A Billionaire Investor Says The Economy Is Headed For '20 Years Of Ugliness' | Davos 2019



Bob there's suddenly a lot of talk about a 70% marginal tax rate on incomes of 10 million or more in the United States a couple of very smart people here have called that a disaster and scary is that something we should actually be worried about well I don't think it would be good but mostly I don't think it would solve any problems I mean the reason that that's emerging as a topic is because of populism income inequality and the populism and income inequality are really rooted and much deeper issues that that tax rate a 7% tax rates not going to address you really need to have jobs and incomes in the parts of the country that had been gutted by one one force or another and so largely that the forces of populism are much more powerful they're not going to be really addressed by that kind of a shift in taxes I think the one thing that it would do is it helped with the deficit and that's worth mentioning because you know given the fiscal stimulation last year you know we're running a significant deficit right now about 4% GDP and but one of the one of the elements of that that people haven't really paid much attention to is that when you consider the size of the deficit the growth rate in the economy and the maturity of the debt in just a few years the debt rollovers are gonna be substantial and the gross issuance of Treasuries is going to be running around 25 percent of GDP or higher so literally 25 percent of GDP issuance of Treasuries every year normally people don't pay much attention to that because you assume that the debts are going to be rolled over but the interesting element of that today is that so much of the US Treasury debt is owned by foreigners and so much of it is owned by central banks and countries where we have some element of conflict that it it's a it it's an element of a lever that could be used and so you don't necessarily assume that you're gonna roll over those debts now if you if you don't roll over your debts that's when you have major problems and Bridgewater's done exceptional work on history and historical precedents how is that situation likely to get resolved well if you were a foreign investor you'd be looking at that pile of debt that's coming at you over the next ten years and probably wouldn't be too excited about owning it which makes matters worse and so the pressure can come one of two places the pressure can come from the interest rate side or the pressure could come from the currency side but either way the the present value effect of either a higher bond yield or a lower currency means that that kind of 10-year forward currency is probably not something you want to be holding so while in the short term the pressures on the dollar are still relatively relatively positive because the US economy is outperforming there's this long term question mark related to the dollar partly because of those pressures and and what triggers a problem is it's something they've just sort of gradually we're likely to have higher and higher interest rates or do we just cruise along and people talk about the debt for a while and then suddenly something happens and it becomes a crisis depends on how well the economy's managed you know if the economy is well managed the economy's growing then you have the capital inflow if you manage your your political relationships well then you don't have the conflict and you don't have the the threat did that present so it really comes down to leadership and comes down to economic conditions economic growth and you can't predict it that far out but that sort of a latent situation is just something to register as something that could be an issue down the road and Bridgewater raid ala has talked a lot about how we may be in the seventh or eighth inning what he describes is the debt cycle another topic that Bridgewater has done great work on do you still think that that's the case is that about where we are and and how does it end what happens after the ninth inning well we think we're at a key juncture right now the you know if you get a running start on the current situation we had a severe de leveraging 2008 we've had the printing of money we had 10 years of non-stop monetary stimulation zero interest rates was not enough to stimulate the economy because of the debt overhang and and the pressures of deleveraging and deflation and that required quantitative easing so you had ten years of zero negative interest rates quantitative easing which inflated asset prices drove yields down was great for asset markets got a really a moderate growth rate out of the global economy given that degree of stimulation nonetheless ten years of growth and now roughly let's say a year and a half ago then central banks started to contemplate tightening and then this year they have tightened so twelve to eighteen went out twelve to eighteen months into a tightening cycle where the Fed first starts rolling down the balance sheet they start raising interest rates the ECB stops buying bonds we had macro prudential tightening in China to take some of the leverage out of that system which is now creating a knock-on effects through through that economy so we are kind of 12 to 18 months in post tightening typically monetary policy leads by about a year and so it's not unusual to get a slowdown now but at the same time we're on the backside of fiscal stimulation in the United States you know there was a real pop from the fiscal stimulation but that that that's like a shot of adrenaline you get it and then you get on the back side of it and actually slows things things so the the fiscal is rolling over at the same time as the monetary has taken effect and the tightening and liquidity has pushed risk premiums up created a little bit of a correction the stock market the dollars up yield curves flattened it's all very classic in terms of what a turning point typically looks like and so 2018 that whole that whole configuration affected the markets and we think in 2019 it'll probably affect the economy the question is really how much and the interesting the most interesting question pertaining to that inflection point is the financial sector typically when you get to the end of an economic expansion the banks and the financial sector is way over leveraged typically the banks are funding in the wholesale markets they're you know they're buying hot money to fund loan demand and so when you get the rise in interest rates they get squeezed and so on and so forth and that creates the pullback of credit which then triggers the downturn the interesting thing this time is that the financial sector is deleveraged over the last ten years they're funding their funding almost no none in hot money they're almost entirely funded with core deposits plenty of core deposits and they're not over leveraged and so the financial system the banking system in particular is really in a situation that it can actually provide the liquidity that the economy needs and it's not in position to pull back that liquidity like it normally would and so the dynamics of a tightening this time are somewhat different than they would typically be so it's we're right at that threshold it could go one way or the other and so what's your best guess I think our best guess is that it you we will get a global slowdown we've gotten one we think it'll continue because you don't have that latent pullback of leverage in the financial system you probably won't get the air pocket effect and so more than likely you'll you'll get below potential growth but you might get stuck there because the ability of central banks to stimulate on the backside of that is limited I mean basically what you got zero to three percent rates you know no room to cut rates really and probably the the area of vulnerability is the business sector because the business sector has been pretty strong in terms of its spending and technology and the other area vulnerability is what's really priced in to financial markets when you look at the earnings growth this price into the US equity market you know what the peak it was about six and a half percent earnings growth kind of at it at infinitum that's down some to four point eight tech sectors gone from nine to seven percent growth discounted but still you're discounting four point eight percent growth way you know permanently and yet profit margins are a secular high and from a secular standpoint you've got a whole series of forces that are that are turning against corporations and profit margins and so probably your bigger risk is actually in the financial markets than in the real economy and the real economy is more likely to kind of get stuck at a subpar growth and a chronic slow growth with low interest rates as opposed to like a sharp sharp dip and so for equity markets we've got about 10% sell-off people seem incredibly worried about that as though it wasn't predictable or expected despite the run that we've had what do what's most likely there let's say the economy gets stuck let's say the psyche the classic cycle continues well with the markets what always matters is what happens in relation to what's discounted and so and what's discounted is somewhat different across countries in the United States pretty optimistic earnings growth is priced in and so if if you were to go into that sort of sluggish slow growth chronic slow growth environment highly likely the earnings would fall short of what's what's priced in adding to that pressure is that there's a decent amount of embedded expenses in other words companies of essentially to somebody sent extrapolated the good times forward in terms of their their expense base so so there's some operating leverage there that if there's a slowdown in growth at an top-line growth top-line revenue growth it would have a more magnified effect on the bottom line and so you know earnings in the US are likely to underperform what's priced in on the other hand when you look at Europe Japan emerging economies you know there's still a decent risk premium priced in relative to bonds partly because bonds are so bad but you know so you you it's really what that transpires relative to what's priced in so what should i brace for in my personal account down to 30 percent 50 percent or do we just sort of move sideways from here the best thing is if you have diversification right now you just need to be able to sleep a lot better and now worry about those things I mean literally if you balance yourself out with you know a much more balanced asset allocation it's like you know you don't have to you know you're gonna have ups and downs but they're not gonna be big ups and downs okay so the other thing Bridgewater's talked a lot about is the rise of populism you've talked about this is if tax rates aren't gonna fix things because the problem is jobs and income how how does this get resolved most likely based on your studies in history probably with difficulty it's a it's it's just a it's a it's a difficult set of situations that were embedded into and you add to that the amount of promises and debts that are out there and retirement systems that are underfunded it's you're probably gonna essentially have promises not kept you're gonna probably have monetization you know of the fiat money promises that are out there you're probably gonna have a long your money you're not really likely to have kind of a sharp you know kind of depression type environment but kind of 20 years of ugliness you know is kind of what it looks like to us Bob thank you so much pleasure sorry to end on I was gonna say yeah there's something better we can end on white and have something else what is good about it huh well let's see uh there's always opportunity somewhere if you just understand how it worse there's always opportunity somewhere great thank you all right good Henry good




Comments
  1. Odd how these two fund managers are so socialist when capitalism made them who they are.

    They will ultimately be wrong the 4th industrial revolution will break the US economy out.

  2. When asset inflation equals economic growth… Propping up the stock market isn't as important for a $11 an hour Starbucks worker with student debt as it is for Warren Buffet.

  3. Seriously, look at what the tax rates were on the last day in office for that great Republican President, Dwight D. Eisenhower. The top Marginal Rate was 91%. The economy was going great guns. We created the Interstate Highway System, started the Space Program, etc. When the Rich have too much money they gamble with it, and screw up the economy.

  4. Mr. Prince is being so vague. A higher tax on the rich makes more sense than a higher tax on the working class, which has happened. In addition, the public has seen how the wealthy are able to donate mass amounts of money for causes that they care about such as a burning church. I also want to note that Mr. Princee forgets to mention the highly successful U.S business like Starbucks and Amazon. His set for a crash and he will be read. His alredy in Switzerland. He has so much privliage.

  5. Most banks loaning from core deposits??? I thought most banks were still loaning more than they had, factor 10-30.
    Am I wrong? Did I misunderstand what he was saying? Or is he avoiding the real issue?
    If banks were loaning from core deposits we wouldn't need a 20 year "slow down".

  6. The economist in him says a recession is coming. The billionaire in him says taxing him at 70% wont change anything.

  7. It’s gonna come down to labor. Therein the conflict will lay for now and into the future. It’ll create a social revolution of sorts. It’ll be interesting to see to what degree it happens.

  8. It's the same basic process of wealth extraction and accumulation through capitalism.

    This happened at the end of the 19th century, continued through to the great depression.

    After we were saved by the economic boom of WWII, we dutifully played the power-elites' game of market deregulation and lower corporate tax rates.

    This isn't a mystery, people. Study history, it repeats itself.

  9. I feel very strongly that in 2020 we will see the world slipping into a depression far worse than the depression of the 1930s. This is a very bad time to go into debt like buying property etc, at present millions of people throughout the world are unable to pay loans to the bank and finance cos. When the next overnight crash comes it's going to be very bad and the higher you are the harder you will fall, if you have nothing you will have nothing to lose. However, it will be hard for all and the only way we will get through is to show care for each other. The biggest problem facing the world today is overpopulation and this situation together with greed has not been addressed.

  10. We are in a new paridigm economy and we no longer can project the future accurately with past data. To borrow the words of Captain Kirk, "We are in a new frontier, where no man has ever been." With revolution of technology, a new economy has been created, and this will push our world to a new, even greater than ever in the past, modernization, and a renaissance of world economic system.

  11. Greedy billionaires are probably the main causes of inequality but don't really want to talk about it their the main reason most Americans are trying to survive on pathetic wages the men with no shame.

  12. I have heard all this since the 70’s, but it is catching up now.All these years the rich has feasted, and now everybody will get screwed. And the smile on the rich faces will make all of us sick. Anybody want to warm up the guillotine, let them eat cake.

  13. Ok take your 20 years of ugliness and shove it!
    I'd vote to tax you greedy printed money democrats 100% over 1 million a year income ! Since you all have been usinf the taxpayers credit for the last ten years!

  14. O sure taxing the filthy rich will never work according to Bridgewater! Ok fine just pay back all those trillions your freaking Fed crooks have printed of the taxpayers money!

  15. Dot com crash, 911 crash, 2008 crash, e had 3 major ones in less than 10 years. Wtf about the biggest one in 20 years… You mean since dot com era? Please, none will be allowed anymore as we don't consent.

  16. 🐑Such bullshit… The US dollar isn’t worth crap now. It hasn’t been worth crap since it hasn’t been backed by Gold. Which has been a while now. The debt is just another distraction. 🐑 🇺🇸🗽 What do I know 🤷‍♂️🏅

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