The Macro Chain Reaction of Oil Shocks | Bob Elliott

Central banks never ease into an oil shock. Doesn't happen. When you have an oil shock, it's a very difficult scenario for basically policy makers to respond to because it both increases inflation and decreases real growth. I think a lot of people are getting ahead of themselves on talking about the disinflationary impact of an oil price rise. The first step is prices go up, real spending goes down, and that's where we're at right now. Has to get bad before someone does something about it in order to make it fun. people are kind of looking through the

has to be bad in order for something to happen and just assuming everything will be okay forever. And that's just not how markets or economies certainly have worked over the last 100 years. >> Before we get started, a quick reminder that Block Works's premier institutional conference, the Digital Asset Summit, is returning to New York City this March 24th to 26th. This year represents more than $4.2 trillion in assets under management with 150 speakers and 750 institutions attending. Speakers include SEC Chair Paul Atkins, CFTC Chair Michael Celig, Fed Governor Steven Moran, and Tedar CEO Paulo Ardonio,

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may hold positions in the company's funds or projects discussed. As always, investments in blockchain technology involve risk. Terms and conditions apply. Do your own research. All right, everybody. Welcome back to another episode of Forward Guidance. And joining me is one of my favorite repeat guests, Bob Elliot of Unlimited Funds. Always one of the best folks to get on to understand highlevel macro frameworks and how it impacts the world, the economy, markets, everything in between. Bob, always great to have you on here. >> Great. Thanks so much for having me. I feel like when we when

we uh tried to find a good time, which was a few weeks ago, you know, the world was a very different place than uh than it is today. So, we'll just roll with the punches and talk about what's going on. >> Yeah. Honestly, probably silver lining that Yeah. We were planning to do this a few weeks ago and then it got delayed and now we're in a completely different situation, completely different conversation that we're about to have. So, at least it'll Yeah, we're we're in amongst it now. um we're going to try and put on

our geopolitical hats on a little bit and try to figure out how to understand everything that's going on with the Iran strike and how it impacts the global economy. So, you've been writing a lot on your Substack, which is really great. Um you've been writing a few different pieces on how to understand the context of this oil shock of the straight over being closed and its impact on the global economy and yeah, like I said, you're you're really excellent at these high level macro frameworks. So, I just want to understand to you when you see

something like this happen and you contextualize it with where the global economy was heading into this supply shock, what does it look like? How are you understanding this and how does it relate to different oil shocks that we've had like the 2022 one um and even the '08 one? Like we had a pretty significant oil spike back then that led into a recession. So, yeah, walk us through how do you how do you digress something like this when it hits? Yeah. Well, I think we were coming into the the beginning of the year um experiencing

something that I called the savings driven economy, which I sort of describe in contrast to what was for many years postcoid an income driven economy. Um and what I mean by a savings driven economy was we um we started to see basically that spending continued to hold up and investment continued to hold up despite the fact that um you know it took more to savings from households to keep that spending going as labor markets weakened and more to savings from businesses to keep their pace of investment particularly related to AI and such alive. And so

that was sort of the the premise coming into this which in many ways created an economy somewhat on a knife's edge. Meaning if things had gone well and the government had, you know, was pursuing modestly expansionary policy during the year and asset prices lifted a little bit, we were probably going to probably at least meet those sort of expectations. Um maybe even do a little bit better uh than the expectations uh that that sort of out was out in markets at the outset of the year. I think the challenge is when you have an oil

shock, it totally rewrites the conversation. And the reason why that is is because um it's a very difficult scenario for basically policy makers to respond to because it both increases inflation and decreases real growth. And as a result, you know, policy makers are kind of stuck in that sort of environment. And part of the challenge is when we were coming in, we had already had a lot of de savings sort of baked in the cake. And so there's not that much room for additional deavings uh to be applied in this circumstance. Doesn't mean it's a

it's impossible or the households won't to save at all. It's just we're in a very different environment now than we were say if this happened two or three years ago. And so I I think the challenge is basically for uh households and in particular they were already uh spending more than they were earning to saving relatively rapidly. Now you've basically add another 1 to one and a half% price hike across their basket of goods to households that were already spending at only about a percent and a half to wrap up the year in real terms.

And that basically means household consumption is likely to fall to zero in real terms. Um, and for an economy, a US economy that's so reliant on household consumption to keep it going, you know, zero real household consumption is pretty anothetical to expectations of growth of 2 to 3% that we've become used to. >> Yeah. So, so contrasting that with 2022, you know, back then we had probably one of the hottest labor markets we've ever seen. Like job openings were just absurd. Um, and so I I'd love to just hear, you know, back then when we

had that one in 2022, it seems like we narrowly missed a recession on its own. Um, you know, some people debate the semantics that we did see a little one, but whatever. The fact is that we we came out of that somewhat unscathed. And it feels to me like that is because, yeah, the labor market was in an excellent place. Um, people were stuffed with cash from from COVID era stimulus. Companies had plenty of cash as well. things things were good and and we narrowly avoided any sort of major issues there. I get the feeling

that yeah consumers and households like you said are in a very different situation right now. So I'm curious like when you see something like this this oil shock that leads to higher imp higher prices and then lower consumption how at risk are we today versus 2022? >> Well I think 2022 is really helpful because um to study it helps you understand all the different mechanics. So what happened you know while the magnitudes are slightly different the mechanics are actually super similar in the sense of going into it we had a period of elevated inflation you

know that was sort of underlying uh the economy. Now of course that was related to co shocks and it was at a higher level versus today which is essentially you know tariff related plus in terms of inflation um dynamics uh and at a lower level but the that sort of kindling that existed of elevated inflation in the economy before the oil shock existed in both places. In both places we had actually basically the same size oil shock. If anything this oil shock might be larger based upon just what's priced into the curve. So, you know,

leaving aside whether you believe that that's good pricing or bad pricing or whatever, if you just basically take the curve as the market price and a future path of oil prices, uh this one's actually going to be a bit higher. The 22 oil shock uh largely resolved within a year, meaning, you know, it started at the beginning of the year. It peaked uh first in in March and then uh in in the summer and then it went back to basically where it was to start the year. Right now, oil prices are projected to be 40%

higher at the end of this year than they were at the beginning of this year. So, that's a more extended oil shock. Um, and in that 2022 case, basically what you saw was you saw uh, you know, inflation continued to be elevated. Fortunately, nominal uh, earnings growth was relatively strong during that period, particularly uh, when you add in all the transfer payments that were still sort of in the system. It allowed households to to save in response to maintain their nominal, you know, to maintain their real spending to some extent, but you still saw a

reduction in real spending. And so those in the 22 period, if you just think about each one of those levers, it was like household spending uh was strong nominally, right? So picked up nominally, financed by desaving, but real spending fell. And that's a perfect example of this this combination that I'm describing that comes with an oil shock, which is both prices rise because people disave in order to keep up their real spending as much as they can and real spending falls. So it's really hitting essentially both sides of say the Fed's mandate. And what did

we see in response from the Fed? Now, of course, uh it was sort of the unlucky outcome that forced the Fed's hands to transition from basically the transitory narrative to the not transitory narrative and hike a whole heck of a lot uh in response. Um and today what we're seeing is at least so far we've seen an unwind of expectations of easing to basically neutral policy. I think the real question is is actually the next set of policies likely to go higher because this will be enough to sort of force the heads Fed's hand. Certainly

in neither case did we see the Fed cutting into an oil shock, right? We didn't see that at all. We saw the exact at least back in 2022, we saw the exact opposite. >> Um, okay. So, if we just think about like a matrix of of the quality of of the economy going into these shocks. So, you have the current one, you have the 2022 one. I'd love for you to also unpack what happened in '08 and and what was the quality of the economy back then going into it because obviously that one we saw

oil prices surge and then we just had yeah one of the greatest you know the the great recession and oil oil prices crashed afterwards and you know there's this whole demand destruction error. So so I just love to add onto the onto the matrix here of what did it look like in '08 and how did that sequence of events look like? Well, I think interestingly in the '08 cycle, um there was obviously a huge surge in oil prices. I mean, more meaningfully than we're seeing right now. Um and, uh it was predominantly driven at the

time by ve by tight a tight market intersecting with relatively strong um demand from the emerging world. you know there's the um for those for those folks who are back around that time there's whole idea of um a global decoupling right that maybe the US was going to face some pain related to its housing problems but globally we were going to decouple and it wasn't going to be a problem and you know the reality was at that time that the sort of global growth narrative or the narrative of or the the data outside the US

was quite strong um and it was only when the credit problems emerged GED in the US that created the second and third order consequences through the US the economy and the financial systems system that we saw a withdrawal of capital that basically crushed the emerging markets and created that reduction in demand. And so in some ways I I think um I think people who are not sort of living through that period might confuse and confuse uh that period as indicating a strong US economy or even the oil price rises were a meaningful driver of the

economic slowing that occurred and they were pretty marginal. It was pretty fast. it was pretty marginal and the big story there was the credit problems because I mean the credit problems were in the credit problems nearly ruined the entire financial system. So I mean it was just like orders of magnitude more important for the economy in the US. Um but it what it did highlight was just how tight that market was and how reliant it was on emerging markets who then were sort of the ancillary you know uh uh took sort of the the ancillary

hit from the US financial problems. >> Got it. Um, last historical analog I want to ask you to contextualize the situation and um, I know I'm really testing your your financial history, but you've also written a lot, studied a lot of of big macro cycle, so I feel confident you can answer this one too. Um, the the other one is of course the 1970s oil oil shock and what happened there. Um, obviously that one was was the great inflation that also ensued in the 70s. So yeah, lastly, just love to understand what was going on

there and how is it different from today? Yeah, I I think in many ways the uh the linkages are similar to today, but the magnitudes are very different. And so I I think that's people often try and draw analogies of magnitude and analogies of magnitude are kind of silly because you know so for instance back then oil prices went up four or five, right? Okay. So oil prices today are not going up four or five. So we're not likely to see the same sort of magnitude of inflationary pressures in the economy. What that doesn't mean

is that doesn't mean that the linkages are to be ignored. The linkages are the same exact linkages at different magnitude. And so in that case you really had uh in a lot of ways I I had talked about the sort of postcoid period I think as being very similar to sort of that late60s environment where you had sort of persistent inflation that was gradually creeping up large fiscal expansion you know large deficits not much credit driving the economy that's why I think the late60s is actually really not much sort of household credit or corporate credit

or borrowing driving the economy a very income driven expansion that eventually got to a point where we had an oil shock and that oil shock created a lot of pain in the economy and created a lot of inflation and pain and then we had another oil shock on top of it right um and so I I think it's a good analogy in the sense of uh sort of similar kind of kindling that existed meaning like inflation was a little too high for a little too long an oil price rise occurred and that created did basically

the conditions that we saw in 22 and likely to see here, which is rising prices and weakening real demand and real activity creating a challenging circumstance which sort of forces the central bank and the Fed into tightening even though it's kind of an unpleasant tightening given the set of circumstances that exist. >> Cool. All right. All right. So coming back to present day, we have an economy as we mentioned in the last few months was largely driven by disavings. Um so savings rate coming lower and yeah I want to want to contextualize that with what

you're seeing in the health of yeah the consumer in terms of it's its spending potential and and what the incomes were looking like going into this. And so you mentioned that the current oil market is pricing in a crisis that is more extended than the 2022 one leading into this situation of an economy that is on a knife's edge largely held up by the savings and when you put that all together where how do you think you see things playing out from here on? Well, I think coming into this, it's good to just start with

the the baseline dynamic and and and sometimes macro folks will try and make a economy more complicated than it is. Like the US economy is basically households earning money and spending like to oversimplify and then there's some other stuff that goes on, but that's basically what it is. And so when we were coming into this, you know, let's call let's call it through January, household uh income growth was growing at about 3 and a half% or a touch better than that. How was that growing that way? Essentially zero employment growth and three and a half

plus% wage growth year-over-year per worker, right? That's how you get that nominal wage growth. US households were spending at about 5 a.5% coming into it. Uh on a five and a half% growth coming into it. How do you close that gap between those two things? Well, essentially it's it's just mechanical. the savings rate has to fall uh in response to that or transfers have to pick up but transfers have largely been the same through this period. Um and so what you see there is you basically see that gap widening and widening which is the labor

markets weakening gradually. No acute crisis nothing crazy just kind of gradually weakening spending trying to stay up uh as much as possible driven by that that um that savings rate. And then if you think about if you sort of work through those numbers, we had 5% nominal spending growth in an environment of 3% inflation which led to 2% real spending growth. >> Okay, now let's fast for oil introduce the oil shock. How does that change things? Well, the labor markets aren't going to really change in the ne, you know, in the next day or two.

It's just labor markets are >> like watching paint dry. They just basically can carry on as they are, right? I mean, slowly but surely might move in one direction or another, but basically what we're going to see is three and a half% wage growth, real spending growth. The question is, okay, let's just say they keep the saving. You you keep that 5% nominal spending, but now we've gone from an inflation environment of, you know, near three to an inflation environment that's going to have a 1 to one and a half% increase, and therefore real spending

is going to fall. Those are the numbers. That's the sort of uh the the household math problem, I always call it. Um, if anything, the risk is that households might uh uh hold back on their savings to some extent, right? what I just described is that they continue to save uh they continue their pace of desavings or the savings rate continues to fall. If you have an environment where stocks are falling or there's more uncertainty or more concern, you might actually see households no longer choose to increasingly to save and they might pull back on

that and bring their spending in line with income. That would be the biggest risk because then we'd go from a 5% nominal spending growth p uh environment to say a three and a half percent nominal spending growth environment in the context of inflation that could be in the range of you know 4%. And that's where you get negative real spending growth and that creates the second and third order effects of on labor markets and incomes in the future. But we're kind of getting our head ahead of ourselves on that. I think a lot of people

are getting ahead of themselves on talking about the disinflationary impacts of Yeah. of an oil price rise. The first step is that prices go up, real spending goes down, and that's where we're at, right? >> Yeah. I think Yeah, that was that was a nice little segue into how do people try to understand the sequence of events here, especially of something like an oil supply shock? Because you look at something like '08 and it's like well look we you know it central banks should have looked through that and been like oh shoot there's this huge

negative growth impulse on the other side of things. So now you have everybody skipping the first step and saying we got to go straight to cuts and then contrasting that with what so far the reaction from central bank pricing has been mostly hikes or or you know at least less cuts in the case of the US. Um so we just love to understand how are you thinking about monetary policy within this context. So you have like I said you know the US curve is we had a few cuts now we're down to like one maybe

zero. Other countries are are looking at even price beginning the price in hikes. Um and people will look at that and say hey look we should we should move to the next phase of things which is beginning to think about cuts because this is obviously going to be really bad for growth. Um but obviously you need the first to get the second and I feel like that just needs a better explanation. And so I'd love for you to unpack that. >> Yeah. Yeah. I mean I I I was I was writing last night having gotten

a lot of comments about how oil stocks are deflationary or disinflationary and it and the answer is like of course um reducing household purchasing power through higher prices can be disinflationary. Right? But the question is how does that how does that system work? Because what has to happen is the first step is you have to have the prices rise which eat into the real demand capability of the household which then creates the slowing of labor market growth which then hurts nominal incomes which then reduces nominal spending that then has an effect on overall prices. Like

that's the path. And as anyone who's watched the labor markets through time knows, labor markets do not move that fast. Like they just labor markets are boring. We try our best, you know, the the first Friday of every month to make this thing exciting. Like the answer the reality is they are boring as hell. And so don't forget that that they take forever to play out. You know, if we had a reduction in real, say tomorrow, real household spending went down to zero or started to contract, it would probably be nine or 12 months before

we would fully feel that effect in the labor markets. And so the the point is you got to focus on the first on first things first here as terms of how this is likely to to to play out. And the first step is you're going to have those price rises. And so central banks, I think part of the story, getting back to your sort of the core of your original question, which is how do central banks respond to this stuff? Like central banks don't ease into oil shocks. Go back, look through all of time at

all central banks and how they've responded every single time. Like who cares if you think it's a good idea or not. Like I don't really care as a market participant, as a fiduciary like what you think they how you think they should respond is an irrelevant a totally irrelevant way of thinking. A lot of people spend time on it. It's totally irrelevant. It's useless. It just it's distracting. Central banks never ease into an oil shock. Doesn't happen. And so what are we seeing right now? Well, we're seeing what you'd largely expect, which is if oil

prices are going to get, I don't know, a one to one and a half, maybe 2% inflation pressure through through these economies, a little less in the US, a little more in places like Europe, the UK. Yeah, that's probably worth, I don't know, a couple of hikes over the course of the next year. meaning either going from no you know from two cuts to zero or from you know no cuts to two hikes that seems like about right if you look back through time the challenge is that that will as as um I think people

understand will put more pressure on growth right but it's the only solution that they have because the the biggest risk here the biggest risk is that these central banks having accepted elevated inflation for five years postcoavid you ease into this oil shock and then what are they going to do? Like let long-term inflation expectations rise radically. There's no way they're going to let that happen. That would be incredibly risky for them to do. So, they've got to nip this in the butt and make sure it doesn't have the second and third order effects through the

prices on the economy. >> Yeah. I I guess the big question that people are trying to sort out is how forwardlooking and efficient is the bond market going to price this in? Because obviously, you know, to your point, it makes sense for initially the short end of the of the bond market to begin to price in some hikes and some hawkishness, but you would expect potentially to see the long end begin to price in that. Okay, well, look, we're having this this oil shock and central banks are hawkish into it. If if we're looking at

a 10-year bond, maybe it makes sense to start to price in some some negative growth outlooks into that. But so far, we've seen the long end of the bond market sell off pretty significantly. I know you've been bearish bonds, bearish stocks. So, I'd love for you to just explain how you think about how how and when the bond market prices in these events and the sequences of them. >> Yeah, I mean the long end of the of the bond market uh you so far what we've seen is sort of the curve move up basically um

as as this has happened and and if anything what we haven't seen is we haven't seen a real expansion in risk premiums in the bond market through this event. I think that's interesting because if you just sort of go back to what um what caused sort of a lot of the risk in the bond market, what caused the big lift in bonds was basically this transition uh this in the postco period I should say it was a transition from basically no one in the world ever considering that we would have elevated inflation ever again to

a world where people were like yeah it can happen you know we'll we'll have elevated inflation again and that forced essentially you know, some risk premium getting put into the long end of the curve into bonds. You know, what I see now is that there's not people are sort of in that point where they're like, "Oh, they're sort of have um have memory that inflation is likely to come down to central banks uh targets over the course of the next year or two, not recognizing that, you know, inflation shocks can often have a life of

their own. Meaning like if you get an inflation shock into already elevated inflation, just go back to 2022. What did we see? We saw a persistence. We saw inflation above these central banks targets for five years, right? We were year one into something that has played out for the last five years. Um and uh and that was with massive tightening, right? A massive rise in interest rates. inflation is still elevated across every major developed economy relative to what central bank's targets are. So far, we have not seen a recognition that this could extend the life

of that dynamic. And so when I think about what's getting priced into the curve, what's notable is so far there has not been a meaningful expansion of risk premiums in the bond market. That should create steepness in the curve, should create a sell-off in the curve beyond basically just reflecting the fact that we need tighter monetary policy. And to be clear, that's true across the totality of basically financial assets, financial assets in aggregate. Like risk premiums have not risen very much despite the fact that we've had we've entered possibly a new environment of elevated uncertainty.

and and yet, you know, it's hunky dory when it comes to how most uh investors are viewing financial assets at this point. >> So, so what's your checklist or signals to look for for when to flip from being concerned about a hawkish central bank and inflation to demand destruction and negative growth? >> Yeah, great question. And part of the story that creates the weakness in economic activity that comes from an oil shock is from the fact that interest rates rise. Again, important to recognize the ordering matters. Like first interest rates rise, then there's a drag

on the econom. And so what you need to see is you need to see interest rates on the long end rise enough and to the short end to some extent but really on the long end rise enough to start to create a hit to economic activity and also create a hit to asset prices right through the discounting effect. And so when I look at the market right now, you know, I bond yields right now are basically where they've been for the last six or nine months, right? Bond bond yields are like boring, right? You know,

if you had just slept through the last six or nine months, you'd be like, "Oh, basically where we were before." So we got to see bonds move to something that's going to be, you know, create a more meaningful hit to asset prices in the economy. So that's moving up towards the five range say on tens in order to get a more meaningful drag. Now I think part of the story here is that there's not a lot of the economy is very sensitive to those financial conditions. So I don't think you you have to have bond

yields go up to six or seven or eight or something like that to start to create the reversal. I think the cap is closer to five on tens and then at that point that's probably enough of a drag combined with all the other things that we talked about to create, you know, the subsequent uh downdraft in bonds. But again, the ordering it I know it's I know it's hard to it's easy to sort of get ahead of yourself on this thing, but >> you've got to like linkages are ordered for a reason because they have

that ordered effect on macroeconomic conditions. And so I I think in some ways we've almost been like so it's like we have a a a cancer of you know of it's like the cancer of QE that people are like okay well then everything's going to be fine right so why why should I ever worry about anything and the answer is like has to get bad before someone does something about it in order to make it fine >> and like people are kind of looking through that has to be bad in order for something to happen

and just assuming assuming everything will be okay forever and that's just not how markets or economies have wor certainly have worked over the last 100 years. >> Before you place a trade, you should know who is actually moving the market. That's where Arkham comes in. Arkham is a crypto intelligence platform and exchange that lets you see real onchain data, which wallets are buying, selling, and moving funds and then trade directly on that information. Arkham was built to make blockchains human readable instead of raw transaction data. You get clear profiles, visualizers, and custom dashboards that show

what's really happening beneath the surface. Tracking wallets and fund flows is becoming just as important as technical or fundamental analysis. Onchain intelligence is also one of the best tools traders have to protect themselves against hacks, rugs, and scams. With Arkham Exchange, you can go from insight to execution in one place. The world's first exchange powered by crypto intelligence. Check out Arkham and start trading with real onchain insight at arkham.com. Yeah, that's kind of funny. It just reminds me of uh like 2022 era when you were fighting the battle of everybody was I don't know freaking

out about Som rules and and a recession back then. You're like look like here where we are in the economy, the labor market's pretty good. Like we need to see the sequence of events to occur before we get to a point where things are bad and it this sort of feels like a mirrored situation here. >> Right. Right. That's right. That's right. That's um I mean maybe it's just uh it's just kind of a boring uh old macro person who you know writes down this linkage and then this thing and then this thing who studied

too many cycles um who who who think who thinks in order you know in order in terms of how these things play out but um but I think that that's part of the advantage part of the advantage and the alpha opportunities that exist is when people don't think in a disciplined way about the ordering and just rush to one direction or one narrative or one intuition and away from another. I mean look when we look at what's going on with the pricing right now like financial the biggest thing if you think about sort of from

those folks who are trading markets what's the biggest thing that oil shocks create? They create a a hit on financial asset prices as risk premiums as the Fed tightens, central banks tighten and risk premiums expand. Right? That's that's what they do. uh and you know there's a long track record related to that and so far if you look at what's going on with asset prices in aggregate stocks are basically flat and bonds are basically flat since this whole thing has started. Okay. So like that is that is the inconsistency there which is that across asset

markets people are just not recognizing one you know that the oil shock creates this effect and they're rushing to the resolution down the line. Well said. All right. So I want to I want to zoom out to the global economy and how this oil shock is hitting different countries, how it gets reflected in in their currencies and and really divide it between countries that are importing energy versus energy exporters because you know you have Asian Asian economies or or the European economy that are that are big energy importers and especially acutely tied to the straight

of form use versus a country like the US which is nearly energy independent as has very little exposure. and demand and dependencies on the straightfor and what flows through it. And I would just love for you to under unpack like how does that get reflected in the impact of those economies and then how does that get shown in these currencies between energy importers versus exporters. Yeah, I think it's been one of the most challenging circumstances this year is um for the first whatever two months of the year the overwhelming narrative in market action was you

know rest of the world stocks doing well certainly better than expectations and the US trying to keep up and the dollar being a bit soft and and then we have this this thing that happens that basically runs counter to like all of that underlying trend that had existed before um you know I thought we were going to talk about you know dd dollararization when we uh when we originally scheduled this you know it's going to be an update on that conversation from last year and and it's very much the opposite for exactly the fundamental reasons

that you describe which is >> look Japan and Europe are in bad shape when it comes to big oil price rises that's just all there is to it the you know across the developed world they're very sensitive to these things uh and other juris jurisdictions, particularly Canada and the US, are in a lot better shape to absorb these dynamics. And so, it's not that surprising that we've seen one heck of an unwind of the foreign stock versus US stock story in response to this, as well as, you know, some strength in the dollar. Not it's

not, you know, it's not a huge strength relative to what we've seen in the past, but it's still meaningful. Um, and I think that's a combination of the fundamentals, plus I think a lot of people got caught off sides. you know, people got all in on one direction and got whipped uh back in the other direction. Um at this point, I look at things and I sort of say, look, broadly on a relative basis, whether you're looking at at when you're look particularly when you're looking at stocks, we've largely priced in the differential effect of

these of these dynamics. You know, Japanese and European stocks have come back a ton, basically erased their their gains for the year. The place in aggregate that doesn't make sense I'd say is around the aggregate pricing meaning like aggregate stock prices across the global economy you know those have come down a little bit but particularly when you add in the US you know we haven't seen a huge hit to aggregate asset prices in the way um that we you know even we haven't seen a quarter of the hit to aggregate asset prices that we saw

during the 22 episode even though the shock that we're seeing here is um certainly on par with maybe even a bit a bit more significant. And then when it comes to currencies, you know, the real risk in the currency market is uh you know, I think again it's largely played out as you'd expect from the fundamentals um with the dollar being favored relative to these other currencies. Uh it is um you know the the part of the story of what has driven these foreign asset markets is you know a lot of US investors looking elsewhere

outside of the US to you more cheaply valued asset markets. If that really starts to unwind you could create another dollar squeeze scenario which would be very detrimental to asset prices in aggregate somewhat foreign asset prices but really asset prices in aggregate as sort of the dollar wins. And I I I know you guys have been talking about that um in in your uh in your weekly conversations. You know, the the the dollar shock, we should not totally forget the the risk of a dollar shock uh in this whole story. Um and you know, you

start to think about that from a risk management perspective that you might have a lot of risk if the dollar, you know, pushes higher here. >> Yeah. I mean, like just if if you if you take what's priced on central banks at face value right now, it just seems crazy to me that we're in a situation where like we could see the Bank of England or something hiking while the the Fed is still on on a cutting bias. Like does that is there any evidence of that even being like something that occurs? Like I just

I I can't even imagine the impact on on currencies if that actually plays out. Well, I think it comes down to um it comes down to where like the Bank of England or the ECB are going to be tightening aggressively in an environment where they're experiencing a hell of a external drag from rising energy prices, which is probably a way more important story for them than is the incremental monetary policy. I I think often people uh uh overfocus on relative monetary policies as a story for exchange rate movements. Like just think about it. Let's say

the Bank of England tomorrow was like we're going to we're going to tighten 100 basis points. You're like, "Wow, that's that's a that's a big tightening, right?" Well, 100 basis points in yield terms is like a one day standard deviation in currency price terms. Like if you just think about it from a total return perspect like is irrelevant, right? It's why like central banks if they're trying to maintain a currency peg have to tighten, you know, to a thousand% or something like that because you have to be on an annualized basis because you have to

be at levels like that to change the underlying uh supply demand dynamic uh of an exchange rate. And so, um, I I think probably the relative monetary policy is just going to matter a lot less than the relative macroeconomic effects of the rising energy prices. And those are so disproportionately uh in favor of the US and Canada to some extent and uh and negative for uh Europe and Japan that that's just going to drive those currents. That's going to be the much bigger driver of exchange rates ahead. >> That's that's a good nuance. I like

that. Um, the other thing I'm trying to tease out here from, you know, if we have this potential tailor risk of a of a major dollar rally is contrasting that with the price action and potential for gold. Um, you know, when I look at everything that's going on, you you would expect gold to rally pretty significantly here, I imagine. But, uh, since the shock, it's it's been bleeding. Um, I'm curious, how do you think about that? Is it largely something getting caught up short-term in this dollar rally? Is it because positioning was so stretched into

this shock or or how like how's how's gold playing out for you so far and where do you expect that to to go from here? >> Well, gold is a financial asset and so it's really important to keep that in mind. And so to the extent that there are, you know, you're seeing elevated risk premiums across all financial assets, you would expect gold to be affected by it. And you know, not only was gold just sort of generally a financial asset and and to be clear, if you go back and look at how it played

out in 22, which I think is very helpful to to see like gold rallies initially and then it sells off a lot. Why? Because rates go up and all asset prices go down and gold is just one of many assets, financial assets. And so it takes a hit just like everything else. Um, and so, uh, what's played out here, you know, I'd probably put gold in this, the the gold is like the macro equivalent of Japanese and European stocks for the equity allocators in the sense of everyone got bowled up on these things. They generally

made a fair amount of money on those things through the first two months of the year. Then all of a sudden, this you have the shock. everyone's bringing down their risk and you know gold takes a hit just like the European stocks and the and the uh and the Japanese stocks from a fundamentals perspective you know it's a little bit better situation better situated than those assets but it's still part of the sort of overextended um positioning that came into this uh to this reversal. It's why, if when you take a step back, it's why

um if you're building a well- diversified portfolio of assets, it's why you can't just you certainly can't just rely on bonds to be your diversified equities, which we've learned you, but you can't also just rely on gold as a diversifier to your equities in addition to bonds because in an environment of elevated commodity prices, gold underperforms like all financial assets, which is why you have to have commodities. these in your portfolio, right? And when I ask people, you know, was doing some of these uh some CFA events a couple weeks ago, I asked people, you

know, how many people have commodities in their portfolio? >> And it's crickets. >> And they're like, well, commodities, you know, they don't go up as much as stocks. Why would I ever hold them? Well, for this, this is the reason why you would hold them, right? Because there are going to be times when all assets are doing poorly because quantity prices are surging. And if you want to have some protection to your portfolio, that's why you have to have some commodity uh exposure within your portfolio. >> What else? >> Yeah, I just so I just

want to bring this all together now in terms of when we look at all these asset classes and and what they're reflecting. So you have the oil curve is pricing in something that's more significant than 2022. You have bond yields that are the same six months ago. You have equities that are largely flat. um seen small changes in currencies, some pretty aggressive moves in in interest rate pricing from central banks. Um gold's bled a little bit. Why why do you think there's such a contrast or tension between all those asset classes right now? Is it

just like a positioning thing? Are people in complacency? Are they expecting a you know a taco like Liberation Day? What's your what's your read high level? I think there's some collective amnesia about what's going on, what happened in 2022. Um, and part of that is um I think folks have been sort of primed that there's always going to be the next easing and the next easing and the next easing. It's like, you know, QE is like burn like there's all these burnouts on QE walking around, right? Thinking that ah they're just going to get the

next, you know, money hit coming. And this is very different from other shocks like this is very different from traditional growth shocks where the central bank where central banks are sort of all uh all well positioned to ease into this into a growth shock into a you know an external growth shock of some sort. It's a totally different environment. And so, um, the combination of sort of that sort of, uh, forgetting conveniently forgetting about how 22 played out. Um, and then also, you know, this taco stuff is I think people have really uh, gone hook,

line, and sinker. I mean, for good empirical reason, let's say, for why taco, you should always be betting on taco and any fall is a is a good opportunity to buy. But again a war is uh is a very different thing than liberation day. Liberation Day was entirely determined by the, you know, material views of a single person. Meaning tomorrow, you know, on uh the day after liberation day or 5 days after liberation day, like Trump could just change his mind and then magic, you know, policy was different and and and things like he could.

He ran the taco shop. Today, the taco shop is jointly run by two big parties, but really like a dozen parties. And if they don't all agree that we're getting taco ahead, then they'll then no tacos will be served to extend the analogy, right? Um, and I think that's one of the challenges like I most people have not really spent a lot of time studying wars and their effects and things like that because I mean really 75 years we basically had no wars by and large like you know small wars not no wars but basically

small wars that didn't matter that much but wars have a momentum of their own and we're seeing that in real time in terms of how wars have a momentum of their own. And so it's going to take much more than just a simple, you know, taco for this thing to to get resolved anytime soon. And even and I think the oil market is really reflecting that because I mean people are down there counting the barrels. You know, they're saying this many barrels in this under this circumstance and this circumstance and this circumstance. Um, and when

they pencil out all those barrels, even assuming that there's a high probability the US is going to try and back down or have an off-ramp or something like that, what is it like a 60% chance the conflict ends within 45 days? That's a very high chance that a war ends within 45 days. Most wars take, you know, at a minimum years and often longer than years to play out. You know, when they add up all the barrels, they still have that curve where 40 oil prices are 40% uh above where they are today. The problem

is, you know, it doesn't look like people in the equity market and the bond market are actually counting the barrels. They're lazily thinking about Taco and QE and not thinking about the barrels and what the second and third order consequences are of those barrels. And so that is the gap and these gaps happen in markets. This is why you can generate alpha from a macro perspective because you know not everyone is seeing the same reality and future reality at the same time. And so I I think that's the gap we're seeing. >> Amazing. Well, Bob,

that's a that's a great place to leave it. Some sage advice. Appreciate a lot. And uh yeah, great to just walk through these things. You know, there's just endless websaws of news headlines right now. So, I think it's it's a helpful mental model for everybody to to digest and understand. Um so, thank you for coming on and and walking us through all that. I appreciate it. And where can uh where can folks go if they want to see more of your work in depth? >> Yeah, thanks so much for for having me. Uh if you're

interested in my sort of ongoing macro commentary, you can find me at Bobby Unlimited uh anywhere you can find me. Um or check out my Substack non-consensus uh which you noted earlier. Uh if you want to learn more about uh my day job uh behind me, uh check out unlimitedfs.com. >> Awesome. Well, thanks Bob. Always good to have you on. >> Thanks for having me.