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Dr. David McCormick

4/25/16

Bridgewater has about 350 institutional clients and manages about 350 billion dollars in assets.  It has been around for about 40 years.  Besides investing it advises clients on their portfolios following an investment strategy that emphasizes fundamentals, diversification and systemization.  This approach has allowed Bridgewater to develop algorithms for every class of assets and systems to deal with those algorithms.  This allows the company to quickly recognize mispricing for individual assets in the 130 asset classes it follows, which present investment opportunities.

Bridgewater’s culture is described by Dr. McCormick as “idea meritocracy”.  It is based on a wide sharing of ideas and communications and honed through constant debate.  Bridgewater is of the opinion that this allows the best ideas to prevail.  But Dr. McCormick acknowledges that this is not a culture for everyone.  He cited statistics that only one in 400 candidates is hired and only 50% of those hires is around after three years.  

On the economic policy side, Dr. McCormick states that policy makers generally operate in the dark and when they do reach a decision that decision is incredibly hard to implement.

The basic formula for economic policy is that income sources have to equal spending uses.  Prior to the recent economic crisis one-half the uses spending came from borrowing.  This is not sustainable so the economy had to deleverage. The deleveraging had to be done by: 

  • Cutting spending
  • Writing down debt
  • Printing money (inflation)

The magic bullet is having growth exceed interest rates on debt.  For the most part, Dr. McCormick feels that our policy makers did a good job.  Other major economies like Europe and Japan didn’t fare as well.

But the solutions that have been put in place make it very difficult for savers.  Returns on investment are very low.  This is especially difficult for large institutions with fixed liabilities.  It is critical for them to generate enough income to cover their debt burden, but almost impossible to do.  The next ten years don’t offer much in the way of relief.  Still, our present situation would look awfully good to those faced with the problems at the crisis height.

Q&A

Q.  What does the situation look like for our grandchildren?

A.  The key is productivity, which is very hard to predict especially since it is heavily influenced by foreign events.

Q.  What books would you recommend for individual investors?

A.  I can’t recommend any book, but I suggest you view the video on the Bridgewater Website.  http://www.economicprinciples.org

Q.  Would you invest with the Saudis?

A.  I don’t talk about individual investments.  Bridgewater goes through a screening process for potential investments.  Part of that is determining that the investment is located where we can influence thinking as part of our advisory component.  One consideration with regard to the Saudis is whether they and others are going to be able to maintain their spending rate with the price of oil.  Look for a lot of capital outflow in the coming years.

Q.  Is the European economy in for as hard a time as I think it is?

A.  It is a matter of short term outlook vs long-term.  Europe is facing some very tough challenges.  It may handle them short term, but over the long-term it will have to change by splitting apart, or through further integration.  Germany for one favors integration.

Q.  How do you view the Saudi threat of selling investments?

A.  I think it’s an empty threat.  It would severely damage their own interests.

Q.  Why invest in banks when they don’t mark their assets to market value?

A.  Banks are more stable and stronger than ever from a balance sheet perspective.  Some of their assets are marked to market value and others are not because it is too difficult to do.

Q.  How do you see inflation in the future?

A.  There is a bigger risk of deflation than inflation.  We see the Fed following a looser policy rather than a tighter one.

Q.  Will Britain leave the European Union and which country got dropped from the G8?

A.  Russia got dropped.  The British question is too close to call.

Q.  What can financial institutions do to right the economy?

A.  Income inequality hasn’t been adequately addressed and will have to be addressed.

Q.  What are the implications of the growing debt and entitlement programs? 

A.  It all depends on growth.  If we don’t grow beyond our present rate there will be huge problems, if we grow at 4% everything will be fine.

Q.  What do you see as the impact of artificial intelligence?

A.  It is very difficult to determine, but it will be significant.

Q.  It looks like we are in for a period of deficit spending.  How will this impact investing?

A.  Spending on infrastructure could be a good thing.

Q.  Population growth was always concomitant with an increase in the economy.  How does this factor into the immigration issue?

A.  We need population growth through immigration, but it needs to be smart immigrants.

Q.  Are you amazed that no-one was held accountable for the economic crisis and what do you think of George Bush?

A.  There was an enormity of bad decisions.  I don’t know if anyone should have gone to jail.  On balance most of the policy makers did a good job.  President Bush is much smarter than generally given credit for and is really a good guy.