Bridgewater Co-CIO Prince on Global Markets Outlook

but fantastic to have you with us at this conference sir thank you six months ago and I think six-month looks like an absolute lifetime for you and me but we were in the mountains of Davos Switzerland as you know the people that attend that conference are often detached from the world around us you said something to me that just woke me up and everyone else listening you said the boom-and-bust cycle as we know it is over a couple of months later I just wonder how you reflected on those comments and whether the policy response really summer on when you would get a gap what are your thoughts on that Bob the policy regime we're in right now well we've certainly transitioned to a new policy monetary policy regime and the nature of this cycle is radically different even without it I think we would have been in a different kind of monetary and business cycle regime I think the unfortunate thing is at the time I don't think any of us were talking about the virus but you know when I when I you know just to focus in on kind of where we are now and how that that monetary policy cycle fits in I think there are really three key elements to the current set of circumstances we have a collapse in global income caused by a pandemic with interest rates at zero and pretty much everything follows from that this is very much different than a typical economic cycle because the typical economic cycle is a contraction and credit brought about by a tightening of monetary policy or fiscal policy which is largely under the control of the central bank and when things get bad enough they they cut interest rates the ease monetary policy and you come back out of it with an expansion of credit what's happening this time is that we have the collapse and income that the causal influence is the virus it's the pandemic and it's the the it's the the fear of safety it's the it's basically people staying home and not producing things that's caused a collapse and income and the collapse and income causes a collapse in spending so we're is normally you have monetary policy leading that tightening credit falling spending falling and then income being the last thing to fall in this case income is the first thing to fall which is causing the reduction in spending and then all the reactions to that the driving influence is the virus which nobody really understands very well let alone the government responses to the virus and then the responses of the public to the government's and very big differences across country so there's a huge amount of uncertainty related to the virus as a causal influence and then to pull out of this you have zero interest rates you're also going into this accumulating credit as opposed to reducing credit so normally in an economic contraction you're reducing credit raising interest rates which gives you a lot of room to cut interest rates and expand credit coming out in this case we have zero interest rates you can't cut them and credit is expanding which reduces the potential to pull out of it so the solution to that problem is actually appropriate and it's what we refer to as monetary policy 3 or mp3 monetary policy 1 is really an interest rate driven monetary policy that's pretty much come to an end when you hit zero monetary policy 2 was the QE driven monetary policy post 2008 where you just buy the assets but when the risk premiums are already low there's a lot less potential for that monetary policy 3 is where we are now an MP 3 is the coordination of fiscal policy with monetary policy we're really the biggest actor is the fiscal the fiscal stimulation where you can direct the funds to the parts of the economy that that most need it but you support that with monetary policy and the printing of money to buy those bonds so that the interest rates don't go up and and and reverse the effects that you're trying to achieve so so that's a direct reflection of the fact that we're at zero interest rates income and income levels are depressed the actions to date are roughly appropriate in other words the amount of printing and the amount of fiscal stimulation has been roughly sufficient to fill the hole in incomes that was created but not all of that money is getting spent let's say 50 cents on the dollar that the government is sending out is actually getting spent and so actually you haven't had nearly as much of a improvement in spending in the economy as you've had in the liquidity in the system in addition the central bank is printing money over and above what it takes to finance those deficits and sending that into all kinds of assets and so we have a major reflation going on which has been by and large successful so far the big question about that is that while we're used to thinking in terms of growth rates which is changes in output over short periods of time the big thing that's happening now to be to be thinking about is the collapse in income and the level of income that exists because the the low level of income that exists will be with us for a while in some substantial degree which means lower profits lower spending and so forth what also means lower cash flow and for those that are in you know kind of treading on thin ice with respect to their financial position the longer that this goes on the more difficult it becomes for them and so you have these two pressures really operating at the same time you have the collapse in income which is collapsing cash flows which will affect those that are most vulnerable to the collapsing cash flows and you have the expansion of liquidity by the central bank going into assets but may not be sufficient to cover those cash flows and they and the programs today are by and large sufficient to cover the income gap for about three or four months starting from April so we're really talking about an amount of money that gets you through the summer and the problem then is that we're talking about the virus which has a timeframe of probably 18 to 24 months and so I refer to that as a duration mismatch essentially the timeframe of the virus impact on spending an income in relation to the time frame of how long people can last but financially we've got a duration mismatch though as you can see up until today with markets down aggressively we've got a huge rebound because ma - focused on the liquidity side of the equation not on the cash flows a you saying barb are you anticipating that in the next three months as this fan date that was put on a couple of months ago starts to wear off though we could hit another air pocket well you're just gonna see an instant replay over you know every three or four months you'll get the instant instant replay until government's run out of either the willingness or the ability to cover that gap and so that becomes a very large uncertainty and that's also different country by country the United States is in the best position as a reserve currency but your typical you know emerging economy can't necessarily go to the well over and over and over again and so that also produces differentiation so this the the divergent pressures between the income and cash flow to individuals companies and even countries and the production of liquidity is a force that will create a lot of differentiation in outcomes your long-duration assets your store holds of wealth benefit from the liquidity but if you're but if you're a restaurant that can't get the next loan right or maybe you don't want the next loan that liquidity may not help you and so those companies in those individuals and those countries which are most exposed to the cash flow impact they're not store holds of wealth they don't get the liquidity they they suffer the most and so that creates a differentiation of outcomes over time which will be a really key element of what transpires an election in the next year or two and from our standpoint has requires two things it requires diversification you don't want to be in the wrong side of that and be it presents alpha opportunities if you can identify if you can enter identify how those differential forces will play out well let's talk about the divergence right now and define what the wrong side of things actually is do you think the markets doing a decent job of discriminating and looking through the things that you identify probably not good enough I mean you do see some differentiation but you know if it's like six to four but the ultimate outcomes are like eight to two or ten to zero then no they're not and so this is a very unique set of circumstances from a market standpoint because normally we're all thinking about sort of is the next move up is the next move down and that sort of thing we're all we're thinking in terms of growth rates but you know if you start from a 20% unemployment rate effectively and you get a lot of growth and you go to a 15% unemployment rate that's still a 15% unemployment rate that's a that's a massive shortage of income that's embedded in the system that you either have to allow to flow through the system where the government has to fill that hole if you go back to the financial crisis in 2008 the peak unemployment rate was 10% so if if we bounce back from a 20 to a 10 we're just where we were in 2008 and then we're there without the ability to cut interest rates and and move forward and with an having built up a lot of debts just to cover the income hole that we were in so so I think that the the difference in the the market the way the markets will play out versus normal is this accumulation of a low level of income over a long period of time which is a much different sort of grinding influence that almost can't be really discounted ahead of time effectively because you really don't know how long it's gonna last but the longer it lasts that that group that grinding effect of a lower level of income over a sustained period of time will gradually manifest itself on some parts of the economy in the world while at the same time the efforts to offset that with liquidity will benefit other parts of that particularly the marketplace and to some extent the the economy you know I'll add one one other thing to this which is that at the end of the day government's normally get what they want when they try hard enough so we've gone back to 1800 and studied every financial panic and and resulting deleverage reflation and i in in something like a hundred and fifteen out of a hundred and twenty-five times across 39 countries governments got what they wanted but those tho getting what they wanted required choices so for example you've got four big thing for big ways to kind of untangle yourself from a mess you've got an easy to monetary policy you've got an easy enough fiscal policy you've got a debt a debt restructuring and you've got a currency devaluation and so right now we have the first two we have the easing of monetary policy and we have the fiscal policy and it's you know an all-out effort on that basis the question becomes at what point that is that enough or do we then transition to debt restructurings and currency devaluations and from there what is the status of the dollar as a reserve currency and then from there what is the store hold of wealth and those are the big questions that were really focused on right now and and also our clients are really thinking a lot about as well it's a huge huge issues and for everyone tuning in right now I think they want you to lift the lid on Bridgewater what are you positioning for with everything you've just said risk surrounding by what are you actually positioning for well I I can't go into specific positions of course but but the you know I think there are really three big three big we've got our normal processes assessing relative value and so on and so forth and that's spread across a lot of different markets and you know very diversified in our positioning but there are these these three big forces will be relevant to to probably everybody's positioning but reflation store hold of wealth and differentiation those three those three themes are a good basis for thinking about how to structure a portfolio whether it's for a strategic asset mix and a diversified asset mix that you hold or whether it's for a sort of active tactical sort of trading reflation what's the store hold of wealth and differentiy and of outcomes can we talk about what a store hold of wealth is I remember in January right down to go your colleague far enough short good friend as well made some headlights when he said cash is trash given where rights are right now cash is looking pretty good what is this wealth right now Bob sorry to interrupt you I said he still says that um though he almost every day but the yeah so people typically think about cash as the risk-free asset but when you're in a relation the you can have a negative real return of cash and it's not a good story love wealth and so the types of things that you want to look to as a store hold of wealth are things that retain their value in real terms in such circumstances and so for example we talked about gold obviously the gold is just gold is just a contra current it's really a currency if you take the forward price of gold it's just gold gold per dollar you know ounces per dollar or dollars per ounce and and so gold is one of those because not because the the utility value of gold is higher but it's because fiat money declines in value as per as you produce it and so gold prices go up it's mostly that the value of money is going down and so the gold price is a metric for the value of money mostly but also you have other sources of that soar holds a value let's say inflation index bonds are really useful store hold of value because you get paid the inflation rate right we look at things like you know certain types of equities it's very interesting that you know so long as the capitalist system is in place and we have you know free markets and economy and and and companies that operate as the distribution of resources you have companies participating in that in the economy certain types of companies have cash flow that actually puts the establishes them as a form of a store hold of wealth so for example if you're if you're you know if your own a chain of movie theaters that's not really a store hold of wealth because people don't have to go to a movie but if you own but if you're talking about food water and basic health care these things are necessary to physically live there physically necessary all around the world everywhere and so there are certain types of spending like that that that you can be assured that in 1 5 10 20 years from now people will buy food they'll buy bread they'll buy water and they'll buy you know aspirin or whatever so so the and then the companies that provide that are in effect a form of a store hold of wealth if you have certain kinds of technology companies that are at the sort of the the vanguard of productivity and they're the sources of productivity sort of the fountain of innovation and productivity and economy the duration of their cash flows will be much longer than a company that's got a very short duration to cash flows and they'll be much more benefited by the liquidity production than the other types of companies that'll be hurt by the by the contraction and incomes so you know these are the types of things that we look at as as thinking about how do you think about a store hold of wealth over time I don't want it to finish off which i think is a really important theme for a lot of people right now you mentioned free markets and capitalism this doesn't feel my capitalism I don't think we can pretend this is capitalism the Federal Reserve seems to have lost faith in the capitalist system I've asked President Bullard about this earlier this week I'm just wondering from your perspective how things have changed now from a market participants perspective as well where you can make the right macro call and then get the market called really really wrong because you get slapped around the face by a policymaker that just has other ideas about what the price of something should be how do you participate in a market quite like that one well you know just like we talked about end of the boomba cycle as you know and because of the nature of the dynamics has changed that has progressed to what you're talking about which is mp3 puts the government in the middle of the distribution of capital right so capitalism as we know it is the government steps back you know those who have savings or capital make decisions about where to send it on the basis of risk and return and those who need it try to provide a good deal for that and then that's the and that provides for the distribution of resources but that hasn't solved all that's led to certain problems number it's led to over leveraging too much debt it's led to income and wealth inequality which is producing political conflict and so forth so it's not solving all problems it's a good system but it it we're now in a difficult set of circumstances and so now enter the government where the government is is now involved in making choices about where capital goes and we can call it state capitalism it's not like capitalism doesn't exist but state capitalism where where it's there's a certain degree of directed capital and I think element of this is the too-big-to-fail has broadened it used to be that there was no such thing as too big to fail we let continental bank just go down right there was no such thing as too big to fail then we realize hold on a second certain banks are too big to fail now we're at the point the certain companies are too big to fail and so now the government is making choices about what's too big to fail but they're doing it because they're making a choice pertaining to the populace in other words income inequality people need jobs you need to support your population and so they're making very practical a very practical evolution in the in capitalism to achieve what are their greater goals their greater goal is not that we have capitalism their greater goal is to have a healthy you know quality public and if you don't have a healthy quality public where people have food and so for you as a government you'd better find a way to do that otherwise you're going to be held accountable in one form or another and so this transition to state capitalism is having is is a practical response to that it doesn't come without costs I mean David Solomon's interview just before this they were you know they were talking about that a little bit and it doesn't come without cost but what it does is it comes with choices because like I said let's say you have a debt restructuring well the person who held that debt is not coming out very well on that right but maybe the greater good is achieved according to the government or maybe you have a currency devaluation well if you're holding that currency you know you're not served by that but maybe the greater maybe the greater good is served by that according to somebody's judgement so who is making the judgment is shifting to the government because the government is ultimately accountable to the people not to the investors and so the investors it's our job to just figure out what's going on there and stay you know stay safe and stay positioned for it but I think in that world one of the you know one of the you asked me you know how do you deal with that from an investment standpoint now you have to be able to track where the money goes in other the were the world where you just you know cut interest rates and now sort of figure out what the interest sensitive parts of the economy are you know that that that world is is gone now it's like where's the money coming from and where is it going how much is staying in the country how much of it is leaving the country what kind of companies is it going into what did what kind of companies isn't missing and so on and so forth and so you have to be able to track the money in order to have a chance to understand the markets and the differentiations and that are going to be occurring above a thing what makes everyone uncomfortable it's the government making a lot of those decisions for us Bob it's a conversation you and I've got to continue another time Bob friends really appreciate your time at this conference for Bloomberg investments they're the co CIO of Bridgewater

Channel: Bloomberg Live

Views: 147,379

Keywords: Bloomberg

Id: fnn6jTVN_Wo

Length: 22min 7sec (1327 seconds)

Published: Wed Jun 24 2020