This article comes from public micro-channel number: pick up points investment (ID: deepinsightapp) , author: Zhu Ang
Editor’s Note
The global market volatility we have experienced in the past two weeks is probably the largest in the past 10 years, and there is no sign of stopping. We can’t predict the future, but we can know where we are from the research and help us respond.
As the largest short in the US stock market, Bridgewater has been bearish on US stocks and advanced economies since 2019. Today, we made a simple translation of the annual strategy report of Qiaoshui in 2019 and 2020. There are many thoughts worthy of reference. In the new round of crisis, there is very little room for the central bank to move. The developed countries are at the end of long-term bonds and short-term debt, so what will be the new investment paradigm in the end?
Bridgewater 2020 Strategy Report: Our Outlook on Macroeconomics
In the past few decades, our “understanding mechanism for the operation of economic machines” has been a very important tool for us to understand the current economic framework and let us predict what will happen in the future. From the financial crisis caused by deleveraging, to the weak response to monetary stimulus, to beautiful deleveraging, and the slowest economic growth state Interest rates have been reduced to zero, and $ 15 trillion in currencies have been issued worldwide. We see the need for a paradigm shift to prepare.
Let’s review the four main forces driving economic growth:
1. Productivity. Bring long-term real income improvement
2. Long-term debt cycle. Long cycle based on credit growth and interest rate changes
3. Short-term debt cycle. The business cycle of enterprises is mainly dominated by changes in interest rate policies by the central bank
4. Policy. Through the election of leaders and the choices they make
These four forces are intertwined in the economy and the securities market, and eventually achieve equilibrium among changes in real income, changes in credit, changes in capacity, changes in asset prices, and acceptable risk premiums. Monetary and fiscal policies are tools used to achieve economic balance. Let ’s first look at the current situation:
1. The central bank’s monetary policy has reached the end of its life cycle, and the interest rate level has reached 0.
2. All these stimulus policies have promoted the prices of stocks and other assets. Looking back, they have brought huge benefits, but they have caused future implied returns to decline.
3. These policies have widened the gap between rich and poor, and have reached the most extreme levels since 1930. Quantitative easing is more beneficial to those who own assets. After all, only a small part of the easing currency enters the real economy, and most of it flows into financial markets. Globalization and automation are also driving down wages. And companies benefit from deregulation and tax cuts.
4. This kind of enterprise-oriented policy has promoted the level of corporate profitability to the highest level in history and brought social instability. The expansion of corporate profit margins in the past has been difficult to sustain in the future.
When we enter a new era, we think the following scenario will appear:
1. It is difficult for the central bank to stimulate again. Aware of asymmetric risks, the central bank has already entered a new paradigm and no longer actively adjusts interest rates in response to inflation. This is similar to what the United States did in Japan in the 1950s and 1950s.
2. When most of the cycles are finally ended by the central bank’s tightening monetary policy, this time it will be different. The central bank will not tighten and there will be no inflationary pressure in the foreseeable future. When the next cycle comes, the central bank will run out of ammunition.
3. In the long run, the world will move toward expansionary fiscal policy. This is the MP3 (Monetary Policy 3) that Bridgewater believes.
4. The imbalance of huge global wealth will bring persistent political contradictions and extremism, as well as more policy options that affect growth than we imagine.
5. In the past, policies that favored enterprises, capital and the rich should not be extrapolated linearly. Instead, they may be reversed.
6. When the real government bond yield hit a record low, the risk premium was suppressed, pushing the space for asset prices to narrow significantly.
The past paradigm is more favorable to developed countries and Western countries.
Three minutes of the global future
Three points of the world in the future: the US dollar, the euro, and the yuan. These three major currency systems will become engines of global economic growth, and will also help developed and developing countries to achieve balance. Most of the increase in the global economy comes from developing countries, not developed ones. The United States is still the world’s largest economy, and the US dollar remains the world’s major reserve currency. The euro area is the second largest economy in the world, with about a quarter of the US circulation. The yuan still circulates only within China, but China’s monetary policy is independent of the Fed. China’s domestic credit market is as large as the United States. The Asian economy has risen under the leadership of China, which also decoupled from the US dollar later in 2015.
What happens in the future depends on how we get to the end of the long and short debt cycle
History starts from the big pit of the last financial crisis. Global central banks responded quickly and lowered interest rates to zero. But credit did not respond as it should, and it was based on the power of deleveraging. As a result, central banks around the world are expanding at high debt levels. The economy finally recovered, but grew at a very slow rate.
From the worst economic contraction in history, the slowest economic growth in history (since 1950) . Although growth is the slowest, liquidity has squeezed the risk premium to its highest level in 100 yearsLevel, thus creating one of the best performances of asset prices in history.
Continually lower yields on government bonds and a jump in the risk premium will lead to very low levels of future asset returns, limiting future asset returns.
Since most debt / income levels have remained unchanged over the past 10 years, growth has come mainly from income growth. Income growth mainly comes from more people finding jobs. We started at a high unemployment rate, and then the unemployment rate slowly fell to today’s low level. At today’s low unemployment rate, the potential for continued economic growth is also dying.
Due to high debt levels, very low unemployment, little room for interest rate cuts, and structural deflation risks, it is difficult for the economy to maintain a high level of growth.
When an economy has a high unemployment rate, low debt, and high interest rates, the economy has a lot of potential energy. When the interest rate is low, the unemployment rate is low, and the debt is high, the potential energy of the economy is very small. This is also the status of most developed countries today.
The economic downturn is usually caused by monetary tightening, fiscal tightening, or overreaction in the credit system caused by some unexpected events.
The liquidity pipeline will have a crucial impact on results. You can think of this pipeline as three parts. The first part is Yang Hao, which adjusts through interest rates and currency reserves. The second part is entering the system,The ability to increase or decrease leverage on liquidity. The third part is the flow between cash and assets. At present, liquidity tends to be loose, the central bank puts money into the system to provide stable credit, and money is a popular asset from cash.
The key issue with the liquidity supply is inflation, because the central bank sets policies around inflation. In the past 20 years, inflation in the United States has been around 2%, and inflation in 80% of global economies has ranged from 1% to 3%. There are various factors behind it: globalization, technological development replacing labor, more and more independent central banks, and so on. The central bank feels that there are long-term factors suppressing inflation and it no longer believes in the Phillips curve theory.
So we see the status of the United States and most developed countries: low growth, low inflation, zero interest rates, and quantitative easing affect the risk premium.
New Monetary Policy MP3
In simple terms, MP3 is a way for the central bank to directly intervene in the economy through coordination with the government. This method is different from MP1 and MP2 as we know it. MP1 changes interest rates, and MP2 uses asset prices to drive the private sector to increase or decrease spending. When these tools no longer work, you need MP3s to directly intervene in the economy through the government.
MP3 sounds fresh, but it has been used many times in the past. The first was in the 1940s. In order to finance the Second World War, the Fed anchored short-term and long-term interest rates at low levels, and the yield curve sloped upward. The Federal Reserve purchased short-term Treasury bonds to increase reserves by printing money, which provided banks with liquidity. The banks were subsequently stimulated by the slope of the yield curve and the Fed’s guarantee of stable interest rates. These reserves were used to purchase government bonds and eventually provide War financing.
To clearly distinguish MP3 from MP2 and MP1, you need to focus on who’s spending is the goal of the policy and how they are affected by the policy. The goal of the policy is always the same-to start the expenditure engine, to initiate a self-feedback mechanism of cyclical growth of expenditure and income-but the policies are quite different in strategy.
Today, most developed economies have little room to cut interest rates, and their relative incomes are also high. MP1 has run out of water. Liquidity has entered assets on a large scale, leaving little room for MP3. This makes MP3 the next mobility switch. Of course, China is one of the few large economies with room to move. MP1 and MP2 still have a lot of room to play in China.
Emerging emerging Asian countries are in different debt cycles, providing unique investment opportunities and challenges
Investors’ attention is usually concentrated in advanced economies. Publicly traded liquid assets in advanced economies dominate and account for most of the weight in most indices. It is not representative in the investment portfolio. A highly interconnected economic system is emerging among emerging Asian economies. This system is already very large and will have an increasing impact on the world.
The output levels of emerging Asian economic groups are already comparable to the combined output levels of the United States and Europe. In the past three years, it has contributed 2.5 times more to global economic growth than the United States and Europe. Compared with trade between European countries, trade between these countries accounts for a larger proportion of their economies.
Emerging Asian countries’ stock market value lags behind the level of cash flow created by their economies. But because asset prices are securitization of cash flow, the final level of securitizationCan catch up.
Although these economies were mainly exporters to Western economies in the past, today this economic group is paying more and more attention to internality and independence, reflecting its nominal GDP growth that is much higher than the export value in the past decade . These economies will face structural conflicts with the West, and these conflicts will be difficult to manage. The Sino-US conflict is an ideological conflict between the big powers in a small world. The two countries have different systems. The United States is more bottom-up and China is more top-down.
Investing in China and emerging economies has unique risks that go beyond the risks of potential geopolitical conflicts. A very low part of the economy’s cash flow has been securitized and it is easy to reach investors worldwide. (investors) These economies and systems lack understanding, and the investment environment itself is underdeveloped, vulnerable to capital outflows, lacking reliable audits, weak governance, and cultural barriers.
Despite the size of the economy and the size of the market, most investors know much less about the basics of China and the Chinese market. But even if you don’t invest in China, its impact will be revealed through China’s impact on other economies, markets and companies. There we invest more and we respect the Chinese proverb: “Cross the river by feeling the stones.” In other words, it is important to take cautious steps first to gain experience and the understanding that comes with it.
Review of investment returns and current pricing: Compared with relative growth rates, the returns on equity in advanced economies over the past decade have exceeded those in China and emerging Asia. Economic growth has never been the single determinant of equity returns. What is more important is how the conditions related to discounts change, and high growth may also be overvalued (discounted) or undervalued (discounted) .
Furthermore, high growth often requires capital investment and financing, which dilutes earnings per share growth relative to earnings growth. As far as China is concerned, the discount growth is very high, which led to the bursting of the bubble in 2014. In order to ensure growth, there was a huge stock dilution, and the government encouraged the switch from debt issuance to stock issuance. Profit margins were squeezed when foreign companies shifted production to China and wages grew faster than productivity in China. In addition, the tightening of financial regulatory policies over the past few years has pushed up the risk premium. This historical attribute is of course a retrospective, and it is largely extrapolated to today’s pricing, while discounting high-risk premiums from trade conflicts.
Although our attention tends to focus on the West and developed economies that issue reserve currencies, the zero interest rate and sluggish (economic) This is different from populist trends in emerging Asian economies. Emerging Asia has higher recent growth rates, higher productivity growth in the future, higher interest rates, and higher return on assets.
In the long run, our ignorance of the new paradigm is greater than our knowledge. Rather than predicting what is most likely to happen, it is better to ensure that all of these options achieve tolerable results. We know that the best way to understand exactly the scope of potential results and how they affect us is to perform stress tests.
In today’s world, yes, there are unique risks to investing in China and emerging markets. But at the same time, in developed countries, there are significant risks in the later stages of the long- and short-term debt cycle, including populism. These two groups of risks are different from each other and have a low correlation, and each group is compensated for the risk premium. Given this situation, does it really make sense to consider geographically (combination) ?
In the normal period, the central bank stimulated people to borrow short and long loans by spurring the yield curve to stimulate credit growth. The system is now broken. Instead, central banks are incentivizing the world to make short-term or long-term loans with little interestOr the principal pays the risk of stress and directs these funds into any risk-free asset.
In essence, they are making the risk curve steeper and provide ample liquidity to navigate it. Investors are encouraged to finance risky assets at locked, low, and risk-free rates. It’s like a dog chasing its own tail, because investors usually see the interest rate on bonds as the return of their risk-free assets. Zero yield will take away the return, but the financing interest rate for the risk assets held is provided (to investors) .
Even in a world with low or no nominal growth, there will be a level of income (for example, $ 20 trillion in nominal GDP / income) < / span> is distributed in the form of layered cakes: wages, taxes, profits, dividends, etc. Central banks have set interest rates near or below zero in an effort to maintain current income levels, perhaps with a little growth. Compared with the financing funds being close to zero or negative cost, this leaves arbitrage space for each layer of income spread.
Compared with the prospects for slow growth in advanced economies, some emerging economies (especially in the East) Nominal GDP / Revenue may increase by 5% to 10% per year, local currency interest rates / financing are below this level of growth, and (their interest rate) is not higher How many developed countries. The significant difference between long-term nominal GDP growth and interest rates is likely to be the driving force for long-term investment returns.
We can’t make a sword. We are entering a new paradigm, which will bring new challenges and present new opportunities that are different from the past. Above all, diversity will be key.
Bridgewater Global Outlook 2019: Wind and Rain Comes to the Wind
Introduction: Bridgewater is currently the most pessimistic institution for global asset trends. In January 2019, Qiaoshui released the latest global outlook. We have extracted its core ideas and charts, and some of them have added our own understanding, hoping to help everyone’s investment decisions. (Note: we have not listed all the charts, and we have selected the parts that we think are important)
Five sentences from the core point of view:
1. When global liquidity began to tighten last year, almost all asset prices fell;
2. The question is how this tightening of liquidity will be transmitted to economic growth and how policymakers will respond;
3. As the market does not really expect tightening, any kind of tightening will exceed market expectations;
4. The current market profit forecast is still based on moderate economic growth. We think that the profit forecast is too optimistic, especially in the United States;
5. When the next crisis comes, it is very likely that the mud and the sand will fall, the central bank will have little room for regulation and the game of decision makers will make it difficult to introduce effective policies.
Figure 1: We are currently in the late stages of tightening liquidity. If you look at the figure below, we will find a complete cycle. The central bank began to tighten, liquidity became tight, the risk premium rose, asset prices fell, then economic growth slowed, and the central bank began to loosen. We are currently in a liquidity tightening phase, and asset prices will decline in the future.
Figure 2: shows the liquidity situation since the financial crisis. We first experienced a big stagnation of liquidity, and then we began to relax and raise asset prices. At present, the process of peaking liquidity has started to go down. This stage is accompanied by the collapse of some emerging markets.
Figure 3: The increase in asset prices stems from a substantial easing of liquidity. From 2009 to 2019, the global portfolio yield of 60/40 is about 40% higher than the historical average. The reason behind it does not need to be explained, the rise in global asset prices comes from the central bank’s release of the tap of liquidity.
Figure 4: Historically, every tightening and easing cycle in the United States. The tightening will be slow this time, but the impact will be huge. We see that the share of the Fed’s balance sheet will continue to decline over the next few years.
Figure 5: The central bank tightened liquidity, and the short-term interest rate in the United States rose. However, it is currently better that private institutions are creating credit. Business owners begin to regain leverage after experiencing deleveraging. The entire bank is in a relatively healthy state.
Figure 6: Performance of major global asset prices in 2018. We have seen very few asset prices rise, and most asset prices have fallen. Including emerging market stocks, developed country stocks, emerging market bonds, industrial metals, etc.
Figure 7: Stock markets often lead economic fundamentals. Historically, stock markets have basically peaked before economic fundamentals. During the tightening cycle, the stock market peaked first, then the economy peaked, and then negative earnings growth began to drive the stock market to decline further.
Figure 8: Global stock markets have not yet begun to lower their earnings forecasts. We see that the blue line below is the performance of the stock market and has begun to make a U-turn. The red line, earnings growth continues to rise. Especially the lower left corner of the United States. Qiaoshui believes that the overall profit forecast of the market is too optimistic.
Figure 9: The economic growth of countries around the world is turning around, whether it is the United States, Japan,Eurozone, China, and emerging market countries. From this perspective, it proves that the current market may be too optimistic about the profit forecast.
Figure 10: The Fed’s slowdown in rate hikes will not help, as this tightening trend cannot be changed. In particular, we see that short-term interest rates have been turning around.
Figure 11: The implied rate of return of the global capital market is no longer attractive due to the current risk-free rate of return. We can see the comparison in 2009 and 2013 below. It was very obvious in 2009, when the stock market provided good implicit returns, and the 10-year Treasury yield was very low. 2013 also provided an implied return on the stock market close to 6%. At present, the implied return of the stock market is only 4%, and its attractiveness has fallen sharply.
Figure 12: China has begun to relax liquidity and promote policy stimulus. Below we see that short-term interest rates in China have fallen and credit has started to rise.
A unique crisis for the next cycle:
1. The space vacated by the Central Bank is very limited;
2. Splits in decision-making will affect policy effectiveness;
3. The deflation of the zero interest rate level will drive the self-circulation real interest rate level to rise and the risk premium to rise;
4. Too many financial promises that need maintenance.
This article comes from WeChat public account: Point Pickup Investment (ID: deepinsightapp) , author: Zhu Ang