market folly

We're posting up notes from the Capitalize For Kids 2018 investment conference.  Next up is Bob Prince, co-CIO of Bridgewater Associates.


Bob Prince's Capitalize For Kids Presentation

•    Presentation title - “Outlook and Investment Strategy”
•    Look back over the past decade and present - distill to cash flows and discount rates = prices and returns
•    Beneath that is money and credit flows, which determine discount rates
•    These are below the surface primitives that drive the headlines
•    10 years ago high risk premiums, today low risk premiums. These have driven returns
•    Transitioned from long period of monetary easing to tightened
•    Flow of global money and credit is gradually rolling over
•    The pace of monetary tightening is moderate, mostly driven by the Fed via roll down and short rate, with impacts on USD
•    While unusual for this stage of the cycle, the global financial system is not over leveraged and is supporting growth. Typically expansion financed by leverage, but this expansion financed by money, not credit, as consumers have de-levered, banks financed by core deposits, banks are lending. Capital Markets seeing low credit spreads, no credit sell off despite stock market pullback. Money pull back, but economic growth is still booming, pushing up cash flows. Strong year on earnings still. When does monetary tightening impact credit, then we have impact on economy and earnings.
•    First stage of correction / recession is just a monetary pullback, but if credit and risk premiums are affected —> earnings and economic impact which leads to a recession
•    China policy is now of comparable importance as the US and Europe. As China’s labour gets more expensive, we see outsourcing of labour to adjacent countries, which is becoming an independent Asian economic bloc. China + Asian 8 country bloc roughly has a GDP of Europe or USA.
•    Expected returns of assets are low and the next downturn present unique risks
•    Pullback of liquidity is listing the yields of all assets,
•    First time since 90’s we have seen real monetary tightening
•    A chart with asset returns at different stages of the cycle
o    Late cycle, monetary tightening, shows everything suffers except commodities
o    Early and Mid cycle, traditional assets perform well.
•    Thinks we are approaching the later end of the cycle where inflation accelerates and commodities will benefit


•    Unique Risks in the next downturn
o    Central banks ability to reverse the downturn is more limited - need 500bps rate cut to turnaround, QE mostly spent
o    Political divisions will impact effective policy action
o    Deflation with interest rates near zero can trigger a self reinforcing rise in real interest rates and rising risk premiums
o    Lots of obligations out there to be kept - pensions obligations, etc
•    Look east


•    Asia bloc taking share of global output very quickly. Increasingly independent of the issues of the west, driven by Chinese policy, which leads to independence from west. So adds portfolio diverification due to independence of economic returns. 1 year growth of GDP > Mexico GDP, 5 year > Japan, 10 year > Europe
•    Balance a strategic mix, go to the beach, earn the risk premium, and diversify asset classes and macro exposures. Balance the risk allocation to growth and inflation, so when economy goes up or down, inflation goes up or down, still earn risk premium
•    50-60 long bonds, 20 equities, 10 energy equities, 10 gold equities. 7% a year since 2000, 10% since 1970. Diversify, balance exposure to growth and inflation. Not exposed to sustained inflationary or economic situation if you listen to that.


Be sure to check out the rest of the presentations from Capitalize For Kids 2018.