Are We Heading for a Recession?, with Bob Elliott, former Head of Ray Dalio’s Investment Team at World's Largest Hedge Fund

The economy is facing massive turbulence right now. The stock market experienced its worst decline in five years, and then a sharp bounce back. Tariffs are dominating the headlines, fears of a recession are mounting, and we're seeing enormous stock swings. And in the context of... All of this mayhem. I wanted to bring someone on who can cut through the noise and, importantly, who can cut through partisan talking points.

to give us the street story in a measured, nuanced, and data-driven manner on what's actually happening in the economy. Today's guest, Bob Elliott, spent 13 years at Bridgewater Associates, the world's largest hedge fund, including 11 years as the head of Ray Dalio's investment team. While there, he authored many of the key insights in Bridgewater's Daily Observations, a newsletter that became essential reading for money managers and institutional investors worldwide.

During the 2008 financial crisis, he advised the White House, the Federal Reserve, and the Treasury Department on navigating those treacherous economic waters. He's a speaker at Wharton, a magna cum laude graduate of Harvard, the CEO of Unlimited Funds, and the co-founder of GiveWell, one of the largest charity evaluators in the world, which funds around $1 billion of highly effective...

charitable giving. Welcome to the Afford Anything Podcast, the show that understands you can afford anything but not everything. financial psychology, increasing your income, investing, real estate, and entrepreneurship. It's double I fire. I'm your host, Paula Pant. I hold a master's in business and economic reporting from Columbia. And I am a strong believer in taking a measured look at economic data in a manner that is...

free of any presuppositions because here's the thing when markets move when stocks rise or fall it's not because wall street is taking political sides It's because investors are directing their capital to where they believe they will find the best risk adjusted returns. That's it. We live in a highly politicized environment in which administration supporters and administration critics are constantly pointing fingers at one another over market volatility.

As a manager of money, as a capital allocator, how do you direct funds? And in our conversation today, Bob breaks down how professional money what signals they're watching, and most importantly, what we, you and I as individual investors, should take away from all of this. Where should we put our dollars when uncertainty is high? Should we hold on to cash? Should we be buying bonds? Should we be buying the dip in the stock market?

We're going to answer all of those questions with one of the sharpest economic minds. in our country. The former head of Ray Dalio's investment team. Enjoy this conversation with Bob Elliott. Bob, welcome. Thank you so much for having me. Thank you for being here. Bob, are we heading for a recession? I think there's a real high probability that that's going to happen. Oh, geez. Yeah. That was not what I was hoping you would say. Yeah.

We've had, if anything, we've been very lucky the last few years that the U.S. economy has. been persistently stronger than most people had expected. And a big reason why that was was because we had strong labor force growth, strong income growth, strong consumer spending and asset prices that were rising. And one of the challenges that we're facing right now is what I call the wrecking ball of.

policy mix ahead, which is we have an administration that's come in and you can argue about whether or not the sort of long-term goals make sense. along their policy path. But it's pretty unambiguous that their policies that are being implemented are going to be growth negative in the short term, combined with the fact that

We still have a persistent inflation problem, which means that the Fed is not going to be able to get ahead of any concerns about growth weakness. And that combined a growth negative set of federal government policies and a Fed that is behind. is a pretty tough environment, particularly when we have asset prices that are just off all time highs. So as of last month, the inflation rate was 2.8%.

If these policies are growth negative, would that not in some ways help inflation by virtue of slowing growth, but in other ways harm by virtue of potentially driving up prices? I think the question about whether... The current tariff policies or the planned tariff policies are going to net be inflationary or disinflationary. I think there's a reasonable case on either side. If you're sitting in the Fed's shoes.

A lot of the academic literature and the empirical work suggests that they'll be inflationary. And so they'll be essentially be using that assessment as their default assumption about how this will flow through. And we'll need to see something meaningfully different in terms of the actual reported data before they change their stance.

But while there's a lot of ambiguity about the inflationary deflationary effect of tariffs, I think the thing that is not ambiguous is that they are growth negative. And the reason why that is is pretty simple, which is that. You're going to create an environment where a fair amount of goods that are coming into the economy and, you know, we import a lot of goods. Go to Walmart, pretty much everything that's on the shelves of Walmart has been imported.

And in a consumer economy, the prices of those things rising simply means that people will have less in their pockets to spend elsewhere. And so what that means is that the demand for real goods, whether it's for those goods that are being tariffed or for a broader set of services. that next vacation, that next trip, the haircut, etc. The demand for those are going to go down because more money is going to be drawn towards spending on tariff goods that people need. About 70% of the U.S.

spending, it's consumer spending, it's discretionary consumer spending. Is that an over concentration in that sector? And will this have the effect of causing more of our economy to be reflective of business spending. The U.S. economy for a long time has been primarily driven by the consumer. And the reality is in most

diversified economies. It's really household consumption that is really driving the economy. And the reason why that is, is businesses in those sorts of economies, particularly in Western economies, are typically investing in response to the demand that they see rather than building for building, say.

It's different in places like China, where it's governmental policy to create high business investment with the hope that that will then create stronger consumer demand in the U.S. and the rest of the West. It's essentially the opposite. Strong consumer demand leads to business investment. And so the household demand is really the linchpin of the U.S. economy. And so as household demand goes, so too goes the rest of the economy.

Now, you mentioned that tariffs are growth negative in the short term. And I know the philosophy behind them is that there's the hope that in the long term, it will onshore more manufacturing, create more jobs. here. But the counter argument to that is that In an environment where tariffs might not be in place for a long enough time period, there might not simply be enough runway for all of the major capex to get spent for the re-onshoring of those jobs.

How do you respond to all of that? Because you hear the argument, you hear the counter argument. Both of those sound reasonable. Where do you fall? Well, I think the reality is both could be true. If we were in a circumstance where. Let's say there's a 25 percent tariff on all manufactured goods that are coming to the United States and that that would persist for the next 10 years or 20 years.

then businesses could start to think harder about whether it made sense to invest in things like automation or domestic production relative to the costs of importing goods and paying the tariff either directly or indirectly. The challenge really is in an environment of a lot of uncertainty about how these policies are going to play out.

businesses are basically frozen. I mean, think about it. If you were running a business, say, a car company, and you were looking at this environment, and what you've experienced in the last eight weeks is 25% tariffs, 0% tariffs, 25% tariffs, 0%, and 25%. What do you do with that? I mean, that is a extremely challenging environment.

And it's one in which what you see is that business is always in an environment of high uncertainty. Just pull back. They just wait and see. It's also one of the reasons why if you look at things like CEO confidence numbers. for major U.S. corporations. They're the lowest that they've been since the financial crisis.

And is that because they don't know how to invest in an environment where things change? How can you have any confidence when you know what the rules are? And I think that's the core challenge that businesses are facing. And while of course consumer demand is a. primary driver of the economy, the fact that businesses are now basically curtailing any incremental spending on investment means that support to the economy has really evaporated. So it really is now down to basically

whether household spend or not, in an environment where they're effectively getting, in an indirect way, one of the biggest tax hikes that they've experienced in the last hundred years. Right. How long would tariffs have to stay in place in order... to create that re-onshoring of jobs.

Well, if you think about, let's just say in the auto space, like one of the things that's important to think about is we have created incredible efficiency in our manufacturing sector, right? The total amount of manufacturing sector output over the last. 50 years has gone up by multiples, whereas the employment has been cut. And part of the reason why businesses have been able to do that onshore is they run very, very tight production that's intended to meet incremental demand.

Essentially, if you have a factory and it's not running essentially three shifts a day. fully employed, that's wasteful and that's just not acceptable in today's environment. What that means is in order to build new productive capacity, let's say in cars, 50 percent of U.S. cars are met with domestic production, about 50 percent from offshore production. You can't just snap your fingers and create double the production out of these factories because they are.

essentially already running about as tight as they possibly can. And so what you have to do is you have to build new factories. And building new factories is not something that you do at the snap of a finger. It's something that takes It could take five years to build a factory. And so it takes decades to actually get the payback from those. If you're sitting in the shoes of... the CEO of Ford or GM, and you're saying, should I build another factory or not?

You've got to be thinking 30 years into the future. And so the economics have to look good on a 30 year time frame, not on a six week time frame. Right. And given the fact that. Any given presidential administration happens in four-year increments. How would it even be possible for tariffs to be in place long enough for the CEO of a major company to make that type of choice?

It's possible, for instance, we saw some of the 2018 tariffs that were placed on China were persisted into the Biden administration now, obviously, have increased substantially in the second Trump administration. So, you know, it's possible that there could be continuity around tariff policy between different administrations. But I hear you. It's very ambiguous. I think that's why in a lot of ways, if you're building productive capacity domestically today.

You're doing it in one of two different ways. Either it's so compelling. in terms of automation and efficiency, that under a wide variety of circumstances, you're going to be competitive. Or what you're doing is you're basically just building domestic capacity to meet domestic demand in that particular

Good. That way you don't have to deal with there could be tariffs. There could not be tariffs. But my factory is in the U.S. I'm producing for a U.S. audience. And therefore, what happens with international trade policy? Isn't going to matter that much. And that's why what you see is companies like BMW or Toyota, et cetera, building domestic U.S. domestic production capacity in part in order to insulate themselves. from these sort of cross-border conflicts, but...

still the U.S. imports hundreds of billions of dollars of automobiles as a simple example. So it's not like All of the U.S. demand for cars is being met by U.S. production. Right. And that does make sense. Domestic production to meet domestic demand. Overseas production to meet overseas demand. I'm thinking about during the pandemic in 2020, when the price of lumber suddenly spiked. And it was because there were these supply chain disruptions. And yet the cost of...

Making more lumber, the cost of creating the factories necessary to increase lumber production, the timescale of that was too long to be able to meet. kind of upset in supply and demand. But yet that issue very quickly ended up working itself out through the normal mechanisms of supply and demand. So there was a lumber spike and it lasted for a few months and then it. calmed itself down and everybody forgot about it and we all lived happily ever after. Is that type of thing...

likely to happen now? You know, at this current moment with the tariffs being new, there's a lot of upheaval. Will it like lumber in 2020, work itself out over the next few months through normal free market mechanisms? Well, I think probably what we're going to see is we're going to see over an extended period of time, the development of

a significant amount of parallelization of supply chains. So we went from a world that was global, integrated, and just in time to a world that's going to be fragmented. and parallel and with a lot of redundancy in supply chains. And as I said, that started in COVID because obviously the COVID disruptions created a lot of supply chain issues.

But these tariff policies, I think, in many ways are going to exacerbate that need to create redundancy in the supply chain and in manufacturing. And almost by definition. The world was moving towards the lowest cost production, the most efficient production for 50 years, something like that.

And as we transition to a world where we have a lot of redundancy and that redundancy is in higher cost production areas, almost by definition, right? If the economy was set up so that the reason why China produced.

washing machines and laundry baskets and stuff like that was because they were the lowest cost, most efficient producer. Well, if you start to produce those things in the United States, almost by definition, the United States is not the lowest cost, most efficient producer. And so that's what creates.

price pressure, right? There's inflationary pressure in duplicating the supply chains, and then there's inflationary pressure in producing out of higher cost areas. And that's really when you think about sort of the The strategic effects, the longer-term effects, just going back to your question a little bit before, was

You can get benefit from employment, from incremental employment, from the tariffs onshoring production. But that onshore production is happening at a higher cost. And as a result. Essentially, what you're doing is you're socializing that cost to everyone who's spending on that good in the economy. And so that's the tradeoff. In many ways, you could think about.

And the fact that you're going to have higher costs in general globally means that demand is going to go down because higher costs mean that people are just going to spend less. are going to be able to buy fewer units. And so you have the combination of tariffs bringing down the overall demand infrastructure, the overall demand in the economy, and then you have this significant redistribution from essentially consumers who pay for it.

and the companies that meet those consumers through their margins to the workforce that is producing those goods. How that nets out, it's hard to fully know is the reality how that all nets out. No economy has ever implemented instantaneous 20% tariff. Certainly any economies that are as large and complex as the United States. So we'll see. But in general, the story is much more around the consumer law.

meaningfully overwhelms any benefit to a small sector of the economy that gets improved employment as a result. Right. Now, you've talked about how functionally the general public, or at least the people who purchase an item that has been subject to tariffs, functionally have a higher tax that they're paying because that cost has now gone up. And when I think about the overall economy, it strikes me that there are four levers, right? There's the lever of tariffs.

There's the lever of tax policy. There's the lever that comes from the Fed when it comes to monetary policy. And there's the lever of government spending. What I'm wondering is oftentimes when we talk about any one of these factors, It's common to have that conversation in isolation. And so like right now we're having a discussion about tariffs specifically, but how can we have a framework to think about?

The way in which all four of these levers work in concert with each other. Yeah, it's a good question. You want to think about first each one of those pieces individually and how they will have their own discrete effect. And then think about how they intersect with each other to then create maybe compounded effects in one direction or another. So if we just go to your framework here, and I think this connects well with the wrecking ball environment that I was discussing at the top.

which is we have tariffs, which are likely sort of unambiguously a negative growth policy. You have Fiscal spending, while the magnitudes are a bit ambiguous, is clearly moving in one direction, which is that spending is getting cut, a combination of doge effort. Congress, who is taking steps to cut back on spending, particularly to a variety of different programs for lower income folks like SNAP and Medicaid. That's a pretty negative environment. You mentioned tax policy, right? Tax policy...

There's a lot of talk about sort of a big tax cut, particularly when it comes to the extension of what's called the TCJA, which... The Tax Cuts and Jobs Act. Right, the Tax Cuts and Jobs Act, which... sort of more commonly is known as the Trump tax cuts back when he was in his first administration. One of the things that's important to recognize there is that those tax cuts

are already current law. So if they get extended, they'll have no effect. Essentially, by extending the tax cuts, all you're doing is ensuring that there wouldn't be a tax hike occurring, but you actually are not getting any meaningful tax relief. which is important. So there's a zero effect of the tax cut extension. And then finally, let's put it on the board as tariffs, meaningful drag, spending cuts. somewhere between a modest to moderate drag.

zero. And then you have a Fed, which is slow moving in an environment of elevated inflation where they're going to be behind the curve. Let's just say that. So it's going to take a lot of pain before they start to really move to ease. That combination of things is pretty bad. In terms of what's, I hate to be the bearer of bad news here, but if you don't think about it as what you prefer to have happen in terms of the economy, just think about the macroeconomic mechanic.

and what the effects are of each one of those different pieces. And when you look at each one of those different pieces, The sort of eye that a doctor would look at a patient's blood work or something like that, you see basically that that's netting out to something that's pretty negative in the short term. Right. Real downer right now.

You mentioned that maintaining the Tax Cuts and Jobs Act would have a neutral effect. My assumption is if it goes through, that the alternative would be further drag. So if the tax cuts were to expire. then we would functionally have a tax hike. That's exactly right. And I think- Pretty much everyone in Washington is on board with not letting the Trump tax cuts roll off. It would be a pretty significant tax hike.

across the board, and one that would be certainly undesirable in the context of all these other things that are going on. And in some ways, if you look at the commentary from more fiscally conservative elements, particularly of the Republican Party, they see that there's a package here, which is that we'll extend the tax cuts.

But in order to make sure that that doesn't continue to have the sort of elevated deficits that we've had for a while now, we need to essentially get what's called pay-fors. So something's got to pay for those tax cuts to get extended. And so the revenue raised from the tariffs, which.

The most recent policy that could be four or five hundred billion dollars a year. That's actually pretty significant. It's about a quarter of the deficit just in terms of orders of magnitude combined with the spending cuts, which. The budget process proposed something like $200 or $300 billion a year in budgetary cuts. That kind of is enough. to pay for most of the cost, essentially the implicit cost of continuing the tax cuts that exist so that we have something that.

starting to bring the balance, the budget into balance, which is not the top goal of the new administration and the Republican Party, but it is a certainly an important goal that they're pursuing through their work. Right. Now, what about, you know, we saw in the February jobs report, that even though jobs at the federal level had a slight reduction, we saw that government jobs at the...

state and local level actually had a gain. That's the most recent data that's out. We're recording this on the first Thursday of April. And so tomorrow morning, which is the first Friday at 830 a.m. Eastern, we're going to get... The March jobs report, but we don't have it yet. So we're going to use February's data. As of February's data, government jobs, when you include state and local, actually had a slight net gain. How does that factor into this?

When you think about the labor market, government jobs are about 10-ish percent of the aggregate labor market. And federal government jobs are only a few percent of the overall workers, about 2.5 million. Folks who work for the federal government, excluding postal services and the military, which are not necessarily discretionary efforts.

They're kind of independent of the sort of normal discretionary budget. So $2.5 million has actually been flat basically for 50 or 60 years, which is kind of incredible when you think about how much the economy has grown. One of the things that's kind of interesting is The new administration is going through a process of thinking about whether there's efficiency that can be gained. from cutting back on those jobs and there's been some documentation that's being circulated internally

around cutting about a third of those jobs. So that would be 800,000 workers, give or take. 800,000 workers in today's labor market is actually about six months of labor force growth. That's a pretty big set of cuts were they to happen over a 6- or 12-month period. They could essentially erase.

all the other job gains that would happen in the economy. Because we're an aging workforce, demographics are such that the number of prime-aged workers is starting to fade meaningfully, and we don't have nearly as much immigration as we had the last couple of years. And so that would be a big shock to the system, putting in 800 – laying off 800,000.

Folks, you're right that some of those are being picked up by state and local governments, although state and local government employment, it has risen in recent years. It's mostly recovering from the pre-COVID. from the COVID-related drop and is now recovering from that. And so the level of, for instance, state and local employees today relative to where we were pre-COVID, it's only up a few hundred thousand jobs. And so the big picture story is the vast majority of the labor market dynamic.

And gains have been consolidated in the private sector. The vast, vast majority, about 90 percent, has been in the private sector. And nonetheless. These sorts of cuts that are being discussed could be meaningful drag on the labor market in the next six to 12 months. Should we all flee into global bonds? Is that because it sounds as though there's I'm hearing about a lot of negative drag that bodes poorly for the U.S. Certainly equities market, but.

Kind of also the bond market, like it's another 2022 in which there seems like they might be moving in tandem rather than inversely. Yeah. The challenge with 2022 is we had a lot of inflation volatility and a lot of inflation uncertainty. What I describe here is the range of plausible outcomes on inflation, while tariffs are meaningful and will affect overall demand.

The range of likely outcomes related to inflation is much narrower today than it was back in 2022. And so most of the volatility or the uncertainty that you see in the market today is really about how growth is going to play. That's why I emphasize the tariffs, they could be inflationary, they could be deflationary. Hard to know. But what they certainly are is negative for growth. And environments that are negative for growth are good environments to be holding bonds.

And in particular, good environments to be holding bonds relative to stocks. And so that's what we've seen in the market action so far. We've seen in the last couple of weeks. We've seen bond yields come down, meaning bond prices have gone up, have rallied at a time when stock prices have come down. And that's really reflective of the fact that the market is starting to price in a more negative growth environment.

But let's remember, if you just look at something like where stocks are today, Stocks are only down 7% year to date as of today. it's not that big a deal if you've been in this business long enough you know seven percent things go up things go down that's not a huge repricing certainly nothing it can to the type of 25% or 30% declines you typically see in a recessionary environment. And banjos have come down tens of basis points, but this is certainly nothing like the sort of moves that we saw.

during more acute economic downturns. You look at that, and it's true, there's been some increased pricing of weaker economic conditions ahead. But we're really at the tip of the iceberg. If you believe that the tariffs will exist... for an extended period of time and that there will be spending cuts and that the fed will be slow to move there's a lot more pricing that can be unwound in terms of

bonds rallying relative to stocks. And that relates to U.S. bonds. But what about global bonds? Like it seems as though. At least the impression that I get is that the ECB is going to be more likely to make some interest rate cuts. They seem to be moving faster than the U.S. Fed. Yeah, I mean, Europe is in a circumstance where there are inflation targeting central bank. And so they're primarily focused on inflation.

But what I'd emphasize with the ECB is that they've gone through probably a roughly 30-year transition to soft money. And when I mean soft money, if you go back 15, 20 years right after the financial crisis, there was a short spike in inflation that happened that brought inflation in Europe from a little under two to a little over two. And in response, the central bank at the time tightened the growth.

Now, that kicked off the European debt crisis, which was then met with massive stimulation and liquidity to ensure that it would not persist or get worse. That marked an important transition point. ECB, which was originally modeled off of the Bundesbank, which was intended to be highly highly sensitive to inflationary pressures. basically gave up that criteria about 15 years ago to save the euro as a currency.

The result is that even though today European inflation, as measured, is still above their benchmark, and the projections are that inflation will be above their benchmark for the next few years, the ECB is cutting because they've moved to a soft money set of policy.

It's a little more challenging in the Bank of England's case because inflation has been a little more persistent there. Labor markets have been tighter and wage growth has been a little more elevated. And as a function of that, they've been slow moving in terms of delivering. meaningful accommodation in terms of their policy.

They look a lot closer to the Fed on the margin with a bit of a bias to a bit easier policy, but not in a position to move as aggressively to ease as some of the other central banks. Right. Are they still projecting that they'll hit the 2% target?

In 2026. They also are projecting that they will not meet their targets for an extended period. Look, every central bank, every major developed central bank is saying that they're not going to meet their inflation targets for a long time. The interesting thing is that. each one is approaching that circumstance differently. Europe is basically saying, forget it, just keep easing.

It's fine. Don't stress about it. Japan is saying we're comfortable running very easy monetary policy because we've had deflation for the 30 years before. So maybe we shouldn't stomp out this. what modest expansion is occurring. Whereas places like the UK and the US are a little more cautious in terms of delivering a big easing cycle, given the fact that there's this inflation persistence that they're experiencing. to protect what matters most.

Working with a local State Farm agent helps you understand your coverage options. offering local support to help you achieve your goals. Focus on turning your passion into a thriving business, knowing your insurance can change as your business grows. State Farm, here to help you succeed with your business. Like a good neighbor, State Farm is there. Going back to the model of the four levers, one thing that strikes me is that we have...

two major disruptions that are happening right now. One is the tariffs, of course, as we've been talking about, and the other is the reduction in government spending. Can you talk about the fact that both of these are happening simultaneously? do these have? I mean, if either one of these was happening without the other, it would still be disruptive. So how do the two together play off each other?

let's call it the compounded effect of the intersection of these policies, is to think about how they work through the lens of asset market. Because in some ways, you can think about asset markets as they're sort of the lever that determines how households respond to the conditions that they see and how much they choose to save versus spend. if you have something combination of the tariff policy with the

cuts to spending, that creates a negative growth shock. So that negative growth shock is in the context of equity markets in particular that are still pricing in pretty strong growth ahead. For a few years in 2023 and 2024, equity markets... were pricing in very weak economic conditions. And everyone probably remembers 100% probability of recession, which did not come in 2023, right? And so-

Well, there's a lot of talk about individual stock names and things like that. Like from a macro guy's perspective, basically what it looks like is that what happened was everyone expected a recession. A recession didn't come and stocks went up. And the same basic thing happened in 2023. Everyone expected slow growth or 2024. Everyone expected slow growth. Growth wasn't slow. Stocks went up. Well, the challenge that you have in this environment really entering 2025 and that's still in place is.

Equity markets kind of gave up on the slow growth vibe and were like, no, actually growth is going to be super strong. at just at a time when you had the fiscal policies that were coming into place that were going to be a growth negative. And so you put those two things together.

And that is a negative growth shock against high expectations. And that's just in the same way stocks outperformed because the economy was stronger than people expected. You could easily see a circumstance where stocks are weak. because the economy is much weaker than people expected. And that decline in stocks then flows through to household demand and creates

self-reinforcing dynamic because part of the reason why household demand has been so strong is because, look, if you see your 401k and your stock account goes up every day, what are you going to do? You're going to spend more than you would otherwise, right? You wouldn't pull back. And what we're starting to see with the initial data earlier this year is that households are now – there's some signs that households are pulling back on their demand.

So they're spending less of their income because they're seeing instead of equities going up 20 percent a year, they're starting to flatten out and fall. And so now households are starting to think hard about. Do they want to keep spending as rapidly as they were or do they want to sock some away for the future? The problem is when you sock some away from the future, that creates less demand.

that creates less income and that creates a weaker growth environment that's self-reinforcing back to stocks and so you have in many ways the spark of the fiscal negative growth policies, the fiscal tightening that we described, that's kind of the spark. The kindling is very high expectations. And then the fire is households cutting back and creating the self-reinforcing dynamic that further weakens the economy. Now I've heard the hypothesis.

that it is not asset prices, but rather income and wage growth that would drive household spending. And so according to this hypothesis, there's a... significant portion of the US population that is not invested in the stock market at all. There's another portion of the population that only has very minor investments in the stock market, represented by maybe a small 401k balance or a small 403b balance. But that according to this particular hypothesis, the degree to which.

Asset values are a concern for ordinary households is overblown. And as long as ordinary households have, number one, employment, which employment is historically very strong, and number two. sufficient income and wage growth that that alone will keep household confidence high and keep spending high. What do you think of that? That sort of positions it as an either or rather than thinking about it as a set of

linkages that move through time. And so I think you're totally right. For two-thirds of households in the U.S. economy, The thing that matters is whether they have a job or not. Absolutely right. Maybe on the margin, interest rates kind of matter because if they're financing an auto or something like that, or maybe their mortgage, interest rates matter to some extent. But really, it's about whether you have it. The issue, those

folks are primarily spending out of their income, meaning they get their paycheck and they spend out of their paycheck. Maybe they save a little bit on the side. But what drives the volatility of their behavior is whether they're employed. As a function of the volatility of their spending is predominantly driven by the volatility of the employment conditions. The volatility of employment conditions is driven by the volatility of overall spend.

And so if you instead have two-thirds of the economy that has much more volatile spending, that is driven by asset prices or at least meaningfully influenced by asset prices, it's not by no means exclusive. That is the part of the economy that shifts. demand that then creates the knock-on consequences to the rest of the economy. So even though it's totally right, the vast majority of the economy is employment and income sensitive.

They're not the predominant areas of the economy that are leading and volatile. And so when you want to understand how the economy is going to work, you want to focus on those sectors that are leading and volatile. And that then has the second and third effect through the economy. That makes sense.

You mentioned that there's a high likelihood of a recession. Now, when I think of recessions, there's really two factors at play. There's severity and there's duration. Do you have any predictions for... Either or both of the severity or the duration of what we might be expecting. The first thing I say is there's still a lot of uncertainty because there's so much policy uncertainty. So. We could have an environment where a lot of the fiscal tightening gets unwound.

In order to understand what's likely to happen, you have to have a good essentially mark-to-market sense of what that policy mix looks like. But let's just take the current policy mix. For granted, just say this is what's going to happen. The tariffs as implemented on Liberation Day, about 20 percent increase in essentially the effective tariff rate in the United States. Let's take the budgetary cut. that were in the past budget as given a few hundred billion dollars on top of the tariffs.

That's a pretty significant shock to the system that would create relatively acute. decline in economic conditions, which we may already be seeing to some extent. We see it in the soft data, not quite yet in the hard data. and would probably create a more meaningful consequence on the stock market, so something like 25%, if it was believed that those policies would persist.

That's the sort of thing that would create in a lot of ways creates like a normal recession. Now, most people who are in the markets today actually have never seen a normal recession. Right. You've seen. COVID, which is not really a recession at all. That was like a one month. An exogenous shock. Exactly. And you've seen the financial crisis.

which really wasn't a traditional recession because so much of the pain and challenge was concentrated in financial intermediaries in the banks and whether the banks were going to go broke and all the second and third or consequences related to that. It wasn't really like traditional. recession where you get expectations are high, growth slows relative to those expectations, asset prices fall, you get a bit of a self-reinforcing dynamic, asset prices fall further.

You haven't really seen that. And so in that more typical recessionary environment, what happens is you get economic and market weakness. And then eventually what happens is you get fiscal easing and you get monetary easing. That's the way it works. And when the fiscal easing and the monetary easing comes in, that starts to change the economics of incremental behavior and it starts to lift the economy again.

Typically, it takes 20 or 30 percent down in stocks for that to happen. And typically, it takes a couple quarters of weak economic conditions to get. the fed and the federal government moving it along to start to provide some stimulation My guess is we'd see something akin to that in this circumstance because there's not like a problem in the financial system. It's not like the financial crisis where the banks were broke.

We're not really seeing that. A lot of that stuff has been sort of cleaned up and dealt with over the last 15 years. And so my guess is we would see about a year, year and a half of weakness, some moderate declines in asset prices as a function of.

that weakness and reflexive of that weakness and then you'd get enough, when I say easing, it could just be rolling back the tariffs, it could be rolling back the cuts, it could be providing other stimulus efforts, and then you'd have the Fed easing, and that would be enough to sort of bring the economy back. I don't know, the end of 2026, something like that.

We talked about the four levers, right? And how those four levers all work in concert with each other. The piece that I have not asked about. The Arctic ice circle is melting. We've got these new shipping routes opening up. And so we now have what they're calling the cold rush. How is that going to change the fifth lever that we've now just started talking about? Yeah, when you think about long-term growth, what determines long-term growth is population growth.

and productivity growth. And in a lot of ways, These new sort of frontiers, whether it's in AI or in geographic frontiers, they have the opportunity to create longer term productivity, essentially. In a lot of ways, there's no thing that. creates wealth other than long-term productivity. The only thing that creates long-term wealth from a societal perspective. And so in a lot of ways.

These things are super promising along that dimension, right? If we can harness the power of new geographic areas and explore them and whether it's the raw materials and the resources there or other opportunities that we probably haven't even imagined. That creates a lot of opportunity for the economy. I think when someone is investing, and if you think about it, if you buy stocks and you hold them for 50 years,

Essentially, the only thing that matters is earnings over a 50-year time frame. And the main thing that drives earnings over a 50-year time frame is growth. And the main thing that drives growth over a 50-year time frame is productivity. So from a long-term savers perspective, these things are fantastic. AI, going to Mars, like all these different things are incredibly, you have incredible promise.

to advance wealth in the civilization. That's why you want to be a long-term investor in companies that are a part of that. The challenge is, the thing that drives the stock market on a day-to-day basis is how people are perceiving the next six to 12 months. And so all the volatility is in the next six to 12 months, right, is being driven by the next six to 12 months.

And the reality is part of the reason why there's so much volatility is no one really knows what's going to happen in the next six to 12 months. If you ask me what's going to happen in the next 50 years, I'd say things are going to be good. Right. Things are looking up. And in part because things are always looking up over a 50-year time frame. But the challenge is being able to see through the volatility of people's perceptions in the next 6 to 12 months.

to stick to your game plan to take advantage of the long-term growth potential that will happen over 25 or 50 years. You mentioned AI. There are a lot of people who are very bullish about AI. There's also a lot of concern about encroaching competition from China. It strikes me that positivity over the next 50 years cannot be taken for granted because in an environment where there's argument that...

50 years from now, other countries might be more powerful than the U.S. Perhaps we may or may not be the world's reserve currency anymore. There are climate change ramifications that we don't know. The consequences are going to be we have some ideas, but that's certainly a major area of concern for many people. Thinking probabilistically, do we know that 50 years from now will be good? Even if the hypothesis is that it is, how do we mitigate the risk that we're wrong?

It's interesting because, you know, a fair amount of this conversation, you'd say it was very bearish in terms of what. And at the same time, I'm an ultra bull from a long term perspective, because I think when you look at the ability to generate advancements in the U.S. and the global economy over hundreds of years.

we're pretty good at. And particularly having learned a fair amount of lessons about how to be better at it has accelerated our ability. Look, for a thousand years, growth was essentially zero. in part because we didn't have institutional structures that were effective at unleashing people's creative power. And so in that sense,

Yeah, you don't know who's going to be the winner. So maybe China's the winner, maybe somewhere else that we haven't even thought about. Maybe Africa's the winner, right? 50 years from now, they have the highest population growth of anyone. Right, they have the youngest population. The youngest population, the highest population growth.

Maybe it's India. You know, all of these different places. It's hard to know. Part of the reason why you want to be diversified is because you don't know. You don't necessarily want to only bet on USA to be the only success into the future. But if we're talking about. the global economy. 50 or 75 years from now, it is unambiguous that we will be meaningfully better off 50 or 75 years from now than we are today.

So part of the story is getting diversified and sticking to the game plan in order to take advantage of that and not being too sidetracked on tactical ups and downs along the way. For people who are listening to this, if they are sitting on cash, should they continue to sit on it? I'm not asking you to make investment recommendations, but for the average listener who's wondering, all right, here's a lot of information about what is happening in this current market.

But as an individual, what do I do? Yep. For most individuals, it's actually funny. I was having a... a drink with an old friend of mine who works at one of the blue chip hedge funds here in New York. You'd think this guy was pretty sophisticated when it came to personal finance, but he's not particularly sophisticated. And he's like, Look, Bob, I've just been dollar-cost averaging into assets for the last couple of years.

Do you think that's like a good idea to keep doing? And the answer is yes. The answer is yes. When you think about investing, assets almost always will outperform cash. So holding large amounts of cash doesn't make sense because you will always have a cash drag as a function of it. Similarly, trying to tactically trade, I mean, I'll tell you, as a professional,

It's hard enough as a professional to actively trade. If it's not your full-time job and you haven't spent decades doing it, it's even harder to generate good returns trading tactically over time. And so basically every person. Whether you're a person, a senior person working at an hedge fund or you're a person just socking away a little bit of money out of your paycheck every day is much better off just every month.

Putting a little bit of money into stocks, a little bit of money into bonds, maybe a little bit of money into things like gold or some alternative assets. like that to create a nice diversified portfolio. Just do that every month and don't think about it. And if you're able to do that, a nice diversified portfolio.

and you put a little away every month. Just think about this period. What that allows you to do, if you're dollar-cost averaging, it allows you to buy lower prices. Prices go down, you buy lower prices, and if prices go up, then you get the appreciation from your previous purchases. And if you're buying things like both stocks and bonds, you're getting enough diversification. A lot of people focus on the stock market every day, but bonds have had a heck of a year. If you were buying bonds,

This was a great year. This has been a great year for you. And recession would be even better for you if you're holding bonds. That's why it's so important that people don't. overly concentrate in one asset or another because it's very hard to know exactly how the economy is going to play out. So those two core principles, dollar cost average and diversify, and you're going to be okay. And I should probably say I'm not really a personal finance person.

finding ways to reduce or eliminate your taxes in the savings that you are doing is also essentially that's pure alpha, right? If you can reduce your tax burden, that is just simply a benefit to you over your long-term savings. Dollar cost averaging makes a lot of sense when it comes to how to handle.

Because by definition, you can't invest money that you haven't earned yet. What should a person do if they have a lump sum of cash? Perhaps they got a big... commission check they got a big bonus they got a big windfall in some manner they sold their car because they don't need one anymore now they have a twenty thousand dollar check that's just burning a hole in their pocket they should do the same thing

dollar cost average, the thing you don't want to do is you don't want to time. Either you don't want to time out of trying to have skill and you don't want to time out of trying to have luck because you could time it well or you could time it poorly. And I imagine most of the people who are listening to this are thinking about how do you build wealth?

over the long term, strategically, right? And that is not, in a lot of ways, dollar cost averaging is time-based diversification, right? So in the same way you want to have asset-based diversification, you want to have time-based diversification. And so by doing that, you're not by dollar cost averaging, you basically don't put yourself in a position to not be particularly at risk.

that today is a good day or a bad day to buy a particular asset. Right. But by virtue of dollar cost averaging, if you have a large lump sum of money, aren't you overweighted in cash for the duration of the dollar cost averaging period? Yes. And so the question is like, how how fast do you want to move on the dollar cost averaging versus the cash drag that you experience?

And everyone's going to have different preferences. And it depends on if you, you know, if you got a lump sum every 12 months, then effectively you could just dollar cost average every month, you know, over time, et cetera.

when you have a sum of money burning a hole in your pocket, you always feel like you got to do something with it. And part of managing money or investing, it's a psychological game. There's the math and the macroeconomics and all that is also a psychological game. So part of the... benefit of doing something like averaging into positions over time is you take away the emotions of the day. You just say every month and the first of the month, I'm just

putting $100 into stocks and $100 into bonds, you know? And that's just what you do. And you just keep doing that and you'll be okay. More important than having the perfect possible strategy is having a strategy you can stick with. And so that's one of the things that I find very valuable about that is it becomes If that's just your norm, you just do that every, you know, all the time, it becomes your norm of how you operate. And you can you get comfortable with just.

Frankly, things go up, things go down, and you don't even think about it, which I know is hard. But there's a reason why. Passive folks generally beat active investing. There's a reason why the old stories of the person who lost their username and password to their investment account actually does better than the average person. It's because... sticking to the game plan and investing incrementally over time than you are doing anything else. And take that from a person who spent decades

in active management. So tell me about that then. You've spent your decades in active management. Did you have this philosophy during that time or is this a philosophy that has more recently formed? I'd say from a long-term strategic savings perspective, I've strongly believed in this philosophy. I have found working with a financial advisor can be very beneficial because what it does is it creates a hurdle for you to do something. So as a simple example.

investing some small amounts of money from caddying basically had the philosophy. that I've worked out with my financial advisor, which is I trade once a year. I trade once a year. That's it. That's all I get. I get one day a year. Usually it's the Wednesday before Thanksgiving because not much is going on. And that's it. That's all I get.

So whatever I'm going to do, I'm going to I'm allowed to do at one time. And that's all I get to do. That's an incredibly effective way of holding yourself accountable to not overtrade, not trying time markets, et cetera, in your strategic state.

And part of that is a function of, and I think actually this is the case for a lot of people, the last thing you want to be doing when you're working is thinking about your strategic savings portfolio, right? That is the sort of thing that can really drag you down. personal finances. So running your personal finances in a way that is allows you to go do wealth building activities, whether it's your job or your side hustle or whatever it is.

Give yourself the space with your strategic savings portfolio to be able to not have to be too concerned about the day-to-day of that strategic savings portfolio so you can focus yourself on wealth building. That absolutely makes sense. The other side of wealth building is giving. And I wanted to ask you about that. So you tell me about your involvement with GiveWell. Can you tell us?

what GiveWell is for those who don't have immediate name recognition for it. GiveWell is a, I'd call it a modern charity evaluator. So there's been a lot of efforts over the last couple of decades to better sort of identify which charities are, to be blunt, good and which ones are bad, right? The vast majority of charitable activities and nonprofit activities.

have pure intent and are trying to deliver important services all throughout the U.S. economy and globally. But there are some bad apples. And so figuring out which ones have red flags, let's say, is important. There's a whole industry that cropped up, basically focused on that, looking at their annual reports and basically identifying.

programs that were concerning. Well, programs that are concerning, that's cutting out the risky areas where you might give. But what it didn't answer was a very simple question, which we had when we started GiveWell, which was where can I have the most impact for my dollars? It started a couple colleagues together at Bridgewater where we said, this is the end of the year and we want to do some annual giving. And so we just simply, it sounds...

So obvious now, but we just simply said, OK, so what's the most effective thing to give to? And we divvied up. Someone took U.S. education and someone took. US primary care and someone took foreign public health issues. I had spent time working on public health issues in college and stuff like that. So that's an area I was particularly interested in. And basically,

ask questions like, go look at all the different things that are out there. So when I hear the methodology, it sounds a lot like effective altruism. Is that the metric that you use? Number of lives saved per dollar? While the organization wasn't sort of explicitly designed around effective altruism, mostly because we were just some people sitting around a table trying to figure out what to do, a lot of the essentially the goals.

are aligned with the same sort of goals, which is how do you make the most impact? And I think there's a lot of different ways to say, to look at that, you could think about lives saved, you could think about the amount of quality life saved, the quality of life saved or improved. There's a lot of different metrics that you can use. That sort of core concept of focusing on outcomes as a key metric in determining success.

and focusing on provable programs, not theoretical programs, but provable, extensible programs that have a track record. preferably independently triangulated.

published material showing a track record that that intervention, let's say, is effective over time. Now, what strikes me about that is that, and correct me if I'm wrong, but there are other charity ranking websites that will use metrics such as the proportion of your dollar that goes towards administrative overhead as compared to the proportion of your dollar that goes towards direct programs. And so I've seen other...

charity ranking sites that look at the budgetary breakdown as a method of ranking. And what I hear from you is a completely different methodology where, in theory, you don't really care what the budgetary breakdown is so long as the outcomes are present.

Well, I think it comes from a real business focus, which is around not getting too worried about all the different line items, because then if you start to focus on the line items, you can play with the line items, you can change the line items. I mean, as a simple example. Some of those ranking websites will penalize.

for the amount of program expense that exists rather than essentially what's described as like direct capital going to the people who are being served. Like there are program expenses. Like if you've got to get.

malaria bed nets to people in rural areas in Southern Africa, there's lots of programming expenses. There's definitely administrative expenses, overhead expenses. All of those things are necessary to deliver the thing that is needed. If you only said, the cost of the net versus all the ways it took to get the net into the person's hands so they were sleeping in it in the night, it would be a silly way to think about the effectiveness of the program.

We were laser focused on outcomes. And you'd be shocked. You'd be shocked when we started this. We were very surprised at how little most interventions have been studied. Are they effective or are they not effective? There's a lot of programming that's out there where there's no independent or third-party triangulation to say, what are the outcomes related to this relative to the costs associated with them?

I think back to we studied at the outset one particular question, which is basically how do you get better rates of high school graduation or lower rates of incarceration?

community. And there's tons of programming at the time we studied, tons of programming, well-intentioned. These are not people who are trying to scam anyone. These are very well-intentioned people targeting high school students and targeting job skills at the high school level, very well-intentioned programs, have basically little to no discernible effect in terms of life outcomes.

But we saw one of the things that had one of the greatest effects was if a nurse visited a family multiple times in the first year after the child was born. to help answer questions about child rearing, help ensure that they were sufficiently vaccinated, all these different sort of core fundamental health effects. How interesting that was thousands of times more effective.

at benefiting communities' long-term outcome, which could be measured by income or incarceration or high school graduation, college graduation, all these different metrics. Way more effective to just do that.

than engage with students in the high school level. And so this isn't an indictment of people who try and deliver those programs to the high school level. But if what you're focused on is how do you deliver the best outcomes for people, which I think... 98% of the people who are in the NGO community, that's what they really care about, than using data-driven insights into understanding what actually works.

And you'll find that things that seem so simple, honestly, have huge levered effects that are very cost effective. Now, if a person wanted to donate, so myself as an ordinary individual, if I wanted to... I prefer to donate to charities that are relatively small because I like the idea that my donation will be a noticeable proportion of their overall operating budget. Is there a method for very small organizations to be evaluated?

Yeah, there's probably more information than you'd ever want to read about these programs. on the website. And what I'd say is there's a wide range of different sizes of organizations that are involved in it. The key question is really about, do they have the capacity to

deliver the program. Meaning, what you don't want to have happen, and again, lots of very well-intentioned people, but often what you'll see is you'll see a lot of capital flow to certain NGOs that may not have actual capacity to deliver programs.

You don't want that, right? You want your money to affect and improve the lives of people around you. Part of the idea here is find those organizations that have the capacity, almost down to literal programs, programs that would either not happen if they didn't get the money or happen if they do get the money, whether it's Countries, county sites, city sites, particular things where there are clearly delineated programs that will occur because someone has contributed to those programs in a very

in a very targeted way. And one of the neat things about this, again, if you donate, you look at the normal charity evaluator sites, you don't really know exactly Where's the money going? Do they have programs? It's pretty opaque. We actually started, we called it the Clear Fund because the idea was total transparency about everything that was going on. Almost there might be more transparency than most people want, but the idea is. also have enforced, create a culture.

Where those organizations that are receiving the money also have transparency to the donors about where it's getting used, why it's getting used, how effective it is, et cetera. And so I think that creates a good cultural environment where people. can feel connected and see the actual effects of their work. With regard to the scale of GiveWell, I mean, you mentioned – you said a billion. What was it? Yeah, between $500 million and a billion dollars in the last year or so was –

Directly and indirectly channel through give all recommendations. Wow. So how is it that like a handful of guys sitting around a card table 15 years ago, how does that lead to? a billion channeled through, right? Take me through that life cycle. A lot of hard work. I mean, I was very much fortunate to be at the start of it and to chair the board while it transitioned from eight of us around a table to being a standalone organization. But what it has taken is a significant amount of folks who

believe in the mission of building a better charity evaluator, donating to GiveWell specifically so that there are teams. There's teams of researchers. There are teams of researchers at the world's biggest hedge funds. There are teams of researchers around topics, exploring those topics in a rigorous way. That's what's necessary to do it. And so the partners who believe in that mission.

And part of the benefit of that is by believing in that mission and creating that content that's publicly available, it means that for the everyday person, folks like yourself, When you donate, you can contribute to the research effort, but you don't have to, which is great because it means, you know, back to your question, how do you know that your money is being used? That is.

That's one of the ways that, you know, you can have essentially 100 percent impact with the capital that you're giving to these. chosen organizations so it's really about bringing it's a team that has grown to bring the same sort of rigorousness that you would have with investment strategy and just bringing it to the world of nonprofit efforts and evaluation. You mentioned researchers, and it strikes me that GiveWell is very rooted in researchers, right? That's necessary.

for the work that Give All does. But your background, of course, is Bridgewater Hedge Fund, which is also very research driven. So tell me about the theme that I'm seeing throughout your projects is a heavy research focus. Tell me about how you manage good research, right? Because there's certainly a distinction between good research and mediocre. How do you manage and how do you evaluate good research and how else do you carry that through other projects? Yeah, in a lot of ways, I see myself.

trying to bring sort of systemization and quantitative thinking to what often is seen as non-quantitative questions. I mean, as you mentioned, I started my career in macro investing and back. 20, 25 years ago, the idea that you could use quantification and systemization to do macro investing was kind of a crazy idea macro the sort of old macro traders were like old guys who kind of like looked at the newspaper and were like

The pound is going down today and putting on huge bets. Right. These were sort of savants of trading. There's all the savants that were unsuccessful. We've never heard of. We've only heard of the successful savants. And the idea then around systemization was this idea of if you can create ads. systematically or quantitatively understand how the macroeconomy is going to play out, and then you can create a systematic understanding of that.

And then you can leverage that systematic understanding and bet it over and over and over again. You're creating a small repeatable edge with large sample size. generates good returns over time. That is the key to most alpha, so to speak, is that. Most alpha generation are not savants. reading the newspaper. They are people who work tirelessly to have modest edge and just do it over and over and over again. And the reality is when you look out across a lot of different areas,

There's not a lot of folks in public finance and in hedge funds. That idea was uncommon 25 years ago and now is mostly ubiquitous. There's a lot of other places in the world where that isn't ubiquitous. Charity evaluation. It's not ubiquitous. After I left Bridgewater, I built a pharmaceutical commercialization business where

That was not a ubiquitous thing, thinking systematically about how you connect with doctors who have patients that could benefit from therapy. I also ran a venture fund, $125 million venture fund, which did systematic venture investing. Talk about something. where the idea of systemization and quantification is totally foreign to the way of thinking most venture investors.

what they do is they sit across the table from the entrepreneur and they look them in the eye and they say, is this the type of person who will succeed? There's obviously, What are the sales and the margins and all that stuff? But ultimately, a big part of what determines whether or not someone is going to get invested in is the like, does the entrepreneur have the it factor? And the answer is that's totally random.

Right. And you could do a lot better if you just look at whether or not the product quantitatively, if the product is competing effectively against. the other products it's competing against in the market to see whether it's going to be successful over time And so you sort of look at all that and that's really a lot of what I've been focused on. And obviously I have a passion and interest in the macroeconomy because.

Started my career there and did that for many years and still find it fascinating and interesting and write about it regularly. But a lot of what I've done in the last five or 10 years has been figuring out what are all the different, where are the areas where you can bring this concept of. systemization and quantification to generate insight into whether it's investing or charitable giving in a way that other people can't see. And so what are you working on right now?

Yeah, so when I'm not tweeting about what's going on in the global economy, my day job is actually, in many ways, challenging the hedge fund industry that I started my career in. A couple of years ago, I sort of had had been in the what I call the two and 20 industry, whether it's both the venture capital industry and hedge funds for a long time and sort of realized.

A lot of these two in 20 strategies, managers, it's a good business for the manager and it's not a great business for the investor. And the reason why that is, is because most investors, most managers, they generate lots of alpha, but they take it away. And that stinks for the investor, right? And it means that in reality, most investors, besides the person who has made a career in the 220 business, you should not invest in 220. because they are a bad deal for the everyday enough.

And so that got me to start to think about whether there was a way to bring concepts of diversified low cost indexing, which obviously has totally changed stock investing and bond investing in the last couple of decades, whether we could do it in two and 20. And that's pretty neat because. A lot of investors, the biggest, most sophisticated institutions in the world, they invest in 220 strategies, hedge funds and such.

And the way that they do it is very interesting is they end up going to all the big funds. Let's say you're a big sovereign wealth fund. You got $500 billion of assets. You go to all the major hedge funds and you say, I want to invest in you. I'm going to invest in 50 of you. And because I got a lot of money, I'm not paying two and 20. I'm paying a lot less than two and 20. And so what do you see these funds do? They basically create diversified low-cost indexes.

strategies, right? Through the force of their Well, so the idea that got me thinking about, well, could we do that for the everyday investor so that they could get access to those strategies in a diversified alpha is what I call it, diversified hedge fund strategies.

We couldn't invest directly in the funds because you had to pay the managers two and 20 and then yourself. And then that's too many fees. So that's a terrible way to do it. And that's kind of the problem with all sort of access to alternative strategies is that like everyone is. Almost every access to alternatives strategy is adding to the fee problem, not taking away from the fee problem. And so our idea...

Instead was to basically take our experience having built hedge fund strategies for years and build technology that actually allows us to look over the shoulder of how those hedge fund managers are positioned in real time. And with that understanding, we can then take it and take that sort of understanding of long and short positions. Say global macro managers, are they long bonds or short bonds? Long stocks or short stocks?

the currencies or commodities etc and package that into a wrapper an etf wrapper that makes it available for all investors at a low cost in a way that's tax efficient and so That's really, you know, that's what I've been working on a lot in the last couple of years is this idea of diversified low cost indexing for two and 20 strategies, right? Driven by proprietary technology that infers how all these.

And then just makes it available to everyone. And we've got an ETF in the market, which has sort of proven that the technology works the last couple of years, HFND ETF, which you can think about as like the spy for hedge funds. So in the same way you might buy.

SPY or another index, like a bond index fund like TLT. This is kind of the same thing for the hedge fund industry. And what's really exciting is We're now coming out with new products over the course of the next couple of quarters, which are individual hedge fund strategies. whether it's global macro strategies, managed future strategies, some strategies that have the opportunity to generate alpha in bumpy market environments. When those come out, how can people find out about that?

The nice thing about launching ETFs is that they're almost always available across all the major discount platforms. So things like Schwab and NTD and Robinhood, et cetera. So if you're- Vanguard Fidelity. Yeah, a lot of those, yeah, Vanguard Fidelity. If you're self-directed brokerage, you can find those startup ETFs and invest in them directly. And I mean, I guess if people want to learn more about what we're up to, you can definitely check out.

unlimitedfunds.com, which has a lot more information about the products themselves. Nice. Well, thank you for spending this time with us today. Yeah, thanks so much for having me. Thank you, Bob. What are three key takeaways that we got from this conversation? Economic headwinds are getting stronger because of multiple policy factors. So our economy faces a variety of big challenges ahead because we've got several elements that are converging in...

a manner that increases the likelihood of a recession. We've got a combination right now of tariffs, government spending reductions, and a Federal Reserve that's constrained by inflation. Think about the recipe for a recession. Tariffs are in the short term growth negative.

Now, in the long term, there are benefits to tariffs, such as raising revenue for the nation, as well as the re-onsuring of jobs. But in the short term, we've got growth negativity. We also have both businesses and consumers cutting spending. And we have a situation in which the Fed won't lower interest rates or is unlikely to do so because we're in an environment of high inflation. And so all of that means that stocks perform under expectations.

In other words, stocks weaken because the economy is weaker than people expected, and that creates a self-reinforcing dynamic. These are all factors that historically lead to economic contraction and make a recession highly probable. We've had, if anything, we've been very lucky the last few years that the U.S. economy has been persistently stronger than most people had expected.

And a big reason why that was was because we had strong labor force growth, strong income growth, strong consumer spending and asset prices that were rising. And one of the challenges that we're facing right now, it's what I call the wrecking ball of. policy mix ahead, which is we have an administration that's come in and you can argue about whether or not the sort of long-term goals make sense.

along their policy path. But it's pretty unambiguous that their policies that are being implemented are going to be growth negative in the short term, combined with the fact that we still have a persistent inflation problem. Now, I want to emphasize that when we say a recession is probable, that...

not a partisan statement. It's simply an economic reality. Goldman Sachs has raised the odds of a recession to 45%. That's as of Yesterday, Monday, Morningstar has placed the odds of a recession at between 40 to 50%. JP Morgan has placed the odds of a recession at 60%. And so what we're seeing across the board are probabilities ranging between 40 to 60 percent. I will say last week, Goldman Sachs was forecasting a 35 percent probability of a recession. They have now raised that to 45 percent.

And JP Morgan, just to be clear, has revised their probabilistic range at somewhere between 40 to 60 percent, 60 being the upper bound. And I know that some of you are going to write to me and say, well, what about the stimulatory effects of deregulation? Or what about the stimulatory effects of tax cuts? Well, yes, there are a lot of factors at play, and a 50% probability of a recession means that there's a 50% probability there isn't one.

And so our job as investors, our job as the managers of our own household portfolios. is not to adopt a partisan stance, but rather to make an assessment of the current situation and then make a decision about how to react with our money. And that leads to the second key takeaway. Even sophisticated investors embrace simplicity when it comes to personal finance. Now Bob was the head of Ray Dalio's investment team.

He managed billions of dollars professionally using very complex strategies, but for his own personal finances, He advocates for a surprisingly straightforward approach. He recommends dollar cost averaging and diversification. He said to avoid the temptation to time market. Avoid the temptation to trade frequently. Avoid the temptation to trade on the news.

And what's interesting is that he applies this discipline to his own finances in a ritualistic manner. He limits himself to reviewing his investments once a year. The Wednesday before Thanksgiving is when he trades. And if it's not the day before Thanksgiving, he doesn't touch his own portfolio. He rebalances once annually and then leaves it alone. Just dollar costs average in. And this approach makes sense because.

Trading on the news, timing the market, dancing in and out has a higher likelihood of harming your overall returns as opposed to a passively managed dollar cost average buy and hold approach. Because this approach removes emotion from investing and it prevents... falling into the traps that can harm your returns for most people who try to outsmart the market.

I have found working with a financial advisor can be very beneficial because what it does is it creates a hurdle for you to do something. So as a simple example. Investing some small amounts of money from caddying basically had the philosophy.

that I've worked out with my financial advisor, which is I trade once a year. I trade once a year, that's it. That's all I get. I get one day a year. Usually it's the Wednesday before Thanksgiving because not much is going on. And that's it. That's all I get.

So whatever I'm going to do, I'm going to I'm allowed to do at one time. And that's all I get to do. That's an incredibly effective way of holding yourself accountable to not overtrade, not trying time markets, et cetera. That is the second key takeaway. Finally, key takeaway number three is in praise of we the consumers, because consumer spending drives everything. And that's about to get squeezed.

So the American economy fundamentally runs on consumer spending. It makes up roughly 70% of our economic activity. When there's pressure on household budgets, the effect of that ripples throughout the entire system. When imported goods become more expensive, right, when everything on the Walmart shelves or the Target shelves become more expensive, then consumers need to spend less. Elsewhere. And that reduces demand across the economy. And so what happens is a domino effect.

Because when people need to spend more money on the basics they tend to start cutting back on things like vacations, restaurant meals, all those little extras. So money that would have been circulating through the service economy, money that you would use to... Go to Chipotle. Or go to the movies or see a concert.

Well, that disappears and then the whole economy starts to contract. And normally, this is when the Fed would swoop in to lower interest rates in order to spur spending. But in an inflationary environment... They likely won't because their dual mandate, one half of their dual mandate is to manage inflation. The other half is employment.

So their mandate is not related to the economy per se. It is specifically inflation and employment. And given that unemployment is at historic lows, the Fed is in an environment that is... still inflationary and that has historically low unemployment and high labor force participation, they're likely not going to lower rates.

which means they're not going to step in when the economy starts to contract, which is what would normally happen. And so that's what causes the economy to shrink, because people simply have less money to spend, and consumer spending is what drives our economy. The reality is in most developed diversified economies. It's really household consumption that is really driving the economy. And the reason why that is, is businesses in those sorts of economies, particularly in Western economies.

are typically investing in response to the demand that they see rather than building for building. It's different in places like China, where it's governmental policy to create high business investment with the hope that that will then create stronger consumer demand in the U.S. and the rest of the West. It's essentially the opposite. Strong consumer demand leads to business investment.

And so household demand is really the linchpin of the U.S. economy. Those are three key takeaways from this conversation with former hedge fund manager Bob Elliott, who is now the CEO of Unlimited Funds. It is zero cost and we share insights there that we do not share anywhere else.

If you got value from today's episode, and particularly if you found this to be a departure from mainstream media headlines that just try to create fear or outrage, If you found this to be a measured voice, Share this with the people in your life. Share this with your friends, your family, your coworkers, your siblings, your dentist, your barista, your babysitter, your kid's teacher, your therapist, your Uber driver, your wedding photographer, and your favorite veterinarian.

These word-of-mouth recommendations are the most important way that we are able to spread the message of Double Eye Fire. So thank you in advance for sharing this with the people around you. Make sure you're following this show in your favorite podcast player. Apple Podcasts, Spotify, YouTube, where you can leave us up to a five-star review, unless you're on YouTube, in which case you can hit the subscribe button, give us a thumbs up, leave a comment.

Let us know what you thought. Thank you again for being part of this Afforder community. I'm Paula Pant. This is the Afford Anything podcast, and I'll meet you in the next episode.