Bob Elliott
@BobEUnlimited
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CIO at @UnlimitedFnds | PM of $HFND | Fmr IC @Bridgewater | Described as one of the few "sane" voices on #fintwit | Comments are not investment advice
New York, NY
Joined March 2022
Given the nature of this platform, it is 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.
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The selloff in US bonds has sparked a global dump of developed world sovereign debt. Since US yields started rising after the Fed meeting in Sept, global bond yields are higher, while the dollar and gold are surging, reflecting an increasingly global debt contagion. Thread.
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The US banking system is built on the expectation that equity and bond holders accept the bank economic risk and depositors, particularly the small folks, do not. While that is not legally the structure, its important to keep in mind that's functionally how it works. Thread.
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Hearing from some insiders:.-big banks actively working on buying svb business.-fdic considering insurance / liquidity covering up to 95pct of uninsured depositors to acquirer.-Monday 250k on track.-50pct of uninsured paid out next wk. Cant confirm myself but seemed worth sharing.
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This is not the 2008 cycle. Those drawing conclusions from '08 about the need to cut fast today to avoid the risk of a precipitous drop in growth ahead are missing the big picture. '08 was the bursting of the greatest debt bubble in 100 years. This cycle is totally different:
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Fed/FDIC decisions on SVB determine whether they risk a bank run trillions of dollars in size. 1/3 of US deposits are in small banks and ~50% are uninsured. Haircutting SVB depositors will raise sensible questions about holding deposits at any small bank, risking a broader run.
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An aggressive global easing is here without a global slowdown or any stress in asset markets. Such Over Easy policy has been pursued in the past by individual countries, but has never been run at a global scale. Thread.
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Years ago I led research on the GFC and was way out front suggesting trillions in losses, so I know a little something about crummy banks. Getting panicked calls about the risk of SVB deposit losses, a bank with:.1) 15% tier 1.2) 40% LTV.3) 100% deposit liquidity coverage.
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The market action today reflected the fact that there is far too much liquidity still in the system than desirable. Bear market rallies typically come after periods of declines and are driven by short-covering. Today was driven by leveraging up on expectations of a bottom.
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The FDIC has taken SVB in receivership and will manage its resolution. This has happened hundreds of times over the last decades and there is a well tested game plan as I mentioned earlier. Thread.
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Most investment portfolios are totally unprepared for war. In times of conflict inflation rises, gold and commodities outperform, while stocks, bonds, and cash underperform. A typical portfolio of 60/40 + cash is the worst portfolio, particularly on a real return basis. Thread.
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Pricing switched from hikes to cuts in 72hrs, signaling small bank stress is enough to derail the macro strength. JP must be considering lessons of '98 right now when a financial panic drove Fed cuts and extended the tech bubble. Except this time the costs are higher. Thread.
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Typical macro cycle turns are slow to start, but they all end in recession. The current modest rise in unemployment is about median for a year in since YC inversion compared to post-war cycles. But it’s usually in this time frame where things start to get interesting:
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Elliott fam so happy to bring home our newest member, baby C. Petunia (our golden retriever) is most excited, though still figuring out what kinda of dog it is. She’ll be having fun with her new friend soon!. Try not to break the expansion while I’m offline for a little bit…
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Uber driver started pitching me on $NVDA this morning after learning I work in finance. Bought 100 shares last week and is certain it’ll double in the next year despite the recent volatility.
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If bitcoin is going parabolic, maybe money isn't all that tight right now.
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It's hard to know where any economy is going. But if you want to start predicting where the macro economy will go in the next 3-6m, here are the 13 key indicators to track that will give you a head start. 👇.
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I don’t trade crypto and have no inside knowledge. I have traded currency markets for decades, including those that are heavily managed by central banks. Free markets are stochastic. Manipulated markets show abrupt direction changes and signs of stability at narrow ranges:
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I don’t normally read too much into a single day’s market action, but bonds falling on a day when oil was down 5pct is a pretty bad sign for the long-end.
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One of the biggest dynamics in '23 will be the recognition that privately held, illiquid assets are worth nothing close to their current marks. VC, PE, CRE, PC are all marked around highs and do not reflect the re-pricing of the risk free rate, let alone any economic weakness.
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What's happening now is not because of a Fed error. It's driven by the popping of a bubble and its knock on impacts on other positions. If anything it suggests the error was the Fed didn't tighten fast enough earlier to prevent such a bubble from emerging.
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My guess is today will mark the top in the ‘no landing’ scenario narrative. Market based tightening with much more duration supply coming. Tighter for longer Fed. And cyclical sectors starting to turn back over again. A recession is coming. Sooner and harder than most expect.
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Regional bank 'crisis' shifting from deposit runs driving equity declines to speculators engineering equity declines to increase the risk of deposit runs. This new phase divorced from fundamentals risks creating a metastasizing crisis rewarding speculative attacks. Thread.
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Cut through the noise. Core inflation has been stable at 5% annualized over the last 6 months. That is far too high given the Fed’s mandate.
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Sure, the Fed is data driven. It’s driven to find data that supports its policy bias at any point in time.
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The global economy is getting the biggest coordinated easing since the GFC at a time when macro conditions look nothing like the GFC.
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With the most recent leg down, this US bond selloff is on par with the largest ever in history. As shown next, it's also in line the largest falls for major countries that didn't lose a world war or have hyperinflation. Some perspective from my friend @abcampbell on the selloff:
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Many buying bonds to get ahead of the coming recession in '23. But if you look through time, the start of Fed easing is a better timing indicator to buy bonds. In inflationary cycles that typically occurs well after recession start. In growth-focused cycles it happens before.
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While it may be difficult to predict the public markets in '23, it is pretty easy to figure out that Venture Funds are on track to lose $1 trillion in value from peak. The vast majority of these losses have yet to be recognized. '23 will bring more realistic marks. A thread.
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The China/US decoupling is gaining steam. A good reflection of that dynamic is that Chinese share of US imports is on track to fall in half within a year. The decoupling is rewriting global supply chains. Broad based set of gainers, including MEX, CAN, JPN, Asia.
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Don't focus on the nuances of the CPI report. Its much more valuable / less noisy to focus on incomes. That's because in any economy nominal income vs. output determines the structural inflation rate. Most stats show US incomes are growing pretty consistently at 5-6%. Thread:
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US stocks experiencing a surge in earnings *expectations* not actual earnings. Investors are set up for disappointment ahead. Thread.
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Stocks and Bonds get more positively correlated as yields move toward 5%.
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Pretty incredible to see covid-period like deficits being run at a time when unemployment is at secular lows and the economy is growing above potential. In the short-term this helps delay any recession incoming. Long-term it will make managing an eventual recession difficult.
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The biggest unpriced duration supply risk is that the PBOC will need to intervene to support the CNY. CNY at 15 year lows means not too much longer before the PBOC mounts a more aggressive defense. Last time they did, it created a huge ripple through global markets. Thread.
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Buying stocks at these elevated prices on expectations of future Fed easing is a fools errand. The type of conditions that would cause the Fed to ease would also lead earnings to significantly disappoint the current lofty growth expectations.
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Markets are all-in on a soft landing, pricing:.- 25% earnings growth thru '25.- 20% fall in oil prices by '25.- 2.2% inflation forever.- Just 3 fed cuts in 2H24. And to generate any alpha, actual outcomes have to be *even better* than the very optimistic scenario above. Thread.
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When everything is already going up (other than bonds), adding further monetary and fiscal easing to the mix will only serve to further inflate the financial asset bubble. Thread.
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Bunch of data points suggest a substantial weakening in consumer spending in August. If the consumer is actually fading, very hard for equities to hold these levels. Morgan Stanley, Chase, and Citi retail sales trackers all weakened a lot in Aug. Short thread.
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A Fed pause/cut is not supported by the macro data, and also not supported by market signaling. - Stocks are up during this 'crisis,' and IG spreads have risen a mere 30bps. - Compare to '98 when the fed cut 75bps in response to a 22% fall in stocks and 100bps IG spread rise.
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Tons of press saying Buffet's recent cash surge is a signal to be followed. It's not. His cyclical market timing alpha is negative over the last 30 years. Another example that for nearly all investors it's far better to just remain fully invested. Even for an oracle. Thread.
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BoE move today is being pointed at to imply both a put and a pivot. That's not a good interpretation. The BoE provided short-term liquidity to a distressed market to ensure solvent entities didn't go broke unnecessarily. That's a central bank serving as lender of last resort.
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If you don't hate part of your portfolio, you aren't diversified enough.
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What is the likelihood 2024 will have 12% earnings growth *and* 5 rate cuts?. That is what is currently implied by the short-rate and stock market. Soft landing both 100% priced in and unlikely to be achieved. Thread. First the short-rate market, priced for 5 cuts in '24:
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It takes a combo of dynamics to bring recession, many of which will likely come together in the next 6m or so. 1) late cycle.2) weakening of cyclical sectors.3) monetary, fiscal and/or market tightening.4) added drag (like weak foreign demand). That combo emerging now. Thread.
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One of the most consequential shifts in global markets over the next decade would be a re-pricing of neutral rate expectations. For nearly 15 years, most investors and central banks have held that neutral in around 2-2.5%, but increasing evidence it may be higher, even 4-5%.
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The no-landing scenario is now consensus. Growth expectations are now 2.2% for '24 *and* inflation expectations are near 3%. All the while, the Fed is expected to cut 3 times this year and the term-premium still at zero, an increasingly improbable set of pricing.
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One of the most important GFC lessons was that it is better to go big and move swiftly in order to prevent a bank problem from metastasizing. JP & JY clearly drew on that experience today. While the program is likely more than what's needed, it is also likely to work. Thread.
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Stocks are down 25% on the year. But once you take into consideration the rise in discount rates and the impact of the dollar on earnings, the stock market implies higher earnings than at the start of the year. That creates a large earnings re-rating risk to current prices:
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How is it possible that nominal GDP grew 6% in 2023 when M2 was flat, bank balance sheets were flat, and borrowing my nonfinancial sectors was pretty stable?. Velocity.
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The disconnect between Wall Street and Main Street in one chart.
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Australia a case study in a central bank that has been behind the curve tackling their inflation problem. While it has come down from peak it's now stuck at 3-4%, led by a hot economy. Instead of tighter rate policy, the gov is using subsidies to bring down prices. Thread.
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Over the next 12-18m the US will likely get:.1) 100bps more Fed cuts.2) Pro-growth fiscal policy from Trump. Setting up significant stimulation into an economy already running hot and benefiting from easy financial conditions. Makes "No Landing" the clear base case for '25.
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If Fartcoin is going parabolic, maybe monetary policy is far from “very restrictive.”.
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This is disappointing. It is normal for people to have differences of opinion, but these types of unfounded personal attacks are totally unprofessional and stifle what could have been interesting public discussions of markets, the economy and policy.
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Private credit funds are lying to their investors about the valuations of the underlying assets, often claiming marks much higher than in traded public markets. Most investors will be shocked by the losses they eventually take.
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Today's mkt cap concentration in the top 10% largest US stocks has only occurred one other time in history in 1929.
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The last time that core inflation was at today's levels and the unemployment rate was at multi-decade lows, the 10-year bond yield was running at 8-9%.
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The global rise in bond yields is a significant market-based tightening at a time when most see further easing needed instead. Equities have so far looked immune to these rate rises, suggesting markets have yet to reflect the impacts of this acute rate rise. Thread.
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The global economy is getting a shot of adrenaline from a coordinated central bank easing. But unlike the past, it comes at a time when growth is pretty good, asset prices are near highs, and inflation remains elevated. Thread.
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The markets are still pricing in a near 100% probability of a soft landing. Expectations are for rapid earnings growth, no credit issues, inflation at 2%, oil px fall, modest Fed cuts and secularly high real rates. First S&P500 earnings growth, expected to be 12% for '24 & '25:
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Past cycles show that inflation, once entrenched, is hard to beat. And it has proven darn near impossible to beat without significant economic weakness. There is no "immaculate disinflation". PCE data in line with recent CPI, PPI, GDP data. Inflation persistence.
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Buying stocks and bonds here is a bet that the Fed will proactively ease policy which will juice asset returns. If growth is holding up and inflation is moderating there is no need to ease because their goals are accomplished with the current policy in place. Thread.
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The FDIC's 130bln insurance fund *currently* has enough resources to cover >$1tln of depositors if needed. That's because the FDIC doesn't pay out depositors entirely. It only pays out the incremental amount needed to make a failed bank's depositors whole. Thread.
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I taught an intro macro and markets course for a decade and thought folks would enjoy it if I shared some readings inspired by that course. An updating thread:. This POW Camp reading covers nearly every topic in macro and markets in just a few pages:.
I taught an introductory macro & markets course for a decade and each year started with "The Economic Organization of a P.O.W. Camp." It covers nearly every major macro concept in 11 pages. The start to the school year reminded me to read it again.
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Blackstone charging upwards of 500bps per year on 4bln in AUM for their Multi-Strategy mutual fund to generate these kinds of returns.
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Inflation is too high and too sticky given the Fed's mandate, and in the short-term it looks like things are going in the wrong direction. Lets start CPI week with a quick review of what's going on with inflation pressures. First, breakdown of the most recent PCE report:
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Assets prices are at their weakest levels in 40yrs. Not necessarily a buy at these levels - it took another 10pct down to break inflation 80s. Looks like the Fed has more work to do, but watch this closely bc at some point in '23 assets will become a great buy. Thread on '23.
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Inflation has leveled off above the Fed's mandate and yet JP keeps cutting, confidently claiming it is going back to 2%. A range of datapoints indicate inflation has been roughly stable at these levels for 12-18m, suggesting the Fed's view is more hope than reality. Thread.
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The history of what comes soon after a rapid steepening of the YC following inversion is clear. Recession. You certainly have to believe ‘this time is different’ if you are long stocks with 25% earnings growth expected over the next 2yrs.
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Most of the easy money is gone in the bond market at this point. The asset that is now so clearly overvalued is stocks. 50%+ outperformance of stocks vs long bonds in last 3 years is not sustainable. Closing that gap will be extremely painful to most investors.
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The US economy is quite a ways from recession. Looking at the labor market, we should expect recession to begin when claims are ~418k given the past couple cycles and today's working age population size. Even a relatively fast deterioration would take nearly a year to get there.
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Policymakers gathering at JH today wrestle with the question of why they were wrong about the transmission of monetary policy in the last few years. The answer is simple - this has been an *income-driven* expansion, not a credit & money driven one like they've known. Thread.
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The most likely macro scenario by the end of '24 looks like little to no Fed cuts, elevated rates on the long-end, and the economy slipping into recession.
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Getting an uptick in nasty comments. Been an active muter, but shied away from blocking. Gonna block more ahead for:.- Personal attacks.- Repeated misrepresentations of my past views.- False statements about the products I manage (since I can’t respond publicly). Sucks.
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The stock market is pricing in 0% chance of recession in the near term while the bond market is pricing in a near 100% chance. Bond traders used to be the smart money, but looks like they are getting it particularly wrong again.
Massive Market Confusion: @BobEUnlimted says the bond and stock market are signaling completely different outcomes for the economy over the next 6-12 months. We ask Bob which one he thinks is right.
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EM stocks are at 50 year lows relative to US stocks. Over any short time these divergences wont necessarily close, but if you are saving on a multi-decade horizon, it seems pretty clear that a lot more value is in EM vs. US. Note also the story is true with or w/o China stocks.
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Gold pushing new all time highs despite broad hatred in the US, higher dollar, and tighter dollar US monetary policy expectations suggests the surge in demand is from abroad, particularly China. Gold price is rising even as US ETF assets keep falling:
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The rally in stocks in recent weeks has taken attention away from what looks like a pretty concerning forward picture from earnings releases. Q4 earnings expectations have come down considerably in recent weeks, in contrast with equity market strength.
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Accept it, meaningful China stimulus isn't coming any time soon. Chinese policymakers remain almost laughably focused on the wrong policies at the wrong size, with today's debt swap announcement projected to save *0.08% of GDP* in financing costs annually. Thread.
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Sentiment today does feel very similar to mid-08 when many folks created justifying narratives on why the US (and global) economy could navigate the period without a recession.
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The more the Fed commits to cuts, the worse it is for bonds.
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Recessions don't just happen. They are the consequence of a series of causes that create a self-reinforcing slowdown dynamic. Those early stage dynamics have yet to occur in the US. Until they shift, moderating growth can happen, but a recession is unlikely to come. Thread.
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Rotation today is being driven by hedge funds facing short-squeeze on their small cap hedges as yields come down. Coming in to today, our tech showing clearly these managers overweight growth and underweight small+mid cap stocks as hedging shorts. Squeeze could run for awhile.
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The Fed plans to cut 150bps over the next 12m into an economy with strong growth, strong employment and inflation still above mandate. The epitome of "Over Easy" policy. Thread.
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China is on the verge of a BoP crisis. For weeks not the PBOC has held the line at 7.3 for weeks through the fix, intervention, and rate rises, but it is not working. Pressure is mounting for a more substantial FX move, likely on par with the stress seen in '15/16.
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Inflation is higher than the Fed's mandate and not on a path to get to that mandate soon. The CPI report is one data point and most measures show elevated inflation. Areas that had been disinflationary are reverting. And the stickiest parts of inflation remain elevated. Thread
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Bitcoin reinforcing in recent days that it is not driven by rising geopolitical conflict, macro dynamics, or rising banking stresses. Huge discrete moves on idiosyncratic news. Lack of clear fundamental economic return properties undermines its inclusion as a portfolio asset.
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Europe needs a significant exchange rate devaluation. While the currency has weakened modestly in recent weeks, the macro divergences between the EUR and US suggest that this may be just the start of a major realignment. Thread.
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Never imagined that my first time on @CNBC I would be suggesting cash is the best asset out there, but these are the times we live in. Many thanks to @MorganLBrennan and @jonfortt for having me on to get my 'cold shower' take. Check it out!.
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Most interesting part of the presser was JP rationalizing a 50bps cut with much more ahead *and* arguing the economy is in pretty good shape. The dots largely aligned. Suggests the Fed's desired stance now is highly accommodative, not just normalizing. Thread updating views.
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What is the upside for US stocks given current valuations and earnings growth expectations?. With both already stretched there isn't much room to push higher before today's prices reflect a bigger bubble than 2000. Thread.
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I taught an introductory macro & markets course for a decade and each year started with "The Economic Organization of a P.O.W. Camp." It covers nearly every major macro concept in 11 pages. The start to the school year reminded me to read it again.
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The kind of conditions that would lead to Fed cuts starting in March would be terrible for the equity market.
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The best macro folks I've seen actively adjust their views with incremental new information. In macro there are a lot of unknowns about how things will play out, so surprises are part of the business. Many get durable edge by responding agilely to the changes they see. Thread.
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If inflation is really slowing rapidly, it seems businesses, consumers, and landlords all have not noticed. Thread.
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Most investors today have not experienced a normal recession. It's important to remember that they typically take a *long time.*. A few charts about the 2000s cycle. End to end it took 3 years: the full equity market index peaked in Mar '00. That last bottom was Mar '03.
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Today highlights the problem with opaque, discretionary Fed monetary policy decisions. Markets forcefully repriced the future expected rate path, not b/c of new macro data, but b/c JP changed his mind about how to run policy vs the last 2 meetings. Thread.
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A telltale sign of a bad investor is when they make bets based on their views of how political dynamics will transpire. Listen for it. No skilled investor has edge in predicting politics. The only reasonable investor view today is there is more uncertainty than on Friday.
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