Bridgewater Associates

Households and corporates were able to spend down their excess savings. Nominal demand was so far above supply that real economic activity was still catching up. There was a reprieve in the “liquidity hole” as a surging budget deficit was funded with...

Spending is in line with output. Debts are in line with incomes. The risk premiums on assets relative to cash and to one another are roughly in line with their relative risks.

The right response to this set of conditions is to hold short-term interest rates about where they are or to raise them a bit further. The impact of this imbalance between the level of conditions versus what is desired by policy makers began to be felt in the third quarter. Higher rates for longer will drag bond yields higher and produce a grinding pressure on growth.

What is happening so far? We are seeing rapid AI adoption in a few pockets of the economy, like customer contact centers and software engineering, where it is particularly compelling as a productivity enhancer that can reduce labor costs. The data is...

Bridgewater founder and CIO mentor Ray Dalio sat down with Daily Observations editor Jim Haskel in this two-part series to discuss three of the five big forces he identified in his book Principles for Dealing with the Changing World Order...

We’re currently experiencing an unusual economic cycle from an income and credit perspective. Despite a large, rapid monetary tightening, the economy remains strong. Private sector borrowing has been crushed by the tightening. But strong income growth has outweighed these drags and will likely take more than just the tightening to date to crack.

The Fed has made notable progress toward its goals, but it still falls short of these rough guideposts. An easing as is discounted for next year likely requires meaningfully more progress. To lower inflation back to target and bring the economy back into equilibrium, we need to see a slowing of incomes and a rise in savings.

Co-CIO Greg Jensen explains how changes to the composition of US debt issuance has temporarily averted some of the most important consequences of the tightening, and why this support to assets is likely to turn into a drag. The “liq...

Despite a year’s worth of monetary tightening, most major economies remain in disequilibrium. This is not unusual, as restoring equilibrium often takes a series of moves over time. The path to equilibrium has impacts on markets. For example, disequilibriums that call for stimulation and associated expansions of liquidity, interest rate cuts and fiscal support tend to be good for assets.

Publicly traded firms in 11 key emissions-intensive sectors account for about 90 percent of public company emissions. Global decarbonization goals cannot be met without reducing emissions in these sectors. The Glasgow Financial Alliance for Net Zero estimates that more than $30 trillion in investments will be needed to finance the climate transition by 2030.

Last year’s historically large and rapid tightening is starting to constrict the financial system and slow the economy. This is necessary and will need to be sustained to restore equilibrium conditions. The closer an economy is to equilibrium, the easier it is to fix problems and the lower the volatility of markets.

differences in macro conditions and the corresponding policy responses and market action are as large as they have been in 40 years. This highlights the importance and potential of geographic diversification for investors. Structurally, the rising independence of Europe and Asia (with China at its center) as economic blocs with their own monetary policies makes that highly likely.

The diagnosis of the problem in the US banking system has come into clearer focus. Many banks have assets with yields well below market funding rates. The events of the last two weeks will make that much more difficult to manage. For the Fed, cutting rates fixes the bank problem but makes the inflation problem worse.

Policy makers can stop a bank run, but not a repricing of deposits. Higher funding costs will cause the worst banks to fail or become zombies. A systemwide drag on profits is likely to result in less credit availability and a pullback in duration demand. We expect consolidation and retrenchment in the banking system.

The problems in the US banking system will ripple through the economy via both direct and indirect channels. The most direct impact will be through disruptions to the supply of credit and a continued tightening of lending standards. More broadly, this crisis is likely to drive a shift in the way consumers and small businesses view and respond to higher interest rates.

Odds favor a third stage of this tightening cycle likely to be marked either by an economic downturn or failure to meet the inflation target, prompting more tightening. To get 2% inflation, you need a deceleration in wage growth from the prior 5% to about 2.5%. To reduce wage inflation,you need to cut nominal spending and income growth in half to 3-5% and raise the unemployment rate.

Even with the tailwind of falling energy prices, Europe’s inflation problem looks persistent, which is bad news for European assets. Inflation is running hot across every major category and is being propped up by high and increasing wages. The ECB is priced to continue hiking short rates, and quantitative tightening is scheduled to start in March.

The major story is likely to be the impact of higher rates as the tightening flows through to economic conditions. The US, and to some extent European economies, entered 2022 with a head of steam. The effects of Russia’s invasion of Ukraine worsened the already dire inflation picture. The speed and magnitude of the monetary tightening of 2022 were among the most aggressive in history.

Publicly traded firms in a handful of emissions-intensive sectors are responsible for about 60% of all global emissions. A growing number of investors have made commitments to align their portfolios with net zero. By allocating capital to climate solutions and carbon improvers in these sectors, investors can make progress toward their net zero goals.

About 30% of global emissions are created through the operations of publicly traded firms in these sectors—i.e., what is referred to as scope 1 and 2 emissions.4 This includes utilities that burn coal or natural gas for electricity, oil companies tha...

Many of the key markers of an inflation-driven bear market bottom are still missing today— little real economic weakening, few signs the central bank is ready to move to easing, and, as of yet, not much repricing of equities beyond th...

What comes next is weak economies and tough policy choices. Going back before going forward, in 2020-21, aggressively applied MP3 policies stimulated a high level of nominal spending growth that was well in excess of the output capacity of...

High inflation and an extremely tight labor market leave the Fed with little choice but to tighten until the economy and markets weaken, setting up as bad an environment for financial assets as we have seen. Wednesday’s FOMC meeting...

Bridgewater’s Rebecca Patterson: Fed risks credibility in inflation fight By Jennifer Ablan August 25, 2022 Rebecca Patterson, chief investment strategist at Bridgewater Associates , the world's largest hedge fund, sa...

Equities are discounting higher interest rates but not the tightening’s impact on growth and earnings or the possibility that even more tightening will be needed to bring inflation down. Equity returns in the first half of this year...