Tuesday, January 31, 2023

Bridgewater’s Greg Jensen on inflation, energy crisis and UK outlook

Higher inflation will be around for longer than markets are currently pricing in, according to Greg Jensen, co-chief investment officer of Bridgewater Associates.

Speaking at the SALT conference in New York, Jensen gave his take on the global outlook, and described how strategies at the world’s largest hedge fund manager were adapting.

Here are five takeaways.

1. Higher prices will last longer than markets expect

Jensen believes the biggest mistake priced into markets right now is that the West can return fairly quickly to the low inflation seen before the pandemic.

“Markets expect inflation to come down to a little under 3% over the next 18 months or so, and that it will happen without much of a recession.”

He doesn’t believe markets are pricing adequately for how constrained policy-makers are and the uncertainty of the broader economic picture.

“We are still in the early phase of dealing with a radically different world than we had pre-Covid. A world that is de-globalising rapidly, that is de-financialising in certain ways.”

2. Tougher times lie ahead for the West economically

“[The US] has a 3.7% unemployment rate — it is easy for the Fed to talk tough about inflation,” he said. Jensen believes the “really tricky” time for governments and central banks will come when growth declines, unemployment rises and yet inflation remains stubbornly high.

“In our view the more risky part of the downturn will come when it becomes clear that earnings are falling and rates are still not falling, they are rising.”

3. Europe’s crisis will spark a market crash

Places like the UK and Europe “are simultaneously battling currency weakness, economic weakness and inflation problems,” said Jensen. “The downturn feels big relative to the long wave of [the] asset rally, but by historical standards asset prices are still quite high.

“That decline is still quite small relative to the underlying economic conditions. In our view there is a lot more to come. It will get scary when everyone doesn’t think it is a temporary blip, but a permanent phenomenon.”

Jensen called the energy crisis a “big jolting shock” for Europe which will have a more lasting impact than the Covid-19 crisis.

As with the delayed market response to the gravity of the Covid-19 crisis, he predicted the market wouldn’t react to the extent of the European crisis “until it was deeply upon us” and that could happen in the next couple of months.

4. Thumbs down for UK energy policy

Across Europe, Jensen is observing “pretty much a mini balance of payments crisis, and maybe a big one in the UK” — and he has a negative verdict on new Prime Minister Liz Truss’s package of energy support for households.

“Odds are it fails,” he said, describing it as printing money in an inflationary environment. “That formula is quite dangerous with the balance of payments challenges they face.”

“In a crisis like this you either have to crush demand through higher interest rates and lower asset prices or ration demand through a very strong government hand.”

5. Good year for tactical approach of Pure Alpha

The Bridgewater approach relies on deep research and writing down a game-plan for every conceivable macro-economic event — and then translating that into data they can systematise.

Jensen said the biggest areas of concern are geopolitical and centre on higher government involvement of the type which hasn’t been widely seen in the 42 years of Bridgewater’s existence.

Bridgewater separates strategic asset allocation from market timing and tactical approaches. The latter is the prominent approach in Pure Alpha, which has generated strong double-digit returns this year. All Weather follows the strategic approach.

Pure Alpha’s strong year contrasts with losses at the start of the global pandemic, when the decision was taken not to try and bet on how Covid-19 would evolve, indicating a more flexible approach in 2022.