WEBVTT - Bridgewater on Bubbles 0:00:13.440 --> 0:00:16.840 Hello, and welcome to What Goes Up, a weekly market podcast. 0:00:17.320 --> 0:00:20.479 I'm Mike Reagan, a senior editor at Bloomberg, and this 0:00:20.560 --> 0:00:23.640 week on the show, the Federal Reserve just upgraded its 0:00:23.640 --> 0:00:26.920 assessment of the US economy, but at the same time, 0:00:27.000 --> 0:00:30.160 Jerome pal is not really giving the market many clues 0:00:30.200 --> 0:00:32.840 about when the Central Bank will begin to scale back 0:00:32.920 --> 0:00:37.040 the extraordinary monetary stimulus that's been providing. What does this 0:00:37.080 --> 0:00:40.440 all mean for the outlook for inflation and financial markets. Well, 0:00:40.440 --> 0:00:42.879 we'll get into it with the co chief investment officer 0:00:42.960 --> 0:00:46.440 of the world's biggest hedge fund firm. But first, Charlie 0:00:46.520 --> 0:00:49.440 Pellett let us know who this week's mystery co host is. 0:00:50.800 --> 0:00:54.640 Liz Capo McCormick is a reporter for Bloomberg who began 0:00:54.760 --> 0:00:58.160 her career on a wall screen trading desk before being 0:00:58.240 --> 0:01:01.560 lured into media. She actually he has a degree in physics, 0:01:01.880 --> 0:01:05.440 which means she can spot a Mike Reagan tangent from 0:01:05.480 --> 0:01:09.040 a mile away. She's excited to do the podcast because 0:01:09.120 --> 0:01:12.839 now when Reagan asks her dumb questions about the Fed, 0:01:13.240 --> 0:01:16.600 she can just say, listen to the tape, Mike, Liz, 0:01:16.680 --> 0:01:18.720 I'm not sure, Charlie is right about that. I think 0:01:18.720 --> 0:01:21.080 I'm still gonna be asking you questions about the FED 0:01:21.120 --> 0:01:25.440 on a daily basis, as as is our normal routine. So, uh, 0:01:25.680 --> 0:01:27.960 we can't talk about physics, and God knows I have 0:01:28.080 --> 0:01:34.280 to use my physics in a lifetime. We could, I 0:01:34.319 --> 0:01:36.520 will not as if I know what you're talking about, 0:01:36.600 --> 0:01:40.080 but we better not. But let's bring our guests in. 0:01:40.160 --> 0:01:41.840 I don't know if he has any thoughts on physics, 0:01:41.840 --> 0:01:45.320 but I know he's got some great thoughts on the market. Uh. 0:01:45.400 --> 0:01:48.520 He is, as I said, he's the co chief investment 0:01:48.560 --> 0:01:52.920 officer at Bridgewater Associates. His name is Greg Jetson. Greg, 0:01:52.960 --> 0:01:55.800 welcome to the show. Well, thanks a lot, it's good 0:01:55.800 --> 0:01:58.160 to talk to you guys. Greg. Let's get right into it, 0:01:58.360 --> 0:02:01.960 uh and talk about the FED me eating on Wednesday. Um. 0:02:02.200 --> 0:02:05.520 You know, my impression is the statement itself and the 0:02:05.560 --> 0:02:09.280 press conference from Chairman Pal didn't really move the needle 0:02:09.440 --> 0:02:11.680 much as far as I think what a lot of 0:02:11.720 --> 0:02:16.040 market participants really crave. And that's some clarity on when 0:02:16.040 --> 0:02:19.440 we can expect asset purchases to begin to be tapered 0:02:19.520 --> 0:02:23.320 and eventually after that a normalization of interest rate policy. 0:02:23.400 --> 0:02:26.119 But I'm just curious what your reaction is, UM, Did 0:02:26.120 --> 0:02:30.080 you take away anything any new information from that UH 0:02:30.600 --> 0:02:35.040 statement and discussion from Chairman Palu. Yeah, nothing new, particularly 0:02:35.160 --> 0:02:39.800 in on Wednesday's message. But the basic picture is really 0:02:39.800 --> 0:02:42.320 important and really necessarily to talk about it when you're 0:02:42.360 --> 0:02:46.200 thinking about markets and macro economies, which is that we're 0:02:46.200 --> 0:02:48.520 in a new paradigm of central banking. That if you 0:02:48.560 --> 0:02:50.799 go back over the last fourty years, starting with Vulgar, 0:02:51.000 --> 0:02:54.560 you had an inflation fighting what first phase was a 0:02:54.560 --> 0:02:56.880 monetary policy one what we call kind of managing the 0:02:56.880 --> 0:03:00.160 economy through interest rates and lower interest rates causing more 0:03:00.200 --> 0:03:03.480 private sector debt, higher interest rates causing a debt cycle 0:03:03.480 --> 0:03:06.640 in the opposite direction. You move past the financial crisis. 0:03:06.680 --> 0:03:08.600 In two thousand eight, interest rates get all the way 0:03:08.600 --> 0:03:11.160 to zero, private sector debt hits its peaks that even 0:03:11.200 --> 0:03:13.720 at zero interest rates you can't stimulate, and you move 0:03:13.760 --> 0:03:17.640 into money printing making up for the loss of credit. 0:03:17.800 --> 0:03:20.120 And that's what we'd call monetary policy to where you 0:03:20.200 --> 0:03:23.880 go quee by assets with it. It affects the economy, 0:03:23.919 --> 0:03:26.960 but very indirectly and much more effects asset prices. And 0:03:27.000 --> 0:03:28.960 here we are, and what we consider an MP three 0:03:29.000 --> 0:03:32.519 world where in two thousand eighteen the FED kind of 0:03:32.600 --> 0:03:34.679 learned the final lesson that they don't want to be 0:03:34.760 --> 0:03:38.320 too preemptive. That they started raising interest rates before inflation came. 0:03:38.520 --> 0:03:41.720 It had negative effects and unnecessary negative effects in their mind. 0:03:42.360 --> 0:03:45.520 And so here we're in a world where monetary policies 0:03:45.600 --> 0:03:49.040 mostly supporting fiscal policy. It's not as important as fiscal policy, 0:03:49.360 --> 0:03:53.400 and it is not going to be preemptive that they 0:03:53.400 --> 0:03:57.800 are gonna wait and wait and wait for inflation to rise, 0:03:58.320 --> 0:04:01.320 for bubbles to form, but four than take any action, 0:04:01.440 --> 0:04:04.600 and that that's the big deal here. And in a way, 0:04:04.760 --> 0:04:07.720 this is a dangerous territory, but it's also necessary territory. 0:04:07.760 --> 0:04:10.600 When you look at the conditions that we had coming 0:04:10.600 --> 0:04:13.920 into the COVID pandemic. We thought this movement to MP 0:04:14.040 --> 0:04:17.159 three would take five to ten years. But the reason 0:04:17.200 --> 0:04:20.719 that it was inevitable was there. So was the essentially 0:04:20.720 --> 0:04:23.560 the level of io used in the level of wealth 0:04:23.640 --> 0:04:26.599 can't be paid back through income, so you have to 0:04:26.600 --> 0:04:30.800 print money to support essentially the promises in the economy. 0:04:30.839 --> 0:04:34.880 And there's so much division in the country that stimulative, 0:04:34.960 --> 0:04:38.040 more inflationary policy makes more sense than this forty year 0:04:38.160 --> 0:04:42.279 pro corporate lower and lower inflation environment. So you've gotten 0:04:42.279 --> 0:04:45.159 this shift. The shift is necessary, but now we're in 0:04:45.160 --> 0:04:47.760 a whole new set of risks that you know, most 0:04:47.839 --> 0:04:51.640 market participants haven't really had to deal with because the 0:04:51.680 --> 0:04:54.160 problems of of these types of policies haven't really been 0:04:54.160 --> 0:04:57.000 around for forty years. And in the short term, the 0:04:57.040 --> 0:04:59.120 more easy, the better. The countries that have done more 0:04:59.160 --> 0:05:01.080 fiscal and more mod terry are better off in the 0:05:01.080 --> 0:05:05.719 countries that didn't. That's evident, and and that that is 0:05:05.720 --> 0:05:11.239 going to push itself inevitably until those policies cause problems. Greg. 0:05:11.240 --> 0:05:13.880 I'll jump in something also about the FED, but touching 0:05:13.880 --> 0:05:17.120 on what you were saying, this paradigm shift. I'm curious 0:05:17.560 --> 0:05:20.920 you probably heard Jerome Pale in his press conference this 0:05:21.000 --> 0:05:24.400 week that he was he was asked specifically about, oh, 0:05:24.600 --> 0:05:28.039 the break even inflation rates have risen quite sharply, which 0:05:28.160 --> 0:05:30.839 I know you've noted in your recent research, and but 0:05:30.960 --> 0:05:33.920 he said, no, we're fine, They're about in line given 0:05:33.920 --> 0:05:37.760 the difference between CPI and what they track with about 0:05:37.800 --> 0:05:41.240 two percent, and we want inflation expectations to be really 0:05:41.279 --> 0:05:44.320 anchored at two when they're not there yet. So he 0:05:44.440 --> 0:05:47.160 seemed to really like, he didn't blink that he's at 0:05:47.200 --> 0:05:51.600 all concerned. And when you say this paradigm shift is necessary, 0:05:51.640 --> 0:05:55.240 but it creates risks. Do you think that he might 0:05:55.640 --> 0:05:58.000 by the time he's concerned, they might not be able 0:05:58.040 --> 0:06:01.120 to slow the inflation move or you know, how do 0:06:01.160 --> 0:06:02.960 you read that or are he kind of trying to 0:06:03.000 --> 0:06:06.040 convince that he could do it? Well? Yeah, I think 0:06:06.120 --> 0:06:09.280 that they're the power of tightening monetary stolt policy will 0:06:09.279 --> 0:06:11.880 still be pretty successful when they get to it, So 0:06:11.920 --> 0:06:14.080 we'll see. I think the question is whether they're gonna 0:06:14.200 --> 0:06:17.839 want to given the trade offs. So it's gonna be difficult, right, 0:06:17.800 --> 0:06:20.320 And this is why studying like in retrospect, it looks 0:06:20.320 --> 0:06:22.800 like monetary policy in nineteen seventies was totally foolish to 0:06:22.800 --> 0:06:24.479 allow inflation yet as high as it was, but it 0:06:24.520 --> 0:06:27.120 was dealing with problems, real problems at the time, well, 0:06:27.160 --> 0:06:30.080 oil shortages, etcetera. There's a reason real interest rates were 0:06:30.160 --> 0:06:35.280 kept low for extended period of time till inflation rose. Similarly, today, 0:06:35.320 --> 0:06:38.640 with all the challenges we face socially, there's a chance 0:06:38.680 --> 0:06:41.480 they're gonna purposely be behind the curve for an extended 0:06:41.520 --> 0:06:44.160 period of time because inflation is better than the other 0:06:44.200 --> 0:06:47.479 options UM, which the other options are difficult. If you 0:06:47.560 --> 0:06:51.000 take where asset prices are today and you think about 0:06:51.000 --> 0:06:53.520 how much income needs to be generated to support those 0:06:53.520 --> 0:06:56.279 asset prices. In the end, assets can only be worth 0:06:56.320 --> 0:06:59.039 the cash flows that they generate. To generate enough cash 0:06:59.040 --> 0:07:02.440 flow to support this level of equity market, you need 0:07:02.520 --> 0:07:04.960 either a lot of nominal GDP, which either comes from 0:07:05.000 --> 0:07:08.680 a productivity miracle or inflation and you or a much 0:07:08.720 --> 0:07:10.360 lower asset prices. So what do you want. Do you 0:07:10.360 --> 0:07:12.360 want to collapse in asset prices or do you want 0:07:12.400 --> 0:07:15.360 a general rising and nonled GDP. If you take today's 0:07:15.400 --> 0:07:18.080 asset prices and look at how many years of income 0:07:19.080 --> 0:07:22.000 are required to support those, it's about twenty four years 0:07:22.000 --> 0:07:24.640 of income. The only comparable periods in history there four 0:07:24.680 --> 0:07:29.080 of them. One was UM was right before the tech 0:07:29.080 --> 0:07:30.880 bubble in two thousand two thousand. One. Of course, that 0:07:30.960 --> 0:07:34.560 was resolved through a collapse in asset prices, again collapse 0:07:34.600 --> 0:07:37.200 and asset prises. But on the other hand nine and 0:07:37.240 --> 0:07:41.200 nine five were absorbed by inflation, which is the other 0:07:41.280 --> 0:07:44.160 choice UM where nominal g to be caught up. Real 0:07:44.200 --> 0:07:47.360 asset assetprises did bad in real terms, but did quite well, 0:07:47.520 --> 0:07:50.080 quite fine in nominal terms, and nominal GDP caught up 0:07:50.120 --> 0:07:53.040 to the assets through that process. So we think you're 0:07:53.040 --> 0:07:56.040 gonna face that dilemma that if they withdraw liquidity, that's 0:07:56.040 --> 0:07:58.280 gonna have a big impact on asset prices because asset 0:07:58.280 --> 0:08:01.120 price has been so supported by the liquidity, and if 0:08:01.120 --> 0:08:03.960 they don't withdraw the liquidity, they're gonna have inflation problems. 0:08:04.080 --> 0:08:07.480 And so they'll go back and forth between that challenge 0:08:07.480 --> 0:08:09.200 of how much you wanted to show up in lower 0:08:09.200 --> 0:08:11.120 asset prices and how much you wanted to show up 0:08:11.400 --> 0:08:15.800 that pressure physics put it that way UM to uh 0:08:15.800 --> 0:08:17.720 show up in asset prices, and how much you wanted 0:08:17.760 --> 0:08:19.720 to show up in inflation. But there is no easy 0:08:19.760 --> 0:08:22.840 way out of the current dilemma. That's about all the 0:08:22.840 --> 0:08:26.360 physics I can handle. I think Letzletz can get into 0:08:26.400 --> 0:08:30.160 the co of the coefficients and whatnot. But know, to me, 0:08:30.280 --> 0:08:33.840 I'm I'm sort of in awe and impressed of how 0:08:33.880 --> 0:08:37.040 well pal kind of dodges the question of of are 0:08:37.080 --> 0:08:40.600 you even thinking about talking about thinking about maybe whispering 0:08:40.640 --> 0:08:44.319 about tapering UM? And I think that's very understandable given 0:08:44.600 --> 0:08:47.520 you know the reaction we saw the taper tantrum a 0:08:47.559 --> 0:08:51.520 few years ago that he wants to not sort of 0:08:51.559 --> 0:08:54.240 tip his hand about when and if that might be. 0:08:54.320 --> 0:08:56.960 But I wonder if that, as you're talking about, there 0:08:57.040 --> 0:09:00.800 is gonna probably be a reaction in uset more markets. Um. 0:09:01.520 --> 0:09:03.880 You know, the joke I've been saying is tapering ain't easy. 0:09:03.880 --> 0:09:07.040 I don't I don't see any way to do it easily. Um. 0:09:07.080 --> 0:09:10.720 And I wonder if if this um sort of posture 0:09:10.720 --> 0:09:14.480 that he's taking with it now perhaps could condense the 0:09:14.520 --> 0:09:18.440 time between when they finally signal that it's coming uh 0:09:18.440 --> 0:09:21.720 and when they actually start doing it, and perhaps causes 0:09:21.760 --> 0:09:26.040 the tapering to be more aggressive than what the market's expecting. 0:09:26.640 --> 0:09:28.680 And I wonder, you know, how much does that matter 0:09:28.720 --> 0:09:30.760 to markets? Is it all a matter of sort of 0:09:30.760 --> 0:09:34.160 what the Fed fund futures traders and what the eurodollar 0:09:34.280 --> 0:09:37.920 futures traders are pricing in. Is that basically the the 0:09:38.000 --> 0:09:41.800 main metric that will determine how violent the reaction is 0:09:42.120 --> 0:09:44.920 from the market when when it does finally come time 0:09:44.920 --> 0:09:48.880 to say, yes, we're thinking about tapering, Yeah, well it's 0:09:48.920 --> 0:09:51.560 gonna be a big deal. So I think UM, in 0:09:51.640 --> 0:09:55.239 asset prices. Right, there's and I think there's this important 0:09:55.280 --> 0:09:58.200 separation that's gonna matter and is actually the biggest risk 0:09:58.360 --> 0:10:02.080 for asset prices is the separation between the real economy 0:10:02.200 --> 0:10:05.040 and asset prices. The real economy is about to have 0:10:05.080 --> 0:10:07.400 the biggest boom it's ever had. We're gonna go and 0:10:07.640 --> 0:10:10.080 surging through the level. So if you look at where 0:10:10.120 --> 0:10:12.120 we expect will be to a month from now, you're 0:10:12.160 --> 0:10:15.319 gonna robably have four percent unemployment rate, really hard to 0:10:15.400 --> 0:10:21.079 hire anyone, rising wages growth having been eight nine um. 0:10:21.240 --> 0:10:25.439 And the Fed and what could the Fed mindset that 0:10:25.480 --> 0:10:28.200 if you look out, you know, eighteen months there's only 0:10:28.240 --> 0:10:31.240 twenty five basis points of tightening. Price did barely anything right. 0:10:31.600 --> 0:10:33.440 Yet they're gonna be facing those conditions. So I do 0:10:33.480 --> 0:10:36.120 think we're gonna force their hand. It's gonna force their hand. 0:10:36.160 --> 0:10:40.480 The economic growth isn't going to be driven we're so 0:10:40.640 --> 0:10:42.920 affected by the interest rates, at least in my view, 0:10:42.960 --> 0:10:45.720 because it's so fiscally driven. The checks have been written, 0:10:45.800 --> 0:10:51.000 the wealth is there, um, the the fiscal spending is 0:10:51.000 --> 0:10:53.640 still in the pipeline, so it's not as interest rate 0:10:53.720 --> 0:10:56.959 sensitive as let's say, a normal business cycle created by 0:10:57.320 --> 0:11:01.480 um mainly private sector outcomes. So you have this possibility 0:11:01.520 --> 0:11:04.200 that the economy is continue to surge ahead. The FED 0:11:04.280 --> 0:11:06.520 still has these very low interest rates and they have 0:11:06.600 --> 0:11:09.520 to start reeling back. At the same time, the Treasury 0:11:09.600 --> 0:11:12.599 is going to be issuing for a long time of 0:11:12.679 --> 0:11:16.000 GDP of bonds. Currently the Feds buying half of those, 0:11:16.640 --> 0:11:19.439 and if they buy none of those, the private sector 0:11:19.440 --> 0:11:22.120 has got to come up with the money to buy 0:11:22.920 --> 0:11:25.200 GDP and bonds. Are they going to do that at 0:11:25.200 --> 0:11:26.840 this rate? We don't find a lot of buyers in 0:11:26.840 --> 0:11:29.240 the private sector likely to buy bonds at anywhere near 0:11:29.360 --> 0:11:32.600 these rates to that quantity, right, And that's gonna be 0:11:32.640 --> 0:11:34.680 the first thing that's gonna move, is who's gonna buy 0:11:34.760 --> 0:11:37.439 the bonds when the Fed doesn't. When they face those conditions, 0:11:37.480 --> 0:11:40.240 they are gonna taper, and then you're gonna need to 0:11:40.280 --> 0:11:42.920 fill that gap, and you're gonna find out, hi, how hard, 0:11:43.000 --> 0:11:44.880 how hard it is the FED will find out with us. 0:11:45.040 --> 0:11:46.880 And then what are the implications. I actually think the 0:11:46.880 --> 0:11:50.719 implications for markets will be pretty important. The implications for 0:11:50.760 --> 0:11:53.520 the economy will be less set. At which point the 0:11:53.520 --> 0:11:55.480 Fed's gonna face the second elements. Do they react the 0:11:55.520 --> 0:11:58.320 asset prices. Everybody in asset markets is so used to 0:11:58.360 --> 0:12:01.400 them reacting with a trigger finger to asset prices. But 0:12:01.440 --> 0:12:03.960 the reason is that the market the economy has been 0:12:04.080 --> 0:12:07.760 so tied to asset prices, where if the economy is 0:12:07.800 --> 0:12:10.480 being reduced by fiscal policy, all of a sudden, you've 0:12:10.520 --> 0:12:12.680 got two different worlds going on, and you've got the 0:12:12.679 --> 0:12:16.560 possibility that FED won't backstop the liquidity coming out of 0:12:16.600 --> 0:12:19.640 asset prices, and asset prices can fall while the economy rises. 0:12:19.679 --> 0:12:23.040 That's actually a reasonable outcome, in a normal outcome in 0:12:23.080 --> 0:12:26.920 a world where fiscal policies driving the economy rather than 0:12:26.960 --> 0:12:29.719 the interest rate cycle. And so that's really where the 0:12:29.840 --> 0:12:32.520 risks are getting to be really big. And then the 0:12:32.559 --> 0:12:35.480 worst thing for the markets in a sense would be 0:12:35.520 --> 0:12:38.640 a very strong economy that doesn't require this much of 0:12:38.640 --> 0:12:42.200 liquidity while the asset prices required this much liquidity. And 0:12:42.200 --> 0:12:44.040 that's the world I think we're heading too over the 0:12:44.080 --> 0:12:47.679 next six months or so. In that world, it seems 0:12:47.720 --> 0:12:50.800 like somewhere there's got And I'm not a stock girl, 0:12:51.400 --> 0:12:53.920 Mike's the expert on that, but it just obviously I 0:12:54.040 --> 0:12:57.440 watch it, and if if the markets less interest rate sensitive. 0:12:57.480 --> 0:12:59.080 You know, for a while we were thinking, oh my god, 0:12:59.120 --> 0:13:01.360 where the tenure was going, even though it wasn't too 0:13:01.440 --> 0:13:03.400 high relative to history, was going to up end the 0:13:03.400 --> 0:13:06.679 stock market and it hasn't. And with what you just 0:13:06.760 --> 0:13:09.400 laid out, Greg, does that mean we have some more 0:13:09.440 --> 0:13:12.840 glide paths for yields to go higher before the asset 0:13:12.880 --> 0:13:15.800 prices really start going. But obviously there's a point, right, 0:13:15.920 --> 0:13:18.400 And it makes it seem to me, is it harder 0:13:18.400 --> 0:13:20.960 to know when that point is um and is that 0:13:21.080 --> 0:13:23.880 global demand going to come in which it kind of 0:13:24.080 --> 0:13:26.840 has over the last couple of years to kind of 0:13:26.880 --> 0:13:29.440 tamp those yields down or you know, That's what I 0:13:29.480 --> 0:13:31.600 think is tricky. It's a new paradigm. Like you said, 0:13:31.600 --> 0:13:35.200 where where does the cracking point? Yeah, well, but you 0:13:35.240 --> 0:13:39.160 can still look at the quantities, right, So the quantity 0:13:39.559 --> 0:13:41.760 is much more than it has been in those past 0:13:41.800 --> 0:13:46.320 episodes of foreign investors just are unlikely to feel that 0:13:46.360 --> 0:13:48.800 type of hole. So the main question is will the 0:13:48.840 --> 0:13:51.640 Fed continued to hold it for how long? But when 0:13:51.640 --> 0:13:53.360 they don't, it's going to be very hard. But I 0:13:53.400 --> 0:13:55.320 agree again I want to separate. I think there are 0:13:55.360 --> 0:13:57.400 a lot of assets that will be quite vulnerable to 0:13:57.440 --> 0:14:00.000 arise in rates, but the economy won't be as vulnerable, 0:14:00.559 --> 0:14:03.880 and that difference is the difference just thinking. Oftentimes we're 0:14:04.000 --> 0:14:06.600 thinking the economy and assets too much as a as 0:14:06.640 --> 0:14:09.559 being tied together, where obviously COVID christ is a perfect 0:14:09.600 --> 0:14:12.160 example of where the economy and the markets can go 0:14:12.240 --> 0:14:15.680 radically different directions than they did, and the reverse the reverse, 0:14:15.679 --> 0:14:18.120 where the liquidity comes out more money is spent in 0:14:18.160 --> 0:14:21.360 the real economy rather than financial markets. The most extreme 0:14:21.400 --> 0:14:24.200 example is the retail bubble stocks as an example where 0:14:24.840 --> 0:14:27.400 people had nothing to do with COVID. Household savings reached 0:14:27.640 --> 0:14:30.960 record levels, the money goes into certain types of stocks 0:14:30.960 --> 0:14:33.760 and whatever. Now things are opening up, those savings rates 0:14:33.800 --> 0:14:36.960 are declining, there's less liquidity there, and those assets come 0:14:37.000 --> 0:14:41.080 down that we're so unhinged from the real economy anyway. 0:14:41.120 --> 0:14:44.040 So differentiating what we think the real thing is going 0:14:44.080 --> 0:14:46.720 to be in the future globally is differentiating between the 0:14:46.720 --> 0:14:49.560 assets that require the liquidity in the very low real 0:14:49.600 --> 0:14:53.080 interest rates to make sense economically, with those that can 0:14:53.120 --> 0:14:56.520 benefit from the nominal GDP cash flows in the real economy, 0:14:56.640 --> 0:14:59.560 and separating between those the things that really benefit from 0:14:59.640 --> 0:15:03.040 higher dominal GDP will do well. The things that UM 0:15:03.200 --> 0:15:07.480 get hurt by less liquidity that have high duration, those 0:15:07.560 --> 0:15:09.960 assets are in in a lot more trouble. So that'll 0:15:10.000 --> 0:15:12.320 be the kind of the differentiation that I think you'll 0:15:12.360 --> 0:15:23.480 start seeing. Greg. I'm gonna get a little greedy here 0:15:23.600 --> 0:15:26.520 and ask you a two part question. Uh, but you 0:15:26.560 --> 0:15:28.520 should be grateful. I I've been known to ask like 0:15:28.600 --> 0:15:31.720 twelve part questions. I'm gonna take it easy, just try 0:15:31.800 --> 0:15:34.040 to try to keep it to two. But I wanted 0:15:34.040 --> 0:15:36.560 to go back to something you said earlier, and I 0:15:36.640 --> 0:15:38.320 know you've you've done some work on this and given 0:15:38.360 --> 0:15:40.600 it a lot of thought, and that it's that idea 0:15:40.640 --> 0:15:44.840 of the FED being behind the economy and how inevitably 0:15:45.000 --> 0:15:49.480 that's likely to cause some excesses in markets or perhaps 0:15:49.720 --> 0:15:53.040 an inflation. I'm just curious. So so the first part is, 0:15:53.120 --> 0:15:56.080 I'm curious if you're seeing that anywhere. I mean, obviously 0:15:56.120 --> 0:15:58.720 you mentioned the meme stocks. I think that's a clear example. 0:15:58.800 --> 0:16:02.640 But are you ain't it anywhere else? Uh yet? And 0:16:03.040 --> 0:16:06.280 if that where, where are the sort of corners of 0:16:06.400 --> 0:16:09.400 the markets that you would look first? And then on 0:16:09.520 --> 0:16:13.040 top of that, UM, to me, I think bubbles are 0:16:13.320 --> 0:16:18.680 very strange phenomenon because the risk reward relationship is so interesting. 0:16:18.760 --> 0:16:21.320 It almost seems that as an investor you have to 0:16:21.400 --> 0:16:25.200 participate in bubbles because so many people will will call 0:16:25.320 --> 0:16:27.560 the top early and think it's a bubble too early, 0:16:27.680 --> 0:16:29.800 that that you really missed the best parts of them. 0:16:30.200 --> 0:16:31.640 So I'm just wondering, you know, with all the brain 0:16:31.720 --> 0:16:35.080 power at Bridgewater, uh, if you guys are any better 0:16:35.160 --> 0:16:37.960 than us average mortals and trying to figure out sort 0:16:37.960 --> 0:16:40.040 of when the music is about to stop, when to 0:16:40.320 --> 0:16:43.840 once to get out of a clearly overvalued market, and 0:16:43.960 --> 0:16:46.520 all along the bridge waters history we've been systematic, you know, 0:16:46.600 --> 0:16:49.320 so we've taken very like the kind discussion we're having now, 0:16:49.400 --> 0:16:52.800 very qualitative view of the world, but translated into ways 0:16:52.880 --> 0:16:54.640 to measure. So you take something like a bubble, right, 0:16:54.680 --> 0:16:56.520 bubbles a classic qualitative thing. How do you what do 0:16:56.600 --> 0:16:58.560 you mean bubble? How do you measure that it's a bubble? 0:16:58.600 --> 0:17:01.040 Is it enough to say prices are high relative to history? 0:17:01.120 --> 0:17:04.560 Or what's the actual measure? And then how reliable is it? 0:17:04.880 --> 0:17:06.960 And you know, we have six gages of a bubble 0:17:07.000 --> 0:17:08.639 that we use all over the world, right that you 0:17:08.680 --> 0:17:10.879 could apply it to cryptocurrency. You can apply it to 0:17:10.920 --> 0:17:13.359 anything you wanted in the world, the stocks, two bonds, 0:17:13.400 --> 0:17:16.560 and anything that. You know that our basic scoreboard is 0:17:16.960 --> 0:17:20.600 our prices high relative to traditional measures, are prices discounting 0:17:20.760 --> 0:17:26.040 unsustainable conditions. So as an example today, um, you know, 0:17:26.119 --> 0:17:29.480 there's something like ten percent of stocks that are pricing 0:17:29.520 --> 0:17:32.560 in more than revenue growth and margin expangeon. Right. If 0:17:32.600 --> 0:17:35.000 you look at history, two percent of stocks actually achieve that. 0:17:35.080 --> 0:17:37.359 That's an extremely hard thing to do. Everybody's going to 0:17:37.440 --> 0:17:40.240 be the next Amazon. Right. If Amazon was priced today 0:17:41.160 --> 0:17:43.320 as those ten percent of stocks are, if they I mean, 0:17:43.400 --> 0:17:45.880 if it was priced ten years ago as those stocks were, 0:17:46.000 --> 0:17:48.399 the the annual return on Amazon would have been like 0:17:48.480 --> 0:17:50.680 eight percent a year because it would already have priced 0:17:50.720 --> 0:17:54.040 in this incredible outcome that not every company does. Growing 0:17:54.119 --> 0:17:58.159 revenue you're faster, Um, so very very hard. It's not 0:17:58.520 --> 0:18:01.280 not counting the base effects from right, No, No, I'm 0:18:01.320 --> 0:18:04.919 talking about right, ongoing growth rates. Without the base effect, 0:18:05.800 --> 0:18:08.720 it doesn't happen. That's very very unlikely to happen. Right. 0:18:08.880 --> 0:18:11.480 Potentially with inflation or something you might but but in 0:18:11.560 --> 0:18:14.119 a normal kind of forward looking picture, you don't get 0:18:14.160 --> 0:18:17.440 that two percent of stocks actually achieve them. So that's 0:18:17.880 --> 0:18:20.800 an example of discounting unsustainable conditions and not they can't 0:18:20.840 --> 0:18:23.680 as a group actually achieve that condition. The fact that 0:18:23.760 --> 0:18:25.879 new another now I'm on the third thing is new 0:18:25.920 --> 0:18:28.080 buyers entering the market. How many new buyers are there, 0:18:28.119 --> 0:18:30.760 how big a part of the market they are. There's 0:18:31.440 --> 0:18:35.520 the broad sentiment measures, there's purchases being financed by leverage, 0:18:36.080 --> 0:18:40.560 and buyers and businesses sort of extending making extended forward purchases. 0:18:41.320 --> 0:18:43.920 That's our checklist for a bubble. We measure all the 0:18:44.160 --> 0:18:47.040 different things. And you see today a fair amount of 0:18:47.080 --> 0:18:50.399 the equity market in the US in the bubble, but 0:18:50.520 --> 0:18:52.840 not the aggregate. So the aggregate, we would say is, 0:18:52.960 --> 0:18:55.000 you know, short of a bubble, but um, there are 0:18:55.040 --> 0:18:59.600 definitely pockets that meet those standards and um, and that's dangerous. 0:18:59.640 --> 0:19:01.359 And then you said, well, what do you want to 0:19:01.400 --> 0:19:03.040 do buy or sell them? Well, that's a whole other 0:19:03.160 --> 0:19:06.560 dangerous thing. And that's where when we survived surviving two thousand, 0:19:06.640 --> 0:19:08.320 two thousand one, we had to draw down in two thousand, 0:19:08.400 --> 0:19:11.399 two thous and one associated with the bubble, both the 0:19:11.520 --> 0:19:13.760 dollar and the equity market and how that was playing 0:19:13.760 --> 0:19:16.399 out at the time, and that really forced us to 0:19:16.520 --> 0:19:19.320 get into flows, which is basically how we measure bubbles 0:19:19.359 --> 0:19:23.000 today is well, how where's the money coming from? Who 0:19:23.040 --> 0:19:25.000 are the buyers and sellers? What are their balance sheets? 0:19:25.000 --> 0:19:26.480 Like how much more money can they put into this 0:19:26.560 --> 0:19:31.240 bubble versus how much um income they're getting and when 0:19:31.280 --> 0:19:33.919 does that start to flip? Right? And so for us, 0:19:34.400 --> 0:19:37.720 that process of being able to look at the balance 0:19:37.760 --> 0:19:39.920 sheets of the buyers and sellers think about when they've 0:19:39.960 --> 0:19:42.040 been stretched to an extreme where they won't have the money, 0:19:42.080 --> 0:19:45.119 where there's more supply coming than possible demand. So you 0:19:45.160 --> 0:19:46.879 look at the I p O pipeline, you look at 0:19:46.960 --> 0:19:51.800 the creation of of new instruments, those things relative to 0:19:51.880 --> 0:19:54.720 that how fast those balance sheets are growing, And that's 0:19:54.720 --> 0:19:56.760 how we try to measure that, cris Cross. And it's 0:19:56.760 --> 0:19:59.200 still a very very dangerous game, like you're saying. So 0:19:59.320 --> 0:20:02.960 the third part is be careful and be conservative in 0:20:03.080 --> 0:20:06.160 your thinking around the ability to time those things, because, 0:20:06.240 --> 0:20:08.440 like you said, that's kind of the easiest place to 0:20:08.520 --> 0:20:13.040 die in asset prises is trying to be short a 0:20:13.119 --> 0:20:16.480 bubble too early. Um. So I think that's the kind 0:20:16.480 --> 0:20:19.400 of the way that we um we go about trying 0:20:19.440 --> 0:20:22.240 to think about it and deal with it, and you're in. 0:20:22.920 --> 0:20:24.960 What I would say is there's areas that look quite 0:20:25.000 --> 0:20:27.440 bubble like, are quite dangerous, but you also have the 0:20:27.600 --> 0:20:30.399 ingredients for bubbles that it's nowhere near as bigger bubble 0:20:31.440 --> 0:20:33.080 yet as it was in ninety nine. So we know 0:20:33.200 --> 0:20:37.000 bubbles can get bigger. And it's um and you have 0:20:37.119 --> 0:20:40.200 the perfect storm for bubbles, access liquidity, a very easy 0:20:40.240 --> 0:20:42.880 central bank at a pickup in growth and a pick 0:20:42.960 --> 0:20:46.760 up in um new wealth. New Wealth tends to get 0:20:46.800 --> 0:20:50.879 spent fast, tends to get over extrapolated, and and so 0:20:51.040 --> 0:20:54.439 you have a lot of the conditions for an ongoing bubble. 0:20:54.480 --> 0:20:57.320 Now I think the trigger will be man. There's so 0:20:57.440 --> 0:20:59.879 much supply. The supply is coming at the market very 0:21:00.040 --> 0:21:03.040 quickly in those areas, and when the liquidity starts to 0:21:03.119 --> 0:21:05.360