The End Game Ep 24 – Greg Jensen, Bridgewater Associates

The End Game Ep 24 – Greg Jensen, Bridgewater Associates

July 29, 2021

Our special guest on the latest edition of The End Game is Greg Jensen, the co-CIO of Bridgewater Associates, the $140billion asset manager based in Westport, Connecticut.

Over his 25 year career at the firm, Greg has spent an inordinate amount of time using historical precedents to construct ever-more complex algorithms to help understand and predict evolving market dynamics.

In this fascinating discussion, Greg digs deep into the current macro environment, explaining at length how Bridgewater’s framework helps them evaluate the predicament facing the world’s central banks and formulate a set of likely outcomes in terms of both policy and market response.

The death of the ‘transitory’ narrative, the lessons to be learned from previous periods of disruption and the advantages the shrinking set of options available to policymakers offer investors all come under the microscope as we get an insight into the investment process  behind one of the world’s largest pools of capital.

The Grant Williams Podcast
The Grant Williams Podcast
The End Game Ep 24 – Greg Jensen, Bridgewater Associates
Loading
/

Our special guest on the latest edition of The End Game is Greg Jensen, the co-CIO of Bridgewater Associates, the $140billion asset manager based in Westport, Connecticut.

Over his 25 year career at the firm, Greg has spent an inordinate amount of time using historial precedents to construct ever-more complex algorithms to help understand and predict evolving market dynamics.

In this fascinating discussion, Greg digs deep into the current macro environment, explaining at length how Bridgewater’s framework helps them evaluate the predicament facing the world’s central banks and formulate a set of likely outcomes in terms of both policy and market response.

The death of the ‘transitory’ narrative, the lessons to be learned from previous periods of disruption and the advantages the shrinking set of options available to policymakers offer investors all come under the microscope as we get an insight into the investment process behind one of the world’s largest pools of capital.

 

Grant Williams:

Before we get going, here’s the bit where I remind you that nothing we discuss during The Endgame should be considered as investment advice. This conversation is for informational and, hopefully, entertainment purposes only. So, while we hope you find it both informative and entertaining, please do your own research or speak to a financial advisor before putting a dime of your money into these crazy markets. And now, on with the show.

Grant Williams:

Welcome, everybody to another edition of The End Game. Joining me as always, as we continue our search for whatever might await us is the good man himself, Bill Fleckenstein. Hi, mate.

Bill Fleckenstein:

Hello, mate. How are you today?

Grant Williams:

Well, I’m doing very well. There’s storm clouds all around the Cayman Islands which may be appropriate for the conversation we’re about to have, but so far no rain. How’s the leg?

Bill Fleckenstein:

Doing better. Just now, I’m 100% healed. I’m just, I’ve got to rebuild my calf muscles.

Grant Williams:

Attaboy, attaboy. Just stand on the edge of the stairs. In fact, you can do the whole podcast just standing on the edge of the stairs on your tiptoes, so yeah.

Bill Fleckenstein:

Yeah. I went to PT already today. I’m done for the day.

Grant Williams:

You’re done for.

Bill Fleckenstein:

Yeah.

Grant Williams:

All right. I will need a note from your PT, too, just to make sure that you do that. Well, mate, joining us today, we’re delighted to have Greg Jensen, a co-CIO of Bridgewater. And the conversation we want to have is very broad in nature, where Bill and I, both really interested in the framework these guys use. And how they kind of think about broad aspects of not just the bond market and the equity markets, but the way the whole thing is held together. Bill and I have been reading Ray Dalio’s work for a number of years. We’ve kind of dug into that and it does make for an interesting conversation when you have someone as big as this, Bill, that do the work on the macro, but also have to manage money.

Bill Fleckenstein:

Yeah, that have to manage the money part is where you sometimes can really learn things because we’re all wrong and what you have to adjust to that and rework your theories and all that. So, I’m really looking forward to hearing his thoughts.

Grant Williams:

And let’s put a stake in the ground. Nobody’s more wrong than you and me, right? We’re not going to let people come and run and pass us in the homestretch, ain’t it?

Bill Fleckenstein:

No, no. It’d really be hard. We’re tough to beat.

Grant Williams:

All right. Well, let’s bring Greg in and see what he has to say.

Bill Fleckenstein:

All right.

Grant Williams:

Well, Greg, welcome to The End Game podcast. Thanks so much for taking the time to do this with us.

Greg Jensen:

Well, thanks for having me.

Grant Williams:

We’ve both been looking forward to this conversation for a while. Yeah, this series has been such a fascinating journey. It’s kind of gone in directions that Bill and I didn’t really think it would go in and we’ve kind of kicked around so many interesting ideas. And what we’ve really tried to do, every time we’ve had these conversations is just really start with some really broad ideas, and then kind of see where they take us. They never to be focused on two or three things. And there’s definitely a few themes that come up recurring, so we’ll definitely, if they don’t come up naturally in this conversation, we’ll kind of see what your thoughts are on that.

Grant Williams:

But I guess to kick off, what would be great is to get a sense of how your framework at Bridgewater has had to, I guess, evolve over the last kind of 13, 14 years in the age of QE and all this extraordinary policy. And if we could kind of kick that around, just kind of walk through how you feel that you’ve had to adapt to meet the times.

Greg Jensen:

It’s a great question, sot let me just start with what we do at Bridgewater, and then we can talk about how it evolves over time. But for 45 years, the only thing that Bridgewater have been trying to answer two questions. One is how does the global economy work? And how do you take that understanding and utilize it to build great portfolios? That’s the focus of the organization. That’s all we do. And we’ve been focused since 1980, in systemizing that thinking, so that everything that we’ve ever learned about markets or economies, we’ve written down, programmed into algorithms in 1980 that was rules on yellow pieces of paper with employees going around with scientific calculators.

Greg Jensen:

Today, that’s algorithms, but those algorithms reflect the logic of, “Well, how does this machine work? How do we track the money in the world? Why the assets go up or down in different conditions? What are assets pricing?” All those kinds of questions and building that logic over time, so it’s what I call a compound understanding machine, but we keep trying to learn. Right? And so, when you talk about the evolution, I mean, I just think of it all the time, there are things happening in the world that are surprising us and that’s then the new research is all focused on those surprises, and things that we haven’t already built in.

Greg Jensen:

Of course, when you think about quantitative easing and even MP3, I wouldn’t really describe that as a surprise in the following sense that, look, if you take, as we did at Bridgewater 100 years of history, these patterns emerge, right? You have major debt cycles, interest rate cycles, you get to the end of those cycles. When you get such debt problems that interest rates get near zero, you always get money printing and quantitative easing.

Greg Jensen:

So, we had been thinking about quantitative easing. I remember we built our first systems around that in 2001. Obviously, well, before the financial crisis, as US interest rates and that cycle got down near zero, we recognized the risk of it, and Japan was starting to play around in very minor ways. And we studied the Great Depression. We studied, “Well, how does that work as monetary policy?” Recognizing these different types of errors and built very crude systems for what to do in markets when you get to quantitative easing. How do you reflect that pressure in a way similar to how you would reflect movements in interest rates in your views about what’s going to happen to growth, inflation and asset prices.

Greg Jensen:

So then in comes 2008 and we get to quantitative easing and we’re using those processes. And then we’re learning, right? Like $1 of QE in the US is much more effective than $1 of QE in Japan. Why is that? Right? And understanding the mechanics of that. Well, all it depends on who gets the money, what they do with it, and that if they’re buying one type of assets from one type of investors in the US and another asset from a different type of investor in Japan, you’re going to get different outcomes.

Greg Jensen:

And so, we’ve refined our understanding of quantitative easing, just by staring at what’s surprising us, learning building that into the process, and you keep moving, right? And today, we’ve moved from, the period from let’s say, the 1950s through 2008, and a period of interest rate, what we call MP1 into MP2 being quantitative easing, and now this phase that’s been accelerated with the pandemic, has been this movement in the monetary, what we call Monetary Policy 3, but it’s the merger of fiscal and monetary policy.

Greg Jensen:

And that’s all happened for reasons that have played out before in history. It’s happening again. And it’s I think, while it’s very hard day-to-day to know what’s going to come next, I think the big waves you can see, and the likely cause effect linkages of where this is headed over some period of time. And so that’s what we study, and we keep studying and keep evolving. Thinking about new things that are emerging over the last 15 years dealing with China’s rise and what it’s like to have two world economic powers at the same time or inequality, and what it’s like in a democratic capitalist society to get these levels of inequality? All of those questions are the questions that we continue to build into our process, reflect on old history and try to, therefore, have an advantage on what’s likely to come next.

Grant Williams:

No. I love this historical focus, because it’s I keep talking about this. And I do believe all the answers are there somewhere in the history books because like as you say, this has all happened before in various forms, maybe not at the same time as it is now. So, as you’ve kind of thought about this ahead of time and if you think about QE in 2001, you’re seven years ahead of its arrival. As it’s come in, how has the initial kind of explosion of QE into markets, perhaps kind of differed from the way you kind of gamed it to play out once it finally got here?

Greg Jensen:

Well, I think the thing that what the original QE in 2008 really offset a credit contraction and that’s actually easy for the Central Banks to do. They can print money, offset a credit contraction, and we were very right in that period in thinking that’s not going to be inflationary, because all they’re doing is offsetting a credit, a disinflationary or deflationary credit contraction. This is not inflationary. It is supporting assets, supporting balance sheets and moving us along in that way. And so that period, I think we nailed the mechanics of that correctly and measured those roughly right.

Greg Jensen:

As I said, subsequently, I’d say we got somewhat surprised by how stuck money got in Japan and Europe and it didn’t go out in the global economy as much. It didn’t create the same degree of outcomes. And then more recently, while we were thinking that the destiny was there that you would end up with QE not doing enough, because QE works through asset prices. Asset prices keep rising, but this kept making the wealth divide worse and money kept getting stuck at the top. You’re giving more and more money to the people that need it the least, that are doing the least with it in terms of the real economy. And so, money’s piling up and you had this stuck at the top, phenomenon in the US that itself was unsustainable, which would eventually lead to some redistribution. Some of that, essentially taking the deflationary impulses in the world and transferring them to the people that hadn’t accumulated the wealth.

Greg Jensen:

One way or the other, we thought that mechanism would come up, that you would see that over the next decade. And of course, it all happens in a six-month period, really a very, very, very fast period. And so, that has radically changed things. Now, and I think you’re seeing it, it’s interesting now. We’ve been wrong about bonds over the last year or particular last few months, because we think that nominal GDP impact of what’s going on is going to be huge. It’s more sustained than the Fed expects, because you’ve created all of this money, all of this demand without corresponding supply. And you’re seeing all of that in the stats, interestingly, and it’s a good humbling experience to go through. In the markets it’s been different, right? You’re not seeing the flow through.

Greg Jensen:

Now, there’s good reason for that in that the Fed continues to buy half the bonds that are being issued. The other bonds in a sense are being funded by this excess amount of cash everywhere and excess cash on balance sheets, how sustainable that is when nominal GDP is flying. And eventually, the Feds is going to withdraw the purchase of bonds. I’d expect it anyway as its nominal GDP continues to be as strong as we expect. But that’s certainly been a learning, which is this period, despite the tremendous pressure in the economy and the tremendous shortages and the obvious inflation pressures that are now even showing up in the government’s statistics, that you still have had interest rates remain where they are. That’s been, again, the markets and economies continue to always humble you with things that are surprises. And so obviously, one of our current research projects are getting to the bottom of the buying and selling that’s causing that. How sustainable it is. It looks unsustainable to us, but anyway, we’ll see as that evolves.

Bill Fleckenstein:

You, I think, just touched on something about inflation that I keep scratching my head over. And that is, it would seem and based on what I’ve read that you’ve written, that it seems like a reasonable expectation that the inflation will not prove to be transitory. Obviously, we don’t know that for sure, but we could make a pretty good case that that will be the outcome. And yet, it seems to me that market participants don’t want to believe that. I’ve seen surveys, you’ve probably seen the same ones where it seems like the vast majority of investors thinking it will be transitory. And I’m guessing the bond market must think that because otherwise, why would it be where it is? Is that sort of the same conclusion you have the people have decided that it’s transitory and that if it’s not transitory, we’re going to go through a whole shift where a lot of investors have to start moving their portfolios and their assets that they own around?

Greg Jensen:

Yeah, I agree with how you’re reading the market. Certainly, it gets you most directly and the breakeven inflation rate is quite low relative to what’s going on with inflation. And in our view, the physics of what’s necessary, that in one sense people can think of inflation as bad, but you have to consider all your options here. What are the options? We have a situation where wealth is divided extremely poorly. You have a situation where the interest rates have already been pushed to zero and you’re only stimulating what you’re stimulating that this move to fiscal policy is the natural outcome of this, the end of this 40-year cycle. If you go back to the early ‘80s, you had a cycle that started with tight money to get inflation down. That deflationary wave was compounded by globalization, the lowering of tariffs, the benefiting from the labor force, all over the world, extremely pro-corporate policies, even by the time Clinton was President, that it was a bipartisan agreement on market economies. And such you go through 2000-2008.

Greg Jensen:

That whole extreme cycle, that was essentially anti-labor, pro-corporate, pro-assets, lower interest rates, pro-debt, all of those things have reached a crescendo, right? And what do you have to do now to sustain that? You got to print money. You have to get rid of the debt. And now, you’ve got to look at everybody that were the losers in that whole game? And how do they benefit in society or you risk the loss of society? So, that’s this huge cycle. And when you look at the options, given where we’ve now pushed asset prices to, that how do you reconcile asset prices with cash flows?

Greg Jensen:

The one way to look at the overall economy, I look at it like it’s a family business, and how long, how much future income you have to take to pay back all of the owners, right? And so if it was a family business and your parents are transferring it to you, today, if you take the US equity market, the combination of the debt and the equity and say, “Well, how long would it take to pay off all the asset owners for their draw in future income?” You’d have to work the family business for 25 years before you get a paycheck, right?

Greg Jensen:

And that is one of the four peaks in history. You had that peak in 1999/2000. You have that peak in 1929. You have that peak in 1965. You have that peak in 1905 in terms of the years of future income that are dedicated to paying back to the wealth. And there’s just two ways to reconcile that and basically, that’s where you have the huge wealth divide problems and one way or the other, the cash flows, the willingness for people in the future to work to pay off old wealthholders is bounded in a democracy. And so, you end up with this extreme and you have two ways to reconcile it. Of course, in 1929 and 1999 and 2000, we know how it gets reconciled. Crashes that aren’t deflationary themselves and they get resolved one way. That’s one possibility. I think that’s the lower of the two possibilities on how this gets reconciled.

Greg Jensen:

I think the more plausible is you bring incomes up through rising nominal GDP, through government redistribution and that that offsets the disinflationary pressures and you push to an inflationary environment that allows incomes to catch up. That’s how 1965 and 1905, how incomes came in line with asset prices. With negative real returns and assets high, but not necessarily down in nominal terms, and high wage growth and nominal GDP growth that brings cash flows in line with asset prices. So, that’s my best guess of what policymakers will stumble their way towards and are stumbling their way towards. It’s not like there’s a grand plan to create inflation in order to reconcile incomes with the asset prices, but one way or the other, you get to choose every day.

Greg Jensen:

Do you keep money easy? Do you keep it? Do you tighten it? If equities go down 20%, what do you do? Do you let it happen or do you? And those choices and I think we see the bias, the choices are clear. That every downturn is going to be met with more and more fiscal and monetary policy. And every upturn, the tightening is going to be slower. The complete reverse of Volcker did in the 1980s to get control inflation, they did the opposite. Every tightening was tight, they get the real rates high, and then inflation starts falling. And through this whole process, it’s easier and easier money, bigger, bigger budget deficits now over the last three cycles.

Greg Jensen:

And that’s to me, that’s the destiny until and this is the big risk, everybody’s worried and the market gets about a slowdown if COVID gets worse or something happens in China or such where actually a slowdown is easy. If a deflationary slowdown is easy for policymakers, they’ll print more money and spend more money. What’s hard is when they’re constrained and that constraint obviously is inflation and currency and that’s where the gig will be up when you get there. And that’s actually what in our view, everybody has to start hedging in their portfolios is not the next downturn in disinflation/deflationary downturn.

Greg Jensen:

It’s the fact that essentially inflation and currency problems becoming constraints on the government. And this world where we’ve been living in where policymakers get whatever they want, more or less from the stock market and interest rates to a world where they can’t. And how do you hedge that? That’s really we think the big question for portfolio.

Bill Fleckenstein:

Well, how do you?

Greg Jensen:

Well, I think-

Bill Fleckenstein:

I mean, I agree. I mean, that’s the big question, right?

Greg Jensen:

Yeah. So, I think a few different things that we play with is A, having looking at different ways to have store holds a wealth and different ways to arbitrage what the government is giving you. So, I’ll start with the second, arbitraging what the government’s giving you. The government is giving you bond yields at 1% and nominal GDP well above that. And the likelihood that the cash flows generated in the economy are better than the bonds is very, very high. So, the more you can isolate the types of equities that are likely to generate cash flows associated with nominal GDP, you’ve got a good spread, but you better be hedged.

Greg Jensen:

Equities are not attractive on an outright basis. They’re only ordered, like cash flows. Almost any cash flow that’s out there is not attractive on an outright basis, only attractive relative to interest rates. All the asset prices make a reasonable amount of sense as long as interest rates stay here. So, basically getting those cash flows by packaging up, not the bubble stocks or whatever, but getting the cash flows of companies that are likely to move up and down with nominal GDP and hedging the risk that the Central Bank can’t maintain control of the economy.

Greg Jensen:

I think there’s great hedges available, whether it’s short bonds. If it gets a very good hedge, short three year from now Eurodollars or whatever are great hedges. Because that’s the risk is that the Fed ends up having to tighten when they don’t want it. It’s not a risk that the economy goes down, and they print more checks because that money will flow into assets and whatever from an asset holder perspective. And so, that’s one thing.

Greg Jensen:

The second thing is the store hold of wealth question, which is okay, the policy is clear and also, I’d say somewhat sensible, but clear is to diminish the value of the dollar. And so, the main question is, what do you hold against that diminishing value? And there’s no one in my view, unfortunately, no one great answer to that. It’s a combination. We hold a portfolio of things. You want to hold some foreign currencies that aren’t going through those policies you want to hold. Probably, we think inflation indexed bonds, even at very, very low real yields have some place to do some of the hedging. Because the breakeven inflation rates are so low, so they’re so much more attractive than nominal bonds.

Greg Jensen:

You’ve got gold and commodities and other necessities as part of that, but getting more of those things where the supply are more limited and there’s actually reason to hold, that’s a portfolio of that and not taking any one bad and maybe gold. It’s possible it’s gold is the old way and cryptocurrency is the new way or whatever, but a basket of things that will protect you in that world and then stress testing. Does that basket actually work? Look at the ‘70s. Look at other periods of when they purposely brought down money and what are those things?

Greg Jensen:

And I think that leads you to A, being cautious because you might not know before you enter that diversified in that, but much more so. Everybody is in US financial assets to such an extreme, right? That those are dangerous. I mean, US debt instruments are particularly dangerous. US equities that benefit directly from the liquidity that the Feds giving are dangerous, right? So, looking for a more globally diversified basket of things along those lines would be places that we’d be thinking about.

Grant Williams:

Greg, there’s so many different parts of what you’ve just been talking about that I want to unpack. And I really, for the first time, I think this whole series, I don’t really know where to start because there’s so much to get your teeth into. But let me take it back to the answer you gave a few moments ago. We’re talking about the bond market, the inequality. On the one hand, we’ve got the Fed talking about how they’re not generating any inequality. I mean, it’s farcical to suggest that it’s so clear as you pointed out so beautifully about what QE1 did.

Grant Williams:

But as you guys think through cause and effect as we move down possible policy choice decision trees, and I think you’re absolutely right. Hedging against that deflationary impulse is the easiest thing to do, because we now know exactly what’s going to happen. There does, of course, come a point where that playbook won’t work anymore. I don’t know how far away you think we are from that, but the other thing that I’ve pondered for some time is we’ve been used to over multiple decades now that the bond market is sending the correct signal. People say, “You’ve got listen to the bond market.”

Grant Williams:

And so, when we look at Bill’s point about where the bond market is trading, it’s suggesting that things aren’t great and markets are perhaps seeing deflation is in the future. Do you guys through your work, do you believe that the bond market still sends uncorrupted signal or has the fact that we’ve had essentially global coordinated QE basically dulled all those signals in the bond market? Because now, people as we’ve just highlighted, they know what the response is going to be, so they’re ahead of the response, not necessarily the economic conditions that would price the bond market at a certain level?

Greg Jensen:

Yeah, I think that’s a great question. And I’ve really, this is a thing in terms of learning and better way to thinking particularly in this environment about what are the markets saying, right? When I joined Bridgewater 25 years ago, I’m thinking about reading the market, right? You’d think of the bond yield as reflecting the likely economic conditions, growth and inflation conditions. And the bond market was quite good at that, like you’re saying a pretty reliable signal. Now, you move into a world of policy dominant from a private sector world where the Fed controlled one thing, the short rate, everything else was more or less market determined. The short rate was obviously very important.

Greg Jensen:

But you move to this world, where in a sense, the Central Bank is controlling the short rate. They’re also in a soft sense with QE controlling the bond yield and in a soft sense, controlling the aggregate corporate spread and mortgage rates. I mean, you went from one level of control to multi layered control of the economy. That’s a big difference. And so, when you look at market prices today, what do you see? It’s much more like what you’re seeing is what the market thinks the policymakers will do to achieve the outcomes that they want rather than reflecting what economic conditions it will be. It will be, well, what interest rate will the Fed set in order to create the economic outcomes they’re trying to get, so that the pricing and that was probably true to a certain extent all through history. But today, it’s very directly true.

Greg Jensen:

That’s why, why is it that the bond yield is where it is? Well, people think that’s where the Fed wants it, and that the Fed can get what they want. And so that’s the thing. Now, I think, even on that basis, the markets are going to prove to be wrong because I think the Fed is going to be forced to change their policy, and they’re going to allow a higher bond yield because they’ll be overwhelmed by the evidence. But anyway, that’s the flip from the bonds, reflecting the economic conditions to the bonds reflecting the policy that the policymakers want to achieve in order to create a set of conditions.

Greg Jensen:

And that’s really important when you build systems to trade markets. All of a sudden, think about it differently, right? One way we were thinking, “Well, why don’t we think about growth and inflation and how that’s reflected the bond market of being ahead of that?” Today, we think more in terms of, “Well, what are policymakers going to do given the conditions that are likely to happen? And are they going to be able to do it? Like how do you build in whether they’re losing control or not?” That been an evolution in our thinking to reflect today’s conditions.

Greg Jensen:

By the way, there are parallels in that. You take the 1930s and ‘40s and you take the war economy on it. It’s a fascinating mechanical exercise, right? Obviously, the war is different and whatever. I’m not trying to compare all these things. But you have yield curve control purposely to refund the banks. You have the ability to do that because you have capital controls. You have a totally different economy that also worked. It can work. And so, understanding that. Of course, in order to do that, if they want to control the yield curve and the bond rate, et cetera, floating currencies and lack of capital controls won’t work.

Greg Jensen:

So, they couldn’t go down a path of more bond yield control and more capital controls, that’s an equilibrium path that might work as well that we all have to be prepared for, right? And that in some ways, that’s also part of what’s growing in probability is more and more capital controls inside a world of more controlled interest rates, so that you prevent some of the currency and inflation problems that you’ll get if you don’t do that.

Grant Williams:

It’s really interesting. Bill has had this phrase for many, many years now about the market, the bond market taking the printing press away from the government. And what you’re talking about there where you talk about the market realizing that maybe they don’t get what they want. That seems to be Bill’s kind of aha moment that we’re kind of describing here. So, when you think that through that moment in time where investors realize they may not actually win this round, this may not turn out the way they think. Do you kind of think through how the dominoes topple at that point? Because that seems to me to be the seismic shift in the markets that we’ve kind of constructed around ourselves over this last 15 years or so. And some kind of disorderly return to let’s call them normally-functioning markets, where people’s investment aims dictate their actions rather than policymaking decisions.

Greg Jensen:

Yeah. Well, I think that all hinges, right? The hinges on the dollar and inflation. So, what does losing look like for the government? It’s only one way to lose, right? As long as they can print money and maintain a stable currency, they can do anything they want. There’s no problem, right? Logically, we all know, there’s a limit to that. Otherwise, why don’t we just give money to everyone and fix every monetary problem you have, right? So, we know there’s a limit. We don’t know exactly where the limit is, but we know losing is losing control of the currency.

Greg Jensen:

And that, to me, I mean, this is a little bit more of a stretch, but that it’s almost inevitable, right? Think of how tempting it is today, to say, “Oh my gosh, how much can we do? There’s no end in what you can do.” And if inflation is so low, why not? And what’s actually happening? What’s causing inflation to be so low, right? And there’s an element of I talked about before, the reason you got the disinflation was Fed policy with high real interest rates, globalization, and kind of the pro-corporate, anti-labor policies that went on for a long time. And finally and obviously, most importantly now is technological deflation, right?

Greg Jensen:

Now, four or five of those are no longer that deflationary. I mean, globalization’s wages around the world have kind of equilibrated and it’s not like we’re getting like globalization isn’t coming with problems and obviously, the conflict with China and all that means that people are changing the way they think about globalization, trying to secure supply lines, rather than get the most efficient ones, and so on. So, and Fed policy, obviously, has changed, government policy has changed, and even regulations on corporations are changing. So, most things are changing in an inflationary environment with the exception of the disinflation from technology.

Greg Jensen:

Now, it makes sense to be clear as a government policy, if you have a significant disinflation from technology, redistributing that and that boon. It’s a boon for the economy to have that disinflation, somehow spreading that out, so it doesn’t all get concentrated just in the people that control that technology, which would be a very dystopian future if you didn’t do anything about that outcome. That there’s a good to that and there’s a limit to that, though, which is you do some of that and when you do too much of it, you create other types of problems, right?

Greg Jensen:

And so now, the question is what’s appropriate amount and how far beyond that have we gotten or when will we get beyond that? Because it’s unquestionable, we’re tapping that reserve. We’re using it massively and how big that reserve is is the question for how quick this will go. Within Bridgewater, we’re all debating how quick. I’m definitely on the view of we are in hyperinflation at warp speed. I think what happened to markets, what’s happening is so fast that the odds that you’ve used that resource and before you know it, it’s gone because you’ve spent, you put so much money out there. And there is, other than World War II, no parallel to what’s going on with government spending. And so, I think we may tap it very quickly.

Greg Jensen:

Who knows? I don’t know. And we tried to measure the mechanics of it. And there’s a lot of room for error in that and so, it may take a while. But does anybody really believe we’re not going to tap, like we’re not going to use it? Because now that you know it’s there and you’re tapping it, like we’re going to use it and printing money and all that can happen so quickly. So if I’m wrong and it doesn’t happen in this cycle, the next downturn, we’re going to hit it even harder. And I think that’s the inevitable part of it.

Greg Jensen:

And I do fear that it’s happening quicker than we realize and that we’re in for some significant volatility associated with realizing that actually we’ve used the whole disinflationary reserve. And now, we’ve got to adjust and everything, all assets are built on this. All asset prices are built on the current liquidity levels and the current interest rate levels. And if those aren’t sustainable, a whole lot of things will have to adjust significantly.

Bill Fleckenstein:

You described the bond market in a way that I never thought about it before of, if I paraphrase this correctly, where the bond market is sort of pricing in what the policymakers kind of want or level to try to encourage to happen. I never thought of it that way before. When you marry that up with what you just said as long as the bond market is willing to price itself at where the policymakers wanted and not off the real world as the inflation pressures that we are seeing, it seems like it would be easier to use up that disinflation reservoir sooner rather than later. Because the longer that the bond market lets the government continue on this policies, it seems the faster we’ll use that up. Is that an accurate extension of what you said?

Greg Jensen:

Yes, I think that’s the case, right? And you’re creating these massive incentives and the incentives that in the sense of encouraging people in their investment portfolio to think through, which is take advantage of that, right? The economy naturally is in a sense, although I’d argue, in a very unhedged way. Meaning, people or asset prices are surging. Everything is surging, because the interest rates are so low and there’s so much money and that the movement out of bonds by the private sector, because the Fed’s purchasing more and more of them, and the fiscal money is all going into these things.

Greg Jensen:

But they’re also reliant on those things, so there’s very little where you’re taking advantage of the fact that yeah, the government is, like the bond markets giving you that and it’s also the biggest risk that it goes away. And that’s where it comes into doing those things that are naturally being encouraged, but making sure you have the hedge that’s necessary and that you don’t get scared off. In the very short term bond yields fall when equities fall, in the short term. But in the long term, that policy, particularly when you hit policymaker constraints reverses. And so what was normally a hedge, which is, “Let me hold some bonds with my stocks” will probably become the opposite when the liquidity has to come out of the system, and you have to kind of repeg your currency, right?

Greg Jensen:

And that’s the fourth phase if you follow this through historical cycles. We’re in the third phase, print the money, spend the money, deal with the debt problem you’re at and basically, the Jubilee phase of the big cycles. But what comes next is the phase where you got to repeg your currency. And that’s a super painful phase for assets. You have to rebuild the faith in the currency, one way or the other. Sometimes they peg it. It could be like the 1980s where you just do that by the Fed driving interest, real interest rates very high. It could be like other periods where it gets pegged to something else.

Greg Jensen:

But that is the natural next phase after you use up that reservoir, you do this kind of jubilee, you get rid of the debts in nominal terms, and you have this currency that’s too volatile to really pin down an economy, and then you peg it, and in some form. So I think that is, again, the thing you want to be thinking about. Now, again, as I said, policymakers maybe sooner, maybe later, it depends how policymakers go. You can imagine if Republicans get control of Congress in 2022, maybe the fiscal gets way cut back in the short term and you have less of that. I mean, all of those things are possible. But I do think that the destiny of this wave is of that nature that you eventually come back full cycle to where you’ve done everything you can with the currency and you have to repeg it and that will be the next movement.

Grant Williams:

Greg, it’s so interesting in hearing you talk that through because I think anytime you’ve looked at historical examples of this stuff, you can talk about this in terms of history and it’s a very straightforward set of dots to join from where we are now. Certainly from where we’ve been through, where we are now, to exactly what you just described of having to repeg the currency to something. When you don’t look at it through a historical lens, you tend to get headlines about the dollar losing its hegemony and the end of it is the reserve currency and it sounds so much more dramatic and so much more, therefore, impossible for it to happen. And I think you get a lot of debate about this. People saying, “Well, it will never happen and the dollar won’t lose its hegemony”

Grant Williams:

But as I say, what you’ve just described has happened over and over and over again throughout history. So, how do you go about communicating these thoughts to investors in a way that strips out the kind of hyperbole and the charged rhetoric of scenarios that seem in the context of today to be so dramatic? And yet on a historical basis they happen every 35, 40 years?

Greg Jensen:

Yeah, well and we try to just look at this as mechanics, right? And you go through this and even for us like going through all of this, there’s the big surprises that happen, right? I mean, it was hard to imagine and we had actually built into our process the idea that interest rates probably couldn’t be negative. That we thought like that that was a very unlikely thing. That was a huge mistake on our part of believing that, right? That the things that again, if you went back in 1980s or 1990, not that long ago and said, “You know what? Interest rates are going to be negative.” And people are going to see that as totally normal. And they’re going to think that, like it’s almost impossible to picture the Fed raising interest rates to 3%. You couldn’t even fathom this.

Greg Jensen:

And here we are, right? And the US government is going to run a budget deficit of 50% of GDP into a surging economy and so on, and so forth. So many things are already inconceivable, but we adjust to them as they happen and they’re normal. And they’re like, you know? So again, the same thing will happen. I think, with the dollar and everything, it will happen. I mean, it could happen in a very dramatic way. But it also could happen like we have shifted from a budget deficit policy that’s so radically different, a monetary policy that is so radically different, negative interest rates. You can go into high interest rates and inflation.

Greg Jensen:

And a lot of the reason that all of these things, markets, that the pricing of the current regime gets so entrenched, right? Well, how much evidence is it going to take to believe that inflation is really happening? And we all look back at the ‘70s and think how could these policymakers have been so dumb? Wasn’t it obvious, they kept the interest rate low. But it’s just like this, right? They lived through it. And you can read the Fed notes from those periods, they’re thinking, it’s going to come back. It’s the oil, it’s an oil supply check data. They have all these reasonable reasons. They’re not idiots. They’re no dumber than we are, it all happened and they had a history of stable prices, the Great Depression, et cetera.

Greg Jensen:

And you see how these things build. So anyway, in terms of explaining it, I mean, we try to bring people through the mechanics. We tried to show the benefits of being prepared for these differences, this range of scenarios. And over time, we’ve been right about enough, although we’re wrong about plenty. So, as I say these things, I hope everybody will understand that we’re right just slightly more often than we’re wrong. But that, going through that, through history, describing that, and then being able to because we dig into, well, who the buyers and sellers were, what motivated them, et cetera. Being able to describe why we’re wrong, I think all of that kind of builds the comfort that there’s an engineering.

Greg Jensen:

And this is not, for us, it’s not political. We’re not making any points about how everything should be just trying to measure the mechanics of how everything actually works. Where does the dollars come from? Where do they go? What does that mean? So that it’s also a super analytical process, where oftentimes a lot of people’s views on these things seem to be more skewed based on their political views or whatever rather than a purely mechanical look at how the system works.

Bill Fleckenstein:

Since you’ve kind of thought ahead and tried to think through the unthinkable, so to speak. I understand completely the case for the bond market, starting to revolt and take the printing press away and the way you describe it. What I have trouble figuring out is how the dollar declines against other, say Japan or the Euro, when they’re pursuing similar policies, although we’re in different phases of them, particularly versus Japan. I mean, I know it can happen, but I can’t create an imaginative framework as to how that could take place. Since you’ve thought about it, could you kind of describe how it might, take a guess at how that might happen?

Greg Jensen:

Yeah, well, let me first say on the first part of your question was, and I just want to say the way what I’m saying about bonds are slightly different than what you’re saying. So let me just clarify that first. I don’t think to be clear, the Fed can’t have the printing press taken away from them by the bond market, right? I think that was the fundamental mistake. The bond vigilantes thing is if the Fed can print money and buy the bonds, they can drive the bond yield wherever they want. They just have to live with the repercussions of that. The repercussions of that show up in inflation and currencies, and then the Fed has to decide how they react to that.

Greg Jensen:

So, what I think is going to take away the printing press from the Fed is the economic reality of inflation, et cetera and the Fed is going to start lowering their purchases, and at what level will you attract the private sector in to fund this budget deficit? My guess is in today’s conditions and I think it will be worse in the future, but in today’s conditions, it will probably take something like a 4% bond yield to attract private sector capital to fill the budget deficit if the Fed wasn’t filling half of it. Something like that.

Greg Jensen:

You can look at who would be the buyers, what price are they requiring, whatever. So, it would take something like that. Now, will the Fed allow that? They’ll buy the bonds to get the outcomes they want, but if the outcomes become a problem for them, they’ll start buying fewer bonds and allow the private sector set the bond yield. That’s how I think the bond sell off, the first phase of the bond sell off will likely occur that the inflation.

Greg Jensen:

Now, on the currency question you’re asking. I don’t necessarily mean I agree with you. Japan, Europe, all roughly in the same boat, although to be fair, what the US is doing today is beyond any of those in terms of the fiscal policy element of this. And way beyond. I mean, a lot of times we get the question like, well, Japan ran big deficits and printed a lot of money. Yes, but only in a very passive sense. Meaning, most of the deficits were revenue declines, not spending increases. The US is a spending increase surge, not a revenue decline story. In fact, revenues are surging.

Greg Jensen:

So, A, Japan didn’t do very much relative to the deflationary pressures. The US is doing five times more than anything Japan ever tried and so, that’s really important to realize. And the US is pushing this in today in a procyclical period, so a very extreme difference. And I think that is, so innate even now. The budget deficit itself has two sides on the currency, right. What you’re seeing is the dollar can be strengthened by the budget deficit, because foreigners buy some of those bonds. They turn their currency and they buy US bonds. US higher interest rates relative to the rest of the world sucks in some capital. Of course, whether it ends up being bearish or bullish, it just depends on how much of the money that’s printed and then spent goes out in terms of consumption or investment into the rest of the world and the netting of that.

Greg Jensen:

But the longer term path is printing money driving down the currencies, not necessarily relative to each other, but relative to everything else. And so that’s where you see it if you don’t get it in relative currencies, you’ll see an inflation. Now, not every country is doing this, so it’s also interesting, like financially where the banana republics kind of is like the developed world is now the banana republics. You go to look at Mexico’s monetary policy or whatever and it’s much more like US in the 1980s than the US today in terms of that.

Greg Jensen:

So, you also have a shifting between which Central Banks can get away with this, and the difference between countries that are still building their credibility, operating very different than those that are using their credibility. And so you are also, I think, you will see a shift among the currencies where these policies are not occurring and the currencies where they all are. But more generally, it will probably show up in inflation and real assets that currency weakness across all of those areas.

Grant Williams:

Greg, let me go back if I can to something you touched on very briefly a little while ago. And that’s you talked about societal problems as an almost inevitable outcome of this. Now, again, that historical lens is enormously instructive in terms of how these policies tend to ripple through society. I think anyone who’s paying attention can see those ripples taking place now. Ironically, with kind of social media and the general media landscape being the way it is, the ripples are kind of disappearing. It’s hard to put them together, because you see so many different inputs into your media feed. It’s not coordinated in the three network channels as it used to be.

Grant Williams:

But talk us through how you think about these potential societal problems, because they’re not just US-based. This is happening in France, we’re seeing protests in Australia, we’re seeing protests in the UK, that fabric really feels to be under pressure. So, how do you think that through in terms of what that might mean for stability of the financial system and potential asset prices if it does start to escalate from here?

Greg Jensen:

Yeah, well, like you said, I think history is a guide and that fabric that you’re describing. That didn’t always exist, of course. The television three networks uniting a nation or whatever. That’s a certain period, a short period of post-World War II United States kind of thing. You go back before that, the media is local and newspapers and whatever. And everybody’s hearing, you have a similarly divided country in many ways. And that’s where we think the ‘20s and ‘30s are. Again, I don’t want to overstate the similarities, but there’s a lot of similarities where you have disinflationary wealth divides. You have media pretty divided as well. You have very different stories, and the US handles this better than any other country in the world, but still radical change, right?

Greg Jensen:

So, you go through the 1920s and you get to FDR and you get coming off the gold standard and all of these things. Radical change, radical change that really work in the sense that the US if you take kind of the basic balance that has worked. It won’t necessarily always work, but has worked with US is this balance between democracy and capitalism. Staying in some harmony that capitalism has a winner-take-all phenomenon. Democracy as one person, one vote imperfectly as we do it, but still pulls back in another direction.

Greg Jensen:

And you see those waves, right? But you get this period of the 1930s, where you had a fragmented country. It comes together, it comes together in part because you’ve joint enemy. Without that is a question how you come back together. But anyway, so you go through that period of radical change and extreme division through it, a joint enemy, et cetera. You come out united and because of the inflation of the war, the private sector comes out totally unindebted while the public sector comes out with high debts. So, now we have this sort of playing out again, in a sense, but without the common end without anything pulling us together. Many things dividing us, very few things pulling us together.

Greg Jensen:

But you’re having that revival of the private sector debt getting pushed to the government, the government printing away that debt, very similar to World War II. You come out with high nominal debt of the government and lower, a little bit lower private sector debt. So I think that, I may have lost the thread of your question a bit. But the basic issue is that I think you’re right, that we have this, divide this division. It’s not clear how we fix it. But one thing that we know is we were on an unsustainable path of more and more concentration of wealth. Technology creating a winner-take-all society. Having so much of growing more than the majority of the country losing real purchasing power.

Greg Jensen:

That’s not a sustainable democracy. You are going to have to give on something. And so then, what do you give them, right? How do you do this? Do you print money? Do you create inflation? Go down the paths of UBI? Do you do something else? What do you do? That, we’re stumbling through and it’s very possible we fail in finding a solution. But what I do think is true is the old process of, let’s say, private sector dominated, technology dominated, more and more corporate power, was not going to work. That something had to give and we’re in the process of seeing whether the things that we’re doing are better than that. But it was a natural outcome that there was going to be a counter reaction.

Greg Jensen:

And you’re seeing that and you continue to see it with the disgruntled miss that the counter reaction has not done enough. And I’m not sure that we have, we know what the tools are to do this. So, in a lot of ways, history would also suggest, you actually need a terrible crisis to reunite countries like that. Without a terrible crisis, it may be impossible. The US history divided in the Civil War, you get the Civil War, you come back together to a certain degree. You have the divisions, again, really building up into World War II and World War Two brings it back together, but can you get through it without a grave crisis? Obviously, that’s the hope. But there’s not a lot of evidence in history that you’ll get that coming back together without some significant break.

Bill Fleckenstein:

If you were to guess at what might be the first sort of canary in the coal mine that would suggest that market participants have decided that inflation is going to not be transitory, going back to financial markets, again, away from the geopolitical. Where would you guess, I know, this is a guess, but you’ve thought about this, I’m sure. Where might it show up first, in break evens, in FX? I mean, I can come up with various different scenarios. But do you have a thought about where it might happen or you just say, “Look, we’re just going to try to recognize it as it happens, and not have a prejudice as to where it’s most likely to occur first?”

Greg Jensen:

Well, I think, A, I think you’re seeing it all over the place, right, that you’ll see it in commodity prices. You’ll see it in supply lines being overwhelmed by demand. You’ll see it in wages. You’ll see it, and basically, you look at that whole series of things you’d expect to happen, almost every one of them is happening. When we look at what inflation pressures are, like the whole dashboard is telling you exactly. You got bubbles. You got everything that you would want to see, right?

Greg Jensen:

And so, I think that the indications are that you’re seeing it and that the main question, the thing, the next step is, “What will the policy reaction to it be? Is all that transitory somehow?” The reason that I don’t think you’re going back, like if you basically take what the markets are saying today, I think they’re saying, “Well, the policymakers are going to maintain policies like this.” And we’re going to come back to something like we were pre-pandemic. But the balance sheets are nothing like they were pre-pandemic. I mean, people have gotten so much wealthier that if you take the things relative to where they were pre-pandemic, you’ve got long rates, interest rates are much lower, money printing is so much higher, balance sheets so much stronger.

Greg Jensen:

The employment situation has never been this tight. You just, nobody can find anybody. And the supply lines are so much more overwhelmed than they were before and household wealth has never been anywhere near this. Paper wealth has never been near these levels. So across the board, you’ve got the things we’d be looking for. And the main thing is, so everything else is gone. You’re deep into the late cycle for everything except the Feds, like that’s the only last moving piece. And that’s what I think it’s like, so these are the indications. And now, it’s a question of when will that manifest in Fed policy. And if it doesn’t manifest, I think you will see the incentives are to accelerate that. So, I think what you’ll see is more people borrowing to take advantage of the extremely low interest rate relative to inflation and anything.

Greg Jensen:

You borrow and buy almost anything and probably be better off. I mean, a little bit of a joke on used cars or whatever. But if the Fed doesn’t control this, you just create that incentive massively and I think you’ll see more and more of that. And eventually, that forcing the Fed getting dragged up, not so much by the bond market, but by that nominal GDP and the recognition that the inflation problem is here to stay. So, I think that’s what you would see. And I think you will see that taking advantage of that arbitrage grow and that will be the pressure that will sustain the economy, and force the Fed into moving.

Grant Williams:

It’s interesting, Greg, because when you kind of think these things through and I think a lot of people have gone through the same thought exercise and come to those similar, if not the same conclusions. So it really boils down to a question of what is the event, the number, the print, whatever it may be that finally forces the Fed’s hand? Because if the three of us can see this stuff happening, other investors can see this stuff happening, we can see these signals. The Fed put governor after governor up behind the dais somewhere and they tell you that there may be some froth around the edges, but we’re not worried that things are getting overheated, which is clearly nonsense given just about any metric you look at.

Grant Williams:

So, it seems to me, it boils down to a fact of what’s going to be the tipping point? What might be? Is it a double digit inflation print? Is it some kind of enormous weekly earnings number? What could it be do you think that might finally mean they cannot stick their heads in the sand anymore and they have to do something?

Greg Jensen:

Yeah, well, my thought is A, it doesn’t have to be that dramatic, right? That this just keeps time keeps plugging along. And I think you’ve seen in the last three months, the inflation prints have been pretty incredible, that people can keep writing them off. How many, if you analyze them, they’re 9, 10, 11 kind of numbers. And how many of those are we going to get before people, before even the Fed says, “You know what? We should start withdrawing liquidity.” And all of a sudden, the sensitivity to that liquidity and all these assets that require the constant printing money to sustain the assets, because there’s no cash flow, to sustain them.

Greg Jensen:

That I think that it may not be dramatic. I think they will continue as much as they can to go really slow, but I think you’ll see continuing of those prints and them moving and them moving in a way they remove some of the liquidity and that getting forced that way. Now, it can be dramatic, I think there is a chance that they’re slow and things accelerate so fast that you do see some of those things. But I think the evidence even last three months has been interesting, right? That you get these pretty remarkable data prints and still very little reaction. And that tells you both how important the liquidity is and how unimportant at this moment those facts are.

Greg Jensen:

And that the second thing is, though, but I do also believe that they will eventually react to those things and they’re getting put more and more in that corner. And that they will eventually react to those things because those things build their own momentum. I mean, just think about what’s happening. What’s going to happen with wages? Wages are going to accelerate at a rate we haven’t seen a long time. Think about Social Security payments that they’re going to be indexed next year. So, security payments are going to be indexed to this inflation print. That’s going to be massive.

Greg Jensen:

So, a lot of things are happening with a lag. So, there’s some of the stuff that’s behind us because of the pandemic, coming back from the pandemic and such. But a lot of this happens with the lag, the wage move and the fixed payments on Social Security and such that are just revving up, right? And in past periods of inflations, you’ve never had Social Security to be as relevant part of the economy as it is today as an example and it’s indexed. So when you look at what causes the ongoing of the hyperinflations in developed worlds or whatever, indexation is such a big important part now. The US doesn’t have too much indexation, but it does have more indexation as a result of Social Security and some pension benefits and such.

Greg Jensen:

So, anyway, all of that, I think there’s a decent chance. It feels gradual when you look print by print, but I think nine months, we’ll look back and say, it felt gradual day by day, but that wow, we’re in a totally different place than we were when we had this conversation.

Bill Fleckenstein:

In listening to you just walkthrough that, it seems to me almost a slam dunk as much as anything can be with all these moving parts, that given when the Fed is finally forced to acknowledge that if inflation is going to be non-transitory as it sounds like we all are assuming, they’re almost certainly going to be behind the proverbial curve, when they start to act, it would seem to me. I just can’t see them doing something radical and get out in front of it. And they’ve already laid the groundwork for that anyway with all their speeches about averaging the inflation and, and running the hot and all that sort of thing.

Bill Fleckenstein:

So, it occurs to me that a second order problem might be if they are slow to react and withdraw liquidity, and that they run the risk of losing some credibility when people realize that they’re moving slow and maybe they can’t act to get in front of it, it creates a whole other set of problems. I mean, I don’t know how likely that is.

Greg Jensen:

Yeah. Well, and I think that’s the… well, I don’t know whether that will be this cycle. I do think eventually that’s the cycle. That it will be, but I agree with that as a long-term outcome. Now, if you said it, just to take the slam dunk thing. We’ve all been doing this long enough to know how impossible it is. It’s hard enough to describe what happened, to describe what’s going to happen. And that the main thing that I’d say if we’re wrong about this in this discussion, like what’s the future where this, it doesn’t play out anything like what I’ve described, right? Which is also I think, plausible.

Greg Jensen:

I’d say much less likely but plausible, which is you end up with now, that the technological deflationary pressures are so strong that actually this is just a short-term mismatch that you get plenty of demand, you have plenty of supply at very low marginal cost and this eases. The inflation pressures ease the supply lines, eases that past the sort of the pandemic, and potentially fiscal policy is removed faster than I expect will be, the Republicans win, et cetera. You end up in a world and obviously, some of the news out of China, whatever. You get a China slow down or less movement into assets in China. You have some more excess liquidity in the world. That and I’d also say that globally, that there’s still an excess of money, liquidity printing, not nearly the same budget deficit. So those would be reasons that there’s a lot of liquidity, you maintain low interest rates and that’s plausible.

Greg Jensen:

The main thing, the main reason I would say, if that happens, not a problem. For most people, that’s a good world. The assets will be fine. The thing you have to worry about is the world we’re talking about. That world will continue to generate liquidity continue to provide assets. The world you have to worry about is if those things don’t happen. And then that getting to the last point back to maybe not this cycle, but if you do all of this and it comes back in. There’s no inflation problem and no currency problem. I mean, just think of how empowered you are in the next downturn. And so that’s the best scenario.

Grant Williams:

That’s a good point.

Bill Fleckenstein:

Well, just to be clear. The slam dunk part, I didn’t mean on the outcome. I meant that the Fed would be behind the curve. That was the part that I thought was a slam dunk, not the future.

Greg Jensen:

Yes, yes, they are behind the curve and they will be that. They’re in agreement. [crosstalk 00:58:59].

Bill Fleckenstein:

That’s all I was saying.

Greg Jensen:

Yeah. Okay. I’m sorry.

Bill Fleckenstein:

No, no.

Grant Williams:

We’re running out of time a little bit here. But I’d love to just talk a little bit about confidence. About how you guys factor confidence into your model? How you kind of measure and where you think we are in that stage? Because we’re seeing a lot of University of Michigan, there’s some really wacky numbers coming out in some of these confidence surveys. So how, what kind of an input is that for you and how do you monitor it and how do you kind of weigh it when you’re trying to figure out what happens next?

Greg Jensen:

Well, I think mostly we track money and balance sheets and confidence are usually, it could be a little bit of a trigger to that. But what really matters is how money is moving, so we don’t overweigh the importance of confidence, we do have gauges. And I think sometimes confidence and animal spirits are a theme that we factor into our process to a certain degree. But they’re limited by balance sheets, right? So, if you take when the Trump tax cuts come out or whatever, there is this rise in corporate confidence in such that has some effect, but it’s limited by balance sheets and those things that limit it.

Greg Jensen:

Today’s building in confidence combined with the balance sheets or whatever it is a very different sort of much more fiery set of conditions because you have such a radical change in the preexisting conditions to which money is available to do that, right? You have more money on balance sheets than you’ve ever had. You have more wealth than you’ve ever had, so the actual ability to combine the confidence into actions is quite different. And so, I think, generally speaking, you want to be doing the opposite of what everybody is doing.

Greg Jensen:

So again, if people are very confident in their asset, that’s a negative sign, but it’s much more negative if that confidence has already drawn the money in. If there’s more money then it’s a different story than if the confidence and the money have already moved. So, it really depends on how that confidence and the balance sheet movements are interacting.

Grant Williams:

Okay, perfect. Well, look, Greg, we’ve just about run out of time. I can’t thank you enough for taking the time to chat with us. It’s been hugely enjoyable and incredibly, I think useful to people listening to this. Just the perspective that you guys have and the work you’ve done is of a level greater than most investors have the capacity to do. So, to be able to share in that thinking and give people a window into the inputs that you guys have put together is a remarkable gift for a lot of people, so thank you for that.

Greg Jensen:

Well, thank you. It was a lot of fun and I appreciate what you guys are doing, getting all these different points of views out there on how this is going to play out. And we’ll see. It will be fun to do a retrospective five years from now.

Grant Williams:

Yeah, yeah. Assuming that, I mean, look, Bill and I’s hair can’t get any grayer. You’ve got some mileage in the tank there, but Bill and I, we’re stuck the way we are. That’s one thing for sure. All right, Greg. Listen, thank you so much.

Greg Jensen:

Thank you again for your time.

Bill Fleckenstein:

All right, thank you.

Grant Williams:

I really enjoyed that. I have to say. I mean, it would have been so good to have more than an hour, but I just, I really thought that was a very interesting conversation, I have to say.

Bill Fleckenstein:

I did, too. And I think from a macro perspective, we covered a broad area. Had we tried to get into more detail in almost anything, we would have lost the thread of the macro.

Grant Williams:

Yeah, exactly, yeah.

Bill Fleckenstein:

Because I wanted to ask a couple of questions about how do they know if the algo got off track or if the theory got off track? And how do they reckon? I would love to have talked some about that as an old programmer myself. I’d love to get into that, but I felt like it was more important to hear the important things rather than some of the details.

Grant Williams:

Yeah, I agree. With any luck, Greg enjoyed it as much as we did. And we can persuade him to come back and continue the conversation because it was an awful lot of fun.

Grant Williams:

All right, mate. Well, the journey continues. Our thanks to you out there for listening. Hope you enjoyed that as much as we did. If you’re not following us on Twitter already for some bizarre reason, you really ought to rectify that. You can follow me @TTMYGH.

Bill Fleckenstein:

And I’m @fleckcap.

Grant Williams:

He always has been and he always will be. Mate, I will talk to you soon.

Bill Fleckenstein:

Look forward to it next time.

Grant Williams:

Take care.

Grant Williams:

Nothing we discussed during The End Game should be considered as investment advice. This conversation is for informational and, hopefully, entertainment purposes only. So, while we hope you find it both informative and entertaining, please do your own research or speak to a financial advisor before putting a time of your money into these crazy markets.

Read More