Bridgewater's Patterson Warns of a 'Vulnerable' Dollar

what's the latest meetings like in terms of the volatility we're seeing the complexities and nuances what is the tone within your meetings as you assess this 2022 well obviously as you hinted at lisa there's just so much changing now structurally as well as cyclically and so there's a lot of of people saying where are we going not just the next month or next quarter but the next five to ten years if we do deglobalize or regionalize what does that look like what are the implications of that as well as the short-term worries over can the fed will the fed tighten enough to get inflation back down to its target if we have higher stickier inflation for longer how does that flow through to the market so a lot of uncertainty if i had to sum it up how do you determine whether a move like what we're seeing ahead of the open today is a head fake or not well we don't trade daily wiggles in the market so we'd take a step back and say okay what's discounted a lot has changed since the beginning of the year i think the biggest change has been discounted tightening by central banks particularly the fed and we have seen that flow through clearly to the bond markets and we have seen the equity decline so far largely a function of the change in discount rates you haven't seen a major change in expected earnings growth and so that to us is the thing we're watching if this is a head fake or continuing that would be the shoe to drop if the fed continues to tighten to try to reduce demand to get inflation under control i would expect to see that flow through into discounted growth which then eventually should bring equities that next leg lower for years people were saying that markets were benefiting even though the economy was not and that actually we saw all of the financialization represented by an s p on a vertical trajectory are we heading into the opposite can we be heading into the opposite where we see markets lag behind an economy that continues to be strong actually that has been our view and continues to be our view as we look ahead that we're in a situation now where the nominal economy is likely to outperform financial markets fairly substantially and that is mainly a function of the policy reaction we got during the pandemic you know all the fiscal and monetary stimulus that came through and left households wealthier than before the pandemic corporate balance sheets stronger than before the pandemic it gives them a cushion to withstand the tightening so it is going to feed through to markets and obviously that wealth effect will also feed through to the economy but that starting strong nominal point for the economy means financial assets could underperform you've got it bridgewater in your fancy kitchen they get the whole subzero thing you know like the big stones look who's talking bloomberg hello you've got it living online memorial pressure cooker and the only reason i hired you was the steam coming out of the kettle is the currency market to me the conundrum here and you beautifully described the fiscal impulse and the wealthing that occurred and maybe the d well thing that's occurred now what what releases the pressure is dollar dynamics what kind of pressures will we see well i think the most important thing to understand about the dollar right now is how quickly our external need for foreign capital is is increasing so if you go on your bloomberg page it'll show our current account deficit for the united states at around three and a half percent which is already a big widening our timely estimates suggest that's closer to five or six percent of gdp and so for the dollar to stay supported we need to continue getting enough capital to offset that and we think there's a growing risk around that so the dollar we think is vulnerable on a cyclical basis and also a structural basis this is important steve roach 101 someone has supported us for years here and and davos if we get a twin deficit do you link those two together mathematically or philosophically do you link current account with recession gloom together are they two separate events well they they are mathematically linked as you know well tom you're being humble yeah you do but i think what what we're following it's like this is a tip pro surveillance tip don't ask the question unless you know the answer it's just like judge judy continue so the the current account the balance of payments is what i'm focused on relatively more um and so that financing need is the is the canary in the coal mine if u.s growth continues to outperform the rest of the world if interest rates in the us continue to be so much more attractive both on an absolute level and on a change basis then maybe the u.s does continue to hold up for the dollar but it's a question mark where does the money go if it doesn't go to the well let's look let's look i mean year to date japanese equities are actually outperforming u.s equities if you take out the currency effect uk stocks are outperforming u.s stocks some emerging market equities are outperforming and so not all the capital is flooding here it is looking for opportunities where policy makers are less constrained where valuations are a lot less demanding where positions where exposure is is a lot more moderate what you said about yields being attractive to other nations how high do treasury yields have to go in order to remain that attractive to support the dollar that's a great question and i don't have a number for you but what what is interesting to us when we look at the bond market so we try to understand all the different players in every market what motivates them to buy or sell and when we look at the us bond market today even though you have less issuance for the fed flipping from quantitative easing to quantitative tightening is obviously very significant but the big player that we're watching that we think is is suggests more upside for bond yields are banks so a year ago you had a steep curve you had a ton of deposits coming in and the banks were putting that into bonds so you had a lot of demand keeping down the yield that's over the curve is flatter the deposit inflow is slower so there's less bank buying of bonds to hold down the yield so when we look at who's going to buy those bonds if the fed's out we still see a supply demand and balance that to us suggests yields higher i don't know what the magic number is but we still think we have further to go on the upside to go electrical engineering on you this is within the perfect electrical system of switzerland and trust me folks it is perfect the slew rates here that you're describing how do you affect an interest rate parity strategy a sophisticated hedge if you will given slew rates we've never seen before are you talking about risk parity are we talking about yeah so what's so interesting to to me about all of this is when you think about how most investors in the world have positioned for the last one or two decades they have been biased towards rising growth and falling inflation that's 60 40 right you're gonna do your equities do well growth is rising etcetera right it worked great till now and the world has gone upside down so now we have falling growth and rising inflation obviously we've seen the portfolio hit those folks have taken the difference with risk parity strategies is that their balance for growth and inflation so even if bond yields are going up you have balance in other parts of the portfolio namely commodities and other inflation sensitive assets so they tend to hold up better through the cycles including these periods

Channel: Bloomberg Television

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Keywords: Bloomberg

Id: oHB3Qbe_bjs

Length: 7min 18sec (438 seconds)

Published: Mon May 23 2022