An Update on the Big Forces Shaping Markets Today with Greg Jensen

If you go back to what was expected in markets in March and where we are today, we've got a lot more tariffs. We've got a lot more uncertainty. We've certainly got a lot more geopolitical conflict. And yet, you look at the markets and everything's fine. And honestly, I think it's a gift to client portfolios getting the opportunity to make adjustments, to get more diversified, to get more resilient.

Yeah. Well, it's a good time because there's so much to talk about. So, I mean, first off, I would start with I think the work that we've done on what we think modern mercantilism looks like has continued to play out. So, this is kind of the main theme. It's messy in terms of the application of any particular set of principles as you look at what's going on in the US administration today. But the basic picture that the goal of most of the economic policies are to use the economy to strengthen the US, strengthen kind of the government, strengthen the working class in the US. Those things continue to move forward and the implications of those things continue to move forward. And we're really at a critical time here. We're going to go into the July 9th date and our basic view is that you'll continue to see the push towards further tariffs. We've learned a lot in the last couple months about the pain tolerance of the Trump administration, but I would say the big picture is the overall view of how the world works hasn't changed. And so what you're likely to see in our view on July 9th is a push wherever the Trump administration feels they can towards higher tariffs. And while they've learned how dependent the US economy is on China for certain things, in other cases where the US isn't as dependent on other economies, I think you're going to see stronger than the market's currently expecting push on tariffs and the continuation of the basic policies of the Trump administration, which is to push back, right? And again, just step back and look at the world. US mercantilism, the fact that Trump's president is in part a reaction to mercantilism in China, the growth of China, the implications that's had on the US economy, the US middle class, and so on. And now you've got US mercantilism, and that's now flowing in to have even more implications in the rest of the world. And of course, there's more than just the tariff part of that picture. There's the geopolitical part of that picture. You've got Russia, Ukraine, you've now got Israel, Iran. We'll see exactly where that plays out in the next couple days. And you've got the growth of China, the implications in Asia for that growth and the hardening of positions along those lines as well. I think it matters for financial markets. I think there are risks of tail events that are significantly larger than they have been on average over the last 40 years. There always are, but they are large and it's dangerous. And as an investor and certainly the way I'm thinking about all our portfolios is, boy, how do you stay resilient? How do you hedge out as much of these risks as possible? So, a lot going on in terms of geopolitical conflict. The rules are changing on how the global order works at a time when investors are so massively overinvested in the US relative to GDP share or any kind of way you would look at how much you'd want to be invested in the US economy if you looked at it more like a normal economy in the world. And so you're starting to see in our view both, I'd say look at the data although I'd say the data is arguable but look at the data, you're seeing major institutions across the world pulling back from buying US assets. You're seeing that most directly in the dollar, which is most clearly implicated as global investors pull back from their investments in the US and more generally we think it's a long-term risk to US financial assets that's happening at a cyclical time. So when we go into our kind of bread and butter of what's happening cyclically, it's been interesting, right? I did think the new policies, trade policies and otherwise would cause more of a freeze in the US and global economy than it has. But you're starting to see some of that play out, right? So, the economy didn't slow as quickly. Corporate activity remained relatively strong. Corporate profits remain very strong. Corporations have not cut back on capex all that much. The AI push and the need for the raw materials of AI, the chips, the power, those things continue. I think what you're seeing, as I would expect, is that most of the major players believe that it is existential. They still have cash. They have big balance sheets. They have the ability to continue to do significant capex. And you are seeing that and I think that will continue to accelerate. But you're starting to see more indications in the US, in the UK, in Canada of growth weakening in the hard data. And we do think it's not going to be, you know, at least this phase will be a slowdown below potential. Probably not quite to recession levels, but a slowdown at a time when the Fed is kind of stuck. The Fed's stuck for a couple of reasons. Most importantly is the uncertainty around the inflation picture. When tariffs start to show up more in the core inflation numbers, which we expect in the next couple months, will that push inflation to levels that makes it hard for the Fed to ease? On top of that, the fiscal bump that's coming in the US is significant. And if you're the Fed and you're thinking about maybe do I cut rates or do I wait to let the fiscal bump play its part in the early part of next year, that's going to make it more complicated. So, we think the Fed's going to be stuck. I'd say Powell's comments generally lean towards the kind of the least risky thing to do is wait. And so we think the Fed will be waiting into a global economic slowdown. Now the rest of the world is less constrained. We think overall, although this is not 100% certain by any means, but overall that the trade implications in the US tariffs and such are disinflationary for the rest of the world as there's some degree of dumping of things that would have normally come into the US on top of the cyclical growth hit that those things are causing and the uncertainty that they're causing. So you're starting to get a slowdown and I think it'll be a disinflationary slowdown more clearly. So we do expect policy makers in the rest of the world to move quicker and of course which levers they pull will matter a lot. There's to some degree we expect reasonable movement in monetary policy across the world potentially some easing of quantitative tightening across the world which has had implications on the long end of the yield curve. At the same time you might not get as much of that as you normally do because in a lot of cases there'll be a significant fiscal response. Certainly, you need military buildouts in a lot of places that haven't had military buildouts in a while. You're seeing a push in Canada and some other places for fiscal policy to offset some of the negatives from the US trade policy. And so you're seeing more proactive fiscal than you usually do at this point in a slowdown. And so that's another part that complicates the picture when it comes to rates, particularly on the long end. Then the other big question and the huge research that we've been working on is how to think through the deficit picture and how much government debt is too much and where are the limits. I've been doing a lot of digging on this, Jake, trying to see are we missing anything because I do think we have a somewhat different perspective than the perspective that's out there in the world on fiscal deficits and specifically when you can print your money the only way you run into fiscal problems is if those fiscal problems lead to a currency problem or an inflation problem. I think that's the case. I've read people with alternative viewpoints trying to look through the mechanics of what they're saying. But again, the Fed can get what they want with respect to interest rates. And so there isn't really a problem unless the Fed getting those interest rates lead to outcomes that they can't live with. Those outcomes generally, inflation and currency problems, investment bubbles are another third one a little bit lower down the list. And so when we look at these debt deficits, that's the big question that we're dealing with is is the disinflationary effect of everything else that's happening in the world big enough to offset ongoing growing budget debt loads. And we're not confident in that. But if you just look at how it's been going, it's been the disinflationary technological implications for different reasons in the world. You've seen continued progress on inflation. And so the basic picture in our view is while these big budget deficits have shifted up the sustainable level of real interest rates, shifted up inflation and growth rates, they're still in a context of a world that's generally disinflationary. And so that's the thing we'll be looking at is are the countries hitting the currency the inflation constraints is the government debt loads affecting productivity in such a way that the limits get closer. Right, you look at a country like the UK they're closer to the limits of fiscal in part because their debt loads are big but also because their productivity is so low they can't grow their way out of these problems and we'll see how much that rolls into other countries and that'll be the big question and of course against that question. As you know, the other thing that is on my mind and super passionate about is the transformational effect of AI in our labs. We're playing with all of that technology, utilizing it to build an artificial investor and I see that we're the progress at such a fast rate to having tremendous impact on Bridgewater, tremendous impact on how you would devise an investment process at this point and more generally what that means for white collar work across the US economy. And I think this is coming. The move towards agents is happening. It's a little bit slower than maybe I would have expected a year ago, but it's happening. And I think that that is another big aspect of really squaring the circle here of can you square the circle of US asset prices. In order to do it, you really do need a productivity jump of significant magnitude, which we may be on the cusp of. I think the intelligence is here in many ways. The implications are coming and I think the bubble's probably ahead of us, not behind us. So those are the big things. You know, that's a long download for you, Jake, but those are the big things on my mind.

Yeah, it's been very interesting. There's plenty to be surprised about in terms of the reaction of asset markets, how quickly assets were able to pull back despite what is really if you go back to what was expected in markets in March and where we are today. We've got a lot more tariffs. We've got a lot more uncertainty. We've certainly got a lot more geopolitical conflict. And yet you look at the markets and everything's fine and make a few observations about that. I mean first off honestly I think it's a gift to client portfolios getting the opportunity to make adjustments to get more diversified to get more resilient. You're in this world the geopolitical world we're talking about this with very modest risk premiums in equities. What you've seen over the last couple months is a risk premium in bonds start to get priced in. The yield curve steepening the kind of the long-term risk premiums in bonds. Still not huge to be clear. You've just had some normalization in the risk premium in bonds. But you haven't seen that in equities. And oftentimes when you see risk premiums enter the bond market, you subsequently see them in the equity market. You've got that on top of having low risk premiums into what is absolutely a risky world. We're talking about July 9th. We'll see. We'll also see as these US tariffs become more permanent whether the current reaction of the world is sustained which so far retaliatory tariffs have not been a big deal. That's impressive again if you add that to the list of things that have made asset markets able to bounce back. Now I think it gets harder as the US policies get more set in stone for there not to be some push back there in terms of retaliation and so that's another risk and the most clear targets of retaliation that could actually hurt the US are US corporations right US doesn't export all that much you can do some retaliatory tariffs but more likely over time is if the US doesn't allow imports of their goods It's making it harder for US companies to operate. Now, the US is already taking some defensive measures to prevent that 899 stuff in the big beautiful bill to try to make sure that the US can penalize any country that penalizes any US corporations. Maybe that offsets some of those risks, but we'll see. And certainly you've entering this unknown period in terms of how the global economy will reset, how other countries will react to these big changes in the US and what that means for corporate profits and so on. So yeah, I think we are running into this risk period. You've already seen in my mind the early shifts of the biggest investors in the world. You see that flowing into the dollar. I think over time that money not flowing into US assets at the same rate will lead to this draining risk that'll increase risk premiums. You know, even just a normalization in risk premiums in the equity market would probably cause a 15-20% down move. You've already seen some like half of that happen in the bond market. So I think the likelihood that you see that normalization occur in other assets is rising.

Yeah. Well, I think this is itself not a huge deal but the precedent of just continuing down this mercantilist line and this isn't even one of the Trump administration things. This came up in Congress and the main point is mercantilism is everywhere. You know, I wrote a daily observations now, you know, many months ago now called we're all mercantilists now. And you're seeing this everywhere, right? So now in order to say how do you prevent other countries from retaliating for the US in terms of mercantilism? Well, what do you do? More mercantilism, which is that you end up with this rule saying that, hey, if anybody tries to tax our companies or discriminate against our companies, we'll discriminate against them. And that's what 899 is about. Now, the Senate is watering it down a bit. It probably won't go into effect until 2027 and we'll see how much it's used because it is a dangerous tool for US asset markets. Basically raising this question around when you reinvest in the US, can you count on the rules or will there all of a sudden be different forms of let's say capital taxation, capital theft, and capital controls? When you start talking about saying, okay, we're just going to hit dividends on an investment that was made without the assumption of these taxes that you could hit those dividends and other payments with a 15% tax. All of a sudden, you need a further risk premium to hold US assets. Now, I think the bill itself will be watered down, may not be that big a deal, but you are seeing US policy makers willing to cross lines that they were unlikely to before. And in the end, I think this is the global point is that mercantilism begets mercantilism. One reaction causes another action causes another reaction and it's very very hard and certainly with the Trump administration very unlikely you're going to get out of that cycle. So what you're seeing instead is the US trying to out-mercantilize everybody else by threatening market access, threatening these taxes to prevent other countries from taking their own steps. But overall the US is so dependent on financial investment from the rest of the world. And one part of that the reason the US has been able to attract so much is stable rule making. We're clearly crossing the line to not very stable rule making and the potential for rules that really hurt foreign investors in the US to be made fairly quickly has grown at a high rate. And I think you're going to see in many ways the reaction in the capital flows to that.

I think what you should expect is a policy maker who will want to maintain Fed independence but at the same time will come in with an easing bias, significant easing bias and when you look at the world today certainly if you look at it through the lens of an easing bias there's an argument to be made there's a case to be made inflation pre-tariffs was falling and clearly so and if you didn't have this tariff kind of overhang you would the Fed would probably be lowering rates here and on top of that many people will make the argument could make the argument that whatever implications the tariffs have on inflation will be transient best looked at like that and so you have an economy that's not running too hot with inflation coming back towards target let's get back on the normalization train and ease and I think you're going to see central banks are more likely to be interpreting the circumstances that way coming in near the halfway point of next year so the market's got to start pricing that in as well.