Episode 375: Beware the Market's 'Expectations Bubble'
On this week's Stansberry Investor Hour, Dan and Corey welcome Bob Elliott back to the show. Bob is the co-founder, chief investment officer, and CEO of Unlimited. The investment firm uses machine learning to replicate the index returns of hedge funds, venture capital, and private equity. Bob explores a wide range of topics in the podcast, from counteracting inflation with certain investments to the worsening future of globalization.
Bob kicks off the show by talking about the importance of holding yourself accountable with investing and about bonds in relation to the Federal Reserve's next moves. Many investors are expecting an aggressive rate-cutting cycle, but as Bob points out, the Fed may not live up to those expectations. He also discusses the flaws of the 60/40 portfolio in today's market, why you should hold gold as part of your portfolio, and two primary factors that could contribute to a long-term inflationary environment. Bob notes...
Through 2020, we had the lowest number of deaths in global conflicts per capita as we'd had basically in 1,500 years... [Now] it's like a war in Ukraine, a war in Gaza, a war in Mali. It's like war, war, war, war. And that is important because wars are inflationary no matter how you look at it... The probabilities are tilted toward more conflict ahead, and certainly the momentum is in that direction.
Next, Bob explores ways to properly balance your portfolio to preserve wealth and minimize volatility. This leads to a conversation about Treasury inflation-protected securities. Bob describes why they're a better investment today than they were a few years ago and what gives them an edge over nominal bonds. After, he discusses the supply-and-demand imbalance in natural resources, oil's supply sensitivity versus precious metals, and the green-energy movement...
Despite a lot of negative commentary about fracking and new oil supply coming on line, the reality is U.S. oil supply is basically at all-time highs right now... It lifts the bottom level of oil prices considerably. It sets sort of a floor on productive supply because of regulatory considerations [and] infrastructure considerations that basically have to be responsive to environmental concerns.
Finally, Bob makes his case for investing in natural resource companies and warns listeners about roll costs when trading in the futures market. He then talks from a macro perspective about productivity in relation to AI. As he explains, AI has not yet led to large productivity advances like we saw with the advent of the personal computer...
With framing technological innovation and having the right perspective with technological innovation, the question is not: "Does it help?" The question is: "Is it accelerating your productivity at a rate that is meaningfully faster than all the innovations that happened before?"
Click here or on the image below to watch the video interview with Bob right now. For the full audio episode, click here.
(Additional past episodes are located here.)
Dan Ferris: Hello, and welcome to the Stansberry Investor Hour. I'm Dan Ferris. I'm the editor of Extreme Value and The Ferris Report, both published by Stansberry Research.
Corey McLaughlin: And I'm Corey McLaughlin, editor of the Stansberry Daily Digest. Today we interview Bob Elliott, co-founder and CEO of Unlimited Funds.
Dan Ferris: Bob is a very smart macro guy. He worked for Ray Dalio at Bridgewater for years and now is the CIO of Unlimited Funds. He's also the portfolio manager of the Unlimited HFND multi-strategy return tracker ETF. It just tracks a bunch of hedge fund strategies under one ticker symbol. Kind of neat. And we're going to talk to him about all kinds of wonderful macro stuff. He is one of my absolutely solid go-to macro guys, so let's not delay. Let's talk to him right now. Let's talk with Bob Elliott. Let's do it right now.
All right. Bob Elliott, welcome back to the show. Good to see you again.
Bob Elliott: Thanks so much for having me back on.
Dan Ferris: You bet. You know what? I have to start this off by noting your pinned post on X, formerly Twitter of course. And it's kind of badass. It says, "Given the nature of this platform, it's hard to know what kind of track record folks have in making major macro calls. Here's a look at my track record over the last few years: thread." And then you've got a bunch of calls and stuff that you post. And this was recent. This was July 12. So, what – something – you've got a bee in your bonnet about this, it seems like.
Bob Elliott: Well, I think if folks are following – Twitter by its nature is a bit ethereal. People sort of say things, and it comes in and it goes out. And the classic sort of thin twit, Furu kind of vibe is you post –
Dan Ferris: Not a real place, Dave Chappelle said.
Bob Elliott: Right.
[Laughter]
Yeah, you post a bunch of things, many of which are conflicting, and you only pick out the good ones. And so, I think – genuinely, I think it's hard for people who are consuming the information to understand whether it's good or bad, whether people have demonstrated consistency in terms of their ability. And so, that was part of it. Also, to be frank, part of running money is holding yourself accountable to whether you're right or you're wrong. And there's actually a lot of value for me in looking at how has it played out over the last couple of years? Where have I been right and where have I been wrong?
Dan Ferris: Right. It's very noble. And I also like the kind of – I like the attitude, Bob. I like it. I like the mojo. One thing I – but the thing I really want to talk to you about, this is the one topic that's on my mind here, is the sort of bonds versus equities. And I'll tell you what I mean. So, we're still inverted. The 10-year is 4.1% or 4.2% or something-percent. And T-bills, one-months are like 5.3%. So, it's like 100 basis points. And when I look at – the stock market seems really expensive if you look at CAPE ratio or – and some people talk about concentration too in the top names, and there are other ways to look at it: market cap to GDP or whatever. So, it seems to me like we're getting this vibe, as everyone likes to say, from the Fed that cuts are coming, which is not always a wonderful thing but people seem to think it is wonderfully bullish.
So, if on the forward curve of the short end of the rate curve the expectation is down and we're still inverted 100 basis points in the 10-year and stuff, it seems to me like you could easily get a situation where the reaction to whatever happens – geopolitically, Fed policy, whatever it is – pushes that 10-year up kind of substantially. And I don't – I think at current levels I'm not sure equities would like that very much. That's sort of my concern right now.
Bob Elliott: I think that's a very reasonable concern. And part of the challenge in trading markets is – and particularly when you start trading bond markets, is you have to trade against what's priced in. And what's priced in is, to be frank, a very fast cutting cycle. What's priced in is – by next summer will be at 350, and we're at 525 to 550 right now. Those sorts of cuts, is it possible? Of course it's possible. But those are the sorts of cuts that would come in a relatively substantial deceleration. We're getting close to one cut every meeting starting in September. And that's a – remember back when the Fed was hiking at that level of aggression. Inflation was very, very elevated. They were behind the curve and inflation was very elevated. That sort of cutting cycle, it's not quite a crisis cutting cycle but it is a – would be consistent with a recessionary environment, relatively steep recessionary environment. And so, it's not clear that that's going to happen. And as you say, if the cuts don't come, then yields will rise. And if yields rise, it will directly affect the economy but also affect equities directly through rising discount rates.
Dan Ferris: Right. And I feel like even less cut than expected at this point is hawkish. It's like, "Go ahead. Cut whatever –" their usual quarter, their 25-point cuts or whatever, and maybe that's a lot less over the next some months than expected. And that seems kind of hawkish. It just – it feels like a risky moment, frankly.
Bob Elliott: Yeah. I think for financial assets it is a risky moment because you have such – essentially such extreme expectations priced in. In stocks you have – it's not just that you have the various ratios that you referred to as being elevated, which they certainly are, but actually I think one of the important things is almost all those ratios are priced off of forward earnings. And it's important to recognize forward earnings are not actual earnings.
[Laughter]
Dan Ferris: That's right.
Bob Elliott: People are sort of like, "Well, forward earnings." That's – it's obvious – that's what the baseline is. OK, well, when the earnings get delivered, then they're earnings, not until they get delivered. And so, I think we have on the stock side a valuation, extreme valuations, but also relatively extreme earnings growth expectations, in the mid double digits to high double digits over the course of the next 18 months. That's very, very high for a late cycle environment, for a late cycle economy, to get that sort of earnings growth.
And then, on the flip side we have very high expectations of easing in the bond market. And you sort of have in many ways an expectations bubble going on right now in both the stock market and the bond market that can – that are intersecting each other, as you know, and could easily be disappointing simply if the Fed is just a little more cautious than expectations and maybe if growth just doesn't quite deliver the extremity of the earnings expectations that are currently priced in.
Dan Ferris: Right. So, what do you do about it? What do you buy?
Bob Elliott: Cash.
[Laughter]
Dan Ferris: Exactly.
Bob Elliott: I think that that – we're in this environment where the inverse of the 60/40 looks like the trade basically. I think probably the best trade is an equal risk rate of long-term bonds and stocks in terms of being short in both of those relative to cash. And we've seen that basically play out to some extent over the course of the last couple of weeks. That trade has played out pretty well in that pinned – noted in that pinned tweet that you referred to at the top of the show.
And I think that sort of repricing is happening with the disappointment – I think so far it's been really about the disappointment in the equity market side of things, which has been interesting because you haven't really gotten a bond rally, even though stocks have come down. The bond rally in these days has just been not that compelling. If you had told me stocks, the Qs are down 10% or something like that and bond yields have moved seven basis points, that's just not that much relative to the magnitude of the equity move.
Dan Ferris: Glad you mentioned that with the U.S. government debt ticking over $35 trillion just within a day or two of when we're talking because one of the interesting things that I saw some years ago, I think it was a report from 2015 or 2016 from a guy named Chris Cole from Artemis Capital – he writes these very interesting reports with lots of literary references and things to them, and pointed out that over the very long term, certainly beyond the last few decades of generally kind of easier monetary policy, stocks and bonds correlate positively. There wasn't – the 60/40 didn't work this way then that it has in recent history. So, maybe the 60/40 blip is over, and then what the hell do you do?
Bob Elliott: Right. I think it's a great point. We all sort of have grown up in our professional careers just sort of seeing 60/40 stocks – bonds balancing stocks. And that may not be true. And in fact, has not been true over very, very long periods of time, that stocks and bonds have been correlated. I think traditionally the one asset that has been less correlated to both of those is gold, of course. And so, if you're building a portfolio, there's a strategic reason to hold gold in terms of being a diversifier. And then, there's also tactical reasons to hold gold. I think one of the questions here is – let's say we get into an easing environment. We probably are in an incremental easing environment. Which of the two assets do you want to hold in that environment? Do you want to hold gold or do you want to hold bonds? Well, bonds are already pricing in very aggressive easing. And there's very large deficits, continued supply, very high outstanding stock of bonds, lots of buyers of bonds that have – that are basically back up to their max positions in those, versus gold, if you look – I think people will look at the future data, which is trivial in the size of the overall gold market. Go out there and talk to people who are investing. You mention gold and they look at you like you're a crazy person living in a cabin upstate with your guns and water.
And so, it's like 100% of the world holds bonds and 1% of the world holds gold. And that 1% holds about 1% of their portfolio in gold. That strategically, if you think about it, the next 10, 20, 30 years, I think it makes for – the world is strategically underweight gold relative to bonds. And I think that will play out to the advantage of the holders of gold.
Dan Ferris: Yeah. That underweightedness, it has been persistent, though, hasn't it over time? It's sort of like – in other words, I buy this argument all day. I love gold. I own gold. I tell people to buy – I tell our readers to buy gold and hold it as a really meaningful part of your portfolio. And when I – and I hear some of these things and I go "Yeah." And it sort of – we've been talking about the copper supply deficit for a while and other things. It sort of reminds me of when we were kids and everybody said, "One day, everybody in China is going to buy a refrigerator and, boy, is that going to be big."
[Laughter]
So – and it kind of happened. There was huge demand in the early 2000s. So, it's – I don't know. I don't even know what my point is. I just always – there's a little devil's advocate in me with everything.
Bob Elliott: Yeah, yeah. I think the question is how do you get over the hump? That's the – and part of that is the continued challenge, challenging of the status quo of the 60/40. And the reality is the 60/40 has really only been challenged for a relatively short period of time over the last 15 years. It's basically COVID and 2022 where it was challenged. And so, I think that's the basic – the tide will shift here when we have a situation where stocks fall and bonds don't save stocks. That's what – where the challenge – that's when people are going to kind of see what's going on.
Corey McLaughlin: What do you think the prospect is of – and maybe this is something that illuminates the shift or the issues with 60/40 moving ahead. What do you think the prospect is of that we're in a higher inflationary period – I'm talking about multi-decades – compared to what it's been? And that if the Fed cuts rates now – it's going to be kind of smaller because they're not going to be able to cut as much, and then we'll have that inflationary kind of rebound and then… That's where my head's at. I'm trying to figure out, all right, the Fed cuts now and inflation is still higher than it has been in relatively recent history. What happens next after that?
Bob Elliott: Well, I think the idea that we're going to be in a higher inflationary environment ahead seems pretty compelling to me than the last 20 or 30 years. What I first emphasize is if you're holding 60/40, the portfolio you're holding is essentially in a position that is hugely underweight, higher inflationary dynamics. So, just start off with 60/40, it's basically saying there will be secular disinflation and strong growth happening for the next 30 years, just as it has for the last 30 years. And so, even if you were to just get to neutral, meaning you were balanced to the possibility that we might have higher inflation or not in the next 10, 20, 30 years, that would mean getting away from the 60/40 portfolio as your baseline.
And I think there's probably compelling reasons why it probably is higher than average, that probability is higher than average, because of the dynamics that we've seen. Basically, we had globalization and no conflicts over the course of 20 or 30 years. If you look at the conflict side of things, we basically had the number – through 2020 we had the lowest number of deaths and global conflicts per capita as we had basically in 1500 years in the global economy. Now, am I predicting that it will necessarily go up? I'm not necessarily predicting it, that it'll go up, but it certainly – it has risen. And I wouldn't necessarily assume that we would fall back to that trajectory. I was just reading the Financial Times today, and it's like "a war in Ukraine," "a war in Gaza," "a war in Mali." How many – it's like war, war, war, war. And that is important because wars are inflationary no matter how you – no matter how you look at it, wars are inflationary, whether you think they're just wars or unjust wars or whatever. It doesn't really matter. It's definitely inflationary because it involves creating stuff and destroying it. And also destroying the infrastructure that exists there and then having to rebuild it again. And so, I think that part of things is really – tilts. The probabilities are tilted towards more conflict ahead, and certainly the momentum is in that direction.
And then, in terms of globalization, we're clearly past peak globalization. The geopolitical circumstance is – folks are pulling apart, whether, say, a Trump administration gets elected and pursues a tariff policy or they don't get elected and the existing administration pursues other ways in which efforts are made to put up trade barriers. In one form of another, trade barriers, capital barriers, geopolitical integration is definitely going to be lower in the future than it has been in the past. And so, that also is inflationary because it means you have to do supply chains and duplicate infrastructure versus just using the lowest cost producer globally.
Dan Ferris: Right. Yeah, the other thing about war, though, is it's– I'm just thinking of World War I. You had this century of – pretty much a deflationary century and the world expands and the Industrial Revolution happens. And then you get some fanatical guy who kills the archduke and his wife and every country in Europe is at war. Who saw this coming even when it started? You just didn't see the magnitude of it even when that event happened. And war has – it sort of discombobulates. It creates this potential for tail risk that other things don't have. It's worrisome.
Bob Elliott: Yeah. I think for most – it's just important for any investor to recognize that whatever – the typical sort of portfolio, 60/40 or the equivalent, it's just totally unprepared for a war environment. And so, just imagine if you're holding that as your savings portfolio. You're making a huge bet that there will be peace. Now, there could be peace. And look, I'm – this is not an argument in favor of conflict or anything like that.
Dan Ferris: Yeah. Right.
Bob Elliott: Peace is great. It's just that it is not necessarily by any means certain. And if anything, indications are moving in – are transitioning away from a global peace, global peace to something that involves more global conflict. And so, it's best to be prepared for a wide variety of outcomes, particularly if you're thinking about your savings portfolio. If you're saving over 20 or 30 years, genuinely, who knows exactly how all of this is going to play out, so why make huge tilts in your portfolio rather than creating more balance?
Dan Ferris: More balance. And to me, I'll tell you, you mentioned the two ultimate balancers. The ultimate balancer is cash – to me. And gold, too, I think, has a place there. When I think about over the years in the newsletter business especially, there's always some marketing person saying, "Hey, when the market goes down this thing will go up, won't it? And that thing will go up. And we can say that thing will go up. And that thing will go up." And over the years I've gone, "Hmm, OK, maybe." And now I'm like, "Nope. Just hold cash."
And I know really conservative value investor types who say, "Well, we did buy a few S&P 500 put options, just a little tiny few bips of put options, but we hold plenty of cash," et cetera, et cetera. But really, that's what I've learned over decades of this, is that the balance you speak of, it seems that cash and gold are hard to beat. But what else – you've got a lot more experience of actually running money, so what does balance look like to you?
Bob Elliott: I think the other story – if you're a long-term saver, the biggest threat you actually have to your savings is inflation. That is the biggest threat eroding your purchasing power. And I think too often investors don't think about how do you preserve purchasing power over an extended period of time? And how do you reduce volatility related to purchasing power? So, I think this has been actually a very interesting three years because if you're a 60/40 portfolio or for instance if you're overweight bonds – let's say you're getting near retirement and you were overweight bonds, you had a double whammy of bonds falling in value and inflation obviously rising substantially. And you put those two things together and that is killer for a portfolio. And so, looking at your savings portfolio and saying not "How do I optimize a nominal return?" but "How do I minimize the amount of volatility I'm getting on the long-term real return?" I think is very important.
So, a simple example right now is if I'm thinking about long-term savings portfolio, and say I'm looking at Treasury inflation-protected securities, they're offering a 2% to 2.5% yield, real yield that pays that in real terms plus realized inflation. Now, is realized inflation perfect? Of course it's not perfect. I wouldn't – but it's not worth getting too hung up on that. If inflation is high, you're going to get paid more and if inflation is low, then you'll be fine and you'll get that real yield accrual. That's a good asset from a long-term saver's portfolio. But I tell you, getting a guaranteed or close to guaranteed outcome of a 2.% to 2.25% real yield over a 30-year time frame, it's pretty tough to actually beat that, particularly when you think about the risk-taking that would have to happen on top of it.
Now, you still want to think about – there's still possibilities that the U.S. government could devalue those bonds in various ways, so you might want to also hold gold and other assets, commodities and other assets in addition to that. But that's a good example of if you're just thinking about nominal returns you might say, "Let me go buy those bonds, those nominal bonds right now." If you're thinking about real returns and how to reduce real volatility, then you get drawn to assets like gold, TIPS, commodity plays, et cetera that are much better at preserving purchasing power.
Dan Ferris: OK. TIPS. So, I need –
Bob Elliott: Right. TIPS. Nobody talks about them.
Dan Ferris: Yeah, it's like –
Bob Elliott: They're –
[Laughter]
Dan Ferris: Yeah. Maybe we need to wake the listener up a little. TIPS. Oh, boy. OK. Yeah.
[Laughter]
Bob Elliott: It's the most boring, critical asset –
Corey McLaughlin: The thing with TIPS I always – that I think people – people just don't understand how they work, I think, a lot of times. And then, it seems like – I don't know, so maybe you could explain to people maybe just briefly how that – how they actually function, how you're able to –
Bob Elliott: Yeah, well, I think the challenge with TIPS is that they sound like an inflation-protected asset, which they are, because TIPS pay you actual realized inflation plus a real yield. That's how they're quoted. That's what they pay. I think the challenge that most people see with them or experience with them is you think you have an inflation-protected security. As an example, long-term TIPS in the last three years have gone down 40% or 50% and you're like, "Inflation is up and TIPS are down. I'm confused. I thought I was protected from inflation."
Dan Ferris: Exactly.
Bob Elliott: That's – but that's because TIPS are a real bond. A real yield bond. And so, real interest rates have risen. And so, one of the challenges with TIPS, if you go back three years, was the real yield on those assets was negative, meaningfully negative, which means by buying those assets you were locking in a destruction of your purchasing power. That's a bad asset to buy, just to be blunt. There's lots of ways – for instance, if you just hold cash, yielding-cash T-bills or the equivalent, if you look across countries, across time offers – typically offers a modest positive real return across countries, across time. So, why would you buy something that destroys your value in terms of the yield when you could just hold cash?
But what's happened subsequently is that the real yield on those bonds has gone up a lot, up to that 2% to 2.5%, depending on the day. And because of that, now the expected future return of TIPS is very different than it was before. And so, you're getting that real return on a forward-looking basis. And so, that's why I think today they're a much more compelling asset class from a valuation perspective and from that inflation protection certainly than they were a few years ago when they were basically locking in terrible returns.
Dan Ferris: Right. And inflation, that TIPS – that's CPI year over year.
Bob Elliott: Yep, they pay printed CPI, which – look, I'm not going to say CPI is a perfect instantiation of the inflationary pressures of the economy. Yeah, I think there's all sorts of reasons why you might think that it's imperfect. But it's certainly better than not getting paid that accumulated return.
Dan Ferris: That's a fair point. It's better than the destruction of the cash.
Bob Elliott: Right. It's better than holding nominal bonds. And again, if you just look at how people are looking at things, OK, how many listeners to this hold TIPS? I bet it's going to be under 10.
[Laughter]
It's not going to be many. And everyone holds nominal bonds. But why would you today – just as a very simple example – why would you ever hold a long-term nominal bond paying just over four in nominal terms? No matter that, that's what you get. Just remember, the return of a bond over its lifetime is its yield. Plain and simple. Yield is destiny. OK. So, you can get a nominal bond that's paying in the low fours or you can get a real bond that's paying two percent real plus whatever inflation is. So, you just totally have taken the inflation – you've meaningfully taken the inflation risk off the table. Those two things are totally different assets. One can be totally inflated away very easily. The other, you're getting paid at least compensated to some extent what measured inflation is. Those are two very different assets, yet everyone holds the nominal bonds and no one holds the TIPS. Doesn't make any sense when the prospective return between the two assets and the risk-reducing aspect of them are totally different.
Dan Ferris: OK. You have me convinced that buying TIPS today is nothing like buying them in 2020.
Bob Elliott: And I should say there's very easy ways to do it. Look, you can go out and buy ETFs. You can buy LTVZ, which is a long-term TIPS ETF. Buying the physical bonds is a little bit of a pain in the backside. So, you can buy short-term bonds, like VTIP or TIP or other ETFs. I don't get paid for any of these ETFs. I wish I did.
[Laughter]
But those are just very easy, efficient ways for people to get access to those types of assets without having to do all the legwork of buying the bonds themselves.
Dan Ferris: All right. A totally different idea and ticker symbols, too. What could the listener want more? They love ticker symbols. What about commodities, Bob? There have been a couple really stellar performers here in the last, I don't know, year or so. Copper had a nice run. It's backed off. Gold is doing pretty well. We talked about gold, I know. What – do you own any? Simply put?
Bob Elliott: Well, I think industrial commodities are really interesting from a, let's say, a long cycle perspective because the challenge with industrial commodities – you sort of made reference to this earlier, which is that the production of copper today is a function of what decisions people made 10 to 15 years ago and what the demand was – the prospective demand was 10 or 15 years ago. And basically, there's nothing you can do about it. On the margin you can try and scrap and you can try and get more out of a mine or whatever, but it takes 10 to 15 years to start a mine and produce. And so, we basically are seeing a circumstance where the production of these – of the mine supply across the – much different, let's say, on the metals side of things – is not projected to keep up with the demand.
Now, because the mine supply was done during – was essentially set during a more depressed macroeconomic environment, and particularly as you start to look at many of the metals, next generation activities are expected to use a fair amount of those metals, which is going to risk creating a squeeze. Now, will the squeeze be as bad as what sort of two lines on the chart predict? Probably not, because there's always efficiency and then there's replacement and people are pretty smart about how to make these things more and more efficient. But there's a general idea that we're going to transition, let's say, to an increasingly green-oriented world without substantial use of industrial metals, which are undersupplied in the context of supply being set 10 or 15 years ago. That story seems pretty compelling. And that story will likely flow through to other prices throughout the economy.
Dan Ferris: Right. And maybe with the caveat that if this economic weakness that we talked about materializes, that bet is temporarily off. Those –
Bob Elliott: That's right. That's right.
Dan Ferris: Right? The prices get hurt. Yeah.
Bob Elliott: Of course. Of course. And there's – part of this is there's this strategic portfolio point and then there's tactical positioning. And of course, in some ways because metals are the most marginal demand element and because the supply is generally fixed, they're actually some of the best capturers of incremental demand – incremental global demand, I should say, in a way that's a little different than oil because oil – traditionally, oil was thought of as having a relatively fixed supply and demand being the primary driver. But what we've seen really in the last 10 years, since I guess the mid-2010s, is that supply actually is pretty price-sensitive and responsive through the creation of all the shale and related activities, which means that it's less – oil is less – it's more supply-sensitive than a lot of the metal side of markets these days.
Dan Ferris: Right. And it doesn't take nearly as long, really, to explore and develop and start producing either.
Bob Elliott: Well, a lot of them –
Dan Ferris: In 10 or 15 years, that's like after the exploration and development for – It's two decades solidly for –
[Crosstalk]
Bob Elliott: Right. Right. Right. Versus oil, they just put – they literally just put the cap on it. If it's below the marginal production value, they just put the cap on it. And then, when the price goes above they just take the cap off and keep fracking, which is actually – from a global economy perspective is actually probably a good thing because you don't have huge swings in oil prices. Given the elasticities, if you go back pre-GFC – I'm sure you guys remember – when you had that $50 to $70 oil spike right in the summer of 2008, that's a pretty extreme – it's very hard for an economy to deal with. And so, from a macroeconomic stability or volatility standpoint it's actually a pretty good thing that the U.S. in particular has created enough – let's call it agile supply that's helping constrain the extremes of price movements, not to mention from sort of a geopolitical standpoint the fact that the U.S. is now by far the – a large producer in the market means that the U.S. is less reliant on external imports of oil than it has been really since probably the post-World War II era.
Dan Ferris: Right. And do you – we've discussed over the past couple of years the idea that governments generally favor so-called green energy and like to make a villain out of fossil fuels in particular and that that is a general kind of discouragement against developing new supply, and they've set these dates – 2030, 2035, 2050 – these things. And it kind of discourages the kind of long-term investments that you need to make. It might take – the supply is agile. It might take less time to explore, develop, produce, whatever, but the investment isn't a five-year investment for new oil supply. It's decades hopefully. And that generally discourages the development of that supply.
That's been an important narrative. That's been a market-moving narrative, it seems like to me, in oil and copper and things.
Bob Elliott: Yeah – it's interesting, at least in the U.S. context, let's say, despite a lot of commentary – negative commentary about fracking and new oil supply coming on line. The reality is the U.S. oil supply is basically at all-time highs right now. So, it's – I think there's probably political considerations why folks don't really want to – particularly in the current administration – talk about the fact that oil supply is at all-time highs. But it is – whatever the construct is, at least in the U.S. context, is not – it's not so constraining that we aren't able to push to those new highs. I think probably more structurally basically what it does is it lifts the bottom level of oil prices considerably, meaning it sets sort of a floor on productive supply because of regulatory considerations, infrastructure considerations that basically have to be responsive to environmental concerns. Leave aside whether you believe that those are good policies or bad policies. It just essentially lifts the overall cost.
And so, I think we've got a situation where – I've been around long enough to remember oil and gas prices below a buck. We probably will not see that in our lifetime. But we'll probalby have less volatile but more elevated prices over the longer term because of those considerations.
Dan Ferris: What's the lowest – the lowest gasoline price I remember as a kid walking down to the filling station to fill up the gas station to mow the lawn was $0.25.
Bob Elliott: Ooh. That's a little lower than I remember.
[Laughter]
Dan Ferris: Yeah. Yeah.
Corey McLaughlin: Much lower than I remember.
Dan Ferris: I don't see any gray hair over there, so this is – $0.25 gasoline right here.
Corey McLaughlin: What's $0.25, Dan? What is that? What is that?
[Laughter]
Dan Ferris: Yeah, what is that? That's right. Two bits.
Bob Elliott: I love it. I love it.
Dan Ferris: Yeah.
Bob Elliott: Back when they carried coins.
Dan Ferris: Yeah. That's right. And there was real metal content in them, too.
Bob Elliott: Yeah, there you go.
Dan Ferris: All right. So, rubber meeting the road in the portfolio, then, for commodities, where would you be today?
Bob Elliott: Well, I think the – it's important to recognize when you're investing in commodities you're not investing in spot commodities in general. You're not investing in spot commodities. One thing I'd say is one of the ways you can get access to these exposures is by looking for resource companies. And I think resource companies are actually very interesting. In the context of – we started off by saying the overall stock market is relatively elevated in terms of its valuation. Resource companies are not elevated in terms of their valuation. They're actually quite moderately priced from a long-term perspective, and particularly if you think more structurally that commodity price pressures will exist, that's a good place to be. Most people are – at least in the last couple of years have become very overweight in tech and growth and AI and all that stuff and underweight in stuff coming out of the ground. And the prices show that. So, anyway, that's certainly one of the areas with those resource companies that you can turn your attention to.
In terms of investing in the commodities directly, it's very important to recognize you don't invest in spot commodities. You invest in – typically in futures in one form or another. And so, things like roll costs do actually meaningfully influence your returns. And so, you just want to be careful about not bleeding returns by having high roll costs. And so, there are different products that are out there that look at that as an input into determining a good commodity index, sort of a good financial commodity index that can be a good savings vehicle where you're not sort of bleeding away the roll costs over time and still getting access to the volatility of the individual – to the price movements if they occur, to the upside price movements. So, that's one of the considerations that you want to have there.
Dan Ferris: I'm hoping Bob's – I'm just talking to our listeners right now – I'm hoping Bob's discussion of roll costs kind of discourages you and just makes you want to stay away from futures and stick to the producers, the really good producers that we've been recommending.
Bob Elliott: Yeah, I think there's lots of good reasons why the producers can be a better – just an easier thing for people to deal with rather than getting too much into the nuances and the financial engineering of futures, roll costs, and things like that.
Dan Ferris: OK. So, Bob, I feel like – I'm just aware here that – I feel like I've been calling the tune here this whole talk. But I'm starting to wonder, well, I wonder if I just started out by saying, "Forget what I think – what's on your mind?" would we have wound up in a similar spot in this conversation?
Bob Elliott: Well, I think the interesting thing is – the primary thing in my mind is that possibility that both stock investors and bond investors are going to get disappointed over the second half of the year. So, we started – your nagging worry is my top macro trait for the second half of the year.
Dan Ferris: OK. All right.
Bob Elliott: So, it actually worked out perfectly. You couldn't have had a better lead.
Corey McLaughlin: Yeah, it sounds like there needs to be an adjustment one way or another with stocks and/or bonds – or bonds. Maybe both. But one or the other more so than the other. I don't – that's what it sounds like to me.
Bob Elliott: Yeah, well, anything –
Dan Ferris: Yeah, that's what it sounds like to me, too. Relative – stocks are expensive plus relative to bonds, kind of dicey.
Corey McLaughlin: Yeah.
Bob Elliott: Yeah. Any good macro trade, what I'd say is you have to have the humility to recognize you may be wrong. So, for instance, I think one of the nice things about the short stocks and bonds trade is if you get the kind of earnings that are priced into stocks, which are very high, then bonds are going to sell off and stocks won't rally nearly as much. And on – which I think is a possibility. My guess is it won't happen. My guess is that the bond – the stock side of the trade will be weaker rather than the bond side of the trade. But I could for whatever reason be wrong under pricing or under expecting the AI trade and the benefits from that, as a simple example.
And so, part of the idea is to balance here in terms of the stocks and the bonds. The main risk to that trade – and again, when you put on these macro trades you always have to think about what are the different states of the future world and where you could be right and where you could be wrong and where the probabilities tilt in your direction. The main way that that could be wrong is if we have a massive productivity – positive productivity shock, meaning inflation falls a lot and we get very strong growth, which is good for both stocks and bonds. That's the main dynamic. And for instance, today I was writing about you look at the productivity dynamics. There's a lot of promise/hope talk, future thinking about what's going on, what's going to happen with productivity. And then, when you look at the hard macro data, actually productivity over the last couple of years has been – across the developed world has been the worst that it's been in decades. And so, I don't see it but it doesn't mean it might not happen. But that's the main risk.
Corey McLaughlin: Yeah, it's funny, I was going to ask you about that –
Dan Ferris: There was one point specifically about AI in regard to that.
Corey McLaughlin: Yeah. Yeah, I was going to ask you about that. You said that the promised AI boom may be coming in the future but for now it's looking like a yawn from a macroeconomist perspective.
Bob Elliott: That's right. When macroeconomists see flat lines they don't get too excited. I think…
Technological innovation and projecting technological innovation and the productivity impact of it, I think, is one of the structurally most challenging things from the perspective trading markets or being from a macro perspective. And –
Dan Ferris: Isn't that funny, Bob? That's one of the things people feel most certain about, isn't it, at any given moment? That's crazy.
Bob Elliott: Right. Right. And I think that that's right, is that – I think it's in particular challenging because folks don't necessarily appreciate the baseline dynamics that have to occur. So, as a simple example, I posted that exact thing about AI not having an effect. And – or not seeing an increase in overall productivity. Whether it's having an effect or not, let's leave that aside. Not seeing that overall increase in productivity. And then, a typical response is, "Well, I know someone whose productivity was increased as a function of using ChatGPT."
And that's not the question. When you're thinking about macro – when you're thinking from a macroeconomy perspective what the impact of a technology innovation is on productivity, it's not whether someone's benefited. It's whether someone has benefited substantially more than has the technological innovation that has occurred before.
So, as a simple example, compare personal computing to an Apple iPhone to – an iPhone to ChatGPT. Now, from my perspective, when you look at that, in order to get productivity to accelerate, productivity growth to accelerate, you actually have to have those subsequent technological innovations make us even more productive, productive at an even faster rate. Not that they make us more productive because of course they make us more productive. There's always technology that makes us more productive. Every day we become more productive because there's always some incremental technology. But to get more growth, to get faster growth, it has to make you more productive even faster.
And so, I think that's one of the challenges that's – that always exists with technological – with framing technological innovation and having the right perspective of technological innovation. The question is not "Does it help?" The question is "Is it accelerating your productivity at a rate that is meaningfully faster than all of the innovations that happened before?" I think that's the perspective that's super challenging for people to get their heads around because it's very hard to understand. Indoor plumbing. Do you have an appreciation of how big a deal indoor plumbing was? I don't. I've always lived with indoor plumbing. So – but it was a big deal. You know what I mean? It was a radical difference.
Air conditioning. Refrigeration. These are things that were radical shifts in terms of productivity enhancement. But we have no idea what they were like because we've always lived with them. So, we don't – we can't look back at that '60s data and really appreciate how big a deal those were relative to my iPhone 15 versus my iPhone 14 versus my, I don't know, my iPhone 6, which I still use.
[Laughter]
Dan Ferris: That's funny.
Corey McLaughlin: I'm with you. I'm on a very old iPhone, too.
Dan Ferris: OK. Wow, I never would have expected to be the tech-forward guy in the group. I have a 12 that I – I mean, whoo! Dan, he's way ahead of the curve! Or not as far behind it.
Bob Elliott: Right. Not as far behind the curve as the rest of us.
Corey McLaughlin: Yeah.
Dan Ferris: OK. That's something. All right. So, yeah. We started out at a good place and we've ended up at a good place, I think. But if I ask you – maybe we could just sum up a little bit. If I said, "Hey, Bob, real quick broad strokes, what does your kind of savings core, whatever you want to call it, portfolio look like right now?" – just broadest strokes.
Bob Elliott: Yeah. I think a good long-term savings portfolio has got a balanced allocation to stocks, bonds, commodities, and gold, tilted towards – and TIPS, I should say – but tilted towards those assets that help protect against inflation. So, more gold than you'd expect – more gold, more TIPS, more commodities than stocks and bonds. And ideally layers on – has a reasonable amount of cash in that portfolio and layers on some active management to help navigate through sort of the tactical dynamics that are going on. Low cost active management is probably what I would say.
Dan Ferris: All right. Thanks for that. It's actually time for my final question, which you've answered it before. I'm kind of hoping you don't remember it. It's the same question for any guest no matter what the topic –
Bob Elliott: I don't remember it.
Dan Ferris: Good. Excellent. It works better that way, I think. So, same question no matter what the topic. If you've already said the answer, by all means feel free to repeat it. So, the question is simply if you could leave our listeners with one final thought today, what would you like that to be?
Bob Elliott: Well, I think the biggest thought is don't assume that the past 10, 20, 30 years are going to be how the next 10, 20, 30 years are going to play out. And that it's really important in terms of building a longer-term savings portfolio compounding wealth, which is really – for the vast majority of people who are watching this and are investing it's not about the tactical trades of whether what's exactly priced into December 25 SOFRs versus how the Fed's going to behave. It's about building and compounding that wealth. And while prudent asset management and prudent savings always feels too conservative relative to the shiny thing, it's over time the thing that is going to build wealth, build you to a retirement point that you can feel comfortable in. And the way you're going to get there is by making sure that you're well prepared to a wide variety of outcomes, because what happens in – what the future holds is very uncertain. And so, it's time now to start to be thinking about how do you prepare yourself for all the different outcomes that could come, particularly ones in which inflation erodes your wealth and savings portfolio.
And so, that's the key. And so, it can often seem foolish – we talked about commodities and gold and TIPS and all these things and that risk seems far off, but it could – I think 2022 is a good indication that it could come faster than anyone is prepared for, and you want to be prepared for those possible outcomes.
Dan Ferris: I hope there are many Ferris Report readers listening to this because that preparing for a wide variety of outcomes, I've just – I've hammered on that. And in our Stansberry Daily Digest once a week I've done it, too. Just hammered on this. Prepare, don't predict. Prepare for a wide variety of outcomes. And I've just beat it to death. I've beat it to death. So, I want everybody to know, look, Bob's smarter than me. He's richer than me. He's younger and better-looking. Everything. More experienced handling money for other people and stuff. So, take it from him. You don't take it from me? Take it from him. Thank you for that. Excellent, excellent answer. A plus.
[Laughter]
Bob Elliott: I appreciate that.
Dan Ferris: Yeah. All right. Thanks a lot, Bob. I always enjoy talking with you and I hope we'll do it again soon.
Bob Elliott: For sure. Thanks so much for having me.
Dan Ferris: You bet.
[Music plays]
Dan Ferris: Well, that was really fun. I love talking with Bob. What a smart guy. And he agrees with me, so he's really smart, right?
Corey McLaughlin: Yes, of course. He's the – I think the point there about – well, most of the conversation really about alternatives to the 60/40 portfolio, especially if you're – is a great one. I think especially if you're closer to retirement or in retirement – the stock/bond performance in 2022, which caught a lot of conventional investors off guard, I think that could sort of happen all over again if we get into this longer-term inflation era and when rate cuts stoke inflation and then you're back into that early 2022 mode where rates are going higher generally over a longer period of time and then stocks take a cut from that, bonds take a cut from that.
And so, yeah, for anybody closer to retirement or in retirement, I think that all of those ideas we talked about – and even if you're not, even if you're longer term – I'm thinking about myself – longer term, like, "Yeah, I'm still more interested in stocks but I also don't – I hate losing money. And I don't want to lose money in – like people lost it in 2022." So, it's just something – I don't think that idea can be shared enough.
Dan Ferris: Yeah, he hit on a – he did hit on some really great points for the thoughtful long-term saver/investor, which is exactly what we want. That's – I hope that's what most of our listeners are. I hope they're not wild-eyed gamblers. I hope they're mostly prudent, long-term saver/investors because that's exactly the kind of ideas Bob delivers.
And he hit on some really – there's some really good takeaways here. Remember, we talked about "What do you do?" and he said, "Old cash." And how do you balance? Well, TIPS. He had some really solid answers. And holding gold, too, he mentioned. He also talked about commodities. I just thought he really just provided some really solid answers to the question we're always ultimately asking: What should I own? What should I buy? How should I invest?
I think we need to have Bob around more often, man.
Corey McLaughlin: Yeah. Great macro outlook. And I would go – if you're interested, I would go to his Twitter page and run down what he – what you mentioned right off the top, his different – he listed out his calls of the last two years or so and what he got right, what wasn't as right, what was wrong. The one that is really – made a lot of sense to me at the time too was in December 2023 when everybody was expecting – or, a lot of people were expecting 2024 to have six or seven interest rate cuts this year. Obviously, that has not happened. And he did not think that would happen and neither did we. And I think that's a lot of the same – that ability to say that even and think that way is – I think that came through in this conversation again, too.
Dan Ferris: Yeah, absolutely. Good track record. Smart macro guy. There aren't as many of those around as I would like. But yeah, that was great. That's – so, that's another interview. That's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as we did. We do provide a transcript for every episode. Just go to www.investorhour.com, click on the episode you want, scroll all the way down, click on the word "transcript," and enjoy. If you liked this episode and know anybody else who might like it, tell them to check it out on their podcast app or at InvestorHour.com please. And also, do me a favor: Subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts. And while you're there, help us grow with a rate and a review. Follow us on Facebook and Instagram. Our handle is @InvestorHour. On Twitter our handle is @Investor_Hour. Have a guest you want us to interview? Drop us a note at Feedback@InvestorHour.com or call our listener feedback line, 800-381-2357. Tell us what's on your mind and hear your voice on the show.
For my cohost, Corey McLaughlin, till next week. I'm Dan Ferris. Thanks for listening.
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