Bridgewater Talk on Global Outlook: Is Stagflation Next?

Earlier this month, Bridgewater Senior Portfolio Strategist Jim Haskel discussed the current market environment with the firm’s Co-CIO Greg Jensen including the global outlook as the Covid-19 pandemic continues, the challenges faced by policy makers and the prospects for deflation, inflation or stagflation.

Here are some highlights:

  • Jensen emphasized how ­­we are facing a “rare set of circumstances” because the current crisis is a result of an income shock—rather than a credit shock, which triggered the financial crisis of 2008-2009 and is what has typically triggered past recessions. The direct fall in income as the coronavirus spread is the “largest and fastest we’ve seen,” he argued, explaining how it has led to a simultaneous collapse in both supply and demand. As a result, the Fed is injecting money to fund an income rather than a credit, “hole” —a situation in which the outcome is less certain.
  • Bridgewater estimates that there has been a $27 trillion hit to global corporate revenues and a $6.8 trillion hit to global profits because of the pandemic. While central bank intervention has been necessary, those income and earnings hits remain unresolved.
  • While the Fed’s reaction was necessary, Jensen suggests that we face a risk of the financial markets diverging further from the underlying, “real” economy. The gap between asset pricing (which has been bolstered) and the underlying economy must be reconciled, according to Jensen. “We can’t get them too far out of line,” he said, adding that if the Fed continues to print money to drive up asset prices, then either: (1) financial markets will decline to align with future incomes; or (2) income will have to be drive up to meet asset prices through inflation.
  • Continued money supply injections will eventually “hit a wall,” Jensen says, and lead to inflation and currency-related problems.
  • According to Jensen, we have become accustomed to deflationary pressures (which have persisted over the past 30-40 years) supported by a backdrop of Fed policy, globalization, the tech boom and increasing debt level. Today, many of those trends have flipped, he said.
  • Unlike during the financial crisis, when quantitative easing was geared to replace credit, the current strategy of replacing income creates the same level of household demand but fails to offset the loss of jobs. Such a scenario, although admittedly necessary, increases inflationary risks. If unchecked, says Jensen, it could lead to stagflation.
  • The upcoming election adds another layer of uncertainty, Jensen argues, adding that investors must find new ways to diversify their portfolios.