Bridgewater Report
Bridgewater Report
BOB PRINCE
GREG JENSEN
KAREN KARNIOL-TAMBOUR
If these conditions don’t exist, intolerable circumstances will ensue that will drive changes toward these
equilibriums being reached. For example, if an economy’s usage of capacity (e.g., labor and capital) remains
low for an extended period of time, that will lead to social and political problems as well as business losses,
which will produce further changes until these equilibriums are reached.
The two levers are monetary policy and fiscal policy. Monetary policy is managed by central banks to drive
money and credit changes that finance the purchases of goods, services, and financial assets. Fiscal policy is
managed by the legislative and executive branches of governments to use taxes, government spending, and
laws and regulations to influence economic behavior. Structural reforms are changes in laws and regulations,
so they occur via fiscal policies.
10.0%
10.0%
7.5%
7.5%
5.0%
5.0%
2.5%
2.5%
0.0%
0.0%
-2.5%
1960 1980 2000 2020 1960 1980 2000 2020
25%
20%
15%
10%
5%
0%
Please review the “Important Disclosures and Other Information” located at the end of this report.
1.0 Disequilibrium
0.9
0.8
Among the worst
0.7
0.6
0.5
0.4
0.3
0.2 Equilibrium
In Japan and China, because spending is more aligned with labor output, inflation is under control, giving
policy makers room to support economies and markets.
12.5%
20%
10.0%
15%
7.5%
10% 5.0%
5% 2.5%
0% 0.0%
-2.5%
-5%
1960 1980 2000 2020 2000 2010 2020
1.0 Disequilibrium
0.8
0.6
0.4
The path from disequilibrium to equilibrium allows for big swings in markets, which can be in either direction,
so this is not a good short-term timing measure. But it is a frame of reference for longer-term positioning that has
a good track record. For example, the following table shows the average returns of assets across various stages,
divided into bullish disequilibriums, which typically lead to stimulative policies that are supportive to assets;
bearish disequilibriums, which generally require tighter policies and are bad for assets; and near-equilibrium
conditions, where volatility is lower and you are likely to earn a normal risk premium on assets held.
er s
Stocks & Bonds Short Rates Nominal Bonds IL Bonds Equities
(at Equal Risk)
Disequilibrium
Disequilibrium
Data through March 2023. Please review the “Important Disclosures and Other Information” located at the end of this report.
U
Concept Current In/Out of Equilibrium?
Near
In
Spending
When you add up this picture, you can see why the degree of disequilibrium is so high and why we favor cash
in relation to assets in most developed economies until these imbalances are closer to being resolved. On the
other hand, we favor assets in relation to cash in Japan, China, and much of Asia because they are either closer
to equilibrium or are in disequilibriums that favor an expansion of liquidity that makes cash unattractive in
relation to assets.
Updating that picture, what has happened is that we have moved incrementally in the direction of an economic
contraction with a slight moderation in inflation. The cracks in the banking system are a move in that direction
and are a direct result of the aggressive easing and then aggressive tightening of monetary policy.
The easing pushed a lot of liquidity into banks via zero-yielding deposits, and given the lack of loan demand
at the time, the liquidity went into bonds at very low yields. The subsequent tightening and rise in short-
term interest rates are now causing disintermediation of those low-yielding deposits, replaced by deposits and
borrowing at market yields that are higher than the yields on the bonds purchased, causing losses on a mark-
to-market basis and on an accrual basis over time. At the same time, there is a tightening of credit standards,
which is threatening credit losses at a time when earnings power is diminished by the upside-down bond
holdings. This is passing through to a slowing of credit into the economy and a weakening of banks’ ability to
cushion a downturn.
We are also seeing the first signs of a rise in savings rates that would be more consistent with the past year’s
rise in interest rates and weakening of asset markets. This month’s ISM survey was the first that showed both a
weakening of orders and a weakening in employment. The JOLTS figures also showed a drop in job openings.
And business loan demand has collapsed. These are all signs that the tightening is passing through to the
economy. This raises the odds of a pause in the tightening cycle, but at the cost of a decline in earnings and a
rise in risk premiums.
It takes big moves over a sustained period of time to restore equilibriums once they have deviated substantially
from desired levels. The following charts update some of the key characteristics and influences that we
outlined in prior research.
Broad inflation and the wage inflation around which it is anchored have moderated a bit, but both remain
significantly elevated relative to equilibrium levels.
12.5%
10.0%
7.5%
5.0%
2.5%
0.0%
10.0%
7.5%
5.0%
2.5%
0.0%
-2.5%
-5.0%
1970 1980 1990 2000 2010 2020
Wages are simply a price set by the supply and demand of labor. The supply/demand balance today does not
resemble the conditions that led to past wage declines.
All Employee Wages (Ann, 3mma) Level + Change in Unemployment Rate (Inv)
9% -4%
8%
-2%
7%
0%
6%
5% 2%
4% 4%
3%
6%
2%
5.0%
-2%
2.5%
0% 0.0%
-2.5%
2%
-5.0%
-7.5%
4%
-10.0%
1970 1980 1990 2000 2010 2020
Looking directly at corporate profits shows a bit more progress toward equilibrium, but we estimate corporate
profits need to fall roughly 20% and are currently down a bit less than 10%. More pain is needed to raise
unemployment, reduce wages, and moderate inflation.
-4% 30%
20%
-2%
10%
0% 0%
-10%
2%
-20%
4% -30%
-40%
1970 1980 1990 2000 2010 2020
Liquidity Cycle
i.e., cash to assets; assets to cash
Liquidity
Tightens
Central Bank Risk Premiums Rise
Tightens and Assets Fall
e
u rop
U K, E
US,
Growth Growth
Rises Slows
si a
n ,A
pa
Ja
in a,
Risk Premiums Fall Ch Central Bank
and Assets Rise Eases
Liquidity
Improves
Relating the liquidity cycle to asset returns, in the West, the coming stage is bad for stocks and less bad for
bonds than where we’ve been.
Liquidity
Tightens
Inflation Rises Risk Premiums Rise
and Assets Fall
Equities -
Bonds - -
Equities +
Bonds + +
Risk Premiums Fall Inflation Falls
and Assets Rise
Liquidity
Improves
1%
0%
-1%
-2%
-3%
-4%
-5%
-6%
20%
10%
0%
-10%
-20%
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