WEBVTT - Bridgewater's Greg Jensen on Why Markets Have Further to Fall 0:00:10.480 --> 0:00:13.680 Hello, and welcome to another episode of the All Thoughts Podcast. 0:00:13.760 --> 0:00:16.959 I'm Tracy Alloway and I'm Joe Wise. Joe, you know 0:00:17.079 --> 0:00:20.599 something that really annoyed me last year? There are a 0:00:20.720 --> 0:00:24.560 number of things I was sure, Yeah, there's actually a lot. Okay, 0:00:24.800 --> 0:00:28.639 there's a lot, I hear. I'm just a part of 0:00:28.640 --> 0:00:31.880 our daily chatter is here now. But keep going, keep going. 0:00:32.680 --> 0:00:36.000 What I'm annoyed about today? Yeah, Well, there was a 0:00:36.040 --> 0:00:40.560 moment early last year where people were talking about stagflation, 0:00:40.800 --> 0:00:44.600 and it wasn't the risk of stagflation. People were talking about, oh, 0:00:44.640 --> 0:00:48.920 we're in a stagflationary environment, which really bothered me because yes, 0:00:49.760 --> 0:00:52.760 you know, prices were going up, but economic growth was 0:00:52.760 --> 0:00:55.160 still relatively strong, and so there was no way you 0:00:55.160 --> 0:00:58.880 could have said that last year there was stagflation happening. Yeah, 0:00:58.960 --> 0:01:01.640 I think there's right. Um, you know, people and people 0:01:01.680 --> 0:01:03.920 say this kind of stuff all the time. People throughout 0:01:03.960 --> 0:01:08.160 any terms. The seventies, it's the eighties, it's four, it's 0:01:08.480 --> 0:01:11.600 two thousand and two. People are always reaching for something. 0:01:11.640 --> 0:01:14.320 There's no you know, that's like, you know, I guess 0:01:14.319 --> 0:01:16.800 optimistically say that's what makes a market, right. People have 0:01:16.840 --> 0:01:19.560 a bunch of different years, this is very true. Well, 0:01:19.680 --> 0:01:21.240 I have to say, you know, some of the people 0:01:21.280 --> 0:01:25.160 who were accurately talking about the risks of stagflation, not 0:01:25.240 --> 0:01:29.920 stagflation actually happening in that particular moment, I feel like 0:01:30.040 --> 0:01:34.280 they've been sort of borne out by events. And the 0:01:34.360 --> 0:01:38.320 US economy is still going relatively strong. It's not shrinking 0:01:38.480 --> 0:01:42.039 by any means, but with the Federal Reserve raising rates, 0:01:42.480 --> 0:01:45.759 the question clearly on everyone's mind is whether or not 0:01:46.280 --> 0:01:48.360 we're going to get a soft landing, whether or not 0:01:48.400 --> 0:01:50.920 it's possible to have prices start to come down but 0:01:51.040 --> 0:01:53.800 also maintain economic growth. Well, what I would say is, 0:01:53.840 --> 0:01:56.320 for sure, whatever you want to call the environment of 0:01:56.400 --> 0:01:59.440 this year and sort of the last quarter of last year, 0:01:59.520 --> 0:02:02.200 the second have of last year, it's been a really 0:02:03.040 --> 0:02:07.480 toxic brewis so to speak for uh for financial assets, 0:02:07.760 --> 0:02:10.680 for for asset prices. So you know, the economy is 0:02:10.720 --> 0:02:14.839 still growing appears, and you know the jobs are still 0:02:14.880 --> 0:02:17.840 being added. But this mix that we have right now 0:02:18.040 --> 0:02:21.760 of very high inflation relative to the last couple of 0:02:21.760 --> 0:02:26.200 decades or last several years, and concerns about whether it 0:02:26.200 --> 0:02:29.320 could be brought down without coloboring growth, it's a it's 0:02:29.360 --> 0:02:34.040 pretty rough for anyone stocks and bonds. Yeah, it is 0:02:34.080 --> 0:02:35.959 a tough time for markets. And the other thing I 0:02:36.000 --> 0:02:38.799 would say is, you know, we hear people talk about 0:02:38.800 --> 0:02:43.959 these big picture macro ideas like stag inflation or recessionary 0:02:44.080 --> 0:02:47.160 risk or whatever, but then I feel like we don't 0:02:47.200 --> 0:02:50.800 actually hear that much about how you translate that into 0:02:50.960 --> 0:02:55.240 a cohesive trading strategy. So, you know, we've had some 0:02:55.240 --> 0:02:58.200 commodity specialists come on here and say, obviously, you know, 0:02:58.280 --> 0:03:00.760 if inflation is going up, commodity rices are going up 0:03:00.800 --> 0:03:04.800 by commodities. But beyond that, it's not exactly clear to 0:03:04.880 --> 0:03:08.840 me how you actually invest in that type of environment, because, 0:03:08.840 --> 0:03:12.640 as you mentioned, it just feels like it's bad for everything. Yeah, 0:03:12.800 --> 0:03:14.760 the only thing that really works, he had commodities sort 0:03:14.760 --> 0:03:18.760 of worked. Holding dollars has worked, ironically, given the level 0:03:18.760 --> 0:03:22.240 of inflation. But this is an environment where typical portfolio 0:03:22.280 --> 0:03:25.560 strategies and most assets the people own, whether it's docks 0:03:25.639 --> 0:03:30.080 or bonds, really in for a rough rude. Yeah, all right, Well, 0:03:30.120 --> 0:03:32.480 on that note, we are going to be talking with 0:03:32.560 --> 0:03:37.320 someone who is basically all about forming a cohesive trading 0:03:37.400 --> 0:03:40.880 strategy around the macro picture. We're gonna be speaking with 0:03:40.920 --> 0:03:43.440 Greg Jensen. He is, of course the co c i 0:03:43.520 --> 0:03:46.960 O of Bridgewater, and we're going to get into it. 0:03:47.040 --> 0:03:48.880 Let's go, Greg, thanks so much for coming on. All 0:03:48.920 --> 0:03:51.560 thoughts great, thanks for having me. Maybe just to begin with, 0:03:51.680 --> 0:03:55.000 you could give us a short summary of what exactly 0:03:55.000 --> 0:03:57.680 it is that you do at Bridgewater and what makes 0:03:57.680 --> 0:04:01.800 Bridgewater I guess different to other types of funds because 0:04:02.040 --> 0:04:04.960 I feel like Bridgewater you know, you say that name, uh, 0:04:04.960 --> 0:04:09.400 and it has a little bit of mystique around it. Yeah. Great. 0:04:09.480 --> 0:04:11.760 So the you know, I'm one of the three co 0:04:11.880 --> 0:04:14.960 chief investment officers with Ray Dalio and Bob Prince, and 0:04:15.000 --> 0:04:19.960 we are focused on working with the team of investors 0:04:20.680 --> 0:04:25.000 to think through how the global financial system works, to 0:04:25.160 --> 0:04:30.359 build that out into algorithms to predict what's next. It 0:04:30.440 --> 0:04:32.200 starts with really looking at the world and trying to 0:04:32.240 --> 0:04:34.880 process how all these things, the concepts you guys were 0:04:34.880 --> 0:04:37.679 talking about before growth, inflation, how those how the money 0:04:37.720 --> 0:04:40.880 flows into financial markets as a result of those things, 0:04:40.920 --> 0:04:44.279 and how to predict what's next. And so I am 0:04:44.320 --> 0:04:50.640 passionate about taking those types of big picture ideas thinking 0:04:50.720 --> 0:04:54.560 through how you'll translate your thinking about them into rules 0:04:54.600 --> 0:04:57.760 that you could apply across time and across countries. And 0:04:57.800 --> 0:05:00.520 as we developed that, as our our team develops that, 0:05:00.560 --> 0:05:02.200 we work hard to say, okay, this is how we 0:05:02.240 --> 0:05:05.000 think this works. If you're talking about the dynamic of stagflation, 0:05:05.000 --> 0:05:06.640 why would that happen? How does it happen? How do 0:05:06.680 --> 0:05:09.039 you measure whether it's happening or not? And what do 0:05:09.080 --> 0:05:12.240 you do if it does happen? And by you know, 0:05:12.279 --> 0:05:16.200 it's starting with human intuition and logic, but forcing to 0:05:16.320 --> 0:05:19.679 discipline of pulling out what's going on in your brain, 0:05:20.160 --> 0:05:23.080 translating that into rules that you can apply and therefore 0:05:23.120 --> 0:05:26.920 stress tests whether they've been true in different types of environments. UM, 0:05:27.000 --> 0:05:29.200 that's been kind of the magic of Bridgewater is having 0:05:29.240 --> 0:05:32.479 a community of people that are passionate about that understanding, 0:05:32.960 --> 0:05:36.479 building up what we call that compound understanding, the algorithms 0:05:36.520 --> 0:05:40.159 that suggest that, and then constantly thinking about what's changing 0:05:40.160 --> 0:05:42.839 and what you might be wrong about. Is there a 0:05:43.040 --> 0:05:46.240 core like framework that you use? So obviously there are 0:05:46.240 --> 0:05:49.160 all kinds of inputs when thinking about the global economy. 0:05:49.480 --> 0:05:54.840 Inflation and energy prices and trade imbalances and domestic savings, 0:05:54.880 --> 0:05:57.120 are domestic debt or national debt? Like all these different 0:05:57.160 --> 0:05:59.600 things that are always going up and down. But would 0:05:59.600 --> 0:06:02.440 you say that Bridgewater and or you have like a 0:06:02.440 --> 0:06:06.359 core framework that you then put all those factors into, 0:06:06.440 --> 0:06:10.240 Like what is the sort of like underlying lens through 0:06:10.279 --> 0:06:15.840 which you view the economy and therefore financial markets. Yeah, well, 0:06:15.839 --> 0:06:17.960 I mean starting with the financial markets and then I'll 0:06:18.000 --> 0:06:19.720 go to the economy, But I'd say on both, the 0:06:20.960 --> 0:06:23.800 basic picture of the financial markets is that every price 0:06:24.560 --> 0:06:28.080 is discounting a future, and if you can understand what 0:06:28.320 --> 0:06:31.440 future that's discounting and compare it to what you think 0:06:31.440 --> 0:06:33.080 the future will be, which I'll come back to the 0:06:33.080 --> 0:06:36.520 economy and markets, but um, and then how do you 0:06:36.720 --> 0:06:39.920 how do you it's really changes in people's perception of 0:06:39.960 --> 0:06:44.040 that future that drives changes in asset classes. So that's 0:06:44.080 --> 0:06:45.960 one framework, and I'll get into that a little bit. 0:06:46.000 --> 0:06:49.599 But understanding what markets are saying about the likely cash 0:06:49.640 --> 0:06:52.239 flow of assets and the discounting of those cash flows, 0:06:52.279 --> 0:06:54.919 and then how those things are going to change. And 0:06:54.920 --> 0:06:56.919 the second thing I'd say is that we think a 0:06:56.960 --> 0:07:00.800 lot in terms of buyers and sellers, essentially knowing how 0:07:00.839 --> 0:07:03.480 many dollars there are to buy an asset relative to 0:07:03.520 --> 0:07:06.279 the supply of that asset and that whole world is 0:07:06.480 --> 0:07:10.200 there's so much in there of understanding why people buy things, 0:07:10.480 --> 0:07:12.760 what caused them to do that, where the dollars come 0:07:12.800 --> 0:07:16.360 from to do that, and how different types of things 0:07:16.400 --> 0:07:18.680 are produced, whether it's a financial assets produced one way, 0:07:18.720 --> 0:07:21.880 a real good producer totally different way. But that's the 0:07:21.960 --> 0:07:24.440 second kind of lens that we're constantly looking at. Do 0:07:24.480 --> 0:07:26.680 we understand all the buyers in the market, what their 0:07:26.680 --> 0:07:30.520 motivations are. Do we understand how that assets produced and 0:07:30.600 --> 0:07:33.440 what the motivations of the producers are. And so those 0:07:33.480 --> 0:07:35.440 are the two frameworks for which we've spent four or 0:07:35.480 --> 0:07:39.840 five years building up layers and layers of understanding beneath that. 0:07:40.520 --> 0:07:42.360 But those things we think, and you can go in 0:07:42.440 --> 0:07:45.480 any economy, whether it's in the Soviet Union and the 0:07:45.760 --> 0:07:50.160 you know, in the eighties, or in China today or um, 0:07:50.200 --> 0:07:54.480 you know, or in Latin America in hyper inflations. Those 0:07:54.520 --> 0:07:58.640 frameworks work, you know, they're they're what we call timeless universal. Now, 0:07:58.640 --> 0:08:02.040 the inputs of the frameworks change, but the basic frameworks 0:08:02.120 --> 0:08:05.360 do and um. And so that's that's kind of this 0:08:05.440 --> 0:08:08.680 starting point. And now in terms of the economy, that 0:08:09.280 --> 0:08:11.760 understanding what's going to happen next to cash thowse. We 0:08:11.800 --> 0:08:14.560 think a lot in terms of the transactions that drive 0:08:14.640 --> 0:08:17.000 the economy. How does it actually work, Where does the 0:08:17.000 --> 0:08:19.800 money come from when somebody buys something or somebody sells something, 0:08:20.240 --> 0:08:23.400 the understanding the bottom line mechanics of that and all 0:08:23.440 --> 0:08:27.239 the incentives that run through the process at the simple 0:08:27.320 --> 0:08:29.840 level of interest rates and monetary policy, but other types 0:08:29.880 --> 0:08:33.960 of incentives, tax policy, etcetera that affect those outcomes. And 0:08:34.000 --> 0:08:36.839 so again we've been building that model of saying, okay, well, 0:08:36.880 --> 0:08:38.360 who are all the buyers and sellers in the real 0:08:38.400 --> 0:08:41.480 economy and what's motivating them? And what's the ability to 0:08:41.480 --> 0:08:43.600 produce and where is the demand coming from? Those types 0:08:43.640 --> 0:08:45.959 of questions. That's the framework that we're doing, and then 0:08:46.000 --> 0:08:49.760 just constantly thinking about what's going on and what we're 0:08:49.800 --> 0:08:53.000 then going to do about that systematically, So we're always 0:08:53.040 --> 0:08:56.360 because we're predicting two hundred different markets and economic stats 0:08:56.360 --> 0:08:58.880 and hundreds of different things, there's always the feedback loop 0:08:59.000 --> 0:09:01.960 of missing stuff which you then go through and say, okay, 0:09:01.960 --> 0:09:03.640 well what am I missing? How am I dealing with 0:09:03.720 --> 0:09:06.640 is As an example today, the deglobalization is a huge 0:09:06.679 --> 0:09:08.800 deal over the last four years we really haven't been 0:09:08.800 --> 0:09:10.559 dealing with you know, and now you've got to deal 0:09:10.559 --> 0:09:12.920 with it. You've got to have a perspective on how 0:09:12.960 --> 0:09:15.560 to think about supply chains differently and the rebuilding of 0:09:15.600 --> 0:09:17.880 them and all of these questions. And because we have 0:09:18.160 --> 0:09:20.160 a good process that we're building from the base on, 0:09:20.200 --> 0:09:23.160 we could spend all our time on the things we 0:09:23.200 --> 0:09:25.600 think we're missing and then try to add them into 0:09:25.600 --> 0:09:30.840 that understanding. So I definitely want to get into deglobalization 0:09:31.200 --> 0:09:33.679 and what you're seeing with supply chains and things like that, 0:09:33.720 --> 0:09:36.200 but just before we do, just so we understand the 0:09:36.240 --> 0:09:40.000 framework a little bit better. I'm curious how machine learning 0:09:40.080 --> 0:09:43.240 and artificial intelligence fits into all of this, because, on 0:09:43.280 --> 0:09:45.760 the one hand, I can understand if you're looking at 0:09:45.760 --> 0:09:49.080 economic data points trying to find signs of where things 0:09:49.080 --> 0:09:51.480 are going, or looking at the market trying to figure 0:09:51.480 --> 0:09:54.640 out whether or not things are under or overvalued, that 0:09:54.720 --> 0:09:57.240 machine learning could play a role in that. But when 0:09:57.240 --> 0:10:00.640 you talk about things like incentives, I tend to think 0:10:00.640 --> 0:10:02.160 of that as much more of a you know, a 0:10:02.320 --> 0:10:06.400 human emotion, what's actually driving people to do this, And 0:10:06.480 --> 0:10:09.520 I don't necessarily automatically think of that as something that 0:10:09.600 --> 0:10:14.079 lends itself to modeling or machine learning and things like that. 0:10:14.160 --> 0:10:16.240 So could you maybe talk a little bit more of 0:10:16.240 --> 0:10:21.400 that aspect of your strategy. Yeah, great, so artificial intelligence 0:10:21.440 --> 0:10:24.520 of them very passionate about it, but it's a broad 0:10:24.720 --> 0:10:27.760 category of things for which machine learning is a subset. 0:10:27.800 --> 0:10:30.280 So let me start at the artificial intelligence level. The 0:10:30.320 --> 0:10:32.600 thing that Bridgewater has been doing for forty years is 0:10:32.600 --> 0:10:36.240 one of the most unique laboratories of is what would 0:10:36.360 --> 0:10:41.080 be considered old style artificial intelligence, which is an expert system. 0:10:41.160 --> 0:10:44.240 So everything that we're doing in markets is happening through 0:10:44.280 --> 0:10:47.120 algorithms that we've produced. We produced them and what was 0:10:47.320 --> 0:10:49.520 the original thought of how AI would work, which is 0:10:50.040 --> 0:10:54.000 experts thinking about what's going on, writing down what they're learning, what, 0:10:54.120 --> 0:10:56.560 writing down what their rules are. And because we've invested 0:10:56.559 --> 0:10:59.040 massively in that process and we've been doing it for 0:10:59.040 --> 0:11:02.559 a long time and have great expertise that we're able 0:11:02.600 --> 0:11:05.000 to execute trades across two in our markets are twenty 0:11:05.040 --> 0:11:09.400 four hours a day, all of those things algorithmically reflecting 0:11:09.440 --> 0:11:11.680 everything that we've learned. So we have this big AI 0:11:11.840 --> 0:11:15.280 process that's like humans and machines, where the humans are 0:11:15.320 --> 0:11:17.440 looking at the machines, think about what's wrong, but keep 0:11:17.440 --> 0:11:21.000 programming that in and over time there's more and we're 0:11:21.080 --> 0:11:24.000 done with computers and now machine learning, you know, comes 0:11:24.000 --> 0:11:26.920 along over the last decade and is helpful in that 0:11:26.960 --> 0:11:29.360 process as well. But it's also a tool and that 0:11:29.480 --> 0:11:31.559 you have to be very careful. And to your point 0:11:32.240 --> 0:11:34.320 on what what machine learning can help with and what 0:11:34.400 --> 0:11:37.600 it can't, at least in the current situation, is that 0:11:37.679 --> 0:11:40.680 when the data that you can plug into a machine 0:11:40.760 --> 0:11:44.080 learning model is representative of the data in the future, 0:11:44.360 --> 0:11:45.680 it can be very helpful. You have to have a 0:11:45.679 --> 0:11:47.280 lot of it, and you have to have but it 0:11:47.320 --> 0:11:49.040 has to be representative of the data in the future. 0:11:49.280 --> 0:11:51.640 What's so interesting about economies and markets is it never 0:11:51.679 --> 0:11:55.040 works that way because even just the existence of machine 0:11:55.120 --> 0:11:59.240 learning itself changes the future so that the future data 0:11:59.240 --> 0:12:01.360 points aren't gonna be like the past data points because 0:12:01.400 --> 0:12:03.800 machine learning exists. And and this is a game of 0:12:04.160 --> 0:12:07.319 in which the players are affected by the tools. It's 0:12:07.400 --> 0:12:09.960 not like physics. It's not it's not something physical where 0:12:09.960 --> 0:12:13.120 it doesn't matter if you're watching it. It matters completely 0:12:13.320 --> 0:12:16.559 that people are using machine learning techniques make machine learning 0:12:16.559 --> 0:12:20.880 techniques themselves dangerous. If they're using data from the premachine 0:12:20.960 --> 0:12:25.319 learning era as an example, and so a understanding that. Right. 0:12:25.320 --> 0:12:27.959 So there's a lot that machine learning can be helpful 0:12:27.960 --> 0:12:31.280 on data cleansing other things, but it's wrong to think 0:12:31.360 --> 0:12:34.200 of it as a landscape that's actually good for machine learning. 0:12:34.440 --> 0:12:36.840 You have to be super careful because the data from 0:12:36.880 --> 0:12:39.480 the past is not like the data from the future, 0:12:39.559 --> 0:12:43.920 and almost by definition, any anything like this changes the 0:12:43.960 --> 0:12:47.040 future relative to the past. More generally, there's so little 0:12:47.080 --> 0:12:50.840 sample size in global economies. We have a couple of 0:12:50.880 --> 0:12:54.680 debt cycles over the last hundred years. We have a 0:12:54.720 --> 0:12:57.400 world that was, as we're saying, globalizing. The last fourty 0:12:57.480 --> 0:13:00.400 years is one big cycle of lower and lower interest 0:13:00.480 --> 0:13:04.080 rates and declining inflation. So you have to be incredibly 0:13:04.120 --> 0:13:07.439 careful to use those techniques that are so valuable in 0:13:07.480 --> 0:13:10.280 certain ways in the economy and other things in our 0:13:10.360 --> 0:13:14.520 industry because of those challenges. Now, over time, I mean, 0:13:14.720 --> 0:13:18.080 I'm optimistic that machine learning can take great strides, and 0:13:18.480 --> 0:13:21.840 as we do, we're working on different ways to use 0:13:21.920 --> 0:13:24.320 machine learning to help researchers and other things. And I 0:13:24.360 --> 0:13:26.520 think that over time, computers will keep doing more and 0:13:26.559 --> 0:13:30.280 more that humans can do. But handling that in a 0:13:30.360 --> 0:13:34.959 knowledgeable way and not using the fanciest optimizer of the day, 0:13:35.000 --> 0:13:37.520 which today machine learning is the fanciest optimizer of the day. 0:13:37.559 --> 0:13:41.720 But all through history optimizers have in markets have have 0:13:41.960 --> 0:13:45.760 failed for the same reason, which is the past. If 0:13:45.800 --> 0:13:48.880 you don't understand it extremely well, isn't going to be 0:13:49.040 --> 0:13:51.160 the way to get the data. The data itself doesn't 0:13:51.160 --> 0:13:54.720 tell the story. You have to actually understand the human 0:13:54.760 --> 0:13:57.959 motivations on the other side of markets. So in five 0:13:58.040 --> 0:14:04.000 hundred years, maybe Bridgewater will have a machine learning algorithms 0:14:04.040 --> 0:14:06.959 that have seen twenty great financial crazies and twenty big 0:14:06.960 --> 0:14:10.920 dead cycles and twenty high inflationary periods. But as you 0:14:11.000 --> 0:14:15.080 note here in two, there just haven't been that much 0:14:15.200 --> 0:14:17.760 data yet. Hard to get out of sample data for 0:14:17.880 --> 0:14:20.000 some of this stuff. But what do you know, let's 0:14:20.040 --> 0:14:22.680 talk about right now for a moment, and thinking about 0:14:22.720 --> 0:14:26.480 what you just said, like we are experiencing it appears 0:14:26.560 --> 0:14:29.600 or reversal of a forty year pattern in interest rates. 0:14:29.960 --> 0:14:34.120 It does appear that we're certainly experiencing inflation the likes 0:14:34.120 --> 0:14:37.440 of which we haven't seen in several decades. So how 0:14:37.440 --> 0:14:40.520 do you adjust this new a new thing emerges or 0:14:40.560 --> 0:14:42.720 maybe it's de globalization. How do you what is the 0:14:42.760 --> 0:14:47.600 process by which you sort of acknowledge or recognize that 0:14:47.760 --> 0:14:51.600 say this is something different. Yeah, well, I think are 0:14:51.640 --> 0:14:54.480 going back to our frameworks right that you can look at. 0:14:54.520 --> 0:14:57.120 So why did the why did the inflation? And now 0:14:57.280 --> 0:14:59.240 let's say slow in your oath with inflation. I agree 0:14:59.240 --> 0:15:01.000 with you, I don't want to get should agree what 0:15:01.040 --> 0:15:02.640 you're saying in the introduction of getting stuck in the 0:15:02.680 --> 0:15:05.960 words place these different things, but the basic picture is 0:15:06.160 --> 0:15:10.680 if you turn back the clock to COVID, COVID accelerated 0:15:10.720 --> 0:15:13.000 something that we expected to happen over a decade, which 0:15:13.080 --> 0:15:17.640 was this combination of fiscal and monetary policy. We thought 0:15:17.680 --> 0:15:20.960 that would happen because it's necessary monetary policy. Quantitative easing 0:15:21.000 --> 0:15:24.200 by itself was getting stuck in assets, was was worsening 0:15:24.240 --> 0:15:27.520 the wealth divide. Eventually that in order to turn around 0:15:27.560 --> 0:15:30.120 some of the economic ills that had been stretched over 0:15:30.160 --> 0:15:32.640 that four to year period, that you would need to 0:15:32.760 --> 0:15:36.920 combine fiscal and monetary policy. That happened in in warp 0:15:37.000 --> 0:15:41.880 speed during the COVID crisis, and it showed the power 0:15:41.880 --> 0:15:46.120 of it that that printing money and getting that money 0:15:46.120 --> 0:15:48.160 into the hands of people that would spend it in 0:15:48.200 --> 0:15:52.200 the real economy worked massively well. It was way more 0:15:52.240 --> 0:15:56.400 effective way to ease policy than anything that had been 0:15:56.400 --> 0:15:59.520 tried before, lowering your interest rates or quantitative easing. But 0:15:59.800 --> 0:16:04.560 what it did was instantly create demand without creating supply. Normally, 0:16:05.320 --> 0:16:08.560 when the economy is strong, the demand is coming at 0:16:08.600 --> 0:16:10.200 the same time the supply is coming in the sense 0:16:10.200 --> 0:16:12.400 that somebody gets hired and they're supplying o good at 0:16:12.440 --> 0:16:14.560 the same time they're getting paid in demanding a good. 0:16:14.760 --> 0:16:20.400 So you've got demand without supply instantly. In terms of COVID, Now, 0:16:20.400 --> 0:16:21.840 it took a little while to play out because the 0:16:21.880 --> 0:16:24.720 lockdowns and other things related to COVID, but that that 0:16:24.840 --> 0:16:27.640 had this huge inflationary effect. Right, And if you just 0:16:27.640 --> 0:16:29.280 think about the framework I was saying before, if you 0:16:29.320 --> 0:16:31.520 just look at, well, how many dollars are available to 0:16:31.560 --> 0:16:34.680 spend relative to the supply of whether that was the 0:16:34.680 --> 0:16:38.440 supply of meme stocks or the supply of used cars, right, 0:16:38.520 --> 0:16:41.720 nothing kept up in that phase that the demand rose 0:16:41.800 --> 0:16:46.400 so quickly the supply of assets and didn't keep up. Now, 0:16:46.440 --> 0:16:49.320 as time goes, assets that are easy to print, meme stocks, 0:16:49.320 --> 0:16:52.040 et cetera, the supply of those increased quickly. The things 0:16:52.040 --> 0:16:56.040 that are harder to supply are still lagging that demand shot, 0:16:56.520 --> 0:16:59.080 and so you get this inflation. And now the inflation 0:17:00.080 --> 0:17:03.160 becomes sticky when you end up in where I think 0:17:03.200 --> 0:17:07.320 we are, which is now this wage price combo, because 0:17:07.560 --> 0:17:09.919 wages are now the thing that we're most short on 0:17:09.960 --> 0:17:12.040 in the United States is actually labor at this point, 0:17:12.560 --> 0:17:15.879 and wages are rising and goods prices are rising, and 0:17:15.920 --> 0:17:18.160 they cycle on each other. The wages drive up goods 0:17:18.200 --> 0:17:20.399 prices and they drive up the demand for goods because 0:17:20.760 --> 0:17:23.000 because incomes are rising as a result of the wages. 0:17:23.400 --> 0:17:25.320 And so you've got that cycle, and that we think 0:17:25.359 --> 0:17:28.919 that cycles pretty sticky, although we'll see that's certainly the 0:17:28.920 --> 0:17:31.400 place you'd be looking is whether that cycle turns out 0:17:31.440 --> 0:17:34.360 not to be sticky. But that then so we're measuring 0:17:34.400 --> 0:17:36.439 that phenomenon, right, And if you try to do that 0:17:36.480 --> 0:17:38.560 statistically with so little sample, and you looked at the 0:17:38.600 --> 0:17:40.680 last four years, you almost never see that spot. You 0:17:40.800 --> 0:17:43.000 have to go back to other periods in history, so 0:17:43.240 --> 0:17:45.840 statistically you will you would be looking for inflation to 0:17:45.920 --> 0:17:49.840 revert because the last fourty years it mostly has. Now 0:17:50.240 --> 0:17:52.439 in this case that we think that if you measure 0:17:52.440 --> 0:17:54.520 that dynamics at a physics level and you look at 0:17:54.520 --> 0:17:56.720 what's happening to incomes as a result of the wage 0:17:56.720 --> 0:18:00.240 inflation and what that means for spending and where action 0:18:00.280 --> 0:18:03.000 and other things will be, we think you're stuck in 0:18:03.080 --> 0:18:07.120 a more stubborn inflation spiral. Now that's all coming from 0:18:07.200 --> 0:18:10.200 algorithms that we've produced, but they're not the same as 0:18:10.200 --> 0:18:13.399 the algorithms that would be produced through a machine learning process, 0:18:13.440 --> 0:18:17.719 particularly if it waited the last fourty years significantly. And 0:18:17.760 --> 0:18:20.320 that's the difference. Knowing that difference being able to tune 0:18:20.320 --> 0:18:23.240 your algorithms in the way that you think things work 0:18:23.560 --> 0:18:26.800 rather than the way that they've worked over most of 0:18:26.840 --> 0:18:29.320 the history. And that's the freedom you have as a 0:18:29.400 --> 0:18:31.959 human to look at that history and understand it and 0:18:32.000 --> 0:18:34.000 therefore say, well, I haven't seen this before, but I 0:18:34.040 --> 0:18:36.439 know the physics of how it would work, and you 0:18:36.480 --> 0:18:38.840 get you get different answers as a result. Now, I 0:18:38.840 --> 0:18:41.760 don't think that's impossible that you could imagine someday, uh 0:18:41.880 --> 0:18:45.520 machine learning capable of seeing those differences and whatever, but 0:18:45.640 --> 0:18:48.760 it's extremely difficult. And so in any event, that's where 0:18:48.800 --> 0:18:52.360 the expertise comes in to understand those different types of situations, 0:18:52.359 --> 0:18:55.600 which when you're in and tune your algorithms and you're 0:18:55.640 --> 0:18:59.560 thinking to your systematic process in that way. So you 0:18:59.600 --> 0:19:03.879 mentioned the potential stickiness of inflation as we get this 0:19:03.960 --> 0:19:09.000 sort of wage price spiral, and obviously this is something 0:19:09.320 --> 0:19:12.440 that is concerning to the Federal Reserve and that's why 0:19:12.440 --> 0:19:15.000 we're seeing them hike interest rates at the moment. Could 0:19:15.040 --> 0:19:20.160 you walk us through exactly how you see interest rate 0:19:20.280 --> 0:19:25.560 hikes impacting inflation at the moment, Like when when you 0:19:25.640 --> 0:19:29.560 walk through that as a as a trading strategy or 0:19:29.600 --> 0:19:32.440 when you're trying to gauge the impact of what that 0:19:32.520 --> 0:19:36.280 could be on the economy and on broader markets, what 0:19:36.440 --> 0:19:39.800 exactly are you seeing? Yeah, so this is a great 0:19:39.840 --> 0:19:41.800 example of coming back to the framework. Right, So we 0:19:41.840 --> 0:19:45.040 look at if the Fed raised a short term interest rates, 0:19:45.040 --> 0:19:48.200 how much will that cut the dollar spent on goods 0:19:48.200 --> 0:19:51.280 and services? If you're trying to estimate inflation relative to 0:19:51.359 --> 0:19:53.320 what's going to happen to the production of those goods 0:19:53.320 --> 0:19:56.080 and services. And when you look at that, this is 0:19:56.119 --> 0:19:58.520 the tough thing for the Fed that if you take 0:19:58.520 --> 0:20:02.160 the last decade, what the FED did was drove up 0:20:02.200 --> 0:20:05.320 asset prices so much more than the economy itself, so 0:20:05.400 --> 0:20:09.119 that there's a huge gap between asset prices and the 0:20:09.200 --> 0:20:11.960 cash flows available to those assets in the real economy. 0:20:12.320 --> 0:20:14.560 And that gap is an unsustainable gaps. Somehow you have 0:20:14.600 --> 0:20:18.359 to pay for the assets with cash flows generated in 0:20:18.359 --> 0:20:22.000 the real economy. One person's assets is another draw on 0:20:22.119 --> 0:20:25.120 somebody else's future income, So the incomes and the assets 0:20:25.280 --> 0:20:26.959 have to align at some point. Now that could take 0:20:27.000 --> 0:20:29.320 a very long time, but the last decade was extreme. 0:20:29.359 --> 0:20:31.720 It was one of the most extreme periods of assets 0:20:31.720 --> 0:20:36.359 doing well relative to the nominal cash flows. Today, the 0:20:36.440 --> 0:20:38.280 FEDS trying to deal with the aftermath of that. The 0:20:38.280 --> 0:20:40.240 aftermath of that is we've got a tremendous amount of 0:20:40.240 --> 0:20:43.120 paper wealth, we got a tremendous amount of demand relative 0:20:43.200 --> 0:20:45.639 to the ability of the economy to supply it. And 0:20:45.680 --> 0:20:47.560 now the FED has two choices. If you said, what 0:20:47.640 --> 0:20:50.240 is it going to take to get inflation back to target? 0:20:50.960 --> 0:20:53.160 You know, and it's not I don't want to give 0:20:53.359 --> 0:20:55.359 the sense of false precision. But if we said, well, 0:20:55.359 --> 0:20:58.120 how much you have to drop demand change the labor 0:20:58.160 --> 0:21:00.520 market to get it, you're looking at a tort term 0:21:00.520 --> 0:21:03.000 interest rate of five and a percent and a recession, 0:21:03.160 --> 0:21:06.840 a d percession, and a crash probably in financial markets 0:21:06.920 --> 0:21:10.280 down if you choose to go that direction. I don't 0:21:10.280 --> 0:21:12.240 think the FED will do that. I think the FED 0:21:12.359 --> 0:21:16.000 will instead watch as growth stats. One of the things 0:21:16.040 --> 0:21:18.720 you were saying, Tracy, and the intro that equippal with 0:21:18.760 --> 0:21:20.639 a little bit is I think growth is slowing right now. 0:21:20.680 --> 0:21:22.720 Now it's just starting to show up. But I think 0:21:22.720 --> 0:21:26.639 you're gonna see you are gonna see negative growth in 0:21:26.680 --> 0:21:31.439 the next year. Tube Real growth now different than nominal growth, 0:21:31.600 --> 0:21:34.919 and so this gets complicated, and nominal growth will be 0:21:35.440 --> 0:21:37.680 high and real growth will be slow, and that's gonna 0:21:37.720 --> 0:21:41.439 be a dilemma and how fast the FED deals with 0:21:41.440 --> 0:21:46.480 that dilemma of do they actually raise rates? Are they 0:21:46.520 --> 0:21:49.480 serious about two percent inflation or are they gonna kind 0:21:49.480 --> 0:21:52.840 of way the consequences of bringing inflation down as quickly 0:21:52.880 --> 0:21:58.360 as markets currently expect against that consequence in the real economy. 0:21:58.440 --> 0:22:01.119 That's where we suspect the FED will actually go slower. 0:22:01.280 --> 0:22:02.800 They're not going to go to five percent, or at 0:22:02.840 --> 0:22:04.680 least if they do, they're going to go there slowly. 0:22:05.000 --> 0:22:06.439 And so we think they need to tighten a lot 0:22:06.480 --> 0:22:09.200 more to get inflation down, but likely they won't choose 0:22:09.840 --> 0:22:12.680 to bring inflation down because they'll be weighing that trade 0:22:12.680 --> 0:22:16.280 off and be cautious along the way. But I don't 0:22:16.320 --> 0:22:19.440 know for sure. That's another good example of why data 0:22:19.480 --> 0:22:21.159 matching or what is very tough. This is in the 0:22:21.200 --> 0:22:23.400 hands of a few policymakers. They're going to make those 0:22:23.400 --> 0:22:27.399 decisions of how important inflation is to them relative to 0:22:27.480 --> 0:22:32.399 how important the ramifications of fighting inflation are. Well. So 0:22:32.440 --> 0:22:34.800 the FED has, you know, in theory, it has a 0:22:34.840 --> 0:22:38.480 goal of getting uh, you know, inflation back down to 0:22:38.800 --> 0:22:43.040 two percent, but it's been suggested by others that okay, 0:22:43.119 --> 0:22:46.480 if inflation gets down maybe four percent or two four 0:22:46.480 --> 0:22:49.040 percent or three percent, that it could start breathing a 0:22:49.040 --> 0:22:51.200 little bit, that maybe it doesn't have to go as 0:22:51.280 --> 0:22:55.440 aggressively in that last one or two percent. If if 0:22:55.440 --> 0:22:58.680 the direction is right, is there like a level of 0:22:58.760 --> 0:23:05.639 either inflationation or either inflation improving or real growth decelerating 0:23:06.040 --> 0:23:08.439 that you would suspect would be consistent with saying, you 0:23:08.480 --> 0:23:11.040 know what, the Fed like, we're not going to go 0:23:11.080 --> 0:23:13.679 as hard as maybe we had planned, Like what level 0:23:14.280 --> 0:23:16.880 of activity maybe gives them a little bit of comfort 0:23:17.720 --> 0:23:20.399 reading how Jay Powell and they are gonna, you know, 0:23:20.440 --> 0:23:22.840 it's not necessary Like, I don't know that I have 0:23:22.880 --> 0:23:25.840 any particular insight on that other than that they seem 0:23:25.960 --> 0:23:30.280 to be lagging and somewhat backward looking. But my if 0:23:30.320 --> 0:23:32.879 you're asking me if I were in their shoes, I 0:23:32.920 --> 0:23:34.960 would be wary. Right. I think they're gonna. They're in 0:23:35.000 --> 0:23:38.479 this dilemma, and it's due to a lot of reasons. 0:23:38.480 --> 0:23:40.480 It's not the fault of the current Fed per se. 0:23:40.480 --> 0:23:43.560 If you go back to the debt bubble prior to 0:23:43.600 --> 0:23:46.320 two thousand and eight and you're still living the ramifications 0:23:46.359 --> 0:23:49.160 of that debt bubble, We've gone through transferring that debt 0:23:49.200 --> 0:23:53.440 to the government, we've gone through inflating it away to 0:23:53.480 --> 0:23:57.080 a certain degree, and we're in this process that is 0:23:57.119 --> 0:24:01.440 a long process that normally would with inflation. And so 0:24:01.560 --> 0:24:05.040 the current Fed is in a very difficult spot, but 0:24:05.080 --> 0:24:07.520 it's a spot that's been set up over fifteen twenty 0:24:07.600 --> 0:24:11.200 years and and and so they're making choices between bad 0:24:11.240 --> 0:24:14.600 outcomes here. But so the one the outcome, my guess, 0:24:14.600 --> 0:24:16.240 is they're going to try to carve the middle of 0:24:16.280 --> 0:24:18.119 that that in the end there's no magic to a 0:24:18.119 --> 0:24:21.919 two percent inflation target, like you're saying, lower and reasonably stable. 0:24:22.440 --> 0:24:26.159 Probably four will be a better choice. Now the markets 0:24:26.160 --> 0:24:28.480 stopped to adjust a lot. If if you're actually gonna 0:24:28.480 --> 0:24:30.359 have a long term inflation rate of four, the markets 0:24:30.400 --> 0:24:32.480 have that they're not pricing that in. That's a lot 0:24:32.520 --> 0:24:36.119 of adjustment from here. It's particularly bearish for bonds, but 0:24:36.280 --> 0:24:39.160 somewhat bearish for equities as the disc out rate evolved 0:24:39.200 --> 0:24:42.040 in that direction. But I think that, like you're saying, 0:24:42.160 --> 0:24:43.800 the goal would be to get it down a bit 0:24:44.240 --> 0:24:47.280 while maintaining as much as you can the economy and 0:24:47.320 --> 0:24:50.200 reasonable shape. Now that's gonna be very difficult to get 0:24:50.680 --> 0:24:54.200 and right now, unless they raise interest rates more than 0:24:54.400 --> 0:24:59.440 expected and hit markets harder, we still think you're gonna 0:24:59.480 --> 0:25:02.640 be above five in core inflation, you know, going out 0:25:02.680 --> 0:25:04.640 the next twelve months. So something's got to change even 0:25:04.680 --> 0:25:07.400 further than it has in order for them to get 0:25:07.440 --> 0:25:10.440 that get that down. But to me, I would consider, 0:25:10.800 --> 0:25:14.080 you know, them getting it down to four and maintaining 0:25:14.440 --> 0:25:18.480 reasonable you know, very slow economic growth of a big success. 0:25:18.840 --> 0:25:20.240 And if they try to get more than that, I 0:25:20.240 --> 0:25:22.240 think they're gonna get They're gonna pay a lot on 0:25:22.240 --> 0:25:39.080 one side or the other, just on the idea of markets, 0:25:39.240 --> 0:25:41.679 And you mentioned earlier a lot of what you do 0:25:41.800 --> 0:25:45.240 is sort of trying to figure out discounted cash flows 0:25:45.320 --> 0:25:47.000 or trying to figure out what the market is actually 0:25:47.040 --> 0:25:50.720 discounting in terms of the future. What are markets seeing 0:25:51.160 --> 0:25:53.720 right now, because it feels at the moment like people 0:25:53.720 --> 0:25:58.719 are simultaneously positioned for higher inflation, but also there is 0:25:58.760 --> 0:26:02.760 this expectation of her session and you know, to the 0:26:02.800 --> 0:26:04.760 point that Joe was making. At some point you would 0:26:04.800 --> 0:26:07.320 kind of expect those two to start impacting each other 0:26:07.359 --> 0:26:11.439 and potentially cancel each other out. The I'd think the 0:26:11.480 --> 0:26:15.040 markets are pricing in actually a pretty darn smooth landing 0:26:15.080 --> 0:26:17.800 here that if you look at the break even inflation curve, 0:26:17.840 --> 0:26:20.520 the difference between inflation and X bonds and nominal bonds, 0:26:20.840 --> 0:26:23.280 you see what the markets are expecting for inflation, and 0:26:23.440 --> 0:26:26.280 they expect inflation to come down over the next eighteen 0:26:26.280 --> 0:26:29.360 months to two point seven percent. And at the same time, 0:26:29.359 --> 0:26:31.400 while equities are down, it can feel like a big 0:26:31.440 --> 0:26:33.800 thing has happened in in the stock market, not much 0:26:33.800 --> 0:26:37.720 has actually happened that that stocks have dropped mostly in 0:26:37.800 --> 0:26:41.400 line with the interest rate rise such that up until 0:26:41.440 --> 0:26:45.000 the last couple of weeks, cash flows projected in the 0:26:45.000 --> 0:26:48.320 equity market actually gone up, not down over the period 0:26:48.359 --> 0:26:51.760 of equity equity weakness, because the cash flows have to 0:26:51.800 --> 0:26:54.920 make up for the discount rate increase. So now you're 0:26:54.960 --> 0:26:59.199 starting to see the market price in less liquidity and 0:26:59.280 --> 0:27:00.840 the fact that the cash flows are going to be 0:27:00.880 --> 0:27:02.520 a bit worse. That growth can be slow, but it's 0:27:02.520 --> 0:27:07.200 still extremely optimistic pricing in the equity market about future 0:27:07.200 --> 0:27:09.760 cash flows. So overall, i'd say if you if you 0:27:09.800 --> 0:27:12.959 track what the markets are saying, they're essentially saying we're 0:27:12.960 --> 0:27:16.040 going to get the decline inflation, the Fed's gonna tighten 0:27:16.080 --> 0:27:19.040 to about three and then be done and it's going 0:27:19.119 --> 0:27:21.840 to flatten out there, and that the economy at that 0:27:21.880 --> 0:27:24.920 point will be good. And that's kind of that's the 0:27:24.960 --> 0:27:27.080 betting line. You think about that as the line. Now, 0:27:27.119 --> 0:27:29.800 if it's better than that, if inflation falls further with 0:27:29.920 --> 0:27:33.720 growth being better than that, markets will go up. And 0:27:33.760 --> 0:27:36.080 if it's worse than that, if inflation is more sticky 0:27:36.359 --> 0:27:39.040 and you have to hit growth harder, assets are gonna 0:27:39.080 --> 0:27:42.080 fall from here. And and our view would be on 0:27:42.080 --> 0:27:44.159 the second that it's going to be much tougher. That 0:27:44.280 --> 0:27:47.359 is still very optimistic pricing. Even though I can feel like, 0:27:47.359 --> 0:27:50.920 oh my gosh, stocks are down almost or whatever um 0:27:50.960 --> 0:27:53.600 from their peak. It feels like our sessions being priced in. 0:27:53.680 --> 0:27:56.679 But all this really changed is the discount rate on assets, 0:27:57.359 --> 0:28:01.440 and you're going into a period where the liquidity hole 0:28:01.600 --> 0:28:05.080 is getting bigger bigger. The Fed's gonna start running down 0:28:05.119 --> 0:28:09.840 their balance sheet. Banks that were too The FED and 0:28:09.920 --> 0:28:12.080 banks were the reason there was so much money going 0:28:12.080 --> 0:28:14.480 around last year. The FED was still buying assets, and 0:28:14.560 --> 0:28:18.280 the banks were buying bonds at record clips, almost crazy 0:28:18.280 --> 0:28:20.800 fashion in my mind, because they had so much access deposits. 0:28:21.040 --> 0:28:24.280 All that's reversing. They're not buying bonds anymore. The Feds 0:28:24.359 --> 0:28:26.959 not Fed's actually gonna roll off their thing. Banks aren't 0:28:27.080 --> 0:28:30.919 because they essentially bought in an excess of bonds and 0:28:31.000 --> 0:28:33.760 now the market has to clear, and for the bond 0:28:33.800 --> 0:28:37.680 market to clear with private sector buyers, they need to 0:28:37.760 --> 0:28:41.640 draw those assets from other assets, and there's so many 0:28:41.680 --> 0:28:43.520 assets in the US you're seeing this This a lot 0:28:43.520 --> 0:28:46.200 of the market action last couple of weeks. The assets 0:28:46.240 --> 0:28:48.760 that need liquidity the most, that don't themselves have cash 0:28:48.800 --> 0:28:52.720 flows are getting killed because liquidity is being withdrawn from 0:28:52.760 --> 0:28:56.760 the aggregate system, and those assets that require kind of 0:28:56.800 --> 0:29:00.880 pondsi like ongoing purchases to support the assets, are getting 0:29:00.960 --> 0:29:04.200 hit the hardest. And so I think today's market pricing 0:29:04.280 --> 0:29:08.960 is still overly optimistic. It's been a small move relative 0:29:09.040 --> 0:29:14.240 to the secular change that we're actually experiencing. So we're 0:29:14.240 --> 0:29:17.480 experiencing a secular change. And look, I would never say 0:29:17.560 --> 0:29:20.320 in a million years, and I know this that investing 0:29:20.480 --> 0:29:24.600 or portfolio management is easy, but it is true that 0:29:24.640 --> 0:29:26.760 you know, in the last decade and maybe before a 0:29:26.920 --> 0:29:30.520 stocks mostly just went up. And also investor has had 0:29:30.560 --> 0:29:33.600 the luxury of those other asset class treasuries that sort 0:29:33.640 --> 0:29:36.160 of acted as a natural hedge. They also end up 0:29:36.200 --> 0:29:38.720 over time, but they usually on a short term basis. 0:29:38.880 --> 0:29:42.560 We're moving inverse relationship to stocks, so that had an 0:29:42.560 --> 0:29:45.280 effect of volatility smoothing, and so you could buy a 0:29:45.280 --> 0:29:47.080 bunch of stocks and buy a bunch of bonds and 0:29:47.200 --> 0:29:49.640 you don't always make money, but both generally went up, 0:29:49.680 --> 0:29:52.160 and they also sort of canceled each other out in 0:29:52.200 --> 0:29:54.720 the short term. So I'm curious, like how you're thinking 0:29:54.760 --> 0:29:58.240 about like portfolio construction, if we're like shifting to a 0:29:58.280 --> 0:30:01.320 new regime. If inflay Shin, let's say it comes down, 0:30:01.360 --> 0:30:04.640 but it still remains for a while above this two 0:30:05.080 --> 0:30:08.520 goal or target, Like, how do you approach the general 0:30:08.520 --> 0:30:12.200 problem of building a portfolio? Yeah? Great questions. So I 0:30:12.280 --> 0:30:15.440 mean you start with, like you're saying that the lessons 0:30:15.480 --> 0:30:17.800 of the last twenty years, in particular in terms of 0:30:17.840 --> 0:30:20.880 portfolio construction, you really have to understand the reason for 0:30:20.960 --> 0:30:23.960 them and then think about whether those reasons exist. So 0:30:24.480 --> 0:30:28.320 you made the point about both assets doing great. You know, 0:30:28.440 --> 0:30:31.560 since the financial crisis, you've had this incredible run where 0:30:31.720 --> 0:30:34.400 diversification was actually almost always bad. All you wanted was 0:30:34.560 --> 0:30:38.160 US assets and US equity assets, and everything else was 0:30:38.240 --> 0:30:40.280 a drag. Now that's not going to go on forever. 0:30:40.320 --> 0:30:42.600 It's a kind of obviously true. US equities can't take 0:30:42.640 --> 0:30:45.400 over everything in the world, um, and yet they were 0:30:45.400 --> 0:30:48.480 on pace for that, And most portfolios are are still 0:30:48.520 --> 0:30:51.760 dominated based on what's been great for the last decade. 0:30:52.560 --> 0:30:56.800 And and like you said, the relationships change as a 0:30:56.880 --> 0:30:59.640 result of the impacts on the cash flows. Right, So 0:30:59.640 --> 0:31:02.840 if you why are stocks and bonds gonna be negatively 0:31:02.840 --> 0:31:04.960 correlated in the future? If they were positively correlated in 0:31:04.960 --> 0:31:07.479 the last one of years. Well, and the difference is 0:31:07.920 --> 0:31:11.920 the cash flows on equities and bonds are affected by 0:31:11.960 --> 0:31:16.160 both real growth rates but also inflation. Now the real 0:31:16.200 --> 0:31:19.040 growth rates stocks and bonds act opposite. So if real 0:31:19.080 --> 0:31:22.160 growth is the dominant factor in inflation, stable stocks and 0:31:22.160 --> 0:31:25.640 bonds are gonna be great diversifiers if inflation. Though inflation 0:31:25.680 --> 0:31:28.760 is bad for bonds and to some extent bad for stocks, 0:31:28.760 --> 0:31:31.080 although we get into that all of a sudden, they're 0:31:31.080 --> 0:31:34.160 no longer good diversifires when inflation is more volatile than growth. 0:31:34.240 --> 0:31:37.000 So if you look at history, hundreds of years of history, 0:31:37.040 --> 0:31:41.240 stocks and bonds are always negatively correlated, good diversifiers when 0:31:41.280 --> 0:31:45.280 inflation is stable and low, and they're bad diversifiers when 0:31:45.320 --> 0:31:47.560 inflation is high. And that's just a function of the 0:31:47.600 --> 0:31:50.360 cash flows. And so if you don't think in terms 0:31:50.400 --> 0:31:52.920 of the correlation, but think in terms of the actual 0:31:53.080 --> 0:31:56.400 physical cash flows, you can start to see in different 0:31:56.440 --> 0:31:59.640 types of environments what the good diversifiers are. So if 0:31:59.680 --> 0:32:02.840 you take today and you say what diversifies stocks and 0:32:02.920 --> 0:32:05.880 bonds If they're not good diversifiers for each other, well, 0:32:05.880 --> 0:32:07.920 and that's really you want to be careful and figure 0:32:07.920 --> 0:32:11.520 out ways to take a view on inflation and break 0:32:11.560 --> 0:32:15.240 even inflation. The difference between inflation index bonds and nominal 0:32:15.240 --> 0:32:17.720 bonds is one way. You mentioned commodities in the intro 0:32:17.840 --> 0:32:20.560 and commodities is one way. But you need those things, 0:32:21.120 --> 0:32:24.040 and we think also looking at certain emerging markets that 0:32:24.160 --> 0:32:25.960 have what the developed world needs. You have a world 0:32:25.960 --> 0:32:30.240 where your short labor and your short commodities and your deglobalizing. 0:32:30.280 --> 0:32:32.520 So you've got to look at the emerging market allies 0:32:32.640 --> 0:32:36.600 essentially that you can reliably provide the things that the 0:32:36.640 --> 0:32:41.440 world's missing. Those places are the places to diversify the 0:32:41.520 --> 0:32:44.320 problem that's going on in the stock and bond market 0:32:44.400 --> 0:33:01.680 that are more and more correlated rather than diversity. Can 0:33:01.720 --> 0:33:04.760 you talk a little bit more about the impact of 0:33:04.760 --> 0:33:09.120 inflation on stocks and why you see stocks is not 0:33:09.160 --> 0:33:14.280 necessarily outperforming or performing reasonably well in an inflationary environment, 0:33:14.320 --> 0:33:17.040 because I think this is an ongoing debate in markets 0:33:17.120 --> 0:33:20.360 whether or not equities actually have that pricing power. Yeah, 0:33:20.360 --> 0:33:22.960 so if you look at periods of inflation, right, I mean, 0:33:23.000 --> 0:33:26.640 stocks can often be better than cash and inflation periods 0:33:26.640 --> 0:33:28.520 but lose a lot in real terms. And why does 0:33:28.560 --> 0:33:34.200 that happen a there's stocks are a function of both 0:33:34.440 --> 0:33:38.480 the cash flows and the way those cash flows are discounted. 0:33:39.400 --> 0:33:41.600 So if you take periods of high of high inflation, 0:33:41.600 --> 0:33:44.400 if you take the seventies as an example, cash flows 0:33:44.440 --> 0:33:48.440 were decent for companies, but they were hit by a 0:33:48.520 --> 0:33:53.160 significant rise in the discount rate and the uncertainty essentially 0:33:53.160 --> 0:33:55.760 a higher uncertainty were supremium when you have higher and 0:33:55.760 --> 0:34:00.479 more volatile inflation. So cash flows were fine, but ease 0:34:00.960 --> 0:34:03.520 dropped a lot during the seventies, and that's a function 0:34:03.560 --> 0:34:06.520 of the higher discount rate and the higher risk premium. 0:34:06.560 --> 0:34:09.239 And what you see is these big divergences and more 0:34:09.360 --> 0:34:14.480 volatile corporate situations and generally lost productivity as a result 0:34:14.640 --> 0:34:19.160 of the instability of inflation and the price feature. So so, 0:34:19.239 --> 0:34:22.480 but basically stocks cut both ways. The cash flows generally 0:34:22.920 --> 0:34:25.919 stay in line. Profits a little bit less so because 0:34:25.960 --> 0:34:28.720 margins are hit to a certain degree. But the biggest 0:34:28.760 --> 0:34:30.799 thing is that the risk premium on the discount rate. 0:34:30.800 --> 0:34:32.359 All of a sudden, if you have a risk free 0:34:32.440 --> 0:34:35.759 rate of government bond yielding fift what are you going 0:34:35.840 --> 0:34:39.080 to demand out of your equities? And that's been the 0:34:39.080 --> 0:34:41.400 the history of it is that that and when the 0:34:41.400 --> 0:34:44.520 FED tries to then battle the inflation, of course that's 0:34:44.640 --> 0:34:48.600 particularly bad for equities because you get a growth slow down, 0:34:48.800 --> 0:34:52.279 you get the disinflation effect, and you get this lack 0:34:52.320 --> 0:34:55.640 of liquidity. So the second point that's making stocks really 0:34:55.680 --> 0:34:59.359 bad in this inflation here this period over the last 0:34:59.480 --> 0:35:02.279 four months, it's the lack of liquidity. The FED had 0:35:02.320 --> 0:35:05.880 been providing tremendous liquidity up until this calendar year. You 0:35:05.960 --> 0:35:11.160 see how many stocks needed that liquidity because they needed 0:35:11.160 --> 0:35:15.200 new buyers. And right now we can calculate about the 0:35:15.239 --> 0:35:20.400 US equity market can only survive essentially with new buyers 0:35:20.480 --> 0:35:23.799 entering the market because they're not cash flow generating themselves. 0:35:24.640 --> 0:35:28.719 And that's near a historic high. That's like basically right 0:35:28.760 --> 0:35:34.080 in line with and it exists because because the FED 0:35:34.400 --> 0:35:37.400 produced liquidity for so long, you're declining real rates high 0:35:37.480 --> 0:35:40.520 levels of liquidity. You get the reverse and you're seeing 0:35:40.520 --> 0:35:44.720 that squeeze. The stocks that need that liquidity are getting 0:35:44.800 --> 0:35:48.120 hit the hardest and um, and that's happening quite quite quickly. 0:35:48.160 --> 0:35:50.440 You also see that to some extent, you need constantly 0:35:50.440 --> 0:35:53.840 new buyers in crypto space as well. Just the removal 0:35:53.840 --> 0:35:58.480 of macro liquidity is starting to affect the entities everywhere 0:35:58.719 --> 0:36:01.920 that need the liquidity in the mode. So this is 0:36:01.960 --> 0:36:04.439 really interesting and that's a stunning stat and it's sort 0:36:04.480 --> 0:36:06.920 of one of my pet theories, which is that something 0:36:07.000 --> 0:36:10.759 changed after the two Crisis, which is that in an 0:36:10.840 --> 0:36:15.680 environment of low growth, people started chasing momentum as a 0:36:15.719 --> 0:36:18.560 way to outperform. You just followed wherever the money went, 0:36:19.080 --> 0:36:22.960 and money going into something basically helped inflate the valuation, 0:36:23.040 --> 0:36:25.279 and then that attracted more money and so you had 0:36:25.320 --> 0:36:29.239 this really bad cycle. So two things here, how do 0:36:29.280 --> 0:36:36.800 you calculate that number exactly? And then secondly, what happens 0:36:36.920 --> 0:36:40.279 as this starts to reverse as the momentum goes in 0:36:40.320 --> 0:36:43.120 the other direction. I mean, for the past ten years 0:36:43.200 --> 0:36:45.720 or so, it would have been that as the markets 0:36:45.719 --> 0:36:49.359 were going down, the FED might you know, step in 0:36:49.400 --> 0:36:52.040 and start easing again, and then that would be the 0:36:52.080 --> 0:36:56.200 circuit breaker. But what's the circuit breaker on valuations in 0:36:56.239 --> 0:36:59.120 this environment? I'll start with the first question on how 0:36:59.120 --> 0:37:01.880 do we start? And I don't mean to again I 0:37:02.040 --> 0:37:04.560 worry about false precision where this this all this stuff 0:37:04.640 --> 0:37:08.480 is rough, but the basic idea is you can there's 0:37:08.520 --> 0:37:12.280 always in normal times, there's a churn in financial markets. 0:37:12.320 --> 0:37:14.920 Some people have to sell their financial market assets because 0:37:14.960 --> 0:37:17.920 they're spending in their economy, they're retiring, whatever the reasons are, 0:37:18.680 --> 0:37:22.560 and assets inaggregate are going to go up if there's 0:37:22.640 --> 0:37:26.520 more money available to buy than that constant turn rate 0:37:26.600 --> 0:37:33.040 to sell. Many companies provide enough cash flow that they 0:37:33.120 --> 0:37:35.520 don't require new buyers. They can offset that sound and 0:37:35.560 --> 0:37:38.239 let's say five percent of holders want to sell on 0:37:38.280 --> 0:37:41.600 a normal basis every year, Well, you need an asset 0:37:42.200 --> 0:37:45.480 that has five percent cash flow in order to offset that, 0:37:45.520 --> 0:37:48.080 either by doing buy backs themselves or dividends or whatever 0:37:48.120 --> 0:37:51.480 to create that cash flow that's there. That you can 0:37:51.520 --> 0:37:55.040 then look at the companies across the market and see 0:37:55.040 --> 0:37:58.920 how many of them can, essentially through the money they're earning, 0:37:59.040 --> 0:38:02.560 satisfy the liquidity needs of the rate the basic rate 0:38:02.600 --> 0:38:05.840 of sellers versus those that need a constant flow of 0:38:05.880 --> 0:38:08.960 new buyers. And that's how we look at those assets 0:38:09.000 --> 0:38:11.000 and break them into those that can make it. That 0:38:11.040 --> 0:38:14.080 are that are subject to what happens in nominal GDP. 0:38:14.239 --> 0:38:16.480 They need actually the profits and the cast flows. They 0:38:16.520 --> 0:38:18.759 need the economy to be okay, but they don't need 0:38:18.800 --> 0:38:21.960 new liquidity versus the ones that even if the economy 0:38:22.000 --> 0:38:24.920 is great, they need new liquidity. And that's where that 0:38:25.080 --> 0:38:28.640 calculation is coming from. The circuit breaker question, like what 0:38:28.840 --> 0:38:33.000 actually stops the downward spiral evaluations here exactly. This again 0:38:33.040 --> 0:38:35.600 a great example of where you'd have to have an 0:38:35.640 --> 0:38:39.120 incredibly smart machine learning system to recognize the difference between 0:38:39.200 --> 0:38:42.400 this downturn and the two thousand eight downturn or the 0:38:42.400 --> 0:38:45.759 two thousand or the COVID downturn or whatever. Where there 0:38:45.840 --> 0:38:51.120 is a huge difference in downturns when policymakers are unconstrained. 0:38:51.800 --> 0:38:54.520 So if you take even two thousand eight, as devastating 0:38:54.560 --> 0:38:59.440 as that was, policy makers, because inflation was low, they 0:38:59.440 --> 0:39:01.360 could print much money and spend as much money as 0:39:01.400 --> 0:39:04.480 they were willing to do, like there wasn't a constraint. Basically, 0:39:04.480 --> 0:39:07.160 there's three constraints on policy makers if you look through history. 0:39:07.239 --> 0:39:12.960 They can always create nominal growth if they don't have 0:39:13.000 --> 0:39:16.120 an inflation problem, if they don't have a currency problem, 0:39:16.320 --> 0:39:18.840 and they don't have a bubbles problem. And um, so 0:39:18.960 --> 0:39:20.799 you take it two thousand eight or the COVID thing, 0:39:21.320 --> 0:39:23.239 and you see how it works. Right, They did a 0:39:23.239 --> 0:39:26.359 lot more effectively in COVID, which is print the money, 0:39:26.360 --> 0:39:28.120 spend the money, and you can off set anything. You 0:39:28.120 --> 0:39:30.480 could shut down the whole global economy and within a 0:39:30.520 --> 0:39:35.440 month you could offset that with printing money and spending money. 0:39:35.520 --> 0:39:38.160 And when we went through that, that's when I I 0:39:38.280 --> 0:39:40.040 sort of went through Oh my gosh. You know, it's 0:39:40.040 --> 0:39:44.120 so obvious policy makers to any deflationary shock can off 0:39:44.120 --> 0:39:46.760 set it. What you see in history is they always 0:39:46.800 --> 0:39:48.600 eventually do. It might take a while, whether it's the 0:39:48.600 --> 0:39:50.360 Great Depression, coming off the gold standard or whatever. It 0:39:50.400 --> 0:39:52.000 might take a while, but they can do that. But 0:39:52.040 --> 0:39:54.239 if you look at history and you look at when 0:39:54.320 --> 0:39:58.920 policy makers are constrained, it's when it's inflationary. Therefore you 0:39:58.960 --> 0:40:02.080 can't use that unting and spending and you have a 0:40:02.160 --> 0:40:05.160 much more difficult thing. So so basically you could buy 0:40:05.280 --> 0:40:08.120 you'd want to buy DIBs when the central bank is 0:40:08.200 --> 0:40:11.920 able to essentially be that shock absorber. But when inflation 0:40:11.960 --> 0:40:16.480 is stubbornly high into weakening assets, um, you can't. If 0:40:16.520 --> 0:40:19.480 that's not gonna be there, they're they're gonna be. In fact, 0:40:19.520 --> 0:40:21.480 they want the asset prices to fall to a certain degree. 0:40:21.880 --> 0:40:23.880 And even if they fall more than they want them to. 0:40:24.680 --> 0:40:28.080 They're weighing the inflation picture against that. So all of 0:40:28.080 --> 0:40:31.680 a sudden, you've got a much bigger dip possibility before 0:40:31.760 --> 0:40:34.840 you get relief from policy makers. And in fact, the 0:40:34.880 --> 0:40:38.680 dip has to become disinflationary in order to do that. 0:40:39.400 --> 0:40:41.920 And so that's why the drawdowns and the loss in 0:40:42.000 --> 0:40:44.440 real terms in the ninet seventies and early eighties was 0:40:44.520 --> 0:40:47.840 so much worse than most of those other drawdowns in 0:40:47.920 --> 0:40:50.680 terms of the duration over which it lasted. And you 0:40:50.680 --> 0:40:54.200 see that across economies, that that when policy makers are 0:40:54.239 --> 0:40:57.319 constrained by inflation or currency, you know, it can take out, 0:40:57.520 --> 0:41:01.200 it can lead to lost decades. Can we pivot a 0:41:01.200 --> 0:41:03.520 little bit? So we've been talking about this new regime, 0:41:03.560 --> 0:41:07.840 the new macro regime, the difficulty of asset prices in 0:41:08.000 --> 0:41:11.360 higher inflation. But obviously the other big story, and you 0:41:11.600 --> 0:41:14.799 mentioned at the beginning, is what's going on geopolitically. And 0:41:14.880 --> 0:41:19.440 of course there's the concerns about deglobalization between US and China. 0:41:19.560 --> 0:41:24.520 There's the war that's taking place with Russia's invasion of Ukraine. 0:41:25.080 --> 0:41:29.000 How does this sort of geopolitical reset, perhaps of the 0:41:29.000 --> 0:41:31.520 word I don't know the word, how do you incorporate 0:41:31.560 --> 0:41:34.920 that into your thinking? Yeah, well, we try to incorporate 0:41:34.960 --> 0:41:37.000 it in the same way I was describing before, which 0:41:37.000 --> 0:41:40.240 is what does it mean for the production of goods 0:41:40.239 --> 0:41:44.280 and services and for the availability of money and credit 0:41:44.520 --> 0:41:48.680 to purchase those things? And what you see you come back. 0:41:48.840 --> 0:41:50.759 I kind of lade the intro to the inflation that 0:41:50.840 --> 0:41:53.360 you had this huge demand shock as you created demand 0:41:53.400 --> 0:41:58.200 without creating supply. Supply actually was reasonable post COVID, and 0:41:58.320 --> 0:41:59.880 a lot of people are blaming the inflation on some 0:42:00.000 --> 0:42:02.440 fly when it was actually this massive increase in demand 0:42:02.640 --> 0:42:05.160 that accelerated so much faster than supply could keep up. 0:42:05.880 --> 0:42:09.680 Then you go into this phase, the phase the Russia 0:42:10.160 --> 0:42:15.240 UH invading Ukraine, which really put the globalization into fast forward. 0:42:15.680 --> 0:42:18.160 That was happening, It was in the background also happening, 0:42:18.200 --> 0:42:20.520 but now this is in fast forward and on the 0:42:20.719 --> 0:42:24.879 you know, the front burner of so many companies um 0:42:24.920 --> 0:42:26.960 and you get a real supply shock. So in the 0:42:27.000 --> 0:42:29.720 case of the Russia Vasia Ukraine, you have a massive 0:42:29.719 --> 0:42:33.880 commodity supply shock. Now that's starting to play out. Russia's 0:42:34.160 --> 0:42:36.640 commodity supply. While they'll shift, they won't sell the Europe 0:42:36.680 --> 0:42:39.320 their energy or whatever they'll try to sell to India 0:42:39.400 --> 0:42:42.600 and China and such, and they'll do that to some degree, 0:42:42.680 --> 0:42:46.160 but the bigger picture is Rushi's oil production is gonna fall. 0:42:46.239 --> 0:42:48.759 It needs the Western technology to do that. So you 0:42:49.120 --> 0:42:52.759 added from a demand shock into a supply shock, and 0:42:53.000 --> 0:42:57.080 that has big impacts on the essentially the ability to 0:42:57.120 --> 0:43:02.360 supply um the global enemy. And right now we're actually 0:43:02.360 --> 0:43:05.520 in a lull of seeing that because you also have 0:43:05.560 --> 0:43:10.040 one of the biggest shutdowns of commodity producing economy ever, 0:43:10.200 --> 0:43:12.919 China shut down, and the impact that has on on 0:43:13.680 --> 0:43:16.839 um commodity demand is massive, and yet it's not really 0:43:16.840 --> 0:43:20.400 showing up because you have an offsetting supply shock simultaneously. 0:43:20.719 --> 0:43:23.760 But the Chinese demand shock will fade in our view anyway, 0:43:23.760 --> 0:43:27.160 a lot faster than the Russia Ukraine demands a supply 0:43:27.200 --> 0:43:31.400 shock will. So we're also i'd expect somewhat of a 0:43:31.440 --> 0:43:35.680 surge catch up to the supply shock, as if trying 0:43:35.719 --> 0:43:37.879 to comes out as eventually well out of its COVID 0:43:38.000 --> 0:43:45.319 zero policies. So hey, that's going on now. Secularly, as 0:43:45.360 --> 0:43:48.400 you're describing, there's this big trend of the globalization that 0:43:48.520 --> 0:43:51.879 one of the lessons that US corporations of European corporations 0:43:51.920 --> 0:43:54.920 have taken is, Wow, we need a much more reliable, 0:43:54.960 --> 0:43:58.279 secure supply chain and we need to build that. And 0:43:58.320 --> 0:44:02.480 that's building for resilient see, rather than building for efficiency. 0:44:02.600 --> 0:44:04.399 And that's part of the inflation story. If you take 0:44:04.440 --> 0:44:07.160 the last thirty years, everything in the global economy was 0:44:07.200 --> 0:44:10.680 built for efficiency. Almost nothing was built for resiliency, and 0:44:10.680 --> 0:44:13.680 it was part of the disinflation story that now you're 0:44:13.719 --> 0:44:16.600 going the opposite direction. You've got to build semiconductors in 0:44:16.640 --> 0:44:20.520 your own economy. You've got to get energy from sources 0:44:20.560 --> 0:44:23.439 that you can rely on. You've got to do raw 0:44:23.480 --> 0:44:26.279 materials production in places that you know you'll be able 0:44:26.280 --> 0:44:29.160 to access it. And and this is part of the 0:44:29.160 --> 0:44:33.680 reason that you'll actually have demand for capital expenditures even 0:44:33.680 --> 0:44:36.400 if the economy starts to turn down. So that's going 0:44:36.440 --> 0:44:40.000 to create pressure on nominal GDP, even if profits are 0:44:40.000 --> 0:44:42.560 starting to climb. Normally, capital expenditors go up and down 0:44:42.560 --> 0:44:45.880 with profits. But you've got to rebuild an economy. And 0:44:45.880 --> 0:44:50.120 this is where you have the impact of stranded assets 0:44:50.120 --> 0:44:53.799 that all of this capacity to export of the world 0:44:53.800 --> 0:44:58.000 in China and all of the capex that went there. 0:44:58.600 --> 0:45:02.280 It's got to get replaced over time, and that's costly 0:45:02.640 --> 0:45:05.520 without creating wealth in a sense, because it's off setting 0:45:05.600 --> 0:45:09.080 stranded assets and UM. And that's gonna be a big phenomenon. 0:45:09.160 --> 0:45:12.000 That is an inflationary phenomenon because it's going to create 0:45:12.080 --> 0:45:16.759 higher um nominal GDP, but without let's say, creating new wealth. 0:45:16.800 --> 0:45:20.480 It's offsetting lost wealth and UM. And so those are 0:45:20.520 --> 0:45:23.040 the that's the cost of the globalization. And we've had 0:45:23.040 --> 0:45:24.960 this wind at our back for so long that that 0:45:24.960 --> 0:45:27.880 people even forget it's a wind in a sense UM. 0:45:27.960 --> 0:45:30.640 And now you've got the wind in your face as 0:45:30.680 --> 0:45:35.440 you go through the process of unwinding the incredible efficiency 0:45:35.440 --> 0:45:37.480 of the global economy over the last thirty years and 0:45:37.560 --> 0:45:40.760 building something more resilient. And we don't think that's gonna stop. 0:45:41.320 --> 0:45:45.560 There's the the pressures between the US and China are 0:45:45.600 --> 0:45:49.200 such that you're almost certainly on a path two too 0:45:49.719 --> 0:45:53.759 largely separated economies. They'll have an interface in trade and 0:45:53.840 --> 0:45:57.200 other things, but they won't be so tightly linked uh 0:45:57.280 --> 0:45:59.759 as they have been, and that's that's a very big deal. 0:46:00.239 --> 0:46:04.520 Is there a predictable inflation or growth effect of this 0:46:04.880 --> 0:46:07.080 or is this like a Okay, there's going to be 0:46:07.160 --> 0:46:10.600 some period where things have to reset and supply chains 0:46:10.600 --> 0:46:14.120 are reoriented, but then things settled down, Or is this 0:46:14.239 --> 0:46:17.319 like a permanent sort of regime shift that then you know, 0:46:17.520 --> 0:46:19.520 goes into what we talked about in the first half 0:46:19.560 --> 0:46:25.399 of the discussion about you know, rethinking asset prices. Yeah, 0:46:25.400 --> 0:46:28.439 I think it's a it's a secular drag the same 0:46:28.480 --> 0:46:32.040 way globalization was a secular benefit to asset prices. This 0:46:32.200 --> 0:46:34.759 benefit asset prices over the last thirty years was it 0:46:34.880 --> 0:46:37.880 led to lower real interest rates, lead the glut in 0:46:37.960 --> 0:46:41.440 savings in China and other places came into the US 0:46:41.880 --> 0:46:45.000 route drove assets up. Those things are changing. You're not 0:46:45.080 --> 0:46:48.720 gonna have the lower lower the disinflationary impact of tapping 0:46:48.719 --> 0:46:50.800 into the most efficient pools, and you're not going to 0:46:50.880 --> 0:46:55.840 have the excess liquidity transfer back to the United States assets. 0:46:55.880 --> 0:46:57.640 So as a result of that, I think you see 0:46:57.680 --> 0:47:00.640 a trend in rising real yields, a end in higher, 0:47:00.719 --> 0:47:04.680 more stubborn inflation because it's less efficient. Those things I 0:47:04.680 --> 0:47:06.920 think you get. Now you get some benefits too, because 0:47:07.040 --> 0:47:11.440 that certainly from a social cohesion perspective, all of a 0:47:11.520 --> 0:47:15.840 sudden kind of the losers of globalization um get the benefit, 0:47:15.920 --> 0:47:18.920 that's the higher wages, the So a lot of this 0:47:18.960 --> 0:47:22.040 discussion is focused on the negatives to the financial markets. 0:47:22.040 --> 0:47:25.880 Which the financial markets benefited massively from globalization, the average 0:47:25.880 --> 0:47:27.799 worker in the United States did not, and now the 0:47:27.880 --> 0:47:31.360 reversal will do the same. It's kind of the definancialization 0:47:32.280 --> 0:47:36.640 of the US, which arguably is good for a social good, 0:47:36.800 --> 0:47:39.239 but it is a very difficult environment for assets, just 0:47:39.320 --> 0:47:43.239 offsetting the incredibly great environment assets have had. Those so 0:47:43.320 --> 0:47:47.680 those things I think are sticky and will play out secularly. 0:47:48.080 --> 0:47:50.160 Now they could play out very quickly. The Russian Ukraine 0:47:50.160 --> 0:47:52.319 type thing creates a shock in that direction. That's a 0:47:53.080 --> 0:47:57.719 sweakening growth, rising inflation shock. So obviously, if China moves 0:47:57.719 --> 0:47:59.600 on Taiwan or something like that, you could see the 0:47:59.640 --> 0:48:03.439 success alerate. But right now, I I'd say it's even 0:48:03.480 --> 0:48:05.600 if it doesn't accelerate in that rapid way, it will 0:48:05.640 --> 0:48:08.240 be a constant grind for a decade. One more question 0:48:08.400 --> 0:48:11.680 along these lines. You know, this conversation has been very 0:48:12.000 --> 0:48:14.720 US asset centric, and you say that in the beginning 0:48:14.800 --> 0:48:18.840 that investors were so bullish on US assets post GFC 0:48:19.040 --> 0:48:21.799 that they were unpaced to take over everything in the 0:48:21.960 --> 0:48:24.279 entire world. But as you know that, you know you're 0:48:24.320 --> 0:48:26.279 not just followut you're following. I think you said two 0:48:26.680 --> 0:48:30.960 markets around the world or something like that. Is that assumption, like, 0:48:31.000 --> 0:48:35.000 should people think more global in this environment when UM 0:48:35.040 --> 0:48:38.520 If if we're seeing the assumption break that u S 0:48:38.520 --> 0:48:41.160 stocks can't just take over the entire world, what does 0:48:41.200 --> 0:48:44.120 this mean for non us SS. Yeah, well, I think 0:48:44.200 --> 0:48:49.000 that one thing strategically most investors should focus on that 0:48:49.040 --> 0:48:52.720 hasn't been a big deal over the last decade is diversification. 0:48:53.200 --> 0:48:54.880 So I think there are issues. You go around the 0:48:54.920 --> 0:48:57.680 world and there are big issues. Europe's going into a 0:48:57.719 --> 0:49:01.400 significant recession, probably worse than the US UM as a 0:49:01.400 --> 0:49:04.080 result of everything that's going on UM in terms of 0:49:04.080 --> 0:49:06.360 supply shock there and the war and the impact of that. 0:49:06.440 --> 0:49:08.080 And at the same time they're gonna have a massive 0:49:08.120 --> 0:49:13.319 fiscal spending to try to change their infrastructure and rebuild militaries. UM. 0:49:13.440 --> 0:49:17.480 So you've got stress, significant stress there, and you've got 0:49:18.040 --> 0:49:21.120 UM significant stress around the world. Chinese assets, while I 0:49:21.120 --> 0:49:23.440 think you're they're at a totally different part of the cycle. 0:49:23.480 --> 0:49:26.839 They have a disinflation they have weak um, a very 0:49:26.880 --> 0:49:30.400 weak economy, and a central bank and government that's prepared 0:49:30.440 --> 0:49:33.160 to stimulate a totally different set of circumstances. And then 0:49:33.160 --> 0:49:35.520 you had to Japan, and you've got trying to maintain 0:49:35.560 --> 0:49:40.200 an interest rate backs amazing range of circumstances and opportunities, 0:49:40.960 --> 0:49:43.400 and I think diversifying across those risks, you've got a 0:49:43.440 --> 0:49:46.360 huge risk in the United States, is that liquidity that 0:49:46.400 --> 0:49:49.879 was stuck in the U S assets comes out to US. 0:49:50.400 --> 0:49:52.640 Most investor will be way better off having a much 0:49:52.680 --> 0:49:55.200 more global mix of assets than they currently have. So 0:49:55.239 --> 0:49:57.319 that would be point one in terms of the short term, 0:49:57.600 --> 0:50:00.680 short term kind of alpha opportunities. I think it's also 0:50:00.800 --> 0:50:03.760 that that's right. I think a lot of assets outside 0:50:03.760 --> 0:50:06.560 of the US are more attractive than the US, although 0:50:06.760 --> 0:50:09.400 there's risks everywhere, but the pricing is so different. We 0:50:09.440 --> 0:50:12.279 talk about the pricing of cash flows, the pricing of 0:50:12.360 --> 0:50:15.399 cash flows in the US. If you take companies very 0:50:15.440 --> 0:50:18.920 similar cash flow allocations, you can get them in the 0:50:18.960 --> 0:50:21.319 rest of the world of those same cash flows for 0:50:21.440 --> 0:50:24.680 thirty cheaper. That's the issue. The US has done so 0:50:24.800 --> 0:50:27.160 much better and whatever for so long that it's being 0:50:27.239 --> 0:50:30.759 extrapolated right. China is the most extreme of that, and 0:50:30.800 --> 0:50:33.960 for reasons that you can understand, given the regulation, etcetera. 0:50:34.000 --> 0:50:37.080 But if you just take the reasonably expected cash flows 0:50:37.080 --> 0:50:41.080 and you compare that to a similarly situated American company, 0:50:41.960 --> 0:50:44.319 you're seeing these huge differences. Now, the huge differences can 0:50:44.320 --> 0:50:47.520 have merit. There's reasons. There's bigger risk premiums in assets 0:50:47.560 --> 0:50:49.560 in different parts of the world. There's more even more 0:50:49.680 --> 0:50:53.120 risk and the worst spilling over in Europe. There's China 0:50:53.320 --> 0:50:56.600 is even more risk of regulator a year, the inability 0:50:56.640 --> 0:50:59.040 to invest in China, all of those things. So there's reasons. 0:50:59.400 --> 0:51:02.319 But on net we think you're you're certainly gonna want 0:51:02.320 --> 0:51:06.800 a much more diversified portfolio going forward than you have today. Greg, 0:51:06.960 --> 0:51:10.439 that was a really fascinating conversation, and yeah, we really 0:51:10.480 --> 0:51:12.879 appreciate you taking the time to come on all thoughts 0:51:12.920 --> 0:51:15.640 great well, I enjoyed it, so thank you both. Thanks Greg, 0:51:15.680 --> 0:51:32.359 that was awesome. So, Joe, that was really interesting, first 0:51:32.400 --> 0:51:34.000 of all, and secondly, I think it was kind of 0:51:34.000 --> 0:51:37.480 a good foil to the macro discussion that we had 0:51:37.520 --> 0:51:40.520 a little while ago with Neil data Um and Luke 0:51:40.600 --> 0:51:43.759 Kawa as well. So I guess this is sort of 0:51:44.239 --> 0:51:46.520 I mean, this is pretty bearish, the idea that you 0:51:46.520 --> 0:51:51.279 could get drop in in the US markets. Yeah, that's 0:51:51.320 --> 0:51:54.680 pretty bad. Yeah, No, I mean it's definitely. Yeah, this 0:51:54.760 --> 0:51:56.840 idea that the market is still even with all the 0:51:56.920 --> 0:52:02.239 volatility that we've seen pricing in a soft landing was striking. 0:52:02.640 --> 0:52:06.319 And then of course this idea that like, look, you know, 0:52:06.400 --> 0:52:09.799 we've had this incredible run for risk assets pro and 0:52:09.800 --> 0:52:12.520 the conditions were just right. And I thought Greg laid 0:52:12.520 --> 0:52:15.040 out a very good, sort of like simple way of 0:52:15.040 --> 0:52:17.919 thinking not just that the conditions were right, but why 0:52:18.000 --> 0:52:22.160 the conditions in particular were right for investors buying stocks 0:52:22.280 --> 0:52:24.680 or bonds. And I think, you know, it's like pretty 0:52:24.719 --> 0:52:28.799 significant question about whether you know, when all the dust 0:52:28.840 --> 0:52:32.560 settles on this sort of the pandemic and post pandemic period, 0:52:32.800 --> 0:52:37.160 whether those conditions can be returned to absolutely. And also 0:52:37.239 --> 0:52:39.799 just this idea, and we've discussed it before, I think 0:52:39.920 --> 0:52:42.840 with with Matt King from City Group on this podcast, 0:52:43.080 --> 0:52:45.160 but this idea of I mean, it's sort of the 0:52:45.600 --> 0:52:49.120 flows before prose idea. The idea of flows attract inflows, 0:52:49.200 --> 0:52:52.000 and that's how you get to these really lofty valuations 0:52:52.400 --> 0:52:55.880 and when the conditions that sustain those start to turn. 0:52:56.040 --> 0:53:00.120 To Greg's point, there's not really anything that can or 0:53:00.160 --> 0:53:03.560 pin them anymore, like to his point that the cash 0:53:03.560 --> 0:53:06.279 flows aren't really there. And look, you know, I think 0:53:06.400 --> 0:53:09.080 we're sort of you know, a conversation you always hear 0:53:09.160 --> 0:53:10.799 is like, well, okay, what do you buy? What's the 0:53:10.920 --> 0:53:15.480 right portfolio strategy for this new inflationary environment? What do 0:53:15.480 --> 0:53:17.600 you what did you we reallocate to? Maybe it's whatever 0:53:17.600 --> 0:53:20.040 it is, but like I also think, like it's possible 0:53:20.080 --> 0:53:22.640 that everything is. And I don't know, but like maybe 0:53:22.680 --> 0:53:26.200 there is not like an optimal portfolio if the conditions deteriorate, 0:53:26.640 --> 0:53:32.040 if inflation remains high, real growth decelerates, etcetera. And I 0:53:32.040 --> 0:53:34.640 don't know if it will, but maybe, like you know, 0:53:34.920 --> 0:53:37.680 bad news like asset prices aren't going to go up 0:53:37.719 --> 0:53:40.200 in that environment, and the fascet prices aren't going up, 0:53:40.200 --> 0:53:43.239 then there's not gonna be some like magic portfolio construction 0:53:43.280 --> 0:53:45.400 that makes it easy. Yeah, all right, well shall we 0:53:45.480 --> 0:53:47.439 leave it that. Let's leave it there. This has been 0:53:47.480 --> 0:53:50.520 another episode of the All Boughts podcast. I'm Tracy Alloway. 0:53:50.600 --> 0:53:53.120 You can follow me on Twitter at Tracy Alloway and 0:53:53.120 --> 0:53:56.040 I'm Joe Wisn'tal. You can follow me on Twitter at 0:53:56.080 --> 0:54:00.680 the Stalwart. Follow or producer Carmen Rodriguez. She's at Harmon Arman. 0:54:00.800 --> 0:54:04.400 Follow the Bloomberg head of podcast Francesco Levi at Francesco Today, 0:54:04.840 --> 0:54:07.680 and check out all of our podcasts at Bloomberg under 0:54:07.719 --> 0:54:10.320 the handle at podcasts. Thanks for listening.