Bob Elliott: Why the Market Hasn’t Crashed Yet
Bob Elliott of Unlimited Funds joins the podcast to discuss the importance of diversification in investment portfolios, gold as a contra currency, and the role of the Federal Reserve in the modern economy.
Additional Resources
Earn a yield on gold, paid in gold
The Case for Gold Yield in Investment Portfolios
Podcast Chapters
00:00 – Bob Elliott
02:45 – Interest rates
08:41 – Commercial Real Estate
15:38 – Income-driven Growth
19:20 – Fed Weakening Control
26:02 – Economic Modernization
31:48 – Monetary policy challenges
37:12 – Gold vs Bonds
43:15 – Lightning Round
43:55 – Bond Vigilantes
45:02 – BTC vs ChatGPT
47:34 – Gardening vs Investing
48:55 – New Inflation Target
50:20 – Diversification vs low fees
52:00 – Unlimited Funds
53:30 – Passive Income in Gold
Transcript
Ben Nadelstein:
Welcome back to the Gold Exchange podcast. My name is Benjamin Nadelstein. I am joined by one of my favorite guests, the CEO and CIO of Unlimited Funds, Bob Elliott. Bob, how are you doing today?
Bob Elliott:
Great! How are you doing, Ben?
Ben Nadelstein:
Bob, I’m really excited to have you on, especially because, you know, in the gold space, you just read a lot of newsletters and articles and everyone is just so doom and gloom. The Fed is going to destroy the entire economy. People are going to be running around with a chicken head cut off scenario. And then I get to Twitter and I see Bob Elliot’s feed and it just always makes me smile because I think, okay, something good is potentially going to happen. It is not all lost. So let’s start with you. A macro overview. Most analysts have said at 5% interest rates, the economy is going to blow up. There’s going to be massive unemployment, firms are going to be going out like there’s no tomorrow. And yet, if you look on Bob Elliott’s feed, which I highly recommend you follow, things seem to be pretty boring. Things are. Okay. So why don’t I take it to you, the man with the boring macro outlook, Bob Elliott.
Bob Elliott:
Yeah, I don’t know if the, if the boring macro outlook, I’m really juicing the social media as much as I probably should be. But, you know, it’s been, it’s been more right than wrong, for sure, over the course of the last, you know, 18 months or so. And I think the big picture story here is that the economic cycle that we’re experiencing today is a lot different than most economic cycles we’ve experienced in our professional careers or in our lives. And that is we’re now firmly within income led expansion and that income led expansion. What that means is that people are earning a certain level of wage growth, which is growing about 6% a year in terms of the overall economy. And theyre taking that income that theyre getting from wages and theyre spending it with personal consumption spending activity about running at about 6% nominal a year in the economy. And that is then leading that spending is then just someone elses income, which is then flowing back into the wages picture, unlike some of the other cycles that weve experienced in our careers, say the 2008 cycle or the 2000 cycle, where there was huge debt growth in the economy, fueling economic activity.
At this point, debt growth for households and corporations is actually at basically recession level lows of the last 75 years. And so it’s not a credit fueled recovery. It’s an income fueled recovery, and that’s very sustainable. And in particular, the thing connected to the interest rate picture is that if youre primarily spending your income out of your way, spending out of your wages and not borrowing, the current level of interest rates doesnt have a lot of influence on your behaviors. Lets just say youre a very simple household and you are just earning $1,000 a week in a paycheck and then turning around and buying $1,000 a week in paying your rent and buying groceries and putting gas in your car. If you’re just behaving that way, interest rates could be zero. They could be two, they could be five, they could be ten. It wouldn’t really influence what’s going on with your behavior. And while that’s an oversimplification, and interest rates do affect folks on the margins, the big picture level, the big picture story is closer to that simplified example than it is many of the cycles we’ve experienced before.
Ben Nadelstein:
All right, so let me see if I can get this straight. It seems like we’ve got some income driven growth, and usually compared to something like credit or debt driven growth, which has all these kind of nasty connotations to it, income driven growth is actually pretty good. People’s income rises, they spend stuff. Obviously, that spending goes to people who are earning an income on the opposite side. And since that seems pretty sustainable, the fact that the Federal Reserve has raised interest rates to 5%, oh, my gosh. Know that that actually affects people on the margin a lot less than analysts or financial media thought. But why don’t I shoot some immediate objections back at you, and you’ll handle them, hopefully quickly.
Bob Elliott:
I love a few objections.
Ben Nadelstein:
So, objection number one. Bob, we’ve heard all about these zombie companies. These are firms that can’t even pay the interest expense on their debt. And obviously interest expense. A big part of that is interest rates. So at 0% interest rates, if we had a large percent of the economy that were zombie firms, how is it possible that a 5% interest rate, these zombie firms, are still walking around? I mean, wouldn’t you think that the 5% would be like a shotgun blast to the head. There’s my first objection, 5% interest rates. Well, Bob, clearly that has to matter because we have zombie firms in the economy.
Bob Elliott:
Yeah. And I think there’s certainly, that dynamic certainly exists. And the question is not whether or not it exists. The question is how big is it relative to the overall economy and how many firms are facing dynamics that are similar to the dynamics that you’re describing. There’s certainly a fair, there were a fair number of venture backed companies that faced challenges with their funding over the last couple of years, and a fair number shut down, and that led to some layoffs, particularly in the coastal tech centers. And there are certainly many private equity backed companies that may not be quite to the point that you’re describing, but certainly are teetering on the edge and are just getting by earning enough EBITDA to cover their interest payments. In that sense, they’re a bit zombie, given how debt laden they are. But those companies at the economy wide level are more the exception rather than the rule. And in many ways, when you think about the financial state of companies in the economy, we almost have a barbell economy in the US. We have very, very big companies that have earned blockbuster earnings, that have great balance sheets, that have tons of liquidity.
The companies that are in the s and P 500 that you see every day that are doing well, if anything, they may be benefiting from higher rates as theyre earning more on cash relative to the long term debt that they locked in. And so theyre doing pretty well. And then, interestingly enough, we have a huge portion of the economy, which is very small businesses. And very small businesses in a lot of ways operate closer, akin to households that arent taking on a lot of debt. And the reason why that is is if youre running, you know, a sandwich shop or a small business, a small services business, you basically have to be cash flowing, right? You’re not going to be borrowing. These aren’t venture backed businesses. They’re not borrowing tons of money in order to operate. They’re basically operating in a way that generates positive, free cash flow, which is paying for the expenses and paying for the people who own the business. And so those companies are less affected. In fact, only about, if you look at the NFIB survey, only about 25% of companies borrow at all on a regular basis. That’s a survey of small businesses.
And so that’s pretty tiny. And most of that borrowing is transactional in the sense of like, if you’re going to build a house, well, first, what you do is you borrow to buy the land, and then you build the house, and then you sell it. And so in that sense, they’re certainly borrowing, but that’s more like recurring borrowing and revolving borrowing than it is like, you know, building up large debt stocks. And so the companies you refer to exist, they certainly are feeling pain, but they are not the majority of the economy or anywhere close to it.
Ben Nadelstein:
Okay, objection number two. You handle that one way too easily. Objection number two is, okay, well, I’ve heard that commercial real estate is having a really tough time. I heard there was that building in San Francisco that went from like a trillion dollars to $0.30 on the dollar. So what about commercial real estate? I mean, clearly interest rates are hurting commercial real estate, right, Bob?
Bob Elliott:
Well, commercial real estate was hurting well before we had a rise in interest rates. And of course, because workforce patterns have shifted, it has created a particular pain in shiny office buildings, in large metropolitan centers. The first thing id say about that is there has been actually a fair amount of evolution on that dimension, really, even over the course of the last couple of years. New York City is now at an 80% midtown occupancy rate, where it was in the sixties and the fifties before. So occupancy is coming back. Its probably not going to reach anywhere near the levels that we saw in 2019, but its not nearly as disastrous as some people had suggested. So thats helpful for those buildings and the yielding of them. It is true that the rise in interest rates has made the financing of those buildings more expensive and that much of that lending has come from banks. I think the important thing to recognize, though, is that the loans, you have to roll up your sleeves, you cant just say, well, prices are down a fair amount, therefore its going to be a problem. You have to roll your sleeves and understand the loans.
The loans are, most loans are 50 LTV loans, meaning there’s $50 of equity and $50 of borrowing that goes to the banks. Most of that bank lending is on balance sheet, which means that banks only have to recognize those problems at the time in which the debt comes due. On average, those debts run between five and ten years in terms of duration, and they can be rolled, extended, modified. I always like to joke, one thing bankers are really good at is figuring out how to deal with bad loans. Not so much lending, but figuring out how to deal with the bad lending that they’ve done in the past. And there’s a fair amount of regulatory relief in place for those banks to extend and pretend. And that is totally normal. That’s how banking has worked for thousands of years, has been taken income today extended and pretend, bad loans and hope for the future and eventually, over long periods of time, write it off. And so you put those things together. It’s a problem concentrated in a very small segment of the commercial real estate market. I should also mention, downtown, shiny office buildings are only like five or 10% of the overall commercial real estate market.
There’s lots of other things in commercial real estate, like warehouses and gas stations and strip malls and multifamily apartment buildings. All sorts of stuff in commercial real estate that is not downtown, shiny office buildings. Occupancy is rising. The loans are relatively well capitalized. The banks are, they’re taking a long time in duration, and the banks have a lot of flexibility to extend and portend. Honestly, before the losses peak in this, it’s probably going to be five years, five to seven years before losses in crew peak. And like five to seven years. I mean, I don’t know what you’re doing in five to seven years, but, you know, like we will forgotten this conversation in five to seven years.
Ben Nadelstein:
Bob, I will never forget a conversation with you as long as I live. That was an easy softball. Okay, let’s, let’s take the final objection, which is, all right, yeah, I hear all this stuff and, you know, extend and pretend, but what about me as an individual investor? I hear from the financial media, while the treasury is a risk free return, which you can obviously disagree with that, but okay, at 5% or five and a half percent, I can get a CD from my bank, or I can buy a t bill and chill, as they say, and I can just get 5%? So shouldn’t that mean that on the margin, when someone’s saying, I got a million dollars, I can either get a guaranteed 5% zero risk, as they say, or I can go into the stock market, which is very risky, and the stocks are all bubbles and we’re in a bubble economy, and all these stocks are going to tank and it’s going to be like the next great Depression. So aren’t people taking their money instead of the stock market and putting it into CDs and treasury bonds and bills? And so can’t that hurt the stock market just because there’s 5% interest rates?
Bob Elliott:
Yeah, well, certainly the repricing, it’s normal in a tightening cycle to have a repricing of cash rates, which are risk free essentially relative to asset yields. And that in many ways, is, is exactly what the central bank, in any tightening cycle, is trying to do, change that trade off between holding cash and buying assets or holding cash and engaging in economic activity. Its certainly true that on the margin that has created the higher rates on the short end have created a demand for cash relative to assets, and almost by definition has created somewhat of a drag on asset prices relative to what would have happened otherwise. That said, it’s not like what would have happened otherwise was constant. That’s evolved too. And in part, a big part of the story is the fact that we have had a meaningful rise, that meaningful rise in nominal incomes that we talked about fueling this economic expansion has also been supportive to asset prices, both in terms of the valuations of the asset prices, seeing higher nominal earnings as a function of that, but also in terms of continuing a flow of capital to those asset prices. Because if people are employed and theyre earning good wages, theyre saving in their four hundred one s, and that is supporting asset prices.
Thats a very stable, sticky support to asset prices. In many ways. Whats happened, when you look at whats happened, for instance, in the equity market over the last couple of years is that discount rates, interest rates have risen, cash rates have risen, but stocks are still up in aggregate. And that reflects the fact that those earnings have risen during that period because nominal growth has been pretty good. And then further, to some extent, that is then being further extrapolated in the future. Now that might be a good idea or that might be a bad idea. I think its probably a little frothy in terms of how much it’s extrapolated. But the basic fundamental idea of equities rising in this environment, and I say over the last couple of years, there’s a lot of fundamental oriented drivers for why equities have risen in the post COVID period.
Ben Nadelstein:
This is why I love having you on because it’s just always such a rosy picture. I fire these objections off and things are okay, Ben, things are okay. All right, so let me ask a question that you brought up, which is there’s this borrowing, right? And most of it isn’t really on the short end of the yield curve, as we would call it. It’s actually sometimes on the longer end of the yield curve. And the fed, we know, actually doesn’t really have much control over that long end of the curve. They can push really, really hard on the short end of the curve because that’s where they control that overnight lending rate. And that kind of pushes on the short end of the curve the most. But the long end, the longer duration bonds, those actually aren’t as affected by what the Federal Reserve does. So would you say that it’s true that the Fed actually has a lot less power than we think to affect economic conditions? Because at the end of the day, if they’re pushing on the short part of that yield curve, and almost nobody interacts with the short part of that yield curve, or it’s okay when that yield curve gets pushed to 5% interest rates, that the Fed actually has a lot less power than we thought.
Bob Elliott:
Yeah, I think many folks looked at traditional indicators, whether it’s changes in short rates, changes in bond yields, yield curve inversion, and looked back over the course of the last 50 years or something like that, and said, oh, look, this is basically, I’m sure you heard, fastest tightening that has ever occurred. It’s not quite right, but there was sort of a spirit around just how fast the tightening was, and that was going to create slowdown. I think one of the challenges with that is that, as you mentioned, the economy is really meaningfully restructured, particularly in the post GFC period. Just for context, leaning into the GFC, half or more of mortgages in the US were floating rate. Today it’s essentially close to zero. Basically, all mortgages are long term in nature. The bond market, you still had significant borrowing of CI lending on the short end, using floating rate and funding through commercial paper. Largely. Most corporations, particularly big sophisticated corporations, use the opportunity with low interest rates to term out that debt and issue long term bonds. And so we’ve had that restructuring of debt in the economy to term it out at low interest rates.
Which means that if you’re a very, again, a simple practical example, if you’re a household that bought your house in 2015 and refinanced post COVID to a mortgage that was 3% for 30 years, interest rates in the US economy, they could be two, they could be five, they could be ten, or they could be 10,000. What you’ve done is you have a mortgage, that mortgage rate is locked in, it doesn’t make any difference to you. And so I think that’s one of the challenges that the Fed is really facing in terms of slowing this economy. And we haven’t really talked about it, but inflation is still a problem in the economy, given the overall pace of growth that’s occurring right now, which is a concern for the Fed. But the Fed really is struggling to be able to have a large effect for that relatively significant structural reason that in many ways, credit, which is the lever that they control, they control the price of credit on the short end of the economy, the influence of the price of credit on the short end of the economy is just much lower today than it was even ten or 15 years ago.
Ben Nadelstein:
I find that such an interesting point because the economy itself almost like evolved to say, okay, we’re going to do everything we can to make sure that another 2008 style crisis doesn’t happen. And obviously there’s lots of differences today than what happened during the 2008 crisis. But part of that was to say, oh my gosh, these changing rates just really destroyed people who had variable rate mortgages and these balloon payments. And now all of a sudden just people learned over time, okay, gosh, we definitely can’t do that ever again. And so you see almost none of those financial derivatives or anything like that in the economy because people realize, okay, fool me once, but I’m definitely not getting fooled by that again. So I guess my question now is, okay, maybe those in the 2008 period were something to be aware of, those derivatives, those kind of financial rejiggerings that happened in the housing market. What is something we should be looking at now? Something that we’ve, yes, okay, maybe we’ve evolved a thick skin on this side of our economy, but there’s this kind of soft underbelly on the other side. So what should investors be looking at saying, okay, maybe it’s inflation, maybe that’s a thing.
Okay, in 2008, inflation wasn’t the big deal, it was all these bankruptcies. So what is the new crisis or the crisis point that we should be looking out for in this kind of new evolved economy?
Bob Elliott:
Well, I think part of it is, I think there’s a lot of people who sort of grew up on 2008 and COVID and the tech bust, and they see the world as where is the crisis crisis and v shaped recovery? And that if you look across economic cycles, across countries, across time, I think the primary thing that you would see if you sort of really lived through those cycles is that it’s really boring. And I say that from the perspective of like, think about the US economy. It’s like a huge $27 trillion a year GDP tankership. Moving that thing in one direction or another is very difficult absent a relatively substantial shock. If you go back and look at previous cycles that were not shock oriented cycles, but cycles that were too strong for too long, which was met by central bank tightening, which eventually slowed the economy. They’re the sorts of things that played out over years, not over days. And I think we think of cycle downturns today. It’s like what happened in March of 2020. It was like equities went down for 20 days, not five years of a cycle slowing 20 days of down and then up.
Or if we think about 2008, which the most acute part was a few months long, what that highlights is that most likely, there isnt any one particular thing thats going to radically change the economic environment quickly. More likely what were going to see in terms of slowing of the economy as a function of the tightening cycle is closer to death by 1000 paper cuts, where, well, weve already had venture funded companies that are know that aren’t doing well, and then they lay people off, and then maybe some private equity backed that aren’t doing well, and then auto borrowing, the rates are a little high, so that slows down a little bit, and all of these different pieces come together and the rest of the world is slowing down a little bit. So maybe that creates a drag on the US economy. And so you sort of have all of these pieces together that create a composite set of drivers that are slowing the economy without too much reliance on any one particular thing. And if what you’ve looked at the last few years is several times investors have bet on a thing being the crisis that turns the economy, and they have been dead wrong as a function of the fact of not understanding that those things were small, they might have felt like crises.
SVB, as a perfect example, felt like a crisis in the moment. But if you’d done the work and you had lived through the financial crisis, it wasn’t a huge leap to say SVB was very different from the global financial crisis. And so markets traded closer to it being a crisis that would destroy the economy. And the macro economy just kept going.
Ben Nadelstein:
It’s always a rosy picture, and this is why we need to have you on more often, because the economy is strong. We might die slowly, but at least it’s a thousand people paper cuts instead of just one big bang. So why don’t I challenge you here, which is that in 1971, for those who don’t know, President Richard Nixon, in his kind of beautiful voice, which I can’t redo, closed the gold window. Now, this was supposedly temporary, right? He said, hey, you know, we’re going to close the gold window. And the reason I find this meaningful, and maybe you’re going to disagree, is that before 1971, obviously there was some tampering with the gold standard that America was on and the redeeming quality of the paper that they were issuing and how it could be redeemed for gold and at what price. But in some sort of semblance of an idea, there was gold and there was dollars and they were somehow connected. And then in 1971, that really shut off for good. That was kind of the final nail in the coffin, as you can say, on the gold standard system. And then from that point on, we had floating exchange rates where all these currencies traded with each other.
And then the actual paper dollars were no longer redeemable for any amount of gold. You couldn’t slide that across a teller window and get really anything back. They would just say checking or savings. Right. So from 1971 there have been a lot of changes in the economy, just like there have been a lot of changes in the economy from 2008. So in my opinion, those have been negative changes. So theres been just exploding debt. Weve grown the debt exponentially large since around 1971. Another would be these interest rates from the Fed are completely just unstable, right? So sometimes theyll shoot the moon like in the seventies and then starting the eighties, they’ll just fall, fall, fall, fall, fall, fall, with of course some breaks in the middle, but they’ll just fall for 40 years straight. Now, obviously we’re in maybe one of those break periods, but it feels like the demand for credit is just only when rates fall and fall meaningfully below where they were. So those to me seem like really big macro important things that have changed about our economy since 1971 for the worse. So first, do you agree with that assessment that since 1971 we’ve obviously had this exploding debt and that’s for the worse?
And that these interest rates have become much more unstable than they were maybe in the previously? And does that matter to investors or is this just kind of. Oh yeah. Well, we used to be on gold and now we’re on paper and things change and oh, ben, you weird gold bug, you just like things the way they used to be. So does that matter at all, the way the economy’s changed since 1971? Or is that just kind of a fun historical tidbit? Oh yeah, we used to be on a gold standard. Anyways, back to work.
Bob Elliott:
Yeah, I think if you look through the history of monetary regimes, there has, and not just in the US context, but if you look at, for instance, history of chinese monetary regimes over hundreds of years, or monetary regimes that had existed in Europe, etcetera, what you see is you often see fluctuations from moving from hard money regimes like gold standards or specie backed money in one way, shape or form, that eventually in one form or another, is devalued, whether it be through cutting coins or reducing the weight of the hard money in the coins or various other measures the introduction of alternative lower quality monies that essentially devalues the previous money. And then eventually you get to the fiat world. And the fiat world feels good, feels better, more effective, because what it allows you to do from a central authority’s perspective is that you have the ability essentially to control, to have more control over the money supply in the economy, and presumably as a function of that, more control over stimulating or tightening conditions. The big challenge with that is that there’s always a incentive for the private sector to borrow more in that currency and for the public authorities to continue to stimulate until the point in which you get that stimulation.
That creates sufficient instability and concern about the money, which then practically feeling is like inflation is too high in economies. And then that creates a reactionary force, whether to either instill limitations of that fiat management or to move back to hard money. Like, that’s a very typical cycle that we’ve seen play out over and over again. And the US context is not that much different. I think in several ways the US fiat system was on the precipice of not working, given the elevated inflation in the seventies. And it took, frankly quite a stern central authority to enforce that the dollar would preserve its value relative to stuff. And that was, you go back and study that period. It now looks from our perspective like that was how it was going to play out all along, that Volcker was going to get it done and we were going to have tight money and the dollar would survive. I would say if you look back through time, it was less certain. Even Volcker would say it was less certain at the time than I think people gave it credit for. But that ushered in for a variety of different reasons.
Global reasons, global disinflationary impulses and global integration. A big disinflationary wave that has largely ended. And as part of that disinflationary wave, interest rates came down, people could borrow more, their debt service would look consistent even though they were borrowing more. The challenge that we have now is we’re coming back to one of those instances. Whether you look at a combination of fiscal, uh, uh, behavior, uh, here in the US, and I can use the US as an example, but it’s kind of true across most of the developed world, you know, fiscal behavior that, uh, where we’re running deficits that are, you know, wartime like deficits at a time when unemployment is at 75 year lows, um, or on the monetary policy side, where, uh, you know, uh, to put it bluntly, like the Fed has, has not met its mandate on the inflation side for several years and projects to not meet it for several more years. I don’t know about you. If I had failed at doing my job for five years, I should hope that someone would throw me out rather than let me just carry on with the existing approach. And I think those are the types of dynamics that sow the seeds for the reversal of interest and understanding of fiat currency relative to specie in one form or another.
And I think, you know, we’re starting to see the nascent pressures related to that. The real question is, you know, on the fiscal side and the monetary side, you know, is the US and other developed world countries, are they going to, you know, tighten the belt the way that is necessary in order to preserve the value of that relative to stuff in particular, or are we going to let, they gonna let the desire, the, the good feeling of immediate, the immediate gratification of additional stimulus continue to persist, which undermines the dollar and other developed fiat currencies in terms of their long term success.
Ben Nadelstein:
Bob, this is the first time I have a definitive answer to your question, which is they will continue to use the power of the one ring for any lord of the Rings fans out there. So, okay, let’s say I’m someone who thinks, you know what, I really don’t see how someone in Congress or someone in another country who works at their central bank is going to let go of all this stimulation power. I don’t think most people say, you know what, I’m going to run on tightening our belt as a country that tends to be disfavorable when you are trying to get elected. So for those of us who think, okay, I think monetary policy and fiscal policy is going to continue in the direction it has, does that mean kind of looking back for the last 40 years, that it seems like interest rates will have to continue to fall to stimulate borrowing and not just, you know, ease in terms of their, in their rates, but actually ease ever more than they have before. Because if you look for 40 years, it wasn’t that. Okay, hey, we’ll just go back to 2% and people will start borrowing just as they did before.
No, no, no, this time you have to go to one and a half. Okay, then maybe I’ll. Okay, one and a half. I’ll maybe refi. Okay, when there’s a crisis, we raise rates. Okay, back to one and a half. Oh, that didn’t work. Okay, how about 1%? And they keep falling and falling and falling in a secular trend until we’ve hit literally 0% interest rates. So the first question is, do you actually think that this secular fall has changed? Are we going to start seeing rising rates and stable, if you want to call them stable interest rates again, or is that secular decline still in effect?
Bob Elliott:
Steven I think it’s a good question. I think one of the challenges in terms of extrapolating that secular decline in interest rates has been, has been the fact that many of the big disinflationary pressures which has helped drive that interest rate down are likely reversing. And if you think about interest rates, really in many ways, they just have two pieces, which is they have expected inflation and they have real interest rates. In an environment where many of those disinflationary pressures have reversed, we could easily see the interest rate term structure start to price in higher, longer term expected inflation. It’s been basically stuck at 2% for 20 years. But there’s no certainty, there’s no reason why it must be that way in terms of long term inflation expectations. I think on the same side, if we’re seeing a period here where where you have a continued lack of commitment to achieving, or to running monetary policy necessary to bring inflation down, we may well see a circumstance where, on the short end of the curve, the Fed chooses to run real interest rates that are too low given economic conditions. I think one of the challenges on the interest rate side of things is that if they do that, if they are not committed to running sufficiently tight monetary policy, that starts to create uncertainties on the long end about how interest rates will evolve, partially because of uncertainties about inflation, but also partially uncertainties about how interest rates will respond to the economy.
And typically, in that sort of circumstance, you’d see an expansion of risk premiums, meaning that you’d have to get a higher real interest rate to hold dollars for ten years than if there was more certainty about what the path of monetary policy would be. And so I could easily see a circumstance where we see pressure on the long end to rise relative to the short end, as that easier than appropriate monetary policy plays out, that that pressure on the long end would be too significant a tightening cycle, given if there was weakness in the economy, which would then cause the central bank to first, obviously cut rates, cause the Fed to cut rates on the short end, but then need to resolve that problem through an increase in money supply to buy those bonds. So that path that I’m describing is not a path that will happen in the next three months or something like that, but you could easily see that path sort of evolving over the course of the next ten years in terms of a cycle where we have the curve steepen substantially, then fall, then still be too steep, then get money demand into money, buying that bond and basically putting in some form of yield curve control, not explicitly, probably more implicitly than explicitly, in order to depress yields in order to keep the economy going.
That overall dynamic, its a dynamic that for a long time is bad for bonds, particularly relative to cash, until the central bank comes in and starts buying them. And its particularly good for hard assets because its aligned with a persistent path of monetary and fiscal policy that is easier than appropriate given economic conditions.
Ben Nadelstein:
Bob, before I let you make the case for gold, I’m going to scold you live publicly on a podcast. So Bob is a very smart guy and we like him a lot. And he likes gold, which is, which is all about. Not that all our guests do like gold, but a lot of them tend to. So Bob, I watch a lot of your podcasts, I watch a lot of your interviews, but the only mistake I ever see you make is you say gold is a non yielding asset. It pays no interest, which is not true. So for those interested in the truth, you can check out monetary dash metals.com. We pay a yield on gold paid in gold. If you want to learn about leases or bonds and how they work, I suggest you check out monetary dash metals.com. But without that fact, you are perfect on gold. You are one of the best gold spokesperson around. So I’m going to leave it to you. I’m going to give you the first objection, which everyone eh, gold, shiny pet rock. Warren Buffett doesn’t like it. Meh. You know, if I want safety, I don’t want this, all this volatility.
Gold, it’s a shiny pet rock. It’s a relic. What do you say to the people who say, I got the 60 40 portfolio, I got my stocks for growth, and I got my bonds for safety, why do I need gold?
Bob Elliott:
Well, gold is a unique asset in the sense that it really is a contra currency to other fiat currencies, and I should say financial assets denominated in fiat currencies. And it has a very long history of serving in that role. And when I say long history, I mean thousands of years across geographies, across disconnected geographies in the past. And so there is good reason to believe in the moneyness of gold and that people will use it, will continue to use it in the future as that contra currency. And I think functionally, we’re seeing that play out in real time. Maybe less in the US context, but more in the global context, where we see foreign central banks looking to diversify their reserves away from us dollars and into other assets, particularly gold. And where we see households who are struggling to find savings vehicles during times of stress looking to gold as that store hold of wealth. I think some of the more interesting things that are going on in the market today around that chinese demand, that sort of home chinese demand, theres been central bank demand for a long time. But home chinese demand, what a great example there in that economy where the housing market doesnt look good, the stock market doesnt look good, theres no real access to bonds, wealth management products that have been sold by banks, which are basically yielding short term assets, many of which have defaulted and raised questions about their credit worthiness.
Bitcoin is outlined, outlawed, like what is the thing that you use that you can hold in your hand a meaningful amount of wealth in a way that is storable, transportable, durable, doesn’t have cybersecurity risks. And what we’re seeing in those environments is people are drawn to gold. It’s, you know, it’s like, you know, chinese savers could do anything in the world, you know, they could save, they could figure out a way to save essentially in any asset in the world. And what are they doing, doing during a time of stress? They are saving in gold. And it shows once again that it’s the, it’s, it’s the same old, same old, that gold serves as that contra currency. And then I think from a portfolio perspective, maybe you believe what I’m saying and maybe you don’t. But from a portfolio perspective, if you’re going to empirically consider which assets serve as good diversifiers, if you hold bonds in your portfolio, you really do need to hold gold. The reason why that is, is that gold serves as an asset that outperforms during a certain set of equity market downturns, where bonds typically underperform. So that would be dynamics where inflation is elevated relative to what expectations were, or where theres concerns about money as a storehold of wealth.
And so in those circumstances, I think people quickly forget. If you look at equity market downturns or negative rolling twelve month periods in us equities, over the last 75 years, gold has outperformed bonds in 50% of those environments. And the last five years is such a great example of that. During periods where equities have drawn down, gold has outperformed bonds relatively consistently. And so, just from an empirical perspective, when you look at that and you look at the consistency. And it’s not only back in 1970, in the last five years, this empirically is true. It is surprising that folks would say, well, I absolutely want to hold 40% of my portfolio in bonds and I want 0% in gold. Those two things, they just don’t align with the fundamental empirical outcomes that we’ve seen with the asset over time. That doesn’t mean. That doesn’t mean you have to go buy, put 100% of your portfolio in gold. It doesn’t mean you have to become a gold bug and store bars in your basement. Just means allocate a prudent, maybe 510 percent of your portfolio to gold because it serves as that nice diversifier through an unusual set of circumstances, like many that we’ve seen in the last five years, that your existing portfolio does not protect you from.
Ben Nadelstein:
And again, for those interested earning a yield and the storage fees on that gold that diversifies your portfolio, you can check out monetary dash metals.com dot bob. We get to the lightning round. So I’m going to ask you some quick questions. You can answer as short or as long as you want. You can answer even with just one word, and that is fine by us here at monetary metals. Okay, lightning round, which is more likely, the bank of Japan brings their interest rates up to 5% or the Fed brings their rates up to 10%, which is more likely?
Bob Elliott:
I don’t think I’ll see the bank of Japan at 5% before I die.
Ben Nadelstein:
Well, hopefully, hopefully there is a long life ahead of you, and maybe the bank of Japan decides something fun. Okay, next one, the bond vigilante. These are people who say, whoa, that is a lot of debt you are loading up there, Uncle Sam. Or Bank of Japan, it is time for you to pay your fair share in interest rates. Do you think the bond vigilante is dead or just around the corner?
Bob Elliott:
I think there’s a lot of concern about how the Fed or how the treasury is going to finance these huge recurring deficits, particularly in an environment of elevated inflation. And so whether you call them vigilantes or you just call them households that need a little more yield to buy the big debt supply that’s coming to the market, I think we’re likely to see them ahead, and we’re likely to see yields rise somewhat meaningfully before they rise enough to start to create enough of a drag on the real economy to start to create an easing which would be beneficial to bond. So, in particular, you got to focus on the order. First, bonds go up, then the economy slows, then the Fed eases, then bond yields start to fall.
Ben Nadelstein:
Okay, next lightning round question. Would you rather have the Fed add bitcoin to their balance sheet in place of bonds? Or would you rather have the Fed have all of their decisions on interest rates be made by ChatGPT?
Bob Elliott:
I’ve long argued that the Fed would be better off and policy would be better if the Fed pursued a systematic approach to their decision making. Now, I’m not sure about chat GPT, I found it very effective at being able to give me a few jokes that I can share with my friends and family. I’m not sure I would trust it with monetary policy these days, but I think there is a world where where the Fed could move to a model where they are much more driven by systematic, data driven approaches that are public, that can be debated and discussed, where what we call the reaction function. So how the Fed is expected to react to a certain set of data is known rather than opaque. I mean, right now, essentially what we have is we have a decision making engine thats run by somewhere between one person and a little over a dozen people who are discretionarily just figuring out what they want to do on a day to day basis. And theres a reason why people who trade financial markets increasingly have moved away from purely discretionary and towards more systematic trading. And theres no reason why policy shouldnt move in that direction to some extent.
That doesn’t mean it’s black and white, doesn’t mean follow the gps into the lake, it just means you could get 80 or 90% of decisions and understanding of what the Fed’s likely to do using a more systematic approach. Now, me saying that replacing the Fed board of governors with computer probably won’t get me any friends there at the Federal Reserve or the, or the member banks. But I think my guess is there will be a day when we see something like that evolve more significantly for decision making.
Ben Nadelstein:
Well, when you are finally elected to the board of governors, please bring me on so we can turn on the computer together. Okay, next one. So, Bob, not a lot of people know this about you, but you are an avid gardener and you love botany. So here’s a fun one. What is your favorite fact about botany that you could tell an investor?
Bob Elliott:
Oh, my favorite fact about botany? To tell an investor, I’d say, I’d say probably the best thing to think about when you’re thinking about plants and gardening in general is just like in investing. When you’re gardening, diversification is key. And the reason why that is, is that you never quite know what sort of atmospheric conditions are coming in any one year, and you never quite know what sort of pathogens will knock out certain crops. And so you’re much better off planting a very diverse set of different types of crops, as well as different hybrids of every individual crop in order to get to your best chance of success. So, out with the monoculture of the backyard garden, and in with diversification.
Ben Nadelstein:
I bet that is the first time you’ve gotten that question. Okay, next one in the lightning round is 3% inflation, the new 2% inflation for the Fed.
Bob Elliott:
Right now, I don’t think that the Fed is shifting the target in terms of where they want to get inflation. I think the failure to get it there in as rapid a way as would be consistent with the mandate is more a function, is mostly a function of having a bad understanding of what is driving this cycle, and therefore thinking that what they’re doing is much tighter than what it actually is, and not a matter of political influence and not a matter of giving up on the mandate. Now, that is with who is at the Fed today and the set of governors that are there today, that doesn’t mean that that might not change. And so I think it’s very important to recognize that, you know, particularly influence on the Fed from the president is something that has gone, gone in waves. There have been times when there has largely been no influence, which has been the last couple of decades, and there are times when actually they’ve closely coordinated. And so I wouldn’t necessarily assume that just because the chair today is committed to the 2% mandate and that the board today is committed to the 2% mandate, that that may not change in the future.
Ben Nadelstein:
Last question. In the lightning round, which do you think is worse for the average investor? Lack of diversification or high fees?
Bob Elliott:
Oh, gosh. I mean, both. I can’t choose between the two. I think, as a everyday investor, there are basically, those are the two things that will determine your long term ability to generate wealth. And if your fees are too high, every dollar that you’re paying the manager is a dollar that’s not in your pocket. And to be clear, every dollar that you’re paying the government is also a dollar that’s not in your pocket, and that compounds over time to radically change the picture. I saw recently an article that talked about, what if Warren Buffett had charged hedge fund fees on Berkshire rather than had, I mean, essentially charged no fees or whatever the infrastructure is that he created in the corporation structure, and the difference in long term returns would have been like 90% difference, right? In terms of hedge fund fees versus the outcome. And so I think that’s a good lesson to learn. And similarly for those who are trying to compound long term wealth without taking significant drawdowns at any point in time, because you never know when you need your savings portfolio, when are you going to buy a house, kids go to college, medical issue comes up.
You never know when those things are going to come up. Diversification is the key to compounding that in the best way possible.
Ben Nadelstein:
Preston okay, as we wrap up here, Bob, if people aren’t convinced to follow you on Twitter, I don’t know what, maybe they should go see a doctor because clearly there’s something wrong with their head. Been an awesome conversation. You’re always a bright light in this kind of gloomy atmosphere that we sometimes have in the gold bug community. Bob, where can people find more of your work? Obviously they got to follow you on Twitter and tell us a little bit about what you’re doing at unlimited.
Bob Elliott:
Yeah, so for ongoing, an ongoing flow of macro and investing related commentary, you can definitely check me out on Twitter at Bobby Unlimited. I also run a YouTube channel which has regular macro outlooks as well as clips from appearances like this, also under Bobby Unlimited. And I write a fair amount about the industry on LinkedIn. So three different places where you can find me doing what I’m doing there. In terms of my day job, I run unlimited, which is a company that’s committed to leveraging technology to bring all investors access to the most sophisticated asset returns and strategies that are out there and doing that at a much lower fee point. Diversified, low cost indexing for the world of two and 20 just in the way we just talked about diversification and low cost. You bring them together if you want to check that out, it’s unlimited funds.com.
Ben Nadelstein:
Bob, it has been a pleasure as always, speaking with you. Have fun in the garden and we will see you next time.
Bob Elliott:
Thanks so much for having me!
Additional Resources for Earning Interest in Gold
If you’d like to learn more about how to earn interest on gold with Monetary Metals, check out the following resources:
In this paper, we look at how conventional gold holdings stack up to Monetary Metals Investments, which offer a Yield on Gold, Paid in Gold®. We compare retail coins, vault storage, the popular ETF – GLD, and mining stocks against Monetary Metals’ True Gold Leases.
The Case for Gold Yield in Investment Portfolios
Adding gold to a diversified portfolio of assets reduces volatility and increases returns. But how much and what about the ongoing costs? What changes when gold pays a yield? This paper answers those questions using data going back to 1972.
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