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We're going to talk about Bridgewater, the world's largest hedge fund, is on the rebound. The Pure Alpha strategy, very highly watched, is up eighteen percent through June after a week twenty twenty three. That's all according to people familiar with the matter.
Bridgewater is also plowing into the high flying world of artificial intelligence, joining us now to talk about it more as Greg Jensen, the co chief investment officer at Bridgewater associates and Greg talking about the performance at Bridgewater has clearly been up double digits this year. What is happening that's going right? What are the bets that you guys made off that you are seeing now play into twenty twenty four.
Well, I think Bridgewater can benefit in multiple ways.
The basic idea of Pure Alpha is that for over forty years, we've built up our understanding of how macro developments impact markets, and we continue to improve that process. But there's been so many things, as you guys are talking about here, so many major macro events going on this year that have pressured markets. The fact that the FED had to tighten slower than it expected to at the beginning of the year, the ripple that had through the fact.
That US growth has been generally resilient.
All of those pressures add up to opportunities for US and particularly differential pressures across countries. After the tightening cycle was very global. The impact of that tightening cycle across the world has been quite different, creating a tremendous amount opportunities for a strategy like perov.
What do you expect going forward?
I was watching last night in preparation a panel you did at Davos, which you know is back in January you were skeptical that we'd get six cuts this year, and at that time the market was pricing that in Now you know, we're we're only looking at two maybe one, and yet the market is up, you know, fifteen percent.
What's driving that and can it continue going forward?
Yeah?
Well, when you talk about the equity market, I think the biggest question, right, the thing that reconciles the circle between the interest rate market and the equity.
Market is productivity.
Is there going to be a major productivity effect of the new technologies, machine learning, et cetera coming through because you need it really to reconcile the level of stock market. The expectation for earnings going forward are quite high. At the same time, the expectation the interest rate market is that the central Bank will be able to cut rates that services.
Inflation will continue to come down.
So you need this kind of perfect situation of earning staying strong, demand staying strong enough to make those earnings strong without keeping inflation above the FEDCE target. How do you get there? You've got to get there through higher productivity. So that's the big question is how much productivity When will it occur? Because to reconcile the markets, you need a pretty big jump in productivity to allow higher earnings and lower inflation.
Well, I definitely want to get to machine learning, but before we do that, let's wrap in FED risk and political risk into one question. Because I was reading a note from Goldman saying that the risk of Trump being real elected and putting in place some of those tariffs that he's talked about, it could lead to five extra FED hikes.
So not talking about cuts there.
And when you think.
About all the known unknowns that are out there, especially as it relates to politics right now, are you hedging for any risk of something like that scenario playing out?
Yeah, I think you have to be really thoughtful because there's so much political risk going on, and the shift generally you're seeing across the world is kind of dissatisfaction.
With the people in power.
Populism in many cases being continuing to be on the rise, and a Trump versus Biden or Trump versus whoever the Democratic nomine ends up being is very significant change in policy, one of the more significant elections. It will probably happen very quickly, just like there was the significant corporate tax cut when Trump came in before, he's coming in ready with tariffs.
That's the big first thing, you know.
The second thing will be the continuation of the tax cuts. All of this move towards populism is pointing towards an inuation of more government deficits, probably more inflation. Tariffs, at least in the short run and probably in the long run. Our view would be that they're inflationary and a Trump presidency the thing that we kind of most be concerned about is the long end of the rate curve.
Probably bonyots fed.
They'll try to get it easy fed in and probably have the most significant challenges on the long end of the curve in terms of bonds. But those policy changes are going to be significant. And if you look at basically just understanding global macroeconomics today versus twenty five years ago, understanding government interaction with markets has become so critical.
How do you then position if you believe inflation is in the future, do you go short the long end of the curve? And do you do it significantly?
Well?
We try to take a diversified set of positions so that no one position can be too dominant in our portfolio.
The it's tricky, right the long end of the YEO curve.
A lot's going to depend on politics, right, and a lot's going to depend on how unified the government is. Will Trump be able to get everything he wants? Or if the Democrats are elected, will they be able to get everything they want? Dividing government will generally be good for bonds, and a unified government one where or the other Republican or Democrat would probably be bad.
Anytime these governments are unified.
Right now, you're seeing movements towards populism, movements toward bigger deficit spending, and we think that's the more likely outcome is that you continue down that path. But there's a lot of change along the rank along the way. And in the short run, what's going to matter is the is FED policy and is the FED constrained? We think the Fed's itching to ease. They want to essentially have the stats come in a way that allows them to and.
We're close to that they probably do.
Right, with one hundred billion dollars plus of debt servicing costs every month, we need rates to be lower.
At what point does and I know we want to get to AI machine learning.
I want to get there as well, But at what point does this massive debt and the servicing costs really start to become a problem.
For you know, the ten year yield or the strength of the dollar.
Well, and that's what I think we're going to find out.
Right.
What you can see right now is there's not much risk premium in long duration bonds.
There hasn't been a problem.
That doesn't mean there won't be, right, and I think the main thing I'd say is the destiny here is that governments are going to push until we hit the limits.
Right.
You see that in countries like Brazil or whatever, where they're at the point where fiscal spending hits the limits. You saw that for a brief moment in twenty twenty.
Two with the UK.
It Liz Trust moment with Trust moment. But in the US you're still probably always away. But I think the destiny of it because of the populism and sort of the amount of things that need to be fixed in the US, the likelihood is we find there that now I would guess that's a couple of years away, but that we're continue to press in the direction until we find the limit. That easing fiscally will continue to be the path until that limit is hit.
Until the bond vigilantes come back.
Yeah, and it won't be speculators are too small relative to what's going on. It's really the FED, the and generally the size of that issuance. And so what is going to be the limit is inflation. If there's no inflation problem, there won't be a problem for bonds. It it won't come from anything other than inflation currency problem.
I want to talk about something people are really excited about. That's artificial intelligence, greg By. We recently reported that just about a week ago, exactly a week ago, Bridgewater started its own AI strategy in a new format here, a new fun format. But also you were an early investor in open AI in anthropic How do you think about
investing in AI at Bridgewater? Do you buy into those high flying names or are you better off doing it in the private names personally given where valuations are today.
Yeah, well, i'd say when we think about it from a pure AFFAM perspective, So what we built up at Bridgewater is an expert system based on everything we've learned over the forty years, mainly on how economic cycles work, and big productivity miracles are pretty separate from economic cycles. So when you look at what we're doing in pure AFA, we're generally trying to make sure we don't have too much exposure to whether the productivity miracle works out or not.
So when we trade US equities, we trade them kind of with AI hedge because the pressures, the normal cyclical pressures will play out on the regular companies. And when you look at US stocks, it's kind of the regular companies that Wou'd say are pretty expensive.
Relative to the rest of the world.
Mediocre companies in the US have a US premium in them relative to the rest of the world. Now, the great companies in the US are the companies hitting the cutting edge. That's a different story, and it's very different than nineteen ninety nine two thousand. Been at Bridgewater for twenty nine years and I lived through ninety nine two thousand. That bubble was all about future expectations. Most of what's priced into equities today actually say, are based on what's
happening right now. I mean, what's happening with Nvidia's demand just is incredible, and whether.
It's slightly over priced or slightly underpriced or whatever, it's a close call.
This is not like the ninety nine bubble, and at least in my view, because the earnings for those companies are actually there in a way they weren't there for a company like Cisco in nineteen ninety nine, So there is a big difference. Now you still need those earnings to be sustainable, which requires a continued growth in those areas,
but not a not an outlandish one. And that really comes to what internally, So there's we need to understand AI from a macro perspective, and then we need to understand it from a as a user a micro perspective. Right that RI Labs, which is twenty five people, we set aside a bridge where are fully focused on using machine learning for everything you need to do to invest in markets.
That group we're hands on. We see both the problems.
There are many problems that language models off the shelf have many problems with them, but if you can combine them with data models, you can create this incredible strength. And right now I expect over the next five years so much of what human investors and analysts can do can be better done with machine intelligence.
So that's been a journey for me. I've been looking at.
This for Bridgewater s built an expert system based on human intuition being translated into algorithms for AI. Having machine learning generate the ideas, generate the algorithms. That's been kind of a dream for me, and the technologies really came together in twenty twenty two or so that the pieces came together such that I thought we were ready to build an artificial investor, and we've moved down that track at rapid rate.
Greg, thank you so much for giving us a preview on this new strategy over at Bridgewater, and of course the view of a very complicated markets of course, that is Greg Jensen, CIO at Bridgewater Associates Cocio