Speaker 1: Hello, and welcome to another episode of the All Thoughts Podcast.
Speaker 1: I'm Tracy Alloway and I'm Joe Wise. Joe, you know
Speaker 1: something that really annoyed me last year? There are a
Speaker 1: number of things I was sure, Yeah, there's actually a lot. Okay,
Speaker 1: there's a lot, I hear. I'm just a part of
Speaker 1: our daily chatter is here now. But keep going, keep going.
Speaker 1: What I'm annoyed about today? Yeah, Well, there was a
Speaker 1: moment early last year where people were talking about stagflation,
Speaker 1: and it wasn't the risk of stagflation. People were talking about, oh,
Speaker 1: we're in a stagflationary environment, which really bothered me because yes,
Speaker 1: you know, prices were going up, but economic growth was
Speaker 1: still relatively strong, and so there was no way you
Speaker 1: could have said that last year there was stagflation happening. Yeah,
Speaker 1: I think there's right. Um, you know, people and people
Speaker 1: say this kind of stuff all the time. People throughout
Speaker 1: any terms. The seventies, it's the eighties, it's four, it's
Speaker 1: two thousand and two. People are always reaching for something.
Speaker 1: There's no you know, that's like, you know, I guess
Speaker 1: optimistically say that's what makes a market, right. People have
Speaker 1: a bunch of different years, this is very true. Well,
Speaker 1: I have to say, you know, some of the people
Speaker 1: who were accurately talking about the risks of stagflation, not
Speaker 1: stagflation actually happening in that particular moment, I feel like
Speaker 1: they've been sort of borne out by events. And the
Speaker 1: US economy is still going relatively strong. It's not shrinking
Speaker 1: by any means, but with the Federal Reserve raising rates,
Speaker 1: the question clearly on everyone's mind is whether or not
Speaker 1: we're going to get a soft landing, whether or not
Speaker 1: it's possible to have prices start to come down but
Speaker 1: also maintain economic growth. Well, what I would say is,
Speaker 1: for sure, whatever you want to call the environment of
Speaker 1: this year and sort of the last quarter of last year,
Speaker 1: the second have of last year, it's been a really
Speaker 1: toxic brewis so to speak for uh for financial assets,
Speaker 1: for for asset prices. So you know, the economy is
Speaker 1: still growing appears, and you know the jobs are still
Speaker 1: being added. But this mix that we have right now
Speaker 1: of very high inflation relative to the last couple of
Speaker 1: decades or last several years, and concerns about whether it
Speaker 1: could be brought down without coloboring growth, it's a it's
Speaker 1: pretty rough for anyone stocks and bonds. Yeah, it is
Speaker 1: a tough time for markets. And the other thing I
Speaker 1: would say is, you know, we hear people talk about
Speaker 1: these big picture macro ideas like stag inflation or recessionary
Speaker 1: risk or whatever, but then I feel like we don't
Speaker 1: actually hear that much about how you translate that into
Speaker 1: a cohesive trading strategy. So, you know, we've had some
Speaker 1: commodity specialists come on here and say, obviously, you know,
Speaker 1: if inflation is going up, commodity rices are going up
Speaker 1: by commodities. But beyond that, it's not exactly clear to
Speaker 1: me how you actually invest in that type of environment, because,
Speaker 1: as you mentioned, it just feels like it's bad for everything. Yeah,
Speaker 1: the only thing that really works, he had commodities sort
Speaker 1: of worked. Holding dollars has worked, ironically, given the level
Speaker 1: of inflation. But this is an environment where typical portfolio
Speaker 1: strategies and most assets the people own, whether it's docks
Speaker 1: or bonds, really in for a rough rude. Yeah, all right, Well,
Speaker 1: on that note, we are going to be talking with
Speaker 1: someone who is basically all about forming a cohesive trading
Speaker 1: strategy around the macro picture. We're gonna be speaking with
Speaker 1: Greg Jensen. He is, of course the co c i
Speaker 1: O of Bridgewater, and we're going to get into it.
Speaker 1: Let's go, Greg, thanks so much for coming on. All
Speaker 1: thoughts great, thanks for having me. Maybe just to begin with,
Speaker 1: you could give us a short summary of what exactly
Speaker 1: it is that you do at Bridgewater and what makes
Speaker 1: Bridgewater I guess different to other types of funds because
Speaker 1: I feel like Bridgewater you know, you say that name, uh,
Speaker 1: and it has a little bit of mystique around it. Yeah. Great.
Speaker 1: So the you know, I'm one of the three co
Speaker 1: chief investment officers with Ray Dalio and Bob Prince, and
Speaker 1: we are focused on working with the team of investors
Speaker 1: to think through how the global financial system works, to
Speaker 1: build that out into algorithms to predict what's next. It
Speaker 1: starts with really looking at the world and trying to
Speaker 1: process how all these things, the concepts you guys were
Speaker 1: talking about before growth, inflation, how those how the money
Speaker 1: flows into financial markets as a result of those things,
Speaker 1: and how to predict what's next. And so I am
Speaker 1: passionate about taking those types of big picture ideas thinking
Speaker 1: through how you'll translate your thinking about them into rules
Speaker 1: that you could apply across time and across countries. And
Speaker 1: as we developed that, as our our team develops that,
Speaker 1: we work hard to say, okay, this is how we
Speaker 1: think this works. If you're talking about the dynamic of stagflation,
Speaker 1: why would that happen? How does it happen? How do
Speaker 1: you measure whether it's happening or not? And what do
Speaker 1: you do if it does happen? And by you know,
Speaker 1: it's starting with human intuition and logic, but forcing to
Speaker 1: discipline of pulling out what's going on in your brain,
Speaker 1: translating that into rules that you can apply and therefore
Speaker 1: stress tests whether they've been true in different types of environments. UM,
Speaker 1: that's been kind of the magic of Bridgewater is having
Speaker 1: a community of people that are passionate about that understanding,
Speaker 1: building up what we call that compound understanding, the algorithms
Speaker 1: that suggest that, and then constantly thinking about what's changing
Speaker 1: and what you might be wrong about. Is there a
Speaker 1: core like framework that you use? So obviously there are
Speaker 1: all kinds of inputs when thinking about the global economy.
Speaker 1: Inflation and energy prices and trade imbalances and domestic savings,
Speaker 1: are domestic debt or national debt? Like all these different
Speaker 1: things that are always going up and down. But would
Speaker 1: you say that Bridgewater and or you have like a
Speaker 1: core framework that you then put all those factors into,
Speaker 1: Like what is the sort of like underlying lens through
Speaker 1: which you view the economy and therefore financial markets. Yeah, well,
Speaker 1: I mean starting with the financial markets and then I'll
Speaker 1: go to the economy, But I'd say on both, the
Speaker 1: basic picture of the financial markets is that every price
Speaker 1: is discounting a future, and if you can understand what
Speaker 1: future that's discounting and compare it to what you think
Speaker 1: the future will be, which I'll come back to the
Speaker 1: economy and markets, but um, and then how do you
Speaker 1: how do you it's really changes in people's perception of
Speaker 1: that future that drives changes in asset classes. So that's
Speaker 1: one framework, and I'll get into that a little bit.
Speaker 1: But understanding what markets are saying about the likely cash
Speaker 1: flow of assets and the discounting of those cash flows,
Speaker 1: and then how those things are going to change. And
Speaker 1: the second thing I'd say is that we think a
Speaker 1: lot in terms of buyers and sellers, essentially knowing how
Speaker 1: many dollars there are to buy an asset relative to
Speaker 1: the supply of that asset and that whole world is
Speaker 1: there's so much in there of understanding why people buy things,
Speaker 1: what caused them to do that, where the dollars come
Speaker 1: from to do that, and how different types of things
Speaker 1: are produced, whether it's a financial assets produced one way,
Speaker 1: a real good producer totally different way. But that's the
Speaker 1: second kind of lens that we're constantly looking at. Do
Speaker 1: we understand all the buyers in the market, what their
Speaker 1: motivations are. Do we understand how that assets produced and
Speaker 1: what the motivations of the producers are. And so those
Speaker 1: are the two frameworks for which we've spent four or
Speaker 1: five years building up layers and layers of understanding beneath that.
Speaker 1: But those things we think, and you can go in
Speaker 1: any economy, whether it's in the Soviet Union and the
Speaker 1: you know, in the eighties, or in China today or um,
Speaker 1: you know, or in Latin America in hyper inflations. Those
Speaker 1: frameworks work, you know, they're they're what we call timeless universal. Now,
Speaker 1: the inputs of the frameworks change, but the basic frameworks
Speaker 1: do and um. And so that's that's kind of this
Speaker 1: starting point. And now in terms of the economy, that
Speaker 1: understanding what's going to happen next to cash thowse. We
Speaker 1: think a lot in terms of the transactions that drive
Speaker 1: the economy. How does it actually work, Where does the
Speaker 1: money come from when somebody buys something or somebody sells something,
Speaker 1: the understanding the bottom line mechanics of that and all
Speaker 1: the incentives that run through the process at the simple
Speaker 1: level of interest rates and monetary policy, but other types
Speaker 1: of incentives, tax policy, etcetera that affect those outcomes. And
Speaker 1: so again we've been building that model of saying, okay, well,
Speaker 1: who are all the buyers and sellers in the real
Speaker 1: economy and what's motivating them? And what's the ability to
Speaker 1: produce and where is the demand coming from? Those types
Speaker 1: of questions. That's the framework that we're doing, and then
Speaker 1: just constantly thinking about what's going on and what we're
Speaker 1: then going to do about that systematically, So we're always
Speaker 1: because we're predicting two hundred different markets and economic stats
Speaker 1: and hundreds of different things, there's always the feedback loop
Speaker 1: of missing stuff which you then go through and say, okay,
Speaker 1: well what am I missing? How am I dealing with
Speaker 1: is As an example today, the deglobalization is a huge
Speaker 1: deal over the last four years we really haven't been
Speaker 1: dealing with you know, and now you've got to deal
Speaker 1: with it. You've got to have a perspective on how
Speaker 1: to think about supply chains differently and the rebuilding of
Speaker 1: them and all of these questions. And because we have
Speaker 1: a good process that we're building from the base on,
Speaker 1: we could spend all our time on the things we
Speaker 1: think we're missing and then try to add them into
Speaker 1: that understanding. So I definitely want to get into deglobalization
Speaker 1: and what you're seeing with supply chains and things like that,
Speaker 1: but just before we do, just so we understand the
Speaker 1: framework a little bit better. I'm curious how machine learning
Speaker 1: and artificial intelligence fits into all of this, because, on
Speaker 1: the one hand, I can understand if you're looking at
Speaker 1: economic data points trying to find signs of where things
Speaker 1: are going, or looking at the market trying to figure
Speaker 1: out whether or not things are under or overvalued, that
Speaker 1: machine learning could play a role in that. But when
Speaker 1: you talk about things like incentives, I tend to think
Speaker 1: of that as much more of a you know, a
Speaker 1: human emotion, what's actually driving people to do this, And
Speaker 1: I don't necessarily automatically think of that as something that
Speaker 1: lends itself to modeling or machine learning and things like that.
Speaker 1: So could you maybe talk a little bit more of
Speaker 1: that aspect of your strategy. Yeah, great, so artificial intelligence
Speaker 1: of them very passionate about it, but it's a broad
Speaker 1: category of things for which machine learning is a subset.
Speaker 1: So let me start at the artificial intelligence level. The
Speaker 1: thing that Bridgewater has been doing for forty years is
Speaker 1: one of the most unique laboratories of is what would
Speaker 1: be considered old style artificial intelligence, which is an expert system.
Speaker 1: So everything that we're doing in markets is happening through
Speaker 1: algorithms that we've produced. We produced them and what was
Speaker 1: the original thought of how AI would work, which is
Speaker 1: experts thinking about what's going on, writing down what they're learning, what,
Speaker 1: writing down what their rules are. And because we've invested
Speaker 1: massively in that process and we've been doing it for
Speaker 1: a long time and have great expertise that we're able
Speaker 1: to execute trades across two in our markets are twenty
Speaker 1: four hours a day, all of those things algorithmically reflecting
Speaker 1: everything that we've learned. So we have this big AI
Speaker 1: process that's like humans and machines, where the humans are
Speaker 1: looking at the machines, think about what's wrong, but keep
Speaker 1: programming that in and over time there's more and we're
Speaker 1: done with computers and now machine learning, you know, comes
Speaker 1: along over the last decade and is helpful in that
Speaker 1: process as well. But it's also a tool and that
Speaker 1: you have to be very careful. And to your point
Speaker 1: on what what machine learning can help with and what
Speaker 1: it can't, at least in the current situation, is that
Speaker 1: when the data that you can plug into a machine
Speaker 1: learning model is representative of the data in the future,
Speaker 1: it can be very helpful. You have to have a
Speaker 1: lot of it, and you have to have but it
Speaker 1: has to be representative of the data in the future.
Speaker 1: What's so interesting about economies and markets is it never
Speaker 1: works that way because even just the existence of machine
Speaker 1: learning itself changes the future so that the future data
Speaker 1: points aren't gonna be like the past data points because
Speaker 1: machine learning exists. And and this is a game of
Speaker 1: in which the players are affected by the tools. It's
Speaker 1: not like physics. It's not it's not something physical where
Speaker 1: it doesn't matter if you're watching it. It matters completely
Speaker 1: that people are using machine learning techniques make machine learning
Speaker 1: techniques themselves dangerous. If they're using data from the premachine
Speaker 1: learning era as an example, and so a understanding that. Right.
Speaker 1: So there's a lot that machine learning can be helpful
Speaker 1: on data cleansing other things, but it's wrong to think
Speaker 1: of it as a landscape that's actually good for machine learning.
Speaker 1: You have to be super careful because the data from
Speaker 1: the past is not like the data from the future,
Speaker 1: and almost by definition, any anything like this changes the
Speaker 1: future relative to the past. More generally, there's so little
Speaker 1: sample size in global economies. We have a couple of
Speaker 1: debt cycles over the last hundred years. We have a
Speaker 1: world that was, as we're saying, globalizing. The last fourty
Speaker 1: years is one big cycle of lower and lower interest
Speaker 1: rates and declining inflation. So you have to be incredibly
Speaker 1: careful to use those techniques that are so valuable in
Speaker 1: certain ways in the economy and other things in our
Speaker 1: industry because of those challenges. Now, over time, I mean,
Speaker 1: I'm optimistic that machine learning can take great strides, and
Speaker 1: as we do, we're working on different ways to use
Speaker 1: machine learning to help researchers and other things. And I
Speaker 1: think that over time, computers will keep doing more and
Speaker 1: more that humans can do. But handling that in a
Speaker 1: knowledgeable way and not using the fanciest optimizer of the day,
Speaker 1: which today machine learning is the fanciest optimizer of the day.
Speaker 1: But all through history optimizers have in markets have have
Speaker 1: failed for the same reason, which is the past. If
Speaker 1: you don't understand it extremely well, isn't going to be
Speaker 1: the way to get the data. The data itself doesn't
Speaker 1: tell the story. You have to actually understand the human
Speaker 1: motivations on the other side of markets. So in five
Speaker 1: hundred years, maybe Bridgewater will have a machine learning algorithms
Speaker 1: that have seen twenty great financial crazies and twenty big
Speaker 1: dead cycles and twenty high inflationary periods. But as you
Speaker 1: note here in two, there just haven't been that much
Speaker 1: data yet. Hard to get out of sample data for
Speaker 1: some of this stuff. But what do you know, let's
Speaker 1: talk about right now for a moment, and thinking about
Speaker 1: what you just said, like we are experiencing it appears
Speaker 1: or reversal of a forty year pattern in interest rates.
Speaker 1: It does appear that we're certainly experiencing inflation the likes
Speaker 1: of which we haven't seen in several decades. So how
Speaker 1: do you adjust this new a new thing emerges or
Speaker 1: maybe it's de globalization. How do you what is the
Speaker 1: process by which you sort of acknowledge or recognize that
Speaker 1: say this is something different. Yeah, well, I think are
Speaker 1: going back to our frameworks right that you can look at.
Speaker 1: So why did the why did the inflation? And now
Speaker 1: let's say slow in your oath with inflation. I agree
Speaker 1: with you, I don't want to get should agree what
Speaker 1: you're saying in the introduction of getting stuck in the
Speaker 1: words place these different things, but the basic picture is
Speaker 1: if you turn back the clock to COVID, COVID accelerated
Speaker 1: something that we expected to happen over a decade, which
Speaker 1: was this combination of fiscal and monetary policy. We thought
Speaker 1: that would happen because it's necessary monetary policy. Quantitative easing
Speaker 1: by itself was getting stuck in assets, was was worsening
Speaker 1: the wealth divide. Eventually that in order to turn around
Speaker 1: some of the economic ills that had been stretched over
Speaker 1: that four to year period, that you would need to
Speaker 1: combine fiscal and monetary policy. That happened in in warp
Speaker 1: speed during the COVID crisis, and it showed the power
Speaker 1: of it that that printing money and getting that money
Speaker 1: into the hands of people that would spend it in
Speaker 1: the real economy worked massively well. It was way more
Speaker 1: effective way to ease policy than anything that had been
Speaker 1: tried before, lowering your interest rates or quantitative easing. But
Speaker 1: what it did was instantly create demand without creating supply. Normally,
Speaker 1: when the economy is strong, the demand is coming at
Speaker 1: the same time the supply is coming in the sense
Speaker 1: that somebody gets hired and they're supplying o good at
Speaker 1: the same time they're getting paid in demanding a good.
Speaker 1: So you've got demand without supply instantly. In terms of COVID, Now,
Speaker 1: it took a little while to play out because the
Speaker 1: lockdowns and other things related to COVID, but that that
Speaker 1: had this huge inflationary effect. Right, And if you just
Speaker 1: think about the framework I was saying before, if you
Speaker 1: just look at, well, how many dollars are available to
Speaker 1: spend relative to the supply of whether that was the
Speaker 1: supply of meme stocks or the supply of used cars, right,
Speaker 1: nothing kept up in that phase that the demand rose
Speaker 1: so quickly the supply of assets and didn't keep up. Now,
Speaker 1: as time goes, assets that are easy to print, meme stocks,
Speaker 1: et cetera, the supply of those increased quickly. The things
Speaker 1: that are harder to supply are still lagging that demand shot,
Speaker 1: and so you get this inflation. And now the inflation
Speaker 1: becomes sticky when you end up in where I think
Speaker 1: we are, which is now this wage price combo, because
Speaker 1: wages are now the thing that we're most short on
Speaker 1: in the United States is actually labor at this point,
Speaker 1: and wages are rising and goods prices are rising, and
Speaker 1: they cycle on each other. The wages drive up goods
Speaker 1: prices and they drive up the demand for goods because
Speaker 1: because incomes are rising as a result of the wages.
Speaker 1: And so you've got that cycle, and that we think
Speaker 1: that cycles pretty sticky, although we'll see that's certainly the
Speaker 1: place you'd be looking is whether that cycle turns out
Speaker 1: not to be sticky. But that then so we're measuring
Speaker 1: that phenomenon, right, And if you try to do that
Speaker 1: statistically with so little sample, and you looked at the
Speaker 1: last four years, you almost never see that spot. You
Speaker 1: have to go back to other periods in history, so
Speaker 1: statistically you will you would be looking for inflation to
Speaker 1: revert because the last fourty years it mostly has. Now
Speaker 1: in this case that we think that if you measure
Speaker 1: that dynamics at a physics level and you look at
Speaker 1: what's happening to incomes as a result of the wage
Speaker 1: inflation and what that means for spending and where action
Speaker 1: and other things will be, we think you're stuck in
Speaker 1: a more stubborn inflation spiral. Now that's all coming from
Speaker 1: algorithms that we've produced, but they're not the same as
Speaker 1: the algorithms that would be produced through a machine learning process,
Speaker 1: particularly if it waited the last fourty years significantly. And
Speaker 1: that's the difference. Knowing that difference being able to tune
Speaker 1: your algorithms in the way that you think things work
Speaker 1: rather than the way that they've worked over most of
Speaker 1: the history. And that's the freedom you have as a
Speaker 1: human to look at that history and understand it and
Speaker 1: therefore say, well, I haven't seen this before, but I
Speaker 1: know the physics of how it would work, and you
Speaker 1: get you get different answers as a result. Now, I
Speaker 1: don't think that's impossible that you could imagine someday, uh
Speaker 1: machine learning capable of seeing those differences and whatever, but
Speaker 1: it's extremely difficult. And so in any event, that's where
Speaker 1: the expertise comes in to understand those different types of situations,
Speaker 1: which when you're in and tune your algorithms and you're
Speaker 1: thinking to your systematic process in that way. So you
Speaker 1: mentioned the potential stickiness of inflation as we get this
Speaker 1: sort of wage price spiral, and obviously this is something
Speaker 1: that is concerning to the Federal Reserve and that's why
Speaker 1: we're seeing them hike interest rates at the moment. Could
Speaker 1: you walk us through exactly how you see interest rate
Speaker 1: hikes impacting inflation at the moment, Like when when you
Speaker 1: walk through that as a as a trading strategy or
Speaker 1: when you're trying to gauge the impact of what that
Speaker 1: could be on the economy and on broader markets, what
Speaker 1: exactly are you seeing? Yeah, so this is a great
Speaker 1: example of coming back to the framework. Right, So we
Speaker 1: look at if the Fed raised a short term interest rates,
Speaker 1: how much will that cut the dollar spent on goods
Speaker 1: and services? If you're trying to estimate inflation relative to
Speaker 1: what's going to happen to the production of those goods
Speaker 1: and services. And when you look at that, this is
Speaker 1: the tough thing for the Fed that if you take
Speaker 1: the last decade, what the FED did was drove up
Speaker 1: asset prices so much more than the economy itself, so
Speaker 1: that there's a huge gap between asset prices and the
Speaker 1: cash flows available to those assets in the real economy.
Speaker 1: And that gap is an unsustainable gaps. Somehow you have
Speaker 1: to pay for the assets with cash flows generated in
Speaker 1: the real economy. One person's assets is another draw on
Speaker 1: somebody else's future income, So the incomes and the assets
Speaker 1: have to align at some point. Now that could take
Speaker 1: a very long time, but the last decade was extreme.
Speaker 1: It was one of the most extreme periods of assets
Speaker 1: doing well relative to the nominal cash flows. Today, the
Speaker 1: FEDS trying to deal with the aftermath of that. The
Speaker 1: aftermath of that is we've got a tremendous amount of
Speaker 1: paper wealth, we got a tremendous amount of demand relative
Speaker 1: to the ability of the economy to supply it. And
Speaker 1: now the FED has two choices. If you said, what
Speaker 1: is it going to take to get inflation back to target?
Speaker 1: You know, and it's not I don't want to give
Speaker 1: the sense of false precision. But if we said, well,
Speaker 1: how much you have to drop demand change the labor
Speaker 1: market to get it, you're looking at a tort term
Speaker 1: interest rate of five and a percent and a recession,
Speaker 1: a d percession, and a crash probably in financial markets
Speaker 1: down if you choose to go that direction. I don't
Speaker 1: think the FED will do that. I think the FED
Speaker 1: will instead watch as growth stats. One of the things
Speaker 1: you were saying, Tracy, and the intro that equippal with
Speaker 1: a little bit is I think growth is slowing right now.
Speaker 1: Now it's just starting to show up. But I think
Speaker 1: you're gonna see you are gonna see negative growth in
Speaker 1: the next year. Tube Real growth now different than nominal growth,
Speaker 1: and so this gets complicated, and nominal growth will be
Speaker 1: high and real growth will be slow, and that's gonna
Speaker 1: be a dilemma and how fast the FED deals with
Speaker 1: that dilemma of do they actually raise rates? Are they
Speaker 1: serious about two percent inflation or are they gonna kind
Speaker 1: of way the consequences of bringing inflation down as quickly
Speaker 1: as markets currently expect against that consequence in the real economy.
Speaker 1: That's where we suspect the FED will actually go slower.
Speaker 1: They're not going to go to five percent, or at
Speaker 1: least if they do, they're going to go there slowly.
Speaker 1: And so we think they need to tighten a lot
Speaker 1: more to get inflation down, but likely they won't choose
Speaker 1: to bring inflation down because they'll be weighing that trade
Speaker 1: off and be cautious along the way. But I don't
Speaker 1: know for sure. That's another good example of why data
Speaker 1: matching or what is very tough. This is in the
Speaker 1: hands of a few policymakers. They're going to make those
Speaker 1: decisions of how important inflation is to them relative to
Speaker 1: how important the ramifications of fighting inflation are. Well. So
Speaker 1: the FED has, you know, in theory, it has a
Speaker 1: goal of getting uh, you know, inflation back down to
Speaker 1: two percent, but it's been suggested by others that okay,
Speaker 1: if inflation gets down maybe four percent or two four
Speaker 1: percent or three percent, that it could start breathing a
Speaker 1: little bit, that maybe it doesn't have to go as
Speaker 1: aggressively in that last one or two percent. If if
Speaker 1: the direction is right, is there like a level of
Speaker 1: either inflationation or either inflation improving or real growth decelerating
Speaker 1: that you would suspect would be consistent with saying, you
Speaker 1: know what, the Fed like, we're not going to go
Speaker 1: as hard as maybe we had planned, Like what level
Speaker 1: of activity maybe gives them a little bit of comfort
Speaker 1: reading how Jay Powell and they are gonna, you know,
Speaker 1: it's not necessary Like, I don't know that I have
Speaker 1: any particular insight on that other than that they seem
Speaker 1: to be lagging and somewhat backward looking. But my if
Speaker 1: you're asking me if I were in their shoes, I
Speaker 1: would be wary. Right. I think they're gonna. They're in
Speaker 1: this dilemma, and it's due to a lot of reasons.
Speaker 1: It's not the fault of the current Fed per se.
Speaker 1: If you go back to the debt bubble prior to
Speaker 1: two thousand and eight and you're still living the ramifications
Speaker 1: of that debt bubble, We've gone through transferring that debt
Speaker 1: to the government, we've gone through inflating it away to
Speaker 1: a certain degree, and we're in this process that is
Speaker 1: a long process that normally would with inflation. And so
Speaker 1: the current Fed is in a very difficult spot, but
Speaker 1: it's a spot that's been set up over fifteen twenty
Speaker 1: years and and and so they're making choices between bad
Speaker 1: outcomes here. But so the one the outcome, my guess,
Speaker 1: is they're going to try to carve the middle of
Speaker 1: that that in the end there's no magic to a
Speaker 1: two percent inflation target, like you're saying, lower and reasonably stable.
Speaker 1: Probably four will be a better choice. Now the markets
Speaker 1: stopped to adjust a lot. If if you're actually gonna
Speaker 1: have a long term inflation rate of four, the markets
Speaker 1: have that they're not pricing that in. That's a lot
Speaker 1: of adjustment from here. It's particularly bearish for bonds, but
Speaker 1: somewhat bearish for equities as the disc out rate evolved
Speaker 1: in that direction. But I think that, like you're saying,
Speaker 1: the goal would be to get it down a bit
Speaker 1: while maintaining as much as you can the economy and
Speaker 1: reasonable shape. Now that's gonna be very difficult to get
Speaker 1: and right now, unless they raise interest rates more than
Speaker 1: expected and hit markets harder, we still think you're gonna
Speaker 1: be above five in core inflation, you know, going out
Speaker 1: the next twelve months. So something's got to change even
Speaker 1: further than it has in order for them to get
Speaker 1: that get that down. But to me, I would consider,
Speaker 1: you know, them getting it down to four and maintaining
Speaker 1: reasonable you know, very slow economic growth of a big success.
Speaker 1: And if they try to get more than that, I
Speaker 1: think they're gonna get They're gonna pay a lot on
Speaker 1: one side or the other, just on the idea of markets,
Speaker 1: And you mentioned earlier a lot of what you do
Speaker 1: is sort of trying to figure out discounted cash flows
Speaker 1: or trying to figure out what the market is actually
Speaker 1: discounting in terms of the future. What are markets seeing
Speaker 1: right now, because it feels at the moment like people
Speaker 1: are simultaneously positioned for higher inflation, but also there is
Speaker 1: this expectation of her session and you know, to the
Speaker 1: point that Joe was making. At some point you would
Speaker 1: kind of expect those two to start impacting each other
Speaker 1: and potentially cancel each other out. The I'd think the
Speaker 1: markets are pricing in actually a pretty darn smooth landing
Speaker 1: here that if you look at the break even inflation curve,
Speaker 1: the difference between inflation and X bonds and nominal bonds,
Speaker 1: you see what the markets are expecting for inflation, and
Speaker 1: they expect inflation to come down over the next eighteen
Speaker 1: months to two point seven percent. And at the same time,
Speaker 1: while equities are down, it can feel like a big
Speaker 1: thing has happened in in the stock market, not much
Speaker 1: has actually happened that that stocks have dropped mostly in
Speaker 1: line with the interest rate rise such that up until
Speaker 1: the last couple of weeks, cash flows projected in the
Speaker 1: equity market actually gone up, not down over the period
Speaker 1: of equity equity weakness, because the cash flows have to
Speaker 1: make up for the discount rate increase. So now you're
Speaker 1: starting to see the market price in less liquidity and
Speaker 1: the fact that the cash flows are going to be
Speaker 1: a bit worse. That growth can be slow, but it's
Speaker 1: still extremely optimistic pricing in the equity market about future
Speaker 1: cash flows. So overall, i'd say if you if you
Speaker 1: track what the markets are saying, they're essentially saying we're
Speaker 1: going to get the decline inflation, the Fed's gonna tighten
Speaker 1: to about three and then be done and it's going
Speaker 1: to flatten out there, and that the economy at that
Speaker 1: point will be good. And that's kind of that's the
Speaker 1: betting line. You think about that as the line. Now,
Speaker 1: if it's better than that, if inflation falls further with
Speaker 1: growth being better than that, markets will go up. And
Speaker 1: if it's worse than that, if inflation is more sticky
Speaker 1: and you have to hit growth harder, assets are gonna
Speaker 1: fall from here. And and our view would be on
Speaker 1: the second that it's going to be much tougher. That
Speaker 1: is still very optimistic pricing. Even though I can feel like,
Speaker 1: oh my gosh, stocks are down almost or whatever um
Speaker 1: from their peak. It feels like our sessions being priced in.
Speaker 1: But all this really changed is the discount rate on assets,
Speaker 1: and you're going into a period where the liquidity hole
Speaker 1: is getting bigger bigger. The Fed's gonna start running down
Speaker 1: their balance sheet. Banks that were too The FED and
Speaker 1: banks were the reason there was so much money going
Speaker 1: around last year. The FED was still buying assets, and
Speaker 1: the banks were buying bonds at record clips, almost crazy
Speaker 1: fashion in my mind, because they had so much access deposits.
Speaker 1: All that's reversing. They're not buying bonds anymore. The Feds
Speaker 1: not Fed's actually gonna roll off their thing. Banks aren't
Speaker 1: because they essentially bought in an excess of bonds and
Speaker 1: now the market has to clear, and for the bond
Speaker 1: market to clear with private sector buyers, they need to
Speaker 1: draw those assets from other assets, and there's so many
Speaker 1: assets in the US you're seeing this This a lot
Speaker 1: of the market action last couple of weeks. The assets
Speaker 1: that need liquidity the most, that don't themselves have cash
Speaker 1: flows are getting killed because liquidity is being withdrawn from
Speaker 1: the aggregate system, and those assets that require kind of
Speaker 1: pondsi like ongoing purchases to support the assets, are getting
Speaker 1: hit the hardest. And so I think today's market pricing
Speaker 1: is still overly optimistic. It's been a small move relative
Speaker 1: to the secular change that we're actually experiencing. So we're
Speaker 1: experiencing a secular change. And look, I would never say
Speaker 1: in a million years, and I know this that investing
Speaker 1: or portfolio management is easy, but it is true that
Speaker 1: you know, in the last decade and maybe before a
Speaker 1: stocks mostly just went up. And also investor has had
Speaker 1: the luxury of those other asset class treasuries that sort
Speaker 1: of acted as a natural hedge. They also end up
Speaker 1: over time, but they usually on a short term basis.
Speaker 1: We're moving inverse relationship to stocks, so that had an
Speaker 1: effect of volatility smoothing, and so you could buy a
Speaker 1: bunch of stocks and buy a bunch of bonds and
Speaker 1: you don't always make money, but both generally went up,
Speaker 1: and they also sort of canceled each other out in
Speaker 1: the short term. So I'm curious, like how you're thinking
Speaker 1: about like portfolio construction, if we're like shifting to a
Speaker 1: new regime. If inflay Shin, let's say it comes down,
Speaker 1: but it still remains for a while above this two
Speaker 1: goal or target, Like, how do you approach the general
Speaker 1: problem of building a portfolio? Yeah? Great questions. So I
Speaker 1: mean you start with, like you're saying that the lessons
Speaker 1: of the last twenty years, in particular in terms of
Speaker 1: portfolio construction, you really have to understand the reason for
Speaker 1: them and then think about whether those reasons exist. So
Speaker 1: you made the point about both assets doing great. You know,
Speaker 1: since the financial crisis, you've had this incredible run where
Speaker 1: diversification was actually almost always bad. All you wanted was
Speaker 1: US assets and US equity assets, and everything else was
Speaker 1: a drag. Now that's not going to go on forever.
Speaker 1: It's a kind of obviously true. US equities can't take
Speaker 1: over everything in the world, um, and yet they were
Speaker 1: on pace for that, And most portfolios are are still
Speaker 1: dominated based on what's been great for the last decade.
Speaker 1: And and like you said, the relationships change as a
Speaker 1: result of the impacts on the cash flows. Right, So
Speaker 1: if you why are stocks and bonds gonna be negatively
Speaker 1: correlated in the future? If they were positively correlated in
Speaker 1: the last one of years. Well, and the difference is
Speaker 1: the cash flows on equities and bonds are affected by
Speaker 1: both real growth rates but also inflation. Now the real
Speaker 1: growth rates stocks and bonds act opposite. So if real
Speaker 1: growth is the dominant factor in inflation, stable stocks and
Speaker 1: bonds are gonna be great diversifiers if inflation. Though inflation
Speaker 1: is bad for bonds and to some extent bad for stocks,
Speaker 1: although we get into that all of a sudden, they're
Speaker 1: no longer good diversifires when inflation is more volatile than growth.
Speaker 1: So if you look at history, hundreds of years of history,
Speaker 1: stocks and bonds are always negatively correlated, good diversifiers when
Speaker 1: inflation is stable and low, and they're bad diversifiers when
Speaker 1: inflation is high. And that's just a function of the
Speaker 1: cash flows. And so if you don't think in terms
Speaker 1: of the correlation, but think in terms of the actual
Speaker 1: physical cash flows, you can start to see in different
Speaker 1: types of environments what the good diversifiers are. So if
Speaker 1: you take today and you say what diversifies stocks and
Speaker 1: bonds If they're not good diversifiers for each other, well,
Speaker 1: and that's really you want to be careful and figure
Speaker 1: out ways to take a view on inflation and break
Speaker 1: even inflation. The difference between inflation index bonds and nominal
Speaker 1: bonds is one way. You mentioned commodities in the intro
Speaker 1: and commodities is one way. But you need those things,
Speaker 1: and we think also looking at certain emerging markets that
Speaker 1: have what the developed world needs. You have a world
Speaker 1: where your short labor and your short commodities and your deglobalizing.
Speaker 1: So you've got to look at the emerging market allies
Speaker 1: essentially that you can reliably provide the things that the
Speaker 1: world's missing. Those places are the places to diversify the
Speaker 1: problem that's going on in the stock and bond market
Speaker 1: that are more and more correlated rather than diversity. Can
Speaker 1: you talk a little bit more about the impact of
Speaker 1: inflation on stocks and why you see stocks is not
Speaker 1: necessarily outperforming or performing reasonably well in an inflationary environment,
Speaker 1: because I think this is an ongoing debate in markets
Speaker 1: whether or not equities actually have that pricing power. Yeah,
Speaker 1: so if you look at periods of inflation, right, I mean,
Speaker 1: stocks can often be better than cash and inflation periods
Speaker 1: but lose a lot in real terms. And why does
Speaker 1: that happen a there's stocks are a function of both
Speaker 1: the cash flows and the way those cash flows are discounted.
Speaker 1: So if you take periods of high of high inflation,
Speaker 1: if you take the seventies as an example, cash flows
Speaker 1: were decent for companies, but they were hit by a
Speaker 1: significant rise in the discount rate and the uncertainty essentially
Speaker 1: a higher uncertainty were supremium when you have higher and
Speaker 1: more volatile inflation. So cash flows were fine, but ease
Speaker 1: dropped a lot during the seventies, and that's a function
Speaker 1: of the higher discount rate and the higher risk premium.
Speaker 1: And what you see is these big divergences and more
Speaker 1: volatile corporate situations and generally lost productivity as a result
Speaker 1: of the instability of inflation and the price feature. So so,
Speaker 1: but basically stocks cut both ways. The cash flows generally
Speaker 1: stay in line. Profits a little bit less so because
Speaker 1: margins are hit to a certain degree. But the biggest
Speaker 1: thing is that the risk premium on the discount rate.
Speaker 1: All of a sudden, if you have a risk free
Speaker 1: rate of government bond yielding fift what are you going
Speaker 1: to demand out of your equities? And that's been the
Speaker 1: the history of it is that that and when the
Speaker 1: FED tries to then battle the inflation, of course that's
Speaker 1: particularly bad for equities because you get a growth slow down,
Speaker 1: you get the disinflation effect, and you get this lack
Speaker 1: of liquidity. So the second point that's making stocks really
Speaker 1: bad in this inflation here this period over the last
Speaker 1: four months, it's the lack of liquidity. The FED had
Speaker 1: been providing tremendous liquidity up until this calendar year. You
Speaker 1: see how many stocks needed that liquidity because they needed
Speaker 1: new buyers. And right now we can calculate about the
Speaker 1: US equity market can only survive essentially with new buyers
Speaker 1: entering the market because they're not cash flow generating themselves.
Speaker 1: And that's near a historic high. That's like basically right
Speaker 1: in line with and it exists because because the FED
Speaker 1: produced liquidity for so long, you're declining real rates high
Speaker 1: levels of liquidity. You get the reverse and you're seeing
Speaker 1: that squeeze. The stocks that need that liquidity are getting
Speaker 1: hit the hardest and um, and that's happening quite quite quickly.
Speaker 1: You also see that to some extent, you need constantly
Speaker 1: new buyers in crypto space as well. Just the removal
Speaker 1: of macro liquidity is starting to affect the entities everywhere
Speaker 1: that need the liquidity in the mode. So this is
Speaker 1: really interesting and that's a stunning stat and it's sort
Speaker 1: of one of my pet theories, which is that something
Speaker 1: changed after the two Crisis, which is that in an
Speaker 1: environment of low growth, people started chasing momentum as a
Speaker 1: way to outperform. You just followed wherever the money went,
Speaker 1: and money going into something basically helped inflate the valuation,
Speaker 1: and then that attracted more money and so you had
Speaker 1: this really bad cycle. So two things here, how do
Speaker 1: you calculate that number exactly? And then secondly, what happens
Speaker 1: as this starts to reverse as the momentum goes in
Speaker 1: the other direction. I mean, for the past ten years
Speaker 1: or so, it would have been that as the markets
Speaker 1: were going down, the FED might you know, step in
Speaker 1: and start easing again, and then that would be the
Speaker 1: circuit breaker. But what's the circuit breaker on valuations in
Speaker 1: this environment? I'll start with the first question on how
Speaker 1: do we start? And I don't mean to again I
Speaker 1: worry about false precision where this this all this stuff
Speaker 1: is rough, but the basic idea is you can there's
Speaker 1: always in normal times, there's a churn in financial markets.
Speaker 1: Some people have to sell their financial market assets because
Speaker 1: they're spending in their economy, they're retiring, whatever the reasons are,
Speaker 1: and assets inaggregate are going to go up if there's
Speaker 1: more money available to buy than that constant turn rate
Speaker 1: to sell. Many companies provide enough cash flow that they
Speaker 1: don't require new buyers. They can offset that sound and
Speaker 1: let's say five percent of holders want to sell on
Speaker 1: a normal basis every year, Well, you need an asset
Speaker 1: that has five percent cash flow in order to offset that,
Speaker 1: either by doing buy backs themselves or dividends or whatever
Speaker 1: to create that cash flow that's there. That you can
Speaker 1: then look at the companies across the market and see
Speaker 1: how many of them can, essentially through the money they're earning,
Speaker 1: satisfy the liquidity needs of the rate the basic rate
Speaker 1: of sellers versus those that need a constant flow of
Speaker 1: new buyers. And that's how we look at those assets
Speaker 1: and break them into those that can make it. That
Speaker 1: are that are subject to what happens in nominal GDP.
Speaker 1: They need actually the profits and the cast flows. They
Speaker 1: need the economy to be okay, but they don't need
Speaker 1: new liquidity versus the ones that even if the economy
Speaker 1: is great, they need new liquidity. And that's where that
Speaker 1: calculation is coming from. The circuit breaker question, like what
Speaker 1: actually stops the downward spiral evaluations here exactly. This again
Speaker 1: a great example of where you'd have to have an
Speaker 1: incredibly smart machine learning system to recognize the difference between
Speaker 1: this downturn and the two thousand eight downturn or the
Speaker 1: two thousand or the COVID downturn or whatever. Where there
Speaker 1: is a huge difference in downturns when policymakers are unconstrained.
Speaker 1: So if you take even two thousand eight, as devastating
Speaker 1: as that was, policy makers, because inflation was low, they
Speaker 1: could print much money and spend as much money as
Speaker 1: they were willing to do, like there wasn't a constraint. Basically,
Speaker 1: there's three constraints on policy makers if you look through history.
Speaker 1: They can always create nominal growth if they don't have
Speaker 1: an inflation problem, if they don't have a currency problem,
Speaker 1: and they don't have a bubbles problem. And um, so
Speaker 1: you take it two thousand eight or the COVID thing,
Speaker 1: and you see how it works. Right, They did a
Speaker 1: lot more effectively in COVID, which is print the money,
Speaker 1: spend the money, and you can off set anything. You
Speaker 1: could shut down the whole global economy and within a
Speaker 1: month you could offset that with printing money and spending money.
Speaker 1: And when we went through that, that's when I I
Speaker 1: sort of went through Oh my gosh. You know, it's
Speaker 1: so obvious policy makers to any deflationary shock can off
Speaker 1: set it. What you see in history is they always
Speaker 1: eventually do. It might take a while, whether it's the
Speaker 1: Great Depression, coming off the gold standard or whatever. It
Speaker 1: might take a while, but they can do that. But
Speaker 1: if you look at history and you look at when
Speaker 1: policy makers are constrained, it's when it's inflationary. Therefore you
Speaker 1: can't use that unting and spending and you have a
Speaker 1: much more difficult thing. So so basically you could buy
Speaker 1: you'd want to buy DIBs when the central bank is
Speaker 1: able to essentially be that shock absorber. But when inflation
Speaker 1: is stubbornly high into weakening assets, um, you can't. If
Speaker 1: that's not gonna be there, they're they're gonna be. In fact,
Speaker 1: they want the asset prices to fall to a certain degree.
Speaker 1: And even if they fall more than they want them to.
Speaker 1: They're weighing the inflation picture against that. So all of
Speaker 1: a sudden, you've got a much bigger dip possibility before
Speaker 1: you get relief from policy makers. And in fact, the
Speaker 1: dip has to become disinflationary in order to do that.
Speaker 1: And so that's why the drawdowns and the loss in
Speaker 1: real terms in the ninet seventies and early eighties was
Speaker 1: so much worse than most of those other drawdowns in
Speaker 1: terms of the duration over which it lasted. And you
Speaker 1: see that across economies, that that when policy makers are
Speaker 1: constrained by inflation or currency, you know, it can take out,
Speaker 1: it can lead to lost decades. Can we pivot a
Speaker 1: little bit? So we've been talking about this new regime,
Speaker 1: the new macro regime, the difficulty of asset prices in
Speaker 1: higher inflation. But obviously the other big story, and you
Speaker 1: mentioned at the beginning, is what's going on geopolitically. And
Speaker 1: of course there's the concerns about deglobalization between US and China.
Speaker 1: There's the war that's taking place with Russia's invasion of Ukraine.
Speaker 1: How does this sort of geopolitical reset, perhaps of the
Speaker 1: word I don't know the word, how do you incorporate
Speaker 1: that into your thinking? Yeah, well, we try to incorporate
Speaker 1: it in the same way I was describing before, which
Speaker 1: is what does it mean for the production of goods
Speaker 1: and services and for the availability of money and credit
Speaker 1: to purchase those things? And what you see you come back.
Speaker 1: I kind of lade the intro to the inflation that
Speaker 1: you had this huge demand shock as you created demand
Speaker 1: without creating supply. Supply actually was reasonable post COVID, and
Speaker 1: a lot of people are blaming the inflation on some
Speaker 1: fly when it was actually this massive increase in demand
Speaker 1: that accelerated so much faster than supply could keep up.
Speaker 1: Then you go into this phase, the phase the Russia
Speaker 1: UH invading Ukraine, which really put the globalization into fast forward.
Speaker 1: That was happening, It was in the background also happening,
Speaker 1: but now this is in fast forward and on the
Speaker 1: you know, the front burner of so many companies um
Speaker 1: and you get a real supply shock. So in the
Speaker 1: case of the Russia Vasia Ukraine, you have a massive
Speaker 1: commodity supply shock. Now that's starting to play out. Russia's
Speaker 1: commodity supply. While they'll shift, they won't sell the Europe
Speaker 1: their energy or whatever they'll try to sell to India
Speaker 1: and China and such, and they'll do that to some degree,
Speaker 1: but the bigger picture is Rushi's oil production is gonna fall.
Speaker 1: It needs the Western technology to do that. So you
Speaker 1: added from a demand shock into a supply shock, and
Speaker 1: that has big impacts on the essentially the ability to
Speaker 1: supply um the global enemy. And right now we're actually
Speaker 1: in a lull of seeing that because you also have
Speaker 1: one of the biggest shutdowns of commodity producing economy ever,
Speaker 1: China shut down, and the impact that has on on
Speaker 1: um commodity demand is massive, and yet it's not really
Speaker 1: showing up because you have an offsetting supply shock simultaneously.
Speaker 1: But the Chinese demand shock will fade in our view anyway,
Speaker 1: a lot faster than the Russia Ukraine demands a supply
Speaker 1: shock will. So we're also i'd expect somewhat of a
Speaker 1: surge catch up to the supply shock, as if trying
Speaker 1: to comes out as eventually well out of its COVID
Speaker 1: zero policies. So hey, that's going on now. Secularly, as
Speaker 1: you're describing, there's this big trend of the globalization that
Speaker 1: one of the lessons that US corporations of European corporations
Speaker 1: have taken is, Wow, we need a much more reliable,
Speaker 1: secure supply chain and we need to build that. And
Speaker 1: that's building for resilient see, rather than building for efficiency.
Speaker 1: And that's part of the inflation story. If you take
Speaker 1: the last thirty years, everything in the global economy was
Speaker 1: built for efficiency. Almost nothing was built for resiliency, and
Speaker 1: it was part of the disinflation story that now you're
Speaker 1: going the opposite direction. You've got to build semiconductors in
Speaker 1: your own economy. You've got to get energy from sources
Speaker 1: that you can rely on. You've got to do raw
Speaker 1: materials production in places that you know you'll be able
Speaker 1: to access it. And and this is part of the
Speaker 1: reason that you'll actually have demand for capital expenditures even
Speaker 1: if the economy starts to turn down. So that's going
Speaker 1: to create pressure on nominal GDP, even if profits are
Speaker 1: starting to climb. Normally, capital expenditors go up and down
Speaker 1: with profits. But you've got to rebuild an economy. And
Speaker 1: this is where you have the impact of stranded assets
Speaker 1: that all of this capacity to export of the world
Speaker 1: in China and all of the capex that went there.
Speaker 1: It's got to get replaced over time, and that's costly
Speaker 1: without creating wealth in a sense, because it's off setting
Speaker 1: stranded assets and UM. And that's gonna be a big phenomenon.
Speaker 1: That is an inflationary phenomenon because it's going to create
Speaker 1: higher um nominal GDP, but without let's say, creating new wealth.
Speaker 1: It's offsetting lost wealth and UM. And so those are
Speaker 1: the that's the cost of the globalization. And we've had
Speaker 1: this wind at our back for so long that that
Speaker 1: people even forget it's a wind in a sense UM.
Speaker 1: And now you've got the wind in your face as
Speaker 1: you go through the process of unwinding the incredible efficiency
Speaker 1: of the global economy over the last thirty years and
Speaker 1: building something more resilient. And we don't think that's gonna stop.
Speaker 1: There's the the pressures between the US and China are
Speaker 1: such that you're almost certainly on a path two too
Speaker 1: largely separated economies. They'll have an interface in trade and
Speaker 1: other things, but they won't be so tightly linked uh
Speaker 1: as they have been, and that's that's a very big deal.
Speaker 1: Is there a predictable inflation or growth effect of this
Speaker 1: or is this like a Okay, there's going to be
Speaker 1: some period where things have to reset and supply chains
Speaker 1: are reoriented, but then things settled down, Or is this
Speaker 1: like a permanent sort of regime shift that then you know,
Speaker 1: goes into what we talked about in the first half
Speaker 1: of the discussion about you know, rethinking asset prices. Yeah,
Speaker 1: I think it's a it's a secular drag the same
Speaker 1: way globalization was a secular benefit to asset prices. This
Speaker 1: benefit asset prices over the last thirty years was it
Speaker 1: led to lower real interest rates, lead the glut in
Speaker 1: savings in China and other places came into the US
Speaker 1: route drove assets up. Those things are changing. You're not
Speaker 1: gonna have the lower lower the disinflationary impact of tapping
Speaker 1: into the most efficient pools, and you're not going to
Speaker 1: have the excess liquidity transfer back to the United States assets.
Speaker 1: So as a result of that, I think you see
Speaker 1: a trend in rising real yields, a end in higher,
Speaker 1: more stubborn inflation because it's less efficient. Those things I
Speaker 1: think you get. Now you get some benefits too, because
Speaker 1: that certainly from a social cohesion perspective, all of a
Speaker 1: sudden kind of the losers of globalization um get the benefit,
Speaker 1: that's the higher wages, the So a lot of this
Speaker 1: discussion is focused on the negatives to the financial markets.
Speaker 1: Which the financial markets benefited massively from globalization, the average
Speaker 1: worker in the United States did not, and now the
Speaker 1: reversal will do the same. It's kind of the definancialization
Speaker 1: of the US, which arguably is good for a social good,
Speaker 1: but it is a very difficult environment for assets, just
Speaker 1: offsetting the incredibly great environment assets have had. Those so
Speaker 1: those things I think are sticky and will play out secularly.
Speaker 1: Now they could play out very quickly. The Russian Ukraine
Speaker 1: type thing creates a shock in that direction. That's a
Speaker 1: sweakening growth, rising inflation shock. So obviously, if China moves
Speaker 1: on Taiwan or something like that, you could see the
Speaker 1: success alerate. But right now, I I'd say it's even
Speaker 1: if it doesn't accelerate in that rapid way, it will
Speaker 1: be a constant grind for a decade. One more question
Speaker 1: along these lines. You know, this conversation has been very
Speaker 1: US asset centric, and you say that in the beginning
Speaker 1: that investors were so bullish on US assets post GFC
Speaker 1: that they were unpaced to take over everything in the
Speaker 1: entire world. But as you know that, you know you're
Speaker 1: not just followut you're following. I think you said two
Speaker 1: markets around the world or something like that. Is that assumption, like,
Speaker 1: should people think more global in this environment when UM
Speaker 1: If if we're seeing the assumption break that u S
Speaker 1: stocks can't just take over the entire world, what does
Speaker 1: this mean for non us SS. Yeah, well, I think
Speaker 1: that one thing strategically most investors should focus on that
Speaker 1: hasn't been a big deal over the last decade is diversification.
Speaker 1: So I think there are issues. You go around the
Speaker 1: world and there are big issues. Europe's going into a
Speaker 1: significant recession, probably worse than the US UM as a
Speaker 1: result of everything that's going on UM in terms of
Speaker 1: supply shock there and the war and the impact of that.
Speaker 1: And at the same time they're gonna have a massive
Speaker 1: fiscal spending to try to change their infrastructure and rebuild militaries. UM.
Speaker 1: So you've got stress, significant stress there, and you've got
Speaker 1: UM significant stress around the world. Chinese assets, while I
Speaker 1: think you're they're at a totally different part of the cycle.
Speaker 1: They have a disinflation they have weak um, a very
Speaker 1: weak economy, and a central bank and government that's prepared
Speaker 1: to stimulate a totally different set of circumstances. And then
Speaker 1: you had to Japan, and you've got trying to maintain
Speaker 1: an interest rate backs amazing range of circumstances and opportunities,
Speaker 1: and I think diversifying across those risks, you've got a
Speaker 1: huge risk in the United States, is that liquidity that
Speaker 1: was stuck in the U S assets comes out to US.
Speaker 1: Most investor will be way better off having a much
Speaker 1: more global mix of assets than they currently have. So
Speaker 1: that would be point one in terms of the short term,
Speaker 1: short term kind of alpha opportunities. I think it's also
Speaker 1: that that's right. I think a lot of assets outside
Speaker 1: of the US are more attractive than the US, although
Speaker 1: there's risks everywhere, but the pricing is so different. We
Speaker 1: talk about the pricing of cash flows, the pricing of
Speaker 1: cash flows in the US. If you take companies very
Speaker 1: similar cash flow allocations, you can get them in the
Speaker 1: rest of the world of those same cash flows for
Speaker 1: thirty cheaper. That's the issue. The US has done so
Speaker 1: much better and whatever for so long that it's being
Speaker 1: extrapolated right. China is the most extreme of that, and
Speaker 1: for reasons that you can understand, given the regulation, etcetera.
Speaker 1: But if you just take the reasonably expected cash flows
Speaker 1: and you compare that to a similarly situated American company,
Speaker 1: you're seeing these huge differences. Now, the huge differences can
Speaker 1: have merit. There's reasons. There's bigger risk premiums in assets
Speaker 1: in different parts of the world. There's more even more
Speaker 1: risk and the worst spilling over in Europe. There's China
Speaker 1: is even more risk of regulator a year, the inability
Speaker 1: to invest in China, all of those things. So there's reasons.
Speaker 1: But on net we think you're you're certainly gonna want
Speaker 1: a much more diversified portfolio going forward than you have today. Greg,
Speaker 1: that was a really fascinating conversation, and yeah, we really
Speaker 1: appreciate you taking the time to come on all thoughts
Speaker 1: great well, I enjoyed it, so thank you both. Thanks Greg,
Speaker 1: that was awesome. So, Joe, that was really interesting, first
Speaker 1: of all, and secondly, I think it was kind of
Speaker 1: a good foil to the macro discussion that we had
Speaker 1: a little while ago with Neil data Um and Luke
Speaker 1: Kawa as well. So I guess this is sort of
Speaker 1: I mean, this is pretty bearish, the idea that you
Speaker 1: could get drop in in the US markets. Yeah, that's
Speaker 1: pretty bad. Yeah, No, I mean it's definitely. Yeah, this
Speaker 1: idea that the market is still even with all the
Speaker 1: volatility that we've seen pricing in a soft landing was striking.
Speaker 1: And then of course this idea that like, look, you know,
Speaker 1: we've had this incredible run for risk assets pro and
Speaker 1: the conditions were just right. And I thought Greg laid
Speaker 1: out a very good, sort of like simple way of
Speaker 1: thinking not just that the conditions were right, but why
Speaker 1: the conditions in particular were right for investors buying stocks
Speaker 1: or bonds. And I think, you know, it's like pretty
Speaker 1: significant question about whether you know, when all the dust
Speaker 1: settles on this sort of the pandemic and post pandemic period,
Speaker 1: whether those conditions can be returned to absolutely. And also
Speaker 1: just this idea, and we've discussed it before, I think
Speaker 1: with with Matt King from City Group on this podcast,
Speaker 1: but this idea of I mean, it's sort of the
Speaker 1: flows before prose idea. The idea of flows attract inflows,
Speaker 1: and that's how you get to these really lofty valuations
Speaker 1: and when the conditions that sustain those start to turn.
Speaker 1: To Greg's point, there's not really anything that can or
Speaker 1: pin them anymore, like to his point that the cash
Speaker 1: flows aren't really there. And look, you know, I think
Speaker 1: we're sort of you know, a conversation you always hear
Speaker 1: is like, well, okay, what do you buy? What's the
Speaker 1: right portfolio strategy for this new inflationary environment? What do
Speaker 1: you what did you we reallocate to? Maybe it's whatever
Speaker 1: it is, but like I also think, like it's possible
Speaker 1: that everything is. And I don't know, but like maybe
Speaker 1: there is not like an optimal portfolio if the conditions deteriorate,
Speaker 1: if inflation remains high, real growth decelerates, etcetera. And I
Speaker 1: don't know if it will, but maybe, like you know,
Speaker 1: bad news like asset prices aren't going to go up
Speaker 1: in that environment, and the fascet prices aren't going up,
Speaker 1: then there's not gonna be some like magic portfolio construction
Speaker 1: that makes it easy. Yeah, all right, well shall we
Speaker 1: leave it that. Let's leave it there. This has been
Speaker 1: another episode of the All Boughts podcast. I'm Tracy Alloway.
Speaker 1: You can follow me on Twitter at Tracy Alloway and
Speaker 1: I'm Joe Wisn'tal. You can follow me on Twitter at
Speaker 1: the Stalwart. Follow or producer Carmen Rodriguez. She's at Harmon Arman.
Speaker 1: Follow the Bloomberg head of podcast Francesco Levi at Francesco Today,
Speaker 1: and check out all of our podcasts at Bloomberg under
Speaker 1: the handle at podcasts. Thanks for listening.