What Happens To Markets, Economy, After Government Shutdown? | Bob Elliott
Summary
Market Outlook: The podcast discusses a typical late-cycle environment where markets are forward-looking, focusing on long-term performance, particularly for 2026, with an emphasis on gold and stocks.
Government Shutdown Impact: The economic impact of a government shutdown is considered minimal unless prolonged, with potential GDP reduction estimated at 0.1% per week, but long-term effects are unlikely unless it extends significantly.
Policy and Growth: Current government policies, including reduced immigration and tariffs, are seen as growth-negative, with these effects expected to peak in early 2026, potentially dragging on the economy.
Inflation and Spending: Tariffs are contributing to inflation, eroding household spending power, as income growth remains weak, leading to concerns about future consumer spending sustainability.
Fed Policy: The benefits of Fed rate cuts have largely been realized, primarily through lowering bond yields, which have supported asset prices, but further easing would require worsening economic conditions.
Asset Performance: Gold has shown strong performance due to underownership and speculative risk-taking, while bonds are seen as a potential outperformer in 2026 if growth expectations falter.
AI and Market Dynamics: The AI sector's substantial capital expenditure is highlighted, but its impact on the broader economy is limited, with concerns about whether this investment will translate into meaningful productivity gains.
Investment Strategy: The importance of being tactical in a late-cycle environment is emphasized, with a focus on being prepared to shift quickly from growth assets to defensive positions as market conditions change.
Transcript
This is very typical late cycle environment. You know, mo basically no one who is trading professionally today has lived through a traditional late cycle. Those businesses and those companies tied to the real economy. That's where the cracks are going to show here. Markets are typically forward-looking and particularly the equity market is forward-looking. It's not really focused on whether there's a growth bump uh or drag for a few weeks this quarter. What it's looking at is what does 2026 look like? What's going to outperform in 2026, gold or stocks? Bob Elliot joins us once more. He's the CEO and CIO of Unlimited, macro research investment firm tracking global economic trends. We're talking about the global economic trends today. What's happening with markets, gold, stocks, Bitcoin, all of it. We'll talk about all of this. The government shutdown. What does it what does this mean for the economic growth outlook? What does this mean for the labor market? Welcome back to the show, Bob. Good to see you. >> Ah, thanks so much for having me. Great to see you. >> Let's start with the government shutdown. It has been estimated, according to this article from the Guardian, it has been estimated that it will cost the US economy billions of dollars a week. This isn't the way to have a discussion shutting down the government and lowering the GDP. Scopa said the US Treasury Secretary told the CNBC Financial News Network, "We could see a hit to the GDP, a hit to growth, and a hit to working America. Prolonged failure to reach a deal would be costly. We estimate that each week of shutdown will reduce US GDP growth by 0.1 percentage points in Q4 annualized terms, translating into a 7 billion weekly hit to the economy. All right. Um I I don't know how they derive these numbers, but assuming they're uh accurate, what does this mean? >> Yeah. Well, the there's um if you've been around the macro world for long enough, there you got a few rules of thumb. And one of the classic rules of thumb is shutdowns don't matter. And the reason why they don't matter is because of course there's some small impact that you just described, which is about right, about a tenth of a point of GDP per week in terms of a shutdown. But if people ultimately just get paid the salaries back, they'll smooth their spending and it won't be that big a deal. And so the real question is whether there's a long-term a prolonged shutdown that would have to go you know to the point in which people start workers start to get squeezed or those people were relying on the government dole start to get squeezed and you know that's probably months of shutdown which has never been seen at least since the7s um and so we're not there yet. Uh, I think probably the more interesting topic here is whether or not the government whether the administration uses this as essentially a Doge 2.0 tool to increase cuts to various programs and personnel that they would prefer to cut based upon their priorities. They've certainly said as much but have yet to actually implement that. And we've already got about 150,000 workers coming off the government dole in October. Those are the people who took the buyouts earlier this year. And so that would add even further to an already weak labor market if they use this as an opportunity to to cut further in in government employment. >> You mentioned uh in July on CNBC with tariffs. We're talking about an actual tariff delay impact that could be 3 or 6 months from the time of actual announcement before it gets onto our store shelves. So that was four 5 months ago. And now that we have a government shutdown around October, layered on top of that, how do you think the cumulative effects of policy unc uncertainty uh tariff impacts that should be seen on shelves around now uh will stack on top of each other and um create a growth outlook that um you know we we we can use as investors? >> Yeah. Yeah. I mean if you look just generally at the set of policies that are in place here even putting aside the government shutdown is a tactical drag on growth policy in general is is growth negative and it's been increasingly growth negative over the source the course of the year combination of reduced immigration which essentially directly impacts the ability for household income growth to happen uh because there's just less workers that are working as a result of that reduced immigration uh with the tariff policy ies which you know tariffs take time and um and what we're seeing is it's taking months from the point in which policies get implemented to actual tariffs get collected. Part of that is there's some frictions. Also part of it is like you know how hard is it to run the DMV? Imagine trying the greatest tariff hike experiment in modern economic history. Like there are some instances where there's literally not people at the border to collect the tariffs and they have to hire the people and get the paperwork together to do it. So that effect is still ramping up even now and remains uh uh you know a couple hundred billion annualized pace below what the statutory rate is. And so we've got this pretty pretty big negative growth effect coming from government policy that's probably going to peak around the first quarter of 2026 um which will you know be a drag on the economy. We certainly saw it in the first half a little bit of a reprieve here uh in over the summer and now the question is are we coming back to that drag now that we're getting um you know getting the tariffs ramping up and also the shutdown uh just another straw in the camel's back of uh negative federal growth uh government growth policy. >> Okay. So what will be the cumulative effects of tariffs? >> Yeah. >> Is inflation finally going to kick around the corner um at least on the government print? Well, what we're seeing is uh there's no doubt that uh the implementation of the tariffs is creating an upward pressure on inflation. If you look at uh I was just writing about it today on my substack, if you just look at durable goods prices or core goods prices, uh they've gone from falling at a couple percent a year to now rising at a couple percent a year uh related to the tariffs. And that turning point happened right at the beginning of this administration. And the way that that's affecting the real economy is it's basically raising prices. We're seeing core CPI go from the mid twos back up to three and probably a little higher over the next couple of months. That then is eroding household spending power uh in at a time when household income growth is about as weak as it's been in the cycle. Only 3.5% over the course of the last couple of months. And so you put that together 3.5% income growth for households with you know between 3 and 3.5% inflation in the economy. That's not very that's not a good deal for underlying power for households to spend and so far they're continuing you know their spending particularly over the summer by rapidly reducing their savings but that can only last for so long. >> Fed policy Bob we're looking at how many cuts for the remainder of the year? >> We'll probably get a couple more cuts through the end of the year. Um and I I think the main thing from Fed policy perspective is that most of the benefit that we're seeing to the economy has already uh from Fed cuts has already basically flowed through. And the primary benefit is not the lowering of the interest rates because not that many borrowers borrow on the short short end. It's really about bringing down bond yields, which we've seen a about 100 basis point move down in mortgage rates, which is giving the tiniest bit of life uh to the to the housing market. Um, and you know, we saw that fall in interest rates and discount rates uh really support asset prices. Uh the primary driver of stock prices going up over the course of the last couple months has come from falling discount rates. Not from uh higher growth expectations, but from the fact that bond yields have fallen, lowering the discount rate, which lifts prices of all assets, whether it be stocks, bonds directly, or things like gold. And so we've basically had the max effect from the Fed uh easing. In order to get more Fed easing than currently priced in, which would have more uh uh uh stimulative effect, we probably need even worse economic conditions. And that's not the sort of thing that you necessarily want if you're certainly if you're holding risky assets is you don't really want more Fed easing than is currently priced in. >> Why are markets discounting the fact that the government is in a shutdown? By discounting, I mean not caring. looking that. >> Yeah. Looking right through it because usually it doesn't matter. I mean, I've I don't know. I've gone through uh half dozen of these things in my career over the last 20 years. There's been I think 14 since the 70s. And basically, they've had no effect. And given that's the lesson that everyone has on it, that these things have no effect or whatever effect is is pretty incremental, pretty modest, um everyone's looking at it and saying, "Who cares? We're going to look right past it." I mean, look, markets are typically forward-looking and particularly the equity market is forward-looking. It's not really focused on whether there's a growth bump uh or drag for a few weeks this quarter. What it's looking at is what does 2026 look like for the economy. And unless I should say and unless things get really bad with the shutdown, it's not going to affect 2027. >> I I I understand. I I I let me let me um just ask you as an economist how are you how are you uh taking your where are you getting your economic data from because right now was government workers are furoughed we don't have official BLS and official government numbers so how are you you know what are you doing >> we're all living in the darkness uh which um which is actually kind of fun uh from a from a macro perspective uh because those folks who basically spend time triangulating the government data are actually in great shape because you already know a bunch of data sources that help you triangulate. So for instance, I mean the most direct one is obviously for the employment report we've got something like ADP actually the Chicago Fed the Fed is actually going to step up I think in terms of providing more information. The Chicago Fed just put out uh a multifactor basically a multi-data input model for the unemployment rate and for hiring um that brings together a bunch of different private sector sources in order to continue to monitor what's going on. Um and then on spending it's it's tough that's for sure. But you do have company reports and I often am looking at the credit card data which is you know anyone is a bit noisy. any one of the sources like Bank of America or Chase or whatever are noisy but in totality they give you a pretty good sense as to whether growth and demand is strong or weak. Uh and there it's kind of interesting just as uh the door closed on our ability to uh get government data. We have started to see in a couple of those sources some relatively abrupt slowdown in spending um in just the last couple of weeks. And so, you know, it may be that the demand side of the economy is uh is a bit weaker than what many people are thinking. >> As we progress through the queue u the last quarter of 2025 or into the last quarter of 2025, Bob, which asset classes this year in 2025 so far have surprised you the most in terms of how they performed? >> Well, I mean, you got any any any sensible person would look at gold and say, "Wow, that has been uh on a tear." I mean I have uh talked on this show about gold and and have uh have talked about the the important role of gold in a in a portfolio for a long time but uh the strength that we've seen uh in the yellow metal is quite impressive here. I think really two factors going into it. One um of all the assets uh in the risky asset spectrum uh you know gold is pretty underowned. You know, a lot of people own stocks, a lot of people own bonds, other growth assets. They don't really own a lot of gold. And so, and it doesn't take much uh in terms of flows to go from traditional financial assets to gold in order to create a squeeze in price. And so, we're seeing that uh squeeze there. And then, of course, there's sort of a broader story here around it's really a broader developed world story, not really just a US story, around basically giving up on inflation mandates in order to support growth. uh that was sparked in many ways by uh uh chairman Paul's Jackson Hole speech but also reinforced by the efforts from the Bank of England um that's facing even higher inflation in the US and still cutting rates and in that environment where you have monetary debasement of fiat combined with risk-taking behavior and an underowned environment in gold it makes sense you know why gold has seen such a spike relative to other assets in the market >> so you're saying gold is signaling much higher inflation or perhaps Perhaps economic deterioration or perhaps geopolitical uncertainty were all the above, none of the above. >> Yeah, I think it it's mostly uh it's it's signaling two things. A desire for speculative risk takingaking um meaning that people are just interested in buying financial assets, levering up to buy financial assets, which is why you're seeing it outperform at the same time that stocks are up, which is a pretty unusual circumstance. But part of the story from a fundamentals perspective is that um I think there's a broad-based view that uh that central bankers across the developed world are going to give up on their inflation mandates and instead basically uh depress their currencies in order to uh in order to support their bond markets and their and their economies. And there's basically only one true fiat contracurrency that's out there and that's gold. what's going to outperform in 2026, gold or stocks? >> Well, I think you know the the uh the dark horse uh in 2026 uh are bonds, which uh you know, I'm sure nobody who is watching this is really going to get fired up when I suggest that bonds might be a good investment or particularly real yields that are still running at mid2s across the US. If we have any hint of a slowdown, you know, bonds are at multi- uh year lows, continue to be at multi-year lows at a time when, you know, expectations uh of growth across the US economy are extraordinarily strong. Uh and they are broadly quite underowned relative to benchmarks. And so any sort of growth slowdown that we see here from these exuberant expectations is really going to favor bonds as people rush out of, you know, speculative MAG7s and the various AI names and go uh into more defensive assets. And so that to me seems like the uh the darkhorse uh of outperformance that could come around here in uh 2026. Why do you think stocks in particular the S&P 500, NASDAQ have been continuously reaching all-time highs despite the labor market weakening? If you look at private um private uh uh data from ADP and from the Carl Group, for example, while the government has shut down, they've all pointed to deteriorating labor market conditions. Even Deron Pow has admitted that the labor market is weakening. If you take a look at um if you take a look at uh inflation concerns, inflation expectations have been going up. And so that should put a dampening on consumer spending. And yet at the same time, stocks risk appetite is reaching new all-time highs week after week, seemingly disconnected from the real economy. If you agree that it's disconnected from the real economy, what's driving this this rally? Well, if you just just from a diagnostic perspective, what's driving the rally is the is the are the tech names. Um, so if you just look at SPY versus RSP, the uh you know, S&P 500 versus equal average um uh stock market, what you see is basically that the mega caps are the are driving uh what's going on here. And so what we have here uh in the AI names is a speculative frenzy. Is it uh and and I should say if you look at sort of the 493 or the equal weighted S&P it's basically been flat for you know a year basically give or take um which is more aligned with the weakness that we're seeing in the real economy. And so when you look at that, you basically have to say to yourself, um, uh, you know, I think everyone is trying to figure out who to bet on in the, uh, in the AI chase. Uh, because probably whoever wins in the AI chase is going to, uh, to see valuations that are are multiples of what they are today, even if they're elevated. The real question is who are the going to be the winners and the losers in that in that space. And that's something that you know individual stock pickers are are going to either uh make or ruin their careers on in terms of picking in that in that uh in that cohort. >> So you think that bond yields will fall long term like a long end of the curve will fall in 2026? Is that because of the Fed cutting rates? >> Well, I think it's a combination of the Fed cutting rates plus very high expectations of growth still priced into the into the financial markets. And so any hiccup that you see there um is going to create downward pressure on assets and risky assets in particular uh move folks to bonds. If you you know part of my day job is I'm I'm talking to talking hundreds of raas on an ongoing basis and every single one of them is underweight bonds and so it's not going to take much in terms of a growth slowdown or a bond outperformance for people to rush back uh to duration in order to protect their portfolios uh if there's any hiccup in in the risky asset market. >> So here you have um something you've tweeted let me just um share this here between ADP and paychecks. We've timely covered We've timely We have timely coverage of 25% of the US private sector. Sugar coat it all you want. The US labor market is clearly sucking wind and here you have uh employment change in negative territory as of the last two months. If this trend continues, Bob, um we're looking at an uh labor market recession, if you want to call it that, what does that mean for markets? what typically does well or survives during an environment where the labor market is deteriorating? >> Well, what typically does well are bonds and gold uh during those environments and what typically does poorly are risk assets um and particularly you know credit and equity and it's interesting we are already starting to see some signs of challenges starting here in the credit markets and in the private credit market. So if you look at for instance how BDC's have been performing or some of the big private credit names the publicly traded private credit names they are down a lot and that's kind of reflecting you know you kind of think about the tide of liquidity uh and the tide of liquidity might be coming out uh of a lot of those names that might be being sucked in by the AI names but I think what it's showing is the real economy is in tough shape and so anything uh and when I say the real economy I I you I separate that from whatever the AI you know cross investment scale up story is that's not really the real economy the real economy are you know uh real you know real businesses that are have been let money or um or or publicly traded those businesses are starting to show fracture and the companies that are financially exposed to them are starting to show fracture and so that I think that's really where the story is now I think there's a question about will that expand enough to start to create a little concern about continuing to take on as much risk in the AI names. But it's the real economy that's that's at risk at this point. >> At risk of what exactly? >> Well, I mean, a significant slowdown. Look, the the economy at some level is not that complicated, which is that GDP growth is predominantly driven by household spending. Household spending is predominantly driven by wage income particularly today in an environment of dimminimous credit or borrowing. And so when you put that together and household wage growth is uh is extremely soft. And so you put that together and you basically say we the nominal GDP growth in the economy in the in the real economy cannot be that strong when you have a situation where the labor markets are contracting and where nominal wage growth is running at 3%. Even inv you know particularly in an environment where inflation is actually up to three and a three and a half%. And so you put that I call it the household uh you know spending problem. It's basically if your wage growth, your income growth is growing at 3% or three and a half percent and price growth is at three or three and a half percent, your real spending power is essentially zero. And zero real spending power from households means that GDP is going to be weak. It might be buoyed better than it would be otherwise by some AI infrastructure investing, but it's not going to be a strong economy in that sort of circumstance. Take a look at this article from um the WF World Economic Forum. The US rally has relied in particular on a select group of mega cap tech companies dubbed the magnificent 7. Companies such as Nvidia, Microsoft, Amazon, Alphabet are at the forefront of both revenue forecast and market valuations. Their capital expenditure is unprecedented. each has deployed approximately $ 36 billion on average over the past four quarters. In comparison, the average quarterly uh spending for the typical S&P 500 is only $2 billion. This is meme I'm seeing online. I think I mentioned to you offline that uh tech companies are just sending billions of dollars to each other. It's like an infinite money glitch in the AI sector and that's propping up their stocks to all-time highs. I don't know if that's actually what's going on, but this is an incredible comparison. $ 36 billion of capex versus two billion for the average company. What do you make of this? >> Well, I think I I make of it in two ways. One, if you just think about it from a real economy perspective, you add those hyperscalers and and add in sort of your open AIs and your oracles and stuff like that, you're getting about 400 billion annualized pace of investment uh into the economy right now. Uh for an economy that's $30 trillion, 400 billion sounds like a lot, but it's just over 1% of the overall economy. So sure, lots of investment going on, big numbers from a nominal perspective, pretty irrelevant from a from a growth perspective for the real economy. And that's a very important thing to keep in mind, just having those scales in your head. I think the second question, which is for these companies in particular, they're obviously one of the ways that you can create uh the illusion of earnings is through a bunch of capex. uh but ultimately what has to happen is it has to translate into revenues for those companies and so far go look at the total revenue from your open AIS and your metas and your uh XAIS etc in terms of the actual revenue that those companies are receiving from their activities at this point and even take relatively extreme expectations of growth and you're not even close to covering the type of capex that's happening here. I think one of the challenges is is a lot like Google back in in the early 2000s, which is if you become the industry leader, all of this investment will pay off. But that means for the vast majority of these companies who are not going to be the sole primary leader, in fact, got to keep in mind the primary leader might not even be in the United States. It might be in China in terms of who wins the AI race. And if those companies in the US don't win, whichever companies in the US don't win, they are going to have uh have basically engaged in the greatest investment flop since railroad construction back in the 1800s. Do you think that AI capex or capex from AI companies, tech companies like I mentioned is what's driving this rally in the broad markets right now which is then feeding uh capital liquid uh liquidity injection into other sectors and other commodities perhaps into gold. In other words, we've got hyperscalers, Nvidia, Microsoft and the works spending a lot of money and that liquidity is flowing into the rest of the system. Basically, they're doing their own private sector version of QE, if you will. >> Yeah. Yeah. I don't I mean, they're they're investing a little bit in each other's assets, but I don't think that's prim primarily what's happening is private sector investors are bidding up these stocks and they're um they're basically using all the tools of leverage that they can possibly find in order to do it. If anything, I think the contrast between like the BDC's, the private credit BDC's and what we're seeing with the AI companies is highlighting that capital is like getting sucked from the real economy into the AI scalers. Uh, and so that is so it's less of a of an aggregate shift up and more like the sucking sound. And the question is, is that all that capital getting sucked into uh into a fire and being lit on fire or is it being used for productive investment? And so, you know, until we start to see meaningful productivity enhancement from any of that or meaningful revenues from those companies, uh it's not, you know, it's it's going to be a real question about whether it's worth it. I mean, if anything, uh, actually before the shutdown, the the census, the US census did a, uh, a bi-weekly survey of, uh, of companies, the thousands of companies about their AI usage and actually showed a flatlining in AI usage and some turning down amongst bigger companies. That is not a great sign when you're thinking about all of this investment that is essentially allin on AI radically changing what we do from dayto day. I think the ultimate question for me is what should we be doing? On the one hand, look, you're you're you're talking about an economic slowdown. You've presented stats showing how the labor market is slowing down. On the other hand, uh like we've talked about for the last 20 minutes, risk assets, including Bitcoin and stocks, have been ignoring these trends. And so, you know, one can stay defensive, but then we h you and I could have had this exact conversation a year ago and we would have missed this rally. >> Yeah. >> So, if we would have Right now, it's kind of like a FOMO kind of phase where I could get defensive and buy gold at $4,000 or I could or I could bank on the bond rally or I could just continue to ride this wave and hope that the momentum doesn't stop. It's an awkward phase right now. What do you think? >> Yeah. Well, I mean, I think uh uh two things. One, the classic line of what do you do when you see a bubble? You run to it, right? That is the classic line in terms of asset management. Um and I think that's basically what we're seeing right now. Uh I mean, you know, bubble broadly thought about. Um uh the other thing I'd say is this is very typical late cycle environment. You know, mo basically no one who is trading professionally today has lived through a traditional late cycle and that's where expectations are super high and they gain momentum just as the real economy is slowing down. And I think it is late cycles are the hardest time to trade because you want you you need for a variety of reasons to stay in uh jubilant markets uh to keep up with uh your peers. But the key thing is when those cracks start to form, you know, when the questions start to emerge about things like AI or things like the real economy, you've got to be in a position to be able to very quickly and tactically adjust and forego that previous boom narrative and get defensive. And so from my perspective, this is really this is this is the time to be tactical. It's fine. run headlong into uh to to gold and to stocks at this point into the AI names as the bubble emerges, but be prepared to shift rapidly. And that's, you know, it's interesting when we look at how hedge funds are managing through this. Um like macro funds are doing great, incredible. Our products in in uh our macro strategy is doing fantastic being long stocks here. But what we know is that that can quickly shift and uh not many managers are in a position to be able to go from being you know significantly overweight stocks to underweight within you know what could take we you know you might need to do that in the form of weeks and so you got to either be able to do it yourself or hire those people who are able to do it in this sort of environment. >> When stocks are in a bubble we can take measurements to make that conclusion. We can take discounted cash flows. We can see that the company's valuation on a on a PE or EVA double whatever valuation you want to match it with compared to its peers is perhaps out of whack when something like gold which doesn't inherently have any cash flow on its own or Bitcoin for that matter reaches $4,000 and $125,000 respectively. How do you assess whether or not that asset is in a so-called bubble? >> Yeah, you you've got to look at the flows. You got to look at who's buying. So as an example, up until um uh a few months ago, we had central bank buying of gold which could be quite persistent. I mean central banks are like very slow moving. They just keep buying gold. We had a fair amount of buying from the east. So the Chinese and Indian uh uh cohorts were buying gold pretty aggressively. But we hadn't seen the shift essentially unlocking um US and Western retail investment. And just in the last few weeks, this surge has really shown the the emerging signs of that retail interest in gold for the first time. There's obviously been a fair amount of retail interest in Bitcoin for a while, but you know, now finally they're getting around to the old boomer bitcoin with gold and starting to buy. And so that that are the that's the sort of sign that you start to say, okay, from a flows perspective, how how stretched is that? That's probably just getting started. it could run a little bit further, but it's not going to be too long before we're like, you know, who's selling? And that's one of the challenges when you start to ask yourself who on earth is underweight or who is selling uh in the market, that's when you start to think for something like gold, maybe we've gotten a little too uh a little too bubbly uh in the asset. We're not quite there yet, but it could come soon. >> Okay, thank you very much, Bob. Uh let's close off on um best and worst assets for 2020 for actually no we've talked about 2026 the remainder of Q5 Q4 2025. >> Yeah. Well I mean I think um you're you're probably going to continue to see uh cash be uh not a great asset at least in the near term. Um and uh and what I'd say is look cash one of the worst assets in aggregate and then also those those businesses and those companies tied to the real economy that's where the cracks are going to show here and so um that repricing has started but still has a long way to go. So, uh, whether it's BDC's, private credit, the private credit suppliers, um, you know, traditional, uh, traditional consumer demand companies, things like that, those are the sorts of areas that are probably going to be the underperformers, whereas, um, it's probably going to take a little bit more work before we start to see cracks uh, in in the bubbles that we're seeing uh, whether it be in gold or uh, in the Mag 7. >> Thank you very much, Bob. Tell us where we can find more information about you. Uh yeah, you can find me on basically all the socials under the Bobby Unlimited uh handle. Uh you can also check me out on Substack uh where I write a daily report uh called non-conensus uh and you can subscribe and and check that out. >> Okay, thank you very much, Bob. We'll speak again soon. Make sure to follow Bob in the link down below and make sure to follow this channel, subscribe and like this video and we'll see you next time. Take care for now.
What Happens To Markets, Economy, After Government Shutdown? | Bob Elliott
Summary
Transcript
This is very typical late cycle environment. You know, mo basically no one who is trading professionally today has lived through a traditional late cycle. Those businesses and those companies tied to the real economy. That's where the cracks are going to show here. Markets are typically forward-looking and particularly the equity market is forward-looking. It's not really focused on whether there's a growth bump uh or drag for a few weeks this quarter. What it's looking at is what does 2026 look like? What's going to outperform in 2026, gold or stocks? Bob Elliot joins us once more. He's the CEO and CIO of Unlimited, macro research investment firm tracking global economic trends. We're talking about the global economic trends today. What's happening with markets, gold, stocks, Bitcoin, all of it. We'll talk about all of this. The government shutdown. What does it what does this mean for the economic growth outlook? What does this mean for the labor market? Welcome back to the show, Bob. Good to see you. >> Ah, thanks so much for having me. Great to see you. >> Let's start with the government shutdown. It has been estimated, according to this article from the Guardian, it has been estimated that it will cost the US economy billions of dollars a week. This isn't the way to have a discussion shutting down the government and lowering the GDP. Scopa said the US Treasury Secretary told the CNBC Financial News Network, "We could see a hit to the GDP, a hit to growth, and a hit to working America. Prolonged failure to reach a deal would be costly. We estimate that each week of shutdown will reduce US GDP growth by 0.1 percentage points in Q4 annualized terms, translating into a 7 billion weekly hit to the economy. All right. Um I I don't know how they derive these numbers, but assuming they're uh accurate, what does this mean? >> Yeah. Well, the there's um if you've been around the macro world for long enough, there you got a few rules of thumb. And one of the classic rules of thumb is shutdowns don't matter. And the reason why they don't matter is because of course there's some small impact that you just described, which is about right, about a tenth of a point of GDP per week in terms of a shutdown. But if people ultimately just get paid the salaries back, they'll smooth their spending and it won't be that big a deal. And so the real question is whether there's a long-term a prolonged shutdown that would have to go you know to the point in which people start workers start to get squeezed or those people were relying on the government dole start to get squeezed and you know that's probably months of shutdown which has never been seen at least since the7s um and so we're not there yet. Uh, I think probably the more interesting topic here is whether or not the government whether the administration uses this as essentially a Doge 2.0 tool to increase cuts to various programs and personnel that they would prefer to cut based upon their priorities. They've certainly said as much but have yet to actually implement that. And we've already got about 150,000 workers coming off the government dole in October. Those are the people who took the buyouts earlier this year. And so that would add even further to an already weak labor market if they use this as an opportunity to to cut further in in government employment. >> You mentioned uh in July on CNBC with tariffs. We're talking about an actual tariff delay impact that could be 3 or 6 months from the time of actual announcement before it gets onto our store shelves. So that was four 5 months ago. And now that we have a government shutdown around October, layered on top of that, how do you think the cumulative effects of policy unc uncertainty uh tariff impacts that should be seen on shelves around now uh will stack on top of each other and um create a growth outlook that um you know we we we can use as investors? >> Yeah. Yeah. I mean if you look just generally at the set of policies that are in place here even putting aside the government shutdown is a tactical drag on growth policy in general is is growth negative and it's been increasingly growth negative over the source the course of the year combination of reduced immigration which essentially directly impacts the ability for household income growth to happen uh because there's just less workers that are working as a result of that reduced immigration uh with the tariff policy ies which you know tariffs take time and um and what we're seeing is it's taking months from the point in which policies get implemented to actual tariffs get collected. Part of that is there's some frictions. Also part of it is like you know how hard is it to run the DMV? Imagine trying the greatest tariff hike experiment in modern economic history. Like there are some instances where there's literally not people at the border to collect the tariffs and they have to hire the people and get the paperwork together to do it. So that effect is still ramping up even now and remains uh uh you know a couple hundred billion annualized pace below what the statutory rate is. And so we've got this pretty pretty big negative growth effect coming from government policy that's probably going to peak around the first quarter of 2026 um which will you know be a drag on the economy. We certainly saw it in the first half a little bit of a reprieve here uh in over the summer and now the question is are we coming back to that drag now that we're getting um you know getting the tariffs ramping up and also the shutdown uh just another straw in the camel's back of uh negative federal growth uh government growth policy. >> Okay. So what will be the cumulative effects of tariffs? >> Yeah. >> Is inflation finally going to kick around the corner um at least on the government print? Well, what we're seeing is uh there's no doubt that uh the implementation of the tariffs is creating an upward pressure on inflation. If you look at uh I was just writing about it today on my substack, if you just look at durable goods prices or core goods prices, uh they've gone from falling at a couple percent a year to now rising at a couple percent a year uh related to the tariffs. And that turning point happened right at the beginning of this administration. And the way that that's affecting the real economy is it's basically raising prices. We're seeing core CPI go from the mid twos back up to three and probably a little higher over the next couple of months. That then is eroding household spending power uh in at a time when household income growth is about as weak as it's been in the cycle. Only 3.5% over the course of the last couple of months. And so you put that together 3.5% income growth for households with you know between 3 and 3.5% inflation in the economy. That's not very that's not a good deal for underlying power for households to spend and so far they're continuing you know their spending particularly over the summer by rapidly reducing their savings but that can only last for so long. >> Fed policy Bob we're looking at how many cuts for the remainder of the year? >> We'll probably get a couple more cuts through the end of the year. Um and I I think the main thing from Fed policy perspective is that most of the benefit that we're seeing to the economy has already uh from Fed cuts has already basically flowed through. And the primary benefit is not the lowering of the interest rates because not that many borrowers borrow on the short short end. It's really about bringing down bond yields, which we've seen a about 100 basis point move down in mortgage rates, which is giving the tiniest bit of life uh to the to the housing market. Um, and you know, we saw that fall in interest rates and discount rates uh really support asset prices. Uh the primary driver of stock prices going up over the course of the last couple months has come from falling discount rates. Not from uh higher growth expectations, but from the fact that bond yields have fallen, lowering the discount rate, which lifts prices of all assets, whether it be stocks, bonds directly, or things like gold. And so we've basically had the max effect from the Fed uh easing. In order to get more Fed easing than currently priced in, which would have more uh uh uh stimulative effect, we probably need even worse economic conditions. And that's not the sort of thing that you necessarily want if you're certainly if you're holding risky assets is you don't really want more Fed easing than is currently priced in. >> Why are markets discounting the fact that the government is in a shutdown? By discounting, I mean not caring. looking that. >> Yeah. Looking right through it because usually it doesn't matter. I mean, I've I don't know. I've gone through uh half dozen of these things in my career over the last 20 years. There's been I think 14 since the 70s. And basically, they've had no effect. And given that's the lesson that everyone has on it, that these things have no effect or whatever effect is is pretty incremental, pretty modest, um everyone's looking at it and saying, "Who cares? We're going to look right past it." I mean, look, markets are typically forward-looking and particularly the equity market is forward-looking. It's not really focused on whether there's a growth bump uh or drag for a few weeks this quarter. What it's looking at is what does 2026 look like for the economy. And unless I should say and unless things get really bad with the shutdown, it's not going to affect 2027. >> I I I understand. I I I let me let me um just ask you as an economist how are you how are you uh taking your where are you getting your economic data from because right now was government workers are furoughed we don't have official BLS and official government numbers so how are you you know what are you doing >> we're all living in the darkness uh which um which is actually kind of fun uh from a from a macro perspective uh because those folks who basically spend time triangulating the government data are actually in great shape because you already know a bunch of data sources that help you triangulate. So for instance, I mean the most direct one is obviously for the employment report we've got something like ADP actually the Chicago Fed the Fed is actually going to step up I think in terms of providing more information. The Chicago Fed just put out uh a multifactor basically a multi-data input model for the unemployment rate and for hiring um that brings together a bunch of different private sector sources in order to continue to monitor what's going on. Um and then on spending it's it's tough that's for sure. But you do have company reports and I often am looking at the credit card data which is you know anyone is a bit noisy. any one of the sources like Bank of America or Chase or whatever are noisy but in totality they give you a pretty good sense as to whether growth and demand is strong or weak. Uh and there it's kind of interesting just as uh the door closed on our ability to uh get government data. We have started to see in a couple of those sources some relatively abrupt slowdown in spending um in just the last couple of weeks. And so, you know, it may be that the demand side of the economy is uh is a bit weaker than what many people are thinking. >> As we progress through the queue u the last quarter of 2025 or into the last quarter of 2025, Bob, which asset classes this year in 2025 so far have surprised you the most in terms of how they performed? >> Well, I mean, you got any any any sensible person would look at gold and say, "Wow, that has been uh on a tear." I mean I have uh talked on this show about gold and and have uh have talked about the the important role of gold in a in a portfolio for a long time but uh the strength that we've seen uh in the yellow metal is quite impressive here. I think really two factors going into it. One um of all the assets uh in the risky asset spectrum uh you know gold is pretty underowned. You know, a lot of people own stocks, a lot of people own bonds, other growth assets. They don't really own a lot of gold. And so, and it doesn't take much uh in terms of flows to go from traditional financial assets to gold in order to create a squeeze in price. And so, we're seeing that uh squeeze there. And then, of course, there's sort of a broader story here around it's really a broader developed world story, not really just a US story, around basically giving up on inflation mandates in order to support growth. uh that was sparked in many ways by uh uh chairman Paul's Jackson Hole speech but also reinforced by the efforts from the Bank of England um that's facing even higher inflation in the US and still cutting rates and in that environment where you have monetary debasement of fiat combined with risk-taking behavior and an underowned environment in gold it makes sense you know why gold has seen such a spike relative to other assets in the market >> so you're saying gold is signaling much higher inflation or perhaps Perhaps economic deterioration or perhaps geopolitical uncertainty were all the above, none of the above. >> Yeah, I think it it's mostly uh it's it's signaling two things. A desire for speculative risk takingaking um meaning that people are just interested in buying financial assets, levering up to buy financial assets, which is why you're seeing it outperform at the same time that stocks are up, which is a pretty unusual circumstance. But part of the story from a fundamentals perspective is that um I think there's a broad-based view that uh that central bankers across the developed world are going to give up on their inflation mandates and instead basically uh depress their currencies in order to uh in order to support their bond markets and their and their economies. And there's basically only one true fiat contracurrency that's out there and that's gold. what's going to outperform in 2026, gold or stocks? >> Well, I think you know the the uh the dark horse uh in 2026 uh are bonds, which uh you know, I'm sure nobody who is watching this is really going to get fired up when I suggest that bonds might be a good investment or particularly real yields that are still running at mid2s across the US. If we have any hint of a slowdown, you know, bonds are at multi- uh year lows, continue to be at multi-year lows at a time when, you know, expectations uh of growth across the US economy are extraordinarily strong. Uh and they are broadly quite underowned relative to benchmarks. And so any sort of growth slowdown that we see here from these exuberant expectations is really going to favor bonds as people rush out of, you know, speculative MAG7s and the various AI names and go uh into more defensive assets. And so that to me seems like the uh the darkhorse uh of outperformance that could come around here in uh 2026. Why do you think stocks in particular the S&P 500, NASDAQ have been continuously reaching all-time highs despite the labor market weakening? If you look at private um private uh uh data from ADP and from the Carl Group, for example, while the government has shut down, they've all pointed to deteriorating labor market conditions. Even Deron Pow has admitted that the labor market is weakening. If you take a look at um if you take a look at uh inflation concerns, inflation expectations have been going up. And so that should put a dampening on consumer spending. And yet at the same time, stocks risk appetite is reaching new all-time highs week after week, seemingly disconnected from the real economy. If you agree that it's disconnected from the real economy, what's driving this this rally? Well, if you just just from a diagnostic perspective, what's driving the rally is the is the are the tech names. Um, so if you just look at SPY versus RSP, the uh you know, S&P 500 versus equal average um uh stock market, what you see is basically that the mega caps are the are driving uh what's going on here. And so what we have here uh in the AI names is a speculative frenzy. Is it uh and and I should say if you look at sort of the 493 or the equal weighted S&P it's basically been flat for you know a year basically give or take um which is more aligned with the weakness that we're seeing in the real economy. And so when you look at that, you basically have to say to yourself, um, uh, you know, I think everyone is trying to figure out who to bet on in the, uh, in the AI chase. Uh, because probably whoever wins in the AI chase is going to, uh, to see valuations that are are multiples of what they are today, even if they're elevated. The real question is who are the going to be the winners and the losers in that in that space. And that's something that you know individual stock pickers are are going to either uh make or ruin their careers on in terms of picking in that in that uh in that cohort. >> So you think that bond yields will fall long term like a long end of the curve will fall in 2026? Is that because of the Fed cutting rates? >> Well, I think it's a combination of the Fed cutting rates plus very high expectations of growth still priced into the into the financial markets. And so any hiccup that you see there um is going to create downward pressure on assets and risky assets in particular uh move folks to bonds. If you you know part of my day job is I'm I'm talking to talking hundreds of raas on an ongoing basis and every single one of them is underweight bonds and so it's not going to take much in terms of a growth slowdown or a bond outperformance for people to rush back uh to duration in order to protect their portfolios uh if there's any hiccup in in the risky asset market. >> So here you have um something you've tweeted let me just um share this here between ADP and paychecks. We've timely covered We've timely We have timely coverage of 25% of the US private sector. Sugar coat it all you want. The US labor market is clearly sucking wind and here you have uh employment change in negative territory as of the last two months. If this trend continues, Bob, um we're looking at an uh labor market recession, if you want to call it that, what does that mean for markets? what typically does well or survives during an environment where the labor market is deteriorating? >> Well, what typically does well are bonds and gold uh during those environments and what typically does poorly are risk assets um and particularly you know credit and equity and it's interesting we are already starting to see some signs of challenges starting here in the credit markets and in the private credit market. So if you look at for instance how BDC's have been performing or some of the big private credit names the publicly traded private credit names they are down a lot and that's kind of reflecting you know you kind of think about the tide of liquidity uh and the tide of liquidity might be coming out uh of a lot of those names that might be being sucked in by the AI names but I think what it's showing is the real economy is in tough shape and so anything uh and when I say the real economy I I you I separate that from whatever the AI you know cross investment scale up story is that's not really the real economy the real economy are you know uh real you know real businesses that are have been let money or um or or publicly traded those businesses are starting to show fracture and the companies that are financially exposed to them are starting to show fracture and so that I think that's really where the story is now I think there's a question about will that expand enough to start to create a little concern about continuing to take on as much risk in the AI names. But it's the real economy that's that's at risk at this point. >> At risk of what exactly? >> Well, I mean, a significant slowdown. Look, the the economy at some level is not that complicated, which is that GDP growth is predominantly driven by household spending. Household spending is predominantly driven by wage income particularly today in an environment of dimminimous credit or borrowing. And so when you put that together and household wage growth is uh is extremely soft. And so you put that together and you basically say we the nominal GDP growth in the economy in the in the real economy cannot be that strong when you have a situation where the labor markets are contracting and where nominal wage growth is running at 3%. Even inv you know particularly in an environment where inflation is actually up to three and a three and a half%. And so you put that I call it the household uh you know spending problem. It's basically if your wage growth, your income growth is growing at 3% or three and a half percent and price growth is at three or three and a half percent, your real spending power is essentially zero. And zero real spending power from households means that GDP is going to be weak. It might be buoyed better than it would be otherwise by some AI infrastructure investing, but it's not going to be a strong economy in that sort of circumstance. Take a look at this article from um the WF World Economic Forum. The US rally has relied in particular on a select group of mega cap tech companies dubbed the magnificent 7. Companies such as Nvidia, Microsoft, Amazon, Alphabet are at the forefront of both revenue forecast and market valuations. Their capital expenditure is unprecedented. each has deployed approximately $ 36 billion on average over the past four quarters. In comparison, the average quarterly uh spending for the typical S&P 500 is only $2 billion. This is meme I'm seeing online. I think I mentioned to you offline that uh tech companies are just sending billions of dollars to each other. It's like an infinite money glitch in the AI sector and that's propping up their stocks to all-time highs. I don't know if that's actually what's going on, but this is an incredible comparison. $ 36 billion of capex versus two billion for the average company. What do you make of this? >> Well, I think I I make of it in two ways. One, if you just think about it from a real economy perspective, you add those hyperscalers and and add in sort of your open AIs and your oracles and stuff like that, you're getting about 400 billion annualized pace of investment uh into the economy right now. Uh for an economy that's $30 trillion, 400 billion sounds like a lot, but it's just over 1% of the overall economy. So sure, lots of investment going on, big numbers from a nominal perspective, pretty irrelevant from a from a growth perspective for the real economy. And that's a very important thing to keep in mind, just having those scales in your head. I think the second question, which is for these companies in particular, they're obviously one of the ways that you can create uh the illusion of earnings is through a bunch of capex. uh but ultimately what has to happen is it has to translate into revenues for those companies and so far go look at the total revenue from your open AIS and your metas and your uh XAIS etc in terms of the actual revenue that those companies are receiving from their activities at this point and even take relatively extreme expectations of growth and you're not even close to covering the type of capex that's happening here. I think one of the challenges is is a lot like Google back in in the early 2000s, which is if you become the industry leader, all of this investment will pay off. But that means for the vast majority of these companies who are not going to be the sole primary leader, in fact, got to keep in mind the primary leader might not even be in the United States. It might be in China in terms of who wins the AI race. And if those companies in the US don't win, whichever companies in the US don't win, they are going to have uh have basically engaged in the greatest investment flop since railroad construction back in the 1800s. Do you think that AI capex or capex from AI companies, tech companies like I mentioned is what's driving this rally in the broad markets right now which is then feeding uh capital liquid uh liquidity injection into other sectors and other commodities perhaps into gold. In other words, we've got hyperscalers, Nvidia, Microsoft and the works spending a lot of money and that liquidity is flowing into the rest of the system. Basically, they're doing their own private sector version of QE, if you will. >> Yeah. Yeah. I don't I mean, they're they're investing a little bit in each other's assets, but I don't think that's prim primarily what's happening is private sector investors are bidding up these stocks and they're um they're basically using all the tools of leverage that they can possibly find in order to do it. If anything, I think the contrast between like the BDC's, the private credit BDC's and what we're seeing with the AI companies is highlighting that capital is like getting sucked from the real economy into the AI scalers. Uh, and so that is so it's less of a of an aggregate shift up and more like the sucking sound. And the question is, is that all that capital getting sucked into uh into a fire and being lit on fire or is it being used for productive investment? And so, you know, until we start to see meaningful productivity enhancement from any of that or meaningful revenues from those companies, uh it's not, you know, it's it's going to be a real question about whether it's worth it. I mean, if anything, uh, actually before the shutdown, the the census, the US census did a, uh, a bi-weekly survey of, uh, of companies, the thousands of companies about their AI usage and actually showed a flatlining in AI usage and some turning down amongst bigger companies. That is not a great sign when you're thinking about all of this investment that is essentially allin on AI radically changing what we do from dayto day. I think the ultimate question for me is what should we be doing? On the one hand, look, you're you're you're talking about an economic slowdown. You've presented stats showing how the labor market is slowing down. On the other hand, uh like we've talked about for the last 20 minutes, risk assets, including Bitcoin and stocks, have been ignoring these trends. And so, you know, one can stay defensive, but then we h you and I could have had this exact conversation a year ago and we would have missed this rally. >> Yeah. >> So, if we would have Right now, it's kind of like a FOMO kind of phase where I could get defensive and buy gold at $4,000 or I could or I could bank on the bond rally or I could just continue to ride this wave and hope that the momentum doesn't stop. It's an awkward phase right now. What do you think? >> Yeah. Well, I mean, I think uh uh two things. One, the classic line of what do you do when you see a bubble? You run to it, right? That is the classic line in terms of asset management. Um and I think that's basically what we're seeing right now. Uh I mean, you know, bubble broadly thought about. Um uh the other thing I'd say is this is very typical late cycle environment. You know, mo basically no one who is trading professionally today has lived through a traditional late cycle and that's where expectations are super high and they gain momentum just as the real economy is slowing down. And I think it is late cycles are the hardest time to trade because you want you you need for a variety of reasons to stay in uh jubilant markets uh to keep up with uh your peers. But the key thing is when those cracks start to form, you know, when the questions start to emerge about things like AI or things like the real economy, you've got to be in a position to be able to very quickly and tactically adjust and forego that previous boom narrative and get defensive. And so from my perspective, this is really this is this is the time to be tactical. It's fine. run headlong into uh to to gold and to stocks at this point into the AI names as the bubble emerges, but be prepared to shift rapidly. And that's, you know, it's interesting when we look at how hedge funds are managing through this. Um like macro funds are doing great, incredible. Our products in in uh our macro strategy is doing fantastic being long stocks here. But what we know is that that can quickly shift and uh not many managers are in a position to be able to go from being you know significantly overweight stocks to underweight within you know what could take we you know you might need to do that in the form of weeks and so you got to either be able to do it yourself or hire those people who are able to do it in this sort of environment. >> When stocks are in a bubble we can take measurements to make that conclusion. We can take discounted cash flows. We can see that the company's valuation on a on a PE or EVA double whatever valuation you want to match it with compared to its peers is perhaps out of whack when something like gold which doesn't inherently have any cash flow on its own or Bitcoin for that matter reaches $4,000 and $125,000 respectively. How do you assess whether or not that asset is in a so-called bubble? >> Yeah, you you've got to look at the flows. You got to look at who's buying. So as an example, up until um uh a few months ago, we had central bank buying of gold which could be quite persistent. I mean central banks are like very slow moving. They just keep buying gold. We had a fair amount of buying from the east. So the Chinese and Indian uh uh cohorts were buying gold pretty aggressively. But we hadn't seen the shift essentially unlocking um US and Western retail investment. And just in the last few weeks, this surge has really shown the the emerging signs of that retail interest in gold for the first time. There's obviously been a fair amount of retail interest in Bitcoin for a while, but you know, now finally they're getting around to the old boomer bitcoin with gold and starting to buy. And so that that are the that's the sort of sign that you start to say, okay, from a flows perspective, how how stretched is that? That's probably just getting started. it could run a little bit further, but it's not going to be too long before we're like, you know, who's selling? And that's one of the challenges when you start to ask yourself who on earth is underweight or who is selling uh in the market, that's when you start to think for something like gold, maybe we've gotten a little too uh a little too bubbly uh in the asset. We're not quite there yet, but it could come soon. >> Okay, thank you very much, Bob. Uh let's close off on um best and worst assets for 2020 for actually no we've talked about 2026 the remainder of Q5 Q4 2025. >> Yeah. Well I mean I think um you're you're probably going to continue to see uh cash be uh not a great asset at least in the near term. Um and uh and what I'd say is look cash one of the worst assets in aggregate and then also those those businesses and those companies tied to the real economy that's where the cracks are going to show here and so um that repricing has started but still has a long way to go. So, uh, whether it's BDC's, private credit, the private credit suppliers, um, you know, traditional, uh, traditional consumer demand companies, things like that, those are the sorts of areas that are probably going to be the underperformers, whereas, um, it's probably going to take a little bit more work before we start to see cracks uh, in in the bubbles that we're seeing uh, whether it be in gold or uh, in the Mag 7. >> Thank you very much, Bob. Tell us where we can find more information about you. Uh yeah, you can find me on basically all the socials under the Bobby Unlimited uh handle. Uh you can also check me out on Substack uh where I write a daily report uh called non-conensus uh and you can subscribe and and check that out. >> Okay, thank you very much, Bob. We'll speak again soon. Make sure to follow Bob in the link down below and make sure to follow this channel, subscribe and like this video and we'll see you next time. Take care for now.