David McCormick, Bridgewater Associates co-president, discusses how to balance your portfolio amid the Fed’s low rate policies.
Bridgewater Associates Mccormick on the Fed: Video and transcript below
oday is about theintersection of policy and investing and economics. and no one better equipped than david mccormick, bridge water associates co-president and member of the management committee. he was treasury undersecretary for international affairs during the bush administration. bridgewater has han $150 billion under management and the world’s largest hedge fund. thanks for coming in. so we’ll hear a couple things in the next frankly half hour. we’ll hear from jack lew on dodd-frank and i want to getyour views on that but we’re going to get bernanke’s testimony at 8:30. what are you expecting to hear? i think what you’re likely to hear is what you’ve been hearing. if yld step back and saidhow would we have expected if this was managed well the qeprocess managed well, how would we sxrekts this had to go.that implies you don’t think it’s being managed well. no, i do. i think it’s managed well in the following sense. bernanke says here are then cans that need to be in place before we begin to pull back on qe. if those conditions are in place, we’ll begin to do so. and if those conditions are n in place, then we’ll make policy decisions. how would you position yourself for whatever he’s about to say today or the last two months? well, we’ve had two major strategies. we have our all-weather strategy and our pure alpha strategy. the all-weather strategy is a portfolio of assets that we hold over time. pure alpha strategy, we’re taking particular positions. in the current situation, we’re long equities an bonds. the all-weather strategy, reports out about a month ago that it’s underperformed.d bonds. the all-weather strategy,reports out about a month ago that it’s underperformed. it’s a strategy that supposed to perform in all weather. so what do you think has gone wrong or is there a longer term horizon that will change things? if you look at all weather, we would say it performed just as we expected. so if you step back and lookover 18 years, it’s had something like 8% performance annually net of fees. and it’s a strategy that you’ll hold over time. and if you’re holding risky assets and risk premiums come in, ultimately you’l see that in the performance. when we interviewed ray lio, your partner, he talked a lot about the great rotation from bonds into equities happening in the second half of the year. is that still on track in your mind given what’s going on with the bernank? if you think about what’s happened, the u.s. policymakers have manageddeleveraging in a very good way. and we’re beginning to return to normal conditions. when you begin to return to normal conditions, you would expect to see investors to begin to move out of the risk curve in terms of the assets they’re holding. that’s what we’ve seen over the last few years. we saw it particularly last month when people were selling their bond funds in great numbers. is that the beginning of something or was that just something tied to the movementthat you saw on the ten year? and i guess do you think the tenyear stays in this range where it is right now? well, i think what we would say is that we expect interest rates to rise over time.you have to keep in mind that the economy is still very overindebted. so very sensitive to change in interest rates and that’s why the policy dilemma is for the fmoc and federal reserve towatch that very carefully and you see that debate taking place.jim, what do you think of that? just trying to figures out wherethe ten year is headed from here. have we seen the greatestdislocation or are you going to see more shocks? i don’t know about rates. i’m curious, i have to justify the short side constantly when i present my business to people and i’m curious on the all-weather, one of the interesting things about the last 20 years or 18 years is that basically stocks and bondsboth went up at the same time. it’s been a great time in effect to have a balanced portfolio. and how do you navigate in anenvironment where only one is going up and the other is goingdown? well, the notion of balance and the notion in all-weather is the idea that you want to hold a portfolio of assets that haveperformed well under a variety of economic scenarios. and so that balance is going to have a set of assets that haveperformed well and raising growth, rising inflation. so you vary the asset allocation basically. and you’ll locate the portfolio and the risk of the portfolio in a way that — but you see what i’m driving at. if equities say are going up, do you think equities will do better than bonds and equities are going up 10% a year andbonds are going down 2% a year, net all in, and you’re 60/40,you make six points on the equities, you lose a little bit on bonds, but that’s not 8% or 10%, that’s 5% and change beforefees. it’s important to differentiate the notion of a balanced portfolio that’s going to perform over time relative to cash versus an active portfolio where you have a point of view on different asset class. so this is a portfolio of assets to perform well under any environmental scenario. you talk to investors all thetime. what is your sense in terms of where they’re placing money? well, i think just to the conversation jim and i were justhaving, i think there is a growing recognition that it’s very difficult to generate alpha in this environment, a lot of uncertainty. and so you see investors increasing and might having towards more of a balanced portfolio. do you own any gold? we own gold. what percentage of the portfolio? i won’t get into thepercentage, but we own it. okay. real quick because we do havejack lew coming on, dodd-frank. you were there in the midst ofthe crisis. you look at where we are coming up with the fifth yearanniversary. have we done enough, have we done too much, have we done too little? how do you see it? it’s still very much under way. i think it’s too early to tell in terms of the balance of the pros and cons. i think here’hat we know. we know we’re safer today in the sense that the banks are better capitalized, there has been focus on regulators. but we also know there has been an excessive amount of regulation and that’s just in the proces implemented. not even half of dodd-frank has been implemented. that is imposing a great deal of cost and there is a great deal of uncertainty. biggest risk that you guys think about. it’s the risk that you don’t see. the unknown risk that is the most challenging one. if you think about it from a policy making standpoint, we’re in the midst of a deleveraging. and you see those different case studies playing out in the u.s.,europe, japan. and the big risk is that policymakers get that one. and i think the highest risk of that being the case is in europe at the moment. okay. one final question for you. we had a guy on, mark leibovich, a book called this town and it’s about the revolving door. you went from washington to wall street.how do you think about that issue? well, i think that you can see the different models when you’re dealing with people fromdifferent countries. obviously there are pros an cons to each. i think there is a real vibrancy that was within our systemd cons to each. i think there is a real vibrancy that was within our system where you can draw talent from the outside and people come into public service for the sole reason to try to contribute.so i think there is enormous benefits of that and you see guys like that when guys like hank paulson come into be treasury secretary. but there is risk.