Karen Karniol-Tambour, the co-chief investment officer of Bridgewater Associates, warned investors that upcoming recessions may play out more painfully than in the past, may be more difficult to handle and “longer” than we’re used to as the Federal Reserve struggles to intervene.
Bridgewater has almost $130 billion in assets under management.
In February, Karniol-Tambour, 37, became the first woman to hold the most senior investing job at the world’s largest hedge fund. She was promoted to co-CIO less than four months after billionaire founder Ray Dalio stepped down as co-CIO and gave up control of the hedge fund.
In the past, central banks could step in and reverse downturns in the economy, Karniol-Tambour said in a Feb. 7 interview on Bloomberg’s “Next Big Risk.” That won’t be so easy in the future in a period of inflation, she predicted, because central banks are involved in the recession.
“Everyone investing today has had their whole investment career over a period of significant disinflation,” Karniol-Tambour said, “in a time when every time there was a significant downturn in the economy, central banks could just hop right in and reverse it. They didn’t face any kind of trade-off, and we saw it the most in covid when the economy’s going down. Reversing it is a win-win for everyone because growth is a disaster and there is no inflation. Just ease everything you can.
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“What that means is recessions could never ever be deep and long. They were always quick and shallow, because there was always a savior to save the day.
“We’re going into a world where that just is not what it’s going to look like anymore, where every time the economy slows, it’ll be painful because central banks will want to ease, and at the same time, will be struggling with how sticky inflation has been and that’ll be exacerbated by the political situation.”
As of December 2022, President Joe Biden has been in recession denial, instead predicting the economy will boom. The U.S. economy expanded at a 2.9 percent annualized rate in the fourth quarter of 2022 despite predictions of a dramatic slowdown as consumers kept spending and companies continued hiring.
The 18-month U.S. Treasury yield curve, deemed by Fed Chairman Jerome Powell as the most reliable warning of an upcoming recession, fell to new lows Thursday at close to minus 170 basis points. In negative territory since November, the “near-term forward spread” compares the forward rate on Treasury bills 18 months from now with the current yield on a three-month Treasury bill.
Constantly raising interest rates and printing money are the root causes of the disaster, according to Karniol-Tambour. “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,” she said.
She added, “So they (Feds) will 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,” she said.