Transitioning to Stagflation - latest from Bridgewater

[Kevin K]

I found this new report from Bridgewater fascinating, though as usual I'm uncertain what the actionable take-aways are for average retail investors.

A few excerpts from the opening paragraphs.

"MP3 policies were very successful, stimulating a high level of nominal demand and a rapid recovery in employment markets in response to the pandemic. But this stimulation was applied for too long, and the offsetting monetary tightening is now coming too late, resulting in what we now have, which is a monetary inflation.....As central banks pursue their dual mandate of maximum employment and stable prices.....we see them toggling back and forth in their prioritization, trying to avoid both an unacceptably deep economic contraction and an unacceptably high inflation rate, culminating in a long period of too-high inflation and too-low growth, i.e., stagflation.

Asset returns are driven by how conditions unfold in relation to what is discounted..... Today, our indicators suggest an imminent and significant weakening of real growth and a persistently high level of inflation (with some near-term slowing from a very high level). Combining this with what is discounted, the difference between what is likely to transpire in the near term and what is discounted is the strongest near-term stagflationary signal in 100 years.....A second tightening cycle is not discounted at all and presents the greatest risk of massive wealth destruction."

If nothing else they make it sound like holding mostly if not exclusively TIPS on the fixed income side and some commodities and gold are likely to be prudent moves for quite some time. It seems to me they paint a pretty accurate picture of the challenges central bankers face and the slim odds of their threading the needle.

https://www.bridgewater.com/research-an ... tagflation

[garlandwhizzer]

Worth reading IMO, even though it paints a very troubled picture. We're not sure what will occur in the near or intermediate term future. Only predictions, that is to say, guesses. Many seem to believe that the worst is behind us and are pushing prices of beaten down names up. My guess is that they are mistaking noise for signal. A lot of pain probably lies ahead IMO, perhaps for years not months. We've gotten used to quick V shaped recoveries in bear markets but I believe this one will take quite a while to play out before we're out of the woods. Inflation is hard to kill and raising rates, our only real policy tools are raising rates and QT, very blunt instruments to kill it. It does not work until it severely depresses aggregate demand and produces a lot of pain in consumers. We're just starting down the road now and are IMO a long way from where it will be effective. I'm definitely not buying into the rebound optimism now. At some point in this bear market, a buying opportunity might appear, but I think it's too early now to get optimistic.

Garland Whizzer

[CletusCaddy]

Come on, nobody knows better than the market, but Bridgewater somehow gets a pass?

[9-5 Suited]

Worth reading IMO, even though it paints a very troubled picture. We're not sure what will occur in the near or intermediate term future. Only predictions, that is to say, guesses. Many seem to believe that the worst is behind us and are pushing prices of beaten down names up. My guess is that they are mistaking noise for signal. A lot of pain probably lies ahead IMO, perhaps for years not months. We've gotten used to quick V shaped recoveries in bear markets but I believe this one will take quite a while to play out before we're out of the woods. Inflation is hard to kill and raising rates, our only real policy tools are raising rates and QT, very blunt instruments to kill it. It does not work until it severely depresses aggregate demand and produces a lot of pain in consumers. We're just starting down the road now and are IMO a long way from where it will be effective. I'm definitely not buying into the rebound optimism now. At some point in this bear market, a buying opportunity might appear, but I think it's too early now to get optimistic.

Garland Whizzer

“Pessimism isn’t just more common than optimism. It also sounds smarter. It’s intellectually captivating, and it’s paid more attention than optimism, which is often viewed as being oblivious to risk. Tell someone that everything will be great and they’re likely to either shrug you off or offer a skeptical eye. Tell someone they’re in danger and you have their undivided attention.”

- Morgan Housel, The Psychology of Money

[DonIce]

Bridgewater and Ray Dalio seem to have been excessively pessimistic (at least in their public statements) for a long time now. But, holding much of one's fixed income in TIPS is always a good idea. Very skeptical about any significant allocation to commodities (commodity ETFs or rolling futures contracts generally loses money over time due to contango, even if the spot price is steady or slowly going up).

[Logan Roy]

[Thread merged into here --admin LadyGeek]

This recent piece from Bridgewater, on their thinking behind the chances of a more prolonged period of stagflation, contains a lot of useful perspectives on understanding the current environment, and data (some simulated – TIPS) on asset classes through comparable environments that may be actionable *if* such an environment would pose a problem for an investing plan.

On criticism that issues around the regulation of gold trading in the US around the early 1970s may have skewed its performance, I'd note that broad commodities behaved somewhat similarly. And interesting to note that tightening, during stagflation, is still bad for everything.

MP3 reflationary policies injected massive amounts of money and credit into economies, leading to self-reinforcing high nominal growth, leading to self-reinforcing inflation, leading to an abrupt shift in market discounting from a benign monetary policy to a rapid tightening. This discounting of a sharp tightening, its knock-on effects across markets, and the early stages of an actual tightening are producing the first transition in the economic environment since MP3 policies were enacted. We are still in the early stages of this transition, and the path will depend a lot on how central bankers play their difficult hand, so one should not be firmly committed to one scenario or another. But as things now stand, odds favor a stagflationary environment that could last for years. [...]

https://www.bridgewater.com/research-an ... tagflation

[LadyGeek]

I merged Logan Roy's thread into the ongoing discussion.

(Thanks to the member who reported the post and explained what's wrong.)

[Logan Roy]

Scanned and searched for a post on this but genuinely couldn't find it.

Come on, nobody knows better than the market, but Bridgewater somehow gets a pass?

I think these are two reasonable answers:

1) Bridgewater do a lot of research. 1,700 employees producing more data on the economy than the federal reserve. They're also in a position where they can take a broad, long-term perspective (having only institutional clients), while most traders and fund managers are stuck in the "short-term performance derby".

2) Issues relating to asset allocation haven't really got an EMH solution. There's William Sharpe's global market portfolio: "In a simple world, the market portfolio would include every publicly traded security, with each held in proportion to the total amount outstanding." But attempts to build these involve an uncomfortable number of decisions, and we'd have to decide whether we still consider government bonds 'efficiently priced' (relative to other asset classes), after years of central bank purchases.

Some versions of a global market portfolio have you almost 50% in real estate and commodities. So 60/40 could be the active bet on deflation.

[Florida Orange]

When someone tells you bad news it feels like they're telling you the truth or letting you in on a secret. When someone tells you good news it feels like they're trying to sell you something or manipulate you. Warnings and pessimism operate more strongly to reinforce confirmation bias than does encouragement or optimism. I'm not saying the original quote is wrong; that's just how human psychology works.

[billaster]

I can only assume that MP3 is some new mumbo jumbo jargon invented to impress the clients.

[Logan Roy]

I can only assume that MP3 is some new mumbo jumbo jargon invented to impress the clients.

You know what they say about assumptions.

Monetary Policy 3 (MP3) — Helicopter Money
MP3, or helicopter money, is what’s being employed today in conjunction with QE. This is where, in order to create demand and/or avert mass poverty, the government straight up hands out cash (all those stimulus checks). The idea behind it is obvious — if there is a spending deficit, fix it by putting money directly in the hands of consumers. Why is this usually the last resort? Well for starters, if the situation were not truly dire in terms of mass unemployment, a large drop in economic output, and a reduction in credit growth, helicopter money would be highly inflationary.

https://medium.com/alpha-beta-blog/the- ... e4fa116a59

[billaster]

I can only assume that MP3 is some new mumbo jumbo jargon invented to impress the clients.

You know what they say about assumptions.

Monetary Policy 3 (MP3) — Helicopter Money
MP3, or helicopter money, is what’s being employed today in conjunction with QE. This is where, in order to create demand and/or avert mass poverty, the government straight up hands out cash (all those stimulus checks). The idea behind it is obvious — if there is a spending deficit, fix it by putting money directly in the hands of consumers. Why is this usually the last resort? Well for starters, if the situation were not truly dire in terms of mass unemployment, a large drop in economic output, and a reduction in credit growth, helicopter money would be highly inflationary.

https://medium.com/alpha-beta-blog/the- ... e4fa116a59

Thanks, for confirming what I said ... new mumbo jumbo jargon made up by Ray Dalio to impress his Bridgewater clients.

[Kevin K]

I can only assume that MP3 is some new mumbo jumbo jargon invented to impress the clients.

You know what they say about assumptions.

Monetary Policy 3 (MP3) — Helicopter Money
MP3, or helicopter money, is what’s being employed today in conjunction with QE. This is where, in order to create demand and/or avert mass poverty, the government straight up hands out cash (all those stimulus checks). The idea behind it is obvious — if there is a spending deficit, fix it by putting money directly in the hands of consumers. Why is this usually the last resort? Well for starters, if the situation were not truly dire in terms of mass unemployment, a large drop in economic output, and a reduction in credit growth, helicopter money would be highly inflationary.

https://medium.com/alpha-beta-blog/the- ... e4fa116a59

Thanks, for confirming what I said ... new mumbo jumbo jargon made up by Ray Dalio to impress his Bridgewater clients.

I really don't think it's fair to call it mumbo jumbo:

"In his book Principles for Navigating Big Debt Crises, Dalio documents the steps that central banks have historically taken when faced with a booming economy that suddenly crumples under the weight of debt. The first step (Monetary Policy 1, or MP1) is to cut overnight official rates to stimulate credit and investment expansion. The second (MP2) is to buy government debt (quantitative easing) to support asset prices and prevent uncontrollable waves of deleveraging. If MP1 and MP2 are insufficient to halt a downturn, central banks take step three (MMT, which Dalio calls MP3) and proceed to finance the spending priorities that political leaders deem most essential. The priorities can range from financing major national projects to “helicopter money” transfers directly to consumers.

Achieving political agreement on what to finance and how is essential for implementing MP3 effectively. In a financial meltdown or other national emergency, political unity and prompt action are essential. Unity requires a strong consensus on what should be financed. Speed requires the existence of a trusted institution to direct the spending."

https://www.ineteconomics.org/perspecti ... tabilities

[billaster]

I suppose mumbo jumbo is in the eye of the beholder but when a writer confuses the very fundamental difference between monetary policy and fiscal policy, let's just say I give them the side-eye. Especially when they make up goofy new names to lend credence where there is none.

[Logan Roy]

I suppose mumbo jumbo is in the eye of the beholder but when a writer confuses the very fundamental difference between monetary policy and fiscal policy, let's just say I give them the side-eye. Especially when they make up goofy new names to lend credence where there is none.

I think you're criticising acronyms and things you really haven't read. MP1, 2 and 3 is a pretty useful shorthand – it avoids having to give a primer on the stages of monetary policy in every article, as well as having to type 'helicopter' 86 times in a piece.

Ray Dalio explaining Monetary Policy 3 in 2019:

Hence I believe we will have to go to Monetary Policy 3, which is fiscal and monetary policy coordination that is of a form that we haven’t seen before in our lifetimes but has existed in various forms in others’ lifetimes or faraway places. It is inevitable that this shift will happen because it is inevitable that central bankers will want to ease when interest rates are pinned at 0% and when quantitative easing will be ineffective in achieving the goal. I recently refreshed my prior exploration of past cases and future possibilities of such coordination, which I will share below.

https://www.linkedin.com/pulse/its-time ... -ray-dalio

[billaster]

Sorry, I shouldn't have been so harsh in my criticism. Dalio has some good ideas. I just get annoyed when writers start coining unnecessary and confusing new jargon to express their ideas.

[corpgator]

Can't have stagflation without high unemployment. Can't have high unemployment with job reports like today month after month.

[Malum Prohibitum]

Can't have stagflation without high unemployment. Can't have high unemployment with job reports like today month after month.

528,000. Wow. That seems like it came out of nowhere.

[delamer]

If you find Bridgewater’s arguments convincing and their suggested allocations a good solution, then jump in.

But it’s market timing.

[nisiprius]

I can only assume that MP3 is some new mumbo jumbo jargon invented to impress the clients.

You know what they say about assumptions.

Monetary Policy 3 (MP3) — Helicopter Money
MP3, or helicopter money...

https://medium.com/alpha-beta-blog/the- ... e4fa116a59

Thanks, for confirming what I said ... new mumbo jumbo jargon made up by Ray Dalio to impress his Bridgewater clients.

I really don't think it's fair to call it mumbo jumbo:

I think it's perfectly fair to say it is a) not a standard or neutral economic term, and b) is politically loaded. If I'm not mistaken, "helicopter money" is an explicit reference to the economic theories of Milton Friedman. And "MP3" sounds superficially like the standard term "M3," but obviously isn't.

If I'm mistaken, please cite a source that is not an opinion piece, gives a clear definition, and asserts that it is a standard term in general use in economics.

[incognito_man]

I can only assume that MP3 is some new mumbo jumbo jargon invented to impress the clients.

You know what they say about assumptions.

Monetary Policy 3 (MP3) — Helicopter Money
MP3, or helicopter money...

https://medium.com/alpha-beta-blog/the- ... e4fa116a59

Thanks, for confirming what I said ... new mumbo jumbo jargon made up by Ray Dalio to impress his Bridgewater clients.

I really don't think it's fair to call it mumbo jumbo:

I think it's perfectly fair to say it is a) not a standard or neutral economic term, and b) is politically loaded. If I'm not mistaken, "helicopter money" is an explicit reference to the economic theories of Milton Friedman. And "MP3" sounds superficially like the standard term "M3," but obviously isn't.

If I'm mistaken, please cite a source that is not an opinion piece, gives a clear definition, and asserts that it is a standard term in general use in economics.

You appear to be correct on its origins, but recently it ("helicopter money") has come to mean the following:

"In recent decades this term has come to refer to a figurative application of Friedman's metaphor, as a type of monetary stimulus strategy that increases the quantity of the money supply and directly distributes cash to the public in order to spur inflation—or rising prices—and economic growth. Helicopter drop policies have become a common feature of the response from policymakers to large scale economic shocks since 2000."

https://www.investopedia.com/terms/h/he ... r-drop.asp

The term "MP3" seems like a natural abbreviation following the (I assume?) already accepted MP1 and MP2 abbreviations for other types of stimulating monetary policies.

Point being, I can't understand why there is any argument over naming/abbreviating a phenomenon which certainly exists in our world. How can something that actually happened (very, very recently in fact) be disregarded as "mumbo jumbo"? I don't get it.

[typical.investor]

I suppose mumbo jumbo is in the eye of the beholder but when a writer confuses the very fundamental difference between monetary policy and fiscal policy, let's just say I give them the side-eye. Especially when they make up goofy new names to lend credence where there is none.

I think you're criticising acronyms and things you really haven't read. MP1, 2 and 3 is a pretty useful shorthand – it avoids having to give a primer on the stages of monetary policy in every article, as well as having to type 'helicopter' 86 times in a piece.

Ray Dalio explaining Monetary Policy 3 in 2019:

Hence I believe we will have to go to Monetary Policy 3, which is fiscal and monetary policy coordination that is of a form that we haven’t seen before in our lifetimes but has existed in various forms in others’ lifetimes or faraway places. It is inevitable that this shift will happen because it is inevitable that central bankers will want to ease when interest rates are pinned at 0% and when quantitative easing will be ineffective in achieving the goal. I recently refreshed my prior exploration of past cases and future possibilities of such coordination, which I will share below.

https://www.linkedin.com/pulse/its-time ... -ray-dalio

What was the US stimulus in 2008? Why isn't that MP3? Saying it existed in faraway scary places is a nice technique to heighten the fear though.

When he says MP3 can't be done by elected officials, it's a little worrisome bad as they might be ... at least they change and we have some control.

Mostly though, I note in his paper he says the market is pricing things this way, and the market is wrong, and I know better listen to me.

I think he is envisioning a monetary Czar position for himself as his retirement gig.

[Logan Roy]

I suppose mumbo jumbo is in the eye of the beholder but when a writer confuses the very fundamental difference between monetary policy and fiscal policy, let's just say I give them the side-eye. Especially when they make up goofy new names to lend credence where there is none.

I think you're criticising acronyms and things you really haven't read. MP1, 2 and 3 is a pretty useful shorthand – it avoids having to give a primer on the stages of monetary policy in every article, as well as having to type 'helicopter' 86 times in a piece.

Ray Dalio explaining Monetary Policy 3 in 2019:

Hence I believe we will have to go to Monetary Policy 3, which is fiscal and monetary policy coordination that is of a form that we haven’t seen before in our lifetimes but has existed in various forms in others’ lifetimes or faraway places. It is inevitable that this shift will happen because it is inevitable that central bankers will want to ease when interest rates are pinned at 0% and when quantitative easing will be ineffective in achieving the goal. I recently refreshed my prior exploration of past cases and future possibilities of such coordination, which I will share below.

https://www.linkedin.com/pulse/its-time ... -ray-dalio

What was the US stimulus in 2008? Why isn't that MP3? Saying it existed in faraway scary places is a nice technique to heighten the fear though.

When he says MP3 can't be done by elected officials, it's a little worrisome bad as they might be ... at least they change and we have some control.

Mostly though, I note in his paper he says the market is pricing things this way, and the market is wrong, and I know better listen to me.

I think he is envisioning a monetary Czar position for himself as his retirement gig.

MP2 refers to Quantitative Easing (2008). And MP3, to distributing currency directly to the public, to increase monetary supply (e.g. covid stimulus cheques). And this isn't the first example of helicopter money – it was done in 1630, by the Republic of Venice, during the bubonic plague.

He is saying the market's wrong. But note how much the market's controlled by monetary policy, and policy may be what's wrong. Bond yields a recent example. With QE, traders bought assets knowing central banks would be forced buyers. I think it's been difficult to make the case that bond markets are still efficiently priced relative to other markets, and relative to the economy.

I often wonder: what would the market portfolio look like now? How much would be holding in bonds on negative real yields, how much in alternative assets: real estate, commodities, infrastructure, private assets? Any option you choose is a macro bet (probably against the market) on something. I do find Bridgewater have a much better grasp on these issues than policy makers, and that's worrying.

[LadyGeek]

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