Bridgewater Associates Co-CIO: Market Too Optimistic, Poor Outlook for Stock and Bond Markets

Bridgewater Fund's Co-Chief Investment Officer, Greg Jensen, recently stated that the market's judgment is incorrect, and investors are overly optimistic about the prospects of US economic growth and the Federal Reserve's ability to sustainably lower inflation and bring it back to the 2% target.

Jensen believes that the Federal Reserve seems to be more realistic in its actions than the market. If the US stock market is to continue rising from its current level, interest rates must be lowered quite quickly to keep profits at a fairly good level. And this is already close to the baseline scenario. To surpass the current level of the stock market, even more is needed. The market is too optimistic.

For most of last year, Bridgewater Fund's performance far exceeded its peers as investors bet that the fastest rate hike in decades would quickly push the US economy into a recession. However, as investors began to bet that the Federal Reserve would slow down its monetary tightening, bond yields started to decline and the stock market rebounded, resulting in a significant retreat in Bridgewater Fund's profits. For example, Bridgewater's Pure Alpha Fund fell by 13% in the fourth quarter ending in November, while the higher leveraged Pure Alpha II Fund fell by over 20% during the same period.

Jensen stated that compared to history, the Federal Reserve's current tightening is rapid and substantial, and any similar tightening in the past has led to a significant economic downturn. The duration of economic decline following a tightening policy varies. Although an economic recession has not yet occurred, it is still possible.

Jensen said that, just like last year, when the stock market falls and short-term interest rates rise, historically, this has always led to an increase in personal savings rates. People tend to save more when they see interest rates rise, asset prices fall, and the real estate market slows down. This means that corporate income decreases, layoffs occur, and the savings rate increases even more when the job market is weak.

However, the fiscal policies introduced during the COVID-19 pandemic have disrupted these traditional economic patterns, making it more difficult to predict the impact of rising borrowing costs, and the impact is much slower to manifest.

Nevertheless, Jensen believes that large companies will eventually feel the tightening effect of rising borrowing costs, forcing them to reduce employment and investment, and people will eventually cut spending and increase savings. If weak economic growth begins to translate into an increase in the savings rate, it is easy to fall into an economic recession, which is difficult to cope with.

Jensen expects that the ultimate result will be somewhat disappointing US economic growth, with inflation still slightly declining but at a relatively high level, and the 2% inflation rate is more likely to be the bottom rather than the top of inflation. These scenarios are likely to be unfavorable for bonds and may have some negative impact on stocks.

Jensen admits that he and Bridgewater Fund have modified their views. Although they still expect the economy to face negative shocks, they anticipate that it will not be as extreme as it seems and will be a more gradual process unfolding. All of this will happen at a more moderate pace.

**Jensen also predicts that from a political perspective, fiscal policy is more likely to be adopted as a response to an economic recession compared to monetary policies such as quantitative easing. Fiscal policy is more effective in rapidly stimulating economic growth but is more likely to cause inflation, as people have already seen. **

Jensen believes that the United States is still adapting to high inflation in the context of deglobalization, although the current discussions are focused on productivity issues, machine learning may change that. Jensen believes that deglobalization and the shift towards fiscal policy have already altered the long-term inflation trajectory, and the market has not fully adapted yet.

Bridgewater's AI

Bridgewater has long been deploying machine learning and other quantitative trading strategies, and has been an early adopter of generative artificial intelligence. Jensen is an early investor in OpenAI and Anthropic. Jensen has praised this technology even before ChatGPT became popular.

When it comes to using artificial intelligence to capture major turning points in the macroeconomy, Jensen warns that this technology is not particularly suited for this task. He believes that the potential lies in combining the ability of artificial intelligence to sift through and analyze large amounts of data with some human insights. He states that as the relevant technology develops market and economic behavioral theories, its value will continue to increase. The focus is on combining large language models with poor accuracy with statistical models that excel at accurately describing the past but perform poorly in predicting the future.

Jensen revealed that Bridgewater is building an ecosystem with a highly skilled team of artificial intelligence "analysts" who think about the economy and the market and then test these ideas. These robots can outperform most junior investment analysts in some internal tests at Bridgewater using cutting-edge technology. So, if there is an investment analyst in the 80th percentile, it is essentially like having millions of such analysts.

What does this mean for those who want to enter the investment industry, or at least Bridgewater? Jensen says to be creative and learn how to use new tools. "This will indeed change the role of investment analysts. And of course, there are people in the lab. We need those who are curious about these new technologies. Who want to leverage them. This will become part of future work. It's hard to imagine any knowledge industry not utilizing these."