1 00:00:10,480 --> 00:00:13,680 Speaker 1: Hello, and welcome to another episode of the All Thoughts Podcast. 2 00:00:13,760 --> 00:00:16,959 Speaker 1: I'm Tracy Alloway and I'm Joe Wise. Joe, you know 3 00:00:17,079 --> 00:00:20,599 Speaker 1: something that really annoyed me last year? There are a 4 00:00:20,720 --> 00:00:24,560 Speaker 1: number of things I was sure, Yeah, there's actually a lot. Okay, 5 00:00:24,800 --> 00:00:28,639 Speaker 1: there's a lot, I hear. I'm just a part of 6 00:00:28,640 --> 00:00:31,880 Speaker 1: our daily chatter is here now. But keep going, keep going. 7 00:00:32,680 --> 00:00:36,000 Speaker 1: What I'm annoyed about today? Yeah, Well, there was a 8 00:00:36,040 --> 00:00:40,560 Speaker 1: moment early last year where people were talking about stagflation, 9 00:00:40,800 --> 00:00:44,600 Speaker 1: and it wasn't the risk of stagflation. People were talking about, oh, 10 00:00:44,640 --> 00:00:48,920 Speaker 1: we're in a stagflationary environment, which really bothered me because yes, 11 00:00:49,760 --> 00:00:52,760 Speaker 1: you know, prices were going up, but economic growth was 12 00:00:52,760 --> 00:00:55,160 Speaker 1: still relatively strong, and so there was no way you 13 00:00:55,160 --> 00:00:58,880 Speaker 1: could have said that last year there was stagflation happening. Yeah, 14 00:00:58,960 --> 00:01:01,640 Speaker 1: I think there's right. Um, you know, people and people 15 00:01:01,680 --> 00:01:03,920 Speaker 1: say this kind of stuff all the time. People throughout 16 00:01:03,960 --> 00:01:08,160 Speaker 1: any terms. The seventies, it's the eighties, it's four, it's 17 00:01:08,480 --> 00:01:11,600 Speaker 1: two thousand and two. People are always reaching for something. 18 00:01:11,640 --> 00:01:14,320 Speaker 1: There's no you know, that's like, you know, I guess 19 00:01:14,319 --> 00:01:16,800 Speaker 1: optimistically say that's what makes a market, right. People have 20 00:01:16,840 --> 00:01:19,560 Speaker 1: a bunch of different years, this is very true. Well, 21 00:01:19,680 --> 00:01:21,240 Speaker 1: I have to say, you know, some of the people 22 00:01:21,280 --> 00:01:25,160 Speaker 1: who were accurately talking about the risks of stagflation, not 23 00:01:25,240 --> 00:01:29,920 Speaker 1: stagflation actually happening in that particular moment, I feel like 24 00:01:30,040 --> 00:01:34,280 Speaker 1: they've been sort of borne out by events. And the 25 00:01:34,360 --> 00:01:38,320 Speaker 1: US economy is still going relatively strong. It's not shrinking 26 00:01:38,480 --> 00:01:42,039 Speaker 1: by any means, but with the Federal Reserve raising rates, 27 00:01:42,480 --> 00:01:45,759 Speaker 1: the question clearly on everyone's mind is whether or not 28 00:01:46,280 --> 00:01:48,360 Speaker 1: we're going to get a soft landing, whether or not 29 00:01:48,400 --> 00:01:50,920 Speaker 1: it's possible to have prices start to come down but 30 00:01:51,040 --> 00:01:53,800 Speaker 1: also maintain economic growth. Well, what I would say is, 31 00:01:53,840 --> 00:01:56,320 Speaker 1: for sure, whatever you want to call the environment of 32 00:01:56,400 --> 00:01:59,440 Speaker 1: this year and sort of the last quarter of last year, 33 00:01:59,520 --> 00:02:02,200 Speaker 1: the second have of last year, it's been a really 34 00:02:03,040 --> 00:02:07,480 Speaker 1: toxic brewis so to speak for uh for financial assets, 35 00:02:07,760 --> 00:02:10,680 Speaker 1: for for asset prices. So you know, the economy is 36 00:02:10,720 --> 00:02:14,839 Speaker 1: still growing appears, and you know the jobs are still 37 00:02:14,880 --> 00:02:17,840 Speaker 1: being added. But this mix that we have right now 38 00:02:18,040 --> 00:02:21,760 Speaker 1: of very high inflation relative to the last couple of 39 00:02:21,760 --> 00:02:26,200 Speaker 1: decades or last several years, and concerns about whether it 40 00:02:26,200 --> 00:02:29,320 Speaker 1: could be brought down without coloboring growth, it's a it's 41 00:02:29,360 --> 00:02:34,040 Speaker 1: pretty rough for anyone stocks and bonds. Yeah, it is 42 00:02:34,080 --> 00:02:35,959 Speaker 1: a tough time for markets. And the other thing I 43 00:02:36,000 --> 00:02:38,799 Speaker 1: would say is, you know, we hear people talk about 44 00:02:38,800 --> 00:02:43,959 Speaker 1: these big picture macro ideas like stag inflation or recessionary 45 00:02:44,080 --> 00:02:47,160 Speaker 1: risk or whatever, but then I feel like we don't 46 00:02:47,200 --> 00:02:50,800 Speaker 1: actually hear that much about how you translate that into 47 00:02:50,960 --> 00:02:55,240 Speaker 1: a cohesive trading strategy. So, you know, we've had some 48 00:02:55,240 --> 00:02:58,200 Speaker 1: commodity specialists come on here and say, obviously, you know, 49 00:02:58,280 --> 00:03:00,760 Speaker 1: if inflation is going up, commodity rices are going up 50 00:03:00,800 --> 00:03:04,800 Speaker 1: by commodities. But beyond that, it's not exactly clear to 51 00:03:04,880 --> 00:03:08,840 Speaker 1: me how you actually invest in that type of environment, because, 52 00:03:08,840 --> 00:03:12,640 Speaker 1: as you mentioned, it just feels like it's bad for everything. Yeah, 53 00:03:12,800 --> 00:03:14,760 Speaker 1: the only thing that really works, he had commodities sort 54 00:03:14,760 --> 00:03:18,760 Speaker 1: of worked. Holding dollars has worked, ironically, given the level 55 00:03:18,760 --> 00:03:22,240 Speaker 1: of inflation. But this is an environment where typical portfolio 56 00:03:22,280 --> 00:03:25,560 Speaker 1: strategies and most assets the people own, whether it's docks 57 00:03:25,639 --> 00:03:30,080 Speaker 1: or bonds, really in for a rough rude. Yeah, all right, Well, 58 00:03:30,120 --> 00:03:32,480 Speaker 1: on that note, we are going to be talking with 59 00:03:32,560 --> 00:03:37,320 Speaker 1: someone who is basically all about forming a cohesive trading 60 00:03:37,400 --> 00:03:40,880 Speaker 1: strategy around the macro picture. We're gonna be speaking with 61 00:03:40,920 --> 00:03:43,440 Speaker 1: Greg Jensen. He is, of course the co c i 62 00:03:43,520 --> 00:03:46,960 Speaker 1: O of Bridgewater, and we're going to get into it. 63 00:03:47,040 --> 00:03:48,880 Speaker 1: Let's go, Greg, thanks so much for coming on. All 64 00:03:48,920 --> 00:03:51,560 Speaker 1: thoughts great, thanks for having me. Maybe just to begin with, 65 00:03:51,680 --> 00:03:55,000 Speaker 1: you could give us a short summary of what exactly 66 00:03:55,000 --> 00:03:57,680 Speaker 1: it is that you do at Bridgewater and what makes 67 00:03:57,680 --> 00:04:01,800 Speaker 1: Bridgewater I guess different to other types of funds because 68 00:04:02,040 --> 00:04:04,960 Speaker 1: I feel like Bridgewater you know, you say that name, uh, 69 00:04:04,960 --> 00:04:09,400 Speaker 1: and it has a little bit of mystique around it. Yeah. Great. 70 00:04:09,480 --> 00:04:11,760 Speaker 1: So the you know, I'm one of the three co 71 00:04:11,880 --> 00:04:14,960 Speaker 1: chief investment officers with Ray Dalio and Bob Prince, and 72 00:04:15,000 --> 00:04:19,960 Speaker 1: we are focused on working with the team of investors 73 00:04:20,680 --> 00:04:25,000 Speaker 1: to think through how the global financial system works, to 74 00:04:25,160 --> 00:04:30,359 Speaker 1: build that out into algorithms to predict what's next. It 75 00:04:30,440 --> 00:04:32,200 Speaker 1: starts with really looking at the world and trying to 76 00:04:32,240 --> 00:04:34,880 Speaker 1: process how all these things, the concepts you guys were 77 00:04:34,880 --> 00:04:37,679 Speaker 1: talking about before growth, inflation, how those how the money 78 00:04:37,720 --> 00:04:40,880 Speaker 1: flows into financial markets as a result of those things, 79 00:04:40,920 --> 00:04:44,279 Speaker 1: and how to predict what's next. And so I am 80 00:04:44,320 --> 00:04:50,640 Speaker 1: passionate about taking those types of big picture ideas thinking 81 00:04:50,720 --> 00:04:54,560 Speaker 1: through how you'll translate your thinking about them into rules 82 00:04:54,600 --> 00:04:57,760 Speaker 1: that you could apply across time and across countries. And 83 00:04:57,800 --> 00:05:00,520 Speaker 1: as we developed that, as our our team develops that, 84 00:05:00,560 --> 00:05:02,200 Speaker 1: we work hard to say, okay, this is how we 85 00:05:02,240 --> 00:05:05,000 Speaker 1: think this works. If you're talking about the dynamic of stagflation, 86 00:05:05,000 --> 00:05:06,640 Speaker 1: why would that happen? How does it happen? How do 87 00:05:06,680 --> 00:05:09,039 Speaker 1: you measure whether it's happening or not? And what do 88 00:05:09,080 --> 00:05:12,240 Speaker 1: you do if it does happen? And by you know, 89 00:05:12,279 --> 00:05:16,200 Speaker 1: it's starting with human intuition and logic, but forcing to 90 00:05:16,320 --> 00:05:19,679 Speaker 1: discipline of pulling out what's going on in your brain, 91 00:05:20,160 --> 00:05:23,080 Speaker 1: translating that into rules that you can apply and therefore 92 00:05:23,120 --> 00:05:26,920 Speaker 1: stress tests whether they've been true in different types of environments. UM, 93 00:05:27,000 --> 00:05:29,200 Speaker 1: that's been kind of the magic of Bridgewater is having 94 00:05:29,240 --> 00:05:32,479 Speaker 1: a community of people that are passionate about that understanding, 95 00:05:32,960 --> 00:05:36,479 Speaker 1: building up what we call that compound understanding, the algorithms 96 00:05:36,520 --> 00:05:40,159 Speaker 1: that suggest that, and then constantly thinking about what's changing 97 00:05:40,160 --> 00:05:42,839 Speaker 1: and what you might be wrong about. Is there a 98 00:05:43,040 --> 00:05:46,240 Speaker 1: core like framework that you use? So obviously there are 99 00:05:46,240 --> 00:05:49,160 Speaker 1: all kinds of inputs when thinking about the global economy. 100 00:05:49,480 --> 00:05:54,840 Speaker 1: Inflation and energy prices and trade imbalances and domestic savings, 101 00:05:54,880 --> 00:05:57,120 Speaker 1: are domestic debt or national debt? Like all these different 102 00:05:57,160 --> 00:05:59,600 Speaker 1: things that are always going up and down. But would 103 00:05:59,600 --> 00:06:02,440 Speaker 1: you say that Bridgewater and or you have like a 104 00:06:02,440 --> 00:06:06,359 Speaker 1: core framework that you then put all those factors into, 105 00:06:06,440 --> 00:06:10,240 Speaker 1: Like what is the sort of like underlying lens through 106 00:06:10,279 --> 00:06:15,840 Speaker 1: which you view the economy and therefore financial markets. Yeah, well, 107 00:06:15,839 --> 00:06:17,960 Speaker 1: I mean starting with the financial markets and then I'll 108 00:06:18,000 --> 00:06:19,720 Speaker 1: go to the economy, But I'd say on both, the 109 00:06:20,960 --> 00:06:23,800 Speaker 1: basic picture of the financial markets is that every price 110 00:06:24,560 --> 00:06:28,080 Speaker 1: is discounting a future, and if you can understand what 111 00:06:28,320 --> 00:06:31,440 Speaker 1: future that's discounting and compare it to what you think 112 00:06:31,440 --> 00:06:33,080 Speaker 1: the future will be, which I'll come back to the 113 00:06:33,080 --> 00:06:36,520 Speaker 1: economy and markets, but um, and then how do you 114 00:06:36,720 --> 00:06:39,920 Speaker 1: how do you it's really changes in people's perception of 115 00:06:39,960 --> 00:06:44,040 Speaker 1: that future that drives changes in asset classes. So that's 116 00:06:44,080 --> 00:06:45,960 Speaker 1: one framework, and I'll get into that a little bit. 117 00:06:46,000 --> 00:06:49,599 Speaker 1: But understanding what markets are saying about the likely cash 118 00:06:49,640 --> 00:06:52,239 Speaker 1: flow of assets and the discounting of those cash flows, 119 00:06:52,279 --> 00:06:54,919 Speaker 1: and then how those things are going to change. And 120 00:06:54,920 --> 00:06:56,919 Speaker 1: the second thing I'd say is that we think a 121 00:06:56,960 --> 00:07:00,800 Speaker 1: lot in terms of buyers and sellers, essentially knowing how 122 00:07:00,839 --> 00:07:03,480 Speaker 1: many dollars there are to buy an asset relative to 123 00:07:03,520 --> 00:07:06,279 Speaker 1: the supply of that asset and that whole world is 124 00:07:06,480 --> 00:07:10,200 Speaker 1: there's so much in there of understanding why people buy things, 125 00:07:10,480 --> 00:07:12,760 Speaker 1: what caused them to do that, where the dollars come 126 00:07:12,800 --> 00:07:16,360 Speaker 1: from to do that, and how different types of things 127 00:07:16,400 --> 00:07:18,680 Speaker 1: are produced, whether it's a financial assets produced one way, 128 00:07:18,720 --> 00:07:21,880 Speaker 1: a real good producer totally different way. But that's the 129 00:07:21,960 --> 00:07:24,440 Speaker 1: second kind of lens that we're constantly looking at. Do 130 00:07:24,480 --> 00:07:26,680 Speaker 1: we understand all the buyers in the market, what their 131 00:07:26,680 --> 00:07:30,520 Speaker 1: motivations are. Do we understand how that assets produced and 132 00:07:30,600 --> 00:07:33,440 Speaker 1: what the motivations of the producers are. And so those 133 00:07:33,480 --> 00:07:35,440 Speaker 1: are the two frameworks for which we've spent four or 134 00:07:35,480 --> 00:07:39,840 Speaker 1: five years building up layers and layers of understanding beneath that. 135 00:07:40,520 --> 00:07:42,360 Speaker 1: But those things we think, and you can go in 136 00:07:42,440 --> 00:07:45,480 Speaker 1: any economy, whether it's in the Soviet Union and the 137 00:07:45,760 --> 00:07:50,160 Speaker 1: you know, in the eighties, or in China today or um, 138 00:07:50,200 --> 00:07:54,480 Speaker 1: you know, or in Latin America in hyper inflations. Those 139 00:07:54,520 --> 00:07:58,640 Speaker 1: frameworks work, you know, they're they're what we call timeless universal. Now, 140 00:07:58,640 --> 00:08:02,040 Speaker 1: the inputs of the frameworks change, but the basic frameworks 141 00:08:02,120 --> 00:08:05,360 Speaker 1: do and um. And so that's that's kind of this 142 00:08:05,440 --> 00:08:08,680 Speaker 1: starting point. And now in terms of the economy, that 143 00:08:09,280 --> 00:08:11,760 Speaker 1: understanding what's going to happen next to cash thowse. We 144 00:08:11,800 --> 00:08:14,560 Speaker 1: think a lot in terms of the transactions that drive 145 00:08:14,640 --> 00:08:17,000 Speaker 1: the economy. How does it actually work, Where does the 146 00:08:17,000 --> 00:08:19,800 Speaker 1: money come from when somebody buys something or somebody sells something, 147 00:08:20,240 --> 00:08:23,400 Speaker 1: the understanding the bottom line mechanics of that and all 148 00:08:23,440 --> 00:08:27,239 Speaker 1: the incentives that run through the process at the simple 149 00:08:27,320 --> 00:08:29,840 Speaker 1: level of interest rates and monetary policy, but other types 150 00:08:29,880 --> 00:08:33,960 Speaker 1: of incentives, tax policy, etcetera that affect those outcomes. And 151 00:08:34,000 --> 00:08:36,839 Speaker 1: so again we've been building that model of saying, okay, well, 152 00:08:36,880 --> 00:08:38,360 Speaker 1: who are all the buyers and sellers in the real 153 00:08:38,400 --> 00:08:41,480 Speaker 1: economy and what's motivating them? And what's the ability to 154 00:08:41,480 --> 00:08:43,600 Speaker 1: produce and where is the demand coming from? Those types 155 00:08:43,640 --> 00:08:45,959 Speaker 1: of questions. That's the framework that we're doing, and then 156 00:08:46,000 --> 00:08:49,760 Speaker 1: just constantly thinking about what's going on and what we're 157 00:08:49,800 --> 00:08:53,000 Speaker 1: then going to do about that systematically, So we're always 158 00:08:53,040 --> 00:08:56,360 Speaker 1: because we're predicting two hundred different markets and economic stats 159 00:08:56,360 --> 00:08:58,880 Speaker 1: and hundreds of different things, there's always the feedback loop 160 00:08:59,000 --> 00:09:01,960 Speaker 1: of missing stuff which you then go through and say, okay, 161 00:09:01,960 --> 00:09:03,640 Speaker 1: well what am I missing? How am I dealing with 162 00:09:03,720 --> 00:09:06,640 Speaker 1: is As an example today, the deglobalization is a huge 163 00:09:06,679 --> 00:09:08,800 Speaker 1: deal over the last four years we really haven't been 164 00:09:08,800 --> 00:09:10,559 Speaker 1: dealing with you know, and now you've got to deal 165 00:09:10,559 --> 00:09:12,920 Speaker 1: with it. You've got to have a perspective on how 166 00:09:12,960 --> 00:09:15,560 Speaker 1: to think about supply chains differently and the rebuilding of 167 00:09:15,600 --> 00:09:17,880 Speaker 1: them and all of these questions. And because we have 168 00:09:18,160 --> 00:09:20,160 Speaker 1: a good process that we're building from the base on, 169 00:09:20,200 --> 00:09:23,160 Speaker 1: we could spend all our time on the things we 170 00:09:23,200 --> 00:09:25,600 Speaker 1: think we're missing and then try to add them into 171 00:09:25,600 --> 00:09:30,840 Speaker 1: that understanding. So I definitely want to get into deglobalization 172 00:09:31,200 --> 00:09:33,679 Speaker 1: and what you're seeing with supply chains and things like that, 173 00:09:33,720 --> 00:09:36,200 Speaker 1: but just before we do, just so we understand the 174 00:09:36,240 --> 00:09:40,000 Speaker 1: framework a little bit better. I'm curious how machine learning 175 00:09:40,080 --> 00:09:43,240 Speaker 1: and artificial intelligence fits into all of this, because, on 176 00:09:43,280 --> 00:09:45,760 Speaker 1: the one hand, I can understand if you're looking at 177 00:09:45,760 --> 00:09:49,080 Speaker 1: economic data points trying to find signs of where things 178 00:09:49,080 --> 00:09:51,480 Speaker 1: are going, or looking at the market trying to figure 179 00:09:51,480 --> 00:09:54,640 Speaker 1: out whether or not things are under or overvalued, that 180 00:09:54,720 --> 00:09:57,240 Speaker 1: machine learning could play a role in that. But when 181 00:09:57,240 --> 00:10:00,640 Speaker 1: you talk about things like incentives, I tend to think 182 00:10:00,640 --> 00:10:02,160 Speaker 1: of that as much more of a you know, a 183 00:10:02,320 --> 00:10:06,400 Speaker 1: human emotion, what's actually driving people to do this, And 184 00:10:06,480 --> 00:10:09,520 Speaker 1: I don't necessarily automatically think of that as something that 185 00:10:09,600 --> 00:10:14,079 Speaker 1: lends itself to modeling or machine learning and things like that. 186 00:10:14,160 --> 00:10:16,240 Speaker 1: So could you maybe talk a little bit more of 187 00:10:16,240 --> 00:10:21,400 Speaker 1: that aspect of your strategy. Yeah, great, so artificial intelligence 188 00:10:21,440 --> 00:10:24,520 Speaker 1: of them very passionate about it, but it's a broad 189 00:10:24,720 --> 00:10:27,760 Speaker 1: category of things for which machine learning is a subset. 190 00:10:27,800 --> 00:10:30,280 Speaker 1: So let me start at the artificial intelligence level. The 191 00:10:30,320 --> 00:10:32,600 Speaker 1: thing that Bridgewater has been doing for forty years is 192 00:10:32,600 --> 00:10:36,240 Speaker 1: one of the most unique laboratories of is what would 193 00:10:36,360 --> 00:10:41,080 Speaker 1: be considered old style artificial intelligence, which is an expert system. 194 00:10:41,160 --> 00:10:44,240 Speaker 1: So everything that we're doing in markets is happening through 195 00:10:44,280 --> 00:10:47,120 Speaker 1: algorithms that we've produced. We produced them and what was 196 00:10:47,320 --> 00:10:49,520 Speaker 1: the original thought of how AI would work, which is 197 00:10:50,040 --> 00:10:54,000 Speaker 1: experts thinking about what's going on, writing down what they're learning, what, 198 00:10:54,120 --> 00:10:56,560 Speaker 1: writing down what their rules are. And because we've invested 199 00:10:56,559 --> 00:10:59,040 Speaker 1: massively in that process and we've been doing it for 200 00:10:59,040 --> 00:11:02,559 Speaker 1: a long time and have great expertise that we're able 201 00:11:02,600 --> 00:11:05,000 Speaker 1: to execute trades across two in our markets are twenty 202 00:11:05,040 --> 00:11:09,400 Speaker 1: four hours a day, all of those things algorithmically reflecting 203 00:11:09,440 --> 00:11:11,680 Speaker 1: everything that we've learned. So we have this big AI 204 00:11:11,840 --> 00:11:15,280 Speaker 1: process that's like humans and machines, where the humans are 205 00:11:15,320 --> 00:11:17,440 Speaker 1: looking at the machines, think about what's wrong, but keep 206 00:11:17,440 --> 00:11:21,000 Speaker 1: programming that in and over time there's more and we're 207 00:11:21,080 --> 00:11:24,000 Speaker 1: done with computers and now machine learning, you know, comes 208 00:11:24,000 --> 00:11:26,920 Speaker 1: along over the last decade and is helpful in that 209 00:11:26,960 --> 00:11:29,360 Speaker 1: process as well. But it's also a tool and that 210 00:11:29,480 --> 00:11:31,559 Speaker 1: you have to be very careful. And to your point 211 00:11:32,240 --> 00:11:34,320 Speaker 1: on what what machine learning can help with and what 212 00:11:34,400 --> 00:11:37,600 Speaker 1: it can't, at least in the current situation, is that 213 00:11:37,679 --> 00:11:40,680 Speaker 1: when the data that you can plug into a machine 214 00:11:40,760 --> 00:11:44,080 Speaker 1: learning model is representative of the data in the future, 215 00:11:44,360 --> 00:11:45,680 Speaker 1: it can be very helpful. You have to have a 216 00:11:45,679 --> 00:11:47,280 Speaker 1: lot of it, and you have to have but it 217 00:11:47,320 --> 00:11:49,040 Speaker 1: has to be representative of the data in the future. 218 00:11:49,280 --> 00:11:51,640 Speaker 1: What's so interesting about economies and markets is it never 219 00:11:51,679 --> 00:11:55,040 Speaker 1: works that way because even just the existence of machine 220 00:11:55,120 --> 00:11:59,240 Speaker 1: learning itself changes the future so that the future data 221 00:11:59,240 --> 00:12:01,360 Speaker 1: points aren't gonna be like the past data points because 222 00:12:01,400 --> 00:12:03,800 Speaker 1: machine learning exists. And and this is a game of 223 00:12:04,160 --> 00:12:07,319 Speaker 1: in which the players are affected by the tools. It's 224 00:12:07,400 --> 00:12:09,960 Speaker 1: not like physics. It's not it's not something physical where 225 00:12:09,960 --> 00:12:13,120 Speaker 1: it doesn't matter if you're watching it. It matters completely 226 00:12:13,320 --> 00:12:16,559 Speaker 1: that people are using machine learning techniques make machine learning 227 00:12:16,559 --> 00:12:20,880 Speaker 1: techniques themselves dangerous. If they're using data from the premachine 228 00:12:20,960 --> 00:12:25,319 Speaker 1: learning era as an example, and so a understanding that. Right. 229 00:12:25,320 --> 00:12:27,959 Speaker 1: So there's a lot that machine learning can be helpful 230 00:12:27,960 --> 00:12:31,280 Speaker 1: on data cleansing other things, but it's wrong to think 231 00:12:31,360 --> 00:12:34,200 Speaker 1: of it as a landscape that's actually good for machine learning. 232 00:12:34,440 --> 00:12:36,840 Speaker 1: You have to be super careful because the data from 233 00:12:36,880 --> 00:12:39,480 Speaker 1: the past is not like the data from the future, 234 00:12:39,559 --> 00:12:43,920 Speaker 1: and almost by definition, any anything like this changes the 235 00:12:43,960 --> 00:12:47,040 Speaker 1: future relative to the past. More generally, there's so little 236 00:12:47,080 --> 00:12:50,840 Speaker 1: sample size in global economies. We have a couple of 237 00:12:50,880 --> 00:12:54,680 Speaker 1: debt cycles over the last hundred years. We have a 238 00:12:54,720 --> 00:12:57,400 Speaker 1: world that was, as we're saying, globalizing. The last fourty 239 00:12:57,480 --> 00:13:00,400 Speaker 1: years is one big cycle of lower and lower interest 240 00:13:00,480 --> 00:13:04,080 Speaker 1: rates and declining inflation. So you have to be incredibly 241 00:13:04,120 --> 00:13:07,439 Speaker 1: careful to use those techniques that are so valuable in 242 00:13:07,480 --> 00:13:10,280 Speaker 1: certain ways in the economy and other things in our 243 00:13:10,360 --> 00:13:14,520 Speaker 1: industry because of those challenges. Now, over time, I mean, 244 00:13:14,720 --> 00:13:18,080 Speaker 1: I'm optimistic that machine learning can take great strides, and 245 00:13:18,480 --> 00:13:21,840 Speaker 1: as we do, we're working on different ways to use 246 00:13:21,920 --> 00:13:24,320 Speaker 1: machine learning to help researchers and other things. And I 247 00:13:24,360 --> 00:13:26,520 Speaker 1: think that over time, computers will keep doing more and 248 00:13:26,559 --> 00:13:30,280 Speaker 1: more that humans can do. But handling that in a 249 00:13:30,360 --> 00:13:34,959 Speaker 1: knowledgeable way and not using the fanciest optimizer of the day, 250 00:13:35,000 --> 00:13:37,520 Speaker 1: which today machine learning is the fanciest optimizer of the day. 251 00:13:37,559 --> 00:13:41,720 Speaker 1: But all through history optimizers have in markets have have 252 00:13:41,960 --> 00:13:45,760 Speaker 1: failed for the same reason, which is the past. If 253 00:13:45,800 --> 00:13:48,880 Speaker 1: you don't understand it extremely well, isn't going to be 254 00:13:49,040 --> 00:13:51,160 Speaker 1: the way to get the data. The data itself doesn't 255 00:13:51,160 --> 00:13:54,720 Speaker 1: tell the story. You have to actually understand the human 256 00:13:54,760 --> 00:13:57,959 Speaker 1: motivations on the other side of markets. So in five 257 00:13:58,040 --> 00:14:04,000 Speaker 1: hundred years, maybe Bridgewater will have a machine learning algorithms 258 00:14:04,040 --> 00:14:06,959 Speaker 1: that have seen twenty great financial crazies and twenty big 259 00:14:06,960 --> 00:14:10,920 Speaker 1: dead cycles and twenty high inflationary periods. But as you 260 00:14:11,000 --> 00:14:15,080 Speaker 1: note here in two, there just haven't been that much 261 00:14:15,200 --> 00:14:17,760 Speaker 1: data yet. Hard to get out of sample data for 262 00:14:17,880 --> 00:14:20,000 Speaker 1: some of this stuff. But what do you know, let's 263 00:14:20,040 --> 00:14:22,680 Speaker 1: talk about right now for a moment, and thinking about 264 00:14:22,720 --> 00:14:26,480 Speaker 1: what you just said, like we are experiencing it appears 265 00:14:26,560 --> 00:14:29,600 Speaker 1: or reversal of a forty year pattern in interest rates. 266 00:14:29,960 --> 00:14:34,120 Speaker 1: It does appear that we're certainly experiencing inflation the likes 267 00:14:34,120 --> 00:14:37,440 Speaker 1: of which we haven't seen in several decades. So how 268 00:14:37,440 --> 00:14:40,520 Speaker 1: do you adjust this new a new thing emerges or 269 00:14:40,560 --> 00:14:42,720 Speaker 1: maybe it's de globalization. How do you what is the 270 00:14:42,760 --> 00:14:47,600 Speaker 1: process by which you sort of acknowledge or recognize that 271 00:14:47,760 --> 00:14:51,600 Speaker 1: say this is something different. Yeah, well, I think are 272 00:14:51,640 --> 00:14:54,480 Speaker 1: going back to our frameworks right that you can look at. 273 00:14:54,520 --> 00:14:57,120 Speaker 1: So why did the why did the inflation? And now 274 00:14:57,280 --> 00:14:59,240 Speaker 1: let's say slow in your oath with inflation. I agree 275 00:14:59,240 --> 00:15:01,000 Speaker 1: with you, I don't want to get should agree what 276 00:15:01,040 --> 00:15:02,640 Speaker 1: you're saying in the introduction of getting stuck in the 277 00:15:02,680 --> 00:15:05,960 Speaker 1: words place these different things, but the basic picture is 278 00:15:06,160 --> 00:15:10,680 Speaker 1: if you turn back the clock to COVID, COVID accelerated 279 00:15:10,720 --> 00:15:13,000 Speaker 1: something that we expected to happen over a decade, which 280 00:15:13,080 --> 00:15:17,640 Speaker 1: was this combination of fiscal and monetary policy. We thought 281 00:15:17,680 --> 00:15:20,960 Speaker 1: that would happen because it's necessary monetary policy. Quantitative easing 282 00:15:21,000 --> 00:15:24,200 Speaker 1: by itself was getting stuck in assets, was was worsening 283 00:15:24,240 --> 00:15:27,520 Speaker 1: the wealth divide. Eventually that in order to turn around 284 00:15:27,560 --> 00:15:30,120 Speaker 1: some of the economic ills that had been stretched over 285 00:15:30,160 --> 00:15:32,640 Speaker 1: that four to year period, that you would need to 286 00:15:32,760 --> 00:15:36,920 Speaker 1: combine fiscal and monetary policy. That happened in in warp 287 00:15:37,000 --> 00:15:41,880 Speaker 1: speed during the COVID crisis, and it showed the power 288 00:15:41,880 --> 00:15:46,120 Speaker 1: of it that that printing money and getting that money 289 00:15:46,120 --> 00:15:48,160 Speaker 1: into the hands of people that would spend it in 290 00:15:48,200 --> 00:15:52,200 Speaker 1: the real economy worked massively well. It was way more 291 00:15:52,240 --> 00:15:56,400 Speaker 1: effective way to ease policy than anything that had been 292 00:15:56,400 --> 00:15:59,520 Speaker 1: tried before, lowering your interest rates or quantitative easing. But 293 00:15:59,800 --> 00:16:04,560 Speaker 1: what it did was instantly create demand without creating supply. Normally, 294 00:16:05,320 --> 00:16:08,560 Speaker 1: when the economy is strong, the demand is coming at 295 00:16:08,600 --> 00:16:10,200 Speaker 1: the same time the supply is coming in the sense 296 00:16:10,200 --> 00:16:12,400 Speaker 1: that somebody gets hired and they're supplying o good at 297 00:16:12,440 --> 00:16:14,560 Speaker 1: the same time they're getting paid in demanding a good. 298 00:16:14,760 --> 00:16:20,400 Speaker 1: So you've got demand without supply instantly. In terms of COVID, Now, 299 00:16:20,400 --> 00:16:21,840 Speaker 1: it took a little while to play out because the 300 00:16:21,880 --> 00:16:24,720 Speaker 1: lockdowns and other things related to COVID, but that that 301 00:16:24,840 --> 00:16:27,640 Speaker 1: had this huge inflationary effect. Right, And if you just 302 00:16:27,640 --> 00:16:29,280 Speaker 1: think about the framework I was saying before, if you 303 00:16:29,320 --> 00:16:31,520 Speaker 1: just look at, well, how many dollars are available to 304 00:16:31,560 --> 00:16:34,680 Speaker 1: spend relative to the supply of whether that was the 305 00:16:34,680 --> 00:16:38,440 Speaker 1: supply of meme stocks or the supply of used cars, right, 306 00:16:38,520 --> 00:16:41,720 Speaker 1: nothing kept up in that phase that the demand rose 307 00:16:41,800 --> 00:16:46,400 Speaker 1: so quickly the supply of assets and didn't keep up. Now, 308 00:16:46,440 --> 00:16:49,320 Speaker 1: as time goes, assets that are easy to print, meme stocks, 309 00:16:49,320 --> 00:16:52,040 Speaker 1: et cetera, the supply of those increased quickly. The things 310 00:16:52,040 --> 00:16:56,040 Speaker 1: that are harder to supply are still lagging that demand shot, 311 00:16:56,520 --> 00:16:59,080 Speaker 1: and so you get this inflation. And now the inflation 312 00:17:00,080 --> 00:17:03,160 Speaker 1: becomes sticky when you end up in where I think 313 00:17:03,200 --> 00:17:07,320 Speaker 1: we are, which is now this wage price combo, because 314 00:17:07,560 --> 00:17:09,919 Speaker 1: wages are now the thing that we're most short on 315 00:17:09,960 --> 00:17:12,040 Speaker 1: in the United States is actually labor at this point, 316 00:17:12,560 --> 00:17:15,879 Speaker 1: and wages are rising and goods prices are rising, and 317 00:17:15,920 --> 00:17:18,160 Speaker 1: they cycle on each other. The wages drive up goods 318 00:17:18,200 --> 00:17:20,399 Speaker 1: prices and they drive up the demand for goods because 319 00:17:20,760 --> 00:17:23,000 Speaker 1: because incomes are rising as a result of the wages. 320 00:17:23,400 --> 00:17:25,320 Speaker 1: And so you've got that cycle, and that we think 321 00:17:25,359 --> 00:17:28,919 Speaker 1: that cycles pretty sticky, although we'll see that's certainly the 322 00:17:28,920 --> 00:17:31,400 Speaker 1: place you'd be looking is whether that cycle turns out 323 00:17:31,440 --> 00:17:34,360 Speaker 1: not to be sticky. But that then so we're measuring 324 00:17:34,400 --> 00:17:36,439 Speaker 1: that phenomenon, right, And if you try to do that 325 00:17:36,480 --> 00:17:38,560 Speaker 1: statistically with so little sample, and you looked at the 326 00:17:38,600 --> 00:17:40,680 Speaker 1: last four years, you almost never see that spot. You 327 00:17:40,800 --> 00:17:43,000 Speaker 1: have to go back to other periods in history, so 328 00:17:43,240 --> 00:17:45,840 Speaker 1: statistically you will you would be looking for inflation to 329 00:17:45,920 --> 00:17:49,840 Speaker 1: revert because the last fourty years it mostly has. Now 330 00:17:50,240 --> 00:17:52,439 Speaker 1: in this case that we think that if you measure 331 00:17:52,440 --> 00:17:54,520 Speaker 1: that dynamics at a physics level and you look at 332 00:17:54,520 --> 00:17:56,720 Speaker 1: what's happening to incomes as a result of the wage 333 00:17:56,720 --> 00:18:00,240 Speaker 1: inflation and what that means for spending and where action 334 00:18:00,280 --> 00:18:03,000 Speaker 1: and other things will be, we think you're stuck in 335 00:18:03,080 --> 00:18:07,120 Speaker 1: a more stubborn inflation spiral. Now that's all coming from 336 00:18:07,200 --> 00:18:10,200 Speaker 1: algorithms that we've produced, but they're not the same as 337 00:18:10,200 --> 00:18:13,399 Speaker 1: the algorithms that would be produced through a machine learning process, 338 00:18:13,440 --> 00:18:17,719 Speaker 1: particularly if it waited the last fourty years significantly. And 339 00:18:17,760 --> 00:18:20,320 Speaker 1: that's the difference. Knowing that difference being able to tune 340 00:18:20,320 --> 00:18:23,240 Speaker 1: your algorithms in the way that you think things work 341 00:18:23,560 --> 00:18:26,800 Speaker 1: rather than the way that they've worked over most of 342 00:18:26,840 --> 00:18:29,320 Speaker 1: the history. And that's the freedom you have as a 343 00:18:29,400 --> 00:18:31,959 Speaker 1: human to look at that history and understand it and 344 00:18:32,000 --> 00:18:34,000 Speaker 1: therefore say, well, I haven't seen this before, but I 345 00:18:34,040 --> 00:18:36,439 Speaker 1: know the physics of how it would work, and you 346 00:18:36,480 --> 00:18:38,840 Speaker 1: get you get different answers as a result. Now, I 347 00:18:38,840 --> 00:18:41,760 Speaker 1: don't think that's impossible that you could imagine someday, uh 348 00:18:41,880 --> 00:18:45,520 Speaker 1: machine learning capable of seeing those differences and whatever, but 349 00:18:45,640 --> 00:18:48,760 Speaker 1: it's extremely difficult. And so in any event, that's where 350 00:18:48,800 --> 00:18:52,360 Speaker 1: the expertise comes in to understand those different types of situations, 351 00:18:52,359 --> 00:18:55,600 Speaker 1: which when you're in and tune your algorithms and you're 352 00:18:55,640 --> 00:18:59,560 Speaker 1: thinking to your systematic process in that way. So you 353 00:18:59,600 --> 00:19:03,879 Speaker 1: mentioned the potential stickiness of inflation as we get this 354 00:19:03,960 --> 00:19:09,000 Speaker 1: sort of wage price spiral, and obviously this is something 355 00:19:09,320 --> 00:19:12,440 Speaker 1: that is concerning to the Federal Reserve and that's why 356 00:19:12,440 --> 00:19:15,000 Speaker 1: we're seeing them hike interest rates at the moment. Could 357 00:19:15,040 --> 00:19:20,160 Speaker 1: you walk us through exactly how you see interest rate 358 00:19:20,280 --> 00:19:25,560 Speaker 1: hikes impacting inflation at the moment, Like when when you 359 00:19:25,640 --> 00:19:29,560 Speaker 1: walk through that as a as a trading strategy or 360 00:19:29,600 --> 00:19:32,440 Speaker 1: when you're trying to gauge the impact of what that 361 00:19:32,520 --> 00:19:36,280 Speaker 1: could be on the economy and on broader markets, what 362 00:19:36,440 --> 00:19:39,800 Speaker 1: exactly are you seeing? Yeah, so this is a great 363 00:19:39,840 --> 00:19:41,800 Speaker 1: example of coming back to the framework. Right, So we 364 00:19:41,840 --> 00:19:45,040 Speaker 1: look at if the Fed raised a short term interest rates, 365 00:19:45,040 --> 00:19:48,200 Speaker 1: how much will that cut the dollar spent on goods 366 00:19:48,200 --> 00:19:51,280 Speaker 1: and services? If you're trying to estimate inflation relative to 367 00:19:51,359 --> 00:19:53,320 Speaker 1: what's going to happen to the production of those goods 368 00:19:53,320 --> 00:19:56,080 Speaker 1: and services. And when you look at that, this is 369 00:19:56,119 --> 00:19:58,520 Speaker 1: the tough thing for the Fed that if you take 370 00:19:58,520 --> 00:20:02,160 Speaker 1: the last decade, what the FED did was drove up 371 00:20:02,200 --> 00:20:05,320 Speaker 1: asset prices so much more than the economy itself, so 372 00:20:05,400 --> 00:20:09,119 Speaker 1: that there's a huge gap between asset prices and the 373 00:20:09,200 --> 00:20:11,960 Speaker 1: cash flows available to those assets in the real economy. 374 00:20:12,320 --> 00:20:14,560 Speaker 1: And that gap is an unsustainable gaps. Somehow you have 375 00:20:14,600 --> 00:20:18,359 Speaker 1: to pay for the assets with cash flows generated in 376 00:20:18,359 --> 00:20:22,000 Speaker 1: the real economy. One person's assets is another draw on 377 00:20:22,119 --> 00:20:25,120 Speaker 1: somebody else's future income, So the incomes and the assets 378 00:20:25,280 --> 00:20:26,959 Speaker 1: have to align at some point. Now that could take 379 00:20:27,000 --> 00:20:29,320 Speaker 1: a very long time, but the last decade was extreme. 380 00:20:29,359 --> 00:20:31,720 Speaker 1: It was one of the most extreme periods of assets 381 00:20:31,720 --> 00:20:36,359 Speaker 1: doing well relative to the nominal cash flows. Today, the 382 00:20:36,440 --> 00:20:38,280 Speaker 1: FEDS trying to deal with the aftermath of that. The 383 00:20:38,280 --> 00:20:40,240 Speaker 1: aftermath of that is we've got a tremendous amount of 384 00:20:40,240 --> 00:20:43,120 Speaker 1: paper wealth, we got a tremendous amount of demand relative 385 00:20:43,200 --> 00:20:45,639 Speaker 1: to the ability of the economy to supply it. And 386 00:20:45,680 --> 00:20:47,560 Speaker 1: now the FED has two choices. If you said, what 387 00:20:47,640 --> 00:20:50,240 Speaker 1: is it going to take to get inflation back to target? 388 00:20:50,960 --> 00:20:53,160 Speaker 1: You know, and it's not I don't want to give 389 00:20:53,359 --> 00:20:55,359 Speaker 1: the sense of false precision. But if we said, well, 390 00:20:55,359 --> 00:20:58,120 Speaker 1: how much you have to drop demand change the labor 391 00:20:58,160 --> 00:21:00,520 Speaker 1: market to get it, you're looking at a tort term 392 00:21:00,520 --> 00:21:03,000 Speaker 1: interest rate of five and a percent and a recession, 393 00:21:03,160 --> 00:21:06,840 Speaker 1: a d percession, and a crash probably in financial markets 394 00:21:06,920 --> 00:21:10,280 Speaker 1: down if you choose to go that direction. I don't 395 00:21:10,280 --> 00:21:12,240 Speaker 1: think the FED will do that. I think the FED 396 00:21:12,359 --> 00:21:16,000 Speaker 1: will instead watch as growth stats. One of the things 397 00:21:16,040 --> 00:21:18,720 Speaker 1: you were saying, Tracy, and the intro that equippal with 398 00:21:18,760 --> 00:21:20,639 Speaker 1: a little bit is I think growth is slowing right now. 399 00:21:20,680 --> 00:21:22,720 Speaker 1: Now it's just starting to show up. But I think 400 00:21:22,720 --> 00:21:26,639 Speaker 1: you're gonna see you are gonna see negative growth in 401 00:21:26,680 --> 00:21:31,439 Speaker 1: the next year. Tube Real growth now different than nominal growth, 402 00:21:31,600 --> 00:21:34,919 Speaker 1: and so this gets complicated, and nominal growth will be 403 00:21:35,440 --> 00:21:37,680 Speaker 1: high and real growth will be slow, and that's gonna 404 00:21:37,720 --> 00:21:41,439 Speaker 1: be a dilemma and how fast the FED deals with 405 00:21:41,440 --> 00:21:46,480 Speaker 1: that dilemma of do they actually raise rates? Are they 406 00:21:46,520 --> 00:21:49,480 Speaker 1: serious about two percent inflation or are they gonna kind 407 00:21:49,480 --> 00:21:52,840 Speaker 1: of way the consequences of bringing inflation down as quickly 408 00:21:52,880 --> 00:21:58,360 Speaker 1: as markets currently expect against that consequence in the real economy. 409 00:21:58,440 --> 00:22:01,119 Speaker 1: That's where we suspect the FED will actually go slower. 410 00:22:01,280 --> 00:22:02,800 Speaker 1: They're not going to go to five percent, or at 411 00:22:02,840 --> 00:22:04,680 Speaker 1: least if they do, they're going to go there slowly. 412 00:22:05,000 --> 00:22:06,439 Speaker 1: And so we think they need to tighten a lot 413 00:22:06,480 --> 00:22:09,200 Speaker 1: more to get inflation down, but likely they won't choose 414 00:22:09,840 --> 00:22:12,680 Speaker 1: to bring inflation down because they'll be weighing that trade 415 00:22:12,680 --> 00:22:16,280 Speaker 1: off and be cautious along the way. But I don't 416 00:22:16,320 --> 00:22:19,440 Speaker 1: know for sure. That's another good example of why data 417 00:22:19,480 --> 00:22:21,159 Speaker 1: matching or what is very tough. This is in the 418 00:22:21,200 --> 00:22:23,400 Speaker 1: hands of a few policymakers. They're going to make those 419 00:22:23,400 --> 00:22:27,399 Speaker 1: decisions of how important inflation is to them relative to 420 00:22:27,480 --> 00:22:32,399 Speaker 1: how important the ramifications of fighting inflation are. Well. So 421 00:22:32,440 --> 00:22:34,800 Speaker 1: the FED has, you know, in theory, it has a 422 00:22:34,840 --> 00:22:38,480 Speaker 1: goal of getting uh, you know, inflation back down to 423 00:22:38,800 --> 00:22:43,040 Speaker 1: two percent, but it's been suggested by others that okay, 424 00:22:43,119 --> 00:22:46,480 Speaker 1: if inflation gets down maybe four percent or two four 425 00:22:46,480 --> 00:22:49,040 Speaker 1: percent or three percent, that it could start breathing a 426 00:22:49,040 --> 00:22:51,200 Speaker 1: little bit, that maybe it doesn't have to go as 427 00:22:51,280 --> 00:22:55,440 Speaker 1: aggressively in that last one or two percent. If if 428 00:22:55,440 --> 00:22:58,680 Speaker 1: the direction is right, is there like a level of 429 00:22:58,760 --> 00:23:05,639 Speaker 1: either inflationation or either inflation improving or real growth decelerating 430 00:23:06,040 --> 00:23:08,439 Speaker 1: that you would suspect would be consistent with saying, you 431 00:23:08,480 --> 00:23:11,040 Speaker 1: know what, the Fed like, we're not going to go 432 00:23:11,080 --> 00:23:13,679 Speaker 1: as hard as maybe we had planned, Like what level 433 00:23:14,280 --> 00:23:16,880 Speaker 1: of activity maybe gives them a little bit of comfort 434 00:23:17,720 --> 00:23:20,399 Speaker 1: reading how Jay Powell and they are gonna, you know, 435 00:23:20,440 --> 00:23:22,840 Speaker 1: it's not necessary Like, I don't know that I have 436 00:23:22,880 --> 00:23:25,840 Speaker 1: any particular insight on that other than that they seem 437 00:23:25,960 --> 00:23:30,280 Speaker 1: to be lagging and somewhat backward looking. But my if 438 00:23:30,320 --> 00:23:32,879 Speaker 1: you're asking me if I were in their shoes, I 439 00:23:32,920 --> 00:23:34,960 Speaker 1: would be wary. Right. I think they're gonna. They're in 440 00:23:35,000 --> 00:23:38,479 Speaker 1: this dilemma, and it's due to a lot of reasons. 441 00:23:38,480 --> 00:23:40,480 Speaker 1: It's not the fault of the current Fed per se. 442 00:23:40,480 --> 00:23:43,560 Speaker 1: If you go back to the debt bubble prior to 443 00:23:43,600 --> 00:23:46,320 Speaker 1: two thousand and eight and you're still living the ramifications 444 00:23:46,359 --> 00:23:49,160 Speaker 1: of that debt bubble, We've gone through transferring that debt 445 00:23:49,200 --> 00:23:53,440 Speaker 1: to the government, we've gone through inflating it away to 446 00:23:53,480 --> 00:23:57,080 Speaker 1: a certain degree, and we're in this process that is 447 00:23:57,119 --> 00:24:01,440 Speaker 1: a long process that normally would with inflation. And so 448 00:24:01,560 --> 00:24:05,040 Speaker 1: the current Fed is in a very difficult spot, but 449 00:24:05,080 --> 00:24:07,520 Speaker 1: it's a spot that's been set up over fifteen twenty 450 00:24:07,600 --> 00:24:11,200 Speaker 1: years and and and so they're making choices between bad 451 00:24:11,240 --> 00:24:14,600 Speaker 1: outcomes here. But so the one the outcome, my guess, 452 00:24:14,600 --> 00:24:16,240 Speaker 1: is they're going to try to carve the middle of 453 00:24:16,280 --> 00:24:18,119 Speaker 1: that that in the end there's no magic to a 454 00:24:18,119 --> 00:24:21,919 Speaker 1: two percent inflation target, like you're saying, lower and reasonably stable. 455 00:24:22,440 --> 00:24:26,159 Speaker 1: Probably four will be a better choice. Now the markets 456 00:24:26,160 --> 00:24:28,480 Speaker 1: stopped to adjust a lot. If if you're actually gonna 457 00:24:28,480 --> 00:24:30,359 Speaker 1: have a long term inflation rate of four, the markets 458 00:24:30,400 --> 00:24:32,480 Speaker 1: have that they're not pricing that in. That's a lot 459 00:24:32,520 --> 00:24:36,119 Speaker 1: of adjustment from here. It's particularly bearish for bonds, but 460 00:24:36,280 --> 00:24:39,160 Speaker 1: somewhat bearish for equities as the disc out rate evolved 461 00:24:39,200 --> 00:24:42,040 Speaker 1: in that direction. But I think that, like you're saying, 462 00:24:42,160 --> 00:24:43,800 Speaker 1: the goal would be to get it down a bit 463 00:24:44,240 --> 00:24:47,280 Speaker 1: while maintaining as much as you can the economy and 464 00:24:47,320 --> 00:24:50,200 Speaker 1: reasonable shape. Now that's gonna be very difficult to get 465 00:24:50,680 --> 00:24:54,200 Speaker 1: and right now, unless they raise interest rates more than 466 00:24:54,400 --> 00:24:59,440 Speaker 1: expected and hit markets harder, we still think you're gonna 467 00:24:59,480 --> 00:25:02,640 Speaker 1: be above five in core inflation, you know, going out 468 00:25:02,680 --> 00:25:04,640 Speaker 1: the next twelve months. So something's got to change even 469 00:25:04,680 --> 00:25:07,400 Speaker 1: further than it has in order for them to get 470 00:25:07,440 --> 00:25:10,440 Speaker 1: that get that down. But to me, I would consider, 471 00:25:10,800 --> 00:25:14,080 Speaker 1: you know, them getting it down to four and maintaining 472 00:25:14,440 --> 00:25:18,480 Speaker 1: reasonable you know, very slow economic growth of a big success. 473 00:25:18,840 --> 00:25:20,240 Speaker 1: And if they try to get more than that, I 474 00:25:20,240 --> 00:25:22,240 Speaker 1: think they're gonna get They're gonna pay a lot on 475 00:25:22,240 --> 00:25:39,080 Speaker 1: one side or the other, just on the idea of markets, 476 00:25:39,240 --> 00:25:41,679 Speaker 1: And you mentioned earlier a lot of what you do 477 00:25:41,800 --> 00:25:45,240 Speaker 1: is sort of trying to figure out discounted cash flows 478 00:25:45,320 --> 00:25:47,000 Speaker 1: or trying to figure out what the market is actually 479 00:25:47,040 --> 00:25:50,720 Speaker 1: discounting in terms of the future. What are markets seeing 480 00:25:51,160 --> 00:25:53,720 Speaker 1: right now, because it feels at the moment like people 481 00:25:53,720 --> 00:25:58,719 Speaker 1: are simultaneously positioned for higher inflation, but also there is 482 00:25:58,760 --> 00:26:02,760 Speaker 1: this expectation of her session and you know, to the 483 00:26:02,800 --> 00:26:04,760 Speaker 1: point that Joe was making. At some point you would 484 00:26:04,800 --> 00:26:07,320 Speaker 1: kind of expect those two to start impacting each other 485 00:26:07,359 --> 00:26:11,439 Speaker 1: and potentially cancel each other out. The I'd think the 486 00:26:11,480 --> 00:26:15,040 Speaker 1: markets are pricing in actually a pretty darn smooth landing 487 00:26:15,080 --> 00:26:17,800 Speaker 1: here that if you look at the break even inflation curve, 488 00:26:17,840 --> 00:26:20,520 Speaker 1: the difference between inflation and X bonds and nominal bonds, 489 00:26:20,840 --> 00:26:23,280 Speaker 1: you see what the markets are expecting for inflation, and 490 00:26:23,440 --> 00:26:26,280 Speaker 1: they expect inflation to come down over the next eighteen 491 00:26:26,280 --> 00:26:29,360 Speaker 1: months to two point seven percent. And at the same time, 492 00:26:29,359 --> 00:26:31,400 Speaker 1: while equities are down, it can feel like a big 493 00:26:31,440 --> 00:26:33,800 Speaker 1: thing has happened in in the stock market, not much 494 00:26:33,800 --> 00:26:37,720 Speaker 1: has actually happened that that stocks have dropped mostly in 495 00:26:37,800 --> 00:26:41,400 Speaker 1: line with the interest rate rise such that up until 496 00:26:41,440 --> 00:26:45,000 Speaker 1: the last couple of weeks, cash flows projected in the 497 00:26:45,000 --> 00:26:48,320 Speaker 1: equity market actually gone up, not down over the period 498 00:26:48,359 --> 00:26:51,760 Speaker 1: of equity equity weakness, because the cash flows have to 499 00:26:51,800 --> 00:26:54,920 Speaker 1: make up for the discount rate increase. So now you're 500 00:26:54,960 --> 00:26:59,199 Speaker 1: starting to see the market price in less liquidity and 501 00:26:59,280 --> 00:27:00,840 Speaker 1: the fact that the cash flows are going to be 502 00:27:00,880 --> 00:27:02,520 Speaker 1: a bit worse. That growth can be slow, but it's 503 00:27:02,520 --> 00:27:07,200 Speaker 1: still extremely optimistic pricing in the equity market about future 504 00:27:07,200 --> 00:27:09,760 Speaker 1: cash flows. So overall, i'd say if you if you 505 00:27:09,800 --> 00:27:12,959 Speaker 1: track what the markets are saying, they're essentially saying we're 506 00:27:12,960 --> 00:27:16,040 Speaker 1: going to get the decline inflation, the Fed's gonna tighten 507 00:27:16,080 --> 00:27:19,040 Speaker 1: to about three and then be done and it's going 508 00:27:19,119 --> 00:27:21,840 Speaker 1: to flatten out there, and that the economy at that 509 00:27:21,880 --> 00:27:24,920 Speaker 1: point will be good. And that's kind of that's the 510 00:27:24,960 --> 00:27:27,080 Speaker 1: betting line. You think about that as the line. Now, 511 00:27:27,119 --> 00:27:29,800 Speaker 1: if it's better than that, if inflation falls further with 512 00:27:29,920 --> 00:27:33,720 Speaker 1: growth being better than that, markets will go up. And 513 00:27:33,760 --> 00:27:36,080 Speaker 1: if it's worse than that, if inflation is more sticky 514 00:27:36,359 --> 00:27:39,040 Speaker 1: and you have to hit growth harder, assets are gonna 515 00:27:39,080 --> 00:27:42,080 Speaker 1: fall from here. And and our view would be on 516 00:27:42,080 --> 00:27:44,159 Speaker 1: the second that it's going to be much tougher. That 517 00:27:44,280 --> 00:27:47,359 Speaker 1: is still very optimistic pricing. Even though I can feel like, 518 00:27:47,359 --> 00:27:50,920 Speaker 1: oh my gosh, stocks are down almost or whatever um 519 00:27:50,960 --> 00:27:53,600 Speaker 1: from their peak. It feels like our sessions being priced in. 520 00:27:53,680 --> 00:27:56,679 Speaker 1: But all this really changed is the discount rate on assets, 521 00:27:57,359 --> 00:28:01,440 Speaker 1: and you're going into a period where the liquidity hole 522 00:28:01,600 --> 00:28:05,080 Speaker 1: is getting bigger bigger. The Fed's gonna start running down 523 00:28:05,119 --> 00:28:09,840 Speaker 1: their balance sheet. Banks that were too The FED and 524 00:28:09,920 --> 00:28:12,080 Speaker 1: banks were the reason there was so much money going 525 00:28:12,080 --> 00:28:14,480 Speaker 1: around last year. The FED was still buying assets, and 526 00:28:14,560 --> 00:28:18,280 Speaker 1: the banks were buying bonds at record clips, almost crazy 527 00:28:18,280 --> 00:28:20,800 Speaker 1: fashion in my mind, because they had so much access deposits. 528 00:28:21,040 --> 00:28:24,280 Speaker 1: All that's reversing. They're not buying bonds anymore. The Feds 529 00:28:24,359 --> 00:28:26,959 Speaker 1: not Fed's actually gonna roll off their thing. Banks aren't 530 00:28:27,080 --> 00:28:30,919 Speaker 1: because they essentially bought in an excess of bonds and 531 00:28:31,000 --> 00:28:33,760 Speaker 1: now the market has to clear, and for the bond 532 00:28:33,800 --> 00:28:37,680 Speaker 1: market to clear with private sector buyers, they need to 533 00:28:37,760 --> 00:28:41,640 Speaker 1: draw those assets from other assets, and there's so many 534 00:28:41,680 --> 00:28:43,520 Speaker 1: assets in the US you're seeing this This a lot 535 00:28:43,520 --> 00:28:46,200 Speaker 1: of the market action last couple of weeks. The assets 536 00:28:46,240 --> 00:28:48,760 Speaker 1: that need liquidity the most, that don't themselves have cash 537 00:28:48,800 --> 00:28:52,720 Speaker 1: flows are getting killed because liquidity is being withdrawn from 538 00:28:52,760 --> 00:28:56,760 Speaker 1: the aggregate system, and those assets that require kind of 539 00:28:56,800 --> 00:29:00,880 Speaker 1: pondsi like ongoing purchases to support the assets, are getting 540 00:29:00,960 --> 00:29:04,200 Speaker 1: hit the hardest. And so I think today's market pricing 541 00:29:04,280 --> 00:29:08,960 Speaker 1: is still overly optimistic. It's been a small move relative 542 00:29:09,040 --> 00:29:14,240 Speaker 1: to the secular change that we're actually experiencing. So we're 543 00:29:14,240 --> 00:29:17,480 Speaker 1: experiencing a secular change. And look, I would never say 544 00:29:17,560 --> 00:29:20,320 Speaker 1: in a million years, and I know this that investing 545 00:29:20,480 --> 00:29:24,600 Speaker 1: or portfolio management is easy, but it is true that 546 00:29:24,640 --> 00:29:26,760 Speaker 1: you know, in the last decade and maybe before a 547 00:29:26,920 --> 00:29:30,520 Speaker 1: stocks mostly just went up. And also investor has had 548 00:29:30,560 --> 00:29:33,600 Speaker 1: the luxury of those other asset class treasuries that sort 549 00:29:33,640 --> 00:29:36,160 Speaker 1: of acted as a natural hedge. They also end up 550 00:29:36,200 --> 00:29:38,720 Speaker 1: over time, but they usually on a short term basis. 551 00:29:38,880 --> 00:29:42,560 Speaker 1: We're moving inverse relationship to stocks, so that had an 552 00:29:42,560 --> 00:29:45,280 Speaker 1: effect of volatility smoothing, and so you could buy a 553 00:29:45,280 --> 00:29:47,080 Speaker 1: bunch of stocks and buy a bunch of bonds and 554 00:29:47,200 --> 00:29:49,640 Speaker 1: you don't always make money, but both generally went up, 555 00:29:49,680 --> 00:29:52,160 Speaker 1: and they also sort of canceled each other out in 556 00:29:52,200 --> 00:29:54,720 Speaker 1: the short term. So I'm curious, like how you're thinking 557 00:29:54,760 --> 00:29:58,240 Speaker 1: about like portfolio construction, if we're like shifting to a 558 00:29:58,280 --> 00:30:01,320 Speaker 1: new regime. If inflay Shin, let's say it comes down, 559 00:30:01,360 --> 00:30:04,640 Speaker 1: but it still remains for a while above this two 560 00:30:05,080 --> 00:30:08,520 Speaker 1: goal or target, Like, how do you approach the general 561 00:30:08,520 --> 00:30:12,200 Speaker 1: problem of building a portfolio? Yeah? Great questions. So I 562 00:30:12,280 --> 00:30:15,440 Speaker 1: mean you start with, like you're saying that the lessons 563 00:30:15,480 --> 00:30:17,800 Speaker 1: of the last twenty years, in particular in terms of 564 00:30:17,840 --> 00:30:20,880 Speaker 1: portfolio construction, you really have to understand the reason for 565 00:30:20,960 --> 00:30:23,960 Speaker 1: them and then think about whether those reasons exist. So 566 00:30:24,480 --> 00:30:28,320 Speaker 1: you made the point about both assets doing great. You know, 567 00:30:28,440 --> 00:30:31,560 Speaker 1: since the financial crisis, you've had this incredible run where 568 00:30:31,720 --> 00:30:34,400 Speaker 1: diversification was actually almost always bad. All you wanted was 569 00:30:34,560 --> 00:30:38,160 Speaker 1: US assets and US equity assets, and everything else was 570 00:30:38,240 --> 00:30:40,280 Speaker 1: a drag. Now that's not going to go on forever. 571 00:30:40,320 --> 00:30:42,600 Speaker 1: It's a kind of obviously true. US equities can't take 572 00:30:42,640 --> 00:30:45,400 Speaker 1: over everything in the world, um, and yet they were 573 00:30:45,400 --> 00:30:48,480 Speaker 1: on pace for that, And most portfolios are are still 574 00:30:48,520 --> 00:30:51,760 Speaker 1: dominated based on what's been great for the last decade. 575 00:30:52,560 --> 00:30:56,800 Speaker 1: And and like you said, the relationships change as a 576 00:30:56,880 --> 00:30:59,640 Speaker 1: result of the impacts on the cash flows. Right, So 577 00:30:59,640 --> 00:31:02,840 Speaker 1: if you why are stocks and bonds gonna be negatively 578 00:31:02,840 --> 00:31:04,960 Speaker 1: correlated in the future? If they were positively correlated in 579 00:31:04,960 --> 00:31:07,479 Speaker 1: the last one of years. Well, and the difference is 580 00:31:07,920 --> 00:31:11,920 Speaker 1: the cash flows on equities and bonds are affected by 581 00:31:11,960 --> 00:31:16,160 Speaker 1: both real growth rates but also inflation. Now the real 582 00:31:16,200 --> 00:31:19,040 Speaker 1: growth rates stocks and bonds act opposite. So if real 583 00:31:19,080 --> 00:31:22,160 Speaker 1: growth is the dominant factor in inflation, stable stocks and 584 00:31:22,160 --> 00:31:25,640 Speaker 1: bonds are gonna be great diversifiers if inflation. Though inflation 585 00:31:25,680 --> 00:31:28,760 Speaker 1: is bad for bonds and to some extent bad for stocks, 586 00:31:28,760 --> 00:31:31,080 Speaker 1: although we get into that all of a sudden, they're 587 00:31:31,080 --> 00:31:34,160 Speaker 1: no longer good diversifires when inflation is more volatile than growth. 588 00:31:34,240 --> 00:31:37,000 Speaker 1: So if you look at history, hundreds of years of history, 589 00:31:37,040 --> 00:31:41,240 Speaker 1: stocks and bonds are always negatively correlated, good diversifiers when 590 00:31:41,280 --> 00:31:45,280 Speaker 1: inflation is stable and low, and they're bad diversifiers when 591 00:31:45,320 --> 00:31:47,560 Speaker 1: inflation is high. And that's just a function of the 592 00:31:47,600 --> 00:31:50,360 Speaker 1: cash flows. And so if you don't think in terms 593 00:31:50,400 --> 00:31:52,920 Speaker 1: of the correlation, but think in terms of the actual 594 00:31:53,080 --> 00:31:56,400 Speaker 1: physical cash flows, you can start to see in different 595 00:31:56,440 --> 00:31:59,640 Speaker 1: types of environments what the good diversifiers are. So if 596 00:31:59,680 --> 00:32:02,840 Speaker 1: you take today and you say what diversifies stocks and 597 00:32:02,920 --> 00:32:05,880 Speaker 1: bonds If they're not good diversifiers for each other, well, 598 00:32:05,880 --> 00:32:07,920 Speaker 1: and that's really you want to be careful and figure 599 00:32:07,920 --> 00:32:11,520 Speaker 1: out ways to take a view on inflation and break 600 00:32:11,560 --> 00:32:15,240 Speaker 1: even inflation. The difference between inflation index bonds and nominal 601 00:32:15,240 --> 00:32:17,720 Speaker 1: bonds is one way. You mentioned commodities in the intro 602 00:32:17,840 --> 00:32:20,560 Speaker 1: and commodities is one way. But you need those things, 603 00:32:21,120 --> 00:32:24,040 Speaker 1: and we think also looking at certain emerging markets that 604 00:32:24,160 --> 00:32:25,960 Speaker 1: have what the developed world needs. You have a world 605 00:32:25,960 --> 00:32:30,240 Speaker 1: where your short labor and your short commodities and your deglobalizing. 606 00:32:30,280 --> 00:32:32,520 Speaker 1: So you've got to look at the emerging market allies 607 00:32:32,640 --> 00:32:36,600 Speaker 1: essentially that you can reliably provide the things that the 608 00:32:36,640 --> 00:32:41,440 Speaker 1: world's missing. Those places are the places to diversify the 609 00:32:41,520 --> 00:32:44,320 Speaker 1: problem that's going on in the stock and bond market 610 00:32:44,400 --> 00:33:01,680 Speaker 1: that are more and more correlated rather than diversity. Can 611 00:33:01,720 --> 00:33:04,760 Speaker 1: you talk a little bit more about the impact of 612 00:33:04,760 --> 00:33:09,120 Speaker 1: inflation on stocks and why you see stocks is not 613 00:33:09,160 --> 00:33:14,280 Speaker 1: necessarily outperforming or performing reasonably well in an inflationary environment, 614 00:33:14,320 --> 00:33:17,040 Speaker 1: because I think this is an ongoing debate in markets 615 00:33:17,120 --> 00:33:20,360 Speaker 1: whether or not equities actually have that pricing power. Yeah, 616 00:33:20,360 --> 00:33:22,960 Speaker 1: so if you look at periods of inflation, right, I mean, 617 00:33:23,000 --> 00:33:26,640 Speaker 1: stocks can often be better than cash and inflation periods 618 00:33:26,640 --> 00:33:28,520 Speaker 1: but lose a lot in real terms. And why does 619 00:33:28,560 --> 00:33:34,200 Speaker 1: that happen a there's stocks are a function of both 620 00:33:34,440 --> 00:33:38,480 Speaker 1: the cash flows and the way those cash flows are discounted. 621 00:33:39,400 --> 00:33:41,600 Speaker 1: So if you take periods of high of high inflation, 622 00:33:41,600 --> 00:33:44,400 Speaker 1: if you take the seventies as an example, cash flows 623 00:33:44,440 --> 00:33:48,440 Speaker 1: were decent for companies, but they were hit by a 624 00:33:48,520 --> 00:33:53,160 Speaker 1: significant rise in the discount rate and the uncertainty essentially 625 00:33:53,160 --> 00:33:55,760 Speaker 1: a higher uncertainty were supremium when you have higher and 626 00:33:55,760 --> 00:34:00,479 Speaker 1: more volatile inflation. So cash flows were fine, but ease 627 00:34:00,960 --> 00:34:03,520 Speaker 1: dropped a lot during the seventies, and that's a function 628 00:34:03,560 --> 00:34:06,520 Speaker 1: of the higher discount rate and the higher risk premium. 629 00:34:06,560 --> 00:34:09,239 Speaker 1: And what you see is these big divergences and more 630 00:34:09,360 --> 00:34:14,480 Speaker 1: volatile corporate situations and generally lost productivity as a result 631 00:34:14,640 --> 00:34:19,160 Speaker 1: of the instability of inflation and the price feature. So so, 632 00:34:19,239 --> 00:34:22,480 Speaker 1: but basically stocks cut both ways. The cash flows generally 633 00:34:22,920 --> 00:34:25,919 Speaker 1: stay in line. Profits a little bit less so because 634 00:34:25,960 --> 00:34:28,720 Speaker 1: margins are hit to a certain degree. But the biggest 635 00:34:28,760 --> 00:34:30,799 Speaker 1: thing is that the risk premium on the discount rate. 636 00:34:30,800 --> 00:34:32,359 Speaker 1: All of a sudden, if you have a risk free 637 00:34:32,440 --> 00:34:35,759 Speaker 1: rate of government bond yielding fift what are you going 638 00:34:35,840 --> 00:34:39,080 Speaker 1: to demand out of your equities? And that's been the 639 00:34:39,080 --> 00:34:41,400 Speaker 1: the history of it is that that and when the 640 00:34:41,400 --> 00:34:44,520 Speaker 1: FED tries to then battle the inflation, of course that's 641 00:34:44,640 --> 00:34:48,600 Speaker 1: particularly bad for equities because you get a growth slow down, 642 00:34:48,800 --> 00:34:52,279 Speaker 1: you get the disinflation effect, and you get this lack 643 00:34:52,320 --> 00:34:55,640 Speaker 1: of liquidity. So the second point that's making stocks really 644 00:34:55,680 --> 00:34:59,359 Speaker 1: bad in this inflation here this period over the last 645 00:34:59,480 --> 00:35:02,279 Speaker 1: four months, it's the lack of liquidity. The FED had 646 00:35:02,320 --> 00:35:05,880 Speaker 1: been providing tremendous liquidity up until this calendar year. You 647 00:35:05,960 --> 00:35:11,160 Speaker 1: see how many stocks needed that liquidity because they needed 648 00:35:11,160 --> 00:35:15,200 Speaker 1: new buyers. And right now we can calculate about the 649 00:35:15,239 --> 00:35:20,400 Speaker 1: US equity market can only survive essentially with new buyers 650 00:35:20,480 --> 00:35:23,799 Speaker 1: entering the market because they're not cash flow generating themselves. 651 00:35:24,640 --> 00:35:28,719 Speaker 1: And that's near a historic high. That's like basically right 652 00:35:28,760 --> 00:35:34,080 Speaker 1: in line with and it exists because because the FED 653 00:35:34,400 --> 00:35:37,400 Speaker 1: produced liquidity for so long, you're declining real rates high 654 00:35:37,480 --> 00:35:40,520 Speaker 1: levels of liquidity. You get the reverse and you're seeing 655 00:35:40,520 --> 00:35:44,720 Speaker 1: that squeeze. The stocks that need that liquidity are getting 656 00:35:44,800 --> 00:35:48,120 Speaker 1: hit the hardest and um, and that's happening quite quite quickly. 657 00:35:48,160 --> 00:35:50,440 Speaker 1: You also see that to some extent, you need constantly 658 00:35:50,440 --> 00:35:53,840 Speaker 1: new buyers in crypto space as well. Just the removal 659 00:35:53,840 --> 00:35:58,480 Speaker 1: of macro liquidity is starting to affect the entities everywhere 660 00:35:58,719 --> 00:36:01,920 Speaker 1: that need the liquidity in the mode. So this is 661 00:36:01,960 --> 00:36:04,439 Speaker 1: really interesting and that's a stunning stat and it's sort 662 00:36:04,480 --> 00:36:06,920 Speaker 1: of one of my pet theories, which is that something 663 00:36:07,000 --> 00:36:10,759 Speaker 1: changed after the two Crisis, which is that in an 664 00:36:10,840 --> 00:36:15,680 Speaker 1: environment of low growth, people started chasing momentum as a 665 00:36:15,719 --> 00:36:18,560 Speaker 1: way to outperform. You just followed wherever the money went, 666 00:36:19,080 --> 00:36:22,960 Speaker 1: and money going into something basically helped inflate the valuation, 667 00:36:23,040 --> 00:36:25,279 Speaker 1: and then that attracted more money and so you had 668 00:36:25,320 --> 00:36:29,239 Speaker 1: this really bad cycle. So two things here, how do 669 00:36:29,280 --> 00:36:36,800 Speaker 1: you calculate that number exactly? And then secondly, what happens 670 00:36:36,920 --> 00:36:40,279 Speaker 1: as this starts to reverse as the momentum goes in 671 00:36:40,320 --> 00:36:43,120 Speaker 1: the other direction. I mean, for the past ten years 672 00:36:43,200 --> 00:36:45,720 Speaker 1: or so, it would have been that as the markets 673 00:36:45,719 --> 00:36:49,359 Speaker 1: were going down, the FED might you know, step in 674 00:36:49,400 --> 00:36:52,040 Speaker 1: and start easing again, and then that would be the 675 00:36:52,080 --> 00:36:56,200 Speaker 1: circuit breaker. But what's the circuit breaker on valuations in 676 00:36:56,239 --> 00:36:59,120 Speaker 1: this environment? I'll start with the first question on how 677 00:36:59,120 --> 00:37:01,880 Speaker 1: do we start? And I don't mean to again I 678 00:37:02,040 --> 00:37:04,560 Speaker 1: worry about false precision where this this all this stuff 679 00:37:04,640 --> 00:37:08,480 Speaker 1: is rough, but the basic idea is you can there's 680 00:37:08,520 --> 00:37:12,280 Speaker 1: always in normal times, there's a churn in financial markets. 681 00:37:12,320 --> 00:37:14,920 Speaker 1: Some people have to sell their financial market assets because 682 00:37:14,960 --> 00:37:17,920 Speaker 1: they're spending in their economy, they're retiring, whatever the reasons are, 683 00:37:18,680 --> 00:37:22,560 Speaker 1: and assets inaggregate are going to go up if there's 684 00:37:22,640 --> 00:37:26,520 Speaker 1: more money available to buy than that constant turn rate 685 00:37:26,600 --> 00:37:33,040 Speaker 1: to sell. Many companies provide enough cash flow that they 686 00:37:33,120 --> 00:37:35,520 Speaker 1: don't require new buyers. They can offset that sound and 687 00:37:35,560 --> 00:37:38,239 Speaker 1: let's say five percent of holders want to sell on 688 00:37:38,280 --> 00:37:41,600 Speaker 1: a normal basis every year, Well, you need an asset 689 00:37:42,200 --> 00:37:45,480 Speaker 1: that has five percent cash flow in order to offset that, 690 00:37:45,520 --> 00:37:48,080 Speaker 1: either by doing buy backs themselves or dividends or whatever 691 00:37:48,120 --> 00:37:51,480 Speaker 1: to create that cash flow that's there. That you can 692 00:37:51,520 --> 00:37:55,040 Speaker 1: then look at the companies across the market and see 693 00:37:55,040 --> 00:37:58,920 Speaker 1: how many of them can, essentially through the money they're earning, 694 00:37:59,040 --> 00:38:02,560 Speaker 1: satisfy the liquidity needs of the rate the basic rate 695 00:38:02,600 --> 00:38:05,840 Speaker 1: of sellers versus those that need a constant flow of 696 00:38:05,880 --> 00:38:08,960 Speaker 1: new buyers. And that's how we look at those assets 697 00:38:09,000 --> 00:38:11,000 Speaker 1: and break them into those that can make it. That 698 00:38:11,040 --> 00:38:14,080 Speaker 1: are that are subject to what happens in nominal GDP. 699 00:38:14,239 --> 00:38:16,480 Speaker 1: They need actually the profits and the cast flows. They 700 00:38:16,520 --> 00:38:18,759 Speaker 1: need the economy to be okay, but they don't need 701 00:38:18,800 --> 00:38:21,960 Speaker 1: new liquidity versus the ones that even if the economy 702 00:38:22,000 --> 00:38:24,920 Speaker 1: is great, they need new liquidity. And that's where that 703 00:38:25,080 --> 00:38:28,640 Speaker 1: calculation is coming from. The circuit breaker question, like what 704 00:38:28,840 --> 00:38:33,000 Speaker 1: actually stops the downward spiral evaluations here exactly. This again 705 00:38:33,040 --> 00:38:35,600 Speaker 1: a great example of where you'd have to have an 706 00:38:35,640 --> 00:38:39,120 Speaker 1: incredibly smart machine learning system to recognize the difference between 707 00:38:39,200 --> 00:38:42,400 Speaker 1: this downturn and the two thousand eight downturn or the 708 00:38:42,400 --> 00:38:45,759 Speaker 1: two thousand or the COVID downturn or whatever. Where there 709 00:38:45,840 --> 00:38:51,120 Speaker 1: is a huge difference in downturns when policymakers are unconstrained. 710 00:38:51,800 --> 00:38:54,520 Speaker 1: So if you take even two thousand eight, as devastating 711 00:38:54,560 --> 00:38:59,440 Speaker 1: as that was, policy makers, because inflation was low, they 712 00:38:59,440 --> 00:39:01,360 Speaker 1: could print much money and spend as much money as 713 00:39:01,400 --> 00:39:04,480 Speaker 1: they were willing to do, like there wasn't a constraint. Basically, 714 00:39:04,480 --> 00:39:07,160 Speaker 1: there's three constraints on policy makers if you look through history. 715 00:39:07,239 --> 00:39:12,960 Speaker 1: They can always create nominal growth if they don't have 716 00:39:13,000 --> 00:39:16,120 Speaker 1: an inflation problem, if they don't have a currency problem, 717 00:39:16,320 --> 00:39:18,840 Speaker 1: and they don't have a bubbles problem. And um, so 718 00:39:18,960 --> 00:39:20,799 Speaker 1: you take it two thousand eight or the COVID thing, 719 00:39:21,320 --> 00:39:23,239 Speaker 1: and you see how it works. Right, They did a 720 00:39:23,239 --> 00:39:26,359 Speaker 1: lot more effectively in COVID, which is print the money, 721 00:39:26,360 --> 00:39:28,120 Speaker 1: spend the money, and you can off set anything. You 722 00:39:28,120 --> 00:39:30,480 Speaker 1: could shut down the whole global economy and within a 723 00:39:30,520 --> 00:39:35,440 Speaker 1: month you could offset that with printing money and spending money. 724 00:39:35,520 --> 00:39:38,160 Speaker 1: And when we went through that, that's when I I 725 00:39:38,280 --> 00:39:40,040 Speaker 1: sort of went through Oh my gosh. You know, it's 726 00:39:40,040 --> 00:39:44,120 Speaker 1: so obvious policy makers to any deflationary shock can off 727 00:39:44,120 --> 00:39:46,760 Speaker 1: set it. What you see in history is they always 728 00:39:46,800 --> 00:39:48,600 Speaker 1: eventually do. It might take a while, whether it's the 729 00:39:48,600 --> 00:39:50,360 Speaker 1: Great Depression, coming off the gold standard or whatever. It 730 00:39:50,400 --> 00:39:52,000 Speaker 1: might take a while, but they can do that. But 731 00:39:52,040 --> 00:39:54,239 Speaker 1: if you look at history and you look at when 732 00:39:54,320 --> 00:39:58,920 Speaker 1: policy makers are constrained, it's when it's inflationary. Therefore you 733 00:39:58,960 --> 00:40:02,080 Speaker 1: can't use that unting and spending and you have a 734 00:40:02,160 --> 00:40:05,160 Speaker 1: much more difficult thing. So so basically you could buy 735 00:40:05,280 --> 00:40:08,120 Speaker 1: you'd want to buy DIBs when the central bank is 736 00:40:08,200 --> 00:40:11,920 Speaker 1: able to essentially be that shock absorber. But when inflation 737 00:40:11,960 --> 00:40:16,480 Speaker 1: is stubbornly high into weakening assets, um, you can't. If 738 00:40:16,520 --> 00:40:19,480 Speaker 1: that's not gonna be there, they're they're gonna be. In fact, 739 00:40:19,520 --> 00:40:21,480 Speaker 1: they want the asset prices to fall to a certain degree. 740 00:40:21,880 --> 00:40:23,880 Speaker 1: And even if they fall more than they want them to. 741 00:40:24,680 --> 00:40:28,080 Speaker 1: They're weighing the inflation picture against that. So all of 742 00:40:28,080 --> 00:40:31,680 Speaker 1: a sudden, you've got a much bigger dip possibility before 743 00:40:31,760 --> 00:40:34,840 Speaker 1: you get relief from policy makers. And in fact, the 744 00:40:34,880 --> 00:40:38,680 Speaker 1: dip has to become disinflationary in order to do that. 745 00:40:39,400 --> 00:40:41,920 Speaker 1: And so that's why the drawdowns and the loss in 746 00:40:42,000 --> 00:40:44,440 Speaker 1: real terms in the ninet seventies and early eighties was 747 00:40:44,520 --> 00:40:47,840 Speaker 1: so much worse than most of those other drawdowns in 748 00:40:47,920 --> 00:40:50,680 Speaker 1: terms of the duration over which it lasted. And you 749 00:40:50,680 --> 00:40:54,200 Speaker 1: see that across economies, that that when policy makers are 750 00:40:54,239 --> 00:40:57,319 Speaker 1: constrained by inflation or currency, you know, it can take out, 751 00:40:57,520 --> 00:41:01,200 Speaker 1: it can lead to lost decades. Can we pivot a 752 00:41:01,200 --> 00:41:03,520 Speaker 1: little bit? So we've been talking about this new regime, 753 00:41:03,560 --> 00:41:07,840 Speaker 1: the new macro regime, the difficulty of asset prices in 754 00:41:08,000 --> 00:41:11,360 Speaker 1: higher inflation. But obviously the other big story, and you 755 00:41:11,600 --> 00:41:14,799 Speaker 1: mentioned at the beginning, is what's going on geopolitically. And 756 00:41:14,880 --> 00:41:19,440 Speaker 1: of course there's the concerns about deglobalization between US and China. 757 00:41:19,560 --> 00:41:24,520 Speaker 1: There's the war that's taking place with Russia's invasion of Ukraine. 758 00:41:25,080 --> 00:41:29,000 Speaker 1: How does this sort of geopolitical reset, perhaps of the 759 00:41:29,000 --> 00:41:31,520 Speaker 1: word I don't know the word, how do you incorporate 760 00:41:31,560 --> 00:41:34,920 Speaker 1: that into your thinking? Yeah, well, we try to incorporate 761 00:41:34,960 --> 00:41:37,000 Speaker 1: it in the same way I was describing before, which 762 00:41:37,000 --> 00:41:40,240 Speaker 1: is what does it mean for the production of goods 763 00:41:40,239 --> 00:41:44,280 Speaker 1: and services and for the availability of money and credit 764 00:41:44,520 --> 00:41:48,680 Speaker 1: to purchase those things? And what you see you come back. 765 00:41:48,840 --> 00:41:50,759 Speaker 1: I kind of lade the intro to the inflation that 766 00:41:50,840 --> 00:41:53,360 Speaker 1: you had this huge demand shock as you created demand 767 00:41:53,400 --> 00:41:58,200 Speaker 1: without creating supply. Supply actually was reasonable post COVID, and 768 00:41:58,320 --> 00:41:59,880 Speaker 1: a lot of people are blaming the inflation on some 769 00:42:00,000 --> 00:42:02,440 Speaker 1: fly when it was actually this massive increase in demand 770 00:42:02,640 --> 00:42:05,160 Speaker 1: that accelerated so much faster than supply could keep up. 771 00:42:05,880 --> 00:42:09,680 Speaker 1: Then you go into this phase, the phase the Russia 772 00:42:10,160 --> 00:42:15,240 Speaker 1: UH invading Ukraine, which really put the globalization into fast forward. 773 00:42:15,680 --> 00:42:18,160 Speaker 1: That was happening, It was in the background also happening, 774 00:42:18,200 --> 00:42:20,520 Speaker 1: but now this is in fast forward and on the 775 00:42:20,719 --> 00:42:24,879 Speaker 1: you know, the front burner of so many companies um 776 00:42:24,920 --> 00:42:26,960 Speaker 1: and you get a real supply shock. So in the 777 00:42:27,000 --> 00:42:29,720 Speaker 1: case of the Russia Vasia Ukraine, you have a massive 778 00:42:29,719 --> 00:42:33,880 Speaker 1: commodity supply shock. Now that's starting to play out. Russia's 779 00:42:34,160 --> 00:42:36,640 Speaker 1: commodity supply. While they'll shift, they won't sell the Europe 780 00:42:36,680 --> 00:42:39,320 Speaker 1: their energy or whatever they'll try to sell to India 781 00:42:39,400 --> 00:42:42,600 Speaker 1: and China and such, and they'll do that to some degree, 782 00:42:42,680 --> 00:42:46,160 Speaker 1: but the bigger picture is Rushi's oil production is gonna fall. 783 00:42:46,239 --> 00:42:48,759 Speaker 1: It needs the Western technology to do that. So you 784 00:42:49,120 --> 00:42:52,759 Speaker 1: added from a demand shock into a supply shock, and 785 00:42:53,000 --> 00:42:57,080 Speaker 1: that has big impacts on the essentially the ability to 786 00:42:57,120 --> 00:43:02,360 Speaker 1: supply um the global enemy. And right now we're actually 787 00:43:02,360 --> 00:43:05,520 Speaker 1: in a lull of seeing that because you also have 788 00:43:05,560 --> 00:43:10,040 Speaker 1: one of the biggest shutdowns of commodity producing economy ever, 789 00:43:10,200 --> 00:43:12,919 Speaker 1: China shut down, and the impact that has on on 790 00:43:13,680 --> 00:43:16,839 Speaker 1: um commodity demand is massive, and yet it's not really 791 00:43:16,840 --> 00:43:20,400 Speaker 1: showing up because you have an offsetting supply shock simultaneously. 792 00:43:20,719 --> 00:43:23,760 Speaker 1: But the Chinese demand shock will fade in our view anyway, 793 00:43:23,760 --> 00:43:27,160 Speaker 1: a lot faster than the Russia Ukraine demands a supply 794 00:43:27,200 --> 00:43:31,400 Speaker 1: shock will. So we're also i'd expect somewhat of a 795 00:43:31,440 --> 00:43:35,680 Speaker 1: surge catch up to the supply shock, as if trying 796 00:43:35,719 --> 00:43:37,879 Speaker 1: to comes out as eventually well out of its COVID 797 00:43:38,000 --> 00:43:45,319 Speaker 1: zero policies. So hey, that's going on now. Secularly, as 798 00:43:45,360 --> 00:43:48,400 Speaker 1: you're describing, there's this big trend of the globalization that 799 00:43:48,520 --> 00:43:51,879 Speaker 1: one of the lessons that US corporations of European corporations 800 00:43:51,920 --> 00:43:54,920 Speaker 1: have taken is, Wow, we need a much more reliable, 801 00:43:54,960 --> 00:43:58,279 Speaker 1: secure supply chain and we need to build that. And 802 00:43:58,320 --> 00:44:02,480 Speaker 1: that's building for resilient see, rather than building for efficiency. 803 00:44:02,600 --> 00:44:04,399 Speaker 1: And that's part of the inflation story. If you take 804 00:44:04,440 --> 00:44:07,160 Speaker 1: the last thirty years, everything in the global economy was 805 00:44:07,200 --> 00:44:10,680 Speaker 1: built for efficiency. Almost nothing was built for resiliency, and 806 00:44:10,680 --> 00:44:13,680 Speaker 1: it was part of the disinflation story that now you're 807 00:44:13,719 --> 00:44:16,600 Speaker 1: going the opposite direction. You've got to build semiconductors in 808 00:44:16,640 --> 00:44:20,520 Speaker 1: your own economy. You've got to get energy from sources 809 00:44:20,560 --> 00:44:23,439 Speaker 1: that you can rely on. You've got to do raw 810 00:44:23,480 --> 00:44:26,279 Speaker 1: materials production in places that you know you'll be able 811 00:44:26,280 --> 00:44:29,160 Speaker 1: to access it. And and this is part of the 812 00:44:29,160 --> 00:44:33,680 Speaker 1: reason that you'll actually have demand for capital expenditures even 813 00:44:33,680 --> 00:44:36,400 Speaker 1: if the economy starts to turn down. So that's going 814 00:44:36,440 --> 00:44:40,000 Speaker 1: to create pressure on nominal GDP, even if profits are 815 00:44:40,000 --> 00:44:42,560 Speaker 1: starting to climb. Normally, capital expenditors go up and down 816 00:44:42,560 --> 00:44:45,880 Speaker 1: with profits. But you've got to rebuild an economy. And 817 00:44:45,880 --> 00:44:50,120 Speaker 1: this is where you have the impact of stranded assets 818 00:44:50,120 --> 00:44:53,799 Speaker 1: that all of this capacity to export of the world 819 00:44:53,800 --> 00:44:58,000 Speaker 1: in China and all of the capex that went there. 820 00:44:58,600 --> 00:45:02,280 Speaker 1: It's got to get replaced over time, and that's costly 821 00:45:02,640 --> 00:45:05,520 Speaker 1: without creating wealth in a sense, because it's off setting 822 00:45:05,600 --> 00:45:09,080 Speaker 1: stranded assets and UM. And that's gonna be a big phenomenon. 823 00:45:09,160 --> 00:45:12,000 Speaker 1: That is an inflationary phenomenon because it's going to create 824 00:45:12,080 --> 00:45:16,759 Speaker 1: higher um nominal GDP, but without let's say, creating new wealth. 825 00:45:16,800 --> 00:45:20,480 Speaker 1: It's offsetting lost wealth and UM. And so those are 826 00:45:20,520 --> 00:45:23,040 Speaker 1: the that's the cost of the globalization. And we've had 827 00:45:23,040 --> 00:45:24,960 Speaker 1: this wind at our back for so long that that 828 00:45:24,960 --> 00:45:27,880 Speaker 1: people even forget it's a wind in a sense UM. 829 00:45:27,960 --> 00:45:30,640 Speaker 1: And now you've got the wind in your face as 830 00:45:30,680 --> 00:45:35,440 Speaker 1: you go through the process of unwinding the incredible efficiency 831 00:45:35,440 --> 00:45:37,480 Speaker 1: of the global economy over the last thirty years and 832 00:45:37,560 --> 00:45:40,760 Speaker 1: building something more resilient. And we don't think that's gonna stop. 833 00:45:41,320 --> 00:45:45,560 Speaker 1: There's the the pressures between the US and China are 834 00:45:45,600 --> 00:45:49,200 Speaker 1: such that you're almost certainly on a path two too 835 00:45:49,719 --> 00:45:53,759 Speaker 1: largely separated economies. They'll have an interface in trade and 836 00:45:53,840 --> 00:45:57,200 Speaker 1: other things, but they won't be so tightly linked uh 837 00:45:57,280 --> 00:45:59,759 Speaker 1: as they have been, and that's that's a very big deal. 838 00:46:00,239 --> 00:46:04,520 Speaker 1: Is there a predictable inflation or growth effect of this 839 00:46:04,880 --> 00:46:07,080 Speaker 1: or is this like a Okay, there's going to be 840 00:46:07,160 --> 00:46:10,600 Speaker 1: some period where things have to reset and supply chains 841 00:46:10,600 --> 00:46:14,120 Speaker 1: are reoriented, but then things settled down, Or is this 842 00:46:14,239 --> 00:46:17,319 Speaker 1: like a permanent sort of regime shift that then you know, 843 00:46:17,520 --> 00:46:19,520 Speaker 1: goes into what we talked about in the first half 844 00:46:19,560 --> 00:46:25,399 Speaker 1: of the discussion about you know, rethinking asset prices. Yeah, 845 00:46:25,400 --> 00:46:28,439 Speaker 1: I think it's a it's a secular drag the same 846 00:46:28,480 --> 00:46:32,040 Speaker 1: way globalization was a secular benefit to asset prices. This 847 00:46:32,200 --> 00:46:34,759 Speaker 1: benefit asset prices over the last thirty years was it 848 00:46:34,880 --> 00:46:37,880 Speaker 1: led to lower real interest rates, lead the glut in 849 00:46:37,960 --> 00:46:41,440 Speaker 1: savings in China and other places came into the US 850 00:46:41,880 --> 00:46:45,000 Speaker 1: route drove assets up. Those things are changing. You're not 851 00:46:45,080 --> 00:46:48,720 Speaker 1: gonna have the lower lower the disinflationary impact of tapping 852 00:46:48,719 --> 00:46:50,800 Speaker 1: into the most efficient pools, and you're not going to 853 00:46:50,880 --> 00:46:55,840 Speaker 1: have the excess liquidity transfer back to the United States assets. 854 00:46:55,880 --> 00:46:57,640 Speaker 1: So as a result of that, I think you see 855 00:46:57,680 --> 00:47:00,640 Speaker 1: a trend in rising real yields, a end in higher, 856 00:47:00,719 --> 00:47:04,680 Speaker 1: more stubborn inflation because it's less efficient. Those things I 857 00:47:04,680 --> 00:47:06,920 Speaker 1: think you get. Now you get some benefits too, because 858 00:47:07,040 --> 00:47:11,440 Speaker 1: that certainly from a social cohesion perspective, all of a 859 00:47:11,520 --> 00:47:15,840 Speaker 1: sudden kind of the losers of globalization um get the benefit, 860 00:47:15,920 --> 00:47:18,920 Speaker 1: that's the higher wages, the So a lot of this 861 00:47:18,960 --> 00:47:22,040 Speaker 1: discussion is focused on the negatives to the financial markets. 862 00:47:22,040 --> 00:47:25,880 Speaker 1: Which the financial markets benefited massively from globalization, the average 863 00:47:25,880 --> 00:47:27,799 Speaker 1: worker in the United States did not, and now the 864 00:47:27,880 --> 00:47:31,360 Speaker 1: reversal will do the same. It's kind of the definancialization 865 00:47:32,280 --> 00:47:36,640 Speaker 1: of the US, which arguably is good for a social good, 866 00:47:36,800 --> 00:47:39,239 Speaker 1: but it is a very difficult environment for assets, just 867 00:47:39,320 --> 00:47:43,239 Speaker 1: offsetting the incredibly great environment assets have had. Those so 868 00:47:43,320 --> 00:47:47,680 Speaker 1: those things I think are sticky and will play out secularly. 869 00:47:48,080 --> 00:47:50,160 Speaker 1: Now they could play out very quickly. The Russian Ukraine 870 00:47:50,160 --> 00:47:52,319 Speaker 1: type thing creates a shock in that direction. That's a 871 00:47:53,080 --> 00:47:57,719 Speaker 1: sweakening growth, rising inflation shock. So obviously, if China moves 872 00:47:57,719 --> 00:47:59,600 Speaker 1: on Taiwan or something like that, you could see the 873 00:47:59,640 --> 00:48:03,439 Speaker 1: success alerate. But right now, I I'd say it's even 874 00:48:03,480 --> 00:48:05,600 Speaker 1: if it doesn't accelerate in that rapid way, it will 875 00:48:05,640 --> 00:48:08,240 Speaker 1: be a constant grind for a decade. One more question 876 00:48:08,400 --> 00:48:11,680 Speaker 1: along these lines. You know, this conversation has been very 877 00:48:12,000 --> 00:48:14,720 Speaker 1: US asset centric, and you say that in the beginning 878 00:48:14,800 --> 00:48:18,840 Speaker 1: that investors were so bullish on US assets post GFC 879 00:48:19,040 --> 00:48:21,799 Speaker 1: that they were unpaced to take over everything in the 880 00:48:21,960 --> 00:48:24,279 Speaker 1: entire world. But as you know that, you know you're 881 00:48:24,320 --> 00:48:26,279 Speaker 1: not just followut you're following. I think you said two 882 00:48:26,680 --> 00:48:30,960 Speaker 1: markets around the world or something like that. Is that assumption, like, 883 00:48:31,000 --> 00:48:35,000 Speaker 1: should people think more global in this environment when UM 884 00:48:35,040 --> 00:48:38,520 Speaker 1: If if we're seeing the assumption break that u S 885 00:48:38,520 --> 00:48:41,160 Speaker 1: stocks can't just take over the entire world, what does 886 00:48:41,200 --> 00:48:44,120 Speaker 1: this mean for non us SS. Yeah, well, I think 887 00:48:44,200 --> 00:48:49,000 Speaker 1: that one thing strategically most investors should focus on that 888 00:48:49,040 --> 00:48:52,720 Speaker 1: hasn't been a big deal over the last decade is diversification. 889 00:48:53,200 --> 00:48:54,880 Speaker 1: So I think there are issues. You go around the 890 00:48:54,920 --> 00:48:57,680 Speaker 1: world and there are big issues. Europe's going into a 891 00:48:57,719 --> 00:49:01,400 Speaker 1: significant recession, probably worse than the US UM as a 892 00:49:01,400 --> 00:49:04,080 Speaker 1: result of everything that's going on UM in terms of 893 00:49:04,080 --> 00:49:06,360 Speaker 1: supply shock there and the war and the impact of that. 894 00:49:06,440 --> 00:49:08,080 Speaker 1: And at the same time they're gonna have a massive 895 00:49:08,120 --> 00:49:13,319 Speaker 1: fiscal spending to try to change their infrastructure and rebuild militaries. UM. 896 00:49:13,440 --> 00:49:17,480 Speaker 1: So you've got stress, significant stress there, and you've got 897 00:49:18,040 --> 00:49:21,120 Speaker 1: UM significant stress around the world. Chinese assets, while I 898 00:49:21,120 --> 00:49:23,440 Speaker 1: think you're they're at a totally different part of the cycle. 899 00:49:23,480 --> 00:49:26,839 Speaker 1: They have a disinflation they have weak um, a very 900 00:49:26,880 --> 00:49:30,400 Speaker 1: weak economy, and a central bank and government that's prepared 901 00:49:30,440 --> 00:49:33,160 Speaker 1: to stimulate a totally different set of circumstances. And then 902 00:49:33,160 --> 00:49:35,520 Speaker 1: you had to Japan, and you've got trying to maintain 903 00:49:35,560 --> 00:49:40,200 Speaker 1: an interest rate backs amazing range of circumstances and opportunities, 904 00:49:40,960 --> 00:49:43,400 Speaker 1: and I think diversifying across those risks, you've got a 905 00:49:43,440 --> 00:49:46,360 Speaker 1: huge risk in the United States, is that liquidity that 906 00:49:46,400 --> 00:49:49,879 Speaker 1: was stuck in the U S assets comes out to US. 907 00:49:50,400 --> 00:49:52,640 Speaker 1: Most investor will be way better off having a much 908 00:49:52,680 --> 00:49:55,200 Speaker 1: more global mix of assets than they currently have. So 909 00:49:55,239 --> 00:49:57,319 Speaker 1: that would be point one in terms of the short term, 910 00:49:57,600 --> 00:50:00,680 Speaker 1: short term kind of alpha opportunities. I think it's also 911 00:50:00,800 --> 00:50:03,760 Speaker 1: that that's right. I think a lot of assets outside 912 00:50:03,760 --> 00:50:06,560 Speaker 1: of the US are more attractive than the US, although 913 00:50:06,760 --> 00:50:09,400 Speaker 1: there's risks everywhere, but the pricing is so different. We 914 00:50:09,440 --> 00:50:12,279 Speaker 1: talk about the pricing of cash flows, the pricing of 915 00:50:12,360 --> 00:50:15,399 Speaker 1: cash flows in the US. If you take companies very 916 00:50:15,440 --> 00:50:18,920 Speaker 1: similar cash flow allocations, you can get them in the 917 00:50:18,960 --> 00:50:21,319 Speaker 1: rest of the world of those same cash flows for 918 00:50:21,440 --> 00:50:24,680 Speaker 1: thirty cheaper. That's the issue. The US has done so 919 00:50:24,800 --> 00:50:27,160 Speaker 1: much better and whatever for so long that it's being 920 00:50:27,239 --> 00:50:30,759 Speaker 1: extrapolated right. China is the most extreme of that, and 921 00:50:30,800 --> 00:50:33,960 Speaker 1: for reasons that you can understand, given the regulation, etcetera. 922 00:50:34,000 --> 00:50:37,080 Speaker 1: But if you just take the reasonably expected cash flows 923 00:50:37,080 --> 00:50:41,080 Speaker 1: and you compare that to a similarly situated American company, 924 00:50:41,960 --> 00:50:44,319 Speaker 1: you're seeing these huge differences. Now, the huge differences can 925 00:50:44,320 --> 00:50:47,520 Speaker 1: have merit. There's reasons. There's bigger risk premiums in assets 926 00:50:47,560 --> 00:50:49,560 Speaker 1: in different parts of the world. There's more even more 927 00:50:49,680 --> 00:50:53,120 Speaker 1: risk and the worst spilling over in Europe. There's China 928 00:50:53,320 --> 00:50:56,600 Speaker 1: is even more risk of regulator a year, the inability 929 00:50:56,640 --> 00:50:59,040 Speaker 1: to invest in China, all of those things. So there's reasons. 930 00:50:59,400 --> 00:51:02,319 Speaker 1: But on net we think you're you're certainly gonna want 931 00:51:02,320 --> 00:51:06,800 Speaker 1: a much more diversified portfolio going forward than you have today. Greg, 932 00:51:06,960 --> 00:51:10,439 Speaker 1: that was a really fascinating conversation, and yeah, we really 933 00:51:10,480 --> 00:51:12,879 Speaker 1: appreciate you taking the time to come on all thoughts 934 00:51:12,920 --> 00:51:15,640 Speaker 1: great well, I enjoyed it, so thank you both. Thanks Greg, 935 00:51:15,680 --> 00:51:32,359 Speaker 1: that was awesome. So, Joe, that was really interesting, first 936 00:51:32,400 --> 00:51:34,000 Speaker 1: of all, and secondly, I think it was kind of 937 00:51:34,000 --> 00:51:37,480 Speaker 1: a good foil to the macro discussion that we had 938 00:51:37,520 --> 00:51:40,520 Speaker 1: a little while ago with Neil data Um and Luke 939 00:51:40,600 --> 00:51:43,759 Speaker 1: Kawa as well. So I guess this is sort of 940 00:51:44,239 --> 00:51:46,520 Speaker 1: I mean, this is pretty bearish, the idea that you 941 00:51:46,520 --> 00:51:51,279 Speaker 1: could get drop in in the US markets. Yeah, that's 942 00:51:51,320 --> 00:51:54,680 Speaker 1: pretty bad. Yeah, No, I mean it's definitely. Yeah, this 943 00:51:54,760 --> 00:51:56,840 Speaker 1: idea that the market is still even with all the 944 00:51:56,920 --> 00:52:02,239 Speaker 1: volatility that we've seen pricing in a soft landing was striking. 945 00:52:02,640 --> 00:52:06,319 Speaker 1: And then of course this idea that like, look, you know, 946 00:52:06,400 --> 00:52:09,799 Speaker 1: we've had this incredible run for risk assets pro and 947 00:52:09,800 --> 00:52:12,520 Speaker 1: the conditions were just right. And I thought Greg laid 948 00:52:12,520 --> 00:52:15,040 Speaker 1: out a very good, sort of like simple way of 949 00:52:15,040 --> 00:52:17,919 Speaker 1: thinking not just that the conditions were right, but why 950 00:52:18,000 --> 00:52:22,160 Speaker 1: the conditions in particular were right for investors buying stocks 951 00:52:22,280 --> 00:52:24,680 Speaker 1: or bonds. And I think, you know, it's like pretty 952 00:52:24,719 --> 00:52:28,799 Speaker 1: significant question about whether you know, when all the dust 953 00:52:28,840 --> 00:52:32,560 Speaker 1: settles on this sort of the pandemic and post pandemic period, 954 00:52:32,800 --> 00:52:37,160 Speaker 1: whether those conditions can be returned to absolutely. And also 955 00:52:37,239 --> 00:52:39,799 Speaker 1: just this idea, and we've discussed it before, I think 956 00:52:39,920 --> 00:52:42,840 Speaker 1: with with Matt King from City Group on this podcast, 957 00:52:43,080 --> 00:52:45,160 Speaker 1: but this idea of I mean, it's sort of the 958 00:52:45,600 --> 00:52:49,120 Speaker 1: flows before prose idea. The idea of flows attract inflows, 959 00:52:49,200 --> 00:52:52,000 Speaker 1: and that's how you get to these really lofty valuations 960 00:52:52,400 --> 00:52:55,880 Speaker 1: and when the conditions that sustain those start to turn. 961 00:52:56,040 --> 00:53:00,120 Speaker 1: To Greg's point, there's not really anything that can or 962 00:53:00,160 --> 00:53:03,560 Speaker 1: pin them anymore, like to his point that the cash 963 00:53:03,560 --> 00:53:06,279 Speaker 1: flows aren't really there. And look, you know, I think 964 00:53:06,400 --> 00:53:09,080 Speaker 1: we're sort of you know, a conversation you always hear 965 00:53:09,160 --> 00:53:10,799 Speaker 1: is like, well, okay, what do you buy? What's the 966 00:53:10,920 --> 00:53:15,480 Speaker 1: right portfolio strategy for this new inflationary environment? What do 967 00:53:15,480 --> 00:53:17,600 Speaker 1: you what did you we reallocate to? Maybe it's whatever 968 00:53:17,600 --> 00:53:20,040 Speaker 1: it is, but like I also think, like it's possible 969 00:53:20,080 --> 00:53:22,640 Speaker 1: that everything is. And I don't know, but like maybe 970 00:53:22,680 --> 00:53:26,200 Speaker 1: there is not like an optimal portfolio if the conditions deteriorate, 971 00:53:26,640 --> 00:53:32,040 Speaker 1: if inflation remains high, real growth decelerates, etcetera. And I 972 00:53:32,040 --> 00:53:34,640 Speaker 1: don't know if it will, but maybe, like you know, 973 00:53:34,920 --> 00:53:37,680 Speaker 1: bad news like asset prices aren't going to go up 974 00:53:37,719 --> 00:53:40,200 Speaker 1: in that environment, and the fascet prices aren't going up, 975 00:53:40,200 --> 00:53:43,239 Speaker 1: then there's not gonna be some like magic portfolio construction 976 00:53:43,280 --> 00:53:45,400 Speaker 1: that makes it easy. Yeah, all right, well shall we 977 00:53:45,480 --> 00:53:47,439 Speaker 1: leave it that. Let's leave it there. This has been 978 00:53:47,480 --> 00:53:50,520 Speaker 1: another episode of the All Boughts podcast. I'm Tracy Alloway. 979 00:53:50,600 --> 00:53:53,120 Speaker 1: You can follow me on Twitter at Tracy Alloway and 980 00:53:53,120 --> 00:53:56,040 Speaker 1: I'm Joe Wisn'tal. You can follow me on Twitter at 981 00:53:56,080 --> 00:54:00,680 Speaker 1: the Stalwart. Follow or producer Carmen Rodriguez. She's at Harmon Arman. 982 00:54:00,800 --> 00:54:04,400 Speaker 1: Follow the Bloomberg head of podcast Francesco Levi at Francesco Today, 983 00:54:04,840 --> 00:54:07,680 Speaker 1: and check out all of our podcasts at Bloomberg under 984 00:54:07,719 --> 00:54:10,320 Speaker 1: the handle at podcasts. Thanks for listening.