Bridgewater on Bubbles

all mean for the outlook for inflation and financial markets. Well, we'll get into it with the co chief investment officer of the world's biggest hedge fund firm. But first, Charlie Pellett let us know who this week's mystery co host is. Liz Capo McCormick is a reporter for Bloomberg who began her career on a wall screen trading desk before being lured into media. She actually he has a degree in physics, which means she can spot a Mike Reagan tangent from

a mile away. She's excited to do the podcast because now when Reagan asks her dumb questions about the Fed, she can just say, listen to the tape, Mike, Liz, I'm not sure, Charlie is right about that. I think I'm still gonna be asking you questions about the FED on a daily basis, as as is our normal routine. So, uh, we can't talk about physics, and God knows I have to use my physics in a lifetime. We could, I will not as if I know what you're talking about,

but we better not. But let's bring our guests in. I don't know if he has any thoughts on physics, but I know he's got some great thoughts on the market. Uh. He is, as I said, he's the co chief investment officer at Bridgewater Associates. His name is Greg Jetson. Greg, welcome to the show. Well, thanks a lot, it's good to talk to you guys. Greg. Let's get right into it,

uh and talk about the FED me eating on Wednesday. Um. You know, my impression is the statement itself and the press conference from Chairman Pal didn't really move the needle much as far as I think what a lot of market participants really crave. And that's some clarity on when we can expect asset purchases to begin to be tapered and eventually after that a normalization of interest rate policy.

But I'm just curious what your reaction is, UM, Did you take away anything any new information from that UH statement and discussion from Chairman Palu. Yeah, nothing new, particularly in on Wednesday's message. But the basic picture is really important and really necessarily to talk about it when you're thinking about markets and macro economies, which is that we're

in a new paradigm of central banking. That if you go back over the last fourty years, starting with Vulgar, you had an inflation fighting what first phase was a monetary policy one what we call kind of managing the economy through interest rates and lower interest rates causing more private sector debt, higher interest rates causing a debt cycle in the opposite direction. You move past the financial crisis.

In two thousand eight, interest rates get all the way to zero, private sector debt hits its peaks that even at zero interest rates you can't stimulate, and you move into money printing making up for the loss of credit. And that's what we'd call monetary policy to where you go quee by assets with it. It affects the economy,

but very indirectly and much more effects asset prices. And here we are, and what we consider an MP three world where in two thousand eighteen the FED kind of learned the final lesson that they don't want to be too preemptive. That they started raising interest rates before inflation came. It had negative effects and unnecessary negative effects in their mind. And so here we're in a world where monetary policies

mostly supporting fiscal policy. It's not as important as fiscal policy, and it is not going to be preemptive that they are gonna wait and wait and wait for inflation to rise, for bubbles to form, but four than take any action, and that that's the big deal here. And in a way, this is a dangerous territory, but it's also necessary territory. When you look at the conditions that we had coming into the COVID pandemic. We thought this movement to MP three would take five to ten years. But the reason

that it was inevitable was there. So was the essentially the level of io used in the level of wealth can't be paid back through income, so you have to print money to support essentially the promises in the economy. And there's so much division in the country that stimulative, more inflationary policy makes more sense than this forty year pro corporate lower and lower inflation environment. So you've gotten

this shift. The shift is necessary, but now we're in a whole new set of risks that you know, most market participants haven't really had to deal with because the problems of of these types of policies haven't really been around for forty years. And in the short term, the more easy, the better. The countries that have done more fiscal and more mod terry are better off in the countries that didn't. That's evident, and and that that is

going to push itself inevitably until those policies cause problems. Greg. I'll jump in something also about the FED, but touching

on what you were saying, this paradigm shift. I'm curious you probably heard Jerome Pale in his press conference this week that he was he was asked specifically about, oh, the break even inflation rates have risen quite sharply, which I know you've noted in your recent research, and but he said, no, we're fine, They're about in line given the difference between CPI and what they track with about two percent, and we want inflation expectations to be really

anchored at two when they're not there yet. So he seemed to really like, he didn't blink that he's at all concerned. And when you say this paradigm shift is necessary, but it creates risks. Do you think that he might by the time he's concerned, they might not be able to slow the inflation move or you know, how do you read that or are he kind of trying to

convince that he could do it? Well? Yeah, I think that they're the power of tightening monetary stolt policy will still be pretty successful when they get to it, So we'll see. I think the question is whether they're gonna

want to given the trade offs. So it's gonna be difficult, right, And this is why studying like in retrospect, it looks like monetary policy in nineteen seventies was totally foolish to allow inflation yet as high as it was, but it was dealing with problems, real problems at the time, well, oil shortages, etcetera. There's a reason real interest rates were

kept low for extended period of time till inflation rose. Similarly, today, with all the challenges we face socially, there's a chance they're gonna purposely be behind the curve for an extended period of time because inflation is better than the other options UM, which the other options are difficult. If you take where asset prices are today and you think about how much income needs to be generated to support those asset prices. In the end, assets can only be worth

the cash flows that they generate. To generate enough cash flow to support this level of equity market, you need either a lot of nominal GDP, which either comes from a productivity miracle or inflation and you or a much lower asset prices. So what do you want. Do you want to collapse in asset prices or do you want a general rising and nonled GDP. If you take today's asset prices and look at how many years of income are required to support those, it's about twenty four years

of income. The only comparable periods in history there four of them. One was UM was right before the tech bubble in two thousand two thousand. One. Of course, that was resolved through a collapse in asset prices, again collapse and asset prises. But on the other hand nine and nine five were absorbed by inflation, which is the other choice UM where nominal g to be caught up. Real asset assetprises did bad in real terms, but did quite well, quite fine in nominal terms, and nominal GDP caught up

to the assets through that process. So we think you're gonna face that dilemma that if they withdraw liquidity, that's gonna have a big impact on asset prices because asset price has been so supported by the liquidity, and if they don't withdraw the liquidity, they're gonna have inflation problems.

And so they'll go back and forth between that challenge of how much you wanted to show up in lower asset prices and how much you wanted to show up that pressure physics put it that way UM to uh show up in asset prices, and how much you wanted to show up in inflation. But there is no easy way out of the current dilemma. That's about all the physics I can handle. I think Letzletz can get into

the co of the coefficients and whatnot. But know, to me, I'm I'm sort of in awe and impressed of how well pal kind of dodges the question of of are you even thinking about talking about thinking about maybe whispering about tapering UM? And I think that's very understandable given you know the reaction we saw the taper tantrum a few years ago that he wants to not sort of tip his hand about when and if that might be. But I wonder if that, as you're talking about, there

is gonna probably be a reaction in uset more markets. Um. You know, the joke I've been saying is tapering ain't easy. I don't I don't see any way to do it easily. Um. And I wonder if if this um sort of posture that he's taking with it now perhaps could condense the time between when they finally signal that it's coming uh and when they actually start doing it, and perhaps causes the tapering to be more aggressive than what the market's expecting. And I wonder, you know, how much does that matter

to markets? Is it all a matter of sort of what the Fed fund futures traders and what the eurodollar futures traders are pricing in. Is that basically the the main metric that will determine how violent the reaction is from the market when when it does finally come time to say, yes, we're thinking about tapering, Yeah, well it's gonna be a big deal. So I think UM, in

asset prices. Right, there's and I think there's this important separation that's gonna matter and is actually the biggest risk for asset prices is the separation between the real economy and asset prices. The real economy is about to have the biggest boom it's ever had. We're gonna go and

surging through the level. So if you look at where we expect will be to a month from now, you're gonna robably have four percent unemployment rate, really hard to hire anyone, rising wages growth having been eight nine um. And the Fed and what could the Fed mindset that if you look out, you know, eighteen months there's only twenty five basis points of tightening. Price did barely anything right. Yet they're gonna be facing those conditions. So I do

think we're gonna force their hand. It's gonna force their hand. The economic growth isn't going to be driven we're so affected by the interest rates, at least in my view, because it's so fiscally driven. The checks have been written, the wealth is there, um, the the fiscal spending is still in the pipeline, so it's not as interest rate sensitive as let's say, a normal business cycle created by um mainly private sector outcomes. So you have this possibility

that the economy is continue to surge ahead. The FED still has these very low interest rates and they have to start reeling back. At the same time, the Treasury is going to be issuing for a long time of GDP of bonds. Currently the Feds buying half of those, and if they buy none of those, the private sector has got to come up with the money to buy GDP and bonds. Are they going to do that at

this rate? We don't find a lot of buyers in the private sector likely to buy bonds at anywhere near these rates to that quantity, right, And that's gonna be the first thing that's gonna move, is who's gonna buy the bonds when the Fed doesn't. When they face those conditions, they are gonna taper, and then you're gonna need to fill that gap, and you're gonna find out, hi, how hard, how hard it is the FED will find out with us. And then what are the implications. I actually think the

implications for markets will be pretty important. The implications for the economy will be less set. At which point the Fed's gonna face the second elements. Do they react the asset prices. Everybody in asset markets is so used to

them reacting with a trigger finger to asset prices. But the reason is that the market the economy has been so tied to asset prices, where if the economy is being reduced by fiscal policy, all of a sudden, you've got two different worlds going on, and you've got the possibility that FED won't backstop the liquidity coming out of asset prices, and asset prices can fall while the economy rises.

That's actually a reasonable outcome, in a normal outcome in a world where fiscal policies driving the economy rather than the interest rate cycle. And so that's really where the risks are getting to be really big. And then the worst thing for the markets in a sense would be a very strong economy that doesn't require this much of liquidity while the asset prices required this much liquidity. And that's the world I think we're heading too over the

next six months or so. In that world, it seems like somewhere there's got And I'm not a stock girl, Mike's the expert on that, but it just obviously I watch it, and if if the markets less interest rate sensitive. You know, for a while we were thinking, oh my god, where the tenure was going, even though it wasn't too high relative to history, was going to up end the

stock market and it hasn't. And with what you just laid out, Greg, does that mean we have some more glide paths for yields to go higher before the asset prices really start going. But obviously there's a point, right, And it makes it seem to me, is it harder to know when that point is um and is that global demand going to come in which it kind of has over the last couple of years to kind of tamp those yields down or you know, That's what I think is tricky. It's a new paradigm. Like you said,

where where does the cracking point? Yeah, well, but you can still look at the quantities, right, So the quantity is much more than it has been in those past episodes of foreign investors just are unlikely to feel that type of hole. So the main question is will the Fed continued to hold it for how long? But when they don't, it's going to be very hard. But I

agree again I want to separate. I think there are a lot of assets that will be quite vulnerable to arise in rates, but the economy won't be as vulnerable,

and that difference is the difference just thinking. Oftentimes we're thinking the economy and assets too much as a as being tied together, where obviously COVID christ is a perfect example of where the economy and the markets can go radically different directions than they did, and the reverse the reverse, where the liquidity comes out more money is spent in the real economy rather than financial markets. The most extreme example is the retail bubble stocks as an example where

people had nothing to do with COVID. Household savings reached record levels, the money goes into certain types of stocks and whatever. Now things are opening up, those savings rates are declining, there's less liquidity there, and those assets come down that we're so unhinged from the real economy anyway.

So differentiating what we think the real thing is going to be in the future globally is differentiating between the assets that require the liquidity in the very low real interest rates to make sense economically, with those that can benefit from the nominal GDP cash flows in the real economy, and separating between those the things that really benefit from higher dominal GDP will do well. The things that UM get hurt by less liquidity that have high duration, those

assets are in in a lot more trouble. So that'll be the kind of the differentiation that I think you'll start seeing. Greg. I'm gonna get a little greedy here and ask you a two part question. Uh, but you should be grateful. I I've been known to ask like twelve part questions. I'm gonna take it easy, just try

to try to keep it to two. But I wanted to go back to something you said earlier, and I know you've you've done some work on this and given it a lot of thought, and that it's that idea of the FED being behind the economy and how inevitably that's likely to cause some excesses in markets or perhaps an inflation. I'm just curious. So so the first part is, I'm curious if you're seeing that anywhere. I mean, obviously you mentioned the meme stocks. I think that's a clear example.

But are you ain't it anywhere else? Uh yet? And if that where, where are the sort of corners of the markets that you would look first? And then on top of that, UM, to me, I think bubbles are very strange phenomenon because the risk reward relationship is so interesting. It almost seems that as an investor you have to participate in bubbles because so many people will will call the top early and think it's a bubble too early, that that you really missed the best parts of them.

So I'm just wondering, you know, with all the brain power at Bridgewater, uh, if you guys are any better than us average mortals and trying to figure out sort of when the music is about to stop, when to once to get out of a clearly overvalued market, and all along the bridge waters history we've been systematic, you know, so we've taken very like the kind discussion we're having now, very qualitative view of the world, but translated into ways

to measure. So you take something like a bubble, right, bubbles a classic qualitative thing. How do you what do you mean bubble? How do you measure that it's a bubble? Is it enough to say prices are high relative to history? Or what's the actual measure? And then how reliable is it? And you know, we have six gages of a bubble that we use all over the world, right that you could apply it to cryptocurrency. You can apply it to anything you wanted in the world, the stocks, two bonds,

and anything that. You know that our basic scoreboard is our prices high relative to traditional measures, are prices discounting unsustainable conditions. So as an example today, um, you know, there's something like ten percent of stocks that are pricing in more than revenue growth and margin expangeon. Right. If you look at history, two percent of stocks actually achieve that. That's an extremely hard thing to do. Everybody's going to

be the next Amazon. Right. If Amazon was priced today as those ten percent of stocks are, if they I mean, if it was priced ten years ago as those stocks were, the the annual return on Amazon would have been like eight percent a year because it would already have priced in this incredible outcome that not every company does. Growing revenue you're faster, Um, so very very hard. It's not not counting the base effects from right, No, No, I'm

talking about right, ongoing growth rates. Without the base effect, it doesn't happen. That's very very unlikely to happen. Right. Potentially with inflation or something you might but but in a normal kind of forward looking picture, you don't get that two percent of stocks actually achieve them. So that's an example of discounting unsustainable conditions and not they can't as a group actually achieve that condition. The fact that new another now I'm on the third thing is new

buyers entering the market. How many new buyers are there, how big a part of the market they are. There's the broad sentiment measures, there's purchases being financed by leverage, and buyers and businesses sort of extending making extended forward purchases. That's our checklist for a bubble. We measure all the different things. And you see today a fair amount of the equity market in the US in the bubble, but

not the aggregate. So the aggregate, we would say is, you know, short of a bubble, but um, there are definitely pockets that meet those standards and um, and that's dangerous. And then you said, well, what do you want to do buy or sell them? Well, that's a whole other

dangerous thing. And that's where when we survived surviving two thousand, two thousand one, we had to draw down in two thousand, two thous and one associated with the bubble, both the dollar and the equity market and how that was playing out at the time, and that really forced us to get into flows, which is basically how we measure bubbles today is well, how where's the money coming from? Who are the buyers and sellers? What are their balance sheets?

Like how much more money can they put into this bubble versus how much um income they're getting and when does that start to flip? Right? And so for us, that process of being able to look at the balance sheets of the buyers and sellers think about when they've been stretched to an extreme where they won't have the money,

where there's more supply coming than possible demand. So you look at the I p O pipeline, you look at the creation of of new instruments, those things relative to that how fast those balance sheets are growing, And that's how we try to measure that, cris Cross. And it's

still a very very dangerous game, like you're saying. So the third part is be careful and be conservative in your thinking around the ability to time those things, because, like you said, that's kind of the easiest place to die in asset prises is trying to be short a bubble too early. Um. So I think that's the kind of the way that we um we go about trying to think about it and deal with it, and you're in.

What I would say is there's areas that look quite bubble like, are quite dangerous, but you also have the ingredients for bubbles that it's nowhere near as bigger bubble yet as it was in ninety nine. So we know bubbles can get bigger. And it's um and you have the perfect storm for bubbles, access liquidity, a very easy central bank at a pickup in growth and a pick

up in um new wealth. New Wealth tends to get spent fast, tends to get over extrapolated, and and so you have a lot of the conditions for an ongoing bubble. Now I think the trigger will be man. There's so much supply. The supply is coming at the market very quickly in those areas, and when the liquidity starts to get drained out, that's where you'll see that criss cross

of probably in more of those bubble areas. No, I was what I was going to ask Greg, is that one of the offshoots of the risks I've read that you mentioned of this MP three policy is that could be in the currency. I assume you're meeting a week or dollar and I wondered if you could talk a little bit about that. We haven't seen that too much yet, but you know what's the likelihood of that? Well, I think in the end, right, if you take the base,

there's the destiny of the path that we're on. Right, that we have learned that you could spend a tremendous amount of money every time the economy goes down, and you can print the money to pay for that. That the destiny here is that you'll keep doing that one way or the other. The politics are go in that direction, whether it's Republicans through tax cuts or Democrats through spending. Either way, that is likely to continue and and until you can't do it anymore. So what is the actual wall?

The wall is inflation. The wall is where a dollar risk or bubbles that becomes so problematic. Right, those are the walls that will prevent this from going on forever and um and the dollar risk is particularly important to consider, but it is worth focusing on the fact that it's a differential. Um So it's relative. So the dollar, how much of the dollar going to go down versus the Euro? Well, Europe's printing money as well, So what's the what's the

relative risk. So for US, the courtesy thing is looking at those differentials and the dollar. The US is on a path so many countries have saved in dollars. They recognize if you take China or others that you can never get richer than the country that prints the money. So if if they want to save in dollars, the FED can tomorrow print more dollars than China could ever

accumulate by selling US um stuff. Right, So eventually you're seeing, just from a geopolitical thing, that saving in dollars is risky for anybody that's competitive with the US, and that the fact that over time you're likely to see a change and where money will be saved at the same time you're likely to see more money printed. That's the picture that eventually will lead to a decline in the dollar.

That could take a while as a reserve currency and clide in the dollar, But in the short term, focusing on those differentials and the most extreme differentials are not within the developed currencies. It's really a lot of the emerging world. Ironically, if you take a cuntry like Mexico, you think of them as a kind of a monetary basket case. Meanwhile, there's so much more conservative monetarily than the than the US is running much lower budget deficits

and much less easy monetary policy into this. So you have these emergent currencies that are actually the ones following what would be traditional type monetary policy standards through a crisis, and the developed world doing something very different. So I think you'll likely, for a variety of reasons, have strengthened some of those emerging currencies, particularly the ones that are going to benefit from this growth surgeon in the US that don't require very much you s dollar liquidity and

so um. So I think that's the place you'll see the first really wave of strength, and more long term, the issue you face is the is the fact that the dollar reserve currency status is naturally changing, and the printing of money and using the dollar as a weapon geo politically is leading to a more rapid transition. So those are the things certainly something that the FED will be watching, but like you said, we're a long way

from the dollar being a problem with anything. The FED would be happy to get a falling dollar from years. So that's a longer term concern, not a shorter term concern, but it will be a measure of whether we pushed too hard. You know, Greg, I keep hearing a lot of people talking about the notion of peak growth, that this quarter may may possibly be the peak of GDP growth, the peak of earnings growth, UM, if not this one next quarter, UH, large part because of the base effects

from last year. And I guess for a lot of people, the same thing applies to inflation, and the the notion that UH any bump and inflation we see in the middle of this year will be likely either UH caused by the supply chain disruptions or the base effects from last year. I think there's a little bit of recency

bias at work to UM. You know, everybody was so worried about inflation during the first phase of chewey and it didn't come to pass UH that people are kind of assuming that's going to be the case UH this time as well in the long run. I know you've You've given a lot of thoughts to inflation, done a lot of work on it, UH, specifically the role that technology plays as a deflationary force, technology and automation and that sort of thing. So I'm just kind of wondering

what your overall sense of inflation is this year. I mean, is there a risk that that kind of consensus that this is just a transitory hot period for inflation service that that that's wrong, that this time is different from the first phase of quity, and maybe that technology effect on inflation will not be as strong as it used to be. Well, there's a lot in there, so let let me go backwards to the mechanics of That was

one of the twelve part questions. So let me go backwards here for the the first part you said is, hey, a lot of people thought that the first quit in two thousand nine was going to be inflationary. To be clear, we didn't. And let me talk about the mechanics of why when you use quantitative easing to buy assets, and you're doing that largely because there's a credit contraction, they

were off setting a correct credit contraction with money. The credit contraction was massively deflationary, and the money off set that, and when into asset prices, it only marginally went into the real economy very different. So you saw a big asset price move, but you didn't see a big move in CPI. You come to this policy where you're writing checks two people on the lower end of the income spectrum um and you're doing a lot of infrastructure, and

you're printing the money to do those things. Totally different. This is all of a sudden creating demand in the real economy without creating supply. So there's no supply associated with those checks, there's no new production, etcetera. It just comes in. So you have this this mismatch. So the belief that it's going to play out like post two dozen tend I think is is wrong and that it

is being underestimated. How big a turning point we are now if they pull back hard on fiscal and let's say the Republicans win in two or whatever, and you come back to the other direction on fiscal maybe that's

a different story. But if you go down this path of printing money to spend in the real economy or to get checks to people who have lower savings rates in the highest end, there's very different than putting the money into asset prices in terms of inflation in a good way, like that's a good redistributed and there's a lot of good in that, but it is different mechanically from the effect on on prices. So that I make

that point first. So I do think there's a big risk the market and the federal underestimating how fast this will happen. And everything is happening in warp speed. If you take the downturn in the Great Depression, right, it took essentially um seven years to get to the bottom of the economy and seven years to get back up. That's how long it took for policy, etcetera. In the financial crisis, you had eighteen months to the bottom, eighteen

months to come back up. In this crisis, you had, you know, such an extreme policy response that within a month and a half of the equity market collapse, you were two months later. You're back essentially to the old highs. Incredibly fast policy response, incredibly powerful, and the real economic effect will be slower than that, but could be much

faster than what we're used to. And so I think that there's a real risk that the inflation could be stronger and more permanent, and that it's largely a big part of the permanence will be the power of labor. Here we're gonna be facing such a shortage of labor. You're already seeing it all over the place, their shortages of goods and stuff. But there'll be a shortage of labor coming fast in the US and m that's a

big deal. And you've gotten now a big shift in the philosophy of government, certainly for now in the US, that you went forty years in a cycle of very pro government policy, pro corporate policies and pretty much anti labor policies for forty years, you have this turn, you know, almost with the hilarious ending of like the president, the last president checking stock prices and tweeting about them every

five minutes, um. As like the extreme of this very pro corporate environment, all of a sudden shifting to a different type of environment where regulation and taxes and um likely eventually minimum wage and these things are going the other direction from an extreme right and naturally will come back to some degree in the other direction. So all of those things are pointing in my mind to a more inflationary and not just transitory, but a pretty big shift, um.

And then it will be it'll be hidden in the transitory nature, much like inflation was in the seventies. When the weal shot comes, is it going to go? Is it going to stay? Of course, you don't want to tighten into an oil shock if you don't have to for good reasons. Similarly, the Fed's gonna look at this year and say, do we really want to tighten into a balance out of the virus, Like does that make sense?

But that's how inflation gets hardened, and and so I do think you'll see that argument, the transitory versus not argument be the big deal, as inflation is rising and I do think we're stuck with more of it for good reason. Now on the technology question that you ask, Yeah,

technology has been a major deflationary force. So if you take the five major forces, the first most important turning point force was central bank Pulsey high real yields drove inflation down, vulcor driving real real high and letting the economy go down until inflation came down. Big deal. So first there was the change of monetary policy in starts driving it. Then there's globalization so much taking advantage of

cheaper wages. There's also lower lower interest rates at tax policy that allowed a pro corporate environment that constrained wages so anti union um, and a very low regulatory environment generally particularly in the US, but generally global um. Most of those are changed, so you're left with technology as the deflationary force, and two points about it. It's certainly been significantly deflationary. The literal semiconductor impact of inflation is

starting to turn. It's getting harder and harder. We have more concentrated semiconductor industry than ever in the world. It's a big flashpoint in the world in terms of danger that there's a risk to supplies from a geopolitical perspective. So you went from let's say twenty years ago, where you had you know, five firms competing to make the cheapest semiconductors to now give three and it's not much

of a competition anymore. It's more of an oligopoly uh and UM and a dangerous supply point where people are turning to the sustainability rather than the cheapest possible supply chain. So you've got a big deal thing there now. More generally,

I think tech will be deflationary. There's still great inventions in AI and whatever they are coming, so there's deflationary forces, and to some extent, policy wise, you want to take technological deflation which goes to very few people the benefits of it, and transfer it to all of society, or else you're gonna end up in a dystopian kind of situation. So that's sort of the best way to look at

the policy today as well. Let's take the technological deflation and let's use it for society is good through um monterary policy three, through essentially investing in the in the economy and using printed money to do that to offset the deflationary force. Now where we are on that, it would look to me like we're pushing that to an extreme,

and you could do way too much of that. A little bit of that is the right move, but you get addicted on that, and too much of that more than offset the technological deflation, which when I look at the quantities, I would guess that's the case unless technological deflation accelerates massively from here. Greg One follow up to that is one of the things that a lot of people have said to me is part of the reason for the kind of secular low inflation environment was demographics

and low yields. Right, demographics. Somebody said to me the other day, oh, ten thousand baby boomers are still retiring all the time for the next decade. They needs to save. And I think there are some folks who did like theories that that that has kind of moved the the bias towards future consumption over currently, I just want to ask you about demographics. How do you think that weighs in? Is that changing or how how will that affect kind

of the inflationary forces and yield. Well, I think it's different for different um for different types of items. But I agree, I agree demographics are part of the deflationary force. Now, the demographics in different places are changing a different degrees, and so if you take the emerging world in India, whatever, you've got different things going on that an aggregate, I don't think it's quite as deflationary as it was when you see the shift in the demand towards the emerging

world from the developed world. But but um, you're right, although that's shrinking the labor force relative to the consuming bodies now to the extent of shrinks consumption more. That's one thing. But as you age, you're shrinking the labor force relative to everybody that has to be supported by

that labor force, and so it cuts both ways. The thing it certainly doesn't real estate if you take the Japan example, is like the classic is that you've got a lot of real estate built up for one level of population, you're shrinking that population, you have extra capacity. Um So, so I think it's a mixed bag, and it's a slow driving force of the disinflation pressures that

could easily be offset by these policies. And a lot of times we get the question, the Japan question or whatever, where well, then they run big deficits, and didn't they print a lot money? They did nothing like this, Just to be clear, while they ran somewhat big deficits, they were largely due to low tax revenue, not due to high standing huge difference in what the source of the

budget deficits it is. And then the second thing is while they printed money, they didn't print anywhere the money that were we printed recently until recently Japan starting to print a fair amount of money. But so the actual policies were muted relative to the inflationary forces and were nowhere near as huge as these policies shifts on. So it's easy to get lost in while it's a trillion dollars, there are a trillion dollars there, the magnitude of what is going on is you know, for the US is

nothing like this since World War Two. And similarly for Japan and other countries, they didn't do anything like this. While they had some of the same language, they weren't doing the magnitude anywhere near these levels. You know, Greg, this whole discussion, uh makes me think that it's it's a very tricky time to allocate assets and decide where you're gonna put your money to work. Listen and I were joking earlier. She said she she feels like she wants to put all her money under the mattress. I

can't do that because my kids will find it. Liz, I'm afraid my kids will find it. But before we got to the crazy things, I'm just wondering if quickly you could give us sort of your big picture thoughts on what proper asset class allocation looks like these days. Well, maybe you should let your kids decide with to buy. That says, that's been the right move for a while. But but but the on the thing is, what we

certainly wouldn't do is put cash under the mattress. Like the basic policy is to make cash be terrible, and so cash is not safe. So the money under the mattress is potentially the worst thing you could do, because the policy is to make that money worthless or worth less than it is today at least, And so what do you do? I mean, this is an interesting world, right. We have this conversation with our clients a lot, and I'd say the big thing is realized. Not all the

world is the US. Not all the world is pursuing these policies this way. So one of the things that's missing in most portfolios is appropriate global diversification. Try is facing other challenges, but very different than the US. Europe is facing different challenges as well. So a globally diversified

portfolio that hasn't helped. In the last fifteen years, the US has been dominant, and but if you look at how those things rotate over time, almost always the best country over the last decade is usually near the bottom in the next decade. And so a that's first thing is thinking about that. I think it's particularly important for what who will benefit from a growth surge but less

liquidity The US has benefited. The assets in the US particularly benefit from a high liquidity environment, and they benefit less they have less essentially cyclical variability associated with the nonl GDP. So look at who the marginal suppliers are. Anyway, that all pushes you to a much more global allocation. The second point would be environmental diversification. Are you prepared for stagflation? It's the real risk, which is they push hard to get the inflation and they can no longer

bail out asset prises. Do you have enough assets that will be acceptable in that environment? And there's argument about what those assets are, but but some mix of assets that will do well in a stagflationary environment would be really important. And generally nobody has those assets. Um So those are um you know, those are the kind of the big things that would come to mind in our view of what that outset allocation should be. So more

global diversification and more assets that can protect you. And probably the worst case is that stagflationary environment. Stand clear of the craziest things we saw in markets this week, Well, we're gonna diversify ourselves here into the craziest things we saw in markets this week. Uh this is a offend a listener favorite, Greg So uh So, no pressure, but I hope, I hope you came with something good. But let's let's start with you. What's the craziest thing you

saw this week in markets? Well? I think not that we've never seen it before, but the Treasury Department today sold four week bills at zero percent. So this kind of speaks to all the liquidity in the market and displite all the angst in the long end and whatever. You know, the government is just selling treasuries at nothing. So it's pretty mind bending to me. So do what do you guys think? Where's the demand that's causing that? I noticed a lot more money is going back into

money market funds. Do you think it's that Well? I think yeah. I mean at that level, I think it's known that the Fed's not tightening anytime soon, so there's a bunch of buyers at that level for that period of time. And so you see that, and you see the need for different entities, banks and others to actually

hold those assets that way given the regulatory environment. So you've got that it's gonna be a lot harder to get the very long duration supply field, but at the very short end, where you know you have the Feds back um, is much easier to fill in. All right, Greig, can you stop zero percent treasury bills for your crazy thing? Well, just back to like buying the thing as your kids would want to do with your money, I'd say the you know, just an example. It's a little stretch from markets.

But one of the interesting phenomenons that is near and dear to my youth is the bubble and baseball cards it's going and so seeing a well this is how football card is even more stretch. It's like the silver to the gold here and uh Tom Brady carter that sold for one point seven million dollars interesting enough, but

but sold in white coin. Um was a good example of what's going on in terms of there's all this new wealth, whether it's a cryptocurrency or new wealth created by tech companies and such, and the money is pouring from them, selling them selling those assets into the things they want to buy. And so it's been a kind of joke about it's like a bubble and everything nerdy.

So if you've got baseball cards, if you've got comic books, if you've got old video games, I mean, it is unbelievable what the market cap of those things are doing. And that's part of what's happening. The new wealth gets spent and it's where that money goes, and there's almost no limit you have, you know, billions of dollars of market captain dog going and like like they get buy

anything real in massive amounts. And that's what you're starting to see is the people that held those assets starting to cash out of those and buy something real. Where there's the new phenomenon of recent buyers coming into those assets, given cash to the people that are really originally produced them, and that money is flooding everywhere, um and and realizing what are those things that that money is gonna go by? That's really been the the play recently. I I am.

I share your fascination with that. I love these crazy collectibles that self for God knows what. I would love to know from what city the person who bought the Tom Brady card came from. I don't think it was Philadelphia, New York list, but I probably probably Boston, I'm guessing. But uh, but Greg, Mine's mine's in that same vein. And one of my favorite things is, uh, collectible sneakers, Not that I have any of myself. None of the sneakers I've worn are collectible to trust me on that.

You you want to throw them away instantly. But two pairs of Air Jordan's up for auction recently. One hasn't gone auction yet, so we only know what the expected value is. One has already gone to auction. The first pair we're Air Jordan's, the very first pair of Air Jordan's, or the first edition of them, weren't by Michael Jordan himself. Uh, they're up for auction. The other pair was Kanye Wests has a set of Air Jordan's out uh called I

believe they're called Yeasys. So the Air Jordan's ones and the Air Easy ones. I want to make us a quiz show for a little bit here. What do you guys, which which pair do you think is more valuable? Kanye's Jordan's were Jordan's, Jordan's Rookie Year, Jordan's Jordan's I think you're asking because Kanye Is Jordan's are better. I'm just going based on my judgment of you're asking the question.

It's the beha, it's the behavioral finance aspect that you really have to get right, and and Greg got it right that time. You're absolutely right. But the the spread in prices is amazing. Granted, the Jordan the Air Jordan's haven't gone on sale yet, but they're expected to get as much as a hundred and sixty four thousand. The air easies are already sold for one point eight million, so ten times the price of Jordan's rookie sneakers. But here's the crazy part. I haven't even gotten to the

real crazy part. The air easies weren't bought by a collector. They're actually bought by a company called Rares and their plan is to cut them up and sell fractional shares of the air easies as investments to other people. So, uh, Greg, I don't know if Bridgewaters in the market for say the laces from from the air easies for for the portfolio. My guess is no, Yeah, that's not quite our area of expertise, but it is a good example of what's

going on. And when you have so much money in financial assets, it will see go home in something and um and that that shift is happening and that those are those are good examples, and that's that's gonna be the big phenomenon. And when there isn't enough money coming into the financial assets, you're still going to have some of that money coming out. And so that's gonna be the kind of turning point because those people that have

accumulated wealth. What was the purpose of it other than to do something with it at some point and so um, So I think you'll see a lot more of crazy stuff as people cash in this extreme amount of wealth it's been accumulated recently. Absolutely reminds me of the old movie Brewster's Million. Remember what h Richard Pryor was just had to spend all the money. He bought a priceless

postage stamp and medal letter with it. You know, it almost feels like that's what's going on when they're like, if you can't keep it as an investment, so he used it to mail you had to use. Um, maybe I'll buy the easies and wearing arind. I can't afford the easy the air easies, so I could. But anyway, I think that is all our time. Liz McCormick, Greg Jensen, such a great conversation. Thank you so much, fear time and hopefully we can do it again. Thank you. What

goes up. We'll be back next week. Until then, you can find us on the Bloomberg Terminal, website and app wherever you get your podcasts. We'd love it if you took the time to rate and review the show on Apple Podcasts, so more listeners can find us, and you can find us on Twitter follow me at Reaganonymous, and Liz McCormick is at at McCormick Liz. You can also follow Bloomberg Podcasts at podcasts I Think You To, Charlie Palette, Bloomberg Radio, and the voice of the New York City

Subway System. What Goes Up is produced by Tofur Foreheads. The head of Bloomberg Podcasts is Francesco Leviy. Thanks for listening, See you next time.