Modern mercantilism and AI continue to drive nearly every big move in markets. Today, the pressure to grab resources as a result of these forces is accelerating, creating acute supply/demand mismatches in goods critical for national survival. At this rate, the world could soon be unrecognizable from the recent past, creating scope for rapid asset repricing.
In our recent CIO letter to clients, we describe how we’re processing these ongoing shifts and the implications for investors. Below, we share some condensed highlights.
Bob, Greg, and Karen
Co-Chief Investment Officers, Bridgewater Associates
The Accelerating Resource Grabs in AI and Modern Mercantilism
1. Modern mercantilism is driving the increased weaponization of chokepoints, creating acute commodity shortages and accelerating the global resource grab.
The US’s escalations in Venezuela, Greenland, and Iran are the product of a world governed by realpolitik with less deference to international norms, and in turn are catalyzing a further breakdown in the US-led system of alliances and an accelerating bid for armaments and commodities.
How the war in Iran plays out from here remains highly uncertain, but enough disruption has occurred, and the process of resuming shipments will be slow enough, that the commodity shock will persist for some time. But despite the still-wide range of outcomes for the war, the strain the conflict is putting on US alliances is more apparent, and the value of self-sufficiency in all things has become crystal clear. US allies are moving quickly to establish such independence.
2. In the AI ecosystem, the resource grab is broadening out.
AI has reached the Barnes & Noble moment. With the latest release of Claude Code, an upstart competitor has created existential risk for major businesses, much as Amazon posed to Barnes & Noble. Markets have started pricing in the risk to application software companies, and companies will either coevolve with AI or face disruption. Just as the original Barnes & Noble moment led to accelerating investment in the dot-com boom, we expect a broadening capex boom as many businesses increasingly realize the imperative of investing in AI. We suspect we’re only in the early stages of market pricing of disruption risk.
AI’s bet on science has paid off, and the profits are fueling a further wave of capex and a looming shortage of compute, which will have to be rationed. The leading labs bet that with continued exponential scaling-up of compute used in pre- and post-training, the models would keep improving. Agentic AI and tools like Claude Code are now generating significant profits and creating an explosion in inference demand as business adoption rises. There will not be enough supply to meet this demand while continuing to train the next generation of models, and how companies respond to these shortages and where they choose to prioritize compute will shape the next phase of the AI boom.
3. The challenges of this environment create a need for real assets relative to financial assets.
Since 2020, countries have been increasingly confronting crises that demand access to physical assets, whether for defense, energy security, or AI infrastructure. And public savers in particular are finding the difficulty of exchanging claims on future cash flows (i.e., financial assets) for critical goods (i.e., armaments in a war) at good prices. US tech companies are deploying their vast balance sheets to bid up critical tech inputs needed for the AI build-out. Adjusting to this new reality requires a shift in saving behavior following decades of continually more saving in US financial assets, which worked in an era where the primary crises were financial in nature. For investors, the cash flows tied to producing, securing, and controlling these critical resources have become more valuable as demand for these resources has risen, while hard assets like gold and real estate offer diversification against the vulnerabilities of purely financial assets.
4. As populism, mercantilism, and the fallout from higher energy prices all create pressure for more fiscal spending, cash looks particularly unattractive.
Policy makers will likely respond to the combination of a secular need to spend and already-strained government balance sheets by reducing the value of money to make debts easier to service rather than by imposing politically painful tax hikes or spending cuts. The limits of this approach are inflation and currency weakness, and those limits are drawing nearer, creating a complicated environment for financial assets relative to cash.
A period of rapid change calls for diversification and agility. It’s clear that we are in a transformative period, but how any of these axes of change plays out remains highly uncertain. Diversification can bolster portfolio resilience to the wide range of risks, and agility enables investors to reposition as the picture of the world we’re heading into becomes clearer.
This research paper is prepared by and is the property of Bridgewater Associates, LP and is circulated for informational and educational purposes only. There is no consideration given to the specific investment needs, objectives, or tolerances of any of the recipients. Additionally, Bridgewater's actual investment positions may, and often will, vary from its conclusions discussed herein based on any number of factors, such as client investment restrictions, portfolio rebalancing and transactions costs, among others. Recipients should consult their own advisors, including tax advisors, before making any investment decision. This material is for informational and educational purposes only and is not an offer to sell or the solicitation of an offer to buy the securities or other instruments mentioned. Any such offering will be made pursuant to a definitive offering memorandum. This material does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors which are necessary considerations before making any investment decision. Investors should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, where appropriate, seek professional advice, including legal, tax, accounting, investment, or other advice. No discussion with respect to specific companies should be considered a recommendation to purchase or sell any particular investment. The companies discussed should not be taken to represent holdings in any Bridgewater strategy. It should not be assumed that any of the companies discussed were or will be profitable, or that recommendations made in the future will be profitable.
The information provided herein is not intended to provide a sufficient basis on which to make an investment decision and investment decisions should not be based on illustrative information that has inherent limitations. Bridgewater makes no representation that any account will or is likely to achieve returns similar to those shown. The price and value of the investments referred to in this research and the income therefrom may fluctuate. Every investment involves risk and in volatile or uncertain market conditions, significant variations in the value or return on that investment may occur. Investments in hedge funds are complex, speculative and carry a high degree of risk, including the risk of a complete loss of an investor’s entire investment. Past performance is not a guide to future performance, future returns are not guaranteed, and a complete loss of original capital may occur. Certain transactions, including those involving leverage, futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Fluctuations in exchange rates could have material adverse effects on the value or price of, or income derived from, certain investments.
Bridgewater research utilizes data and information from public, private, and internal sources, including data from actual Bridgewater trades. Sources include BCA, Bloomberg Finance L.P., Bond Radar, Candeal, CBRE, Inc., CEIC Data Company Ltd., China Bull Research, Clarus Financial Technology, CLS Processing Solutions, Conference Board of Canada, Consensus Economics Inc., DataYes Inc, DTCC Data Repository, Ecoanalitica, Empirical Research Partners, Entis (Axioma Qontigo Simcorp), EPFR Global, Eurasia Group, Evercore ISI, FactSet Research Systems, Fastmarkets Global Limited, The Financial Times Limited, FINRA, GaveKal Research Ltd., Global Financial Data, GlobalSource Partners, Harvard Business Review, Haver Analytics, Inc., Institutional Shareholder Services (ISS), The Investment Funds Institute of Canada, ICE Derived Data (UK), Investment Company Institute, International Institute of Finance, JP Morgan, JSTA Advisors, LSEG Data and Analytics, MarketAxess, Medley Global Advisors (Energy Aspects Corp), Metals Focus Ltd, MSCI, Inc., National Bureau of Economic Research, Neudata, Organisation for Economic Cooperation and Development, Pensions & Investments Research Center, Pitchbook, Rhodium Group, RP Data, Rubinson Research, Rystad Energy, S&P Global Market Intelligence, Scientific Infra/EDHEC, Sentix GmbH, Shanghai Metals Market, Shanghai Wind Information, Smart Insider Ltd., Sustainalytics, Swaps Monitor, Tradeweb, United Nations, US Department of Commerce, Verisk Maplecroft, Visible Alpha, Wells Bay, Wind Financial Information LLC, With Intelligence, Wood Mackenzie Limited, World Bureau of Metal Statistics, World Economic Forum, and YieldBook. While we consider information from external sources to be reliable, we do not assume responsibility for its accuracy.
This information is not directed at or intended for distribution to or use by any person or entity located in any jurisdiction where such distribution, publication, availability, or use would be contrary to applicable law or regulation, or which would subject Bridgewater to any registration or licensing requirements within such jurisdiction. No part of this material may be (i) copied, photocopied, or duplicated in any form by any means or (ii) redistributed without the prior written consent of Bridgewater® Associates, LP.
The views expressed herein are solely those of Bridgewater as of the date of this report and are subject to change without notice. Bridgewater may have a significant financial interest in one or more of the positions and/or securities or derivatives discussed. Those responsible for preparing this report receive compensation based upon various factors, including, among other things, the quality of their work and firm revenues.