Bridgewater co-chief investment officer Greg Jensen and two of his colleagues say that despite the optimism that prevails in the U.S. stock and bond markets, “We are bearish on almost all financial assets while markets are still pricing in Goldilocks conditions” and that “2019 is setting up to be a dangerous period for the economy.” Because financial markets generally discount the future, Bridgewater says, the time to worry about asset prices is now.
Bridgewater, which has about $160 billion under management and has been hugely successful, isn’t your typical Wall Street firm. It distributes reports to clients, potential clients and employees, not to media people like me, and generally goes out of its way to avoid publicity.
In fact, the two reports I’m quoting from warn recipients “not [to] directly copy, modify, recast, publish or distribute this material.” To me, this means that Bridgewater (which declined comment) is saying what it really thinks in these reports, not saying things designed to generate buzz.
Predictions aren’t infallible, of course, and financial markets are often fickle. But I’ve begun thinking about cutting back my stock exposure — I have almost no exposure to long-term bonds — since reading Jensen’s reports. Of which more later.
By contrast, Social Security’s numbers—I’m combining its old-age program with its disability program to keep things simple — are extremely predictable. That’s because the system currently has about 174 million people paying into it and 62 million drawing benefits. This means its numbers are pretty much set and aren’t subject to much year-to-year change.
Social Security’s financial problems have been obscured by the strange bookkeeping, mandated by law, that has hidden the fact that the system has been hemorrhaging cash since 2010 even though its trust fund has been getting bigger. So while Social Security seems stronger on paper, in reality it’s been getting weaker.
Some people, including me, have been sounding alarms for years about the system’s negative cash flow, to little discernible effect. Last year, for example, Social Security took in $41 billion less cash than it paid out, but its trust fund grew by $44 billion. That’s because the Treasury gave Social Security $85 billion of new securities as interest on the $2.89 trillion of Treasury securities the trust fund holds.
As a result, even though the Treasury had to borrow $41 billion in the financial markets to redeem trust fund securities so Social Security would have enough cash to cover its checks, the system looked healthier to the untrained eye at the end of 2017 than at year-end 2016.
Now, though, the system’s trustees are predicting that Social Security’s cash outflow will exceed its interest income by approximately $2 billion more than the interest the trust fund will earn. (I’m using the intermediate projection numbers, the ones that most analysts rely on.)
Sure, a $2 billion trust fund decline is barely a rounding error in the scheme of things. But if these numbers come to pass, it would be the first time since 1982 that the trust fund has shrunk, according to Social Security’s trustees.
And even should next year show a slight surplus, which is entirely possible, this year’s cash shortfall will be about double last year’s — and projections for future years grow increasingly dire.
Given the toxic paralysis in Washington, it’s hard to see anything resembling reform and compromise to help Social Security being adopted any time soon, the way Congress modified the program in the 1980s by increasing Social Security’s tax revenue, raising the retirement age, and slowing down the growth in benefits.
But we can always hope. I guess.
By contrast to Social Security’s numbers, the Bridgewater numbers and projections are definitely iffy. But, like Social Security’s numbers, Bridgewater’s numbers are disturbing.
Bridgewater says that the favorable impact of last year’s tax cut legislation and spending bill on corporate earnings and consumer spending is fading and that long-term interest rates are going to be higher than most people currently expect. These factors, Bridgewater says, haven’t been properly reflected in securities analysts’ upbeat corporate earnings projections.
Combine these factors with the likely downward revisions in earnings forecasts as analysts catch up with reality and Bridgewater says we’re likely to see reductions — possibly sharp reductions — in asset prices starting this year.
By June of 2019, if Bridgewater’s right, markets are likely to be a lot less happy-feeling than they are now. If Social Security’s trustees are right, the system’s financial situation will be even uglier then than it is now. It’s not me saying this. It’s what Bridgewater and Social Security say the numbers are telling them. And that, my friends, is the bottom line.