, most of the time they’re bad ideas. Most of the time your intuition is wrong and bad. And that’s very important, because that’s the beauty of systemization, which is you take that idea, you write it down, you quantify it, you test it, and you’re able to separate between what are actually good ideas, replicatable ideas that you want to actually bet on over time, versus what are the ones that you know you thought were a good idea at the time, but may not be really consistent. So
Steven Feldman 5:39
the idea is that, if you have you may not know which an idea is, which is the right one, until you have a hindsight. So do you have to hit 55 to get right to be make money? Or can you just size your bet be right in 10% of your bets? Make a massive allocation to that, and you end up just fine? Yeah. I
Bob Elliot 5:57
mean, I think different investors have different philosophies on this. Some believe that highly concentrated positions with outsized prospective returns can generate good returns over time. There’s certainly some investors that have been very successful at that. It’s not how I’ve thought about investing over time. I think particularly when you start to think about systematic approaches to macroeconomics, really what you’re trying to get is incremental edge. So a lot of 5545 bets over and over and over again. If you take 5545 bets, say, in any one month, and you take 50 of those bets, and then you take them month after month after month, you’re likely to be pretty successful at what you’re doing. But what that means is you’re wrong 45% of the time. So in your actual bets, you’re wrong 45% of the time, and in your actual ideas, you’re probably wrong 80 or 90% of the time. So I guess, to go back to your original question, what’s it like to be at a hedge fund? The answer is wrong all the time. Right. Gotta get wrong. Gotta
Steven Feldman 6:53
be like baseball. You can make the Hall of Fame by hitting, being, getting, being out two thirds of the time, exactly. So you know, people have watched billions you read the newspaper about the compensation of the Ray Dalio is of the world of Bridgewater and all these other Masters of the Universe. When you show up in a hedge fund, are you working for at Bridgewater? You’re working for Ray Dalio? Are you working for the LP? Or are you working for yourself? Well, I
Bob Elliot 7:18
think different funds have different approaches. A lot of you know, the things like the multi manager funds have gotten a lot of attention where, you know, everyone individuals, have their own book and they’re sort of running money for themselves. That’s not how Bridgewater was constructed. That was very focused on one portfolio, one team running one portfolio, and everyone sort of incrementally working on different aspects to try and build that aggregate portfolio to be better. But I think sort of that the core of of running money as a fiduciary, as an institutional fiduciary, it really comes down you are working on behalf of your clients, and sometimes that will force difficult choices right where, when you’re making a decision between what is best for your client and what is best for you, doesn’t mean that you know you’re doing this as a charitable activity, but there will be tension points between those two. And I think when it comes down to it, holding in your mind that you’re working on behalf of your clients, not on behalf of yourself, is, frankly, what makes people successful over time.
Andrew Brill 8:22
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 wealthium, 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.
Steven Feldman 9:03
So you know, you’re in a big name hedge fund, and I’m not, I don’t see your w2 but I assume you’re a well compensated person. It’s a well compensated industry. You’re not an old guy. You probably were not pushed out. So you decide to leave something had to go on in your head that said, Okay, I show up. I got an important name on my card. I got a lot of zeros in my compensation. But I’m gonna go be an entrepreneur. I’m gonna start something different, unlimited funds. I’ll let you explain it, but let’s go for a second, just the idea of leaving what goes through. One said, By the way, I left the big organization myself, but I was older than you are, and so I can sort of say I banked enough and the risk was diminished. What was in your head and why did you make the change? Well, it’s hard to
Bob Elliot 9:46
believe when I started at Bridgewater, you know, it was, it was a challenger in the idea of systematic macro was unusual. Let’s say it was more, more, sort of the way of the savants, you know, the sorrows of the world. Big bets on on markets versus systematic macro, systematic macro. Now, if you walk down the street, you know, here in New York, every hedge fund, every hedge fund, has a systematic macro book or pod or whatever, and and so it was great going to Bridgewater. It was still, even when I started there, it was, you know, a few billion dollars under management. It was a small team, really, as challengers to the world of Investment Management. And I was lucky enough to be part of the small handful of investors that took it from being a challenger to an incumbent. But, you know, when you become an incumbent, the desire to innovate slows down, the desire to sort of continue to push those down. I’m like, Look, I’m in my 30s. I got a lot of life left in me. I want to keep innovating. And frankly, I’d always enjoyed being in much more smaller, entrepreneurial challenger environments and so and so. That was an important reason why I decided to leave. So
Steven Feldman 10:56
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 11:03
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, you know, doing 20 managers, highly paid portfolio managers, etc. 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 reform 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 managers. And
Steven Feldman 12:52
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 weight, 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, right? But you have a modest fraction of the of the funds under management of Bridgewater. What’s going to change that? Well,
Bob Elliot 14:19
I think 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 the positions in the structure, you don’t have to pay 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? You need a gain. You need 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. It
Steven Feldman 16:34
doesn’t 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 the 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 are 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, then 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 to decide when you’re paying your tax anyway, back to you. So tell us. Let’s go back to these funds themselves, because there might be some people out here who want to learn more, and we’ll send them to your website, of course. So tell us a little bit more about the strategy and the performance. Are you allowed to talk about the performance? Let’s talk about the strategy. And if some investor would like to learn more, they can talk to you and your team. So tell us about the strategy. Yeah, I
Bob Elliot 18:47
mean, the strategy. Really what we’re trying to do is use our technology to look over the shoulder of the most sophisticated asset managers in the world and understand how their position how they’re navigating through various market cycles. And I think when you can do that and you pay full fees, it’s not clear that’s full fees and full taxes. Let’s say it’s not clear. That’s necessarily much better than being a passive investor. But if you can reduce the fees and reduce the taxes hedge fund managers, they generate plenty of high quality returns. You know, if you look back over the last 25 years, you know, the industry as a whole has generated returns that are, you know, equivalent to stocks with about half the monthly volatility, about a third of the drawdowns, and how much leverage, you know, with, with a moderate amount of leverage, not, not a particularly extreme amount of leverage and and so that’s really the the promise of these hedge fund strategies. I think one of the things that’s interesting is when you get to this world of of of what I call alpha mining, which is essentially mining their views by looking at what they’re doing, it also affords you the opportunity. Create much more interesting products. So for instance, instead of taking hedge fund returns as they are, which sometimes can feel a little paltry, I think some advisors look at that and they say, I’m not sure about you know, they’re consistent, but they’re not particularly high performing, you start to do other things, like, how about take those returns and then run them at twice the expected return, right? Because you can put a little leverage into the ETF wrapper, and that generates a much more sort of cash efficient way to get exposure to those returns, plus puts it on par with, say, equity type volatility, but diversifying return and so that those are the sorts of things that by by using technology and seeing and mining the positions that these managers have on at any point in time, you can start to create products that you otherwise would never be able to get access to. So
Steven Feldman 20:50
you’re you feature artificial intelligence. It’s become you can barely read three lines in the business press without seeing it. So what does artificial intelligence allow you to do that? Sort of regular human intelligence doesn’t would not otherwise have allowed you to do. What are you getting for that fact that you are a pioneer in using that in the ETF sort of hedge fund mimicking model? Yeah,
Bob Elliot 21:16
we’re using various machine learning approaches. And the reality is, if you’ve been in the Systematic Investment world for a while, like machine learning has always existed, and then the techniques are just getting better and better. And in particular, when you come to the what is a history of sort of replication of hedge fund strategies or manager strategies, there was always this challenge that existed, which is, if you use sort of more traditional regression type approaches, you have to have a long back end, a long window, right? Because, let’s say a global macro manager has exposure to 30 assets. You know, most of their exposure is to about 30 different risky assets. Well, then you have to have at least 30 months of return information in order to run your regression, and likely longer. And then you’re what you’re getting is you’re getting a very long back history of saying, Okay, well, I can tell you what the average exposure was of hedge funds over the last five or 10 years, but who cares? Like hedge funds move their positions through time. That’s not that helpful. The Alpha comes from the shifting of the positions. One of the neat things about using machine learning approaches and sophisticated modern Bayesian models is you can actually bring that understanding up, up much, much more doing more, much more timely than you were able to do with traditional regression techniques. And the reason why that is is that you could look at today’s returns and you can infer how you know, what are the different ways in which the portfolios of these managers would have positioned, been positioned to generate those returns. But the interesting thing is, because those returns are continuous, those positions are continuous, meaning today’s positions are a function of yesterday’s positions, you can actually start to have a better understanding of today’s positions by looking at what adjacent portfolio generated the returns that we saw yesterday in the context of the of the portfolio that was necessary to generate the returns today. And so what we can functionally do in a way that we could never we could have done it was not commercially viable, say, three or four years ago, was basically build probabilistically, what portfolio do all hedge fund managers have on basically at all points in time, back for the last 25 years and all the way up to today to get our best understanding of today’s portfolio, because that’s what you want to have, right? Are
Steven Feldman 23:25
you using? Are you basically taking all that information and putting in today’s variables? Okay, so today’s interest rates, today’s PE on the s5&p 100 to start to reshape what the model portfolio would be, or is it just a matter of saying under 1000 different combinations of 50 different hedge funds, this is the one that would have worked the
Bob Elliot 23:49
best. Yeah, what we do is we look at the returns actually, we infer the positions from the returns. And because we can see the returns in pretty close to real time, we can infer the portfolio that’s generating those returns in pretty close to real time. And the reality is, we’ve been over the course last two years, been able to see how hedge funds are positioned, faster than they report it to their clients, faster than it’s seen in the media. And so we see moments in the markets where hedge funds positioning and shifts are actually driving the market action, where we can describe and understand that and communicate that in a way that you know it would normally take months or quarters before that becomes explored. I would like
Steven Feldman 24:29
to see one time you’ll come back on the show and you’ll say, when XYZ hedge fund reports, it’s 13 F here’s what’s going to be on it. If you could do that, that will be a lot of credibility. Listen, I want to turn back to the audience for a second, because, like I said, we’re we’re a community of self directed investors. And so there’s a when I read the comments, or I see what people extend to us privately, there’s an enormous concern about being long equities today. Company where you have, and I think that’s where most people still own position. I think our audience is a bit more skeptical, so probably has a little bit or more allocation outside of it, say, just the core stock market. They have precious metals, they own farmland, they own real estate, they own other things, but just on the stock component for the moment, you look in history and you’d see a PE multiple above average, you’d see just the multiple of revenue of companies that would require enormous growth just to justify it on normal PE multiples, when you go from multiple of revenue to multiple of earnings, and so does your product protect people better? So we’re all riding high. And I said, let’s assume, on a tax neutral basis, I could take a portion of my portfolio that’s in equities and I can move it to your ETF, and then three weeks from now, there’s an event, and the market is down, and we all want to it goes back to just normal valuations, which would be down about 30% would you is your fund going to do better? Well, I
Bob Elliot 26:06
think the question is basically, who do you want navigating through these experiences, through these dynamics? One of the nice things about what we’ve been able to do is to build an understanding of how hedge managers are positioned in these environments, and what they’ve shown over time is, is an ability to generate alpha relative to index investing, and to be able to pick the times when it makes sense to continue to be in and pick the times when it makes sense to get out of those markets.
Steven Feldman 26:37
So in these funds, there could be a massive cash position there. Absolutely, absolutely we’re see. I saw this morning. I don’t know this morning or this week about the Buffett position. So he’s sort of running almost the assimilate. He’s running a tax efficient business which has stocks and bonds and operating companies and now a quarter of a trillion dollars of cash, give or take. And so that’s what you’re getting. You’re getting. You’re basically getting someone who’s saying, I’m going to position the fund in a way. You’re going to infer in the ETF that some that these hedge fund managers are positioned to protect against a scary
Bob Elliot 27:10
market. Yeah, if that, if it’s time to protect against a scary market, then they’re generally pretty good at protecting against scary market. If it’s time to go in further, then they’re typically not a position there. And I think probably from a risk perspective, I think one of the things you I think a lot of people hear hedge funds, and they think hot shots that are making wild bets and trying to generate huge returns, and that’s not at all how hedge funds actually generate high quality returns over time. What they generally do is they generate okay returns during upswings in markets, and they are very good at protecting the downside when that time comes, there and that. And the reason why they can do that is because they aren’t long only right. They can, they can invest in a wide variety of strategies, manage their risk up and down, up and down, depending on the circumstances. And so actually, the key for that long term return, for instance, matching the s5&p 100 is many years in which the return is fine, but not notably. It’s not notably better than the s5&p 100, but when things get difficult, limiting that downside. And since the compounded return of an investment matters a lot in terms of limiting the downside, that’s really where they shine.
Steven Feldman 28:28
Yes, you know, I follow Seth Klarman. I, you know, his principles of investing, and one of them is really a core component of my own personal investing, which is, don’t take losses, the massive drawdown, you’re down 25 and now you need 33 to go back to break even is really rugged. And again, managing my own finances. I’m a big believer in the stop law says. I’m a big believer in watching the market and continuing to test my own assumptions. I By the way, I have have Celsius, and I own the stock, and I got it wrong, and I got far fetched wrong, and I got a few things wrong and and I but I don’t, I didn’t have the stomach to take it all down and rebuy, and I know hedge funds do that a lot better, plus they could actually truly hedge, put the hedge and hedge right. I’m not using sophisticated puts and things like that. All right, so let’s take this it’s a good segue into markets. So I give you some credit. I don’t know exactly whether it’s 18 months or two years ago, Fed starts announcing that we’re going to do the pivot, and every mainstream economist and even non mainstream economist says, Okay, that’s the end. It’s over. Rates are going to go up, whether you’re pricing assets or you’re pricing mortgages, everything is going down, and we’re going to be in a recession. You said no, and in hindsight, you’re right, depending on what duration is, but let’s give it that the what I would say that the interest rate raising. Recession risk is now over because they’re lowering rates. Tell us a little bit about that prediction and why. And then, if you wouldn’t mind, tell us where we are today, you know, because now rates are going down, but yet, there seems to be more anxiety about recession in the market, which is strangely topsy turvy, yeah.
Bob Elliot 30:17
I mean, I think the key insight about this, the cycle, which is makes it quite a bit different from previous economic cycles that you know, we’ve lived through in our professional careers, is that this has been an income driven cycle, and that’s confusing to folks, because most of us understand credit driven cycles. So where you have, you know, a lowering of interest rates, which leads to an increase in borrowing by households and businesses, which then supports economic activity and is self reinforcing until the point where a tightening by this by the Central Bank, tightening by the Fed leads to a slowing of that credit economy, and we see a downturn in this cycle. We basically saw no private sector borrowing. Private sector borrowing for the last couple of years has been at recession like lows. What has driven this cycle, really, over the last two years in particular, is income growth. Now income growth, you sort of say, well, what? What’s driving income growth? Yeah, the answer is, spending growth. And you say, okay, but what’s driving spending growth? The answer is income growth, because one person’s spending is another person’s income, and if someone has an in has income, then they can spend it. And it’s not that that creates a spiral. It just creates a self financing dynamic in terms of in terms of the day to day. So if you look at income growth in the economy, household income growth, it’s growing at six or 7% a year, nominally, which is leading to spending growth about six or 7% a year. The thing about that dynamic is it’s super sustainable because it doesn’t build up credit excesses, right? If I’m just if my income is growing at six or 7% a year, and I’m spending at a growth rate of six or 7% a year. I can keep doing that essentially forever, right? Because I’m not taking on a bunch of debt, and that’s basically what’s been driving this expansion. And the important thing about that is, if you’re not borrowing, then interest rates can rise, and it doesn’t make much of a difference. Take, just take the median US household. They own their house. They’ve locked in a 3% mortgage. They own their cars out right there. You know, have two people who are employed and they’re earning their income growth is growing at, you know, five or 6% a year. And don’t not to mention the fact they have a 401, K, and they’re getting all the benefit from stocks. That’s a pretty good situation to be in. Yeah, right, and that’s a very sustainable situation to be in.
Steven Feldman 32:45
But I’m going to challenge it for a second, which is, agree it’s sustainable. But how do you how do you reconcile the fact that some of that income, I can’t I don’t know. I’m not an economist, so I can’t say the percentage, but some of that income is coming from an excess spend, or Lynn Alder, we call fiscal dominance. I didn’t know that word until she said it. So it wasn’t so much about the tinkering of interest rates, because, you’re right, nobody was borrowing. Certainly the the more affluent people who spend more were not borrowing, because they own their homes and they own their cars and they don’t take out, you know, credit card debt too much so, but you have this excess spend in the trillions of dollars that’s coming in, and that has to land somewhere also as income is how does that play into it? If that were to ever go into reverse? Does that change your feelings so strangely, interest rates didn’t matter. But if someone, if Elon Musk, goes in there and says, I’m going to take $2 trillion out of fiscal spending. I would assume that would be disastrous for income. How do you reconcile that?
Bob Elliot 33:49
Well, I think in terms of the story of what’s been driving the US economy, you’ve got to go back to the COVID period. And in the COVID period, we essentially had a resetting of the amount of spending by the federal government, and the deficits of the federal government was going to take on. And that has largely that happened in 2020 and it was an important offset to what was otherwise very negative private sector conditions. The issue is that that that adjustment, that increase in federal spending, largely happened back in 2020 and has been flat since. And so while the US government is running fairly large deficits, the amount of spending, the amount of outlays by the federal government, has been flat for four years, flat for four years. And if the federal government spending is flat, something else has to be driving that nominal GDP up, and that’s where the income growth dynamic is driving up. So the fiscal support to the US economy was very important in getting us out of COVID but it hasn’t but what it did is it essentially ignited an income driven expansion. It. Didn’t drive the income driven. It didn’t drive the expansion in the subsequent period. Now going to your question about, what if there was a big fiscal contraction? Yes, of course, if there’s a big fiscal contraction, that would be pulling growth, essentially pulling GDP away from the economy, and that would be very detrimental. But as long as we’re staying at this level of spending, it’s not the primary driver. What the primary driver is is that income driven cycle,
Steven Feldman 35:25
you know, I am appreciative of and respectful of that call that you made, and around the same time when rates were going up, I you know, wealthion is sisters, businesses is GBI and precious metals? Is that part of that business? And I made a speech to a group of FAS and I said, this time when interest rates go up, gold is going to go up. And honestly, I was almost laughed out of the room. I had a lot of you always, if you talk about gold among any sort of what I’ll call conventional investors, you get a little bit of a stink eye, you know, are you depressed? Are you scared? Are you a Doomer? And I’m none. I just view it as an asset class and performs in a certain way. And I said, but this time, when rates go up, interest outlays will go up, and it’s going to make the US government, if you think about as a company, as a worse credit, and so as a worse credit, people are going to say, well, it’s not, it’s a safe haven. Treasuries are a safe haven asset, but it’s in a worse credit. And am I really getting enough interest to correspond with the increase? And you’re going to see the answer is going to be no, especially for non US investors who haven’t had the Kool Aid that nothing ever goes wrong in the United States, and gold is going to go up. And it did, and that was very gratifying. So my and I know you’re a macro guy, so goals now at an all time high, and what’s your take on where metals go today and where the long term Treasury goes today, and you can tie it into fed and fiscal however you see fit.
Bob Elliot 36:57
Well, I think when you think about gold, gold is is a global asset, and in many ways, it’s just simply a good indication of that trade off between fiat currency and hard money, right? And you’re right that we’ve had a transition here over the course of the last couple of years where combination of high inflation, large fiscal deficits has raised, and I should say, geopolitical tensions has raised the question about whether dollar and dollar bonds are and really sovereign bonds in developed world are really going to be the long, long term store hold of wealth and benchmark store hold of wealth that they always have been, and really starting in places like China and Russia, and now increasingly seeing signs in the west of people seeing how gold is a good contra currency to those bond holdings. The thing I’d emphasize there is that that process is likely just getting started, if you, if you go talk to financial advisors, see surveys of financial advisors, every every investor in the book, has stocks and they have bonds, every single investor. And then you say, you say, how many of your investors have gold? And the answer is like, 1% and those guys are crazy. And so even though the price of gold, the price of gold is at all time highs here, the ownership of gold, the effective economic exposure to gold, is actually quite low, because the vast, vast majority of investors don’t have any exposure. And so it wouldn’t take much the gold market is tiny. That’s the other thing to recognize. You know, the gold market, the monetary gold market, in terms of what’s traded, is hundreds of billions of dollars, on an annual basis, the size of the global sovereign developed world sovereign debt markets are, you know, 10s of trillions. It would take very tiny amounts of desire to diversify out of sovereign bonds and into gold to create a heck of a squeeze on gold on a forward looking basis. And so while, well, I it’s easy to say, hey, look the prices at all time highs, you have to contextualize that in terms of who has what exposure. And this is the exposure high or not? The answer is, by and large, the exposure to gold is not very high. It’s
Steven Feldman 39:19
interesting that you talk about stocks, Bond, gold. I was very gratified. I don’t know if it was two weeks ago or three weeks ago. I saw an interview that made the rounds on from Paul Tudor Jones, and said, I don’t own a bond. Neither do I, as a New York City resident, in a taxable account you’re giving let’s assume there’s an efficient frontier of risk and return. I was giving away half of the return to the governments, and that’s fine. I like good infrastructure, but as an investor, it seemed again, go back to your ETF comment. I think one of the things that I think the average wealth beyond. A audience member and community member. And I think, and it goes beyond is that people don’t really understand the tax particularly well, and it bear repeating, which is, if you, if you own a stock that has no dividend, then you’re not paying any tax. Do you sell it and it’s compounding? You’re basically compounding tax free. And so if equities make 7% and you’re never paying any tax, and you get 7% compounded, compounded compound. If you own a bond and it’s a Treasury, and you’re making 4% you’re giving two away, you’re getting 2% compounding, and over a period of time, that’s death. And so gold falls into the compounding category. And people don’t understand that. It’s pretty, you know it’s it’s by holding it. You’re not giving away anything to the government while you’re waiting. And I am with you. It is. It’s unnervingly under owned by the masses in America, and it has beyond the performance issue. It’s amazing that the performance of gold on a relative basis in any period of time, year to date, 12 months, five years, 10 years. This century is excellent. But if you asked people what the return was, you didn’t know, how does it compare? They would all say, crummy. And they would say, but I’m not depressed, and I don’t think the world is going to end, although there’s some reasons to believe that believe that there’s more risk than people think. And it’s always how strange, and it’s got almost like a PR and branding issue, if we should almost call it something different. Said, If I get had an asset that performed this way, would you be interested in it? It happens to be, be cold gold. No. Not interested anymore. Not interested in an asset class that’s outperformed everything. Oh yeah, yeah. Let’s go. No. So part of what I do in my other job is try to convince wealth managers, that’s why I do those speeches. But I am with you. I can tell you firsthand, it’s under owned, but I can also tell you there’s something has happened. There’s in the last 12 months, something has changed in people’s brains about the world. Maybe it’s reading the news and seeing two wars and seeing inflation and seeing presidential politics and seeing the valuation of the stock market and understanding how risky Treasuries are and is every central bank in the world wrong. And I think that has changed the calculation. I never predict price, but I have a feeling that it is going to grind its way forward.
Bob Elliot 42:25
I think one other thing on gold, we sort of talked about the strategic underowning of it relative, sort of the strategic dynamics. And then I think there’s a tactical impulse here, which, like, if you just look over the last six or eight weeks, has been an important indication of what we’re likely to see with the market action in gold, which is a transition from the Fed for a long time, was holding interest rates at an elevated level in order to stave off inflationary pressures. And basically what happened in mid September was Chairman Powell came up and said, I’m going to cut interest rates. And I’m going to cut interest rates not because I’m trying to protect I’m trying to protect the economy. I’m going to cut interest rates because I think inflation is dead, even though the economy is strong and that’s and to some, to a greater or lesser extent, that’s basically what we’re seeing across all other developed world central banks. That’s what the BOE is doing. That’s what the ECB is doing, cutting in response to an economy that’s not that weak, not sort of the level of weakness that is akin to, say, the financial crisis or something like that, cutting as fast as they did, or planning to cut as fast as they did. Then in an economy that’s not anywhere near as bad as the financial crisis and that sort of over easy policy, that’s the sort of thing that starts to raise the question of whether you really want to be holding bonds in an environment of over easy monetary policy. And while the market action in the last couple of weeks has been pretty counterintuitive, the Fed cuts aggressively, and the bond yield rises 70 basis points. And that’s a classic indication that monetary policy is too easy, and if anything, what we’ve seen is Chairman Powell has doubled down on too easy monetary policy. In those sorts of environment, you hold I’m sure, basically everyone holds bonds. If you’re not holding gold in that sort of environment, you are not protected from what is likely to be overly easy monetary policy. I
Steven Feldman 44:20
like to just bolt on to that, which is the box that the Fed finds itself in. If it’s going to interpret data, it’s going to have to interpret it in a way that reduces rates, because they’re the largest interest player on the planet. And so the notion that if there’s a 5050 ball, to use an NFL term. It is a 5050 ball. They have to cut rates because with a trending trillion dollar a year interest expense, don’t they want that to come down? And there’s so much rolling every month, and the defense budget is 800 billion, and now interest is more than the defense budget. That can’t that doesn’t paint the picture. Of a healthy, healthy country and a healthy credit if you are paying more of your taxpayer dollars. And I don’t listen, I’m not a Doomer, but it does feel doom loop ish to say that you have $1.8 trillion deficit, a trillion dollars of that is interest. Oh, and by the way, it’s now north of what your defense budget is the reason why America and hegemony is so good, and why the country always feels safe and there’s no wars on our border. And so I it’s complex. And again, I get accused of selling my of talking my book, because I do have a precious metals business. But at the same token, it doesn’t feel right, like, you know, there are times in the markets when it felt like we had stasis and it was calm, and the people who were trying to sell you gold were trying to scare you. I’m just saying is the world’s not working right. Interest rates are cut and bond yields go up. You have a $1.8 trillion deficit, and it’s people are shrugging their shoulders that you’re paying a trillion dollars in interest, but 800 billion on defense, that should give people some pause and to move and rethink their allocation at a minimum. And as opposed to just saying, it’ll all work out. And by the way, that’s another thing that’s a whole tenet of wealthion, which is, be informed, make informed decisions. All right, so let’s, let’s let’s go. So if you’re sitting here today, and we just talked a little about gold, a little bit about bonds, if you were, if someone’s not in your fund yet, and we’ll talk about how they will close this will telling them how they can get more information. So how would you position somebody who’s high net worth, mass affluent, they’ve got money to 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 46:54
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 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 you know, 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 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 at 10x 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 trading at 10x on healthy margins and decent earnings growth than those that are trading at, you know, 40x with unbelievable expect. You
Steven Feldman 49:08
know, I would say, just as a general rule, if you investing is as much about creating a system and living with it and not changing around and chasing the next trend. I I’m sure, because of S, p5, 100 funds, I have exposure to the mag, seven and right. But if I, when I press the button, I make an individual share purchase, I could never bring myself to buy something that’s 7070, times earnings with these projections or multiple of revenue. Never, I’m always, I wouldn’t call it contrarian, but it’s just some discipline around earnings multiples, some discipline about what the projection looks like in order to justify today’s value. Or said differently, among bringing it back to hedge fund people some margin of safety. And if you do that, rinse and repeat, and you do it over very. Very, very long periods of time, and you’re very mindful of taxes, you can compound over long periods of time and wake up one morning. I’ll tell you my most I laugh, because when you when fidelity does its reporting of who’s the best and who’s got the best investment performance, the people who have the best investment performance are dead, and the second are the people who forgot they have the account. And so definitionally, trading is risky and difficult to do. It should be left to professionals. It should be left alone, and you should have a system. And I think a system that sort of stands away from the crowd is probably a better one. But what am I not a hedge fund person? Okay, so this has been great. You wouldn’t come on the show unless you wanted people to know a little bit more about unlimited except for maybe you want to hang out with of course. Yeah. So how do people learn more about unlimited funds? Yeah,
Bob Elliot 50:50
you can learn more about unlimited funds at unlimited funds.com you own that URL, just just that simple, and look for our products on the various discount brokerage platforms that are probably in your pocket on your phone, and if you want to follow along, in terms of my ongoing thoughts about macro markets, the economy at Bobby unlimited on Twitter, the same on YouTube, I’ve just started A Tiktok channel. No dancing. You’re by fashionable, but a but a morning overview of what are the key things driving markets. And you know, so check me out on your favorite platform. So,
Steven Feldman 51:31
but so one of the things that wealthion really tries to do is provide, we say we’re a financial education channel. Over time, we’ll offer products over right now, we have advisors for people who don’t quite you know, want to get a more professional insight, which I think is a part of our audience, but not everybody. Are you providing education, webinars, things that are like people can really move themselves up to better understand markets, but also to better understand your product. Is it something? Do you have white papers? Do you have something? What would you tell the person who really says, Listen, I’m a thoughtful investor. Never done this before. You know, I saw this TV show billion, so I know what a hedge fund is. But you know, I’m just, I’m living, you know, I live modestly. Hedge Funds always gave me, you know, a headache. What would you tell that that audience member today, what the person in the wealthy owned community? How would they really get smart and make a super informed decision? Yeah, I
Bob Elliot 52:28
mean, we’ve got a ton of information giving perspective on the drivers of hedge fund returns. Why indexation of hedge fund strategies make a lot of sense, and how our technology is actually doing this in, in a in a quick, easy to access video form, all on the website. So if people want to sort of roll up their sleeves and dig in and better understand what we’re doing, that’s that’s really the place to go. Last very
Steven Feldman 52:53
hard question, welcome a community member, one and a half million dollar net worth outside their home, 55 years old, still working, but wants to retire in their 60s. What percentage should they have in a hedge fund type vehicle like yours? Yeah, well, I
Bob Elliot 53:10
think if you look at the most sophisticated asset managers in the world, they allocate about 20% of their portfolios to what I call alpha strategies. So institutional institutional investors, and I think the challenge for most everyday investors is, how do you do that in a way that isn’t a huge headache? And our idea is to bring one of many products that are available to basically fill that slice, that 20% slice, there’s a lot of good individual in many ways, what we are is the is the spy of hedge fund or alpha generation. And you might have particular managers that you like, that you like their investment strategy, like their tilt absolutely go out there and invest in those strategies. And you know, think about what we’re doing as sort of the low, low cost benchmark in that, in that slice of your bucket. Listen, as
Steven Feldman 53:59
always, be informed. Listen, I’ve gotten to know Bob. Can’t say we’re best friends, but we are on the same page as investors, highly informed, very interested in markets, careful with our own money. Take some pride in that. So I would encourage people to go to the website, and whether you invest or not, there’s a lot of interesting information on it. So anyway, thank you very much for coming on. We’ll have you again, and thanks for indulging my maiden voyage.
Bob Elliot 54:28
Thank you so much for having me. Great. Thanks.
Andrew Brill 54:30
That’s a wrap on another discussion here on wealthion. Thank you for joining us. If you need help being financially resilient, please head over to wealthion.com and sign up for a free, no obligation portfolio review with one of our registered investment advisors, and remember to follow us on social media for the latest news and information to help you invest wisely. If you could like and subscribe to the channel, we greatly appreciate it. Don’t forget to hit the notification bell so you can find out when we post new videos to the channel. Thanks again. Are watching and until next time, stay informed, be empowered and may your investments flourish. And if you like this content, please watch this video next.
