Westport, Conn.
Karen Karniol-Tambour, director of investment research at Bridgewater Associates, the worlds’ largest hedge fund, is known for idea generation. Her boss, Ray Dalio, once likened her to a “vacuum cleaner of learning.” At 35, Karniol-Tambour is one of the youngest and highest-profile women on Wall Street.
The most important mechanism that underlaid everything in the past 60 to 70 years was that monetary policy worked through interest rates. Now it doesn’t. The most direct implication [relates to] asset allocation. The standard investor owns a stock/bond portfolio that’s something like 60/40. Historically, most of the risk was in stocks, and bonds were a growth diversifier. If growth slowed and the market underperformed, you had the backstop of monetary policy; lower rates meant that bonds would perform well. That basically stops working when bond yields are so low that they can’t fall much further to offset a large decline in stock prices.
What offers the best diversification today?
[Central-bank policies] will create enough liquidity that assets such as gold and inflation-linked bonds will probably still be good to hold. And if they do well and succeed, then stocks will do great, so you don’t have to worry.
What does more fiscal spending mean for investors?
The fact that the U.S. election resulted in less of a Democratic majority in Congress and a Democratic president would have mattered so much less at any other point in history. Now it is extremely important because the ability to get legislation passed is so important if fiscal policy is more important than it has been in 70 years. Politics matters more to the market because fiscal policy is the most powerful lever. There are also structural reasons [for politics to matter] if we look at the global competition with China. So much of what drives China’s economy is [government] policies—and a top-down industrial policy. It is hard to see how that doesn’t permeate other countries.
Are you suggesting the U.S. will move toward a government-directed industrial policy?
It may not happen in five years, but there will be a shift in how the U.S. and Europe stay competitive, and a realization that it means more government involvement in industries and technology. Competitiveness policies will have to matter more to the market in the next five years.
China’s new five-year plan came out around our election. What they are saying about dual circulation [an economic strategy that emphasizes increased domestic demand, self-reliance for high-tech goods, and selectively opening up the economy to foreign companies] is very important for investors to understand. They are saying they are going to think about whether their domestic ecosystem is self-sustaining. [They] aren’t giving up on their second ecosystem of exporting abroad. They are thinking more holistically. That is a bigger competitor and competitive ecosystem than the U.S. has faced since World War II. It’s a game changer, and hasn’t been internalized by investors.
What will be the greatest investment opportunity post-Covid?
Diversifying into China. In five to 10 years, unlike during the Cold War with the Soviet Union, investors can have a stake in both sides. You can say, “I’m sure the U.S. is going to come out on top no matter what, and U.S. technology will be better, and that’s where the growth is,” or you can say, “Why would I take that risk? I would much rather be diversified.” It’s a fundamentally different economy that runs on its own clock because it has its own monetary and fiscal policy.
Yet, there are measures under consideration here to restrict investments in China.
It is hard to stop that floodgate because every investor in the world wants to be diversified. China’s markets are so big—it has the second-biggest stock market in the world, the second-biggest bond market—and that’s not even reflective of how big an economy it is. Sure, government pension funds may never be diversified, but for many other investors it will be the sensible pathway. As for financial-system risk, the Chinese are particularly well placed to handle it because everything they own is in their own currency and their regulatory arms are extremely strong.
What is the most important public policy issue the U.S. will face post-Covid?
Can we get past partisanship and get things done? The U.S. benefits from having strong institutions. Will that be the case over the next 10 years? If in 10 years we are sitting here and saying we can’t get anything done, no matter who we vote for, how much will that erode America’s ability to be a leader in ways that matter to markets?
What kinds of stocks will investors be talking about in five to 10 years?
Everything digitized will be priced in. What will be new will be whatever companies Europe and the U.S. are supporting for strategic, competitive reasons—and there will be a continued acceleration into companies that solve issues like climate. As everything becomes more digital, there will be more revenue with fewer employees. We also don’t know where employment will be in 10 years, and if it will be through some universal basic income.
What longer-term scars will Covid-19 leave on investors of your generation?
I suspect Covid will have left us with a sense that really unexpected things outside of the main analysis can happen. Studies of pandemics pre-Covid would have concluded that the vast majority don’t have a big impact on the market. Hopefully, this [crisis] will impact our generation’s thoughts on climate change. There are a lot of scenarios in which climate change isn’t a particularly big deal, and there are tail risks. We will be more comfortable looking at tail outcomes.
You look at a huge amount of data. What will be the more relevant data points in the future?
Gross domestic product has been a good proxy of human well-being. If GDP slows, there is misery and policy responds. There is a recognition that we are at a turning point in wealthier countries where it’s not as good a proxy, whether because of inequality, quality of life and education, or pollution. If you look at the past 20 to 30 years, we have had good GDP outcomes, but the main quality-of-life outcomes aren’t rising. I can imagine a future, to take an extreme, where pollution stats are a big market driver because as soon as you see them, you will think, we need to shut down factories or provide stimulus [if pollution measures are bad.]
How else will investing change?
There will be more investing that tries to achieve goals beyond profits, and thinks about how we are affecting the planet. In the U.S. there has been more shyness in saying clearly, “I care about having impact with my money.” There is more comfort [about that] in Europe. I think that will accelerate.
You have spent part of the pandemic in Israel. What is the one place on Earth that you’d most like to visit when the pandemic ends?
I’m really curious to see India postpandemic.
Thanks, Karen.
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Write to Reshma Kapadia at reshma.kapadia@barrons.com
