Bridgewater’s Prince rejects return of 1970s ‘Great Inflation’


A top investor at the world’s biggest hedge fund says he does not expect a repeat of the “Great Inflation” that took hold in the 1970s, in the latest sign that many big money managers are positioning for more subdued price pressure.

Bob Prince, who runs Bridgewater Associates with Ray Dalio and Greg Jensen, told the Financial Times that long-running deflationary forces would eventually curtail recent price rises and while “you are going to get some inflation” it would be “moderate”.

The co-chief investment officer’s comments come during a furious debate on Wall Street over whether a buzzing economic recovery, a flood of fiscal and monetary stimulus and supply chain troubles will cause a lasting surge in prices for goods and services. The consumer price index, one of the most closely watched inflation measures, soared last month by the most in 13 years at a year-on-year pace of 5 per cent.

Prince joined other managers in suggesting the sharp rise will be transitory; more than 70 per cent of fund managers surveyed by Bank of America this month said they did not expect higher inflation to be permanent.

“There’s not nearly as much potential for a big inflation cycle from private sector credit and spending,” he said. “The government is having to push pretty darn hard with fiscal stimulation to get things going and in addition when you look at inflation, low inflation is a global phenomenon. It’s not a US phenomenon.”

Line chart of 10-year US breakeven rate (%) showing Investors have reduced their bets on higher long-term inflation

Last week, policymakers at the Federal Reserve signalled they were closely following rising inflation indicators and could respond by lifting interest rates as soon as 2023, at least a year before they previously had expected.

Financial markets reacted abruptly to the shift from the US central bank, with the 10-year break-even rate — a market gauge of future inflation expectations — sliding to the lowest level since early March. Top officials at the Fed, including chair Jay Powell, have said they believe inflation will only prove to be a blip.

Prince noted that while US monetary policy remained accommodative, central banks and governments elsewhere were not acting with the same force to drive growth and in fact some were shifting in the other direction. In recent weeks, central banks in Brazil and Russia have raised interest rates in an attempt to tamp down inflation.

“If you go back to the 1970s . . . you didn’t have the printing of money back then but you had credit growth. You had very strong collective bargaining, labour unions,” he added. “You had deregulation of the commodities markets . . . so you had a spike in commodities, spike in oil prices. You had a lot of things there that don’t exist today.”

Key measures of inflation topped 10 per cent during the 1970s as overly loose monetary policy combined with price shocks in food and energy to trigger an economically-damaging cycle that was difficult to break.

Line chart of Year on year change in CPI (%) showing Fed policymakers lost control of price stability in the 1970s

The Bridgewater chief investment officer said he was on the lookout today for red flags, including in sustained wage gains by the labour force, that could precede a “self-reinforcing cycle” of inflation that is difficult to curb. “We haven’t crossed that point yet. It’s still a reasonable possibility.”

Prince added that the shift by the Fed would not take the “inertia in the economic system” away, given savings rates were still elevated and could finance consumer spending in the months ahead. “There’s a lot of latent spending still built up in the system even if the central bank pulls back,” he said.

Still, Prince does not expect the surge of retail trading activity in the $49tn US equity market, which is where many people placed cash during the pandemic, to continue at its same fast pace.

Trading in companies such as cinema chain AMC Entertainment and video game retailer GameStop — so-called meme stocks — has boomed over the past month, captivating traders given valuations have climbed so significantly.

“We’ve probably seen the peak in the retail flow into the stock market,” Prince said. “People are going to go back to earned income instead of the government throwing money at you and therefore more of a normal environment.”

Prince said Bridgewater’s funds were “up pretty well this year. It has been a good year.” He did not disclose the specific performance of the firm’s passive All Weather fund, which invests in different markets based on volatility, or Pure Alpha, a more traditional macro hedge fund. The firm manages $150bn in assets.

The Great Inflation

US consumer price growth surged from under 2 per cent in 1965 to more than 10 per cent during periods of the “Great Inflation” of the 1970s. It set the high watermark for inflation during the postwar era in America and dealt significant damage to the economy.

Decades later, the causes are still the subject of vigorous debate — but many economists agree the period provides an illustrative example to policymakers and investors today.

Most theories suggest a principal cause of the inflation boom was overly loose monetary policy. Economists differ on the how much weight they place on Federal Reserve policymakers attempting to be “opportunistic” in letting the economy overheat to avoid recessions versus “bad luck” and technical mistakes that led to decisions that caused price instability.

Alan Blinder, the Princeton economist and a former top Fed official, argues that factors outside the central bank’s control including shocks to the prices of food and energy during two periods of the 1970s also contributed significantly to the Great Inflation. He also posited that the end of Nixon-era wage price controls added fuel to the inflation fire.

The beginning of the end of the saga came on October 6, 1979 when Paul Volcker’s Fed began aggressively tightening monetary policy in a manoeuvre that brought the central bank’s main interest rate to 17.6 per cent by April the next year and even higher by 1982. The aggressive pullback sparked two recessions and caused unemployment to rise, but it ultimately ushered in a period of more stable prices.

Adam Samson



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