Bridgewater CIO Warns of Deeper, Longer, and ‘Much More Painful’ Recession Than What We’re Accustomed To

Bridgewater Associates’ co-chief investment officer has warned about a recession that is “much more difficult” and “much more painful” than what we’ve been accustomed to. “The dam has been broken where fiscal policymakers are now part of the story,” said the executive of the world’s largest hedge fund.

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

When asked about the next big risk she sees coming over five to 10 years, Karniol-Tambour replied:

The next big risk is recessions that are deeper and longer than what we’ve been accustomed to.

In previous economic downturns, “central banks could just hop right in and reverse it,” she noted, adding that when central banks just eased everything, recessions were “quick and shallow,” not “deep and long.”

She explained that the Covid pandemic was a turning point because for the first time fiscal policymakers got “deeply involved in solving the problem.” In addition to central banks printing money, “policymakers basically come in and direct the money to people,” she said, elaborating:

So to me, the dam has been broken where fiscal policymakers are now part of the story … They’re much more likely to step in with big fiscal expansions.

“Monetary policy on the one hand will be less important because fiscal will be doing what it’s doing,” she described. “On the other hand, they’re going to be in an even tougher spot because they’ll have much more entrenched inflation because of secular inflationary pressures and fiscal policymakers stimulating at the same time.” The Bridgewater executive continued:

So they’ll be forced to tighten a lot more than they would’ve otherwise wanted — or ease a lot less. Those become recessions that are much more difficult, much more painful.

“We’re in a place where to solve a lot of our most important problems, you can’t only rely on market forces, you need political forces to work as well,” she stressed, noting that the risks are “exacerbated by how fast the pace of de-globalization is going to be.”

Karniol-Tambour opined:

The biggest wild card here, of course, is how difficult the relationship gets with China, because China’s so deeply embedded in supply chains.

“There’s a big difference between having to modestly cut them out or actually decoupling from China. That could be a very inflationary event that exacerbates this whole environment significantly,” the executive concluded.

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

Do you agree with Bridgewater Associates’ chief investment officer? Let us know in the comments section below.