Since its founding by Ray Dalio, Bridgewater has grown to about $150 billion in discretionary client assets as of Dec. 31.
Ms. Patterson, one of the most powerful women on Wall Street, also discussed Bridgewater's stance on China, a country that has captured Mr. Dalio's intense interest. She said Bridgewater is staying on top of the tensions between the West and China. "When we look at what's priced into Chinese assets today, I'd say you really see (it) reflected already, the expectation for a very moderate recovery, if any, and some geopolitical risk premium, if you will."
Ms. Patterson also discussed her new life at Bridgewater and its radical transparency culture. Lastly, P&I asked for her advice for up-and-coming investors and strategists in a predominately male industry.
"I think if you have a point of view, don't wait to be perfect, speak up and say, 'Look, I'm not 100% sure, but here's how I see it.' Get yourself in the game," Ms. Patterson said.
For more of Ms. Patterson's views and opinions, please read on for the last installment of this Face to Face. Questions and answers have been edited for style, clarity and conciseness.
Q: This has been an unusual environment in financial markets and the global economy … I'd like to touch on the volatility we're seeing everywhere.
A: With a lot of uncertainty around the Fed, with high uncertainty around inflation, a lot of changes in policy, interest rates, rate differentials, it's no surprise that we're seeing more currency volatility. That is something we have not had for the last decade or two, really.
A lot of investors haven't really been thinking about, "Do I need to hedge currency risk?" I think that's back. You do need to think about hedging currency risk.
Two reasons why the volatility can hurt you. The currency you're denominated in. I know your readership is very global: Depending on your base currency, what you're denominated in, the difference in your returns just in the last 18 months could have been 30 percentage points.
In the 1970s, it was 60 percentage points. This can matter a lot, what currency you choose or what currency you hedge to can matter as much as the assets you own. That's the big deal. The second smaller deal, but still material, is how currency volatility passes through into the assets you own, primarily equities.
We've seen, for example, with the dollar strength over the last several months, a bigger and bigger hit to U.S. multinationals and we have seen them underperform more domestically oriented companies. Thinking about, what exposures do I have within the assets I own? Which equity markets? What types of companies, etc.? Do I need to hedge any of that out or do any kind of currency overlay? And then bigger picture for your total portfolio, what's my base currency? Do I need to be hedging some or all of that back to a different currency over the coming period? So strategic currency hedging, I think is back on top of our concern list for our clients and something we're talking to them about a lot.
Q: What are you exposed to and what are you avoiding?
A: In our Pure Alpha strategy today, we are positioned for an environment where growth slows more than expected and inflation moderates, but not as fast as what's discounted. In that environment, I think the asset class, in my opinion, that's most exposed is equities. I understand, last six weeks or so, we've had a really nice equity rally, our view is that it is a bear market rally or is likely a bear market rally and we've seen those many times before in bear markets.
If the Fed wants to get to its inflation goal, it's going to have to tighten enough to truly slow demand. If we slow demand, we're going to have to see earnings expectations come down. That hasn't happened yet. If earnings expectations come down, earnings growth slows, equities are going to have another leg lower. That's what we think is likely ahead of us. So we're bearish on equities broadly, including the United States, including Europe.
We do see some opportunities in markets that are facing less inflation risk and where valuations are less aggressive and where positioning is less aggressive and that would include places like China, but also Japan. That would be one tilt in our portfolios today.
I'd say we've gotten more neutral on the dollar. We have been more exposed to dollar strength and now we think there's increasing vulnerabilities around the dollar. We're not bearish per se, it tends to be currency-specific, but when you think about the dollar, the financing needs the U.S. has, our current account deficit, our timely estimates have that around 5% of GDP. That's big.
At the same time, the dollar has increased in value a lot on a trade-weight basis, so it's expensive. On a positioning point of view, foreign investors' exposures to the U.S. today are the highest we've seen in a few decades.
To fund this current account deficit, to get the capital flows in to meet the current account hole, you need foreign investors to continue adding to already very large exposures and it's possible, but it seems like that's getting less and less likely. It's just a vulnerability that we want to keep an eye on and make sure we're thinking through with our individual positions. Volatility isn't always just dollar strength, it can be the dollar swinging around both ways. I think investors need to be prepared for that in the coming months and quarters.
Q: You've brought up China several times during our conversation. The biggest China bull on Wall Street is Mr. Dalio. Have escalating tensions between the U.S. and China affected Bridgewater's investments in China?
A: We look at geopolitical and political risk across every position we have in our portfolio. Political risks in the United States, political risks in Britain, in Europe, in China. And I'm not trying to diminish what's happening in China. I'm just saying it's something that's part of our process that we're going to do every day with every position we have. Obviously, we are trying to stay on top of the tensions between the West and China. And when we look at what's priced into Chinese assets today, I'd say you really see reflected already the expectation for a very moderate recovery, if any, and some geopolitical risk premium, if you will.
And when we think about Chinese equities, we are seeing more and more stimulus from the government. In fact, just recently a rate cut. But in addition to that, a greater push on infrastructure spending, trying to provide some level of support to the property market without flooding the market. We think we are going to get probably more of a recovery than is expected, albeit a moderate one.
Even with that risk premium, we think that Chinese equity valuations today are attractive. So we think that this is a way to get diversification in a portfolio, we like having a position in Chinese equities, but do we manage that risk? We do, as we do with every other position in our portfolio.
Q: A follow-up to that, how should U.S. investors consider China as an investment given that it's a huge market, but with many ESG troubles? How do you reconcile that?
A: I think this is a question that depends, if you're looking at your portfolio in two dimensions, risk, return, or in three with sustainability. If you're looking at it from a two-dimensional point of view, I think China is a very additive allocation in a portfolio. Their cycle is so different from most of the developed world where we're seeing the Fed tightening, central banks tightening, we have growth starting to slow, very high inflation rates. They have a very nascent recovery, low inflation and they're stimulating.
So you're getting very different trends in the asset markets and so having both in a portfolio can get you a better risk-adjusted return. So that is a good thing. If you are a sustainability-focused investor, then I think it's going to come down to how you're approaching it. We use the United Nations Sustainable Development Goals, SDGs. We're looking for companies that are meeting those goals or are on a firm path to meeting those goals. And that's how we're trying to approach it. We'll look across every country to see where we can find opportunities that are in line with those principles.
Q: In terms of China, do you have conversations with Ray on the global economy and on China? How have you both conferred on that front?
A: Ray Dalio has transitioned to more of a CIO, mentor, for us at the firm. We still enjoy having conversations with him, hearing his perceptions about the world, getting his perspective, running our thoughts by him. We're so grateful to have him there for that. But with that transition, we wanted to make sure we had the next generation of CIOs ready to drive our portfolios forward.
Obviously we're lucky to have Greg Jensen and Bob Prince, who have been with the firm for a very long time at the wheel. But we also have now an investment committee of senior investors, myself included, who are meeting regularly to talk about positions in our portfolio, to talk about new insights we have about the economy, questioning things, debating things.
We have some incredibly lively debates. That is my very diplomatic way of putting it. But that's one of the things I love about Bridgewater is that it is a meritocracy, it is radical transparency. We have to push back on each other, we have to question everything to make sure we get to the best answer, regardless of who has the answer.
Q: Well, you don't want an echo chamber.
A: Absolutely not. That is not how you get great performance. The investment committee has been, I think, a really great evolution for the company with Ray moving into a new place in his life and a new place in his career and his relationship with Bridgewater. I think it's allowing us to continue to have a really sound, robust thought process and debate to get to the best outcomes for our portfolio. And even then, we know we're going to get it wrong plenty.
Q: You've been with Bridgewater since 2020, how's it going?
A: It's a great question. Look, I went there for a reason. When Ray asked me to consider joining Bridgewater, I thought, "OK, that's going to be a challenge." I went in eyes wide open. But that's exactly why I went. I love trying to understand the world, I love researching, I love digging deep into things and I know the reputation of this company, that it would be challenging, that I would grow as a researcher, as an investor and almost three years in, I am not disappointed. Sometimes it can be very humbling when you've had a long career like I have and then suddenly you feel like you're back at square one, proving yourself. But it does make you think more deeply and not assume things too quickly and I'm grateful for that. No, it's wonderful.
Q: Why is it humbling? If you can just elaborate on that.
A: Things you think you're good at, sometimes people will say, "Yeah, that was all right. That was at the bar."
And you have to take a step back and say, "OK, do I agree with that feedback? Is there something I could be doing better or differently?" And you don't have to agree with it, but often after you have a little time to process, you realize there's a kernel of truth and there is something you can get out of that feedback to improve on and get better. I think as long as you can trust your colleagues, that they're sharing that kind of feedback because they care about you and they want you to be better, it's so much easier to accept it. If you work somewhere where you can't trust your colleagues and you don't know if they're telling you what they really think or want to help you, it's a lot harder to engage in that kind of environment. But I truly believe that my colleagues, when they give me constructive feedback, it's because they want me to be the best I can be.
Q: What has surprised you the most about this cycle and just about what has happened over the last three years?
A: It's a fascinating question, there's so much that surprised us over the last three years. The thing that surprised me in a happy way over the last three years is the technology and innovation. Think about it, after the pandemic hit, within days, not even weeks, my entire company was spread all over the world and we were on Zoom and nothing changed. We continued to do our jobs and talk to each other and keep our community strong. We had vaccines within quarters, not years, that's extraordinary. I think that's a really positive surprise vs. what might have happened.
On a less positive note, is the polarization we've seen in the U.S. I started my career as a journalist and my first job was in Washington covering Capitol Hill. I remember clearly back then the saying that stuck with me that, "It's the economy, stupid." If people have money in their wallets, they tend to vote for the incumbent. And here we are and we get the biggest fiscal and monetary stimulus since World War II and it doesn't really bring the country together at all. It wasn't the economy, it was something else. And then I think about, well, what do you do with that? If we're in a different paradigm, how do you bring the country together? That's something that surprised me and worries me.
I'd say on a similar vein, a land war in Europe in our lifetimes was a huge, unfortunate surprise. I think about that, not just in terms of the structural and cyclical implications for Europe, but what it means for multilateralism. Forget the G-8, which was the G-7 plus Russia, that's dead. I'm not even sure how effective today with the different factions forming around the world, if a G-20 or a G-7 will even really be as functional as they used to be. What does that mean for shared global challenges? So that's a worry.
The last surprise I had, which is less of a worry, more of an observation is that I think China has moved into a new policy paradigm that perhaps investors don't adequately appreciate yet. In the last several decades, the standard procedure was if you hit a road bump, China would open the taps, flood the system with liquidity and growth would pop back. It's been very clear during the pandemic that they said, "No, we want quality growth, we don't want to flood the system." And that means they're going to accept relatively more modest rates of growth over longer periods of time. That's important to think about for China assets, but it's also important to think about for all the second and third derivative impacts it has for global assets and economies that are tied to China. I think it's a pretty big deal.
Q: You are one of the most important women in finance and I wanted to ask you if you have any advice for up-and-coming investors and strategists, especially since we are in a male-dominated industry.
A: For men and women both, read, read, read, read. I read aggregators, I read blogs, I read newspapers, I read a ton of books, especially history. I don't think history repeats, but it rhymes and you can learn a heck of a lot by understanding how the past unfolded and why it unfolded the way it did. Publications like yours are important to stay on top of industry trends. The Economist magazine is a good one-stop shop for a global macro. But anytime I get this question, that's always my first response.
I think for women, in particular, there's no reason to approach it any differently, being a woman than a man, you do your homework, you know your content and then you use your voice. I think the challenge that I still see is women worry that unless they have understood the question from every single angle and they're 120% sure of the answer, they don't always speak up. I'm generalizing obviously, but I don't see that happen as frequently with men. And I think if you have a point of view, don't wait to be perfect, speak up and say, "Look, I'm not 100% sure, but here's how I see it." Get yourself in the game.
