Reflation In Warp Speed Thumbnail 072020.jpg
Research & Insights

Reflation in Warp Speed

The policy response to the current crisis is unprecedented in its speed and magnitude. As a result, we have asset reflation in warp speed. In this research, we illustrate how the linkages occurring through this crisis are the same that occurred in past crises of this magnitude (namely, the Global Financial Crisis and the Great Depression) but at a totally different speed. While this may be intuitively obvious, we thought the visuals were still worth sharing, as they bring to life just how vital the policy response is in driving financial and economic outcomes. We will also ruminate a bit on what that might mean going forward.

What took three years and seven months in the Great Depression took one year and six months in 2008, and only one month in the current crisis. In the Great Depression, it took three years and seven months from Black Thursday before President Roosevelt broke the peg to gold, allowing the Fed to print enough to stop the free fall in equities and the economy, and the reflation continued for four more years before the next downturn. In the Global Financial Crisis, the turn came with the start of QE in March 2009—a year and a half after stocks began to fall—and it wasn’t until a pause in QE2 that equities had another sell-off of more than -20%. This time, when the pandemic hit, the stimulus from the Fed and fiscal authorities was so swift and so massive that the equity downmarket lasted only a month, and stocks are now approaching their pre-crisis peaks once again. In other words, time is not the right concept; what is critical for investors to focus on today (as always, but today in particular) is the cause-effect sequence, which is happening so much faster. The biggest cause-effect drivers are the degree and speed of the policy response and its effectiveness.

This warp-speed response in part reflects the warp-speed nature of the crisis, with the economy seizing up overnight as the virus spread. But it also reflects the evolution of the policy makers’ approach. The lesson from the last recovery is that the risk of doing too little is much greater than the risk of doing too much. While it took several months for the Fed to step back in with QE2 and then QE3 a decade ago, today, the Fed is much more inclined to keep pushing on the gas. As we’ve begun to see, policy makers have also become more willing to embrace fiscal stimulus, though given the political nature of fiscal policy and the lack of experience with relying on fiscal support, the reliability of fiscal policy going forward is more murky. All in all, we expect that policy makers will keep pushing to do whatever it takes to achieve their goals, but perhaps with some gyrations (especially in fiscal policy) along the way.

With policy makers driving the car so much faster, are the risks of a crash higher? We think it’s more that the nature of the risks has changed with the shift in policy maker approach: we’re less concerned that policy makers won’t do enough and more concerned about how much room there is to keep stimulating before running into limits—in the form of inflation or a loss of faith in the currency. Our guess is that over time, extreme fiscal and monetary coordination will bring markets and economies together: the nominal returns in the economy will rise as inflation is pushed higher and as asset returns are diminished in real terms, but probably positive in nominal terms.

In the timeline below, we look at just how this movie has played out so far compared to past reflations.

Reflation in Warp Speed_individual charts_01.png

In the chart below, we collapse the different time scales to show the sequence of events across the cases.

Reflation in Warp Speed_individual charts_03.png

Next, we take a closer look at the drivers of reflation—monetary and fiscal stimulation—and then follow that through to the markets.

The Warp-Speed Policy Response to the Crisis

In the following charts, time is warped to align the period between pre-crash stock highs and the date on which QE begins, which tends to also be the date on which stocks bottom. We maintain this same time-warp through the reflation. You can see that the support policy makers delivered, this time in a matter of weeks, is equivalent to what they doled out over the course of years in the past. This support helps fuel a reflation in asset prices as long as it’s sustained; below, we indicate the new high-water mark in equities on the charts to highlight the relationship.

In each case, first the Fed eases by making short-term liquidity more available and lowering short rates, up until they hit the zero bound. (In the Great Depression, the Fed’s ability to ease was inhibited by the need to defend the gold standard. It took years of intense economic pain and difficult reckoning before FDR broke the peg.)

Reflation in Warp Speed_individual charts_06.png

Then, they move to longer duration asset purchases. In the past few months, the Fed has printed about as much as it did in all of 2008 and 2009.

Reflation in Warp Speed_individual charts_04.png

On the fiscal side, deficit spending ramps up, backstopped by the Fed’s purchases.

Reflation in Warp Speed_individual charts_05.png

The Flow-Through of Stimulus to Asset Markets

As soon as policy makers step in to print and spend, there is an immediate reflation across asset markets. The stimulus puts a floor on equity declines, kicking off a new rally.

Reflation in Warp Speed_individual charts_07.png

Credit spreads begin to compress from elevated levels.

Reflation in Warp Speed_individual charts_08.png

Long rates drift down as the Fed eases more than was priced in. In this crisis, rates were starting from particularly low levels and are now at historic lows.

Reflation in Warp Speed_individual charts_09.png

The effect on commodities tends to be more gradual. Compared to longer duration financial assets shown above, commodity prices are more reflective of real economic activity and investment, and as such the support from stimulus takes longer to flow through.

Reflation in Warp Speed_individual charts_10.png

In currency markets, the initial easing and liquidity production tends to be dollar bearish. Over time there is less of a clear pattern, as currencies reflect relative differences across countries.

Reflation in Warp Speed_individual charts_11.png

The speed of this cycle is a bit disorienting, and the divergence of the markets from the real economy as a result will be an important thing to monitor. The recovery in markets and the liquidity sloshing around everywhere will help pull the economy up once the virus recedes, but the hole in the economy will require capital that will pull the markets down. In the end, they will reconcile, but the nature of that reconciliation will depend on how policy makers pull their levers. Our guess is that over time, extreme fiscal and monetary coordination will bring markets and economies together: the nominal returns in the economy will rise as inflation is pushed higher and as asset returns are diminished in real terms, but probably positive in nominal terms.


Bridgewater Daily Observations is prepared by and is the property of Bridgewater Associates, LP and is circulated for informational and educational purposes only. There is no consideration given to the specific investment needs, objectives or tolerances of any of the recipients. Additionally, Bridgewater's actual investment positions may, and often will, vary from its conclusions discussed herein based on any number of factors, such as client investment restrictions, portfolio rebalancing and transactions costs, among others. Recipients should consult their own advisors, including tax advisors, before making any investment decision. This report is not an offer to sell or the solicitation of an offer to buy the securities or other instruments mentioned.

Bridgewater research utilizes data and information from public, private and internal sources, including data from actual Bridgewater trades. Sources include the Australian Bureau of Statistics, Bloomberg Finance L.P., Capital Economics, CBRE, Inc., CEIC Data Company Ltd., Consensus Economics Inc., Corelogic, Inc., CoStar Realty Information, Inc., CreditSights, Inc., Dealogic LLC, DTCC Data Repository (U.S.), LLC, Ecoanalitica, EPFR Global, Eurasia Group Ltd., European Money Markets Institute – EMMI, Evercore ISI, Factset Research Systems, Inc., The Financial Times Limited, GaveKal Research Ltd., Global Financial Data, Inc., Haver Analytics, Inc., ICE Data Derivatives, IHSMarkit, The Investment Funds Institute of Canada, International Energy Agency, Lombard Street Research, Mergent, Inc., Metals Focus Ltd, Moody’s Analytics, Inc., MSCI, Inc., National Bureau of Economic Research, Organisation for Economic Cooperation and Development, Pensions & Investments Research Center, Renwood Realtytrac, LLC, Rystad Energy, Inc., S&P Global Market Intelligence Inc., Sentix Gmbh, Spears & Associates, Inc., State Street Bank and Trust Company, Sun Hung Kai Financial (UK), Refinitiv, Totem Macro, United Nations, US Department of Commerce, Wind Information (Shanghai) Co Ltd, Wood Mackenzie Limited, World Bureau of Metal Statistics, and World Economic Forum. While we consider information from external sources to be reliable, we do not assume responsibility for its accuracy.

The views expressed herein are solely those of Bridgewater as of the date of this report and are subject to change without notice. Bridgewater may have a significant financial interest in one or more of the positions and/or securities or derivatives discussed. Those responsible for preparing this report receive compensation based upon various factors, including, among other things, the quality of their work and firm revenues.

Stay Informed
Sign up to receive our latest research on the forces shaping global economies and markets.
You're almost finished.
You will receive an email confirmation shortly.
There's been an error. Please start over and try again.
Stay Informed
Sign up to receive our latest research on the forces shaping global economies and markets.
Almost There!
We'd like to know you a bit better!
You're almost finished.
To complete your registration, click the confirmation link in the email we just sent you.
Sorry, there has been an error. Please start over and try again.

Disclaimer & Agreement


Bridgewater Associates, LP is a global investment management firm. Bridgewater Associates, LP advises certain private investment funds and institutional clients, and is not available to provide investment advisory or similar services to most other investors. This website is a resource for audiences other than investors such as potential employees, researchers, students, counterparties and industry participants. Bridgewater Associates, LP believes it is useful for such persons to have an accurate source of relevant information. Under no circumstances should any information presented on this website be construed as an offer to sell, or solicitation of any offer to purchase, any securities or other investments. This website does not contain the information that an investor should consider or evaluate to make a potential investment. Offering materials relating to investments in entities managed by Bridgewater Associates, LP are not available to the general public.

To view this content, you must agree to the following terms, in addition to and supplementing the Bridgewater Terms of Use and Privacy Policy:

I confirm to Bridgewater Associates, LP and agree that:
  • I am entering this website only to obtain general information regarding Bridgewater Associates, LP and not for any other purpose.
  • I understand that investments managed by Bridgewater Associates, LP are not available to the general public.
  • I understand that this website does not contain the information I would need to consider for an investment, and that such information is only available to a limited group of persons and institutions meeting specified criteria.
  • I understand that this website has not been reviewed or approved by, filed with, or otherwise furnished to any governmental or similar authority, and is intended only to provide limited information to members of the public who have a legitimate interest in that information for reasons unrelated to making investments.
  • I understand that when Bridgewater Associates, LP makes third party information available, Bridgewater generally will not have verified statements made by the third party, and the presentation of information may omit important information.
  • I understand that third party materials such as live interviews made available by Bridgewater Associates, LP generally will not have been edited by Bridgewater and statements in those materials by individuals associated with Bridgewater should be understood in the conversational context in which they were made, which may include providing historical background.
  • The content constitutes the proprietary intellectual property of Bridgewater or its licensors and that I will not directly or indirectly copy, modify, recast, create derivative works, post, publish, display, redistribute, disclose, or make available the content, in whole or in part, to any third parties, or assist others to do the same, or otherwise make any commercial use of the content without the prior written consent of Bridgewater.

By registering my information below and clicking "Agree," I certify that I have read, understand and agree to the foregoing Disclaimer, Terms of Use and Privacy Policy.
This website uses cookies. Click here for additional details. By continuing to use this website, you consent to the use of cookies.

Internet Explorer is not supported by this website.

For optimal browsing we recommend using Chrome, Safari, or Firefox.