Bridgewater Associates co-chief investment officer Greg Jensen said Monday that investors are still too optimistic when it comes to inflation and the lowering of interest rates.
Speaking on the Odd Lots podcast, Jensen argued that investors are still too confident that the U.S. economy will start growing again soon. “The Fed seems a little bit more realistic than the markets do on what it’s going to take,” he told the hosts. “To get an equity rally from here, you have to have lower rates fairly quickly into a world where earnings are pretty good. That’s kind of the discounted line. To get above that you need even more than that. And I think that line is super optimistic relative to what we measure.”
While Jensen has been wrong about a few things in the past, he is still the CIO of the world’s largest hedge fund, and has an exceptional finger on the pulse of human behavior. He went on to explain how our current bubble probably would have worked itself out in the past, but thanks to the idiocy of COVID-19 policies, those recovery trends are no longer available to the American public.
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“Usually when, let’s say, as they were last year, stocks were falling and short rates were rising, that formula in history always led to the personal savings rate rising,” Jensen continued. “People seeing higher interest rates available to them, asset prices falling, housing slowing down, etc. Usually people save more money, which meant there was less revenue for companies, which meant there were layoffs, which meant savings rates rose more when the employment market weakened.”
COVID-19 policies trashed this trend, forcing people to borrow more for assets and goods they can’t afford. The pandemic also ushered in a moment of deglobalization, Jensen noted, coupled with the emergence of new technologies such as artificial intelligence, which combine to make for an uncertain future.
The conversation was relatively boring, but reading between the lines felt terrifying. An optimistic economy with a “bad” outlook for bonds and stocks means people will probably keep buying overpriced items that may never recover their value, a haunting psychosocial trend.
For example, folks who bought a home during the pandemic likely purchased at a much higher price than the true value of the property. Those who were late to this trend also purchased overpriced properties with extremely high interest rates, which meant they are paying more every month for an asset that will depreciate with time. (RELATED: You’re Not Poor. You’re Financially Illiterate, And That’s Your Fault)
Unless rates go down and somehow the value of these homes increase (they won’t), the economic uncertainty of the future could lead to a social outcome as bad, if not worse than 2008.