As you know, one of the major issues I am focused on as CIO is how America’s shift toward modern mercantilism will affect the global economic order. As the events of the past few weeks indicate, it is sinking in for US trading partners and traditional allies that they will not be able to rely on the US as a consistent partner. Germany pushing through a major defense and infrastructure bill is indicative of where we’re going— with each major US partner finding a new way to live in a new world order.
To us, this looks like the type of secular shift that markets will be slow to fully price the ramifications of, similar to how markets took years to adjust when the global financial crisis ushered in a global deleveraging and COVID accelerated the shift to fiscal-monetary coordination (Monetary Policy 3). We believe this shift raises questions and risks that investors need to grapple with.
A few weeks ago, I shared my thoughts with our clients on the risk this shift creates for US assets. Since then, US equities entered correction territory and trade tensions have continued to ramp up. Below, I’ve included a brief summary of this research. I hope you find it useful.
Greg Jensen
Co-Chief Investment Officer, Bridgewater Associates
Current US asset pricing requires global cooperation and unconstrained policy makers. Both are at risk.
Overall, the environment for US assets has gotten meaningfully more dangerous for the following reasons:
- US asset prices require a large US capital surplus, because in order to sustain the US’s equity market cap relative to the rest of the world, the US equity market needs to capture 70% of every dollar saved into global equities. The push to reduce trade deficits and escalate trade tensions with key US allies puts this system at risk. Foreign holdings of US assets tower over US holdings of foreign assets. That all could change in this new world.
- US companies need global cooperation. American corporations dominate global profits relative to the US economy’s share of global GDP, and they need the rules in the rest of the world to allow them to do that. US companies’ global profit share is discounted to grow from here, which will be increasingly difficult in a less-globalized world, particularly given the risk that countries facing tariffs could focus their retaliation toward multinational US companies operating in their economies.
- Strong US profit growth has been, in part, the direct consequence of rising fiscal deficits—this dynamic will reverse if we take the commitment to cut deficits by Treasury Secretary Scott Bessent and Elon Musk’s DOGE seriously and if private sector borrowing doesn’t offset the reduction in government borrowing.
- The Fed is starting to face more of an inflation constraint as disinflation has stalled. Inflation is still low enough that the Fed can likely ease in response to growth weakness, but the Fed can no longer preemptively ease before growth cracks—removing a key bullish pressure that supported asset prices late last year.
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