The Price That Matters Most.

by Karen Karniol-Tambour

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Author Introduction:

Karen Karniol-Tambour is Co-Chief Investment Officer at Bridgewater Associates, responsible for managing the company’s investment process. Karen oversees the systemization of Bridgewater’s research into trading strategies, manages the development of proprietary investment management models, directs the design and implementation of client investment strategies, and publishes timely market understanding to clients and global policy makers via Bridgewater’s Daily Observations. She also co-leads the firm’s Sustainable Investing efforts, overseeing the design of new investment solutions with both financial and sustainability objectives. Karen joined Bridgewater in 2006 after graduating from Princeton University. She serves on the boards of Search for Common Ground and Seeds of Peace. Karen is a World Economic Forum Young Global Leader, was included in Fortune’s "40 Under 40" most influential leaders in business in 2019, and has been named to Barron's list of "Most Influential Women in US Finance" for three years in a row. (Source: bridgewater.com)

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News Items enjoys a relationship with Bridgewater Associates that enables us, from time to time, to re-post commentaries from their client newsletter, Bridgewater Observations. We do so here because Ms. Karniol-Tambour’s analysis of “the transition to a higher cost of capital” is concise, well-written and persuasive.

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Karen Karniol-Tambour:

If I could point to one price that matters most for the economy and financial markets, it’s the bond yield. It signifies how expensive it is to move from present to future: in a low-yield world, if you have money, you should consume now and not wait; if you have no money, you can get some by borrowing since it is virtually free. In a high-yield world, if you have money, you should save it because it will grow; if you have no money, it is difficult to get more because you must earn a high return in order to be able to pay it back. The bond yield is the relevant cost of capital, the baseline expected return of any longer-term financial investment, and the hurdle any real economic idea has to clear for profitability.

We’re in the midst of a transition from an exceptionally low cost of capital to more moderate levels. That process is underway but will likely take a few more years to fully complete. Bond yields still need to rise to set a price of capital that is sustainable for the world we’re in, compensating for structurally higher fiscal stimulation and inherently inflationary spending on things like AI investments, remilitarization, rebuilding supply chains to reduce reliance on China, the energy transition, and energy security.