- Future economic cycles are unlikely to have the major booms and busts that historically defined them, according to Bob Prince, the co-chief investment officer of Bridgewater Associates.
- He says the typical causes of economic downturns could take a back seat while new threats from the political realm become more prominent.
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Investors often warn about the danger of extrapolating future results from past performance.
This exhortation also applies to how the economy moves from expansion to recession and back, according to Bob Prince, the co-chief investment officer of Bridgewater Associates, the world's largest hedge fund with $160 billion in assets under management.
For decades, the sequence of events that swings the economy back and forth has played out as follows: conditions turn south, prompting the Federal Reserve to lower interest rates, encourage spending, and boost inflation. The ensuing growth then breeds excesses that overheat the economy. These conditions prompt the Fed to raise borrowing costs to levels that end up choking credit availability and taking economic conditions south again.
This boom-bust cycle as we know it is over, according to Prince, who said in a recent note that "we are unlikely to have a boom."
He holds this view because the ongoing, recordlong expansion was facilitated by a zero-interest-rate policy and unprecedented levels of quantitative easing - and yet it emerged as the slowest on record.
Prince does not see future doses of Fed stimulus creating what one would characterize as a boom economy.
For starters, there's a limit to how much growth you can stoke in an economy that is already mature. To find proof of the economy's maturity, look no further than the 3.5% unemployment rate, a half-century low.
More importantly, the economy now has structurally lower potential to grow faster than its long-term trend.
The post-recession era has demonstrated this. As unemployment fell by more than half from 10%, it failed to produce the wage growth that would have fueled above-trend growth, Prince said.
Going forward, he expects two trends to further limit how much the economy can grow: low productivity and the exit of baby boomers from the workforce.
No "busts" either
Prince also foresees structural changes to the "bust" side of the economy's assorted cycles.
His reason is that the Fed and other central banks are more willing to let inflation oscillate around their target instead of rushing to extinguish it like they did in the past. It was this rush to tighten policy that often sped up the economy's downturn.
"The Fed is in a box, as are other reserve currency central banks, Prince said. They cannot risk overtightening their policy, but they also cannot ease substantially because interest rates are still near zero.
This predicament means that in a major departure from history, Fed policy is unlikely to trigger another bust.
"The biggest risk is political," Prince said of what could cause the next downturn. Practically speaking, he is raising the possibility that slow growth stokes income inequality on a domestic level and lifts China's threat to the West's domination on an international level.
Prince's slow-growth thesis echoes what he told Business Insider during an exclusive interview at the 2019 World Economic Forum in Davos, Switzerland. He predicted "20 years of ugliness" for the economy due to a stretch of sub-par progress.