Co-CIO Greg Jensen Shares Our Outlook for Economies and Markets
October 19, 2023
We’re sharing an edited excerpt of our October 19, 2023, Q3 CIO call with co-CIO Greg Jensen, where you’ll hear Greg describe how he’s seeing the biggest dynamics in economies and markets today. He covers the reasons behind the economic resilience to date, why backward-looking supports are now set to unwind and reverse, the upward pressure on yields that will be a headwind for assets, the grind down we expect in growth, and the divergent global conditions that are creating differential pressures relative to what’s priced in. We hope you enjoy the discussion.
TRANSCRIPT
Note: This transcript has been edited for readability.
Greg Jensen
The world’s changing a lot; the world’s super interesting. There are obviously many things that are timeless and universally true, but the degree to which they’re true or the degree to which you have to understand different types of dynamics is important.
I thought it would be helpful to talk about that in the context of what we were thinking pre-COVID. In 2019, we were thinking the world was at a crossroads—that you had gone through, since Volcker from the 1980s, this disinflationary period, decline in potential growth, and we’re in this risk of secular stagnation, as demographics and debt problems continue to play out.
So the question was, were we going to go down a path of constrained central banks and Japan-style deleveraging? We thought if they didn’t move to what we call Monetary Policy 3, if they didn’t move to fiscal policy matching the importance of monetary policy, you’d end up on this continued downward slope. But we faced these big choices that, really, populism had started to push, which are, are we going to actually change the economy? Are we going to end up with much more government-involved policy—deficit spending and money printing? Pro-labor policies and deglobalization would cause a change in the inflationary and the nominal GDP path that we had had before.
So that was the choice that we faced, and we ended up, really because of COVID, on the upper fork. And COVID accelerated a lot of those secular changes, and there’s so much going on. We had a plan—because we were thinking about this in 2018, 2019—we had a plan on how we’d put fiscal policy bigger into our process, how we’d think about deglobalization and pro-labor policies and the impact they’d have. But then it actually happens, and you learn so much through it actually happening.
Going from that picture to the things that are playing out today, so going from that big picture—the world’s changed a lot from pre-COVID, it’s really important, and those changes are having a lot of impact on what’s going on.
The first thing was we had a massive tightening, and the economy has been resilient despite that. And you really have to understand all of the changes in the economy to understand that.
First was the fact that you had a huge fiscal policy in 2020-21 that led to massive improvements in household and corporate balance sheets. You’ve never come out of a recession with households and corporates having more cash than when they entered the recession with—a better balance sheet than when they entered the recession with. The second thing is that the demand spike, due to that excess cash that went onto the balance sheets from governments to households, led nominal demand to be so far above supply that, even as nominal demand slowed, supply was still struggling to catch up. And a large budget deficit expanded without bond issuance, as I’ll describe, and that supported spending in markets.
So those three things really supported the economy, cushioned the impact of the tightening that actually did occur on credit, and netted to a reasonably sustainable growth rate over that period. But as you’ll see, those things that caused that buffer have largely gone away. Credit’s already fallen a lot. It has created that cushion. But the impact of higher rates for longer now is going to be playing out while there’s much less support on the other side.
Now that the easing’s been pushed back and bond issuance is beginning to normalize, upward pressure on yields is creating another round of tightening, which will be a headwind for other assets and, we think, the overall economy. So as a result, we expect growth to grind down as high rates produce a steady drag and past supports fade. And conditions are diverging globally. There are a lot of different ways that people have handled the post-COVID environment, leading to big differences that create a lot of opportunities in currencies and differential pressures.
And finally, to understand this environment, this timeless and universal truth is really important, which is basically this formula—that money plus credit plus income is equal to the spending in the real economy, the spending on financial assets, and reserves. That’s always true, so there’s a timelessness to it.
But what’s actually happened in this period is so interesting in this timeless truth, because things that almost never happen within this timeless truth have been very important. Money went down in 2023. Credit went down in 2023, particularly private sector credit. Public credit went up, so there’s a little bit of a mix there. Private sector credit went down a lot. Normally, public sector credit is reactive to the overall economy. But public sector credit went up even though incomes never went down. Incomes were kind of flat to slightly down in terms of growth rates. Spending stayed strong, even stronger than income, and that was a function of the money that went into financial assets. Money, in terms of financial assets, money came out of bonds but actually went into equities and cash.
And how did you get there, with money and credit falling and income being kind of flat? How did you get enough money in spending for it to continue to grow and enough money to support financial assets? Well, a unique thing happened: the money came out of reserves. The government borrowed money. It didn’t have to get that money from the private sector; it didn’t have to get that money from, essentially, the money sloshing around the economy. It was able to get the excess reserves that were sitting on the Fed’s balance sheet to fill the hole. So the unique ways that we settled in with a collapse of money and credit but not a collapse of spending in the economy and financial assets—and that’s really important to understand and understand how sustainable it is.
This research paper is prepared by and is the property of Bridgewater Associates, LP and is circulated for informational and educational purposes only. There is no consideration given to the specific investment needs, objectives, or tolerances of any of the recipients. Additionally, Bridgewater's actual investment positions may, and often will, vary from its conclusions discussed herein based on any number of factors, such as client investment restrictions, portfolio rebalancing and transactions costs, among others. Recipients should consult their own advisors, including tax advisors, before making any investment decision. This material is for informational and educational purposes only and is not an offer to sell or the solicitation of an offer to buy the securities or other instruments mentioned. Any such offering will be made pursuant to a definitive offering memorandum. This material does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors which are necessary considerations before making any investment decision. Investors should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, where appropriate, seek professional advice, including legal, tax, accounting, investment, or other advice.
The information provided herein is not intended to provide a sufficient basis on which to make an investment decision and investment decisions should not be based on simulated, hypothetical, or illustrative information that have inherent limitations. Unlike an actual performance record simulated or hypothetical results do not represent actual trading or the actual costs of management and may have under or overcompensated for the impact of certain market risk factors. Bridgewater makes no representation that any account will or is likely to achieve returns similar to those shown. The price and value of the investments referred to in this research and the income therefrom may fluctuate. Every investment involves risk and in volatile or uncertain market conditions, significant variations in the value or return on that investment may occur. Investments in hedge funds are complex, speculative and carry a high degree of risk, including the risk of a complete loss of an investor’s entire investment. Past performance is not a guide to future performance, future returns are not guaranteed, and a complete loss of original capital may occur. Certain transactions, including those involving leverage, futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Fluctuations in exchange rates could have material adverse effects on the value or price of, or income derived from, certain investments.
Bridgewater research utilizes data and information from public, private, and internal sources, including data from actual Bridgewater trades. Sources include BCA, Bloomberg Finance L.P., Bond Radar, Candeal, Calderwood, CBRE, Inc., CEIC Data Company Ltd., Clarus Financial Technology, Conference Board of Canada, Consensus Economics Inc., Corelogic, Inc., Cornerstone Macro, Dealogic, DTCC Data Repository, Ecoanalitica, Empirical Research Partners, Entis (Axioma Qontigo), EPFR Global, ESG Book, Eurasia Group, Evercore ISI, FactSet Research Systems, The Financial Times Limited, FINRA, GaveKal Research Ltd., Global Financial Data, Inc., Harvard Business Review, Haver Analytics, Inc., Institutional Shareholder Services (ISS), The Investment Funds Institute of Canada, ICE Data, ICE Derived Data (UK), Investment Company Institute, International Institute of Finance, JP Morgan, JSTA Advisors, MarketAxess, Medley Global Advisors, Metals Focus Ltd, Moody’s ESG Solutions, MSCI, Inc., National Bureau of Economic Research, Organisation for Economic Cooperation and Development, Pensions & Investments Research Center, Refinitiv, Rhodium Group, RP Data, Rubinson Research, Rystad Energy, S&P Global Market Intelligence, Sentix Gmbh, Shanghai Wind Information, Sustainalytics, Swaps Monitor, Totem Macro, Tradeweb, United Nations, US Department of Commerce, Verisk Maplecroft, Visible Alpha, Wells Bay, Wind Financial Information LLC, Wood Mackenzie Limited, World Bureau of Metal Statistics, World Economic Forum, YieldBook. While we consider information from external sources to be reliable, we do not assume responsibility for its accuracy.
This information is not directed at or intended for distribution to or use by any person or entity located in any jurisdiction where such distribution, publication, availability, or use would be contrary to applicable law or regulation, or which would subject Bridgewater to any registration or licensing requirements within such jurisdiction. No part of this material may be (i) copied, photocopied, or duplicated in any form by any means or (ii) redistributed without the prior written consent of Bridgewater® Associates, LP.
The views expressed herein are solely those of Bridgewater as of the date of this report and are subject to change without notice. Bridgewater may have a significant financial interest in one or more of the positions and/or securities or derivatives discussed. Those responsible for preparing this report receive compensation based upon various factors, including, among other things, the quality of their work and firm revenues.
TRANSCRIPT
Note: This transcript has been edited for readability.
Greg Jensen
The world’s changing a lot; the world’s super interesting. There are obviously many things that are timeless and universally true, but the degree to which they’re true or the degree to which you have to understand different types of dynamics is important.
I thought it would be helpful to talk about that in the context of what we were thinking pre-COVID. In 2019, we were thinking the world was at a crossroads—that you had gone through, since Volcker from the 1980s, this disinflationary period, decline in potential growth, and we’re in this risk of secular stagnation, as demographics and debt problems continue to play out.
So the question was, were we going to go down a path of constrained central banks and Japan-style deleveraging? We thought if they didn’t move to what we call Monetary Policy 3, if they didn’t move to fiscal policy matching the importance of monetary policy, you’d end up on this continued downward slope. But we faced these big choices that, really, populism had started to push, which are, are we going to actually change the economy? Are we going to end up with much more government-involved policy—deficit spending and money printing? Pro-labor policies and deglobalization would cause a change in the inflationary and the nominal GDP path that we had had before.
So that was the choice that we faced, and we ended up, really because of COVID, on the upper fork. And COVID accelerated a lot of those secular changes, and there’s so much going on. We had a plan—because we were thinking about this in 2018, 2019—we had a plan on how we’d put fiscal policy bigger into our process, how we’d think about deglobalization and pro-labor policies and the impact they’d have. But then it actually happens, and you learn so much through it actually happening.
Going from that picture to the things that are playing out today, so going from that big picture—the world’s changed a lot from pre-COVID, it’s really important, and those changes are having a lot of impact on what’s going on.
The first thing was we had a massive tightening, and the economy has been resilient despite that. And you really have to understand all of the changes in the economy to understand that.
First was the fact that you had a huge fiscal policy in 2020-21 that led to massive improvements in household and corporate balance sheets. You’ve never come out of a recession with households and corporates having more cash than when they entered the recession with—a better balance sheet than when they entered the recession with. The second thing is that the demand spike, due to that excess cash that went onto the balance sheets from governments to households, led nominal demand to be so far above supply that, even as nominal demand slowed, supply was still struggling to catch up. And a large budget deficit expanded without bond issuance, as I’ll describe, and that supported spending in markets.
So those three things really supported the economy, cushioned the impact of the tightening that actually did occur on credit, and netted to a reasonably sustainable growth rate over that period. But as you’ll see, those things that caused that buffer have largely gone away. Credit’s already fallen a lot. It has created that cushion. But the impact of higher rates for longer now is going to be playing out while there’s much less support on the other side.
Now that the easing’s been pushed back and bond issuance is beginning to normalize, upward pressure on yields is creating another round of tightening, which will be a headwind for other assets and, we think, the overall economy. So as a result, we expect growth to grind down as high rates produce a steady drag and past supports fade. And conditions are diverging globally. There are a lot of different ways that people have handled the post-COVID environment, leading to big differences that create a lot of opportunities in currencies and differential pressures.
And finally, to understand this environment, this timeless and universal truth is really important, which is basically this formula—that money plus credit plus income is equal to the spending in the real economy, the spending on financial assets, and reserves. That’s always true, so there’s a timelessness to it.
But what’s actually happened in this period is so interesting in this timeless truth, because things that almost never happen within this timeless truth have been very important. Money went down in 2023. Credit went down in 2023, particularly private sector credit. Public credit went up, so there’s a little bit of a mix there. Private sector credit went down a lot. Normally, public sector credit is reactive to the overall economy. But public sector credit went up even though incomes never went down. Incomes were kind of flat to slightly down in terms of growth rates. Spending stayed strong, even stronger than income, and that was a function of the money that went into financial assets. Money, in terms of financial assets, money came out of bonds but actually went into equities and cash.
And how did you get there, with money and credit falling and income being kind of flat? How did you get enough money in spending for it to continue to grow and enough money to support financial assets? Well, a unique thing happened: the money came out of reserves. The government borrowed money. It didn’t have to get that money from the private sector; it didn’t have to get that money from, essentially, the money sloshing around the economy. It was able to get the excess reserves that were sitting on the Fed’s balance sheet to fill the hole. So the unique ways that we settled in with a collapse of money and credit but not a collapse of spending in the economy and financial assets—and that’s really important to understand and understand how sustainable it is.
This research paper is prepared by and is the property of Bridgewater Associates, LP and is circulated for informational and educational purposes only. There is no consideration given to the specific investment needs, objectives, or tolerances of any of the recipients. Additionally, Bridgewater's actual investment positions may, and often will, vary from its conclusions discussed herein based on any number of factors, such as client investment restrictions, portfolio rebalancing and transactions costs, among others. Recipients should consult their own advisors, including tax advisors, before making any investment decision. This material is for informational and educational purposes only and is not an offer to sell or the solicitation of an offer to buy the securities or other instruments mentioned. Any such offering will be made pursuant to a definitive offering memorandum. This material does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors which are necessary considerations before making any investment decision. Investors should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, where appropriate, seek professional advice, including legal, tax, accounting, investment, or other advice.
The information provided herein is not intended to provide a sufficient basis on which to make an investment decision and investment decisions should not be based on simulated, hypothetical, or illustrative information that have inherent limitations. Unlike an actual performance record simulated or hypothetical results do not represent actual trading or the actual costs of management and may have under or overcompensated for the impact of certain market risk factors. Bridgewater makes no representation that any account will or is likely to achieve returns similar to those shown. The price and value of the investments referred to in this research and the income therefrom may fluctuate. Every investment involves risk and in volatile or uncertain market conditions, significant variations in the value or return on that investment may occur. Investments in hedge funds are complex, speculative and carry a high degree of risk, including the risk of a complete loss of an investor’s entire investment. Past performance is not a guide to future performance, future returns are not guaranteed, and a complete loss of original capital may occur. Certain transactions, including those involving leverage, futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Fluctuations in exchange rates could have material adverse effects on the value or price of, or income derived from, certain investments.
Bridgewater research utilizes data and information from public, private, and internal sources, including data from actual Bridgewater trades. Sources include BCA, Bloomberg Finance L.P., Bond Radar, Candeal, Calderwood, CBRE, Inc., CEIC Data Company Ltd., Clarus Financial Technology, Conference Board of Canada, Consensus Economics Inc., Corelogic, Inc., Cornerstone Macro, Dealogic, DTCC Data Repository, Ecoanalitica, Empirical Research Partners, Entis (Axioma Qontigo), EPFR Global, ESG Book, Eurasia Group, Evercore ISI, FactSet Research Systems, The Financial Times Limited, FINRA, GaveKal Research Ltd., Global Financial Data, Inc., Harvard Business Review, Haver Analytics, Inc., Institutional Shareholder Services (ISS), The Investment Funds Institute of Canada, ICE Data, ICE Derived Data (UK), Investment Company Institute, International Institute of Finance, JP Morgan, JSTA Advisors, MarketAxess, Medley Global Advisors, Metals Focus Ltd, Moody’s ESG Solutions, MSCI, Inc., National Bureau of Economic Research, Organisation for Economic Cooperation and Development, Pensions & Investments Research Center, Refinitiv, Rhodium Group, RP Data, Rubinson Research, Rystad Energy, S&P Global Market Intelligence, Sentix Gmbh, Shanghai Wind Information, Sustainalytics, Swaps Monitor, Totem Macro, Tradeweb, United Nations, US Department of Commerce, Verisk Maplecroft, Visible Alpha, Wells Bay, Wind Financial Information LLC, Wood Mackenzie Limited, World Bureau of Metal Statistics, World Economic Forum, YieldBook. While we consider information from external sources to be reliable, we do not assume responsibility for its accuracy.
This information is not directed at or intended for distribution to or use by any person or entity located in any jurisdiction where such distribution, publication, availability, or use would be contrary to applicable law or regulation, or which would subject Bridgewater to any registration or licensing requirements within such jurisdiction. No part of this material may be (i) copied, photocopied, or duplicated in any form by any means or (ii) redistributed without the prior written consent of Bridgewater® Associates, LP.
The views expressed herein are solely those of Bridgewater as of the date of this report and are subject to change without notice. Bridgewater may have a significant financial interest in one or more of the positions and/or securities or derivatives discussed. Those responsible for preparing this report receive compensation based upon various factors, including, among other things, the quality of their work and firm revenues.