A major investor in the world’s largest hedge fund says he does not expect a repeat of the “Great Inflation” that gripped the 1970s, the latest sign that many big money managers are positioning themselves for pressure from more moderate prices.
Bob Prince, who runs Bridgewater Associates with Ray Dalio and Greg Jensen, told the Financial Times that long-lived deflationary forces would eventually reduce recent price increases and, while “it’s going to have some inflation,” it would be “moderate.”
The co-chief investment officer’s comments come during a furious debate on Wall Street over whether a strong economic recovery, a flurry of fiscal and monetary stimulus and supply chain problems will cause a lasting rise in prices for goods and services. The consumer price index, one of the most watched inflation measures, soared last month to the highest in 13 years at a 5 percent year-on-year rate.
Prince joined other managers in suggesting that the sharp increase will be temporary; More than 70 percent of fund managers surveyed by Bank of America this month said they did not expect the higher inflation to be permanent.
“There is not as much potential for a big cycle of inflation from credit and private sector spending,” he said. “The government is having to push hard with fiscal stimulation to make things work and, furthermore, when you look at inflation, low inflation is a global phenomenon. It is not an American phenomenon. “
Last week, policymakers at the Federal Reserve noted that they were closely following rising inflation indicators and could respond by raising interest rates as early as 2023, at least a year earlier than previously expected.
Financial markets reacted abruptly to the US central bank shift, with the 10-year break-even rate, a market indicator of future inflation expectations, falling to the lowest level since early March. Senior Fed officials, including President Jay Powell, have said they believe inflation will only turn out to be a blip.
Prince noted that while US monetary policy remained accommodative, central banks and governments elsewhere were not acting with the same force to drive growth, and some were indeed shifting in the other direction. In recent weeks, the central banks of Brazil and Russia have raised interest rates in an attempt to control inflation.
“If you go back to the 1970s. . you didn’t have money printing back then but you had credit growth. You had a very strong collective bargaining, unions ”, he added. “There was deregulation of the commodity markets. . . so it had a rebound in raw materials, a rebound in oil prices. You had a lot of things there that don’t exist today. ”
Key measures of inflation exceeded 10 percent during the 1970s, as too loose monetary policy combined with price shocks in food and energy to unleash an economically damaging cycle that was difficult to break.
Bridgewater’s chief investment officer said he was on the lookout today for red flags, including sustained wage increases by the workforce, which could precede a “self-reinforcing cycle” of inflation that is difficult to curb. “We haven’t crossed that point yet. It is still a reasonable possibility. ”
Prince added that the Fed’s change would not remove “inertia in the economic system,” given that savings rates were still high and could finance consumer spending in the coming months. “There is still a lot of latent spending piling up in the system, even if the central bank backs down,” he said.
Still, Prince doesn’t expect the $ 49 trillion increase in retail business activity in the stock market, which is where many people placed cash during the pandemic, to continue at the same rapid pace.
The trading of companies such as movie theater chain AMC Entertainment and video game retailer GameStop, so-called meme shares, has exploded over the past month, captivating traders as valuations have risen so significantly.
“We have probably seen the peak in retail flow into the stock market,” Prince said. “People will go back to work income instead of the government throwing money at you and therefore more of a normal environment.”
Prince said Bridgewater’s funding “went up quite well this year. Its been a good year. “He did not disclose the specific performance of the company’s All Weather passive fund, which invests in different markets based on volatility, or Pure Alpha, a more traditional macro hedge fund. The firm manages $ 150 billion in assets.
The great inflation
US consumer price growth increased from less than 2 percent in 1965 to more than 10 percent during the “Great Inflation” periods of the 1970s. It set the highest water mark for inflation during the postwar era in America and caused significant damage to the economy.
Decades later, the causes are still the subject of intense debate, but many economists agree that the period provides an illustrative example for policymakers and investors today.
Most theories suggest that one of the main causes of the inflation boom was too loose monetary policy. Economists differ on the importance they attach to Federal Reserve policymakers who try to be “opportunistic” by allowing the economy to overheat to avoid recessions in the face of “Bad luck” and technical errors that led to decisions that caused price instability.
Alan Blinder, a Princeton economist and former senior Fed official, argues that factors unrelated to the central bank control The inclusion of food and energy price shocks during two periods in the 1970s also contributed significantly to high inflation. He also posited that the end of Nixon-era wage price controls added fuel to the inflationary fire.
The beginning of the end of the saga came on October 6, 1979 when Paul Volcker Fed began to aggressively tighten monetary policy in a maneuver which brought the main central bank interest rate to 17.6 percent in April of the following year and even more so in 1982. The aggressive reversal triggered two recessions and increased unemployment, but eventually ushered in a period of more stable prices.