Bob Prince on Monetary Policy 3, Inflation, Diversification Between East and West

well joining us now on bloomberg television and radio bob prince bridgewater associates co-cio joining us bob thanks a lot we really do appreciate your time um morning morning blow out blowout ism number uh data continues to come in strong mo for the most part if you told me a year ago this is where we'd be i might not believe you we've now had trillions and trillions of dollars pumped into the u.s economy trillions more on the way how do you look at it well there's been a big adrenaline shot right um but i think more broadly um you know the this reflects uh the new environment that we're in and and we're going to be in this environment for a while it's a lot different than the world that we're used to the um you know the way we look at it is there's been a transition to a third type of monetary policy uh the first type of monetary policy the standard is an interest rate driven monetary policy uh as interest rates approach zero uh you go to qe which is uh monetary policy two um and that's largely spent and now we move to really the only the last remaining choice which is the coordination of monetary policy with fiscal policy which also starts to move in the direction of what you might call state capitalism which is the the the responsibility for managing the economy really transitioning from the central bank to some combination of the central bank and the government and so these uh the biden proposals are really just reflecting that kind of inevitable change that we think has been coming but the pandemic over the last year has brought that forward at an accelerated pace bob good morning it's guy um what does that mean for bridgewater what does that mean for investors more broadly do you think well you have to look at the characteristics of that environment let's call it an mp3 environment uh the k the key characteristics of that environment is uh the coordination of policy by the central bank and the fiscal uh which is congress and the president um that the the basically the central bank is printing the money and buying the bonds and then the money is being distributed by the government to wherever they think it should go now that changes the decision maker the key decision maker in this system it goes from the federal reserve chairman it goes to the politicians and so um it you know the effectiveness of that policy it can be it can be a much more effective policy or a much worse policy it all depends on the quality of that decision making for an investor some of the key characteristics of that environment will be a suppression of interest rates and an expansion of incomes you're stimulating the it used to be that you stimulated the economy by cutting interest rates by three to five percent changing changing the economics of borrowing and lending and then sort of the invisible hand would work its way through the system to stimulate growth in this case uh you can't cut the interest rates and so the the money is getting directed intentionally to where they want it to go and that can be actually a tremendous advantage because uh in an interest rate driven policy it's very hard to direct funds let's say to the middle income groups of the middle of the country or a particular group that needs it but in a in an in if an mp3 world the money can be directed to particular areas now on the other hand there's much more room for for bad right if the decisions are bad there could be much more damage there could be much more currency depreciation and so forth so it's uh more room for good more room for bad so bob let's break that apart let's start with the good for a second so the way you're describing it is that not like a green light to load up on leverage load up on risk load up load up could be loading up too much that's the tip so i would say don't load up too much um no but but uh you know specifically there's room for let's call it an asset liability spread between let's say a zero interest rate and a positive cash flow asset now that's very different than buying a very low yielding zero cash flow asset right and so even within the equity market you have a disparity of different types of investments some assets are going to be really benefited by this environment by the by the supporting of the cash flows on that asset those have tended to not be the ones that have been in favor recently uh and they could be funded at zero essentially or funded by selling bonds and buying those on the other hand that very low yield can also inflate the pricing of other assets to the point that you're highly dependent on a continued price appreciation because there is no cash flow underneath it so it's a very potentially dangerous environment for that kind of asset but a very beneficial environment for the for the for the cash flow asset yeah bob you're describing a huge range of outcomes here i the fan chart between kind of one of your potential scenarios and the other is is enormous in terms of the returns that could be generated in there you said something interesting a moment ago as well you said maybe don't load up too much is your attitude to risk changing as a result of this is your attitude to leverage changing as a result of this not really because you can always move the risk of an asset up or down by borrowing or lending cash right so you can you can own a lower risk asset and raise its return in risk somewhat a little bit by borrowing and leverage and you could actually end up with a lower risk asset than the unleveraged asset you can take a highly highly risky asset and reduce its risk by holding some cash so borrowing and lending cash is just uh is just a lever that allows you it's like a sliding scale that allows you to adjust the risk of different kinds of assets which we've done for a long time both in our alpha strategies and in our beta strategies so it does seem though when you look at the range of outcomes a lot of that's going to depend on inflation which kind of speaks to the whole like where the money is going if it's going to the right spot it seems to be developing into somewhat of a binary outcome for inflation when it comes to what investors are looking at what do you see and how do you deal with that as an investor well there's a lot more potential to create inflation through this mp3 type of a policy because you can literally put money into people's hands to go spend right uh and you can choose whose hands you put it in and so there's more potential for inflation but the question is inflation of what and and so you've already had inflation of asset prices and the qe2 world that the qe world was inflated asset prices a lot because that's where the money went um whether we have a a a secular rise in inflation it depends on a lot of other forces it's not just a u.s question it's a global question eighty percent of the countries around the world have an inflation rate of less than three percent central banks have been very successful bringing down inflation over the last 40 years uh globalization has reduced the cost of labor and kept it there so so you had low inflation and stable inflation is a global phenomenon that's just not just a u.s phenomenon so if you were going to have a a a rise in inflation it would probably have to be global and other countries are not stimulating to the extent that the us is so that's in particularly china china's in sort of a steady state on the other hand any given country's inflation rate can also be impacted by their currency so if you had dollar depreciation that could rise that could raise u.s inflation rates relative to other countries inflation rates in fact it would be deflationary for other for other economies and so um the inflation question i think is just more complex than a zero one type of thing however the the thing that we can say it ain't more potential but be that the existence of inflation will be one of the key constraints on whether the mp3 world and whether the central bank what are the fed will continue to have the latitude to pursue these policies without inflation they have a lot of latitude to as well as the government to to continue these policies but with inflation and with inflation and currency depreciation they start to hit the the roadblocks and the constraints for our audience on radio you're listening to bridgewater's bob prince bob um what does this mean for returns what kind of returns are you guys targeting in this new kind of environment is it different to the kind of return structure that you expected before it's been a very turbulent time your returns have been hit do you expect them in this new environment to pick up from here if you just look at the returns of assets as they come packaged they're likely to be low uh you start with the yield on cash you have a negative yield on cash uh a negative real yield on cash and that's been a source of actually wealth destruction in the last 10 years of about 15 now you have negative real yields on bonds and all assets compete with cash and bonds so the yields of other assets are also coming down looking backward that has elevated their prices but looking forward that's reduced to their expected returns so we're going into a world where the whole return structure has dropped and that's particularly relevant in the in the let's say the u.s and europe and in the west where where they're faced with the zero interest rate uh uh problem when you go to china and when you go to asia and you go to the east you don't have that issue you have probably you have a decade coming of relatively high productivity growth you have the potential to use all the normal policy levers um and they haven't blown out their fiscal balance sheet they've kept the virus under control through other means so so we shouldn't just look at the world through the eyes of the west we should look at the we should look at the investing world globally and we think in terms of actually balancing east and west in terms of your exposures and recognizing the unique risks but also the unique opportunities in those two worlds they're very different in the nature of their opportunities and so you really want to be working with both hands on both sides of the world in an investment portfolio so how in both of those um like china pboc wants to open the bond market to get more foreign investors at the same time trying to crack sign on jack ma and fintech um here in the us everyone's loving spax and bitcoin until they don't so like how do you play that barbell well like i said i think uh align yourself with the policies is very important right so if in the in the uh in the west it's really uh the cash flow ass the bet the assets that benefit from the boost in cash flow from nominal spending nominal income rising from the distribution of the of of the monetization into people's hands um and funded it with the negative real interest rate that's essentially the the you know at least for right now that's the um you know that's the path but when you go to asia and china it's very different because because if you look at china and look at the five-year plan and what they recall refer to dual circulation you have a a very rapid development of an internal economy there and what we see is common commonplace everyday industries in in the west those are going to be growth industries and in many cases in china because they didn't exist in china and so they go from non-existing to existing as they move to a more balanced internally oriented economy so there's a lot of room for security selection and and uh and industry positioning and so forth in that part of the world and benefiting from high productivity growth five six percent productivity growth over here in in the west you're looking at a half to one and a half percent productivity growth and zero negative interest rates very very radically different circumstances but really no tightening of monetary policy anywhere and so that's generally a good environment for investing generally but you you you know you have to adapt to this world that we're in it's a new world what's a good store of value in this new world bob well i think a store of value it's different ways of looking at a store of value um um you have to start out with what are the where's where's where's wealth being destroyed today and where's the potential for it to be destroyed and avoid that wealth is being destroyed right now in uh let's say bonds uh t-bills in um and treasury bonds uh they they're no longer an investment asset they're a funding asset um and so that will eventually spread to other assets and drive their yields down um dollar-denominated bonds to a foreign investor will be um you know relatively unattractive as the yields are low and the money's being printed so these are potential areas of wealth destruction in terms of wealth preservation you know diversification is key there's no one asset through the history we've you know we've studied the last 200 years of different policy shifts and panics and so forth and over over 200 years there's never been a single asset that did not have a 50 to 80 percent decline in his purchasing power within the course of a decade every single asset at one time or another has including cash has had a 50 to 80 decline in its value in terms of purchasing power within a decade that means there is no one answer it has to be a diversified answer and the best way to diversify is to is to diversify a portfolio with respect to ups and downs in growth and diversify a portfolio with respect ups and downs and inflation uh if you look at the equity market your storeholds of wealth are going to be assets whose uh whose revenues and cash flow streams are not susceptible to the economic uh cycle or which have very strong balance sheets and get to the other side of a downturn um and otherwise um you know you've got uh so let's go ahead sorry well no i mean i want to hear more but i was gonna say it sounds like bitcoin could be in there bitcoin could be a little bit of a sliver but a little bit of a sliver is a lot of risk anyway so bitcoin and gold are alternative currencies right and so uh and you want to think about gold as an alternative to currency and bitcoin is sort of coming along as another one of those uh alternative alternatives to paper money and therefore it can be in a diversified storehold wealth portfolio it can have a little bit of a sliver well how different is your firm going to be post-pandemic just in the way it operates just in the way you bring people back in working from home how different a world are we now moving into and how is that going to affect the way that you work well you know ironically in some ways we've it's we've been more productive in the last year than we ever were um and in other ways way less it obviously the the the culture of a community is very hard to build when you're not actually seeing each other so we're going to some a blend uh we expect to go to a blend where there's a certain number of days in the week that everybody's actually in an office but it's a lot less it's less than it used to be um and but also coordinating those days in the office so that the things that are best done sitting together in a room can be done sitting together in a room while at the same time allowing some of the flexibility um and actually potential for focus that that's created you know from the other from you know working from an alternative location so as well as lifestyle floats flexibility um but and so we're we're just going to be adding more flexibility to the program and uh but and essentially incorporating a blend of the of the different approaches and experiences bob we really appreciate your time thank you for sharing so much of it with us today one year on from the start of this pandemic looking forward bob prince bridgewater associates co cio thank you very much indeed you

Channel: Bridgewater Associates

Views: 27,301

Keywords: Bob Prince, Economy and Markets, Inflation, Diversification, Monetary Policy 3

Id: qeQQEGo3g4Y

Length: 17min 5sec (1025 seconds)

Published: Wed Apr 21 2021