Bridgewater Associates co-chief investment officer Bob Prince said the US Federal Reserve and the Bank of England are “just one downturn away” from being forced to deploy what the world’s largest hedge fund refers to as monetary policy three.

The Bridgewater veteran said that with quantitative easing having “reached the end of its useful life” and a limit to further interest rate cuts, the Fed and the BOE would have no choice but to start coordinating their actions with Congress and Parliament respectively to stave off an economic slowdown.

“It’s a much messier approach than a 50 basis points cut by the central bank,” Prince told delegates at a recent Investment Magazine conference. “But in the event of a downturn, MP3 is the fiscal policy coordinated with monetary policy which is the bazooka that you have to fire. The Fed and the Bank of England and others are roughly just one downturn away.”

Bridgewater founder Ray Dalio warned earlier this year in Washington DC that the global economy was now in a “great sag” and central bank monetary policy would do little to stimulate growth. Around the same time the International Monetary Fund downgraded its outlook for growth to the lowest level since the global financial crisis.

Prince said the developed world was in the process of stabilising economic growth at trend which was probably the best that policymakers could expect. He added that with high debt levels, low interest rates and low unemployment there was little potential to “kick off an (economic) boom.” As for inflation, a slow growth world made any meaningful uptick even less likely.

“Everything is moving towards MP3,” said the CIO, before adding that the Bank of Japan and the European Central Bank had already started. It means the government “directly engaging in the economy more aggressively supported by liquidity, like bond purchases of the central bank or whatever. So that is MP3 and that is where we are headed.”

Prince added that modern monetary theory, or MMT, was just one version of MP3 which was a much broader approach that could mean any sort of coordination between fiscal and monetary policy to achieve results.

“As institutional investors you have to have your head in the 10-year picture,” he told the audience of super funds and asset consultants. “It’s going to be the compounded effects of what you do over the next decade that will probably have a much bigger impact than what you do in relation to the boom bust cycle that we are used to over the last 50 years.”

As for where equities are headed, Prince said it was the “mechanics of asset prices” driving the market rather than investor sentiment tied to central bank policy. The hedge fund manager cautioned that the market had priced in a floor and that there was no chance of a sharp downturn.

“What will happen if you do get a downturn, then you will get a realisation that there is no back stop,” he said. “So that is sitting out there.”

Prince said with an emerging Asian bloc that contributes 2.5 times more to global growth than that of the US and Europe combined, it made sense for investors to diversify their portfolio between east and the west.

“Two different sides of the globe, two different economic systems, two sets of cash flows, two different monetary policies, two different credit systems so you are covered,” he said. “That diversification is one that that I would be thinking about.”

Sarah Jones is the deputy editor of Investment Magazine. She previously worked for Bloomberg News in London for more than 12 years covering equity markets and global asset management. Prior to moving to the UK, she worked for Australian Associated Press in Sydney covering economics and monetary policy.
Leave a comment