The transcript from this week’s, MiB: Rebecca Patterson, Bridgewater’s Director of Investment Research, is below.
You can stream and download our full conversation, including the podcast extras on iTunes, Spotify, Google, Bloomberg, and Acast. All of our earlier podcasts on your favorite pod hosts can be found here.
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BARRY RITHOLTZ, MIB HOST: This week on the podcast I have an extra special guest. Strap yourself in for this one, Rebecca Patterson. She has a fascinating career and a fascinating job. She’s the Director of Investment Research at investment giant Bridgewater Associates. She also sits on the Investment Committee with Ray Dalio, as well as the two co-CIOs, one of the more interesting and influential and powerful women in the world of finance, and really just the incredible breadth and depth of knowledge.
We talked about everything from inflation to Federal Reserve policy, to crypto, to fiscal stimulus, to China, to different sector rotations that take place at various points in different economic segments, really just an absolute tour de force conversation about all of the things that are driving the market now and not just hindsight, but actual real-time observations that turned out to be the right or wrong, and she describes how they integrate this into their investment process.
Sometimes they look at the world and say, “Well, we see these two things as the highest probability outcomes, and so we’ll position our portfolios to benefit if either of these two disparate and probably mutually exclusive outcomes turn out.” It — it really is a — an an intriguing and fascinating way to think about the world, to look at history, to look at data, and to come up with a defendable approach. I found it absolutely fascinating, and I think you will as well.
So, with no further ado, my conversation with Bridgewater Associates Director of Investment Research Rebecca Patterson.
ANNOUNCER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
RITHOLTZ: My extra special guest this week is Rebecca Patterson. She is the Director of Investment Research at hedge fund giant Bridgewater Associates. Previously, she was the Chief Investment Officer at Bessemer Trust, which she oversaw more than $85 billion in client assets. She is also on the Council of Foreign Relations and a Member of the Economic Club of New York.
Rebecca Patterson, welcome to Bloomberg.
PATTERSON: Thank you, Barry. It’s great to be here.
RITHOLTZ: So, you have a really interesting background that is not the typical Wall Street Research Director or CIO. You — you started as a local reporter in D.C. You worked for Dow Jones in the Wall Street Journal. Tell — tell us a little bit about your journalism career and — and how that led you to finance.
PATTERSON: Sure. So, I’m definitely an accidental banker. I didn’t set out to have a career in finance. I loved researching, I loved riding, I loved connecting the dots. And so, my first job at my hometown paper, the St. Petersburg Times in Washington was great because I got to do all those things. You know, I got to see how policy goes from idea to reality and maybe more importantly why.
And then at Dow Jones, one of my first assignments was writing the Daily Foreign Exchange column for the Wall Street Journal, and I had studied currencies during grad school at Johns Hopkins, but obviously, reality is very different from academia. And I — I learned very quickly that to understand currencies you kind of have to understand everything else, you know, trade and capital flows, relative trends, and economies of markets, psychology. So that was great. That was a great education.
I moved from New York to London with Dow Jones. I was still covering F.X., but also politics and policy in the mid-1990’s when J.P. Morgan reached out and said, “Hey, we read your stuff in the paper. We think you get it whatever it is and we want to hire you.” And I told them, “Hey, I don’t know anything about banking,” but they said I knew more than I realized and I could learn the rest. So I thought, “Well, why not, right? Why not try?”
And my …
RITHOLTZ: Right.
PATTERSON: … first few years there were challenging beyond belief not just because I had a vertical curve to get up by the time. You know, I joined J.P. Morgan in September 1997. Barry, you and I are both old enough that you probably immediately know what I’m talking about.
RITHOLTZ: Things you can change it, yeah.
PATTERSON: Bingo. So, my — my first two years doing currency research for the investment bank I had the Asian currency crisis, I had the yen devaluation …
RITHOLTZ: Long-term capital the next year, right.
PATTERSON: Yep, yep, Russian ruble. And then …
RITHOLTZ: Right.
PATTERSON: … as soon as we are getting out of those, then we had the run-up to the euro. You know, it launched in Jan ’99, and I was one of those folks who were putting together these calculators to understand what would be the conversion rate between the Deutsche mark and the Italian lira, and the peseta. It was – so it was – it was quite an education those first couple of years. But that’s — that’s how I got into banking. I – they read my stock and thought I had it, whatever it is.
RITHOLTZ: So that’s kind of interesting. You — you spent a long time at J.P. Morgan. You were there for about 15 years global currency commodity desk trading, and then asset management chief strategist. How do you work your way from currency to commodity to equity?
PATTERSON: Yeah. So, J.P. Morgan definitely helps me see the world and get a better understanding of it. I feel like, you know, you join the military and see the world. I joined the bank and saw the world.
From — from London I moved to Singapore in the early 1999. I was still doing currency, but now also fixed income research. And that was – that was a great experience to understand that even if all economies and markets have the same drivers, how you think about them is going to change a lot depending on how the economy is made up.
You know, I — I was just getting the hang of Europe and suddenly I’m dealing with remittance flows in the Philippines and reserve adequacy in South Korea. And it — and so it was humbling, but it was a great education. And I think I also learned from that that you can use data from completely other parts of the world to develop your view.
So, you know, even today I look at new export orders from Taiwan or Korea that gives me a leading indicator for U.S. industrial production. So, you — you know, having that holistic take on what’s going on in the world can be really important to have the right views in a — in one specific country. Anyway …
RITHOLTZ: So intermarket …
PATTERSON: Yeah.
RITHOLTZ: … data can be effective if you’re looking in the right place and you’re able to figure out what the impact is going to be on an adjacent or even unrelated market.
PATTERSON: Completely. So, you know, for many years, if you wanted to know what was going on with German industrial production, you would look at Belgium because they did a lot of the assembly of goods that were eventually sold out of Germany. Today I think that’s changed a little, but you look at some of the eastern European countries. But understanding those global supply chains, understanding those linkages, even back in the 90’s when I was getting going in this business were really important to do.
RITHOLTZ: Really, really interesting. And then you end up getting scooped up my Bessemer Trust where eventually you become Chief Investment Officer running a lot of money. $85 billion is a lot of money.
PATTERSON: Yeah, it is a lot of money. My — my mom still giggles a little bit when I – when I mention that. You know, at — at J.P. Morgan, I had gone from research to running a trading desk, and I realized quickly I liked running risk, I like touching the money. I was doing that during ’08, ’09, and — and I also learned about myself that I can handle the pressure of — of things not going up all the time. And so, I knew that was the direction I wanted to go in.
And at J.P. Morgan, while I love the firm, the opportunity wasn’t there when I was ready. And when Bessemer reached out and recruited me, I thought, “All right.” I — you know, I still have friends at J.P. Morgan, but this is — this is the moment to make the leap. And — and it was great.
I — the firm gave me a ton of autonomy. I was able to — to develop new solutions for clients, build a fantastic team. The clients themselves are really interesting. I mean, you know, about wealth today in the United States. Some — some of the people I was dealing with, you really thought about their portfolios like you would in endowment or a pension. They — they (inaudible) 3.
RITHOLTZ: Right, it’s perpetual capital, right.
PATTERSON: Yeah. The complexity is — is not insignificant. So that — that was a lot of fun.
RITHOLTZ: So, you — you end up on the New York Federal Reserve Investor Advisor Committee. Tell us a little bit about that experience, and — and who are the people you met in that role.
PATTERSON: So, I’ve always been close with the New York Fed during my career. I started out doing foreign exchange lessons for junior central bankers in training, and then later on I was on their Foreign Exchange Committee, and then I got pushed into the Investor Advisory Committee, which, you know, I felt initially like the kid at the Thanksgiving table with all the grown-ups because these are all …
RITHOLTZ: Yeah.
PATTERSON: … the masters — truly the masters of the universe, and — and then me.
And — and I’m not trying to be self-deprecating, that’s how I felt. But we took turns presenting in front of the New York Fed officials and then we debate different topics. And I met Ray Dalio there. And after several meetings where, you know, he saw me presenting on a variety of topics, he saw me holding my own against, you know, whoever it was Jim Chanos, Paul Tudor Jones, Bill Ackman, et cetera, and Ray himself. He came up and said, you know, maybe — maybe we should have you come work with us. And — and that was the beginning of a conversation that led me to where I am today.
RITHOLTZ: So, you joined Bridgewater in 2019 before the pandemic, but I’m kind of intrigued by what the process was like to get hired at a place like Bridgewater. I — I got to think it’s more than just Ray saying, “Hey, I met this woman over at the New York Fed, I like her. Give her a job.” Tell us what the process was like to — to actually work your way to the offer from Bridgewater.
PATTERSON: Sure. So, I joined in January 2020, but — but I was interviewing in ’19. And, you know, I think the process for a lot of folks is even more detailed, let’s say, than — than mine was. My process was long. I met a lot of people. I had to come up with ideas on how I would allocate capital to this and that.
I think the most interesting piece of my interview though and — and — and kind of a good window into Bridgewater, Ray had asked me to come join weekly morning meeting they have where they talk about what’s going on in the world. I thought, yeah, that sounds great. I can learn about the people, see what the discussions are like, and I showed up at their office in Connecticut, sat down at the table, several dozen people in the room and it’s being videoed.
And Ray introduces me and — and says, “OK, Rebecca, let’s kick off the meeting. You tell us for the next 10 minutes what you think is the most important thing to think about in the world today.”
RITHOLTZ: Go.
PATTERSON: OK. Go, right, go. And I did not know that was coming. Fortunately, I live and breathe thinking about the market, so I just launched and did my thing. And then afterwards, he said, “OK, everybody dot Rebecca.”
Now, for those of you who aren’t familiar with Bridgewater, dotting is a form of real-time grading. So, we give feedback to each other all the time. And one dot or grade doesn’t make or break your career, it’s really the — you know, the wonderful picture of you that develops over time, sort of a George Soros view of you that evolves over time, but I had never been dotted before.
And suddenly, all these people are whipping out their computers and iPads and putting in little dots next to my name, grading my insight. And — and this is how Bridgewater is. It’s radically transparent. I thought, OK, how do I feel about this because this will be my life. And I’m — I’m kind of grateful it happened because I realized that evening when I got home and I was reflecting on it, I’m OK with it. I might not always agree with every grade I get, but I certainly prefer to know where I stand, but not know.
I don’t want people talking behind my back, I want them talking to my face. So – so that really helped me actually make the decision that I wanted to – to join the firm.
RITHOLTZ: So — so let’s explore this financial point to listen a — a little more. How does this impact — because I’ve never quite heard it described the way you just did? So now you’re at Bridgewater and you go to these regular meetings or anybody who’s there. How does it affect regular conversations? How does it affect presentations? Because I would imagine if every meeting, every discussion group, there’s the potential of being graded. Does that affect how you present, how you behave, how you think about and prepare for each meeting or is it just an ongoing background sort of thing?
PATTERSON: For me, I don’t want to speak for everyone in the firm. For me, it becomes more of a — this is in the background and it’s a way just to get a regular check in on how I’m doing and how people are perceiving I’m doing, where are the areas that I can improve. But I would say, especially in the beginning and even now it’s in the back of my mind, and — and maybe it makes me that one extra degree more thoughtful about how I’m going to present something, but it certainly doesn’t slow you down. You — you can’t let it, right? You’re doing enough hours in the day to worry about how you might get dotted. So, it’s just – it’s a tool really to help you think about what am I doing well at, where areas that I might not see myself that I can do better.
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RITHOLTZ: So, let’s talk a little bit about the research agenda at Bridgewater. How does that get shaped and how does the researcher agenda affect the investment strategy?
PATTERSON: They — that’s a lot of questions, Barry. I’ll wrap into one. There’s a couple things about Bridgewater and how we do research that I think are fairly unique in the industry. One is just the depth of research we do. I — you know, I’ve been in research and investing most of my adult life, and I’ve never seen anything like it. And I think the reason we take so long and go so deep on everything to make sure we truly understand it and understand it not just at the moment in time, but over cycles and different economic environment, so we’ll go back often 50, 100 years in our analysis. We’ll look across countries to see if something is universally true. It doesn’t just work here, but it works in different places.
And once we get that level of confidence that we understand a cause-effect linkage in economies or markets, then we’re going to create rules. If this happens then that, if — if that happens and this, we’ll codify those rules. And those are going to shape the investments we make. Once we understand the rules of how the economic machine works, to borrow Ray Dalio’s term, then we put it into our systems. And we can afford to miss something. You know not that we can’t pull it out of the systems and improve it, but we don’t want to be doing that. So, we want to make sure we get it right up front. And that means doing this unbelievably deep amount of research upfront to understand how the world works.
So, I said that’s pretty different about us. And — and the other thing is that because Ray has had this approach since he started Bridgewater, so he founded the firm 50 years ago coming up …
RITHOLTZ: Wow.
PATTERSON: … and he’s always been doing this, figuring out his – what he thinks, testing it, writing down the rules, and that lets him compound. So when inflation pops, as it’s doing this year, we don’t have to say, “Oh, my gosh, OK, it’s been a while, and go back to the seventies and review that, what did it means.” We already know that. We’ve already studied that. We’ve tested it. So, it freezes up to spend our time in research, looking at what’s different, what — what’s the new thing that maybe we haven’t captured in the past or what are we getting wrong.
I mean, unfortunately, we don’t get everything right. And so, if we get something wrong, we want to understand why, what did we miss. Did we appreciate some variable incorrectly or underappreciated, et cetera? So, we — we really focus our research on those two things: what did we get wrong and why, and let’s fix; and then what are things evolving in the world today that are new.
And maybe, Barry, I can give you one super quick example of that.
RITHOLTZ: Sure.
PATTERSON: You know, when we think about equities, we’re always looking at all the buyers and sellers at every asset class, including equities. And — and we’ve seen in the pandemic a huge increase in the amount of retail investing we’re seeing versus before the pandemic. Obviously, retail investors are something we’ve always tracked.
What’s a little different today is the amount of activity and option with retail investors. And I think that’s the result of changes in technology, changes in cost, the ability of people to be able to use the options at a retail level. And so, that’s something that we want to make sure we’re capturing appropriately in our thinking, and that’ll feed through into investments we make if it becomes a material for striving the equity market.
RITHOLTZ: So — so let’s stay with that because that’s a really interesting issue. I look at the surge of retail investors as a bunch of bored people stuck at home in the first year of the pandemic combined with all of their favorite bedding alternatives, like professional sports wagering. When all that stuff was canceled, the one thing that wasn’t canceled was the stock market. And thanks to Robinhood, they could trade for free, and they could buy fractional shares, so it didn’t take a lot of money. Am I grossly oversimplifying what you described or is that a key factor in, you know, why suddenly the retail investor seemed to surge in 2020 and 2021?
PATTERSON: I would agree with everything you just said, and I would add one very important factor that I’m sure, you know, of and you just didn’t mention, but I think would need to, which is that they not only had the technological ability to do this, they also the financial ability. You know, it’s — and I think we’ll probably talk about it later, but it is really incredible the level of wealth at different socioeconomic cohorts that’s been created during the pandemic thanks to this massive, massive surge in liquidity from the Fed and fiscal transfers from the government.
So, these folks, like you said, were bored, locked at home, but they also have this money. What are you going to do with it? Well, if I can’t go see my friends at a restaurant, I can’t go to a sports game, I — you know, here’s — here’s something else I can do. And by the way, a lot of them, I think. made some decent money over the last year and a half or so.
RITHOLTZ: Especially the — the earlier you were into playing with that the better you — you did post — post lockdown. But — but that’s like kind of one-off thing. What are the biggest drivers into your research? Is it fundamental economic data? Are you really looking at corporate balance sheets, revenue and earnings or is it broader market data or is it all those and more?
PATTERSON: All those and more. Again, that’s — when I say the research we do is deeper than anything I’ve ever seen, you know, every time where I get up in the morning and I read the financial press, and I read my aggregators, and I look at my Bloomberg screen, and I see some snippets, some little thing, I think, oh, that’s interesting.
I send it off to a colleague on the equity team or the fixed income team. 99.5 percent of the time they’re like, oh, yeah, we studied that X years ago. You know, it is amazing the breadth and depth of what we look at to make sure we’re capturing all the players, all the flows, all the input that can affect economies and flow through the markets. It’s really extraordinary.
RITHOLTZ: So, you’re also on Bridgewater’s Investment Committee with Bob Prince, Greg Jensen, and Ray Dalio. Tell us what it’s like working with — with that group. They sound like they can be an intimidating threesome right there.
PATTERSON: Well, I think having my first job in Washington and having to interview members of Congress and — and leaders, and then later in the private bank, you know, working with CEOs and — and people who own the hedge funds and former policymakers, you know, you realize people are people so you shouldn’t be intimidated, you should be respectful of everything they have achieved. So, I — I don’t get intimidated, but I am respectful. I mean, these people have created an amazingly successful company with — with great since inception returns. And — and so, you know, I listen to them carefully, but you have to push back if you don’t agree, and it’s expected.
You know, at the end of the day, if — if they get it wrong because I didn’t push back and we don’t make as much money as we could, that’s my fault. That’s on me. But the — the meeting itself, the Investment Committee that we have, we started that about a year ago, maybe a bit before because Ray, as — as I think has been widely reported in the press, has been transitioning for some time lessen the day-to-day of the company and more into a mentor CIO role.
And — and with that move, we felt we needed to expand the group of key decision-makers. And so, the Investment Committee was formed. And it’s — it’s a place where we’re going to review positions in the portfolio. We’re going to pose questions to each other and about positions, new learnings, things that might be going against us. We feel like it’s a short-term blip, a wiggle in the market or something that maybe we’re missing, and we need to go dig into more.
Again, what makes it different from other investment committees I’ve been on at J.P. Morgan or Bessemer is just the — the bar to get an idea into the portfolio is incredibly high. It can — it can take you several months to get through the gauntlet to make sure you haven’t missed anything before an idea gets in the portfolio.
RITHOLTZ: So — so let me take a step back and ask you a — a broader question. You’ve lived all over the world. You’ve worked all over the world. You’ve traveled to I don’t know 50 countries. How does that impact how you think about long-term investing and the various strategies you want to bring to bear?
PATTERSON: Well, being — going all over the world again — and we talked about this a little earlier, I tried to connect the dots. And so, if I’m seeing, for example, China’s economy slowing down and policymakers are starting to react, we — we saw just recently a small cut in interest rates giving (inaudible) monetary stimulus, but if I’m seeing a slowdown in China, immediately, my mind goes not just the first order consequence, which is how does this affect any Chinese positions. We have a portfolio, but immediately second, third, fourth order.
So what does it mean for supply chains? What countries — if — if we can’t ship out of Chinese ports, where do we ship it from? How does it affect producers across emerging Asia? How does it affect commodities? How does it affect inflation in the United States? How long is this going to last? And then you have to overlay the policy.
If President Xi is thinking about the fall and being — being proposed for a third term, how is that going to factor into the policy response today? What’s already priced in? And so, going overseas, I think, has helped me understand how all these different things connect.
You know, if — if China slows down, that has a lot of implications for Germany. It has implications for Italy. It has — you know, people will say, well, I don’t want to have China in my portfolio. You already do. You know, even if you only own U.S. stocks and bonds, everything is integrated. And so, making sure you’re thinking about how — what happens in one country affects the others, it’s hugely important. People say, “Well, we just focus on the big economies.”
Last year, Malaysia had such an important role in chips and semiconductors because it was one of the key countries that assembled these things. And so, the fact that they were under lockdown with a major hindrance to that supply chain, you think about Taiwan, you — you don’t think about Malaysia, but you have to think …
RITHOLTZ: Right.
PATTERSON: … about every country and its role, not just the big guys.
RITHOLTZ: So, because Malaysia’s lockdown, used car prices are going higher.
PATTERSON: Bingo.
RITHOLTZ: Really, really interesting. Let me ask you one more question about how interconnected the world is. A year ago, we saw some changes in China towards some of their tech companies and — and the shift in the dynamic of more equitable wealth being spread throughout — throughout the country. And from a U.S. perspective, it looked like, hey, China is really rattling the cages of some of their biggest and most important companies kind of in a more direct and — and frightening wave than we saw in the U.S.
If you remember back in 2016 when — when Donald Trump was first elected, he was tweeting at companies and making threats, but never went quite as far as we’ve seen in China. How do you build a model that allows you to incorporate really, really challenging geopolitics like that?
A — a lot of people looked at that and kind of threw up their hands and said, “We — we can’t figure out what the hell is going on in China.” How do you deal with such a complex and — and really challenging set of circumstances?
PATTERSON: So, I agree there is — there’s a different level of understanding around China than the U.S. I mean, most of the capital in the world that gets invested is in America.
RITHOLTZ: Right.
PATTERSON: You know, the — the — the bulk of banks are in the America, the bulk of analysts are in America, so we understand our system incredibly well. Someone from the outside looking at the U.S. could say, “What the heck is going on in the United States? What is the contested election, et cetera, et cetera?”
RITHOLTZ: Right.
PATTERSON: What are — is there going to be more regulatory scrutiny in the U.S. around tech companies? We understand it.
As we look at China, I — I think honestly, given China’s size today and the fact that in our lifetimes there’s a very good chance it will be the largest economy in the world, it will have a currency that’s probably in the top three, maybe five in the world in terms of trading volumes. We need to develop that level of understanding with them as well. And that is not just how their economy works, but it’s also the linkage between policy and the economy.
If you look at Chinese policymakers and what they say, the one thing that’s kind of beautiful is that because of their political system, what the policymakers say is usually what happens. So, if you’re actually reading all their speeches and watching them, you usually have a decent heads up what’s coming whereas in the United States, our policymakers say a lot of stuff, but it doesn’t mean it becomes reality because it has to go through — through Congress, through the Supreme Court, et cetera.
In China, if you wanted to see that there was going to be a clampdown on the tech companies, you know, maybe didn’t know the exact timing or the exact details, but directionally, they telegraph that in advance. I even think about 2015 when China decided that they were going to have more flexibility around the renminbi and — and the Chinese currency weakens. I think it was August that year fairly suddenly.
RITHOLTZ: I remember that, yes.
PATTERSON: Yep. And — and if you look at the speeches they had been giving months in advance, you would have known that something was coming, maybe not today or the magnitude, but you knew something was coming. Just like today in the — in the United States, the Fed will say, “Hey, we’re thinking about tapering,” or “We’re thinking about quantitative tightening.” We know to read those tea leaves.
I think as — as global investors, we all need to get on the bandwagon and get up the curve on China as well because the economy is going to continue to be a major force for global markets. You can get there, you just have to spend the time knowing who the important policymakers are to follow, and then start reading their speeches a lot more carefully than I think most people do today.
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RITHOLTZ: So, listening to you discuss inflation, I think you approached it in a way very different from what I’ve been hearing other people talk about. You said, quote, “Demand shock is what’s driving inflation.” Explain demand shock.
PATTERSON: Sure. So when we look at where we are today with inflation in the United States, it’s very easy to quickly go back to the late 1960’s, early 1970’s and say, “OK, you know, high and rising inflation, high gas prices.” We’ve said that’s behind the curve. Yeah, OK, there are similarities that are worth noting. But back then, what was driving the high inflation were supply shortages. That was the key ingredient.
Today, obviously, there’s things on both side of the demand supply equation, but the bigger deal is the surge in demand, which is just overwhelming the supplies. So, let me give you a number here to — to make this feel more real.
If you look at the supply of goods for U.S. consumers that comes from around the world — so produced everywhere in the U.S., China, outside, et cetera — it’s running about five percent above where it was before the pandemic. So, the supply of goods has increased on that. But then look at the demand side, the demand from U.S. consumers today is about 20 percent higher than the end of 2019.
And you see similar patterns across a lot of things, whether we’re talking about industrial metal where supplies today are high, but the demand is much higher. That’s pushing down inventories.
Ships, we have more ships on the ocean today than we did pre-pandemic, but it’s just not enough.
Labor markets, we’ve got no shortage of jobs today, we just had such high demand for jobs. And so, yes, there are supply constraints here and there. I’m not saying there aren’t. I’m just saying the bigger deal this time and what makes us so different from the 1970’s is this absolute boom and demand.
RITHOLTZ: So, let — let’s stick with demand and another comment of yours was, quote, “We are witnessing the biggest monetary stimulus outside of wartime,” unquote, referring to the various CARES Act. The fiscal stimulus, is that the key driver of all this demand?
PATTERSON: Yeah. Well, it’s the one-two punch of monetary and fiscal. So, Barry, when you and I were — were mere children, it was all about interest rates, right? The Fed was using short-term rate to — to affect economic conditions. We’ll call that monetary policy one. And then in 2008, rates hit zero. The Fed needs to ease more, so then it starts launching more quantitative easing, so we call that balance sheet usage plus interest rates, MP2.
When we got to the pandemic, OK, the Fed went big, and it went fast. We cut rates. We did huge amounts of — of quantitative easing, but it wasn’t enough to fill the hole in the incomes that the pandemic met when we …
RITHOLTZ: Right.
PATTERSON: … shut down the economy. And so, fiscal had to play a bigger role. Fiscal became the dominant policy lever driving growth.
And the Fed facilitated it. Obviously, the Fed is still independent. But the Fed, by keeping yields low by buying the bonds, was allowing the government to borrow and spend like this. And so, we’re in a world we call today MP3, but what’s important is that we not only filled the income holes that are created by the pandemic, we overfill them.
We started to build little mountains. People are wealthier today than they were before the pandemic. Balance sheets of companies and households today are stronger than they were before the pandemic. It’s — it’s the fact that we have such a strong economy today. All this excess savings that was pumped into companies and households that’s created the demand surge, that’s then driving the inflation.
RITHOLTZ: So — so many questions to follow-up with that. We — let — let’s start with the savings rate, which I don’t remember if this was a Bridgewater chart, or I saw it somewhere else. But we’ve seen over the past year and a half American savings rates are at record highs, but slowly drifting down as they spend away their CARES money, their extended unemployment benefits, all the different cash that found its way into households. And we’re slowly approaching the pre-pandemic savings rate. Does that mean that we’re going to see less of that demand push into inflation or is there still enough dry powder that demand is going to continue being a factor?
PATTERSON: So, I think we’re going to see growth moderate this year from last year, which should not surprise anyone.
RITHOLTZ: Sure.
PATTERSON: But even then, I think we should expect to have real growth probably double or more potential and nominal growth still be incredibly strong even with that extra savings rate coming down for a couple of reasons. I think one, we’re starting to see early evidence that the fiscal and monetary stimulus is now passing over to the private sector. So, people are starting to tap their credit cards again. You’re starting to see bank loans picking up again. So, the credit creation, which wasn’t needed for the last two years, that’s now coming in to fill the gap of that savings being spent. So that’s one.
I think another support that we’re going to see having a bigger role this year will be CapEx. So, you’ve seen because of the strong demand and you’re getting the self-reinforcing flywheel of the economy going, companies have the — the clarity looking ahead, and they have the strong demand backdrop that they’re feeling more confident to make investments. And so, we’re going to see CapEx not just in technology, but I think broadly. That’s going to be a support for growth, and that creates jobs then jobs create incomes, incomes great spending.
But then the third one is inventory rebuilding. And we started to see that began as well, but I think that’s still has quite a ways to go. So even though we’re seeing the savings run down to that support for growth running down, I think we’re really transitioning from this policy-driven economy to a private sector-driven economy this year, which should, in all the ways I just described, keep growth very strong albeit off the peaks of 202.
RITHOLTZ: Really interesting. I — you referenced monetary and fiscal as a one-two punch kind of answers the question I — I was going to ask, but I’m ask it anyway. We saw a massive monetary stimulus during and after the great financial crisis, but inflation remained very, very subdued as did GDP. So, it really makes me wonder, is monetary policy alone going to be inflationary or does it require the sort of fiscal stimulus that we saw in — in the CARES Act to drive inflation levels higher.
PATTERSON: I think what we’re learning from 2008 and the years following and then today is that with rates near or at the lower bound and quantitative easing effective, but it affects — it’s closer in different ways, right? It’s going to affect liquidity conditions. It’s going to affect …
RITHOLTZ: Sure.
PATTERSON: … financial markets. The effect on the real economy is — is indirect secondary. So, I think we are learning that if you really want to drive a sustained reflation and higher inflation, you have to have the fiscal with the monetary. And then after 2008-2009, we initially had some fiscal stimulus, but it wasn’t enough and then it quickly slipped into a fiscal drag when we had all the budget fights.
RITHOLTZ: Right.
PATTERSON: And so, that — that slowed down and undermined the recovery.
RITHOLTZ: So, let me ask the flip side of the question about the demand shock. Let’s talk about the supply issues. In some areas, it seems like there’s a lot of shortages, whether it’s semiconductors pushing into automobiles, or we look at the amount of housing inventory ratio-to-sales is at record lows, it doesn’t seem that there’s any supply there. And then — and you — you mentioned the gap between demand and the logistics, whether it ships or shipping containers leading, there’s not enough of those, and we’ve had all these different spot shortages. How significant are all of these supply issues relative to that demand shock?
PATTERSON: The — the supply issues are massive, and — and I don’t mean to underestimate the importance they’re having on inflation. But I think one way you can see that the demand is the bigger deal than the supply is what’s going on with pricing and profit margins for U.S. companies.
Now, this may change going forward, but what we’ve seen to date is that companies in the United States are — the vast majority of companies are able to pass on the higher input costs, threw in prices to customers, and customers are still spending. To me, that tells me that the strength and demand is greater than the supply-driven supply pressures.
If we were to see demands getting eroded, that would tell me that the underlying support for the economy that I’ve been describing that maybe I’m not measuring correctly that the supply issues are becoming a bigger deal, but so far, we haven’t seen that happen. And then we are spending a lot of time trying to understand how long do the supply pressures last. Obviously, it’s a little bit different for different goods, et cetera.
I think — I think the hardest one, frankly, is going to be in the U.S. with labor. How do you get workers to come back? I think we’re going to have to have higher wages. And then the question is can companies continue to raise wages without it passing through into their profit margins?
And — and the other one that I think is really interesting about the U.S. labor market today is retirees. And after the last non-farm (ph) payroll report, of course, everyone was talking about it, but in the past when we have layoffs and — and the older workers got laid off, they came right back to work like everyone else did.
This time what’s different is they’re wealthier. They actually made money during this recession.
RITHOLTZ: Right.
PATTERSON: And so, compared to past crises, they have the financial ability to retire early, and they’re doing it. So maybe a few of them come back over the coming years, but I think we’ve seen a structural shift in our labor supply, and that’s going to keep a pressure on wages, which could keep inflation around longer than, I think, some people are forecasting right now certainly than what’s discounted in the market.
RITHOLTZ: Really, really interesting. Raises — raises the question, you know, people always talk about is the Fed behind the curve or not. I think the more interesting question is, given all these other factors, the fiscal stimulus, the labor market, really how much can the Fed slow inflation given all these other non-monetary factors short of causing a recession? I mean, is this really the sort of thing that the Fed is in a position to do something about?
PATTERSON: I — I think the Fed is — is the only game in town. If we’re going to try to lower inflation, I mean, President Biden and the administration are trying to do what they can to bring down inflation because clearly, it’s hurting him in the polls, but governments aren’t really good at tightening fiscal, and — and governments don’t really like to hurt demand, so he’ll do things at the margin. But really, it’s going to come down to the Fed if we want to get inflation under control.
And then what is the Fed trying to do? Well, they want to make sure over cycle inflation is around two percent. They want to have a strong labor market. They don’t want to create a recession, they want to engineer a soft landing. So how much tightening is the right amount? And I don’t envy them right now because you still have a lot of question marks tied to the pandemic about supplies, about how high wages go. So, I — I think the Fed is likely to do more than what’s priced into the curve right now, so we’ve got about three hikes priced in for this year.
That said, I think there’s still a good risk the Fed will lag economic conditions. So, the result of all this will be higher interest rates, but inflation that ends up higher than what the market is discounting. And this is the one, Barry, that just — it — it blows my mind away. People are really pricing in that the world looks very much like pre-pandemic very quickly within the next year to 18 months, you know, inflation back close to two percent, growth back down towards potential level. And that could happen, but you would have to see the Fed tighten a lot more than it’s priced in to get there, I believe. And so, if the Fed is going to tighten so much or are they going to tighten some and we’re going to have inflation that’s higher.
What we’re doing with our portfolio is positioning for both. We’re positioning for inflation that’s higher than priced in, and we’re positioning for the Fed to tighten more than it’s priced in because we don’t know exactly, which — what the Fed is going to do, how much quantitative tightening, how many rate hikes, what speed, but we know something is coming. And so, we’re going to position for both outcomes, so in the amount of each we get will depend on — on what Chairman Powell — the FOMC decides.
RITHOLTZ: So — so you have that three-body problem, that convexity that you can’t tell what each subsequent change how it impacts the other factors. Hey, if things begin to normalize, if omicron collapses, if the economy reopens, more if people are outdoing what they want to do, maybe we see more supply of housing, people going back into the labor market, maybe things do normalize more quickly, but so many things have to happen in such an order. And the subsequent — the way the billiard balls move around the table are all affected by all the other billiard balls moving around the table, it becomes really challenging to — to map out with any high degree of confidence. What — what’s going to happen next?
Is that why you approach investing with here are multiple scenarios and we’re going to position ourselves for all of them since we don’t know with any degree of confidence which one is going to occur?
PATTERSON: Oh, I — I wouldn’t say we position for all of them. In this case, we’re positioning for two because we think both are likely. You know, but I — I hear what you’re saying. If — if omicron fades quickly — fingers cross — and the world starts to normalize, you will see less demand for goods, more for services relatively speaking.
RITHOLTZ: Right.
PATTERSON: Agreed, and that could bring down some goods prices. Supply chains opening up, I think that takes a while, right? Are you going to suddenly have more truckers on the road? Are you suddenly going to be able to get the stuff out of the ports in Los Angeles? That’s going to take time. I still think you’ll have upward pressure on wages.
The housing one is interesting. You know, if — if omicron fades and you can have more construction workers out there, more supply …
RITHOLTZ: Right.
PATTERSON: … of — of timber, et cetera, but — but what we’re seeing right now is that, you know, consumer prices don’t capture housing very well. And we think that rents and housing prices are going to take a long time for the supply to catch up with demand. So, we see both wages and housing, in particular, as pretty sticky upward pressures on demand — on inflation, excuse me. And I think that’s going to last this year even if the world starts getting back to normal from a pandemic perspective.
RITHOLTZ: Yeah, we — we underbuilt single-family homes for like a decade following the — the housing boom and bust in the mid-2000’s, and now — now we’re paying the price. Given all these things that you’re describing, the demand shock, the supply issues, the supply chain and logistics problems, the Fed not fully being priced in, shouldn’t that have led us to see a huge move hiring gold last year. Gold couldn’t get out of its own way. How do you explain that?
PATTERSON: Yeah. So, I’ve been following gold since I got into investments. And — and last year, you know, we did see a big rise in gold in 2020 and early ’21, and then it — it gave quite a bit back later in ’21. I think I’d probably boil down gold’s lack of stronger performance given inflation to two things. One would be inflation expectations, right?
You want gold as a hedge against inflation, but if you think inflation is — I hate using this word anymore — transitory, and that we’re going to go back to what’s discounted in a year or two years, then there might have — that might have affected how much demand there was from that constituent for gold.
I think the other big deal is that while there wasn’t — obviously, there is a lot of ongoing inflation, there’s also a lot of ongoing nominal growth. And so, if I’m thinking, OK, I want some inflation hedges in my portfolio, I could have gold or I could have cyclical commodities that will benefit not just from inflation, but also from greater demand. So, what we saw last year were cyclical commodities like oil, like industrial metals, copper, et cetera. They did extremely well. They outperformed gold by a lot. And then cyclical assets broadly, including the equities that could pass on the inflation to end — end-users, they also outperformed.
But I don’t think this means gold has lost its luster. I still believe gold is a good diversifying position for a portfolio. I think it tends to perform best at the tails, if you will. If we have a deflationary recession, which is going to lead to expectations for lower interest rates, then you want gold to protect your portfolio. And then at the other end of the extreme, the other tail, when you have overheating in the economy and you’re starting to see demand disruption at the same time, you still see high inflation or unanchored inflation. I think those are going to be your sweet spots for gold. And in the middle, it doesn’t mean that gold won’t do well, it’s just that the outcomes are more varied.
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RITHOLTZ: Let’s talk a little bit about U.S. and overseas investing. Here’s another quote of yours I liked. “The U.S. has been priced to outperform for the next decade. What are the risks in that sort of pricing?”
PATTERSON: Well, we both know that people tend to have a recency bias. So, what has been happening, I don’t know what it is about human psychology, but we just kind of assume it’ll continue. And look, the U.S. has outperformed for well over a decade now. It’s been one of the strongest growing economies in the world, rising profit margins.
The question is if we’re priced to do that again for the next decade, to your point, what are the risks? Well, one thing we’ve seen is that when you have a market outperform for such a long period, some of the tailwinds often become headwinds.
In the case of the U.S. today, think about what’s driven this performance. It’s been beautifully rising profit margins, and those profit margins has been – have been helped by relatively subdued wages, so more capital going to companies and workers. It’s been helped by falling tax rates. It’s been helped by falling regulations, less regulation. And when we think about where we are today, foreign exposure to U.S. stocks and bonds, U.S. assets is at the highest it’s been since the mid-1980’s. So, everyone’s got the trade on, all these beautiful tailwinds. Everyone is expecting it to continue.
When you look at what’s happening today in the world, you know, the U.S. is talking about greater regulation, and globally, we’re talking about greater regulation for a lot of these tech giants. We are seeing rising wages and more power, more capital going to the workers rather than the company bottom line. We are talking about we’ll see what passes higher taxes for corporations. And so, while we’re not sure yet exactly what will play out, we know the risks are growing that these tailwinds, at a minimum, are reduced and at a maximum become major headwinds for U.S. stocks. So that would be a major point I’d make.
The other thing is, you know, we — we love history at Bridgewater, and we’ve gone back and looked at every equity market for the last century or so and said how often do you see any market in the world as kind of one of the top for multiple decades in a row.
RITHOLTZ: Right.
PATTERSON: And there are very, very, very few precedents. U.S. did great in the 2010, but it lagged in the 2000’s. U.S. did great in the 90’s, but it did really poorly in the 80’s versus peers. So, I’m not saying it can’t be different this time. Maybe the U.S. will crush it again in the next decade. But given the historical patterns, given the growing risks, I think it makes a lot of sense not to be overly concentrated in the U.S. taking a medium-term view, not the next couple of months, but the next three to five years. I would make sure I have diversification in my portfolio.
RITHOLTZ: It makes — makes a lot of sense. Let’s talk a little bit about some of those risks. Your boss Ray Dalio mentioned that about five percent of the U.S. stock market was frothy, and then I hear you subsequently say five percent, it’s closer to 10 percent of the stock market is frothy. And some folks would even say 10 percent is conservative. Tell us what you mean by frothy and how that affects the rest of the market. Does it remain its own little corner of — of frothy speculation or does that tend to infect sentiment and impact everything else?
PATTERSON: Sure, sure, good question. So, we — we know that bubbles can create bigger selloffs, right, not just the things that had become bubbles, but to your point spillover effects. And so, years ago we started developing what we call bubble indicators to try to understand the ingredients that can create a bubble and the — and the risk, of course, that that bubble popped.
I can’t really get into all the details of what’s in it, but when we track the companies today that meet those thresholds, I’d say it’s between 10 and 15 percent now of the U.S. stock market that — that hit those levels. And most of those companies today are emerging technology firms that have not yet posted any profits.
Liquidity has been a big, big part of what’s made them in a bubble, and we talked about this earlier. Households that got stimulus, put those savings into the market. At the same time, trading costs came down. But — but what I’d say looking that forward is that bubbles often sow the seeds of their own demise.
So right now, for example, I think this is a — a good one to be watching into this year because valuations on these companies are off their highs, but they’re still quite high. It — it makes it more attractive for them to IPO or to issue. And right now, when we look at where lockups are ending and where we could see supply coming in the market this year, it’s about $400 billion of equity coming to the market, over half of that is from the same set of frothy companies, that’s not a big number for the market as a whole, but for this segment of the market, especially if it’s happening at the same time the Fed is pulling back liquidity, this could be a big deal for those companies. And then to your point, Barry, potentially looking for ripple effects to — to the broader market or at least those sectors.
RITHOLTZ: Really, really intriguing. We’ve been talking a lot about Fed liquidity. How much of Fed liquidity is driving this frothiness?
PATTERSON: Well, I think again it’s the one-two punch of fiscal and Fed that have been driving this. But what’s interesting is that the United States equity market sensitivity, if you will, to liquidity conditions, the way we measure it, has increased pretty substantially over the last several years. We would estimate today that about 40 percent of all U.S. companies are highly sensitive to liquidity conditions, and that’s up from a little over 20 percent a few years ago.
And what that means is, you know, often we’re talking about longer duration equities where the cash flows are going out further in the future. Often, that’s tech and growth companies. As the Fed starts pulling back interest rates and then quantitative tightening, ultimately, these companies are going to be, we think, more vulnerable when that happens.
Now that doesn’t mean you can’t get a rotation in the equity market, people can reduce their exposure. We’re seeing that already in the beginning of the year. People are reducing their exposure to these longer duration equities, moving their money into shorter duration equities that are more sensitive to cyclical conditions that can handle the rise in inflation. So that doesn’t mean the U.S. market overall goes down, it could just be the intra-market rotation we see, but I think it — it also sets us up for markets overseas that are less sensitive to liquidity, more sensitive to global growth, which one would assume if and when the pandemic starts to fade that — that we should see pretty good global growth, especially if China continues to stimulate and that could lead to some of these other markets potentially significantly outperforming the U.S.
RITHOLTZ: So — so let’s stay with that topic of both sector rotation and global rotation. Let’s start with sectors. It sounds like you’re less interested in the big cap tech that’s been kicking butt for so many years and looking at areas like consumer discretionary, energy. What — what else do you think durable goods works when you have that sort of cyclical rotation take place?
PATTERSON: I mean, I would — I would agree with your list. I would add one more to it that I would be — I would be probably constructive on is — is going to be finance and banking. And one thing I just highlight there is what the Fed is saying right now, which again I think we’re in this really interesting place where the Fed is experimenting suggest they’re not putting enough thought into it because clearly they do.
But they’re saying now that instead of doing rate hikes for a year or so and then may be considering starting to take the liquidity out of the market by doing quantitative tightening, this time around they’re saying, well, maybe we’re going to start quantitative tightening after just one rate hike. Why would they do that? Right? Why would they do this quantitative tightening so early in the cycle? And when you read the Fed minutes, there are two things getting highlighted by some of the FOMC voters wanted banks, and the other is the yield curve and the two are related.
You know, I think that having a flatter yield curve, which is more likely if you just use the short-term interest rate tool, it sends a signal. And you already see lots of financial media saying, “Oh, my gosh the yield curve is flattening. We’re pricing in a recession.” The Fed doesn’t want to send that signal. So, if they can use quantitative tightening to try to help keep the yield curves steeper, that’s in their interest.
The other thing is that in the United States our banking system is so fundamental for the health of the overall economy that they don’t want to create any undue stress for the banking system. And so, having a steeper curve helps bank’s profitability, which in turn helps them feel comfortable making loans. More loans mean the economy can pass over from the public to the private sector successfully, and boom, they engineer a beautiful soft landing. So …
RITHOLTZ: That makes perfect sense.
PATTERSON: … when — when you talk about sectors, the Fed may use more quantitative tightening to help keep the curve as steep as they can. I’m not saying it will be steep, but steeper than it would be otherwise. And at the margin, I think that’s probably good news for the bank. So, I would just add that one to the list you — you gave on the rotation.
RITHOLTZ: You know, that makes a whole lot of sense. So — so let’s go global a little bit. Given how you describe China’s policy goals and — and their stimulus shifting, we — we’ve seen them very much move away from real estate as a key driver. How investable is China today? And what do you think their policies are going to be in terms of how they want to stimulate their economy?
PATTERSON: So, China is — is trying to transition from having these boom-bust cycles where policymakers do a lot of stimulus and then grow surges again to having more stability over the medium-term, more elongated cycles, but that means less stimulus and more fine-tuning stimulus along the way.
When I think about where growth is going there this year, last year, one of the big supports for the economy was exports. Oh, Chinese manufacturers were supplying all that demand that Americans and others had. And if the world normalizes this year, we can start using services more. Exports, I would guess, will still stay strong because economies are still very strong, but it might moderate. So, growth in exports not the same engine of growth for China as they were last year.
So what builds in the gap? You know, the consumer right now is soft, partly because of the property de-levering that the government wants to engineer to make sure there’s no bubble there, partly because of COVID lockdowns. And it doesn’t seem like the lockdowns are going away anytime soon. The government doesn’t want to do a huge amount of stimulus, but it needs to do something to get growth back up towards the target around five percent.
So, I would expect that you are going to see policymakers doing more stimulus. The question is how much, when, and is it going to be enough to get back to their target or is — are we going to disappoint consensus. That’s one of the big questions I’m trying to dig into right now with my team, where does the growth come from?
I mean, I’ll give you just a lunar new year one to keep an eye on. China has been the global leader on digital currencies on CBDCs when we go into the crypto space, and they just put out a report over the weekend, a briefing talking about the millions of crypto wallets that now exist in China. We’ve seen some little pilot tests of this, but here — here’s a fun one to get your head around.
Could China do targeted fiscal stimulus soon through crypto? They’ve done it in — on a small scale, but now that they’re getting this out throughout the population, if they want to help the consumer and they want to do it in a very targeted quick way, this could be the true launch of the Chinese digital currency. I don’t know if it’ll happen, but it’s — it’s kind of a fun thing, I think, to keep an eye out for. It wouldn’t surprise me.
RITHOLTZ: Especially the way you could put very specific conditions on those sort of crypto wallets. You can get money out into the public and say, “Hey, if you don’t spend this within 90 days, it — it goes away.” So that your window to — to — to go out and buy this with — or — or use this, which is really intriguing.
Before we get to crypto though, let’s stay with international. Tell us what’s going on in Europe. They — they don’t seem to be able to get out of the wrong way or at least for the past decade have post Greek crisis post all of that in the early 2010’s. They just don’t seem to have found their groove.
PATTERSON: Well, I — I do think this year, Barry, could be a make or break for Europe. I think this is a hugely important year for Europe. And I say that because last year in the pandemic they got the E.U. recovery fund launched. So, the first real attempt at European-wide fiscal transfers, that money is still flowing through, particularly the countries like Italy and Spain. It’s going to be a major support to growth. And they agreed during the pandemic that the fiscal rules they created when the euro was launched have become completely irrelevant. You know, to say that a country should have a three percent budget deficit and 60 percent debt-to-GDP ratio, it’s kind of silly today. No one has debt levels that low anymore anywhere practically. And so, they’re reviewing those rules.
Right now, as we speak and in the coming months, they’re going to come out with revisions. The question is how much fiscal flexibility — try to say that fast — fiscal flexibility do they give the countries? One thing that’s being discussed is saying, OK, anything you do for green investments won’t count. That’s interesting, right? So how much — how much more growth could you get if they don’t force austerity every time you come out of a crisis? So that would be one big deal to watch.
The other one is Germany. So, we have our new government, Angela Merkel has gone off into the sunset, and we have Olaf — Olaf coming in — Scholz. And it seems that that coalition government is relatively more open to fiscal flexibility in Germany. That’s a big deal. We don’t know how much yet, but if Germany is willing to spend a little more, if Europe is willing to spend a little more, none of that is priced in at all in markets if you look at what Europe is expected to do for the next decade. So, this could be the year.
The — the last piece of the puzzle I’d mentioned quickly is Italy. So, one of the things that has been meaningful during the pandemic is Mario Draghi becoming Prime Minister of Italy, which has one of the highest debt-to-GDP ratios in Europe after Greece. And — and they just couldn’t, to your point, get out of their own way.
In the coming two the three weeks, so it’ll be early — in — in early February, it will become clear if Mario Draghi will stay Prime Minister or move into the presidency of Italy. I spent a year of graduate school and then some time as a journalist in Italy when Berlusconi first ran for office. It does matter what Draghi does. If he stays as prime minister, I would be much more confident that Italy will continue to reform and get those recovery funds, which will support growth and support sentiment towards EMU.
If Draghi becomes president and that leads to snap elections in Italy and more political dysfunction and the reforms fall off and they no longer get the money, I worry that people will say, “Oh, here we go again.” And — and then I think the risks are higher that we’re back where we were pre-pandemic for Europe, and we’re in that same boat. But I think the next few months actually are going to tell us a lot about the next decade for Europe.
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RITHOLTZ: So, since we brought up crypto, let — let’s talk a little bit about that. What are your thoughts of this as an investable asset class? Is it millennial gold? Is it digital gold? Is that part of the reason perhaps why gold has been underperforming?
PATTERSON: Well, there’s no great data yet to be able to prove that crypto is taking market share away from gold. The best we’ve been able to do is find filings by certain financial firms showing, buying of crypto, selling of gold within a certain window that gives us at least some anecdotal evidence that maybe that had happened somewhat last year. So, it’s possible that — that you are seeing — people saying I could own gold or crypto, which one do I want, and they’re leaning a little bit more towards crypto. So, I think it’s possible we’re seeing a little of that shift going on.
When I think about crypto, I’m thinking about primarily for my client base so very large institutional investors. Right now, aside from retail, the institutional space is mainly hedge funds, family offices. We aren’t seeing many large institutions in it yet, I think, primarily because the liquidity hasn’t been there to put on a position in large size. And the regulatory ecosystem is largely nonexistent at least in the States. I — I think both will change.
As we get more regulations and it’s a matter of when, not if, I think that will make people more comfortable to put a toe in the water. And as we get more volume, that will create more liquidity, which should over time reduce volatility. So, you’ll get a positive — a positive reinforcement kind of cycle going on there.
The question to me again is when that happens. But for the moment, you know, the liquidity is improving. You can put a position on as a fairly large investor. In a stress period, it’s not clear liquidity there if you want to get out. I think that’s the limiting factor, but I — I do think the space continues to evolve so quickly. And once we get the regulatory ecosystem in place, I think it — it could be a pretty big deal for larger investors.
RITHOLTZ: Really, really kind of intriguing. Talk more broadly about crypto as an investable asset. Is this more like a commodity or a currency or does this eventually evolve into an equity-like asset class?
PATTERSON: Well, that’s — Barry, that’s part of the problem, right? If — you know, in foreign exchange, the space I know best, they’re all currencies, different countries, different fundamentals, but they’re all currencies. Crypto is so different from currencies and that you have some crypto that — that behave more like a currency. You have some that behave like a commodity. You have some that behave like securities.
And as a result, the regulators in the U.S. are debating a little bit. Who should be in charge. And — and so it’s hard to get one body saying, OK, we’re going to drive this forward. And then they are pushing Congress to write some laws to help the regulators, and Congress is not making this their first priority. So, everything is a little stuck right there. But I — I think it’ll continue to evolve.
The crypto is so interesting because they can use technology to serve different purposes. So I — I don’t think, you know, when I — when it first started, I thought, “Oh, it’s just like new currencies.” And so, many of my old currency colleagues now work on crypto desks and they are trading options on crypto and lending on crypto just like we did with currencies back in the 90’s, but they — they’re very, very different from currency markets. And I think that’s one of the challenges with developing the regulatory ecosystem.
RITHOLTZ: Really intriguing. We haven’t really talked about politics at all, and — and given Ray’s most recent book, I have to ask you, when you’re doing your broad overview of the state of the economy, how do you contextualize things like partisan politics and — and tribalisms as a factor?
PATTERSON: Well, politics drives policy, and policy is going to influence the economy and markets. So, I think you have to try to understand politics to the degree you can, and again to the degree you can put probabilities around different policies becoming reality. So, for example, when President Biden has been pushing forward on different fiscal plans, we would try to spend time understanding, OK, if this amount of money gets through government spending, what sectors would that be true? What companies would that be true? How would it flow through the households? Once the households get it, do they save it? Do they spend it? If they spend it, what do they spend at? So, we created this whole process we called fiscal rivers to try to understand that.
So — and — and whether or not the policy gets through is going to depend a lot on the politics. It makes it a lot harder to forecast fiscal than monetary. Monetary is fairly rules-based, fiscal is political-based. But we do follow it. We have an amazing team in-house that does nothing, but living and breath politics all day long, God bless. So, it is a big part of what we do.
But I — I agree with you, it’s — it’s a lot more qualitative and — and difficult to forecast with any confidence, so it’s an input into what we do. But I certainly would never — at Bridgewater or anywhere else — put a trade on just a political view.
RITHOLTZ: So, before I get to my favorite questions, I want to ask you a little bit of a curve ball question.
PATTERSON: OK.
RITHOLTZ: You’re Vice Chair of the Council of Economic Education. You’re about to become Chairperson of that council. Tell a little bit about what the Council for Economic Education is and — and what they do.
PATTERSON: Well, it — it gets back to the politics a little bit. You know, in the United States, only half of the states require students in high school to take at least one course in economics. Only 21 states require students to take a class in personal finance. And — and so this is not a national government thing, it’s a state government thing. But at the end of the day, if you have requirements, you get action. If it’s required, then you will get the courses. And — and we have found clear evidence that the states that teach this, the students, when they graduate, are better prepared to think about college financing, to think about credit cards when they get to college or — or after high school when they get a job.
And so, it’s — it’s in our country’s economic and social interest to have a population that can make good personal finance economic decisions. And ultimately, gosh, wouldn’t it be nice if all of our policymakers understood basic economics?
Sometimes when I listen to the speeches on the Hill, I have questions about a few of them. And so, that’s what this group is doing. We’re trying to advocate states to have requirements. We’re trying to provide great programming for teachers so they can teach in the classroom, and we provide programming directly for the students and their families. The whole point is just to give people the basics so they can make good life decisions, which I think help them as people, but also build, you know, fold through to the economy.
RITHOLTZ: And when you — when you talk about content, you’re really describing a — a financial curriculum for students. What — what ages? What grades?
PATTERSON: Yeah, we’re talking about kindergarten through high school and so …
RITHOLTZ: Oh, really? That — yeah.
PATTERSON: … trying to — yeah, yeah, yeah, yeah, starting that young. What — what does it mean to save? What does it mean to spend? How do you think about how much you should be able to spend? It makes the concepts easy to understand in the beginning. And then when you get to high school, obviously, it gets — it gets more complicated.
But it’s been — it’s been so rewarding to see some of the teachers. We work with 55,000 teachers and they, in turn, touch about five million students right now.
RITHOLTZ: Wow.
PATTERSON: And just when you see the results and the difference it makes that these kids get it, they have confidence. They know what they’re doing. And again, you know, it seems like such a simple thing. But when you look at 2008-2009, how over-levered people were, spending money they didn’t have, flipping homes, and you just think, gosh, these are just such basic concepts. And if we could just make people more educated about it, how much better off we’d all be.
RITHOLTZ: Is the …
PATTERSON: So that’s what the program is about.
RITHOLTZ: Is there — is there anything more shocking than that scene in the middle of a — The Big Short where one of the characters is talking to a woman in a strip club, and she’s a house flipper, as well as a stripper. And he asked her about, “Wait, you have two mortgages?” And she’s like, “No, I have six. I have all these houses,” and that’s when he realizes exactly how over-leveraged and completely oblivious the U.S. consumer has become with — with credit.
Speaking of films, let’s — let’s jump to our favorite questions starting with tell us what you’re streaming these days. What’s keeping you entertained during lockdown on Netflix or Amazon Prime or — or anything else that you’re enjoying?
PATTERSON: Sure. So, I don’t watch TV as much as maybe I’d like to, but when I do watch — when I do watch stuff, you know, given that I spend a lot of my day thinking about what could go wrong in the world, make sure we don’t miss risk, my life can get pretty dark. So, when I watch TV, I’m usually not going for the murders and the crime shows. Ted Lasso would be my cup of tea.
RITHOLTZ: Sure.
PATTERSON: You know, something funny and well-written. And I also love nature and history. So, anytime there’s a good new Ken Burns documentary, I’ve got that on immediately.
RITHOLTZ: Good, good, good couple recommendations. Let’s talk about mentors. Who are the people who helped shape your early career?
PATTERSON: Well, my — my first boss out of college was a gentleman named Paul Tash. He ran the Washington bureau of the St. Petersburg Times when I was there. He — he gave me enough rope to — to do some damage to myself, but didn’t let me completely chew off the rope. And, you know, as a 20-something, having a frontpage article in a Pulitzer Prize running newspaper, that was thanks to him as much as anything.
There were a ton of people later on at J.P. Morgan who helped me become a better researcher, but I think importantly also how to listen to clients. Jan Loeys, who’s — who’s still sort of a senior advisor there and writes research for them, he really stands out in my mind as someone who was there with me in London in that 1997 in sanity, and then — and then all along the way.
And — and over the last decade one more I’d mention I’ve been very lucky to get to know former Treasury Secretary Bob Rubin mainly through the Council of Foreign Relations. And I don’t know if he would think of himself as a mentor to me, but I would.
You know, any time I’ve had a question for Bob he’s been there with really good sound advice. And he’s always gone out of his way to make me feel part of the group at Council events and dinners. Again, when — those moments when you feel like the kid at the table, he made sure to make it clear to everyone at the table that I wasn’t a kid. And I’m incredibly grateful for that.
RITHOLTZ: Really, really interesting. Let — let’s talk about reading. What are some of your favorite books and — and what are you reading right now?
PATTERSON: Oh, I love to read. I mean, I spend half my day reading emails and research reports, but even then after work, if I’m not watching something light or — or entertaining, I’ll pick up a book. I try to alternate between fiction and nonfiction.
So I just finished “Lincoln Highway” by Amor Towles. I had loved “A Gentleman in Moscow.” And this is a very different book, but — but equally well-written.
And then I Just started Ray’s new book on “The Changing World Order,” which somewhat depressing, but very, very good food for thought. And then I’d have to say one of my all-time favorite books that if — if people who are listening haven’t read, they should, is “No Ordinary Time” by Doris Kearns Goodwin. I am a huge fan of both FDR and Eleanor Roosevelt. I think they were both such incredibly important people in America and global history for different reasons. And I think that book captures a period of time in both of those characters so well.
(COMMERCIAL BREAK)
RITHOLTZ: Our final two questions, what advice would you give a recent college grad who is interested in a career in either research or investment and finance?
PATTERSON: OK. I guess, all right, two things. One, be open minded. You know, I get so many young people coming to me saying, “Well, I either want to work at a top three investment bank or a top hedge fund, and — and I think there’s just so many ways to get experience.” You know, there’s Treasury Department at companies. There’s government positions, central bank opportunities, different countries, different cities. Not every good job is in New York City by a long shot. So, I think keep an open mind, take different paths.
And — and I think, in my case, it’s shown it’s been an advantage later on. That would be one. I think secondly quickly, read, read, read, read, read current events, history, academic papers, think tank papers. Don’t just stick to social media.
I think, you know, just knowing what’s going on around you — nothing against social media, but that shouldn’t be your only source. So those would be my two pieces of advice.
RITHOLTZ: I think those are both good pieces of advice. And our final question, what do you know about the world of finance and investing today that you wish you knew, you know, 25, 30 years ago or so when you were first getting started?
PATTERSON: Oh, my God, there’s so much. Well, the — the thing that popped in my head, Barry, when you said that is I wish I had known to tell my dad not to sell his Apple stock. That would have been good, but …
RITHOLTZ: Well, that’s the time machine answer. I’m — I’m really looking more of a …
PATTERSON: Yeah, yeah, yeah.
RITHOLTZ: … what process, what insight would have been helpful earlier.
PATTERSON: Yes, this isn’t — this isn’t back in time with Marty. OK. So, I’d say maybe more like 20 years ago, but when I was an analyst sitting in Singapore with J.P. Morgan and I was writing about the implications of China joining the WTO, I wish I had spent even more time pushing myself to think what could this be. And — and I think fast forward to today, I tried to do it more, but I think I should do it more. I think we should all spend more time thinking about those longer-term things: climate, technology, demographics.
Markets are so immediate, right? You have to have stuff on Bloomberg every second, every day, and there’s so much in front of us that is easy to forget these big structural things that are taking place behind the scenes, but can be equally impassable. So, I’d — I’d say to myself dig into the big things, don’t just focus on what’s here now.
RITHOLTZ: Some really good answers. I’m going to sneak one more question …
PATTERSON: Thank you.
RITHOLTZ: … in and that is so you lived in Singapore for a while, tell us about the food there. All my foodie friends …
PATTERSON: Oh.
RITHOLTZ: … tell me it’s just astonishing.
PATTERSON: Oh, I love you for asking that. So yeah, my husband and I both love to cook, both love to eat. And — well, New York is definitely a food mecca. I’d say if there’s any one place in the world that’s as good or maybe better than New York it’s Singapore. The Asian food is — is just incomparable, but especially over the last decade or two, you now get every cuisine you can imagine.
So, I — it’s tough, New York or Singapore, that’s a tough call. And anyone listening to this who likes dumpling, go, go, go, go.
RITHOLTZ: Rebecca, thank you for being so generous with your time. This has just been absolutely, absolutely fascinating. We have been speaking with Rebecca Patterson. She is the Director of Investment Research at hedge fund giant Bridgewater Associates.
If you enjoy this conversation, well, check out all of our previous interviews we’ve done over the past eight years. You can find those that iTunes, Spotify, all of your favorite podcast sources.
We love your comments, feedback, and suggestions. Write to us at mibpodcast@bloomberg.net. Sign up for my daily reads at ritholtz.com. Follow me on Twitter @ritholtz.
I would be remiss if I did not thank the crack team that helps put these conversations together each week. Mohamad Rimawi is my Audio Engineer. Paris Wald is my Producer. Atika Valbrun is our Project Manager. Michael Batnick is our Head of Research.
I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.
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