We are now firmly in a new macroeconomic and geopolitical paradigm: modern mercantilism, defined by the state’s dominant role in enhancing national wealth and strength—pursued through unilateral action in support of these goals, including tariffs to close trade deficits, the promotion of strategic sectors and national champions, and transactional and at times outright coercive foreign policies.
AI is also progressing at a staggering pace, and while its transformative impact has barely hit, already the exponentially rising sums spent on developing the technology have started to dominate growth and change the shape of the economy.
In our recent CIO Letter to clients, we describe how we’re processing this new investment regime and some of the critical questions we’re watching as these forces are powering a “misshapen” expansion toward its limits. Below, we share some condensed highlights from that letter, laying out our current global outlook.
Bob, Greg, and Karen
Co-Chief Investment Officers, Bridgewater Associates
Looking to 2026, the forces of modern mercantilism and AI are likely to continue motivating new spending, propelling the expansion forward:
- Modern mercantilism will continue to generate stimulative fiscal spending, supporting almost every economy in 2026. In response to the US shift to build a more domestically oriented, self-sufficient economy, more governments are shifting to modern mercantilist policies, taking on direct roles in enhancing each of their country’s wealth and strength by investing in self-sufficiency, defense, and infrastructure.
- AI capex spending will continue to grow exponentially, reshaping the economy. The largest corporate players believe that they are in an existential race to build the fountain of youth; some of them believe that winners could reach civilization-defining progress within the next 2-3 years. Straightforward game-theoretic calculations make it unacceptable for these companies to accept falling behind rivals by even a few months of progress, so one company’s decision to spend more aggressively on AI capex compels others to follow.
The complexion of this expansion is creating a misshapen economy that is worse for workers and more inflationary.
The forces of modern mercantilism and technological progress are creating an economy that is structurally quite different than the economy of the past few decades:
- Growth powered by AI capex spending requires relatively few workers per dollar spent, and the demand for workers it generates is hyperspecialized, localized, and doesn’t flow through to the broader labor market.
- Exponential AI capex growth will put increasing inflationary pressures on the physical world. The limits to AI capex spending won’t come from demand but from the ingredients needed in the physical world: chips, electricity, scientists, etc.
- The shift from globalization to modern mercantilism is unambiguously inflationary. Rebuilding supply chains to enhance self-sufficiency and resilience requires shifting away from the lowest-cost producers and creating “double dos” (spending to build out the same capabilities that already exist elsewhere).
This adds up to what we suspect is a uniquely large gap that is opening up between aggregate conditions conveyed in GDP growth rates and weaker conditions facing most households. While AI will ultimately become deflationary, the inflationary impulse from its physical build-out could get out of hand before disinflationary productivity impacts from AI hit the broader economy.
The longer these dynamics go on, the more the risks build.
- The longer the economy is misshapen by these forces, the more likely that policy will end up being too easy, creating more risk of a bubble. The expansion being worse for employment and households than typical will encourage fiscal policies supporting the real purchasing power of households and discourage central banks from tightening. Easy policy risks further accelerating speculative equity market activity and the frenzy of deal-making and AI investment that’s already underway, creating a ripe environment for a bubble, and risks enabling a cyclical overheating.
- With fiscal policy playing a bigger role, the risk of running into fiscal limits is also increasingly salient. There’s no magic number that determines what level of debt or deficit is sustainable; rather, it depends on how willing buyers are to hold an ever-expanding supply of debt and what it takes to entice the next marginal buyer. Developed world economies haven’t hit these limits, but many are getting dangerously close.
- These circumstances may also create political backlash with a range of potential consequences. Governments around the world are increasingly willing to intervene in the economy to engineer desired economic and political outcomes, and we see populist movements continuing to gain ground over traditional political parties in many countries. It is also easy to imagine the gains from AI being distributed in a way that leads to backlash and taxation/nationalization. An economy that’s worse for workers creates the potential for a political environment where redistributing gains toward the rest of society becomes a priority.
The critical questions we’re watching to determine how these dynamics play out:
- How much productivity this new regime can deliver, and how quickly
A sustained pickup in productivity growth can justify the massive amount of investment in AI, allow the economy to outgrow its fiscal burdens, and reconcile the strong growth priced into stocks with the low inflation priced into bonds. When we look at the pace at which the science of AI is accelerating, we can easily imagine that the eventual boost to productivity from AI will meet and exceed expectations—but we can also imagine many paths where it disappoints, at least in the short term. - How much bad investment it generates along the way
The potential rewards of a step change in economy-wide productivity growth are also massive, but even if ultimately achieved, some of the investments being made along the way will end up being uneconomic. The question is what share of the investment will end up being bad, and how much ends up being comfortably absorbed by companies that come out as winners, rather than taking down companies that ultimately emerge as losers. - How the benefits will be distributed
The question of how productivity benefits will be distributed is critical to shaping the next chapter of economic, political, and investment outcomes. For example, the productivity benefits of AI could be captured by a small group and hit the labor market disproportionately in ways that exacerbate the gap we already see between the aggregate economy and conditions facing households and workers, leading to sharper political consequences. And very strong initial investment gains might ultimately be eroded by government action (e.g., antitrust aimed at preventing too much concentration of power in the firms winning the AI race) or zealous competition among tech firms that erodes profit margins and shifts a larger share of the benefits to consumers.
How to manage money in a misshapen expansion when the risks are piling up.
Today’s environment especially calls for diversification and agility. 2026 may see a tightening of monetary policy in response to sticky inflation, a political backlash against AI that hurts investors, the imposition of fiscal limits, or a shift in who is leading in the AI race to companies that investors are less exposed to (and associated losses in companies where investors are highly exposed). Being prepared for this range of outcomes is the key to preserving and growing wealth. When we think about allocating capital in the new year:
- We see an OK environment for assets in most economies, which calls for spreading risk much more evenly than today’s market-cap weights would imply. Central banks are through the phase of proactive easing that supported assets in recent years, but they are unlikely to need to tighten much absent a larger inflation shock. This average outlook for diversified asset mixes is pretty similar across regions today, which favors spreading risk broadly across the globe. This contrasts sharply with market-cap portfolios, where the majority of risk is concentrated in the US, leaving them susceptible to a US-focused shock and with little exposure to opportunities outside of the US. One of the primary concerns we hear from investors about diversifying across geographies is the worry that shifting away from US markets will sacrifice exposure to potentially transformative AI. We believe this concern is merited and that it is important to have a strategic exposure to AI. However, there are ways to be more geographically diversified without sacrificing AI exposure by starting with a geographically diversified asset mix and adding intentional AI exposures.
- We see growth accelerating, creating headwinds for bonds relative to equities. Across most economies, we expect growth to strengthen, fueled by a combination of broad fiscal expansion, AI capex, and the flow-through of past easing and wealth gains. This growth is likely to support corporate profits and risks stoking inflation at the same time that the issuance to finance that growth is likely to push up yields. With limited room for central banks to lower rates proactively, and with quantitative tightening continuing in Europe and Japan (with global spillovers), we see a challenging environment for bonds and favor equities.
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