Bridgewater’s CIO warns of a deeper, longer and “much more painful” recession than we are used to

Bridgewater Associates’ co-chief investment officer warned of a recession “much more difficult” and “much more painful” than the one we are used to. “The dam has been broken and the fiscal policy makers are now history“, said the head of the world’s largest hedge fund.

Bridgewater executive’s recession warning

In an interview with Bloomberg last week, Karen Karniol-Tambour, co-chief investment officer of Bridgewater Associates, warned of recessions very different from previous ones. Founded by billionaire Ray Dalio, Bridgewater Associates is the world’s largest hedge fund, with about $130 billion in assets under management.

When asked what the next big risk was that she saw coming in the next five to ten years, Karen Karniol-Tambour said:

The next big risk is deeper and longer recessions than we are used to.

In previous economic downturns, “central banks could simply intervene and reverse the trend“, she noted, adding that when central banks simply eased everything, recessions were “rapid and shallow“, not “deep and long“.

She explained that the Covid pandemic marked a turning point because, for the first time, fiscal policymakers were “deeply involved in solving the problem“. In addition to central banks printing money, “policymakers essentially intervene to direct money to people“, she said, noting:

So, to me, the dam has been broken and fiscal policymakers are now part of the story…They are much more likely to intervene with large fiscal expansions.

“On the one hand, monetary policy will be less important because fiscal policy will do what it does“, she describes. “On the other hand, they will be in an even more difficult situation because they will have much more entrenched inflation due to secular inflationary pressures and fiscal policy makers stimulating at the same time.“The Bridgewater executive continues:

So they will be forced to tighten much more than they would have liked – or loosen much less. These recessions are much more difficult, much more painful.

“We are in a situation where, in order to solve many of our most important problems, we must rely not only on market forces, but also on political forces” she stressed, noting that the risks are “exacerbated by the speed at which de-globalization is going to take place.”

Karen Karniol-Tambour opines that:

The biggest surprise here, of course, is how difficult it is to deal with China, because China is so deeply embedded in supply chains.

“There is a big difference between having to reduce them modestly or actually decoupling from China. That could be a very inflationary event that would exacerbate this whole environment considerably“, the leader concluded.

In December of last year, Blackrock, the world’s largest asset manager, followed suit and said that we are heading into a recession that is “the opposite of past recessions“, noting that the “politics of recession” will take over. Jim Cramer of Mad Money said the market has already decided that a recession is coming. However, U.S. President Joe Biden said last week that he does not see the U.S. economy entering a recession this year or next.