Fireside with Karen Karniol-Tambour, Co-CIO, Bridgewater Associates | Global Alts Miami 2025

well good morning everyone and thank you for joining us you guys are in for a treat every time I spend time with Karen and chat I always feel a little smarter um sometimes a little more panicky about the world um I think we're at an interesting inflection and so we're going to jump right in um so let's start off by talking a little bit about the current micro environment in your re research you say that we're at an inflection point tell us what you mean by that well first thank you it's great to be here

in this you know huge Center and feelings very much Mutual but every time we spend time together and you know I've used this term inflection point because if you look at the last 15 years or so of investing they've just had a very certain tone that stands out relative to history where pretty much being a passive investor and holding a very traditional 6040 7030 was unbeatable and it stands out historically it's like the best 15 years you've ever seen for that kind of investing and it's for reasons that can be understood because we came out

of the great financial crisis with the world sort of needing this period of healing needing this period of lots of liquidity and easy money and having a lot of room to run with growth with inflation without there running into any issues and with kind of pretty good valuations because you came out of a crisis and so we got used to this world where anything you did that was an any way shape or form diversifying to a very standard allocation hurt you so the more it was different from a standard 6040 7030 allocation the worse it

was and that that's you know that's in our bones now we've just lived through 15 years where anything diversifying was just worse and the simplest most passive easy easiest thing was best and so it feels to me like we're at an inflection point because we're at a spot where we all know it's a different world that's ahead of us than behind us right we're definitely not in a world where we need to deleverage anymore the private sector is in good shape a lot of debt has moved to the public sector we don't know where all

that public sector debt when it's kind of going to come to roost but probably most importantly the tools we're going to use to manage the economy have changed right Trump and his team are accelerating this Paradigm to um kind of a moralism protectionism industrial policy world and let's be honest valuations are not what they were coming out of the financial crisis because what happens when you have great returns is that that gets you know priced in and expected for the returns later and so the range of outcomes of how the world might look what part

of the world might do well what assets might do well it's just different than it was and yet it's in our bones it's in our body being used to these last 15 or so years where we really you know basically got rewarded the more we just invested passively easily in equities and so it feels like a really important inflection point to ask what should be in the portfolio and where's the world going to go and how's that going to affect the assets that I own I think that's an incredibly important point because I do think

we tend to stick with whatever has worked in the past until it looks like it's not going to work and so here we are at a point where clearly to your point we are um things are changing right and I I do think there's a real sense of equities and growth working because um we were in a global world where like there was some natural cost cutting and now here we are in a protectionist world not just in the United States but all over the place and as a result of that do you think that

we have to think of all of the different markets individually or we have to think of it as a global package of how we want to put these things together do you mean in stocks or just the broad I mean the the world like part of part of one of the things that we've done in the p is like to your point just buy us that's all everybody if everybody just bought us that worked any diversification away from the US hurt so how should we think about that now well the US is is it's a

great example right because so everyone's concentrated and everyone's done as you're saying what worked and what worked is pretty much by equities within equities more and more US the US is 2third of global market cap more like 75% if you don't have a lot of em and then within the us more and more concentrated in a really small number of companies right so concentration is kind of at historic highs and we're in a spot where on one hand you could say but isn't that justified by fundamentals right us companies they've actually been so much better

than foreign companies at producing the profits at at actually returning money to shareholders they've just their earnings have just been so much better than you've seen elsewhere at the same time that's very much in the price and so when I do sort of a Breaky even of how much do you think us earnings need to grow in order for you to say I just broke even relative to just buying a bond because we're also not in the same place with interest rates right there's a positive real interest rate and you can make a lot of

money relatively risk-free I'd say probably need like 9% EPS growth in the US which is not impossible it's a high number it's high relative to history it's not impossible but in most other countries you probably need two maybe 3% so meaningfully lower so the bar for the US to keep being the outperformer has just you know really risen relative to what it was because of this period of massive outperformance and you know going back to your question was just okay so we've been in this thing people like doing what worked I think that it is

a really good time to sort of step back and say how do I think about my vulnerabilities across many lenses the geographic lens is one good one to look at because everyone is just so us concentrated at this point and when I look at what really ends up driving asset performance over time like when you look over a 5 10 year period and say what makes assets generally do well it's usually very macro stuff right it's usually things at the level of is liquidity being provided can policy makers ease is this a good time to

basically be holding risk premiums and earning them or not um and what are the starting valuations and if you line up the US relative to other countries on these Dimensions it kind of looks the same as other places it kind of looks similar it def doesn't really stand out um it has worse valuations it has some better monetary policy backd drop it kind of looks about the same and so the way I would think about it is that when you start out saying I'm starting with the us being 75% of my allocation you are effectively

taking a really big bet that you think the US will radically outperform to give up all the diversification for all the other countries in the world and that might make sense in a certain context of governance but it also is good to just acknowledge that's what's going on that's a big bet it should take a lot of expected outperformance from a already very high level of you know 9% on your gross versus two to be willing to be so concentrated in one place versus get the benefit to diversification so that that's clearly to your point

a big bet that most portfolios are taking right now um how should we be thinking about this differently if you if you believe that this is a huge risk which clearly it is it may work out but it's a huge it's a huge bet we're taking um what things should we be considering to reposition our portfolio so I'd say first at the highest level I think there is a revolution that's going on in portfolio management where when I look at all of our clients across the world the traditional way of doing things was very much

a strategic asset allocation like you go over some period of time you decide under new strategic asset allocation you have your buckets you have some Freedom within that but effectively what you're really saying is like my like building block is the asset class and I start at the top and I say what asset classer should I hold and have like a little bit of Freedom within that and I think there is a big revolution happening of people demanding wanting more flexibility more ability to see their portfolio as one integrated whole and recognizing the issues with

just thinking in asset class terms they leave you sort of not very Dynamic and a lot of the big decisions fall out of that rather than being made explicitly and so when I look at a portfolio a lot of the biggest drivers of whether it does well or poorly are basically how risk on or risk off is it is this a good time you take risk how much risk is that portfolio taking if you're thinking only in asset class terms it sort of falls out you're not really making that decision at top of house it's

kind of falling out of a lot of decisions that are being made more in the micro um and number two what's the macroeconomic environment does it benefit for example growthy companies or does it not benefit growthy companies which is also a decision that's kind of being made in the micro and so part of um the shift in my view is being able to look top of house and say what tools should I use to understand everything across the asset classes and not let every asset class talk in its own language and think about risk and

the environment and its own language because it sounds very compelling in the context of private credit to talk in a certain way and public equity and private Equity talk in another way but put it all together and say top of house what are my risks and therefore what do I want to do about it now I think once you look at your whole portfolio possibilities kind of start opening up especially in the context of whatever it is governance that you know you're sort of w to and you think about um but a couple of things

I'd point out one is within equities I think you definitely get uh a tough time to be asking how much do I just want to be in the market cap versus what is my freedom to be more resilient to different things yesterday Market action is just such a good example of this right because you look at something like how will AI development affect a couple a small handful of big tech companies will they be the winners from AI with someone else be the winner from AI That's a very idiosyncratic question at some level and if

you just hold the market cap you have a lot of exposure because there just happens to be the really big companies so what does it mean to be an equity holder that's more resilient to different ways that AI might evolve and might affect the economy what do mean to be resilient in different ways geopolitics might work out all this leads you to basically saying can I hold my equities in a more resilient way not just market cap and the second thing is that you know kind of top down a big decision I think was being

made um at the top of the portfolio level over time was to shift out of fixed income and that made a lot of sense in the context of rates being zero rates couldn't really play a meaningful role in the portfolio when rates were zero if there's a big downturn what's the FED going to do rates are already at zero that's no longer true today so the question of what kind of protection do I want in a growth downturn you can actually look at something you know like bonds again and uh I think thinking about rebuilding

those bond allocations is a big issue um and then the third issue I'd call out is currencies I think when you look top down you sort of look at your portfolio and you suddenly say wait a minute I'm inheriting a lot of currency exposure when I do buy foreign assets then I may not have actually thought through I may not have actually said I find that currency attractive I may just find that asset attractive and that sort of uncompensated risk that I may or may not want and today in particular with Trump coming in and

trying to shrink the deficit and so on might be particularly tactically unattractive um kind of given the outlook for the dollar so these are all levers that can be used there are more levers that can be used at the most extreme in some ways the best lever can be used is looking at your portfolio and saying just what can I do that's the single most diversifying thing I like it the way it is I've picked all these assets for a good reason every single one of them I I like their returns I they're here for

a reason but they just leave me top of house with a certain amount of vulnerabilities what should I do to best mitigate them in other words let me not rely that the world will stay the way it was where everything I do for diversification hurts me let me bet that it's possible diversification will actually help me and try to think about what's the most diversifying thing so I think that um so so to go back to your earlier statement about the the fact that for 15 years one thing worked so for us as allocators we

constructed these strategic asset allocation portfolios that were heavy on privates which offers a lot less flexibility to change so and given that reality how do you think about what we should be doing tactically in the part of the book we can actually make an impact on and do we have to be more dramatic in the marketable side to compensate for that there not being a lot we can do on the private side which is a growing part of people's portfolios yeah this is a huge huge point of bringing up which is that if you get

to the point where say 50% of your assets are private the pace that you can move them the dynamism you can shift them just isn't there in the same way and then you have a lot of different people in the room with different um outlays they need to make but depending on what kind of outlays they need to make the question of how to do liquidity management becomes tougher and tougher when you're you know so much in privates now the reality is we've never lived through an equity downturn with people had this much in privates

that wasn't just you know very very quickly back up and so if you imagine living through something like 2001 with as many privates as you have today in 2001 allocators very quickly got back in there and found opportunities they were very Nimble because they had a rebalancing mandate so as soon as equities fell they were looking to buy more equities they found good opportunities and this was a big thing that happened it's not going to happen the same way if you're 50% privates you just don't have control that way so I do feel that the

other 50% first of all they naturally that you have to be able to use them to much more dynamically look for opportunities or else your whole portfolio is stuck so if you're 50% in privates you better use your 50% in public to really be able to have the capabilities to nimbly look for opportunities in a more Dynamic way as they arise the second is that like you're saying if you want to shift in any way your risk profile what you're kind of more vulnerable to you have to use your public assets to do that and

you have to use your public assets differently than you used to because you have to use them in compliment and so if 15 years ago you could just look outright and say what's my best public asset mix now you have to say relative what's the best compliment to all these privates that I've picked and I'm in and I'm you know kind of there and it'll take me many years to make that change and so I think public markets are very useful for this you can go in and out much faster you can find Dynamic opportunities

much more quickly and you can really build allocations that are intended to complement the public ones that you have um I'll give a couple quick examples which is you know we have a number of partners that have sort of said I like this idea of being more geographically Diversified but there's no way I'm going to go and build private capabilities in like lots of different countries in Asia like that's just going to take me years to figure out how to do that and especially if I go down you know private Equity Real Estate Public Credit

it's just going to be too hard to go build those capabilities well the public markets are the perfect place to say I just want that complement I just want to get that piece the geographically diversifying that's going to be too hard to build in privates but I can use public markets more nimbly in order to do that second is you know we have partners that use us to basically say how do I get an alternative allocation that its job is to find Opportunities more dynamically and more quickly than what's happening in my privates and then

they can kind of choose how much they gear it towards ones that particularly will perform well when their privates do badly or will perform well at all times and that kind of depends on your governance right because choosing something that will only do well when uh your main portfolio does poorly is something that can be very advantageous but can also be tough governance wise either way public markets we think and Alternatives especially are just very well suited to be that compliment to whatever you have in your privates and the need for that has gone up

a ton as those allocations have gone up so um clearly you're you're arguing for a more Diversified public book as we look ahead to 2025 and Beyond we are you seeing the biggest opportunities and risk in the in the public markets so when I look at the public markets you know I kind of look at a lens of is this a good time to be risk on risk off I'd say it's about neutral in my view um it's not a great time to really lean in and take a ton of risk you already have relatively

squeezed risk premiums and so on but at the same time policy makers they want to provide more liquidity they want to ease more from where they are and their constraints on doing so are a lot less than they used to they're in a spot where you know it's hard to imagine if there was a meaningful risk of growth that there wouldn't be a lot of fed easing there's just not as scared of inflation as they used to be so I think that sums up to kind of a neutral risk on risk-off perspective but as I

said before I'd say the US is kind of in the middle relative to other countries in terms of how attractive it is and so it's an attractive time in my view to take risk spread across a lot of countries especially with the amount of geopolitical tension that we have the probability that correlations across countries will go down and you'll really get the benefit of that diversification or there the second is that I think that you're on the margin more likely to get a strong growth and stronger than expected inflation environments um that on the margin

you're going to get growth a little stronger than expected but also inflation a little stronger than expected that means that I like stocks better than I like something like bonds but within bonds I like the option value of something like inflation L bonds to you know kind of at least get that CP if you can but that could change quickly because with the amount of policy uncertainty you have it's not hard to imagine one policy change really tilting Us in terms of its growth and inflation macro environment with that policy result so the ability to

be more balanced to those outcomes um and be able to shift to something that'll actually do well if growth is falling like having a large enough fixed income allocation to benefit from if there does need to be an easing is real and then the third is I think it's a particularly good time to to hedge foreign currency exposure um you're just at a time where if you think about it if Trump really really wants to shrink the trade deficit the thing that's on the other side of that is foreigners coming in and wanting to buy

us Financial assets right that's how the trade and the current account balance and if he shrinks the trade deficit he's not doing anything about the desire of other people to buy us Financial assets we're still the center of the financial world we said us equities are you know 2third three quarters of equities out there people are going to keep buying our assets that's a lot of dollar upward pressure to be both shrinking the deficit at the trade deficits and having people still buy us assets I think the US US economy is still pretty attractive place

to invest and that means that if you're sitting in the United States today and have a lot of unhedged foreign currency exposure you probably have risk that you don't want packaged with that Geographic diversification you're uh getting otherwise um and brly I'd say the biggest opportunity across quote unquote public markets probably is rebuilding the fixed income allocations because I'm shocked how many people people having in their Public Market fixed income all private credits and I've kind of said well it's not exactly public markets but it's more liquid than private equity and I like private credit

there's nothing wrong with that but obviously that exposure is much more of a credit growthy exposure that is not doing anything for you in terms of diversifying you in case there's a downturn so the ability to rebuild that and have uncorrelated Alpha in there is really big and then I'd be remissed not to say I said an event like Global alts but look uncorrelated Alpha is the single most valuable thing the hardest to find thing because that's the piece where you can make money and not be correlated to all the other risks in your portfolio

so looking for that that that's the holy grail and in every piece of your allocation you should have that and so um you should really be thinking every piece of allocation do I have un correlate Alpha here if not how can I find and get it and not rely on Alpha that just kind of re exacerbates the same biases so I'd love to hear a little bit more about your I think because I think you're correct that most of us have not thought because interest rates were so low about our fixed income portfolios our public

fixed income portfolios are you suggesting or advocating for us to have a broadly Diversified F income portfolio both across Industries and and sectors and and geographies or do you think that we have to think or what are the Dynamics that we should be thinking about in building a fixed income portfolio right now well I think that one of the problems with fixed income portfolios is that for many years the only way to get Alpha was to lean into to take more credit risk in one place or another and again there's nothing wrong with getting Alpha

that way the problem is it's the same type of risk you already have in your Equity portfolio so it could be a great Alpha Source but it's not actually diversifying you and it made sense in an environment where there was no other Alpha to be had but today there is right different countries are easing at different Paces you can actually make money figuring out where do I want to be in the duration curve which country do I want to be in looking and saying things like well the UK they're much more likely to have a

bond rally because they can't withstand their interest rate level versus you know Europe or the United States and so that type of alpha is much more diversifying because it's just something else than what you're getting through credit and you li most fixed income accounts most fixed income managers are primarily playing credit for Alpha it's just the same exposure you already have so if what you're trying to do is say what do I actually have my portfolio do well in a downturn and you load that area with tons of credit exposure you're sort of going against

what you're trying to do in the first place and it made sense when rates were zero everywhere there was just no other choice but today there is right no that I think that's very I think it's an important thing to do I of course the big concern is that we have NE necessarily built out teams to think about things as tactically as that and and that are have strength in those areas so we're going to have to lean really heavily on our partners to help us think through some of that um so we are quickly

at time I'd love for you to end with any key takeaways that you want this crowd to walk away with about how to manage through this period of uncertainty I mean obviously you've given us a lot of great thoughts around diversification is there anything else you think that we should be thinking about as we approach this next 15 years you know it's very interesting because I feel like a lot of the very fundamentals of what will make a market work are what's kind of in question here the backdrop of the institutions that support Marketplace development

and whether they'll stay strong and what are the policy levers that are able to kind of support support it and at the same time the backdrop of any economy at the end of the day is productivity what makes the economy grow and with the mix of Regulation deregulation protectionism but advantages like AI that whole mix of things is really potentially Shifting the way the economy works and potentially really rejiggering what parts of the world are able to benefit from these things and so what I'd leave you with is those are a lot of questions but

they really mean you should question a lot of the foundations of what has really made the economy work they could shift meaningfully in the next 10 years you could be looking at an economy it just operates differently and it could operate very differently in different parts of the world as the world gets more bifurcated and so step back and basically ask yourself what is my portfolio resilient to is it resilient to the more typical stuff like a recession is it resilient to a big shift in what part of the world is the winner versus loser

is it resilient to how the AI Revolution might go forward and you know kind of be ahead of us is it resilient to a big shift in productivity how do I ask these questions in a way that I can be more comfortable that given the range of where the world might go I have I'm doing the best I can to not be overly concentrated one answer because these are Big questions when we're all going to be thinking about for a long time but ones that I wouldn't expect we can all predict perfectly right so please

join me in thanking Karen for sharing some very provocative ideas I think we're all going to go away thinking about what we need to do differently about our portfolios but it's always always a pleasure Karen thank you thank you [Applause] [Music] [Applause]