Bridgewater Associates co-chief executive officer David McCormick said markets may be more influenced by politics today than during any other period in his lifetime — and he warned that policy makers will have little room to respond in the event of a downturn.
“We’re not in a normal environment,” he said Tuesday at the Bloomberg Invest conference in New York. “It’s like policy makers are walking along a ridgeline.”
The economic expansion over the past decade was fueled in part by enormous monetary stimulus following the 2008 financial crisis. Now, amid signs of a slowdown during the late part of the cycle, policy makers are left with fewer fiscal and monetary tools.
“It’s a tough hand to be able to play,” said McCormick, who joined Bridgewater in 2009 after working with former Treasury Secretary Henry Paulson during the global financial crisis.
While the Federal Reserve has raised interest rates under Chairman Jerome Powell, rates remain relatively low. The central bank had held its benchmark rate near zero for long after the crisis, and some investors are now expecting the Fed to cut it amid concerns over U.S. trade tensions with China and threats by President Donald Trump to impose tariffs on all goods from Mexico.
McCormick said policy makers today have much more limited ability to respond to an eventual downturn in a conventional way than they did before the last recession. They have a “a very narrow band of flexibility,” he said, adding that the situation is complicated by the rise of populism, Brexit risks, and America’s trade dispute with China.
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The dynamics between the U.S. and China, a rising economic and geopolitical power, “will be the defining bilateral relationship of our lifetimes,” according to McCormick. “It’s going to be very difficult to manage,” he said.
McCormick said that investors trying to cope with global uncertainty should create a balanced portfolio with “high-quality sources of uncorrelated alpha.” But with investors getting smarter, alpha is becoming harder to find, according to McCormick. He described Bridgewater as a firm that has been set up to relentlessly pursue alpha.
According to McCormick, Bridgewater seeks to create an “elite investment organization” where employees are constantly improving through feedback and “merit-based thinking.” McCormick, a graduate of the U.S. Military Academy at West Point and a former Army Ranger, said the firm’s founder, Ray Dalio, will often refer to the hedge fund firm as the “intellectual Navy SEALS.”
“The Ranger school training was pretty good for Bridgewater,” he joked.