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Rebecca Patterson on Global Macro Investing (Podcast) · Masters in Business

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Speaker 1: M. This is Mesters in Business with Very Results on
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Speaker 1: Bloomberg Radio this weekend. On the podcast, I have an
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Speaker 1: extra special guest Strap yourself in for this one, Rebecca Patterson.
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Speaker 1: She has a fascinating career and a fascinating job. She's
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Speaker 1: the director of investment Research at investment Giant Bridgewater Associates.
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Speaker 1: She also sits on the investment committee with Ray Dalio
0:29
Speaker 1: as well as the two co c i O s.
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Speaker 1: One of the more interesting and influential and powerful women
0:37
Speaker 1: in the world of finance, and really just an incredible
0:41
Speaker 1: breath and depth of knowledge. We talked about everything from
0:46
Speaker 1: inflation to federal reserve policy, to crypto, to fiscal stimulus,
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Speaker 1: to China, to different sector rotations that take place at
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Speaker 1: various points in different economic segments. Really just an absolute
1:01
Speaker 1: tutor force conversation about all of the things that are
1:06
Speaker 1: driving the market now and not just hindsight, but actual
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Speaker 1: real time observations that turned out to be either right
1:14
Speaker 1: or wrong. And she describes how they integrate this into
1:19
Speaker 1: their investment process. Sometimes they look at the world and say, well,
1:23
Speaker 1: we see these two things as the highest probability outcomes,
1:28
Speaker 1: and so will position our portfolios to benefit if either
1:31
Speaker 1: of these two disparate and probably mutually exclusive outcomes turn out,
1:37
Speaker 1: it really is an intriguing and fascinating way to think
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Speaker 1: about the world, to look at history, to look at data,
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Speaker 1: and to come up with a defendable approach. I found
1:49
Speaker 1: it absolutely fascinating, and I think you will as well. So,
1:52
Speaker 1: with no further ado, my conversation with Bridgewater Associates Director
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Speaker 1: of Investment Research, Rebecca Patterson. This is Mesters in Business
2:04
Speaker 1: with Very Renaults on Bloomberg Radio. My extra special guest
2:10
Speaker 1: this week is Rebecca Patterson. She is the director of
2:13
Speaker 1: investment Research at Hedge fund Giant Bridgewater Associates. Previously, she
2:18
Speaker 1: was the chief investment officer at Bessemer Trust. What she
2:21
Speaker 1: oversaw more than eighty five billion dollars in client assets.
2:25
Speaker 1: She is also on the Council of Farm Relations and
2:28
Speaker 1: a member of the Economic Club of New York. Rebecca Patterson,
2:32
Speaker 1: Welcome to Bloomberg. Thank you, Barry. It's great to be here.
2:36
Speaker 1: So you have a really interesting background that is not
2:40
Speaker 1: the typical Wall Street research director or c I oh,
2:45
Speaker 1: you you started as a local reporter in d C.
2:48
Speaker 1: You worked for Dow Jones in the Wall Street journal,
2:50
Speaker 1: Tell tell us a little bit about your journalism career
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Speaker 1: and how that led you to finance. Sure, so I'm
2:58
Speaker 1: definitely an accidental banker. Didn't set out to have a
3:01
Speaker 1: career in finance. I loved researching, I loved writing, I
3:05
Speaker 1: loved connecting the dots. And so my first job at
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Speaker 1: my hometown paper, the St. Petersburg Times in Washington was
3:12
Speaker 1: great because I got to do all those things, you know,
3:15
Speaker 1: I got to see how policy goes from idea to
3:17
Speaker 1: reality and maybe more importantly why uh. And then at
3:22
Speaker 1: Dow Jones, one of my first assignments was writing the
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Speaker 1: daily foreign exchange column for The Wall Street Journal. And
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Speaker 1: I had studied currencies and during grad school at Johns Hopkins.
3:31
Speaker 1: But obviously reality is very different from academia, and I
3:36
Speaker 1: learned very quickly that to understand currencies you kind of
3:40
Speaker 1: have to understand everything else, you know, trade and capital flows,
3:44
Speaker 1: relative trends, and economies and markets psychology. Um so that
3:48
Speaker 1: was great. That was a great education. I moved from
3:51
Speaker 1: New York to London. With Dow Jones. It was still
3:54
Speaker 1: covering effects but also politics and policy. In the mid nineties,
3:57
Speaker 1: when JP Morgan reached out and said, hey, we read
3:59
Speaker 1: your up in the paper. We think you get it
4:02
Speaker 1: whatever it is, and we want to hire you. And
4:05
Speaker 1: I told them, hey, I don't know anything about banking,
4:07
Speaker 1: but they said I knew more than I realized, and
4:09
Speaker 1: I could learn the rest. So I thought, well, why not, right,
4:12
Speaker 1: why not try? And my first few years there were
4:15
Speaker 1: challenging beyond belief, not just because I had a vertical
4:19
Speaker 1: curve to get up, but the time I joined JP
4:22
Speaker 1: Morgan in September, and Barry, you and I are both
4:25
Speaker 1: old enough that you probably immediately know what I'm talking to. Bingo.
4:30
Speaker 1: So my my first two years doing currency research for
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Speaker 1: the Investment Bank, I had the Asian currency crisis, yeah,
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Speaker 1: Russian rouble, and then as soon as we were getting
4:44
Speaker 1: out of those, then we had the run up to
4:46
Speaker 1: the Euro. You know, it launched in Jane and I
4:49
Speaker 1: was one of those folks who were putting together these
4:51
Speaker 1: calculators to understand what would be the conversion rate between
4:55
Speaker 1: the Deutsch Mark and the Italian lira and the pasada
4:59
Speaker 1: and it was so it was. It was quite an
5:02
Speaker 1: education those first couple of years. But that's that's how
5:04
Speaker 1: I got in the banking. I would they read my
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Speaker 1: stuff and thought I had it whatever it is. So
5:10
Speaker 1: that's kind of interesting. You spent a long time at
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Speaker 1: JP Moore and you're there for about fifteen years global currency,
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Speaker 1: commodity desk trading, and then asset management chief strategists. How
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Speaker 1: do you work your way from currency to commodity to equity. Yeah,
5:27
Speaker 1: so JP Morgan definitely helped me see the world and
5:31
Speaker 1: get a better understanding of it. I feel like, you know,
5:34
Speaker 1: you joined the military into the world. I joined the
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Speaker 1: bank and saw the world from from London. I moved
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Speaker 1: to Singapore in early I was still doing currency, but
5:44
Speaker 1: now also fixed income research, and that was that was
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Speaker 1: a great experience to understand that even if all economies
5:51
Speaker 1: and markets have the same drivers, how you think about
5:54
Speaker 1: them is going to change a lot depending on how
5:56
Speaker 1: the economy is made up. You know, I was just
5:58
Speaker 1: getting the hang of Europe and suddenly I'm dealing with
6:01
Speaker 1: remittance flows in the Philippines and reserve adequacy in South Korea.
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Speaker 1: Uh and it and so it was humbling, but it
6:09
Speaker 1: was a great education. And I think I also learned
6:12
Speaker 1: from that that you can use data from completely other
6:16
Speaker 1: parts of the world to develop your view. So you know,
6:18
Speaker 1: even today I look at new export orders from Taiwan
6:22
Speaker 1: and Korea that gives me a leading indicator for US
6:25
Speaker 1: industrial production. So you know, having that holistic take on
6:29
Speaker 1: what's going on in the world can be really important.
6:32
Speaker 1: To have the right views in a in one specific country.
6:35
Speaker 1: Son inter market data can be effective if you're looking
6:40
Speaker 1: in the right place and you're able to figure out
6:43
Speaker 1: what the impact is going to be on an adjacent
6:46
Speaker 1: or even unrelated market completely. So you know, for many years,
6:52
Speaker 1: if you wanted to know what was going on with
6:53
Speaker 1: German industrial production, you would look at Belgium because they
6:57
Speaker 1: did a lot of the assembly of good that were
7:00
Speaker 1: eventually sold out of Germany. Today, I think that's changed
7:03
Speaker 1: a little bit and you look at some of the
7:05
Speaker 1: Eastern European countries. But understanding those global supply chains, understanding
7:10
Speaker 1: those linkages. Even back in the nineties when I was
7:13
Speaker 1: getting going in this business, um, we're really important to do,
7:18
Speaker 1: really really interesting, and then you end up getting scooped
7:20
Speaker 1: up by Bessemer Trust where eventually become chief investment officer
7:25
Speaker 1: running a lot of money. A lot of money. Yeah,
7:30
Speaker 1: it is a lot of money. My my mom still
7:32
Speaker 1: giggles a little bit when I when I mentioned that, um,
7:35
Speaker 1: you know, at JP Morgan, I had gone from research
7:38
Speaker 1: to running a trading desk. And I realized quickly I
7:41
Speaker 1: liked running risk. I like touching the money. I was
7:45
Speaker 1: doing that during O eight oh nine and and I
7:48
Speaker 1: also learned about myself that I can handle the pressure
7:52
Speaker 1: of of things not going up all the time. And
7:55
Speaker 1: so I knew that was a direction I wanted to
7:56
Speaker 1: go in and at JP Morgan. While I loved the firm,
8:00
Speaker 1: opportunity wasn't there when I was ready. And when Bessemer
8:03
Speaker 1: reached out and recruited me, I thought, all right, I
8:06
Speaker 1: you know, I still have friends at JP Morgan, but
8:08
Speaker 1: this is this is the moment to make the leap.
8:10
Speaker 1: And and it was great. I the firm gave me
8:14
Speaker 1: a ton of autonomy. I was able to develop new
8:17
Speaker 1: solutions for clients, build a fantastic team. The clients themselves
8:22
Speaker 1: are really interesting. I mean, you know about wealth today,
8:25
Speaker 1: uh in the United States. Some some of the people
8:28
Speaker 1: I was dealing with, you really thought about their portfolios
8:31
Speaker 1: like you wouldn't endowment or pension and it's perpetual capital. Yeah,
8:36
Speaker 1: the complexity is not insignificant. So that that was a
8:40
Speaker 1: lot of fun. So you you end up on the
8:43
Speaker 1: New York Federal Reserve Investor Advisor Committee. Tell us a
8:48
Speaker 1: little bit about that experience and and who were the
8:51
Speaker 1: people you met uh in that role. So I've always
8:55
Speaker 1: been close with the New York Fed during my career.
8:58
Speaker 1: I started out UH doing foreign exchange lessons for junior
9:03
Speaker 1: central bankers and training, and then later on I was
9:06
Speaker 1: on their foreign Exchange committee, and then I got uh
9:10
Speaker 1: pushed into the Investor Advisory Committee, which you know, I
9:13
Speaker 1: felt initially like the kid at the Thanksgiving table with
9:16
Speaker 1: all the grown ups, because these were all the masters,
9:19
Speaker 1: truly the masters of the universe. And and then me
9:22
Speaker 1: and um, and I'm not trying to be self deprecating it,
9:26
Speaker 1: that's how I felt. But we took turns presenting in
9:30
Speaker 1: front of the New York Fed officials and then we
9:33
Speaker 1: debate different topics. And I met Ray Dalio there and
9:39
Speaker 1: after several meetings where you know, he saw me presenting
9:42
Speaker 1: on a variety of topics, he saw me holding my
9:44
Speaker 1: own against you know whoever. It was Jim Chano's Paul
9:47
Speaker 1: Tutor Jones, Bill Ackman, et cetera. And Ray himself. He
9:51
Speaker 1: came up and said, you know, maybe maybe we should
9:53
Speaker 1: have you come work with us. And um, and that
9:57
Speaker 1: was the beginning of a conversation that led me to
10:00
Speaker 1: where I am today. So you joined Bridgewater in before
10:05
Speaker 1: the pandemic. But I'm kind of intrigued by what the
10:09
Speaker 1: process was like to get hired at a place like Bridgewater.
10:13
Speaker 1: I gotta think it's more than just Ray saying, Hey,
10:16
Speaker 1: I met this woman over at the New York Fed,
10:18
Speaker 1: I like her, give her a job. Tell us what
10:21
Speaker 1: the process was like to to actually work your way
10:25
Speaker 1: to the offer from Bridgewater. Sure so, um, I joined
10:30
Speaker 1: in January, but I was interviewing in nineteen And you know,
10:34
Speaker 1: I think the process for a lot of folks is
10:38
Speaker 1: even more um detailed, let's say, than than mine was.
10:43
Speaker 1: My process was long. I met a lot of people.
10:46
Speaker 1: I had to come up with ideas on how I
10:50
Speaker 1: would allocate capital to this and that. I think the
10:53
Speaker 1: most interesting piece of my interview though, and and and
10:56
Speaker 1: kind of a good window into Bridgewater. Ray had asked
10:59
Speaker 1: me to come join weekly morning meeting they have where
11:02
Speaker 1: they talk about what's going on in the world. I thought, yeah,
11:05
Speaker 1: that sounds great. I can learn about the people, see
11:07
Speaker 1: what the discussions are like. And I showed up at
11:10
Speaker 1: their office in Connecticut, stepped down at the table, several
11:13
Speaker 1: dozen people in the room, and it's being videoed, and
11:16
Speaker 1: Ray introduces me and says, okay, Rebecca, let's kick off
11:20
Speaker 1: the meeting. You tell us for the next ten minutes
11:22
Speaker 1: what you think is the most important thing to think
11:24
Speaker 1: about in the world today. Okay, go right, go. And um,
11:29
Speaker 1: I did not know that was coming. Fortunately I live
11:32
Speaker 1: and breathe thinking about the markets, so I just launched
11:35
Speaker 1: and did my thing. And then afterwards he said, okay,
11:39
Speaker 1: everybody dot Rebecca. Now, for those of you who aren't
11:42
Speaker 1: familiar with Bridgewater, dotting is a form of real time grading,
11:46
Speaker 1: so we give feedback to each other all the time,
11:49
Speaker 1: and one dot or grade doesn't make or break your career.
11:52
Speaker 1: It's really the you know, this wonderful picture of you
11:57
Speaker 1: that develops over time, sort of a George Sarah view
12:00
Speaker 1: of you that evolves over time. But I had never
12:04
Speaker 1: been dotted before, and suddenly all these people are whipping
12:08
Speaker 1: out their computers and iPads and putting the little dots
12:10
Speaker 1: next to my name, grading my insights. And and this
12:14
Speaker 1: is how Bridgewater is it's radically transparent. I thought, Okay,
12:19
Speaker 1: how do I feel about this? Because this will be
12:20
Speaker 1: my life, and I'm kind of grateful it happened because
12:23
Speaker 1: I realized that evening when I got home and I
12:25
Speaker 1: was reflecting on it, I'm okay with it. I might
12:29
Speaker 1: not always agree with every grade I get, but I
12:31
Speaker 1: certainly prefer to know where I stand and not know UM.
12:35
Speaker 1: I don't want people talking behind my back. I want
12:37
Speaker 1: talking to my face. So so that really helped me
12:41
Speaker 1: actually make the decision that I wanted to join the firm.
12:44
Speaker 1: So let's explore this financial point is UM a little more.
12:49
Speaker 1: How does this impact because I've never quite heard it
12:51
Speaker 1: described the way you just did. So now you're at
12:56
Speaker 1: Bridgewater and you go to these regular meetings or anybody
12:59
Speaker 1: who's there, how does it affect regular conversations? How does
13:05
Speaker 1: it affect presentations? Because I would imagine if every meeting,
13:11
Speaker 1: every discussion group, there's a potential of being graded. Does
13:17
Speaker 1: that affect how you present, how you behave, how you
13:21
Speaker 1: think about and prepare for each meeting? Or is it
13:25
Speaker 1: just an ongoing background sort of thing for me. I
13:28
Speaker 1: don't want to speak for everyone in the firm. For me,
13:30
Speaker 1: it becomes more of a this is in the background,
13:33
Speaker 1: and it's a way just to get a regular check
13:36
Speaker 1: in on how I'm doing and how people are perceiving
13:38
Speaker 1: I'm doing. Where are there areas that I can improve?
13:42
Speaker 1: But I would say, especially in the beginning and even now,
13:45
Speaker 1: it's in the back of my mind and and maybe
13:47
Speaker 1: it makes me that one extra degree more thoughtful about
13:51
Speaker 1: how I'm going to present something. Um. But it certainly
13:54
Speaker 1: doesn't slow you down. You can't let it right. You're
13:57
Speaker 1: therearing enough hours in the day to worry about how
13:59
Speaker 1: you get dotted. Um. So it's just it's a tool
14:03
Speaker 1: really to help you think about what am I doing
14:05
Speaker 1: well at Where areas that I might not see myself
14:09
Speaker 1: that I can do better. So let's talk a little
14:12
Speaker 1: bit about the research agenda at Bridgewater. How does that
14:16
Speaker 1: get shaped and how does the research agenda affect the
14:21
Speaker 1: investment strategy they That's a lot of questions, Verry, I'll
14:24
Speaker 1: wrapped into one. Um. There's a couple of things about
14:27
Speaker 1: Bridgewater and how we do research that I think are
14:30
Speaker 1: fairly unique in the industry. One is just the depth
14:34
Speaker 1: of research we do. I you know, I've been in
14:37
Speaker 1: research and investing most of my adult life, and I've
14:40
Speaker 1: never seen anything like it. And I think the reason
14:43
Speaker 1: we take so long and go so deep on everything
14:46
Speaker 1: to make sure we truly understand it and understand it
14:48
Speaker 1: not just at a moment in time, but over cycles
14:51
Speaker 1: and different economic environments. So we'll go back often fifty
14:56
Speaker 1: years in our analysis, will look across countries to see
14:59
Speaker 1: if something universally true. It doesn't just work here, but
15:02
Speaker 1: it works in different places. And once we get that
15:06
Speaker 1: level of confidence that we understand a cause effect linkage
15:10
Speaker 1: and economies or markets, then we're going to create rules
15:13
Speaker 1: if this happens, then that if if that happens, and
15:17
Speaker 1: this will codify those rules, and those are going to
15:20
Speaker 1: shape the investments we make. Once we understand the rules
15:22
Speaker 1: of how the economic machine works, to borrow Ray Dalio's term,
15:26
Speaker 1: then we put it into our systems and we can
15:29
Speaker 1: afford to miss something. You know, not that we can't
15:32
Speaker 1: pull it out of the systems and improve it, but
15:34
Speaker 1: we don't want to be doing that, so we want
15:36
Speaker 1: to make sure we get it right up front, and
15:38
Speaker 1: that means doing this unbelievably deep amount of research upfront
15:42
Speaker 1: to understand how the world works, So I say that's
15:46
Speaker 1: pretty different about us. And and the other thing is
15:48
Speaker 1: that because Ray has had this approach since he started Bridgewater,
15:54
Speaker 1: So he founded the firm fifty years ago, coming up,
15:58
Speaker 1: and he's always been doing the us figuring out is
16:01
Speaker 1: what he thinks, testing it, writing down the rules, and
16:04
Speaker 1: that lets him compound. So when inflation pops as it's
16:08
Speaker 1: doing this year, we don't have to say, oh my gosh, okay,
16:11
Speaker 1: it's been a while and go back to the seventies
16:13
Speaker 1: and review that what did it mean? We already know that,
16:16
Speaker 1: we've already studied that, we've tested it. So it frees
16:19
Speaker 1: us up to spend our time in research looking at
16:24
Speaker 1: what's different, Um, what's what's a new thing that maybe
16:27
Speaker 1: we haven't captured in the past, Or what are we
16:30
Speaker 1: getting wrong? I mean, unfortunately we don't get everything right,
16:33
Speaker 1: and so if we get something wrong, we want to
16:35
Speaker 1: understand why, what did we miss? Did we appreciate some
16:39
Speaker 1: variable incorrectly or underappreciated, etcetera. So we we really focus
16:43
Speaker 1: our research on those two things, what did we get
16:46
Speaker 1: wrong and why? And let's fix it? And then what
16:49
Speaker 1: are things evolving in the world today that are new
16:52
Speaker 1: and maybe Barry I can give you one super quick
16:54
Speaker 1: example of that. You know, when we think about equities,
16:58
Speaker 1: we're always looking at all the buyers and sellers of
17:01
Speaker 1: every athlet class, including equities, and we've seen in the
17:05
Speaker 1: pandemic a huge increase in the amount of retail investing
17:09
Speaker 1: we're seeing versus before the pandemic. Obviously, retail investors are
17:13
Speaker 1: something we've always tracked. What's a little different today is
17:17
Speaker 1: the amount of activity and options with retail investors, and
17:20
Speaker 1: I think that's the result of changes in technology, changes
17:24
Speaker 1: in cost, the ability of people to be able to
17:26
Speaker 1: use options at a retail level. And so that's something
17:30
Speaker 1: that we want to make sure we're capturing appropriately in
17:33
Speaker 1: our thinking, and that will feed through into investments we
17:36
Speaker 1: make if it becomes a material force driving the equity market.
17:40
Speaker 1: So so let's stay with that because that's a really
17:42
Speaker 1: interesting issue. I look at the surge of retail investors
17:48
Speaker 1: as a bunch of board people stuck at home in
17:51
Speaker 1: the first year of the pandemic, combined with all of
17:55
Speaker 1: their favorite bedding alternatives like professional sports a dream. When
18:00
Speaker 1: all that stuff was canceled, the one thing that wasn't
18:03
Speaker 1: canceled was the stock market, and thanks to robin Hood,
18:08
Speaker 1: they could trade for free and they could buy fractional shares,
18:11
Speaker 1: so it didn't take a lot of money. Am I
18:14
Speaker 1: grossly oversimplifying what you described? Or is that a key
18:19
Speaker 1: factor in you know why suddenly the retail investor UH
18:24
Speaker 1: seemed to surge in. I would agree with everything you
18:29
Speaker 1: just said, and I would add one very important factor
18:32
Speaker 1: that I'm sure you know of and you just didn't mention,
18:35
Speaker 1: but I think we need to, which is that they
18:37
Speaker 1: not only had the technological ability to do this, they
18:41
Speaker 1: also had the financial ability. You know, it's I think
18:45
Speaker 1: we'll probably talk about it later, but it is really
18:49
Speaker 1: incredible the level of wealth at different socioeconomic cohorts that's
18:53
Speaker 1: been created during the pandemic thanks to this massive, massive
18:58
Speaker 1: surgeon liquidity from the said and fiscal transfers from the government.
19:02
Speaker 1: So these folks, like you said, we're board locked at home,
19:06
Speaker 1: but they also had this money. What are you gonna
19:08
Speaker 1: do with it? And if I can't go see my
19:10
Speaker 1: friends at a restaurant, I can't go to a sports game,
19:14
Speaker 1: you know, here's here's something else I can do. And
19:16
Speaker 1: by the way, a lot of them, I think made
19:18
Speaker 1: some decent money over the last year and a half
19:19
Speaker 1: or so, especially the earlier you were into playing with that,
19:24
Speaker 1: the better you did post post lockdown. Um. But but
19:29
Speaker 1: that's like a kind of one off thing. What are
19:32
Speaker 1: the biggest drivers into your research? Is it fundamental economic data?
19:36
Speaker 1: Are you really looking at corporate balance sheets, revenue and earnings,
19:40
Speaker 1: or is it broader market data? Or is it all
19:43
Speaker 1: those and more? All those and more? Again, That's when
19:47
Speaker 1: I say the research we do is deeper than anything
19:49
Speaker 1: I've ever seen. Um. You know, every time when I
19:53
Speaker 1: get up in the morning and I read the financial press,
19:56
Speaker 1: and I read my aggregators, and I look at my
19:58
Speaker 1: Bloomberg screen and I see some snippets some little thing,
20:01
Speaker 1: and I think, oh, that's interesting. I send it off
20:04
Speaker 1: to a colleague on the equity team or the fixed
20:06
Speaker 1: income team. Point five percent of the time they're like, oh, yeah,
20:10
Speaker 1: we studied that X years ago. You know, it is
20:14
Speaker 1: amazing the breath and depth of what we look at
20:17
Speaker 1: to make sure we're capturing all the players, all the flows,
20:21
Speaker 1: all the inputs that can affect economies and flow through
20:24
Speaker 1: the markets. Um, it's really extraordinary. So you're also on
20:29
Speaker 1: Bridgewaters Investment Committee with Bob Prince, Greg Jensen, and Ray Dalio.
20:35
Speaker 1: Tell us what it's like working with with that group.
20:39
Speaker 1: They sound like they can be an intimidating threesome right there. Well,
20:43
Speaker 1: I think having my first job in Washington and having
20:47
Speaker 1: to interview members of Congress and leaders, and then later
20:51
Speaker 1: in a private bank, you know, working with CEOs and
20:55
Speaker 1: people who owned hedge funds and former policymakers. You know,
20:59
Speaker 1: you realize people are people, so you shouldn't be intimidated.
21:02
Speaker 1: You should be respectful of everything they've achieved. So I
21:05
Speaker 1: don't get intimidated, but I am respectful. I mean, these
21:09
Speaker 1: people have created an amazingly successful company with with great
21:14
Speaker 1: since inception returns and and so you know I listened
21:18
Speaker 1: to them carefully, but you have to push back if
21:21
Speaker 1: you don't agree, and it's expected. Um, you know, at
21:24
Speaker 1: the end of the day, if if they get it
21:26
Speaker 1: wrong because I didn't push back and we don't make
21:28
Speaker 1: as much money as we could as that's my fault.
21:30
Speaker 1: That's on me. But the meeting itself, Um, the investment
21:33
Speaker 1: committee that we have, we started that about a year ago,
21:38
Speaker 1: maybe a bit before because Ray as as I think
21:41
Speaker 1: has been widely reported and the press has been transitioning
21:44
Speaker 1: for some time UM less than the day to day
21:47
Speaker 1: of the company and more into a mentor c I
21:49
Speaker 1: O role. And and with that move, we felt we
21:52
Speaker 1: needed to expand the group of key decision makers, and
21:55
Speaker 1: so the Investment Committee was formed and it's it's a
21:58
Speaker 1: place where we're going to review positions in the portfolio.
22:01
Speaker 1: We're going to pose questions to each other and about positions,
22:04
Speaker 1: new learnings, things that might be going against us. Do
22:08
Speaker 1: we feel like it's a short term blip, a wiggle
22:10
Speaker 1: in the market, or something that maybe we're missing and
22:13
Speaker 1: we need to go dig into more. UM Again, what
22:16
Speaker 1: makes it different from other investment committees I've been on
22:19
Speaker 1: at JP Morgan or Bestsemer is just the bar to
22:22
Speaker 1: get an idea into the portfolio is incredibly high. It
22:26
Speaker 1: can it can take you several months to get through
22:30
Speaker 1: the gauntlet to make sure you haven't missed anything before
22:33
Speaker 1: an idea gets in the portfolio. So so let me
22:38
Speaker 1: take a step back and ask you a broader question.
22:42
Speaker 1: You've lived all over the world, You've worked all over
22:45
Speaker 1: the world, You've traveled to I don't know fifty UM countries.
22:50
Speaker 1: How does an impact how you think about long term
22:53
Speaker 1: investing and the various strategies you want to bring to
22:56
Speaker 1: back well being? Going all over the world again, and
23:01
Speaker 1: we talked about this a little earlier. I try to
23:03
Speaker 1: connect the dots, and so if I'm seeing, for example,
23:08
Speaker 1: China's economy slowing down and policymakers are starting to react.
23:13
Speaker 1: We we saw just recently a small cut in interest rates,
23:17
Speaker 1: giving one more monetary stimulus. But if I'm seeing the
23:19
Speaker 1: slowdown in China, immediately my mind goes not just the
23:23
Speaker 1: first order consequence, which is how does this affect any
23:26
Speaker 1: Chinese positions we have in the portfolio, but immediately second, third,
23:29
Speaker 1: fourth order. So what does it mean for supply chains?
23:32
Speaker 1: What countries? If we can't ship out of Chinese courts,
23:37
Speaker 1: where do we ship it from? How does it affect
23:39
Speaker 1: producers across emergin Asia? How does it affect commodities? How
23:42
Speaker 1: does it affect inflation in the United States? How long
23:45
Speaker 1: is this going to last? And then you have to
23:47
Speaker 1: overlay the policy. If President she is thinking about the
23:51
Speaker 1: fall and being um being proposed for a third term,
23:56
Speaker 1: how is that going to factor into the policy response today?
23:59
Speaker 1: What's already raced in and so going overseas I think
24:03
Speaker 1: has helped me understand how all these different things connect.
24:07
Speaker 1: You know, if if China slows down, that has a
24:10
Speaker 1: lot of implications for Germany, it has implications for Italy,
24:14
Speaker 1: it has people will say, well, I don't want to
24:16
Speaker 1: have China my portfolio. You already do. You know, even
24:20
Speaker 1: if you only owned US stocks and bonds, everything is integrated,
24:24
Speaker 1: and so making sure you're thinking about how what happens
24:27
Speaker 1: in one country affects the others is hugely important. People say, well,
24:31
Speaker 1: we just focus on the big economies. Last year, Malaysia
24:35
Speaker 1: had such an important role in chips in semiconductors because
24:40
Speaker 1: it was one of the key countries that assembled these things,
24:44
Speaker 1: and so the fact that they were under lockdown was
24:46
Speaker 1: a major hindrance to that supply chain. You think about Taiwan,
24:51
Speaker 1: you don't think about Malaysia, But you have to think
24:53
Speaker 1: about every country and its role, not just the big guys.
24:56
Speaker 1: So because Malaysia is lockdown, used car prices going higher
25:02
Speaker 1: really really interesting. Let me ask you one more question
25:05
Speaker 1: about how interconnected the world is. A year ago, we
25:11
Speaker 1: saw some changes in China towards some of their um
25:16
Speaker 1: tech companies and and the shift in the dynamic of
25:20
Speaker 1: more equitable wealth being spread throughout throughout the country. Um
25:26
Speaker 1: and from a US perspective, it looked like, hey, China
25:30
Speaker 1: is really rattling the cages of some of their biggest
25:34
Speaker 1: and most important companies, kinda in a more direct and
25:41
Speaker 1: and frightening way than we saw in the US. If
25:45
Speaker 1: you remember back in steen when when Donald Trump was
25:48
Speaker 1: first elected, he was tweeting at companies and making threats,
25:52
Speaker 1: but never went quite as far as we've seen in China.
25:56
Speaker 1: How do you build a model that allows you to
26:00
Speaker 1: incorporate really really challenging geopolitics like that. A lot of
26:06
Speaker 1: people looked at that and kind of threw up their
26:08
Speaker 1: hands and said, we we can't figure out what the
26:10
Speaker 1: hell is going on in China? How do you deal
26:12
Speaker 1: with such a complex and and really challenging set of circumstances.
26:18
Speaker 1: So I agree there is there's a different level of
26:21
Speaker 1: understanding around China than the US. I mean, most of
26:25
Speaker 1: the capitol and the world that gets invested is in America.
26:29
Speaker 1: You know, the bulk of banks are in America, the
26:32
Speaker 1: bulk of analysts are in America, and so we understand
26:35
Speaker 1: our system incredibly well. Someone from the outside looking at
26:39
Speaker 1: the US could say, what the heck is going on
26:41
Speaker 1: in the United States, What is the contested election, etcetera, etcetera.
26:44
Speaker 1: What is there going to be more regulatory scrutiny in
26:47
Speaker 1: the US around tech companies? We understand it as we
26:51
Speaker 1: look at China. I think, honestly, given China's size today
26:56
Speaker 1: and the fact that in our lifetimes there's a very
26:58
Speaker 1: good chance it will be the largest economy in the world,
27:01
Speaker 1: it will have a currency that's probably in the top three,
27:05
Speaker 1: maybe five in the world in terms of trading volumes.
27:08
Speaker 1: We need to develop that level of understanding with them
27:11
Speaker 1: as well. And that is not just how their economy works,
27:14
Speaker 1: but it's also the linkage between policy and the economy.
27:17
Speaker 1: If you look at Chinese policymakers and what they say,
27:21
Speaker 1: they one thing that's kind of beautiful is that, because
27:26
Speaker 1: of their political system, what the policymakers say is usually
27:30
Speaker 1: what happens um So if you're actually reading all their
27:34
Speaker 1: speeches and watching them, you usually have a decent heads
27:37
Speaker 1: up what's coming. Whereas in the United States, our policymakers
27:40
Speaker 1: say a lot of stuff, but it doesn't mean it
27:42
Speaker 1: becomes reality because it has to go through through Congress,
27:45
Speaker 1: through the Supreme Court, etcetera. UM. In China, if you
27:49
Speaker 1: wanted to see that there was going to be a
27:51
Speaker 1: clamp down on the tech companies, you know, maybe you
27:53
Speaker 1: didn't know the exact timing or the exact details, but
27:56
Speaker 1: directionally they telegraphed that in advance. I even think about
28:00
Speaker 1: twenty when China decided that they were going to have
28:03
Speaker 1: more flexibility around the remimbi and the Chinese currency weekend.
28:08
Speaker 1: I think it was August that year fairly yep and um.
28:13
Speaker 1: And if you looked at the speeches they had been
28:17
Speaker 1: giving months in advance, you would have known that something
28:20
Speaker 1: was coming. Maybe not the day or the magnitude, but
28:22
Speaker 1: you knew something was coming. Um. Just like today in
28:25
Speaker 1: the in the United States. But said will say, hey,
28:27
Speaker 1: we're thinking about tapering or we're thinking about quantitative tightening.
28:31
Speaker 1: We know to read those tea leaves. I think, as
28:34
Speaker 1: as global investors, we all need to get on the
28:36
Speaker 1: bandwagon and get up the curve on China as well,
28:39
Speaker 1: because the economy is going to continue to be a
28:42
Speaker 1: major force for global markets. You can get there, you
28:45
Speaker 1: just have to spend the time knowing who the important
28:48
Speaker 1: policymakers are to follow and then start reading their speeches
28:52
Speaker 1: a lot more carefully than I think most people do today.
28:55
Speaker 1: So listening to you discuss inflation, I think you approached
29:00
Speaker 1: it in a way very different from what I've been
29:03
Speaker 1: hearing other people talk about. You said, quote, demand shock
29:07
Speaker 1: is what's driving inflation. Explain demand shock. Sure, So when
29:13
Speaker 1: we look at where we are today with inflation in
29:16
Speaker 1: the United States, it's very easy to quickly go back
29:19
Speaker 1: to the late nineteen sixties early nine seventies and say, okay,
29:23
Speaker 1: you know high and rising inflation, high gas prices. Have said,
29:26
Speaker 1: that's behind the curve. Yeah, okay, there are similarities that
29:31
Speaker 1: are worth noting. But back then, what was driving the
29:35
Speaker 1: high inflation were supply shortages. That was the key ingredients. Today,
29:39
Speaker 1: obviously there's things on both side of the demand supply equation,
29:43
Speaker 1: but the bigger deal is the surgeon demand which is
29:46
Speaker 1: just overwhelming the supplies. So let me give you a
29:49
Speaker 1: number here to make this feel more real. If you
29:52
Speaker 1: look at the supply of goods for US consumers that
29:55
Speaker 1: comes from around the world, so produced everywhere in the US,
29:58
Speaker 1: at China, outside, et cetera. It's running about five above
30:03
Speaker 1: where it was before the pandemics. So the supply of
30:05
Speaker 1: goods has increased on net. But then look at the
30:09
Speaker 1: demand side. The demand from US consumers today is about
30:13
Speaker 1: twenty higher than the end of two thousand nineteen. And
30:18
Speaker 1: you see similar patterns across a lot of things, whether
30:21
Speaker 1: we're talking about industrial metals, where supplies today are high
30:26
Speaker 1: but the demand is much higher. That's pushing down inventories. Ships.
30:30
Speaker 1: We have more ships on the ocean today than we
30:32
Speaker 1: did pre pandemic. But it's just not enough. Labor markets.
30:35
Speaker 1: We've got no shortage of jobs today, we just have
30:38
Speaker 1: such high demand for jobs. And so, yes, there are
30:41
Speaker 1: supply constraints here and there. I'm not saying there aren't.
30:44
Speaker 1: I'm just saying the bigger deal this time. And what
30:47
Speaker 1: makes this so different from the nine seventies is this
30:51
Speaker 1: absolute boom in demand. So let's let's stick with demand.
30:54
Speaker 1: And another comment of yours was, quote, we're witnessing the
30:58
Speaker 1: biggest monetary sti mulus outside of wartime unquote, referring to
31:03
Speaker 1: the various Cares Act, the fiscal stimulus. Is that the
31:09
Speaker 1: key driver of all this demand? Yeah, Well, it's the
31:11
Speaker 1: one to punch of monetary and fiscal. So, Barry, when
31:15
Speaker 1: you and I were mere children, Um, it was all
31:19
Speaker 1: about interest rates, right. The FED was using short term
31:22
Speaker 1: rates to to affect economic conditions. We'll call that monetary
31:25
Speaker 1: policy one. And then in two thousand eight rates hit zero.
31:29
Speaker 1: The FED needs to ease more, so then it starts
31:32
Speaker 1: launching more quantitative easing, so we call that balance sheet
31:36
Speaker 1: usage plus interest rates MP two. When we got to
31:40
Speaker 1: the pandemic, okay, the FED went big and it went fast.
31:44
Speaker 1: We cut rates, We did huge amounts of quantitative easy,
31:48
Speaker 1: but it wasn't enough to fill the whole in incomes
31:51
Speaker 1: that the pandemic meant when we shut down the economy,
31:54
Speaker 1: and so fiscal had to play a bigger role. Fiscal
31:57
Speaker 1: became the dominant policy, lever driving growth, and the FED
32:01
Speaker 1: facilitated it. Obviously, the FED still independent, but the Fed,
32:05
Speaker 1: by keeping yields low, by buying the bonds, was allowing
32:09
Speaker 1: the government to borrow and spend like this. And so
32:13
Speaker 1: we're in a world we call a day MP three. Um.
32:17
Speaker 1: But what's important is that we not only filled the
32:20
Speaker 1: income polls that were created by the pandemic, we over
32:23
Speaker 1: filmed them. We started building little mountains. People are wealthier
32:26
Speaker 1: today than they were before the pandemic. Balance sheets of
32:29
Speaker 1: companies and households today are stronger than they were before
32:32
Speaker 1: the pandemic. Um it's the fact that we have such
32:36
Speaker 1: a strong economy today, all this excess savings that was
32:40
Speaker 1: pumped into companies and households that's created the demand surge
32:44
Speaker 1: that's then driving the inflation. So so many questions to
32:49
Speaker 1: follow up with that. Let's let's start with the savings rate,
32:52
Speaker 1: which I don't remember if this was a bridge water
32:55
Speaker 1: chart or a sort somewhere else, but we've seen over
32:58
Speaker 1: the past year and half, American savings rates or recordize
33:03
Speaker 1: but slowly drifting down as they spend away um their cares, money,
33:09
Speaker 1: they're extended, unemployment benefits, all the different cash that found
33:13
Speaker 1: its way into households, and we're slowly approaching the pre
33:18
Speaker 1: pandemic savings rate. Does does that mean that we're going
33:22
Speaker 1: to see less of that demand push into inflation or
33:27
Speaker 1: is there still enough dry powder that demand is going
33:30
Speaker 1: to continue being a factor. So I think we're going
33:33
Speaker 1: to see growth moderate this year from last year, which
33:37
Speaker 1: should not surprise anyone. But even then, I think we
33:41
Speaker 1: should expect to have real growth probably double or more potential,
33:48
Speaker 1: and nominal growth still be incredibly strong even with that
33:52
Speaker 1: excess savings rate coming down. For a couple of reasons.
33:55
Speaker 1: I think one, we're starting to see early evidence that
33:59
Speaker 1: the FIST school and monetary stimulus is now passing over
34:03
Speaker 1: to the private sector, so people are starting to tap
34:05
Speaker 1: their credit cards again. You're starting to see bank loans
34:09
Speaker 1: picking up again, so the credit creation, which wasn't needed
34:12
Speaker 1: for the last two years, that's now coming in to
34:15
Speaker 1: fill the gap of that savings being spent. So that's one.
34:20
Speaker 1: I think. Another support that we're going to see having
34:23
Speaker 1: a bigger role this year will be CAPEX. So you've
34:26
Speaker 1: seen because of the strong demand and you're getting the
34:29
Speaker 1: self reinforcing flywheel of the economy going, companies have the
34:36
Speaker 1: clarity looking ahead and they have the strong demand backdrop
34:39
Speaker 1: that they're feeling more confident to make investments, and so
34:42
Speaker 1: we're gonna see CAPEX not just in technology, but I
34:45
Speaker 1: think broadly that's going to be a support for growth,
34:47
Speaker 1: and that creates jobs, and the jobs create incomes, incomes
34:50
Speaker 1: create spending. But then the third one is inventory rebuilding,
34:54
Speaker 1: and we started to see that begin as well, but
34:57
Speaker 1: I think that still has quite a ways to go.
34:59
Speaker 1: So even though we're seeing the savings rundown, so that
35:03
Speaker 1: support for growth running down, I think we're really transitioning
35:07
Speaker 1: from this policy driven economy to a private sector driven
35:10
Speaker 1: economy this year UM, which should in all the ways
35:14
Speaker 1: I just described, keep growth very strong, albeit off the peaks.
35:20
Speaker 1: Really really interesting. You referenced monetary and fiscal as a
35:25
Speaker 1: one to punch kind of answers the question I was
35:30
Speaker 1: gonna ask, but I'm gonna ask in anyway. We saw
35:33
Speaker 1: a massive monetary stimulus h during and after the Great
35:38
Speaker 1: Financial Crisis, but inflation remained very, very subdued, as did
35:45
Speaker 1: g d P. So it really makes me wonder is
35:50
Speaker 1: monetary policy alone going to be inflationary or does it
35:55
Speaker 1: require the sort of fiscal stimulus that we saw in
36:00
Speaker 1: the Cares Act to drive UM inflation levels higher. I
36:07
Speaker 1: think what we're learning from two thousand eight and the
36:10
Speaker 1: years following and then today is that with rates nearer
36:15
Speaker 1: at the lower bound and quantitative easing effective, but it affects,
36:21
Speaker 1: it flows through in different ways. Right. It's gonna affect
36:23
Speaker 1: liquidity conditions, It's going to affect financial markets. The effect
36:28
Speaker 1: on the real economy is second, is indirect secondary. So
36:32
Speaker 1: I think we are learning that if you really want
36:35
Speaker 1: to drive a sustained reflation and higher inflation, you have
36:40
Speaker 1: to have the fiscal with the monetary and in after
36:43
Speaker 1: two thousand eight two nine UM, we initially had some
36:46
Speaker 1: fiscal stimulus, but it wasn't enough, and then it quickly
36:49
Speaker 1: flipped into a fiscal drag when we had all the
36:52
Speaker 1: budget fights, and so that that slowed down and undermined
36:55
Speaker 1: the recovery. MM so let me ask the flip side
36:59
Speaker 1: of the question about the demand shock. Let's talk about
37:02
Speaker 1: the supply issues. In some areas, it seems like there's
37:06
Speaker 1: a lot of shortages, whether it's semiconductors pushing into automobiles,
37:10
Speaker 1: or we look at the amount of housing inventory ratio
37:13
Speaker 1: to sales, is that record lows. It doesn't seem that
37:17
Speaker 1: there's any supply there. And then add you you mentioned
37:21
Speaker 1: the gap between demand and the logistics, whether it chips
37:27
Speaker 1: or shipping containers leading there's not enough of those and
37:30
Speaker 1: we've had all these different spot shortages. How significant are
37:35
Speaker 1: all of these supply issues relative to that demand shock?
37:39
Speaker 1: The supply issues are massive, and I don't mean to
37:43
Speaker 1: underestimate the importance they're having on inflation, but I think
37:48
Speaker 1: one way you can see that the demand is the
37:51
Speaker 1: bigger deal than the supply is what's going on with
37:55
Speaker 1: pricing and profit margins for US companies. Now this may
37:59
Speaker 1: change going forward, but what we've seen to date is
38:03
Speaker 1: that companies in the United States are the vast majority
38:07
Speaker 1: of companies are able to pass on the higher input
38:09
Speaker 1: costs true end prices to customers, and customers are still
38:14
Speaker 1: spending UM. To me, that tells me that the strength
38:18
Speaker 1: and demand is greater than the supply driven supply pressures.
38:22
Speaker 1: If we were to see UM demand getting eroded UM,
38:27
Speaker 1: that would tell me that the underlying support for the
38:29
Speaker 1: economy that I've been describing that maybe I'm not measuring correctly,
38:33
Speaker 1: that the supply issues are becoming the bigger deal. But
38:36
Speaker 1: so far we haven't seen that happen. And then we're
38:39
Speaker 1: spending a lot of time trying to understand how long
38:41
Speaker 1: did the supply pressures laugh Obviously it's a little bit
38:44
Speaker 1: different for different goods, etcetera. UM. I think I think
38:48
Speaker 1: the hardest one, frankly, is going to be in the
38:51
Speaker 1: US with labor um how do you get workers to
38:55
Speaker 1: come back. I think we're going to have to have
38:58
Speaker 1: higher wages, And then the question and those companies continue
39:01
Speaker 1: to raise wages without it passing through into their profit
39:04
Speaker 1: margins um And And the other one that I think
39:07
Speaker 1: is really interesting about the US labor market today is
39:10
Speaker 1: the retirees. And after the last non farm payroll report,
39:13
Speaker 1: of course everyone was talking about it. But in the
39:16
Speaker 1: past when we have layoffs and older workers got laid off,
39:20
Speaker 1: they came right back to work like everyone else did.
39:23
Speaker 1: This time, what's different is they're wealthier. They actually made
39:28
Speaker 1: money during this recession, and so compared to past crises,
39:32
Speaker 1: they have the financial ability to retire early and they're
39:35
Speaker 1: doing it. So maybe a few of them come back
39:38
Speaker 1: over the coming years. But I think we've seen a
39:40
Speaker 1: structural shift in our labor supply um and that's going
39:44
Speaker 1: to keep a pressure on wages, which could keep inflation
39:46
Speaker 1: around longer. Then I think some people are forecasting right
39:50
Speaker 1: now certainly than what's discounted in the market. Really really
39:53
Speaker 1: interesting raises raises. The question, you know, people always talk about,
39:58
Speaker 1: is the FED behind the or or not? I think
40:01
Speaker 1: the more interesting question is, given all these other factors,
40:05
Speaker 1: the fiscal stimulus, the labor market. Really, how much can
40:10
Speaker 1: the FED slow inflation given all these other non monetary
40:16
Speaker 1: factors short of causing a recession? I mean, is this
40:19
Speaker 1: really the sort of thing that the FED is in
40:23
Speaker 1: a position to do something about? I think the Fed
40:26
Speaker 1: is is the only game in town if we're going
40:28
Speaker 1: to try to lower inflation. I mean, President Biden the
40:31
Speaker 1: administration are trying to do what they can to bring
40:34
Speaker 1: down inflation because clearly it's hurting him in the polls.
40:38
Speaker 1: But governments aren't really good at tightening fiscal and and
40:43
Speaker 1: governments don't really like to hurt demand, so he'll do
40:47
Speaker 1: things at the margin. But really it's going to come
40:49
Speaker 1: down to the FED if we want to get inflation
40:51
Speaker 1: under control, and then what is the FED trying to
40:53
Speaker 1: do well? They want to make sure over a cycle
40:57
Speaker 1: inflation is around two. They want to have a labor market.
41:01
Speaker 1: They don't want to create a recession. They want to
41:03
Speaker 1: engineer a soft landing. So how much tightening is the
41:06
Speaker 1: right amount? And I don't envy them right now because
41:09
Speaker 1: you still have a lot of question marks tied to
41:11
Speaker 1: the pandemic about supplies, about how high wages go, um,
41:16
Speaker 1: so I think the Fed is likely to do more
41:19
Speaker 1: than what's priced into the curve right now. So we've
41:21
Speaker 1: got about three hikes priced in for this year. That said,
41:25
Speaker 1: I think there's still a good risk the FED will
41:27
Speaker 1: lag economic conditions. So the result of all this will
41:30
Speaker 1: be higher interest rates, but inflation that ends up higher
41:35
Speaker 1: than what the market's discounting. And this is the one
41:38
Speaker 1: very that just it blows my mind away. People are
41:42
Speaker 1: really pricing in that the world looks very much like
41:45
Speaker 1: pre pandemic very quickly within the next year to eighteen months,
41:50
Speaker 1: inflation back close to two, growth back down towards potential levels.
41:55
Speaker 1: And that could happen, but you would have to see
41:59
Speaker 1: the FED tighten a lot more than it's priced in
42:01
Speaker 1: to get there, I believe. And so is the Fed
42:05
Speaker 1: going to tighten so much um or are they going
42:08
Speaker 1: to tighten some and we're going to have inflation that's higher.
42:11
Speaker 1: What we're doing with our portfolios positioning for both. We're
42:15
Speaker 1: positioning for inflation that's higher than priced in, and we're
42:18
Speaker 1: positioning for the FED to tighten more than is priced
42:21
Speaker 1: in because we don't know exactly which what the Fed's
42:24
Speaker 1: gonna do, how much quantitative tightening, how many rate heights,
42:27
Speaker 1: what speed um. But we know something's coming, and so
42:31
Speaker 1: we're going to position for both outcomes doing The amount
42:34
Speaker 1: of each we get will depend on on what Chairman
42:36
Speaker 1: Powell and the FMC decides. So so you have that
42:39
Speaker 1: three body problem, that convexity that you can't tell what
42:44
Speaker 1: each subsequent change, how it impacts the other factors. Hey,
42:49
Speaker 1: if things begin to normalize, if O Macron collapses, if
42:53
Speaker 1: the economy reopens more, if people are out doing what
42:56
Speaker 1: they want to do, maybe we see more supply of housing,
43:02
Speaker 1: people going back into the labor market. Maybe things do
43:05
Speaker 1: normalize more quickly. But so many things have to happen
43:09
Speaker 1: in such an order, and the subsequent the way the
43:12
Speaker 1: billiard balls move around the table are all affected by
43:16
Speaker 1: all the other billiard balls moving around the table. It
43:19
Speaker 1: becomes really challenging to to map out with any high
43:22
Speaker 1: degree of confidence what what's going to happen next. Is
43:26
Speaker 1: that why you approach investing with Here are multiple scenarios,
43:32
Speaker 1: and we're gonna position ourselves for all of them. Since
43:35
Speaker 1: we don't know with any degree of confidence which one
43:38
Speaker 1: is going to occur. I wouldn't say we'd position for
43:41
Speaker 1: all of them. In this case, we're positioning for two
43:45
Speaker 1: um because we think both aren't likely. You know, but
43:49
Speaker 1: I hear what you're saying. If if emicron fades quickly
43:53
Speaker 1: fingers crossed, and the world starts to normalize, you will
43:57
Speaker 1: see less demand for goods more for sir. This is
44:00
Speaker 1: relatively speaking, agreed, and that could bring down some goods prices.
44:04
Speaker 1: UM supply chains opening up, I think that takes a while,
44:08
Speaker 1: right Are you going to suddenly have more truckers on
44:11
Speaker 1: the road. Are you suddenly going to be able to
44:13
Speaker 1: get the stuff out of the ports in Los Angeles?
44:15
Speaker 1: That's going to take time. I still think you'll have
44:18
Speaker 1: upward pressure on wages. The housing one is interesting. You know,
44:22
Speaker 1: if if oh macron fades and you can have more
44:25
Speaker 1: construction workers out there, more supply of limber, of timber, etcetera.
44:29
Speaker 1: But but what we're seeing right now is that, um,
44:34
Speaker 1: you know, consumer prices don't capture housing very well, and
44:38
Speaker 1: we think that rents and housing prices are going to
44:41
Speaker 1: take a long time for the supply to catch up
44:44
Speaker 1: with demand. So we see both wages and housing in
44:47
Speaker 1: particular as pretty dicky. Upward pressures on demand on inflation.
44:52
Speaker 1: Excuse me, and I think that's gonna last this year,
44:55
Speaker 1: even if the world starts getting back to normal from
44:57
Speaker 1: a pandemic perspective. Yeah, we um, we underbuilt single family
45:03
Speaker 1: homes for like a decade following the housing boom and
45:06
Speaker 1: bust in the mid two thousands, and now now we're
45:09
Speaker 1: paying the price given all these things that you're describing,
45:14
Speaker 1: the demand shock, the supply issues, the supply chain and
45:18
Speaker 1: logistics problems, the FED not fully being priced in. Shouldn't
45:23
Speaker 1: that have led us to see a huge move higher
45:26
Speaker 1: in gold last year? Gold can't get out of its
45:29
Speaker 1: own way? How do you explain that? So I've been
45:32
Speaker 1: following gold since I got into investments and um, and
45:38
Speaker 1: last year, you know, we did see a big rise
45:41
Speaker 1: in golden and early twenty one, and then it gave
45:45
Speaker 1: quite a bit back later in twenty one. I think
45:47
Speaker 1: I'd probably boiled down gold lack of stronger performance given
45:52
Speaker 1: inflation to two things. One would be inflation expectations, Right,
45:57
Speaker 1: you want gold as a hedge again inflation, But if
46:01
Speaker 1: you think inflation is I hate using this word anymore,
46:05
Speaker 1: transitory and that we're going to go back to what's
46:08
Speaker 1: discounted in a year or two years, then there might
46:11
Speaker 1: have that might have affected how much demand there was
46:14
Speaker 1: from that constituent for gold. I think the other big
46:17
Speaker 1: deal is that while there wasn't obviously there is a
46:21
Speaker 1: lot of ongoing inflation, there's also a lot of ongoing
46:24
Speaker 1: nominal growth. And so if I'm thinking, Okay, I want
46:28
Speaker 1: some inflation hedges in my portfolio, I could have gold,
46:32
Speaker 1: or I could have cyclical commodities that will benefit not
46:35
Speaker 1: just from inflation but also from greater demand. So what
46:38
Speaker 1: we saw last year were cyclical commodities like oil, like
46:42
Speaker 1: industrial metals, copper, etcetera. They did extremely well. They outperformed
46:47
Speaker 1: gold by a lot. And then cyclical assets broadly, including
46:51
Speaker 1: equities that could pass on the inflation to end end users,
46:55
Speaker 1: they also outperformed. But I don't think this means gold
46:59
Speaker 1: has lost its luster. I still believe gold is a
47:02
Speaker 1: good diversifying position for a portfolio. I think it tends
47:06
Speaker 1: to perform best at the tails, if you will, if
47:09
Speaker 1: we have a deflationary recession, which is going to lead
47:13
Speaker 1: to expectations for lower interest rates, than you want gold
47:17
Speaker 1: to protect your portfolio. And then it's at the other
47:20
Speaker 1: end of the extreme the other tail, when you have
47:23
Speaker 1: overheating an economy and you're starting to see demand destruction,
47:27
Speaker 1: at the same time you still see high inflation or
47:30
Speaker 1: un anchored inflation. I think those are going to be
47:33
Speaker 1: your sweet spots for golden in the middle. It doesn't
47:35
Speaker 1: mean that gold won't do well. It's just that the
47:38
Speaker 1: outcomes are more varied. Let's talk a little bit about
47:42
Speaker 1: US and overseas investing. Here's another quote of yours. I
47:45
Speaker 1: liked the US has been priced to outperform for the
47:49
Speaker 1: next decade. Uh, what are the risks in that sort
47:53
Speaker 1: of pricing? Well, we both know that people tend to
47:57
Speaker 1: have a recency bias. So what has been happening. I
48:01
Speaker 1: don't know what it is about human psychology, but we
48:03
Speaker 1: just kind of assume it will continue. And look, the
48:07
Speaker 1: US has outperformed for well over a decade now. It's
48:10
Speaker 1: been one of the strongest growing economies in the world,
48:13
Speaker 1: rising profit margins. The question is if we're priced to
48:18
Speaker 1: do that again for the next decade. To your point,
48:21
Speaker 1: what are the risks? Well, one thing we've seen is
48:23
Speaker 1: that when you have a market outperformed for such a
48:26
Speaker 1: long period, some of the tail winds often become headwinds.
48:31
Speaker 1: In the case of the US today, think about what's
48:34
Speaker 1: driven this performance. It's been beautifully rising profit margins, and
48:39
Speaker 1: those profit margins has been have been helped by relatively
48:42
Speaker 1: subdued wages, so more capital going to companies and workers.
48:46
Speaker 1: It's been helped by falling tax rates. It's been helped
48:50
Speaker 1: by falling regulations, less regulations. And when we think about
48:54
Speaker 1: where we are today, UM, foreign exposure to US stocks
48:59
Speaker 1: and bonds US asked, is that the highest it's been
49:01
Speaker 1: since the mid nineteen eighties. So everyone's got the trade
49:04
Speaker 1: on all these beautiful tail winds. Everyone's expecting it to continue.
49:09
Speaker 1: When you look at what's happening today in the world,
49:11
Speaker 1: you know the US is talking about greater regulation, and
49:14
Speaker 1: globally we're talking about greater regulation for a lot of
49:17
Speaker 1: these tech giants. UM, we are seeing rising wages and
49:21
Speaker 1: more power, more capital going to the workers rather than
49:23
Speaker 1: the company bottom line. We are talking about we'll see
49:27
Speaker 1: what passes higher taxes for corporations, and so while we're
49:31
Speaker 1: not sure yet exactly what will play out, we know
49:33
Speaker 1: the risks are growing that these tail winds at a
49:36
Speaker 1: minimum are reduced and at a maximum become major headwinds
49:39
Speaker 1: for you list stocks, So that would be a major
49:43
Speaker 1: point i'd make. Um. The other thing is, you know,
49:45
Speaker 1: we we love history at Bridgewater, and we've gone back
49:49
Speaker 1: and looked at every equity market for the last century
49:51
Speaker 1: or so and said, how often do you see any
49:55
Speaker 1: market in the world as kind of one of the
49:57
Speaker 1: top for multiple decades the row and there are very, very,
50:03
Speaker 1: very few precedents. Um US did great in the tents,
50:07
Speaker 1: but it lagged in the two thousands. US did great
50:09
Speaker 1: in the nineties, but it did really poorly in the
50:11
Speaker 1: eighties versus Piers. So I'm not saying it can't be
50:14
Speaker 1: different this time. Maybe the US will crush it again
50:17
Speaker 1: in the next decade, but given the historical patterns, given
50:20
Speaker 1: the growing risks, I think it makes a lot of
50:23
Speaker 1: sense not to be overly concentrated in the US. Taking
50:26
Speaker 1: a medium term view, not the next couple of months,
50:28
Speaker 1: but the next three to five years, I would make
50:30
Speaker 1: sure I had diversification in my portfolio. Makes makes a
50:33
Speaker 1: lot of sense. Let's talk a little bit about, uh,
50:36
Speaker 1: some of those risks. Your boss Ray Dalio mentioned that
50:40
Speaker 1: about five percent of the U S stock market was
50:43
Speaker 1: frothy and then I hear you subsequently say five, it's
50:47
Speaker 1: closer to ten percent of the stock market is frothy. Uh,
50:51
Speaker 1: and some folks would even say ten percent is conservative.
50:54
Speaker 1: Tell us what you mean by frothy and how that
50:58
Speaker 1: affects the rest of the market it Does it remain
51:02
Speaker 1: its own little corner of frothy speculation or does that
51:06
Speaker 1: tend to infect sentiment and impact everything else? Sure? Sure,
51:11
Speaker 1: good questions. So, Um, we we know that bubbles can
51:17
Speaker 1: create a bigger sell offs, right, not just the things
51:21
Speaker 1: that had become bubbles, but to your point, spillover effects.
51:24
Speaker 1: And so years ago we started developing what we call
51:27
Speaker 1: bubble indicators to try to understand the ingredients that can
51:31
Speaker 1: create a bubble and the risk of course that that
51:34
Speaker 1: bubble pops. Um. I can't really get into all the
51:36
Speaker 1: details of what's in it, but when we track the
51:40
Speaker 1: companies today that meet those thresholds, I'd say it's between
51:44
Speaker 1: ten and fient now of the U S stock market
51:47
Speaker 1: that that hits those levels. And most of those companies
51:50
Speaker 1: today are emerging technology firms that have not yet posted
51:55
Speaker 1: any profits. Um liquidity has been a big, big part
51:59
Speaker 1: of what's made them in a bubble, And we talked
52:02
Speaker 1: about this earlier. Households that got stimulus put those savings
52:05
Speaker 1: into the market. At the same time trading costs came down. Um.
52:10
Speaker 1: But but what I'd say looking net forward is that
52:12
Speaker 1: bubbles often so the seeds of their own demise. So
52:16
Speaker 1: right now, for example, I think this is a good
52:19
Speaker 1: one to be watching into this year because valuations on
52:23
Speaker 1: these companies are off their highs, but they're still quite high.
52:25
Speaker 1: It makes it more attractive for them to I P
52:28
Speaker 1: O or two issue and right now, and we look
52:31
Speaker 1: at where lock ups are ending and where we could
52:34
Speaker 1: see supply coming in the market this year, it's about
52:36
Speaker 1: four dred billion of equity coming to the market. Over
52:40
Speaker 1: half of that is from the same set of frothy companies.
52:44
Speaker 1: That's not a big number for the market as a whole,
52:46
Speaker 1: but for this segment of the market, especially if it's
52:49
Speaker 1: happening at the same time the FETE is pulling back liquidity,
52:53
Speaker 1: this could be a big deal for those companies. And
52:55
Speaker 1: then to your point, Berry, potentially looking for ripple effects
52:59
Speaker 1: to to the auto market or at least those sectors
53:02
Speaker 1: really really intriguing. Uh. We've been talking a lot about
53:06
Speaker 1: FED liquidity. How much of FED liquidity is driving this frothiness. Well,
53:11
Speaker 1: I think again it's the one to punch of fiscal
53:14
Speaker 1: and FED that have been driving this UM. But what's
53:18
Speaker 1: interesting is that the United States UM equity market sensitivity,
53:23
Speaker 1: if you will, to liquidity conditions the way we measure it,
53:27
Speaker 1: has increased pretty substantially over the last several years. We
53:30
Speaker 1: would estimate today that about of all US companies are
53:36
Speaker 1: highly sensitive to liquidity conditions, and that's up from a
53:39
Speaker 1: little over twenty a few years ago. And what that
53:42
Speaker 1: means is, you know, often we're talking about longer duration
53:46
Speaker 1: equities where the cash flows are going out further in
53:48
Speaker 1: the future. Often that's tech and growth companies. As the
53:52
Speaker 1: FED starts pulling back interest rates and then quantitative tightening, ultimately, um,
53:58
Speaker 1: these companies are going to be, we think, more vulnerable
54:01
Speaker 1: when that happens. Now, that doesn't mean you can't get
54:04
Speaker 1: a rotation in the equity market. People can reduce their exposure.
54:07
Speaker 1: We're seeing that already in the beginning of the year.
54:09
Speaker 1: People are reducing their exposure to these longer duration equities,
54:12
Speaker 1: moving their money into shorter duration equities that are more
54:15
Speaker 1: sensitive to cyclical conditions that can handle the rising inflation.
54:20
Speaker 1: So that doesn't mean the US market overall goes down.
54:23
Speaker 1: It could just be the intra market rotation we see.
54:26
Speaker 1: But I think it also also sets us up for
54:28
Speaker 1: markets overseas that are less sensitive to liquidity, more sensitive
54:33
Speaker 1: to global growth, which one would assume if and when
54:36
Speaker 1: the pandemic starts to fade UM, that that we should
54:41
Speaker 1: see pretty good global growth, especially if China continues to stimulate,
54:45
Speaker 1: and that could lead to some of these other markets
54:48
Speaker 1: UM potentially significantly outperforming the US. So let's stay with
54:53
Speaker 1: that topic of both sector rotation and global rotation. Let's
54:58
Speaker 1: start with sectors. It sounds like you're less interested in
55:04
Speaker 1: the big cap tech that's been kicking butt for so
55:07
Speaker 1: many years, and looking at areas like consumer discretionary energy,
55:13
Speaker 1: what what else do you think UM durable goods works
55:18
Speaker 1: when you have that sort of cyclical rotation take place.
55:22
Speaker 1: I mean I would I would agree with your list.
55:25
Speaker 1: I would add one more to it that I would
55:27
Speaker 1: be UM. I would be probably constructive on UM is
55:33
Speaker 1: going to be finance and banking. And one thing I
55:36
Speaker 1: just highlight there is what the FET is saying right now,
55:40
Speaker 1: which again I think we're in this really interesting place
55:43
Speaker 1: where the fet is experimenting suggest they're not putting enough
55:47
Speaker 1: thought into it, because clearly they do. But they're saying
55:50
Speaker 1: now that instead of doing rate hikes for a year
55:53
Speaker 1: or so and then maybe considering starting to take the
55:57
Speaker 1: liquidity out of the market by doing quantity tative tightening,
56:00
Speaker 1: this time around there saying, well, maybe we're gonna start
56:03
Speaker 1: quantitative tightening after just one rate hike. Um, why would
56:07
Speaker 1: they do that, right? Why would they do this quantitative
56:09
Speaker 1: tightening so early in the cycle. And when you read
56:12
Speaker 1: the Fed minutes, there are two things getting highlighted by
56:14
Speaker 1: some of the f O m C voters. One is
56:17
Speaker 1: thanks and the other is the yield curve and the
56:20
Speaker 1: tour related. You know, I think that having a flatter
56:23
Speaker 1: yield curve, which is more likely if you just use
56:26
Speaker 1: the short term interest rate tool, UM, it sends a signal.
56:30
Speaker 1: And you already see lots of financial media saying, oh
56:33
Speaker 1: my gosh, the yield curves flattening, we're pricing in a recession.
56:37
Speaker 1: The Fed doesn't want to send that signal, so if
56:39
Speaker 1: they can use quantitative tightening to try to help keep
56:42
Speaker 1: the yield curve steeper. That's in their interests. The other
56:45
Speaker 1: thing is that in the United States, are banking system
56:48
Speaker 1: is so fundamental for the health of the overall economy
56:51
Speaker 1: that they don't want to create any undue stress for
56:53
Speaker 1: the banking system, and so having a steeper curve helps
56:57
Speaker 1: banks profitability, which in turn helps them feel comfortable making loans.
57:01
Speaker 1: More loans means the economy can pass over from the
57:04
Speaker 1: public to the private sector successfully and boom, they engineer
57:08
Speaker 1: beautiful soft landing. So that makes perfect sense. Talk about sectors.
57:14
Speaker 1: The FED may use more quantitative tightenings to help keep
57:17
Speaker 1: the curve as steep as they can. I'm not saying
57:19
Speaker 1: it will be steep, but steeper than it would be
57:21
Speaker 1: otherwise had the margin. I think that's probably good news
57:23
Speaker 1: for the bank. So I would just add that once
57:25
Speaker 1: the list you gave on the rotation, you know that
57:28
Speaker 1: makes a whole lot of sense. So so let's go
57:30
Speaker 1: global a little bit. Given how you describe China's policy
57:36
Speaker 1: goals and and their stimulus shifting, we've we've seen them
57:40
Speaker 1: very much move away from real estate as a key driver.
57:45
Speaker 1: How investable is China today and what do you think
57:49
Speaker 1: their policies are going to be in terms of how
57:52
Speaker 1: they want to stimulate their economy. Um. So China is
57:58
Speaker 1: trying to transition from having these boom bus cycles where
58:04
Speaker 1: policymakers do a lot of stimulus and then growth surges again,
58:08
Speaker 1: to having more stability over the medium term. Um, more
58:13
Speaker 1: elongated cycles. But that means less stimulus and more fine
58:17
Speaker 1: tuning stimulus along the way. When I think about where
58:21
Speaker 1: growth is going there this year. Last year, one of
58:24
Speaker 1: the big support for the economy was exports. Oh, Chinese
58:29
Speaker 1: manufacturers were supplying all that demand that Americans and others had.
58:35
Speaker 1: And if the world normalizes this year and we can
58:38
Speaker 1: start using services more, exports, I would guess will still
58:42
Speaker 1: stay strong because the economies are still very strong, but
58:45
Speaker 1: it might moderate. So growth and exports not the same
58:49
Speaker 1: engine of growth for China as they were last year.
58:52
Speaker 1: So what fills in the gap? You know, the consumer
58:55
Speaker 1: right now is soft, partly because of the property de
59:00
Speaker 1: levering that the government wants to engineer to make sure
59:03
Speaker 1: there's no bubble there, partly because of COVID lockdowns, and
59:07
Speaker 1: it doesn't seem like the lockdowns are going away anytime soon. Um.
59:11
Speaker 1: The government doesn't want to do a huge amount of stimulus,
59:15
Speaker 1: but it needs to do something to get growth back
59:18
Speaker 1: up towards the target around five. So I would expect
59:22
Speaker 1: that you are going to see policymakers doing more stimulus.
59:25
Speaker 1: The question is how much when and is it going
59:29
Speaker 1: to be enough to get back to their target or
59:32
Speaker 1: is it is are we going to disappoint consensus. That's
59:34
Speaker 1: one of the big questions I'm trying to dig into
59:36
Speaker 1: right now with my team. Where does the growth come from?
59:40
Speaker 1: I mean, I'll give you just a lunar new year
59:42
Speaker 1: one to keep an eye on. UM. China has been
59:45
Speaker 1: the global leader on digital currency on CBBC's when we
59:49
Speaker 1: go into the crypto space, and they just put out
59:53
Speaker 1: a report over the weekend the briefing talking about the
59:56
Speaker 1: millions of crypto wallets that now exist in China. Uh,
1:00:00
Speaker 1: we've seen some little pilot tests of this. But here
1:00:03
Speaker 1: here's a fun one to get your head around. Could
1:00:06
Speaker 1: China do targeted fiscal stimulus soon through crypto UM they've
1:00:12
Speaker 1: done it on a small scale, but now that they're
1:00:14
Speaker 1: getting this out throughout the population, if they want to
1:00:18
Speaker 1: help the consumer and they want to do it in
1:00:20
Speaker 1: a very targeted, quick way, UM, this could be the
1:00:24
Speaker 1: true launch of the Chinese digital currency. I don't know
1:00:27
Speaker 1: if it will happen, but it's it's kind of a
1:00:29
Speaker 1: fun thing I think to keep an eye out for.
1:00:31
Speaker 1: It wouldn't surprise me, especially the way you could put
1:00:34
Speaker 1: very specific conditions on those sort of crypto wallets. You
1:00:39
Speaker 1: can get money out into the public and say hey,
1:00:42
Speaker 1: if you don't spend this within ninety days, it goes away.
1:00:45
Speaker 1: So that's your window to uh to to go out
1:00:48
Speaker 1: and buy this or use this, which is really intriguing.
1:00:52
Speaker 1: Before we get to crypto though, let's stay with international.
1:00:56
Speaker 1: Tell us what's going on in Europe. They they don't
1:00:59
Speaker 1: seem to be able to get out of their own way,
1:01:01
Speaker 1: or at least for the past decade have post Greek crisis,
1:01:05
Speaker 1: post all of that in nearly they just don't seem
1:01:10
Speaker 1: to have found their groove. Well. I do think this year,
1:01:16
Speaker 1: Barry could be a make or break for Europe. I
1:01:19
Speaker 1: think this is a hugely important year for Europe. And
1:01:22
Speaker 1: I say that because last year in the pandemic, they
1:01:26
Speaker 1: got the EU Recovery Funds launched, so the first real
1:01:30
Speaker 1: attempt at European wide fiscal transfers that money is still
1:01:34
Speaker 1: flowing through, particularly the countries like Italy and Spain. It's
1:01:38
Speaker 1: going to be a major support to growth UM. And
1:01:40
Speaker 1: they agreed during the pandemic that the fiscal rules they
1:01:44
Speaker 1: created when the Euro was launched have become completely irrelevant.
1:01:48
Speaker 1: You know, to say that a country should have a
1:01:50
Speaker 1: three percent budget deficit and debt GDP ratio, it's kind
1:01:54
Speaker 1: of silly today. No one has debt levels that low
1:01:57
Speaker 1: anymore anywhere UM practically, And so they're reviewing those rules
1:02:01
Speaker 1: right now as we speak, and in the coming months
1:02:04
Speaker 1: they're going to come out with revisions. The question is
1:02:07
Speaker 1: how much fiscal flexibility try to say that fast fiscal
1:02:11
Speaker 1: flexibility do they give the countries. One thing that's being
1:02:14
Speaker 1: discussed is saying, okay, anything you do for green investment
1:02:19
Speaker 1: won't count. That's interesting, right, So how much how much
1:02:23
Speaker 1: more growth could you get if they don't force austerity
1:02:26
Speaker 1: every time you come out of a crisis. So that
1:02:28
Speaker 1: would be one big deal to watch. The other one
1:02:31
Speaker 1: is Germany. So we have our new government, Angela Merkel
1:02:34
Speaker 1: has gone off into the sunset and we have all
1:02:37
Speaker 1: off um, all off coming in Choltz. And it seems
1:02:41
Speaker 1: that that coalition government is relatively more open to fiscal
1:02:45
Speaker 1: flexibility in Germany. That's a big deal. We don't know
1:02:49
Speaker 1: how much yet, but if Germany is willing to spend
1:02:52
Speaker 1: a little more, if Europe is willing to spend a
1:02:54
Speaker 1: little more, none of that is priced in at all
1:02:58
Speaker 1: two markets if you look at what Europe is expected
1:03:00
Speaker 1: to do for the next decade. So this could be
1:03:03
Speaker 1: the year. The last piece of the puzzle I'd mentioned
1:03:05
Speaker 1: quickly is Italy. So one of the things that has
1:03:09
Speaker 1: been meaningful during the pandemic is Mario drag becoming Prime
1:03:12
Speaker 1: Minister of Italy, which as one of the highest debt
1:03:15
Speaker 1: to GDP ratios in Europe after Greece. And and they
1:03:19
Speaker 1: just couldn't, to your point, get out of their own way. UM.
1:03:22
Speaker 1: In the coming two to three weeks UM, so it'll
1:03:25
Speaker 1: be early in early February it will become clear if
1:03:29
Speaker 1: Mario Drag will stay prime Minister or move into the
1:03:32
Speaker 1: presidency of Italy. I spent a year of graduate school
1:03:35
Speaker 1: and then sometime as a journalist in Italy when Berlasconi
1:03:38
Speaker 1: first ran for office. UM, it does matter what Drag does.
1:03:43
Speaker 1: If he stays as prime minister, I would be much
1:03:46
Speaker 1: more confident that Italy will continue to reform and get
1:03:49
Speaker 1: those recovery funds which will support growth and support sentiment
1:03:53
Speaker 1: towards e m U. If Drag becomes president and that
1:03:57
Speaker 1: leads to snap elections in Italy and more political well
1:04:00
Speaker 1: dysfunction and the reforms fall off and they no longer
1:04:03
Speaker 1: get the money, I worry that people will say up
1:04:06
Speaker 1: here we go again, and and then I think the
1:04:09
Speaker 1: risks are higher that we're back where we were pre
1:04:12
Speaker 1: pandemic for Europe and we're in that same boat. But
1:04:15
Speaker 1: I think the next few months actually are going to
1:04:18
Speaker 1: tell us a lot about the next decade for Europe.
1:04:22
Speaker 1: So since since we brought up crypto, let's let's talk
1:04:24
Speaker 1: a little bit about that. What are your thoughts of
1:04:27
Speaker 1: this as an investable asset class? Is it millennial gold?
1:04:33
Speaker 1: Is it digital gold? Is that part of the reason
1:04:36
Speaker 1: perhaps why gold has been under performing. Well, there's no
1:04:41
Speaker 1: great data yet to be able to prove that crypto
1:04:47
Speaker 1: is taking market share away from gold. The best we've
1:04:51
Speaker 1: been able to do is find filings by certain financial
1:04:55
Speaker 1: firms showing buying of crypto selling of gold within a
1:04:59
Speaker 1: certain window that gives us at least some anecdotal evidence
1:05:03
Speaker 1: that maybe that had happened somewhat last year. So it's
1:05:06
Speaker 1: possible that that you are seeing people saying I could
1:05:10
Speaker 1: own gold or crypto, which one do I want? And
1:05:12
Speaker 1: they're leaning a little bit more towards crypto, So I
1:05:15
Speaker 1: think it's possible we're seeing a little of that shift
1:05:17
Speaker 1: going on. When I think about crypto, I'm thinking about
1:05:21
Speaker 1: primarily from my client base, so very large institutional investors.
1:05:26
Speaker 1: Right now, aside from retail, the institutional space, it's mainly
1:05:29
Speaker 1: hedge funds, family offices. We aren't seeing many large institutions
1:05:34
Speaker 1: in it yet, I think primarily because the liquidity hasn't
1:05:38
Speaker 1: been there to put on a position in large size,
1:05:41
Speaker 1: and the regulatory ecosystem is largely non existent, at least
1:05:45
Speaker 1: in the State. I think both will change um as
1:05:49
Speaker 1: we get more regulations, and it's a matter of when
1:05:51
Speaker 1: not if. I think that will make people more comfortable
1:05:55
Speaker 1: to put a toe in the water, and as we
1:05:57
Speaker 1: get more volume that will create more liquidity. We should
1:06:00
Speaker 1: over time reduce volatility, so you'll get a positive um,
1:06:04
Speaker 1: a positive reinforcement kind of cycle going on there. The
1:06:07
Speaker 1: question to me again is when that happens. But for
1:06:10
Speaker 1: the moment you know the liquidity is improving, you can
1:06:14
Speaker 1: put a position on as a fairly large investor in
1:06:16
Speaker 1: a stress period, it's not clear liquidity is there if
1:06:19
Speaker 1: you want to get out. Um. I think that's a
1:06:21
Speaker 1: limiting factor. But I do think the space continues to
1:06:24
Speaker 1: evolve so quickly, and once we get the regulatory ecosystem
1:06:28
Speaker 1: in place, I think it it could be a pretty
1:06:30
Speaker 1: big deal for larger investors. Really really kind of intriguing.
1:06:36
Speaker 1: Talk more broadly about crypto as an investable asset. Is
1:06:41
Speaker 1: this more like a commodity or a currency or does
1:06:44
Speaker 1: this eventually evolve into an equity like asset class. Well,
1:06:50
Speaker 1: that's very that's part of the problem, right If you
1:06:53
Speaker 1: know in foreign exchange the space I know best. They're
1:06:57
Speaker 1: all currencies, different countries, different fundamentals, but they're all currencies.
1:07:01
Speaker 1: Crypto is so different from currencies, and that you have
1:07:04
Speaker 1: some crypto that that behave more like a currency, of
1:07:07
Speaker 1: some that behave like a commodity, of some that behave
1:07:10
Speaker 1: like securities. And as a result, the regulators in the
1:07:14
Speaker 1: US are debating a little bit who should be in
1:07:16
Speaker 1: charge and and so it's hard to get one body
1:07:20
Speaker 1: saying Okay, we're going to drive this forward. Um. And
1:07:23
Speaker 1: then they're pushing Congress to write some laws to help
1:07:26
Speaker 1: the regulators, and Congress is not making this their first priorities.
1:07:29
Speaker 1: So everything's a little stuck right there. Um. But I
1:07:33
Speaker 1: think it will continue to evolve. The crypto it's so
1:07:36
Speaker 1: interesting because they can use technology to serve different purposes.
1:07:40
Speaker 1: So I don't think you know when I when it
1:07:42
Speaker 1: first started, I thought, oh, it's just like new currencies.
1:07:44
Speaker 1: And so many of my old currency colleagues now work
1:07:47
Speaker 1: on cryptodesks and they're trading options on crypto and lending
1:07:50
Speaker 1: on crypto, just like we did with currencies back in
1:07:53
Speaker 1: the nineties. Um. But they they're very, very different from
1:07:56
Speaker 1: currency markets, and I think that's one of the challenges
1:07:59
Speaker 1: with developing the regulatory ecosystem. Huh. Really intriguing. We haven't
1:08:04
Speaker 1: really talked about politics at all, and given raise most
1:08:09
Speaker 1: recent book, I have to ask you, when you're doing
1:08:12
Speaker 1: your broad overview of the state of the economy, how
1:08:16
Speaker 1: do you contextualize things like partisan politics and tribalisms as
1:08:22
Speaker 1: a factor. Well, politics drives policy, and policy is going
1:08:28
Speaker 1: to influence the economy and markets. So I think you
1:08:31
Speaker 1: have to try to understand politics to the degree you
1:08:35
Speaker 1: can and again to the degree you can put probabilities
1:08:39
Speaker 1: around different policies becoming reality. So, for example, when President
1:08:44
Speaker 1: Biden has been pushing forward on different fiscal plans, we
1:08:47
Speaker 1: would try to spend time understanding, Okay, if this amount
1:08:50
Speaker 1: of money gets through government spending, what sectors would that
1:08:54
Speaker 1: feed through, What companies would that feed through, How would
1:08:57
Speaker 1: it flow through to households. Once the households get it,
1:09:00
Speaker 1: they save it, do they spend it? If they spend it,
1:09:02
Speaker 1: what do they spend it? So we created this whole
1:09:04
Speaker 1: process we called fiscal rivers to try to understand that
1:09:08
Speaker 1: so and and whether or not the policy gets through
1:09:12
Speaker 1: is going to depend a lot on the politics. Makes
1:09:14
Speaker 1: it a lot harder to forecast fiscal than monetary. Monetary
1:09:19
Speaker 1: is fairly rules based. Fiscal is political base. But we
1:09:22
Speaker 1: do follow it. We have an amazing team in house
1:09:25
Speaker 1: that does nothing but living and breathe politics all day long.
1:09:28
Speaker 1: God bless um. So it is a big part of
1:09:32
Speaker 1: what we do. But I agree with you, it's it's
1:09:34
Speaker 1: a lot more qualitative and and difficult to forecast with
1:09:39
Speaker 1: any confidence. So it's an input into what we do,
1:09:42
Speaker 1: but I certainly would never at Bridgewater anywhere else put
1:09:45
Speaker 1: a trade on just a political view. UM. So before
1:09:48
Speaker 1: I get to my favorite questions, I want to ask you, UM,
1:09:52
Speaker 1: a little bit of a curve ball question. Your vice
1:09:57
Speaker 1: chair of the Council of Economic Education, you're about to
1:10:02
Speaker 1: become chairperson of that council. Tell a little bit about
1:10:06
Speaker 1: what the Council for Economic Education is and what they do. Well.
1:10:10
Speaker 1: It gets back to the politics a little bit. You know,
1:10:13
Speaker 1: in the United States, UM, only half of the states
1:10:18
Speaker 1: require UM students in high school to take at least
1:10:23
Speaker 1: one course in economics. Only twenty one states require students
1:10:27
Speaker 1: to take a class in personal finance. And and so
1:10:30
Speaker 1: this is not a national government thing, it's a state
1:10:32
Speaker 1: government thing. But at the end of the day, if
1:10:36
Speaker 1: you have requirements, you get action. UM. If it's required,
1:10:40
Speaker 1: then you will get the courses. And and we have
1:10:43
Speaker 1: found clear evidence that the states that teach us, the
1:10:48
Speaker 1: students when they graduate are better prepared to think about
1:10:51
Speaker 1: college financing, to think about credit cards when they get
1:10:54
Speaker 1: to college, or or after high school when they get
1:10:56
Speaker 1: a job. And so, if it's in our countries economic
1:11:00
Speaker 1: and social interest to have a population that can make
1:11:04
Speaker 1: good personal finance and economic decisions. Um. And ultimately, gosh,
1:11:09
Speaker 1: wouldn't it be nice if all of our policymakers understood
1:11:12
Speaker 1: basic economics. Sometimes when I listened to the speeches on
1:11:16
Speaker 1: the hill, I have questions about a few of them. Um.
1:11:19
Speaker 1: And So that's what this group is doing. We're trying
1:11:21
Speaker 1: to advocate states to have requirements. We're trying to provide
1:11:26
Speaker 1: great programming for teachers so they can teach in the classroom,
1:11:30
Speaker 1: and we provide programming directly for the students in their families.
1:11:34
Speaker 1: The whole point is just to give people the basics
1:11:37
Speaker 1: so they can make good life decisions, which I think
1:11:39
Speaker 1: help them as people, but also feel fold through to
1:11:42
Speaker 1: the economy. And when you when you talk about content,
1:11:45
Speaker 1: you're really describing a financial curriculum for students. What what ages?
1:11:52
Speaker 1: What grades? Yeah, we're talking about kindergarten through high school?
1:11:57
Speaker 1: Yeah yeah, yeah, yeah, starting that, Yeah. What what does
1:12:00
Speaker 1: it mean to save? What does it mean to spend?
1:12:03
Speaker 1: How do you think about how much you should be
1:12:05
Speaker 1: able to spend? It makes the concepts easy to understand
1:12:09
Speaker 1: in the beginning, and then when you get to high school,
1:12:11
Speaker 1: obviously it gets it gets more complicated, but it's been
1:12:15
Speaker 1: it's been so rewarding to see some of the teachers. Um.
1:12:19
Speaker 1: We work with fifty thousand teachers and they in turn
1:12:22
Speaker 1: touch about five million students right now. UM, And just
1:12:27
Speaker 1: when you see the results and the difference it makes
1:12:30
Speaker 1: that these kids get it, they have confidence, Um, they
1:12:33
Speaker 1: know what they're doing. And again, you know, it seems
1:12:37
Speaker 1: like such a simple thing, but when you look at
1:12:39
Speaker 1: two thousand eight, two thousand nights, how overlevered people were
1:12:43
Speaker 1: stunding money, they didn't have slipping homes, and you just think, gosh,
1:12:47
Speaker 1: these are just such basic concepts and if we could
1:12:50
Speaker 1: just make people more educated about it, how much better
1:12:53
Speaker 1: off we'd all be. So that's what the programs about.
1:12:57
Speaker 1: Is there is there anything more shocking than that scene
1:13:00
Speaker 1: in the middle of The Big Short where one of
1:13:05
Speaker 1: the characters is talking to a woman UM in a
1:13:08
Speaker 1: strip club and she's a house flipper as well as
1:13:12
Speaker 1: a stripper, and he asked her about, wait, you have
1:13:16
Speaker 1: two mortgages and she's like, no, I have six. I
1:13:19
Speaker 1: have all these houses. And that's when he realizes exactly
1:13:23
Speaker 1: how overleveraged and completely oblivious uh, the U S consumer
1:13:29
Speaker 1: has become with with credit. Speaking of films, let's let's
1:13:34
Speaker 1: jump to our favorite questions, starting with tell us what
1:13:39
Speaker 1: you're streaming these days? What's keeping you entertained? Uh during
1:13:43
Speaker 1: lockdown on Netflix or Amazon Prime or or anything else
1:13:46
Speaker 1: that you're enjoying. Sure, um, so I don't watch TV
1:13:51
Speaker 1: as much as maybe I'd like to. But when I
1:13:54
Speaker 1: do watch, um, when I do watch stuff, you know,
1:13:58
Speaker 1: given that I spent a lot of my thinking about
1:14:00
Speaker 1: what could go wrong in the world, I want to
1:14:03
Speaker 1: make sure we don't miss risks. My life can get
1:14:05
Speaker 1: pretty dark, So when I watched TV, I'm usually not
1:14:09
Speaker 1: going for their murders and the crime shows. Um, ted
1:14:12
Speaker 1: Lasso would be my cup of tea. You know, something
1:14:15
Speaker 1: funny and well written. And I also love nature and history,
1:14:20
Speaker 1: So anytime there's a good new ken Burns documentary, I've
1:14:23
Speaker 1: got that on immediately. Good good, good, couple of recommendations.
1:14:28
Speaker 1: Let's talk about mentors. Who were the people who helped
1:14:31
Speaker 1: shape your early career. Well, my my first boughs out
1:14:36
Speaker 1: of college was a gentleman named Paul Tash. He ran
1:14:39
Speaker 1: the Washington bureau at the St. Petersburg Times when I
1:14:41
Speaker 1: was there. He um, he gave me enough rope to
1:14:44
Speaker 1: do some damage to myself, but didn't let me completely
1:14:47
Speaker 1: chew off the rope. UM. And you know, as a
1:14:50
Speaker 1: twenties something having a front page article in the Pulitzer
1:14:53
Speaker 1: Prize reading newspaper, that was thanks to him as much
1:14:56
Speaker 1: as anything. Um. There were a ton of people later
1:14:59
Speaker 1: on at jpm organ who helped me become a better researcher.
1:15:03
Speaker 1: But I think importantly also how to listen to clients.
1:15:06
Speaker 1: Jon Lois, who's who's still sort of a senior adviser
1:15:09
Speaker 1: there and writes research for them. He really stands out
1:15:12
Speaker 1: in my mind as someone who is there with me
1:15:14
Speaker 1: in London in that insanity and then and then all
1:15:18
Speaker 1: along the way and over the last decade one more
1:15:21
Speaker 1: I've mentioned, I've been very lucky to get to know
1:15:24
Speaker 1: former Treasury Secretary Bob Ruben mainly the Council of Foreign Relations,
1:15:28
Speaker 1: and UM, I don't know if he would think of
1:15:30
Speaker 1: himself as a mentor to me, but I would. You know,
1:15:33
Speaker 1: any time I've had a question for Bob, he's been
1:15:36
Speaker 1: there with really good sound advice, UM. And he's always
1:15:39
Speaker 1: gone out of his way to make me feel part
1:15:42
Speaker 1: of the group at Council events and dinners. Again, when
1:15:46
Speaker 1: those moments when you felt like the kid at the table,
1:15:49
Speaker 1: he made sure to make it clear to everyone at
1:15:51
Speaker 1: the table that I wasn't a kid, And I'm incredibly
1:15:53
Speaker 1: grateful for that. Really really interesting. Let's let's talk about reading.
1:15:58
Speaker 1: What are some of your favorite books and and what
1:16:00
Speaker 1: are you reading right now? Oh? I'd love to read.
1:16:02
Speaker 1: I mean, I spend half my day reading emails and
1:16:04
Speaker 1: research reports. But even then, um, after work, if I'm
1:16:08
Speaker 1: not watching something light or or entertaining, I'll pick up
1:16:12
Speaker 1: a book. I try to alternate between fiction and nonfiction.
1:16:16
Speaker 1: So I just finished Lincoln Highway by A. Mortal's I
1:16:20
Speaker 1: had loved Gentlemen in Moscow, and this is a very
1:16:22
Speaker 1: different book, but but equally well written. And then I
1:16:25
Speaker 1: just started raised new book on the Changing World Order, um,
1:16:29
Speaker 1: which somewhat depressing but very very good food for thought.
1:16:33
Speaker 1: And then I'd have to say one of my all
1:16:35
Speaker 1: time favorite books that if if people who are listening
1:16:39
Speaker 1: haven't read, they should is No Ordinary Time by Doris
1:16:43
Speaker 1: Kern's Goodwin. I am a huge fan of both FDR
1:16:47
Speaker 1: and Eleanor Roosevelt. I think they were both such incredibly
1:16:50
Speaker 1: important people in America and global history for different reasons.
1:16:54
Speaker 1: And I think that book captures a period of time
1:16:56
Speaker 1: in both those characters so well. Our final two questions,
1:17:02
Speaker 1: what advice would you give a recent college grad who
1:17:05
Speaker 1: was interested in a career in either research or investment
1:17:09
Speaker 1: in finance? Okay, um, I guess all right. Two things. One,
1:17:17
Speaker 1: be open minded. You know, I get so many young
1:17:20
Speaker 1: people coming to me saying, well, I either want to
1:17:22
Speaker 1: work at a top three investment bank or a top
1:17:25
Speaker 1: hedge funds and and I think there's just so many
1:17:28
Speaker 1: ways to get experienced. You know, there's treasury departments at companies,
1:17:32
Speaker 1: there's government positions, central bank opportunities, different countries, different cities.
1:17:37
Speaker 1: Not every good jobs in New York City by a
1:17:40
Speaker 1: long shot. So I think keep an open mind, take
1:17:43
Speaker 1: different paths. And I think in my case it's shown
1:17:47
Speaker 1: it's been an advantage later on. That would be one.
1:17:49
Speaker 1: I think. Secondly, quickly read read, read, read, read current events, history,
1:17:54
Speaker 1: academic papers, think tank papers. Don't just stick to social media. Um,
1:18:00
Speaker 1: I think you know, just knowing what's going on around you.
1:18:03
Speaker 1: Nothing against social media, but that shouldn't be your only source.
1:18:06
Speaker 1: So those would be my two pieces of advice. Um,
1:18:09
Speaker 1: I think those are both good pieces of advice. And
1:18:12
Speaker 1: our final question, what do you know about the world
1:18:14
Speaker 1: of finance and investing today that you wish you knew?
1:18:19
Speaker 1: You know years ago or so when you were first
1:18:22
Speaker 1: getting started. Oh my god, there's so much. Um. Well,
1:18:26
Speaker 1: the the thing that popped in my head very when
1:18:28
Speaker 1: you said that, as I wish I had known to
1:18:30
Speaker 1: tell my dad not to sell his Apple stock. That
1:18:32
Speaker 1: would have been good. But well, that's the time machine answer.
1:18:36
Speaker 1: I'm I'm really looking more of a what process, what
1:18:39
Speaker 1: insight would have been helpful earlier? Yes, this isn't This
1:18:43
Speaker 1: isn't back in time with Marty Okay, so I'd say
1:18:47
Speaker 1: maybe more like twenty years ago. But when I was
1:18:50
Speaker 1: an analyst sitting in Singapore JP Morgan and I was
1:18:53
Speaker 1: writing about the implications of China joining the w t O,
1:18:58
Speaker 1: I wish I had spent and more time pushing myself
1:19:01
Speaker 1: to think what could this be? And and I think
1:19:06
Speaker 1: fast forward to today. I try to do it more,
1:19:09
Speaker 1: but I think I should do it more. I think
1:19:11
Speaker 1: we should all spend more time thinking about those longer
1:19:15
Speaker 1: term things. Climate, technology, demographics, markets are so immediate, right,
1:19:20
Speaker 1: you have to have stuff on Bloomberg every second, every day,
1:19:24
Speaker 1: and there's so much in front of us, it's easy
1:19:27
Speaker 1: to forget these big structural things that are taking place
1:19:30
Speaker 1: behind the scenes but can be equally impactful. So I'd
1:19:34
Speaker 1: say to myself, dig into the big things, don't just
1:19:38
Speaker 1: focus on what's here. Now some really good answers. I'm
1:19:42
Speaker 1: going to sneak one more question in, and that is,
1:19:45
Speaker 1: so you lived in Singapore for a while, tell us
1:19:48
Speaker 1: about the food there all my foodie star for asking that,
1:19:54
Speaker 1: ha ha. So yeah, my husband and I both love
1:19:58
Speaker 1: to cook, both loved to eat, and and while New
1:20:00
Speaker 1: York is definitely a food mecca, I'd say if there
1:20:04
Speaker 1: is any one place in the world that's as good
1:20:06
Speaker 1: or maybe better than New York at Singapore, Um, the
1:20:09
Speaker 1: Asian food is is just uncomparable. But especially over the
1:20:13
Speaker 1: last decade or two, you now get every cuisine you
1:20:16
Speaker 1: can imagine. UM. So yeah, tough New York or Singapore.
1:20:22
Speaker 1: That's a tough call. Um. And anyone listening to this
1:20:24
Speaker 1: who likes dumpling, go go, go, go go. Rebecca, thank
1:20:29
Speaker 1: you for being so generous with your time. This has
1:20:31
Speaker 1: just been absolutely, absolutely fascinating. We have been speaking with
1:20:35
Speaker 1: Rebecca Patterson. She is the director of investment Research at
1:20:40
Speaker 1: Hedge fund Giant Bridgewater Associates. If you enjoy this conversation,
1:20:44
Speaker 1: well check out all of our previous UH interviews we've
1:20:48
Speaker 1: done over the past eight years. You can find those
1:20:50
Speaker 1: at iTunes, Spotify, all of your favorite podcast sources. We
1:20:55
Speaker 1: love your comments, feedback and suggestions right to us at
1:20:59
Speaker 1: m I B podcast at Bloomberg dot net. Sign up
1:21:03
Speaker 1: for my daily reads at Ridhalts dot com. Follow me
1:21:06
Speaker 1: on Twitter at Rid Halts. I would be remiss if
1:21:08
Speaker 1: I did not thank the crack team that helps us
1:21:10
Speaker 1: put these conversations together each week. Mohammed Ramaui is my
1:21:15
Speaker 1: audio engineer. Paris Walt is my producer. Atika val Bron
1:21:20
Speaker 1: is our project manager. Michael bat Nick is our head
1:21:23
Speaker 1: of research. I'm Barry Ridults. You've been listening to Masters
1:21:26
Speaker 1: and Business on Bloomberg Radio.