Key Concepts
- Software Disruption & AI Agents: The potential for AI agents to automate software development tasks, impacting software companies and potentially shifting profits towards real economy businesses.
- Macroeconomic Resilience: The idea that the core economy is robust and less susceptible to short-term policy changes or individual stock fluctuations.
- War Trade: Investment strategies that benefit from geopolitical instability, typically favoring gold and commodities while disfavoring bonds.
- Diversification & Alternative Assets: The importance of diversifying portfolios beyond traditional 60/40 allocations, incorporating alternative strategies and global assets.
- Dollarization & Global Capital Flows: The trend of international investors shifting capital away from the US dollar and into their domestic markets.
- Systematic Investing & Humility: The benefits of a disciplined, rules-based investment approach combined with acknowledging market uncertainty and avoiding overconfidence.
- Alpha Indexing: A strategy of accessing diversified alpha sources at lower fees than traditional hedge funds.
Software & AI Disruption – A Fundamentals Rotation
The discussion began with the recent decline of IBM stock, triggered by the release of an AI agent capable of automating COBOL code compilation – a core part of IBM’s business. Bob Elliot argued this isn’t simply an isolated incident, but a broader “fundamentals rotation” occurring in the market. He explained that software companies often act as intermediaries, taking profits from real economy businesses. AI tools enabling companies to create their own software effectively allow them to retain more of those profits. This isn’t necessarily negative for the overall economy; it’s a shift in profit distribution, potentially increasing aggregate economic productivity. He emphasized that the “pie” is growing, even if the slices are being redistributed. The concern about software companies cannibalizing each other is acknowledged, but Elliot believes the overall effect will be positive for the real economy.
Contrasting Views on AI & Employment
This perspective contrasts with the concerns raised in a report from Cat Trini Research, titled “2028 Global Intelligence Crisis.” The report predicts a 10% unemployment rate by 2028, driven by AI-induced productivity gains leading to layoffs, resulting in a scenario where productivity rises while living standards fall. Elliot countered this argument, stating that increased productivity generally leads to higher incomes. He cited early data from the St. Louis Fed showing that AI is currently enhancing worker productivity rather than causing job losses, and that labor force growth, despite being constrained, is translating into wage increases. He believes a virtuous cycle of increased productivity and rising incomes is more likely than the dystopian scenario presented in the report. He highlighted that widening margins and topline growth cannot coexist without a workforce earning and spending income.
Macroeconomic Stability & Presidential Policy
The conversation then shifted to the impact of presidential policies on the economy. Elliot asserted that the macroeconomic dynamics are far more significant than any single administration’s policies. He pointed out that key economic indicators – real GDP, unemployment, stock markets, the dollar, and bond yields – haven’t changed dramatically between administrations. He likened the economy to a “freight ship” largely unaffected by “tugboats” (presidential policies). Trump’s claims of a turnaround “for the ages” were dismissed as largely unsubstantiated, given the minimal changes in underlying economic data.
Gold, Commodities & the “War Trade”
The discussion then turned to gold, currently trading around $2,300. Elliot noted recent “frothiness” in the gold market following spikes in the fall and January, but indicated that the underlying flow picture has normalized. ETF flows, central bank activity, and derivatives positioning are all relatively subdued, suggesting an “all clear” signal for re-entry into the gold trade. He anticipates continued upward momentum driven by increased demand from Western investors.
He identified a “war trade” scenario, where gold and commodities typically outperform while bonds underperform during periods of geopolitical instability, particularly given the escalating tensions in the Middle East and the largest military buildup around Iran since the 2003 invasion of Iraq. He noted that most portfolios are currently underweight in these “war-related assets,” being heavily allocated to bonds. He emphasized the need for strategic overweighting of war assets, even if a conflict doesn’t materialize.
The 60/40 Portfolio & Global Diversification
The resurgence of the 60/40 portfolio (60% stocks, 40% bonds) was briefly discussed, but Elliot dismissed it as a “snoozer.” He argued that superior opportunities exist outside the US, particularly in foreign stocks and emerging markets, which have significantly outperformed the S&P 500 year-to-date. He advocated for global diversification, stating that investors who have been properly diversified have been “crushing it,” while those focused solely on US assets have underperformed.
Unlimited’s 50/30/20 Portfolio & Alternative Strategies
Elliot then introduced Unlimited’s 50/30/20 portfolio strategy. This allocates 50% to equities, 30% to fixed income, and 20% to “alternative strategies” – those capable of generating returns in various market environments. He criticized the high fees in the alternative asset space, arguing that they often negate the benefits of alpha generation. Unlimited aims to provide access to diversified alpha sources at significantly lower fees through an “alpha indexing” approach.
The Dollar, De-Dollarization & Investment Themes
The conversation touched on the strength of the US dollar and the trend of “de-dollarization,” where foreign investors are increasingly allocating capital to their domestic markets. Elliot suggested that the dollar is likely to decline by 25-30% over the long term, creating opportunities in other currencies and economies. He highlighted the potential of economies like Australia, which are in a tightening cycle while the US is easing.
He identified the investment theme of increased investment in compute capacity and data centers driven by the AI boom, suggesting that investors should focus on the “picks and shovels” providers rather than trying to predict which AI models will win. He also pointed to opportunities in emerging markets, particularly in countries like Korea, which are experiencing strong earnings growth and have low price-to-earnings ratios.
Systematic Investing, Humility & Ray Dalio’s Perspective
Elliot emphasized the importance of a systematic investment approach, creating a defined set of rules and sticking to them, to overcome the “head game” of investing. He also stressed the need for humility, acknowledging market uncertainty and avoiding overconfidence. He related this to the long-held cautious and often bearish perspective of Ray Dalio, founder of Bridgewater Associates, where Elliot previously worked. He noted that Dalio has consistently expressed similar concerns about the world order for decades, but cautioned against letting such views dictate trading strategies.
Reducing Fees & Unlimited’s Mission
Finally, Elliot discussed Unlimited’s mission to reduce fees in the fund management industry, arguing that current fees are excessive and often outweigh the benefits of alpha generation. He believes that bringing the principles of low-cost indexing to the alternative asset space can significantly improve investor outcomes.
Conclusion
The discussion painted a picture of a resilient economy undergoing a fundamental shift driven by AI and changing global capital flows. The key takeaways are the importance of diversification, embracing alternative strategies, recognizing the limitations of traditional investment approaches, and maintaining a systematic, humble perspective. The emphasis on global opportunities and the potential for a weaker dollar suggests a need to look beyond US-centric investment strategies. Unlimited’s approach, focused on low-cost alpha indexing, aims to address the high-fee problem in the alternative asset space and provide investors with access to diversified sources of return.
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