“We’re Just Getting Started” | Bob Elliott on Why The Oil Shock Is Not Fully Priced In To Markets
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Today's episode is brought to you by the Unlimited HFGM Global Macro ETF, ticker HFGM. Later in the show, you'll hear more about HFGM, currently the number one Morningstar rated fund since its inception in The US macro trading category. Let's get into it. We're here with Bob Elliott, chief investment officer at Unlimited Funds and former member of the investment committee at Bridgewater. Bob, great to see you. Welcome to Monetary Matters.
Thanks so much for having me.
Bob, how do you think about the elevated price of oil, which is now over $100 How does that impact the economy? How does that impact the stock market, the baud market, the Federal Reserve reaction function? We just heard from Jay Powell, lots of dues to get into there. What are your thoughts?
Well, some ways, it's it's a relatively simple, dynamic that occurs when you have an oil shock, which is you have a meaningful increase in prices both directly related to the oil prices, but then second, third order consequences like diesel and then, you know, inputs to all sorts of aspects of the economy. And that increase in prices that will inevitably come, it's baked in the cake, reduces real spending power, particularly for households, who have to basically make the choice to either to save, to keep up their real spending, or curtail their spending in other areas. And basically, they almo
So the price of oil going to, I believe, the the peak in mid mid March was over $120 and, you know, Oman right now, it's over $150 So that is wildly inflationary. Energy is not a huge percentage of the consumer price index, but is extremely volatile component as the fact that the price of oil has nearly doubled in a matter of a few weeks. That is very inflationary. Is it hawkish or is it dumbest? Because if it's just inflationary, oh, the Fed should raise rates, right? But that doesn't look like it's going to happen. Then some people argue that, oh, it actually is going to cause the Fed to cut
I think the ordering matters a lot. And when I say about the ordering, what I mean is first prices have to rise. That will then curtail spending. That will then curtail real spending, which will then reduce the demand for companies to hire, which will then create a slowing of nominal incomes, which will create a disinflationary effect. That's the order of operations. And so far, we're not even in the prices have risen part of this equation quite yet. I mean, on the margin, we've had, a very small, you know, we've had we've had some rise in gas prices, but I mean, we're just getting started to
Do you think that's wrong? Yes.
Unambiguously wrong. Because the the effect of an oil shock is relatively straightforward, which is it's a negative event for real growth. It's a negative event, and and it's an event that creates higher discount rates and rising risk premiums. And so it's just very hard to make the case that somehow an oil shock in The United States is going to be net beneficial for the economy or create stronger real growth, particularly in the context of coming into this. The basic expectation of growth in 2026 was something like two and a half to 3%. And so you have very high expectations. People are posit
We obviously are not gonna get clarity on the Fed's next move probably for as long as this conflict is going on. Does that increase in policy uncertainty, weigh on stocks or bonds in particular?
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