MP3 State Capitalism
The transition to a new monetary policy regime, known as MP3 state capitalism is in play according to Bridgewater’s CIO Prince.
MP3 state capitalism puts the government at the epicenter of capital distribution and it is likely to have a profound impact on investment portfolios going forward.
So how did we get to MP3 state capitalism, which is likely to be radically different from previous cycles?
The idea of state capitalism seems like a contradiction, bearing in mind that the state extracts wealth then allocates resources based on the “greater good” principles rather than the free market profit mechanism.
Prince notes that the amount of printing and stimulation has been sufficient to fill the hole in income which was created due to the 2020 pandemic and the great global lockdowns.
Not enough of that money is being spent
“50 cents on the dollar is getting spent so you haven’t had an improvement of spending in the economy despite all the liquidity in the system” said Prince. Also, the central bank is printing more than what it takes to finance those deficits and buying various assets. There is a major reflation in risk assets playing out.
So the 2020 pandemic and the great global lockdown have accelerated existing macro trends. We see collapsing global income, and consumption. Meanwhile, the central banks’ policy response has been more of the same with near-zero and negative interest rate policy. Moreover, with central banks in cahoots, the market has got its fix with over $18 trillion in global stimulus as the G6 central banks’ balance sheet balloons.
A central bank policy shift to MP3 state capitalism where fiscal and monetary policy is being implemented in tandem for the “greater good of society” could put the bull market in retreat
MP3 state capitalism is about targeting consumption rather than asset prices through Modern Monetary Theory, also known as Universal Basic Income (UBI), giving the populous free money to consume with the hope that it will stimulate consumption.
MP3 state capitalism came into being due to the failure of previous monetary policies
First came MP1, a period of low-interest rates, which failed to stimulate consumption. Policymakers then pursued MP2, a period of massive liquidity injection into the system through the central banks’ multi-trillion-dollar asset purchase program, known as quantitative easing QE. But that too only widened the wealth gap as those with assets benefited the most from the multi-asset bubbles created by the central banks. I would argue that MP2 reduce consumption even further because it diverted capital away from productivity to speculative endeavors, thereby reducing the possibility for those deriving income from wages, typically the middle class, whereas the wealthy derive income from capital.
So one facade of MP3 state capitalism is to finance the peoples’ QE to stimulate consumption
The US government has sent 159 million stimulus checks to Americans, up to $1,200 per individual or $2,400 per married couple, as well as $500 per child under 17 In the UK chancellor Rishi Sunak, is considering giving vouchers worth £500 ($624.20) to adults and £250 to children to boost spending.
MP3, which is where we currently are, requires the coordination of monetary policy with fiscal policy.
So MP3 state capitalism targets consumption and its biggest factor is fiscal stimulation where the governments’ direct funds to where the economy most needs it.
MP3 state capitalism puts the government in the driving seat of capital allocation. Moreover, fiscal policy is supported by the central bank monetizing the debt, buying bonds to prevent interest rates from going higher.
MP3 state capitalism addresses two problems of collapse in income, which means diminishing profits, lower spending, and lower cash flow
Prince notes two pressures in the economy building up at the same time, collapsing income, cash flows, and expanding liquidity by the central bank going into assets that don’t justify cash flows of those companies.
MP3 state capitalism aims to accommodate the shortfalls of MP1 and MP2 where in the latter case the current stimulus programs have enough liquidity to cover the income gap for about three or four months
“But the virus has a time frame of about 18 months, there is a duration mismatch, essentially the time frame on spending and income, in relation to time frame how long people will last” said Prince.
Markets have been focusing on the liquidity side of the equation and not cash flows, so with corporate earnings around the corner we could see a repeat of late February’s sell-off
“You are going to see an instant replay” said Prince.
Stronger economies with robust currencies are better positioned to implement MP3 state capitalism
So the US economy with the USD being the world’s reserve currency is more likely to weather the storm than weaker economies.
“Your typical emerging economy can’t go to the well over and over again,” said Prince.
MP3 state capitalism is based on governments’ ability and willingness to raise finance
“Ability to create liquidity will create differentiation in outcomes over time” said Prince.
So countries, companies, and individuals that are most exposed to the adverse income impact and less able to capture liquidity will be worse impacted, according to Prince.
Emerging economies and currencies are the most vulnerable to a crisis
MP3 state capitalism will come at a cost
Debt restructuring, currency debasement, and the status of the US dollar as the reserve currency and what is a safe store of wealth are likely to be hot topics of discussion going forward.
How do you invest in this new phase of MP3 state capitalism?
“You have got to track where the money goes. The world where you cut interest rates and figure out where the interest-sensitive parts of the economy are have gone,” said Prince. So the holy grail in MP3 state capitalism, a new world order, is tracking capital flows.
Cash is not a risk free asset when you are in a reflation.
Assets that return their value in real circumstances, such as precious metals, gold, which is a counter currency. Inflation linked bonds are also a store of value because you get paid inflation rate. Certain companies (food, water, pharmaceuticals and basic healthcare have cash flow that identify as a store of value.