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there's going to be when you're stuck with two trade-offs too much inflation or you're stuck with too much economic weakness then you navigate through the middle and that means something like stagflation and so I think we're entering a period of stagflation and um and I think the political and the wealth Gap issues and so on create a set of circumstances that it's not easy to get out of what you have is an um enough tightening by the Federal Reserve to deal with inflation adequately is too much tightening for the markets and uh the economy so the FED is going to be in a very difficult place a year from now as inflation Still Remains high and it starts to pinch on both the markets and the econ it's funny because you know everybody says um okay there'll be seven increases or something like that and that sounds like a lot uh but you're taking interest rates up to something like two percent and that two percent um which starts to squeeze the capital markets starts to make it more difficult for a holder of equities because the equity when when you raise the return on bonds and your areas that return on cash and you tighten money then that makes um other assets less attractive such as risky assets particularly long duration assets like tech stocks and the like uh so you produce that that square yes but that's still only at two percent or a little bit over two percent with an inflation rate which is considerably higher than that we've got a seven percent inflation right and we'll probably settle um it'll be a five percent ish or something and so you're still losing that money to inflation people are so what you have is an um enough tightening by the Federal Reserve to deal with inflation adequately is too much tightening for the markets and uh the economy so the FED is going to be in a very difficult place a year from now as inflation Still Remains high and it starts to pinch on both the markets and the economy you know it's like here's the problem if you're borrowing more money than you're Lending and you have a lot of debt you either are going to pay back in hard money or in soft money and so it creates a very difficult trade-off so what can you do do you spend less money the trade-off becomes more and more difficult and that's what is brings about a stagflation environment because they tried to navigate between those two undesirables in other words they want to contain inflation but too high of an interest rate um that's good enough for inflation causes too much economic environment so what can they do no they're in a position already because of that Dynamic spending more than they're earning creation of a lot more debt and a lot of other debt which one man's debts are another man's assets and that has the holder of that assets is losing money imagine holding a bond now and look at how much money is in bond funds and cash okay not only um in cash you don't get any return to compensate for the interest rate and in your bond fund you get Negative returns and how's that feel so are you going to continue to hold those Bonds in that on fund it's a it's a dynamic that they have to deal with that is really beyond their capacity to deal with it they can't change those fundamentals I think that most likely what we're going to have is a period of stagflation and then you have to understand how to build a portfolio that's balanced um for that kind of an environment so there's a whole um relationship between cash bond yields and Equity returns so every investment is an exchange of a lump sum payment for a future cash flow and so the cost of money is a consideration based on relative to the return on money and so when we look at that return when we say I can hold cash or I can hold a bond uh that changes the inclination to hold cash but also one has to look at the return on expect a return on equities in other words one calculates the present value of future cash flows you estimate what are those earnings going to be in the future and what are they worth today and so Bond stocks are now um having expected returns which are not very much more than bonds which would be very not very much more than cash so that why should I own equities uh farther out you know and have the volatility of equities so that shift in the curve in other words the relationship between cash bonds and then the relationship between bonds and equities and the relationship for corporations between the rates at which they borrow at and the rates of that which they can earn money at have a pervasive effect on the economy and the markets so no it's important to take a look at that relationship that yield curve structure that way but um you should go beyond that and include the returns of other assets what can you do in the way of generating returns relative to the costs of money the relative attractiveness of those instruments we're beginning a paradigm shift paradigm shift is a shift from um a mindset one mindset and positioning of that mindset to another mindset and another positioning of that so for example the mindset that we were in was that when you have low inflation and um when you're owning bonds and you're owning cash or um you are operating one way and you don't worry about that and companies don't worry about it in their inventory worries while having larger inventories or homeowners don't worry about inflation as much in the purchases of the houses and so on once that shift begins it causes a reinforcing Dynamic it's like everybody is long bonds we've been in a 40-year bull market in Bots and so it's been fine to have and when that shift starts to take place you see behavioral shifts that reinforce that cycle in the Paradigm so for example when there is the selling of bonds that it makes it more inflationary in and of itself because the amount of debt that has to be sold is not just the deficit but also the amount the debt that's being sold is those bonds so now interest rates have to rise a lot or the Federal Reserve has got to come in there and buy more and then you get wages people make wage settlements that um and such things so a paradigm shift is beginning to take place and that will be also self-reinforcing and it's taking place in this context of the conflict which then creates the breakdown of um efficient systems each country wants to be self-sufficient it needs to to protect itself and in being self-sufficient in that way then you have less efficiencies in the system and all of that becomes self-reinforcing it's all happened before it's all happened many many times before all currencies have a lot of debt and so when you look at one relative to the other there will be a lot of printing I mean currency equals debt and when you hold a currency you're holding a debt instrument and so all of those will um decline in value relative to other things now will the dollar decline more than other currencies it's almost certain that we're going to come into this environment we're in this environment in which there's a shifting of the those currencies um so you're going to see more of China's RAM and B being used you're seeing uh India have a direct link uh with Russia on the uh currency so we're an important change in the currency but how that is a store of wealth is a different question so uh a currency is a medium of exchange and a storehold of wealth and its storehold of wealth um is now a problem particularly for the dollar but it's also a problem for other countries so that that's why you have inflation as money goes into other things and and the cost of borrowing is so low relative to the inflation rate then the courage encourages the borrowing of money and the and the sale of money in other words not holding Financial assets like that so that's yes I think you're changing the nature of what money is right now the U.S is imposing sanctions sanctions are it's a form of economic Warfare and it has a big implication for the dollar right um okay now others are trying to get out of the dollar system there's the dollar system that now is being uh changed India is dealing directly with Russia and um holders of dollars and nominated assets um don't want to hold those dollar analysis if they feel that they're going to be um grabbed and so on so what's happening now um has happened many times before and without that kind of perspective I wouldn't be able to deal with it and I learned this in in in my past uh because um well just quickly uh in 1971 I was clerking on the floor of the New York Stock Exchange and President Nixon gets on and he says um we're not going to give you the gold that the dollar is backed by and we had a devaluation um it took me by surprise um I worked on walked on the floor of the stock exchange I thought it was going to go down a lot it went up a lot and that's because I never experienced the currency devaluation I found the same exact thing when I studied history same exact announcement took place on March 5th 1933 by Roosevelt and had the same effect so I understood um then um how history before me was important studying the Great Depression allowed me in Bridgewater to anticipate the 2008 financial crisis the past is a guide to what's happening now and so when you spend a lot more money than you earn um then you have to print money to make up that difference to make the purchases and then that devalues money and so it's like the examples I gave you of the two currency devaluations that you had before 1971 led to the inflationary period of the 1970s and so you have the stock market yes the stock market goes up in other things but cash is trash and people get them begin to learn that um the bonds that they're holding have negative returns and it starts to change the value of money the value of money the value of dollars and so on so money goes into other assets it produces a more of an inflation and you start to enter a certain type of environment and the environment that we're in is beginning to be very much like the of the 1970s
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