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At Bridgewater, we have been describing an impending paradigm shift in economies and markets as the forces that drove the environment over the last decade have reached their limits. Co-CIO Greg Jensen and Jason Rogers from our research team examine how the shock of the coronavirus has accelerated a shift that we expected would unfold much more gradually over time.

In our continued efforts to measure the financial impact of the coronavirus, we estimate that corporate losses could result in a $20 trillion global ripple effect — a hit that will be felt from incomes and household balance sheets to central banks and governments. Co-CIO Greg Jensen and our research team explore the scale of the holes, and how managing them will impact economic conditions and markets going forward.

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For the first time in history central banks (most importantly the Fed) are producing enough money to make up for contracting credit as an antidote to the D-process. Theoretically, central banks can create whatever levels of nominal GDP growth that they want to create by plugging credit contracting entities into the money machine so that the amount of money that they draw equals the amount of money they need to offset the credit contraction, which not only has the effect of lowering interest rates but also increases the money supply so that there is more money and credit in existence to go for the purchases of goods and services—e.g., the Fed buying credit instruments (e.g., agency paper) that the private sector would otherwise have had to buy leaves the private sector with more money to spend on nominal GDP. While this is theoretically true, there are no good examples of this being done well or to the same extent that it is now being done. Like pandemics, D-processes come along very infrequently, so we don’t have many to look back on and, in those that we have, this antidote was never administered in this dosage.

The global push toward electric vehicles illustrates how technology can radically reshape entrenched industries (sectoral winners and losers), geopolitics (regional winners and losers), productivity, economic growth, and of course demand for extractive commodities (particularly oil). Today’s Observations looks at the implications for growth and oil demand. Globally, policy is changing quickly toward encouraged/forced adoption. In countries where pollution is a major problem and existing auto production is modest (so the lost wealth from disruption is smaller), the policy goals are becoming particularly aggressive. This disruption is different than many other kinds of technological disruption going on today due to the need for significant capital expenditures that will have large implications for growth and profits. Additionally, given low global interest rates, policies that encourage higher private investment without directly impacting government deficits are naturally desirable. The bottom line is that if aggressive adoption targets are hit it will be notable for global growth, and over the medium term it will of course be quite bearish for oil.

As you are likely aware, we have been deeply engaged in China for over 30 years. Throughout this time, we have built a rich understanding of the Chinese economy and markets and we have developed meaningful relationships with Chinese clients and policy makers. China is in the process of opening up and restructuring its capital markets, and its markets are on pace to become some of the most important liquid, publicly traded markets in the world. As most global investors are underweight Chinese assets relative to the size of the economy and markets, the opening up will likely lead to significant restructuring of global portfolios.

Since the global financial crisis, most global asset portfolios have performed extremely well, and we are worried that this performance is creating complacency about future returns. Understanding the mechanics of asset pricing can help make clearer what can and cannot be extrapolated. We will go through the mechanics below. First, to cut to the chase, while backward-looking returns of a traditional portfolio are near all-time highs, forward-looking expected returns are near all-time lows. The huge rally in assets has essentially pulled forward much of the next decade’s expected returns.

As we begin a new year, we wanted to step back and take stock of how unusually fast the global economy has changed over the past 15 years or so. Where growth is occurring and where wealth is held have moved so radically that relying on past market experiences to determine what is important to the global economy is particularly dangerous. The following Observations illustrates those gradual shifts in economic power that have compounded into a transformed economic world.

Most global investors have very small allocations to China that do not appropriately reflect the size and importance of the Chinese economy or its assets. We expect that will change significantly over the next few years, and Bloomberg’s inclusion of the Chinese bond market at a bit over 5% weight is the first material shift by one of the major indices to boost exposure to Chinese onshore financial assets. Many more moves like this are coming and will reshape global portfolios, and we would encourage investors to think proactively about the exposure they want to China now.