22 BARRON’S December 7, 2020
the movies, a sporting event, or a party, will become
commonplace again once the disease is under control.
What are the most important policy issues coming
out of the pandemic?
I hope we will be discussing preparedness, because it
seems we were unprepared for this pandemic in terms of
personal protective equipment and other things. Public
health has been starved for resources in the past decade
or two, and I hope we’ll double down on that, because we
could easily have another pandemic or virus that threat-
ens to be a pandemic.
Also, the pandemic has been much harder on some
socioeconomic groups than others, and I hope that will
continue to get attention. On the other hand, I hope the
dissatisfactions of all groups that expressed their senti-
ments, especially through the last election, will get atten-
tion. There is a big group in the middle of the country that
thinks it hasn’t received enough attention from presidents
of both parties. That’s a big issue, because we don’t want to
go forward forever as if the U.S. is two different countries.
What other important policy issues need attention?
Having enough economic growth to support job growth.
We’re in a lower-growth mode than we’re used to. This
country and the world grew at a great rate in the latter
half of the 20th century, and the outlook is for less
growth than that. Then we’ll have the increasing effects
of automation and digitization. As a combined result,
we’ll have fewer jobs. I worry about where the American
whose main asset is a strong back is going to find work,
because we don’t need that many laptop operators.
You have to worry about our debt load, as well. What
are the long-term ramifications of what the Federal Re-
serve and Treasury have been doing by piling up addi-
tional deficits and debts? I don’t have an answer, but you
can’t inject trillions of liquidity into the economy, as we’ve
been doing this year, and not have an effect.
Turning to investing, what is your big-picture view?
In the years leading up to 2020, there were some major
uncertainties—macroeconomic, political, and geopolitical.
Most assets offered low prospective returns relative to
their history. Most assets were fully or highly priced, and
many people were engaging in what I call pro-risk behav-
ior to try to get a good return in a low-return environment.
That’s not a great combination of factors, and it left the
markets vulnerable to a shock.
When the pandemic hit in March, the markets went
down, the risk-taking stopped, the prospective returns
became high again, and very few assets were fully priced.
So we turned aggressive at Oaktree. But the Fed and Trea-
sury quickly ended that condition with monetary and fis-
cal stimulus. By the end of March, the markets were recov-
ering, and now we are back to where we were a year ago—
uncertainty, prospective returns that are even lower than
they were a year ago, and higher asset prices than a year
ago. People are back to having to take on more risk to get
return. At Oaktree, we are back to a cautious approach.
This is not the kind of environment in which you would
be buying with both hands.
In your bookMastering the Market Cycle,you dis-
cussed cycles and attitudes toward risk. Where
do we stand on those issues now?
Fear of missing out has taken over from the fear of losing
money. If people become ultra-risk-averse, that’s how you
get great bargains. Because they’re risk averse, they won’t
buy. They sell at low prices. But if people are risk-tolerant
and afraid of being out of the market, they buy aggres-
sively, in which case you can’t find any bargains. That’s
where we are now. That’s what the Fed engineered by
putting rates at zero.
You’re not a stock picker, but do parts of the stock
market look appealing?
During the pandemic, my son and his family have been
living with us. He loves growth stocks, and has con-
vinced me that the ones that perform as expected are
probably cheap or certainly reasonable. But we won’t
know that for 10 or 15 years.
Take one of the great tech companies; let’s not be spe-
cific. People think it will grow its revenues at maybe 15%
a year for 15 years. That company also has the ability to
increase its profit margins if it wants to. If it does both,
earnings will multiply many times. The companies that
can do what is expected of them will probably make peo-
ple a lot of money, even from these prices, as long as you
get the right ones.
On the other hand, when you look at the nontech
companies, there are a lot of areas where business mod-
els are severely challenged by the pandemic and other
trends. If you can find among those companies some
where the reality isn’t going to be as bad as the expecta-
tion, then you can make money in those holdings. It is all
a matter of looking for situations where the merits are
underestimated by investors.
How do other asset classes compare on a relative-
value basis?
The capital-market line includes Treasuries, high-grade
bonds, high-grade stocks, high-yield bonds, aggressive
stocks, and private equity. There is a progression. As you
increase the perceived risk, you increase the expected re-
turn. But then the Fed lowered the risk-free rate, and ev-
erything else followed. There aren’t asset classes that are
standouts in the sense that this is fairly priced, but that is a
bargain. These asset classes are in a fair relationship to one
another. The prospective returns are low on everything.
On a personal note, what place would you most like
to visit when the pandemic ends?
Majorca. We really love it, but weren’t able to go this year.
Thanks, Howard.
—Lawrence C. Strauss
KAREN KARNIOL-
TAMBOUR
Director of Investment Research,
Bridgewater Associates
Westport, Conn.
Barron’s: What trends will dominate the investment
world after the pandemic?
Karen Karniol-Tambour:When you get to a point
where interest rates are zero and you’ve already printed
a lot of money, the most valuable thing you can do to get
the economy moving is what we call Monetary Policy 3,
or MP3: You need to have coordinated monetary and
fiscal policy. They can be extremely effective together,
but there are huge implications for investors.
The most important mechanism that underlaid every-
thing in the past 60 to 70 years was that monetary policy
worked through interest rates. Now it doesn’t. The most
direct implication [relates to] asset allocation. The stan-
dard investor owns a stock/bond portfolio that’s some-
thing like 60/40. Historically, most of the risk was in
stocks, and bonds were a growth diversifier. If growth
slowed and the market underperformed, you had the
backstopof monetary policy; lower rates meant that
bonds would perform well. That basically stops working
when bond yields are so low that they can’t fall much
further to offset a large decline in stock prices.
What offers the best diversification today?
[Central-bank policies] will create enough liquidity that
assets such as gold and inflation-linked bonds will proba-
bly still be good to hold. And if they do well and succeed,
then stocks will do great, so you don’t have to worry.
What does more fiscal spending mean for investors?
The fact that the U.S. election resulted in less of a Demo-
cratic majority in Congress and a Democratic president
would have mattered so much less at any other point in
history. Now it is extremely important because the ability
to get legislation passed is so important if fiscal policy is
more important than it has been in 70 years. Politics mat-
ters more to the market because fiscal policy is the most
powerful lever. There are also structural reasons [for poli-
tics to matter] if we look at the global competition with
China. So much of what drives China’s economy is [gov-
ernment] policies—and a top-down industrial policy. It is
hard to see how that doesn’t permeate other countries.
Are you suggesting the U.S. will move toward a
government-directed industrial policy?
It may not happen in five years, but there will be a shift
in how the U.S. and Europe stay competitive, and a real-
ization that it means more government involvement in
industries and technology. Competitiveness policies will
have to matter more to the market in the next five years.
China’s new five-year plan came out around our elec-
tion. What they are saying about dual circulation [an eco-
nomic strategy that emphasizes increased domestic de-
mand, self-reliance for high-tech goods, and selectively
opening up the economy to foreign companies] is very im-
portant for investors to understand. They are saying they
are going to think about whether their domestic ecosystem
is self-sustaining. [They] aren’t giving up on their second
ecosystem of exporting abroad. They are thinking more
holistically. That is a bigger competitor and competitive
ecosystem than the U.S. has faced since World War II. It’s a
game changer, and hasn’t been internalized by investors.
What will be the greatest investment opportunity
post-Covid?
Diversifying into China. In five to 10 years, unlike during
the Cold War with the Soviet Union, investors can have a
stake in both sides. You can say, “I’m sure the U.S. is go-
ing to come out on top no matter what, and U.S. technol-