I re-read the article trying to suss out what time horizon they were thinking of when they made the claim that we need to all get out of nominal bonds. As far as I can tell, they never make that time horizon explicit, so we need to extract it via inference.
Here are their basic principles behind their balance:
The new world they see us going into, they call the MP3 world.The two key building blocks of balance for us are:
1. Select assets that will outperform cash over time;
2. Diversify those assets based on how they will react to future economic scenarios.
So they believe that under the new monetary policy regime, it's time to get away from nominal bonds. Here, in their explanation we get a first hint of their time horizon.Instead of interest rate cuts, policy has moved to MP3 (i.e., the coordination of monetary and fiscal policy). Understanding the nature of MP3 and how it will affect different asset classes allows us to logically balance assets for an MP3 world.
So we are talking about a shift in monetary policy which they predict will continue and which will have certain predictable effects.In an MP3 world, policy makers will respond to a downturn through coordinated monetary and fiscal policy—putting money to work in the real economy, financed by money printing. If this does not succeed in reflating equities, logically we would expect this printed money to end up in inflation-hedge assets like inflation-linked bonds and gold.
For analogies, they look to what happened in the 1940s.In an MP3 world, in the event of a downturn, central banks and fiscal authorities will try to reflate by printing money and spending it in the real economy. This has already happened in response to the pandemic shock, and there will be more of it as necessary.
Then they go further and start trying to factor in geo-politics.
Another important element of our approach to balance in this environment is geographic diversification, which we believe is taking on heightened urgency. For some time, we have spoken of the increasingly “tri-polar” world, with the US, Europe, and China of comparable global importance at this point and therefore deserving of much more similar weight in portfolios than they typically have had. Each pole has a distinct role: Europe is the largest exporter of capital, the US remains the primary reserve currency and therefore primary source of funding, and China contributes the most to global growth.
So now we get to the meat of the problem. Bridgewater is thinking in the immediate to mid term, and trying to out guess what's coming in the next few years. This kind of strategizing is meant to be the value add of their active management. But I am not investing for the next few years, so the immediate unknowns of geopolitics and epidemiology and shifting manufacturing bases and all the rest of it don't concern me. We have plenty of evidence that this kind of market timing is unreliable to net-negative for long term investing.The virus has renewed US-China tensions and accelerated the broader dynamic of a rising power threatening an existing power, with the US at times directing blame at China over the virus and recently escalating sanctions, and China seeking to position itself in a leadership role of extending aid to other economies via its “Health Silk Road.” And we have started to see the repatriation of supply chains as the global shutdowns highlighted the vulnerabilities produced by global supply chains.
In other words, there is real risk that the secular trend toward increased globalization is reversing, a trend that has been an important force supporting global growth and productivity but also increased correlations across global markets.
If MP3 is truly a new regime, how long will it last? The interventions of the 1940s didn't last long at all, and the monetary policy regime changed again. I expect that this will happen too, but I have no particular insights into when or how. The new tri-polar geopolitical world, how long will that last? The Cold War lasted a few decades. American hegemony lasted a few couple decades. I expect geopolitics to change several more times in my lifetime.