Monetary Policy 3, Divergences Between East and West, and Importance of Geographic Diversification

greg let's start off with you giving us a brief description of the most important dynamics in economies and markets that you're seeing right now yeah well the highest level the big deal is that we've entered this new paradigm we've entered it very quickly because of the pandemic we were talking about this in the last strategic report how you're going to get this merger of fiscal policy and monetary policy and how that was coming because you have this huge divergences in wealth and huge conflict both domestic and internationally that's going to lead to the need of this new policy and really in terms of the big things going on that need is different in different countries because of very different secular conditions so in part of the east china et cetera you still have positive interest rates you have a different type of need for these types of policies than you have in most of the west and the the older more established developed world economies they require mp3 other countries don't that difference is a big difference it's going to lead to big differences in returns across currencies and across assets around the world the second thing is that there's so much excess liquidity the printing that's occurred already has created record levels of cash at the same time the value of that cash is being devalued as quickly as the government's command can manufacture it so the devaluation of cash is the second big deal thing that's still going on and that's happening with big differentials and big imbalances and mispricing due to the fact that the way those policy levers are being pulled in different countries is so different so you've had huge shifts and balance of payments as a result and big opportunities because those imbalances are playing out quite differently and finally the next big thing we talk about is the risk of wealth destruction that you have these policies going on when you look at the history of how crises debt crisis have been handled in the past crises like these have been handled in the past there have been major periods of wealth destruction and recognizing the way to create a portfolio that's acceptable for a wide range of the different ways this could play out and the fact that most assets have periods of huge destruction when you have as volatile a set of circumstances as you currently do particularly with how quickly policies are shifting and how quickly um money and credit is shifting that recognizing that risk of wealth destruction particularly when you get to the point where policymakers can't necessarily get what they want today easy policy is relatively easy in the sense that because there's a global deflationary pressures you print money you spend money and you get better outcomes eventually you'll get to a world where printing money and spending money won't necessarily lead to better outcomes for assets and you'll have to choose between driving a reflationary policy and driving your currency down in you know in a way that's not desirable and at that point you could face significant wealth destruction depending on which assets and which currencies you're in bob greg mentioned the big divergences between east and west with a particular focus on the importance of china can you elaborate on what is driving those divergences and what it means for investors today at the high level what we see is that you know the main forces that drive economies of which that we think there are four big forces that drive economies there's productivity which drives long-term uh wealth and income in the country there's a long-term debt cycle which reflects sort of indebtedness and the responsiveness of the economy to different policies there's the short-term debt cycle which you which is the business cycle and largely is is a function of of those policies and and the ebbs and flows of money and credit and then there's politics and politics is really determines who's pulling the levers and what's motivate pulling right and so when you look at those circumstances those four drivers and you compare different countries around the world you see them in very different uh situations so when i look at the united states the us's is looking at low productivity growth not just the united states but most of the old world most of the existing kind of established reserve currency countries are looking at low over the next decade low productivity growth and therefore a low rate of true uh real wealth creation um latter stages of long-term debt cycles the reason that we're at a zero interest rate is because of that it's a it's a it's a classic uh indicator that you're in that stage where the indebtedness is high and you're forced to sort of push rates down down down to stimulate and finally you hit the zero bound uh then you have the short term debt cycle you know what we used to think about as the boom bust cycle is going to be a lot different now it'll be driven by fiscal with monetary policy because you don't have the ability to move the interest rates and so the ability to create a boom is probably what your is is what your is very restrictive and then we go to the politics and the politics is what brings in populism political divisiveness the ability or the inability to make effective decisions and on all four of those counts you the u.s is looking at the u.s and most of the developed world economies are looking at a difficult set of circumstances across all four of those criteria now when you look at the on the other side of the planet when you look at the eastern hemisphere you look at asia look at china almost all four of those across the board are favorable uh even though china has high levels of debt they've done a very good job of circumventing too much uh and so they've been for the last five years or so they've been has been a priority to sort of gently tap the brakes so that it does doesn't get out of hand uh from a cyclical standpoint uh there's plenty of room to stimulate the economy both from fiscal and from monetary uh productivity over the next 10 years is likely to be pretty strong you know four to six percent productivity growth over the next 10 years and the degree of populism and divisiveness within the countries is not anything anywhere near what it is in the western hemisphere in the united states and essentially the governments are able to continue to manage things roughly as normal so on the basis of those two perspectives looking across the board at those four big drivers of growth we see a decade ahead of a pretty big divergence between east and west between the u.s and china which is really just a continuation of the secular trends that we've already experienced but now we're in a situation where what's priced in is the opposite where because of the the interest rate structure and the pricing structure of assets actually was priced in is an appreciation and an outperformance of the us and the western hemisphere in relation to asia so we have this confluence where these you know unsustainable conditions uh unsustainable flows are discounting prices that are discounted unsustainable economic scenarios in our view and it and it's and it's really arguing from a tactical standpoint at least to shift money in that direction but we would say even from a strategic standpoint to be thinking about balancing your beta much more between east and west between the u.s and china particularly as china opens up uh in order to to diversify yourself against these forces we'll go on and on and on in terms of the other implications of that but but you've got the the con the growing conflict and you've got you've got a trade war we've had a trade war you could have capital wars you could have technology wars you could have military wars uh and these things typically unfold in sequence so so you're you're getting compensated for the risks either way but the nature of the risks in the in the different parts of the world are different and therefore there's a true level of diversification that's achieved through that kind of a geographic balance right and so just to add to what bob's saying so few investors are actually balanced and so whether you believe the um the alpha view of of being more bullish on one relative to the other even if you don't believe that the benefits of balance that you're getting almost for free the diversification benefit that so few are taking advantage of it's kind of the simplest and the biggest um available lever for investors which is you've got totally different issues risks all over the world but to be able to diversify those risks in a way that is not largely not tapped into by most investors in having a more a global portfolio that looks like the world that's balanced both for different geographies but also for different environments and so that's kind of the most important step we think strategically investors can take you

Channel: Bridgewater Associates

Views: 18,785

Keywords: Bridgewater Associates, Bob Prince, Greg Jensen, 2021 Global Outlook, Economic Insights

Id: ZWd-VNg24Qw

Length: 9min 17sec (557 seconds)

Published: Thu Feb 04 2021