Karen Karniol-Tambour - Macro Headwinds vs. Tech Tailwinds - [Invest Like the Best, EP.329]

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Hello and welcome, everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best.
This show is an open ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money.
Invest Like the Best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at joincolosis.com.
Patrick O'Shaughnessy is the CEO and founding partner of Positive Sum and the CEO of O'Shaughnessy Asset Management.
All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of Positive Sum or O'Shaughnessy Asset Management.
This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.
Clients of Positive Sum or O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.
Today's conversation was recorded during last week's Sone Conference. I sat down with Karen Carniel Tambor, co-CIO at Bridgewater Associates.
I hosted Karen on this show two years ago, and if you listen to that, you'll remember she has a rare skill for distilling and analyzing complex macro topics.
Today's environment is strikingly different to the summer of 2021, so this is a timely conversation on the big macro variables.
that are on investors' minds today.
Please enjoy my conversation with Karen, and if you want to listen to the other fireside conversations with Sam Altman, Patrick Collison, and Stan Druckenmiller, I recommend watching them on YouTube through the link in the show notes.
Mm.
Karen.
It seems like every single time I talk to you, you get promoted. So if we keep doing this, you're gonna be president in a few years or something like that.
Congratulations on the new position.
Fix. I'll keep talking to you no matter what happens. I promise that.
I would say that the theme
Thus far today of the
Big conversations, the fireside chats like this one.
Has been this clash of what I'll call macro headwinds.
That Stan Drockenmiller just laid out for us.
And technology tailwinds.
the revolution that's going on in the world of artificial intelligence that
Patrick Collison and Sam Alban started the day with this morning.
I would love to hear your take on something like AI. Obviously, you're focused on
the very big global picture of capital markets and all different asset classes.
And when you introduce a force like this into the field.
I'm sure it's something that you've considered.
Deeply.
So what is your reaction to watching this technology unfold in just the last few months and how do you think it affects
The big picture.
You're completely right. I'm the last person you should listen to in terms of actually explaining the technology whatsoever. But
I think the best thing about it in terms of analogies to what's happened so far, which is when you have secular forces, they tend to be slow moving and affect a lot of things in the matter for macro, but affect them over time and over decades.
And in my view, we're kind of living right now with the after effects of having just been through a very long cycle.
Where a few big macroeconomic forces really shaped our world and shaped it really broadly economically, socially, politically over a few decades.
And if you start around the nineties or so, you get these big forces of globalization and automation that
to simplify and obviously a lot's been written about this, take this section, a bite, if you will, out of the US labor market and the US economy that was mostly manufacturing and totally up and
all these people these be manufacturing jobs and certain people in certain locations and moves a lot of those jobs to
cheaper countries, mostly China. So now you have all these jobs disappear. And then the rest of the ones that are left get massively more automated. So people who are left in the US doing manufacturing jobs are now highly, highly radically more productive than they used to be. So you have a productivity explosion in the manufacturing sector requires a lot fewer employees.
That's a huge change. It took a long time for that change to happen to probably, I don't know, 20 years, and the effects of it affected everything in macro.
gradually over that time period, meaning you had higher profits. Really good for companies. They could get more productive fraud. It was really deflationary. That was a big part of what kind of allowed
Federal reserve to keep breathable and all that. It had big social consequences, inequality got bigger, and a lot of the populism we see and the political consequences slow moving, but a lot of our conflict with China comes out of two decades with a slow train going through and making its way through our economy, and this happened all over the world. And
I think when I look at what's happening with AI, the big obvious question is
Are we about to go through this again?
And way, way, way bigger.
Because when you look at estimates and again, I'm certainly not an expert in technology, but you look at
OpenAI's estimates, you look at Goldman's estimates, they all have different methodologies, they all say the percentage of labor market that could be affected by AI in the same way that globalization and automation touch manufacturing, it's a much bigger bite in theory. So you could be hitting a bigger sloth than the people in manufacturing.
And that effect might be even faster and even bigger than what we just lived through. And we're still dealing with the aftershocks of all that. So it's not really something I think people can ignore.
Just this morning, a company called Intercom, which does customer service chat interfaces.
Announced a new AI powered service.
And the stats that they report on
the amount of things that can be handled end to end by
LMs by AI versus no people involved is staggering.
They're starting to see little green shoots like that, that this stuff is real and it's gonna impact
Labor and everything else.
But what things are you watching?
that would bring this level your level of attention where you might actually take action in the portfolio.
For investors out there that are thinking big picture.
Are there certain things that you watch most closely or might begin to watch most closely?
As this unfolds.
Well, the big thing is it has to be big enough to offset the massive inflationary forces that are going the other way. So everything else in the world is kind of going the other way.
I think that if you look at what companies are doing right now.
Sure, some companies are already integrating AI, we have to figure out how fast that's gonna happen, but companies all over
I think it's the biggest wave of what I would call non-economic spending companies have ever had to do, which is that big wave I was talking about from 1990, every time a company spent a dollar, they pretty much knew it was going to reduce their cost base. They knew it was going to be deflationary. So they were spending money to take money out of the cost base to go make that.
worker more productive to go make their supply chain more efficient, to go move things to China. Now
Companies are basically being told, go make your supply chains more resilient instead. And what does that mean? That basically means go spend money to become some sense less productive.
I have the most productive supply chain today, and I have to go double do I have to go spend twice.
And they're also being told you should go and decarbonize. That's a great idea. The world greatly needs that, but that's not spending that tomorrow you're saving money on.
It's in some sense you have to rebuild the whole energy infrastructure. And that moment is inflationary. We're being told, let's go subsidize all sorts of things in order to get more competitive and build things domestically. We didn't need to build domestically before. So that's a massive wave of pretty not economic spending that is kind of structural inflationary force.
And that's already some number of years in the making. Right now, I think that
wave, if you will, is ahead of the AI wave in terms of companies need to do that spending. It's already kind of a system. It's also going slowly. It's not like anybody's about to go
completely get of China, but that is a structural inflationary force and
Well, we have to watch as to how will that structural potential deflationary force could massively upend the economy called
technology and AI, at what pace is that gonna go? And
what's gonna be faster and better and stronger. And the biggest thing I worry is just a more volatile environment.
You have a likelihood for more volatile inflation.
More volatile shifts, yeah, maybe a lot faster than globalization and automation did. And that
causes bassets you hold to look very different.
Sam Baldman this morning said something else really interesting when asked.
What's an area of the world that might get affected by all this technology that people aren't talking as much about?
And he actually said that he thinks some investor will figure this out, figure out how to use this technology to
Earn fantastic returns.
Bridgewater is famously systematic.
an enormous consumer and user of data in its investment process.
What do you think about that idea of using
Some of this cutting edge technology to inform or make
Investment decisions.
And whether or not that'll be a competitive advantage.
I say
Nobody knows the answer to that question yet.
But I do know that
We and others.
are gonna work really hard in trying to figure that out.
We certainly don't know the answer today.
But
We'd be hideous not to go invest energy trying to figure that out and trying to see it. So I could hypothesize, I could tell you all the things that seem promising and unpromising about it.
But the technology is evolving so quickly that do all of our investors we at least have to be asking the questions and studying it.
Can you describe
How the setup of that work.
Plays out.
And I'm also curious for your thoughts.
Let's say that
Isn't true that nobody is able to use this
technology to earn an investing edge. Why might that be the case?
Well, I think the most obvious reason in macro, and obviously I can't speak to all the different types of investing out there in the world, is that
By its nature, you're learning from history.
And
There's a pretty short history of macro markets. And there were a lot of things that were true in that very short history of macro markets that might not be true in the future. So it's pretty easy to optimize or use a very short history to come to very bad conclusions. And so
you could easily imagine doing it poorly. That doesn't mean there isn't a way to do it well. I bet there's a way to do it great.
Fine. That doesn't mean that'll be easy to find and it's easy to imagine messing it up.
It's very different than a problem called Tell me What's a Cat where I can show you
Ten million videos and my risk of being wrong is very, very low, and I've got a really wide range of data.
Yeah, exciting but dangerous seems to be the summary of applying some of these technologies to investing.
Bridgewater's famous daily observations note that it sends to its investors and others.
Often lays out
big picture things in fairly simple terms. If you were writing one of those tomorrow.
About just the general state.
of capital markets.
What would be the key themes of your view?
Today.
Looking forward.
I think the simple thing I would say is that
The world is changing really rapidly.
And capital markets tend to be slow to adapt.
when things structurally change. Cause people trade based on their own experience, they trade based on what they're used to, they have lived experiences in the markets that are a certain way. And so whenever you see big structural changes, markets tend to lag that tend to just take time for investors to kind of
follow up on that. And the most
Obvious case of this is
Look, inflation's been running well above what the Fed wants to be for a while.
And markets are basically telling you
Don't worry.
Fed is always right.
And if it wants its late to be two percent, it's gonna be two percent. And
It's gonna work out. And so almost no matter what happens to inflation.
If you were to tell me, wake me up in Nova Night five years ago and say inflation would be how it is.
What do you think markets would expect?
I wouldn't have expected the markets would say, Don't worry, it's gonna go back. It's gonna go away. The Fed will always get what it wants. I think it's a nature of the Fed's been so successful and central banks have been so successful for so long in containing inflation that it kind of underpins people's expectations. And so you've set up in this world where a lot of what was true about the last 40 years.
Deflationary and because of that.
It was very easy to always
Make money and risky stuff.
The reason it was easy to make money risky stuff is that every time anything went wrong.
Center banks to just solve it because there was no tension in what they were experiencing. It was pretty much if things are bad.
Yeah.
If things are bad, ease.
Why? Because if there's not gonna be any inflation, there's nothing wrong with easing. You can just
always eat as much as you want. There's no tension. Just go make growth as well as you can. You'll never get inflation.
The idea that we're in a different world today, where that's not the case anymore. We're actually
If the economy starts going bad.
It's a very tense situation for a central bank. You do not want to be that central bank that let inflation get out of control.
and we lived through these mistakes in the seventies and so on, they're actually tension for the first time. They're actually constrained saying, what do I want in growth or inflation? I don't think that tension is understood yet by the markets. I think we're about to go experience it because I just don't think that inflation is going to magically return to where it was before.
What do you think that prevailing valuations, let's say just on like the big asset classes?
Tell us about what the market thinks is going on.
What does it seem like is in prices right now, if you will.
as you look at S P five hundred.
multiples or something very basic like that.
Well, I think the stock market is telling you that there's going to be a
Badest.
Economic slowdown.
pretty contained economic slowdown, nothing like significant recession or anything like that.
And uh
With that slowdow alone.
The Federal Reserve is gonna find that sufficient.
To go
ease from five percent to three percent extremely quickly.
that is gonna do that despite where inflation is today, because inflation is gonna go back to totally reasonable levels that they want very, very quickly. And you see that kind of across stock and bond pricing.
bond pricing's telling you inflation to be fine, there's no inflation problem anything like resembling long term, and the Fed's about to ease pretty significantly without a significant slowdown. And where that sort of leaves you is if the market, I believe, is
Asymmetric, it's very asymmetric because
If you actually get an economic slowdown, that's obviously very bad for stocks. I should tell you that that would be pretty bad for stocks, but there's really not much of a recession priced into them, it would be pretty bad.
And usually the way you get out of that, as I was saying, is that every time there's a slowdown, the central bank just comes and eases right away. Now not only will it be much harder for them to ease because inflation's been more problems, the tension is there, but that easing is already priced in.
And so even if they do bite the bold and say, I'm not gonna worry about inflation and ease.
it's already in the market prices, it's not gonna surprise the market so much.
And then on the other hand
If the economy doesn't slow so much, if we don't get that kind of recession, if the equity prices are right, that you're not gonna get a big recession.
that's gonna be a tough spot because I don't really see why inflation's gonna come down with the recession. You have a very, very strong labor market if nothing slows. And so if they don't ease like it's already priced, they're gonna be disappointing.
So every day once we hit summer and the Federal Reserve doesn't pivot in ease, that's effectively a tiny relative to what's priced in.
That's also disappointing. So that's a lot of room for disappointment that can happen whether the economy is strong or weak.
That's all sort of like what I'll call relatively near to intermediate term.
future, how do you think about
Portfolio positioning in light of that.
general view when for a long time it's paid to just be long risk.
And have a very simple portfolio because of everything you've discussed.
How's that different today?
How do you think about positioning
against this asymmetric setup that you described.
I think it's one of the toughest times to be an investor in many years because
Risk gas is so good.
And I think risk gas are about as
unattractive as we've seen a very long time. We're seeing that come to fruition. I don't just bounce back, just get automatic rallies no matter what. So it's a hard time to be an investor. I think as an investor,
You have to think about diversification a different way. Diversification just wasn't that important because the one asset people hold equities was just the strongest outperformer. And the different places investors can look, they can look geographically, so they can look at geographies that have less of this tension, places like Japan or China, where you're in a different situation, you're not about to hit a big center bank tension.
Japan central bankers are pretty excited about getting higher inflation. They've won for a long time and it's far from being out of control.
And if you look at asset classes you haven't typically looked at.
We talked about gold, but that's certainly something that ignored for a while because it didn't seem like there was very good reason to have an alternative to real money and environments change somewhat.
And in general
You s kind of see a reassessment of
As if they were ignored for a long time, saying maybe they have different characteristics in this environment.
I feel like gold, which you mentioned, is like almost literally the opposite of AI.
It's this latent thing just sits there and
has always been an interest to lots of investors. I know you're writing about this right now too. So
Maybe tell us a bit about
I can't even make sense of gold. There's no E against which to measure the P. It seems just like a confounding and confusing.
lump of metal to me. How do you think about it? And in general, like what's your model for thinking about it? And then maybe specifically right now.
Well you're saying it exactly right. I think the right way to think about it is first of all, it is a lump of metal.
That people have thought has value for.
I don't know, at least hundreds of years, probably thousands of years. It's a lump of metal, people have thought as value for thousands of years. So what you're getting is something that.
You can be pretty sure someone in the world is going to find valuable. The problem is when you hold gold, no one's paying you an interest rate, no one's paying you earnings. You're not getting any of those dividends that you usually get by holding financial assets. And so what you basically need to trade off when you choose where to hold gold is how worried am I about
My money's gonna be inflated away, my money's gonna be confiscated, I'm gonna have problems with holding financial assets.
On the other hand.
What am I giving up by holding this lump of metal piece of something that people have thought is valuable for a long time? So if you look at
coming into this environment till today.
Basically, the real interest rate is a good approximation for what are you getting by holding financial assets? You're getting at least that, maybe you're getting even more than that.
And it had fallen so much that you're basically making a zero real return, sometimes negative real return on the alternative to gold. So it didn't seem like you're giving up a lot. It wasn't a big opportunity cost to be in gold rather than in financial assets, and gold had
Pretty long bull run.
And every time it fell was when basically rates rose. So every time there was a real tightening, like a taper tantrum kind of event.
You basically had gold fall because it was like, wait a minute, there's actually an alternative that gives me any kind of yield rather than being stuck in zero.
And now that's changing.
The reason I think that's changing is big shift, I believe, happened basically when Russia invaded Ukraine.
And Western governments, US, Europe, and so on.
Basically said, Wait a minute, Russia
We feel like one of the ways we can exert pressure on you is not to give you access to all the dollars and euros that you have. And so
They in some sense weaponize the dollars that we have, saying if you have a conflict with us, we're gonna try and not let you use those dollars. So for people like Russia,
which there are other countries that may one day find themselves on the other side of a geopolitical conflict, then we're obviously in a shift towards great power conflict.
The opportunity costs became less of a big deal relative to wait a minute, my assets can be confiscated, saving in gold starts looking a lot more attractive. So you've seen
A lot of central banks shift more into gold. You've seen gold rally despite all the tightening that central banks are doing. And then for
That's got more ordinary investors that are less likely to find themselves on the other side of Western sanctions.
The fact that inflation is more volatile certainly raises the probability that you're gonna get some version of a debasement event where you lose your real purchasing power. And so suddenly that opportunity costs.
start seeming a little less like the driver of whether or not to hold the assets.
Dan Drakenmuler used a really interesting
Although somewhat terrifying analogy of us sitting on the Santa Monica Pier and all the near term stuff you talked about is sort of like this.
smaller thirty foot tidal wave that's coming our way.
And we're all focused on that, but way behind that couple of miles is some two hundred foot
tidal wave that's coming in the form of things like
much longer term concerns demographic shifts and
government debt levels, things that tend to
move much more slowly than asset prices.
How do you think about that category of big
longer term, slower moving.
But extremely important.
Macro variables.
I think the biggest thing that affects you as an investor is that those longer term variables
It goes so slowly that they form your assumptions of what assets even are.
And they end up seeping into your portfolio construction because they're just part of that. What is this asset anyway? And what are the assumptions on which you're building all the things that you're building in your portfolio?
And when they start to shift, you don't realize you need to fundamentally require your assumptions. So
You're obviously not gonna trade three month move based on a demographic shift.
But a lot of these slow moving effects do end up then seeping into how to assist behavior. I give up one another example of that, which is emerging markets.
I think for a while we're kind of like
Just a higher risk version.
Of what?
Fascinators, which is it moved together, they were highly correlated, but one was just riskier.
And
That's changed somewhat, probably because a lot of emerging markets have
Got the view to their own drum, they're doing their own monetary policy, they're thinking, wait a minute, I know about this thing called high inflation. They tighten a lot more aggressively into seeing high inflation. And so suddenly the correlations start looking different.
The fact that inflation is becoming more vulnerable means the stocks and bonds aren't suddenly so magically correlated. So, as an investor, you kind of have to think about the long term trends.
Both the perspective of
A lot of times you are investing for the long run, so you don't care about in ten years what's gonna be the value of stock market.
But that is hard to do. You can't really just invest for a ten year period. You really want to think about
those long term trends, how are they affecting my view of what is my asset and what is likely to do well and poorly, and therefore what kind of diversification do I really have?
What do you think are the
right components of the famous term at Bridgewater is the all weather concept, the all weather portfolio.
regardless of what the macro environment throws at us, it'll be able to handle it'cause it's well
diversified, but it just seems like everything you're describing is
maybe a bunch of stuff that we've just never seen before. And like you said, our sample size is pretty small. So
How do you reason about
what belongs in an all weather portfolio and sort of the relative balance or weights of those assets.
Up against
Some of these novel
Interesting variables.
Well you have to ask yourself
The concept behind having an all weather portfolio is basically to say
What are the things that are gonna happen in the world that are gonna affect my assets? And can I find assets that have the opposite responses to that thing happening?
And some things you just cannot find opposite response. So for example
If the Federal Reserve has to radically raise real interest rates to deal with inflation, you know, see this happen in the past.
That is just a discount rate on every cash flow into the future. There's no diversifier for you, except for being in cash, because any cash flow into the future.
There's now a higher discount rate and it's gonna do badly. And so you just know that's a risk of you can be in cash or you can have that risk. But then other things you can say, Oh, there's real diversification available to me, hence I can build an all weather.
Portfolio will do well no matter what happens.
And then the big drivers of assets that you tend to be able to diversify.
First of all, is it's basically the economy. It's like how much economy is there, or growth and at what price is that happening, or inflation.
And there are these natural diversifiers that get built into assets that have different structural components. The easiest example of this is when you have your bonds.
US government's willing to pay you either in a nominal or in a real rate. They're willing to literally pay you CPI or to pay you a rate that's predetermined. And so that's kind of set up to say, look, if inflation is high, I'm going to pay you out.
Inflation is how you're gonna lose purchasing power. And so those two bonds are set up to have opposite structural fundamental biases. And if you put them together, now you have something that you don't care anymore about who inflation is gonna be you can do well in one case, well in the other case.
You're not.
Exposed to that anymore.
And so I think the best you could do as an investor is basically say the big forces you can be
immune from.
I believe growth and inflation are good examples where there are a lot of assets that do well when growth is rising and growth is falling, inflation is rising, inflation is falling. So you can build that resilience.
And then you can kind of look and say, can I do it geographically? Meaning if I didn't do it perfectly, can I just have assets in other parts of the world that just aren't gonna have the same growth rate, aren't gonna have the same inflation rate. Those be going through a different cycle. So if I have a problem in one area, it might not affect me in the other area.
One of the things about modern data on capital markets, having looked at it a lot myself, is that the vast majority of the high quality data comes during a period where effectively America was the global superpower that
There really hasn't been a lot of
Geopolitical
instability since World War Two. Obviously there's been forms of it, but it seems like the rise of China is an important
thing to talk about in that landscape, again, because it's sort of an unusual thing relative to the data set that we
build a lot of our history and understanding on
How do you think about
China's rise, China's power.
the what I'll call a potential conflict between the US and China.
Just it as a variable. I'd love to hear
Your take on.
Well, I think that the biggest thing you said was affected investors most, which is that the US has just been so the winner for so long. And specifically US stocks and US tech have just killed everything.
They've eaten the world.
And if all you did was buy that, you did great.
And the problem is that once that's happened for twenty years, that already gets put into price.
And so if in the beginning of that period you knew that was gonna happen, you did great. But now that it's already happened for a long time.
It's already very much priced in.
And so that assumption of the US being the superpower is now built into the prices. And if you're now focused on the US, which most investors all over the world are, if you look at a global stock market index, it's like sixty five percent US, seventy percent US. So
Everybody is naturally fancy towards an index holding mostly US.
That means expectations of
continued US winning against everyone already in your portfolio, it has to rewin again in an even bigger way for you to actually make money off of that.
Then on the flip side
China's price.
Terribly.
have pretty attractive valuations there. Now there's a lot of good things to worry about with China. I don't think it's a slam dunk that they have an amazing decade ahead of them, but certainly the pricing is much more there to compensate you for that rather than pricing in an amazing decade. And I think what's happening
More broadly is that
Conflict in the US
is very much heating up.
It's in some sense I like to say metastasizing, meaning that it went from a little bit of something that
gets a little bit discussed, but
It's a piece of a discussion versus something that's really seeped into the policy establishments and becoming a big part of how different policymakers in both countries.
think about their role, what they're supposed to be doing, what's happening. So you see it kind of affecting all the decisions being made, both the US and China, and then places like Europe and Japan, they're making a lot more decisions to say, how do I get more competitive relative to the other side? And then how do I stop myself from being too reliant on the other side?
And those are big decisions. So what you're getting as a result of that is very different winners and losers. You're getting governments that are much more comfortable throwing their weight around, especially in places like the US where
Let's be honest, the idea of the government choosing winners or losers or deciding what happens to the economy was like a bad
Bad thing to say, that's not us, that's the communists.
We don't have the government get involved in winners and losers.
There's much more of a sense of well, if you want to beat the Chinese and they're doing it, how can we not do it? So much more comfort saying let's subsidize the things we want, whether it's semiconductors or green energy, let's get in there and really choose how we want the world to be. And so
We are effectively choosing what industries are we wanna make successful and how are we gonna set that up. Different countries are more or less successful as we kind of say, Well, if you want to get around China, who's the best replacement? Where can I put my things that's not China? So those are very different forces that are affecting either sectors individually or countries individually, people trying to get
around the other superpower or set up for success be competitive against it.
How do you monitor for things that are sort of like beneath the surface?
Obviously the most recent would be like some banking crises that have popped up, banks that have gone under after a long time of nothing like that. And I think
If you'd asked
general investors three, six months ago, they would have said
There's tons of liquidity and solvency and great balance sheets, et cetera, in the banking sector. And yet we've had some well-known banks fail.
How do you monitor for things like that that are below the surface narrative?
to watch for them in in terms of ways that would affect investment decisions.
I think that two things. One is I'm a little bit surprised by the degree of surprise to the bank failures because
It's funny, but
You had the fastest rate of tightening we've seen in so long, and it's almost like we expected it. It wouldn't matter.
We've forgotten that.
When you massively raise interest rates
There is a point to doing that. The Fed's doing that for a reason. It's trying to slow the economy, it's trying to get control of inflation.
And the way that rising rates work is that they create a credit tightening.
And go through the crisis system and create a tightening. So that doesn't mean you literally have bank failures. That doesn't mean you specifically can point a bank and say, you know, this one's gonna fail.
But it doesn't mean that this is a fastest rate of tightening you see them in decades. You should expect that to flow through to tighter credit conditions to a credit system that's more vulnerable. Someone is going to be holding all those assets, especially when that much debt was issued, and say, Oh, I have losses on those assets. And Show.
All those assets.
And
How does that then work and flow through? And it comes back to what I think has been
probably the biggest source of insight for me in terms of thinking about trading markets, which is
It's
Much easier to talk about fundamental value.
and pontificate what you think will happen in the world and forget that at the end of the day, for an asset to move, someone has to buy and sell it.
And so to me grounding in
Who literally holds assets?
What happens on their balance sheets? What are all the considerations on them? And what's gonna cause them to buy and sell and why? It's both the thing that can help you most, say something like, That bank's probably gonna fail, because I actually understand what's on the balance sheet.
How to market to market.
What are all the regulatory things affecting it?
And
Result of that, which is when you get different set of circumstances to come to the world, who are the buyers and sellers that get affected, where are they then going to go and buy and sell? That's what's actually gonna cause prices to move. Not you and I, Patrick, talking about what should be the price of something, but someone buying and selling. And when you do that, you realize.
A lot of buyers and sellers do things for reasons.
Other than
the fundamental value of the thing they're buying and selling. There are a lot of pressures on people that lead them to buy and sell and create market prices.
that are because of those circumstances. And a great example of it is these banks that fail, which is
If you print tons of money
And a lot of that gets routed for you know the venture capital industry to you know all these startups and now you're a bank that starts startups.
You're gonna get a huge influx of deposits and not have nearly as much need to lend it out the other end because they're just
huge excess of money. And so that imbalance between lots of money printed and not many people needing to borrow existed. And the question is who would end up with imbalance? What would they do as a result of that? And what you saw is the bank said, Well I gotta make money somehow. It's not like I don't know about this thing called duration risk, but I don't have any choices. I don't have any credit risk to take is
I don't need to make that many loans relative to my influx of deposits. So you want me to be profitable?
I guess I'm gonna take duration risk when that turned.
I lost this.
I've kind of asked about
The obvious variables.
China, AI, inflation, valuations, et cetera.
What are some non obvious variables that have
your attention, if any, that you're surprised.
Aren't on par
with some of those things that I've asked about so far.
It's a squishy thing and so it's hard to talk about, hard to really put your finger on it.
But right now we're seeing an obvious manifestation of it in the debt ceiling, which is
The quality of governance matters a lot.
It underpins a lot what we're doing when we're kind of investing in markets. We assume a certain level of governance is kind of a given when we buy assets and assume normal functioning.
And
That's gone at different times threatened and unthreatened.
But it's something to keep watching kind of how that squishy thing's evolving. It's hard to measure.
Biden gets elected, I was talking about the US, talk about any country, and this has happened all over the world, this situation governance, but Biden gets elected.
We were really nervous.
it's gonna be really impossible to get anything done and
And actually Biden got a lot done legislatively, and we had some of the biggest push of industrial policy we've seen in a very long time.
Policies that were really gonna shape the economy.
And then you have the death ceiling being on the other side where you sort of say, Well, this is not uh
Manifestation of particularly good way of
governing anything, no one would want a system that works the way that
Are currently operating.
And so it's a hard thing to measure.
My intuition is that
When you get a divergence between
People's experiences, social environmental outcomes, and
economic outcomes and you get these big divergences, it's hard to keep political system together when you get too much polarization, which is why I'm so scared that coming out of these decades of globalization automation that we talked about at the beginning of our conversation, we already created these big cleavages, having more of that ahead of us.
can become even worse and we don't really know what's coming at us.
That quality of governance.
investment returns away, it's very hard to measure and very squishy, but it matters a lot. All you have to do is look at countries in the emerging markets that basically have gotten kicked out of access to capital markets because of bad governance and say
It really matters at extremes and it's hard to know if we're walking that line. And at a time like this, the death ceiling, it certainly feels like we're walking that line.
Yeah, it's a great answer'cause it's something that I know of no one that's questioning.
sort of like price for perfection in that sense that we just sort of assume, especially in the US that things
on the governance side and the rule of law and all this stuff will be totally fine. So really, really interesting thing to think about.
I'd love to do like we did last time.
Just a really fast overrated, underrated, just as some of the major asset classes if you're game for it.
Let's start with the basics US stocks, overrated or underrated.
Where
Just because evaluations?
I mean
You could get a recession, you don't have any degree of inflation volatility priced in, you already have Fed easing priced in, there's just room for downside.
The thing that may be even underrated is the beneficiaries of all this AI stuff, they may still be underrated.
If you just say the stock market, especially if you kinda take out the fact that a couple of companies tend to be the mega cap state.
Dominate it.
All right.
What about international developed?
markets not emerging, I'll ask that separately, over or under.
Depends which I think Japan is highly underrated. It's almost like
Everybody decided that Japan sucks coming out of what they had done years ago, and everyone ignores it. Every time I write anything about Japan, nobody pays any attention to it. Nobody wants to talk about Japan.
Seems much better price to me than the US.
What about emerging market stocks which have really languished for
Long, long period of time now.
Uh.
Because of the inverse of the US story?
When all this money got printed and everybody got checks into their house, what do they buy?
About crypto.
They bought tech.
They used to buy emerging market stuff. That used to be the risky stuff to go buy, but that's not what they bought this time around. So you just don't have as much capital build up. And so as we're seeing the capital get sucked out and causing bubbles to deflate in places we all know well.
It's actually it pause and say, Wait a minute, we're actually not seeing that happen in the classic places where it happens, which is emerging markets.
Basically zero mention of crypto today. So Bitcoin
Overrated or underrated.
Uh
I don't know.
I never want you to say the word'cause every time you say the word you get headlines as if you're like a major
Mathority on the topic, so don't know.
How about gold?
Definitely underrated.
I think it's got a long way to run. I think that
There is
A lot of actors the world.
Okay.
are experiencing
Wait a minute, the geopolitics can make it risky for me to be in dollars. There's not a lot of great alternatives.
And they're slow movers. They don't do it in a day.
And I don't think this geopolitical turmoil and this idea that inflation is more volatile than it used to be and it's tougher for the central bank to handle it is going away. And so to me, that's a slow moving, slow secular pressure into gold.
Last one, the potential for deflation.
probably underrated because most of the people who are really close to what's likely to be a tech miracle are not the same ones that talk about inflation and deflation all day. So you don't hear talk about a lot, it's certainly a possibility depending on how fast the tech moves.
I know you are only a couple months into the new role as the CIO at Bridgewater.
But what is it like so far?
sitting on top of an investment process.
With such a large
asset base. What has surprised you so far?
about the responsibilities of the new role.
You grew up in this industry.
And you know that.
There's just so much happening in the world at some level, curiosity is all that matters. Like being a good investor is just about being really curious and learning a lot and knowing what you don't know. And probably the first lesson Ray Dio ever taught me when I was young is he started talking to me about you gotta know what you don't know.
But it never ceases to amaze you how true that is. That's the most important thing in this job.
Bigger the breath, the more you realize there's so many topics there's better expertise than you. And a lot in this job is about being really curious and realizing what are all the areas of expertise you need to make good decisions.
Karen, I absolutely love doing this with you every time we do it. Thank you so much for joining us for the final session today at some.
Thank you so much, Patrick.
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