COVID-19 HAS ACCELERATED THE PARADIGM SHIFT Greg Jensen Co-CIO Bridgewater Associates Summary • Six big forces have shaped our lived experiences as investors over the last decade and longer: – Corporate profit growth outpacing that of the economy – Rising debt and other IOUs relative to incomes – Interest rates and QE as effective tools for monetary policy – Relative stability in the rules – The US dollar as a stable reserve currency – Low and stable inflation • The COVID-19 shock has pushed all of these forces to their limits. For information about the data sources used to inform the analysis in this outlook and other important information, 2 please review the “Important Disclosures and Other Information” located at the end of the presentation. An Unprecedented Hit to Corporate Balance Sheets How Global Non-Financial Companies Fill the Revenue Hole (USD, Bn) Global Global Global Rest of Total Listed Unlisted USA EUR JPN CHN GBR CAN AUS KOR BRZ SAF IND World Total Est. Revenue Decline -19,646 -6,968 -12,678 -3,715 -4,445 -725 -3,306 -993 -517 -166 -218 -233 -48 -1,257 -4,024 Est. Revenue Decline %GDP -22% -8% -14% -17% -34% -14% -23% -37% -32% -13% -14% -15% -15% -48% -25% Immediate Cuts w/ Less Output 15,319 5,360 9,959 2,824 3,336 592 2,710 747 378 130 178 180 38 1,003 3,202 - Labor Costs 2,597 743 1,854 551 541 79 309 176 73 23 25 27 10 189 594 - Intermediate Goods 12,721 4,617 8,105 2,273 2,796 513 2,401 571 304 107 153 154 28 814 2,609 Cuts w/ Weaker Cyclical Conditions 5,832 3,084 2,748 1,763 980 308 892 202 238 91 106 64 13 206 970 - Capex 3,467 1,284 2,184 876 547 155 703 91 142 55 85 42 6 135 630 - Buybacks / M&A / Dividends 2,365 1,801 564 887 433 152 188 111 96 36 21 22 6 72 340 Remaining Capital Need (Sum of Negatives) -3,720 -1,122 -2,598 -729 -179 -95 -637 -72 -153 -52 -54 -112 -28 -309 -1,302 Memo: 2019 Profits 14,545 7,200 7,345 3,939 2,392 888 1,947 498 382 258 326 284 66 355 3,209 Memo: Est Avg. 2020-2021 Profits 11,982 6,278 5,704 3,493 1,838 822 1,649 375 312 240 305 257 61 228 2,399 Memo: % Profit Change -18% -13% -22% -11% -23% -7% -15% -25% -18% -7% -6% -9% -7% -36% -25% Updated as of June 22, 2020. Based on Bridgewater analysis. 3 Please review the “Important Disclosures and Other Information” located at the end of the presentation. Secular Supports to Margins Were Already Unsustainable • Falling interest rates, globalization, falling corporate taxes & deregulation, and shrinking power of labor were already reaching their limits. Deregulation and Corporate Taxes Unionization and Labor # of DOJ Monopoly, Competition, & Mergers Investigations Union Members (% Labor Force) Labor Share of Output Effective Tax Rate (Listed Corps) 600 50% 65% 45% 500 20% 63% 40% 400 35% 18% 61% 300 30% 15% 25% 59% 200 20% 13% 100 57% 15% 0 10% 10% 55% 1970 1980 1990 2000 2010 2020 1980 1990 2000 2010 2020 4 Please review the “Important Disclosures and Other Information” located at the end of this presentation. The “Big Squeeze”: Too Many Promises • IOUs are increasing at the same time as incomes to service them have taken a big hit. Lower Interest Rates Have Supported Debt Growth Dev. World Bond Yield Dev. World Debt 16% 300% 275% 12% 250% 225% 8% 200% 4% 175% 150% 0% 125% 1980 1990 2000 2010 2020 Dev. world debt shows non-financial debt as a share of GDP. 5 Please review the “Important Disclosures and Other Information” located at the end of this presentation. The Policy Paradigm We Have Experienced Is Just One of Many Short Rate Fed BalanceShort SheetRate (%GDP) Private Sector Debt (%GDP)Private Sector Debt (%GDP) 22%20% 22% 175%70% 175% 20%18% 20% 1 2 3 4 5 6 7 155%60% 155% 16%18% 18% 16% 16% 14% 135%50% 135% 12%14% 14% 12% 12% 10% 115%40% 115% 10% 10% 8% 8% 8% 95%30% 95% 6% 6% 6% 75%20% 75% 4% 4% 2% 2% 2% 55%10% 55% 0% 0% -2% -2% 35%0% 35% 192019201920 1930 1930 1940 1940 1950 1950 1960 1960 1960 1970 1970 1970 1980 1980 1980 1990 1990 1990 2000 2000 2000 2010 2010 2010 2020 2020 2020 1 Pre-1934: Gold peg, deflationary depression 4 1951: Treasury-Fed Accord; independent 6 2009: QE and rates to 0 in response monetary policy with a focus on to deleveraging 2 1934: US breaks gold peg, initial recovery growth; inflationary pressures emerge from Great Depression 7 2019: Central banks shifting to a 1979: Volcker tightening: inflation new paradigm? 3 1942: Fed pegs interest rates, 5 preemption & interest rate war-ear fiscal stimulus normalization; secular disinflation 6 Please review the “Important Disclosures and Other Information” located at the end of this presentation. The Necessary Shift Toward Monetary Policy 3 MP1 Borrowers (interest rate (interest rate policy) induced spending) MP2 Savers (asset/liquidity (QE) induced spending) MP3 Government (coordinated (direct spending financed by fiscal-monetary actions) money printing) 7 Please review the “Important Disclosures and Other Information” located at the end of this presentation. Growing Internal and External Conflict • The risk is rising that the rules governing the global flow of goods and capital will change. Data in bottom left chart is through December 2016, and data in bottom right chart is through December 2017. 8 Estimates are based on Bridgewater analysis. Please review the “Important Disclosures and Other Information” located at the end of this presentation. The Decline of an Empire • Shifts in the dominant empire are inevitable. Reserve currency status is typically the last to go. 9 Please review the “Important Disclosures and Other Information” at the end of this presentation. A Wide Range of Potential Outcomes, With Increased Risk of a Secular Inflationary Turning Point 1980 Inflation Disinflation Tight money • Deficit spending + money printing? Pro-labor policies? Globalization • • Reversal of globalization? Cross-currents: Inflation targeting Secular ? Deleveraging Forces + COVID-19 Shock Nominal “Muddling GDP Growth Policy Responses Through” ? • Constrained central banks • Japan-style deleveraging? This exhibit is a conceptual illustration. 10 Please review the “Important Disclosures and Other Information” at the end of this presentation. Massive Divergences Across Countries 2020 Corporate Headline Stimulus Revenue Losses Next 12m Stimulus Impact Net Growth QE Flow (%GDP)† Growth Drag† (%GDP) (%GDP) Impact (%GDP) Mexico -- -16% 1.5% 0.6% -15% -- Russia -- -14% 9.9% 1.9% -13% -- Netherlands -- -16% 6.7% 3.4% -12% * Turkey -- -14% 9.2% 3.3% -11% 1% South Africa -15% -13% 8.1% 2.3% -11% 2% Italy -- -16% 32.2% 5.6% -10% * Spain -- -16% 20.6% 5.7% -10% * United Kingdom -37% -18% 24.1% 7.6% -10% 17% India -48% -12% 8.6% 2.7% -10% 2% Brazil -15% -12% 14.0% 3.8% -9% -- France -- -14% 22.7% 5.4% -8% * Eurozone -34% -13% 29.7% 5.3% -8% 15% Canada -32% -11% 17.7% 5.8% -6% 15% Germany -- -9% 42.0% 5.6% -3% * United States -17% -13% 28.5% 9.7% -3% 9% Japan -14% -7% 37.3% 6.3% -1% 11% Australia -13% -5% 8.8% 4.5% -1% 0% Korea -14% -3% 10.5% 2.4% -1% -- China -23% -6% 14.0% 6.5% 0% -- †Corporate Revenue Losses and Next 12m Growth Drag exclude the impact of fiscal stimulus programs. *Part of Eurozone. Updated as of June 22, 2020. Based on Bridgewater analysis. 11 Please review the “Important Disclosures and Other Information” located at the end of this presentation. It Has Never Been More Difficult to Be an Investor Three sources of return: Cash Beta Alpha Total Return = (Don’t Invest) + (Hold Assets) + (Make Bets) – Likely to be ~0% for – Expected returns – Alpha is difficult: a while are low requires unique insight – Central banks are – Diversification has trying to diminish never been more – Unprecedented the value of cash important, but also environment with never more difficult different linkages to achieve – Potential to be – Need to consider uncorrelated how to get balance in an MP3 world 12 Please review the “Important Disclosures and Other Information” located at the end of this presentation. The Role of IL Bonds and Gold Local Asset Excess Returns by Case (Scaled to 10% Risk) Growth versus expectations and inflation versus expectations analyses are based on Bridgewater analysis. Information shown is the result of analyses of actual and 13 simulated market data.. Please review the “Important Disclosures and Other Information” at the end of this document. Important Disclosures and Other Information Please read carefully the following important disclosures and other information as they provide additional information relevant to understanding the assumptions, research and performance information presented herein. Additional information is available upon request except where the proprietary nature of the information precludes its dissemination. 14 Important Disclosures Information contained herein is only current as of the printing date and is intended only to provide the observations and views of Bridgewater Associates, L.P. (“Bridgewater”) as of the date of writing unless otherwise indicated. Bridgewater has no obligation to provide recipients hereof with updates or changes to the information contained herein. Performance and markets may be higher or lower than what is shown herein and the information, assumptions and analysis that may be time sensitive in nature may have changed materially and may no longer represent the views of Bridgewater.