David McCormick — co-chief executive of the world’s largest and arguably most successful hedge fund and a former Treasury Department official — has a unique vantage point to judge both government policy and financial markets, which he said has left him less than optimistic about growing trade and geopolitical tensions between the U.S. and China.
Before joining Bridgewater Associates in 2009, McCormick served as undersecretary of the Treasury for international affairs during the George W. Bush administration, where he got an upfront look at U.S. trade policy in action, as well as the politics of crisis management during the financial crisis.
The relationship between the U.S. and China will be “the defining relationship of our time,” McCormick said, during an interview at the Bloomberg Invest conference Tuesday in New York. He argued that the Trump administration is right to drive a hard bargain over the issue of intellectual property theft, with China and the rest of the world. “That challenge is a very profoundly real challenge,” McCormick said, adding that its a problem with two facets: economic and military.
Worries over an escalating U.S.-China trade war were blamed in large part for a stock-market retreat in May that saw the S&P 500 SPX, +1.64% and Dow Jones Industrial Average DJIA, +1.67% fall more than 6%. Stocks extended a decline on Monday in a tech-led selloff tied to worries about increased regulatory scrutiny of major industry players, but rebounded sharply on Tuesday on more upbeat comments on trade negotiations by Chinese officials as well as remarks by Federal Reserve Chairman Jerome Powell that were taken as a sign the central bank is leaving the door open to rate cuts.
If the U.S. is lax about its rivals stealing intellectual property, “it ultimately creates an indigenous capability somewhere else, and there are economic costs associated with that,” he said.
“The other challenge is new technologies are very difficult to define as commercial or military. Many of them are dual use,” he said, adding that policy makers must be vigilant in determining which technologies should be shared by U.S. corporations with partners or governments abroad, as this technological transfer could erode U.S. military dominance.
It is for this reason, McCormick argued, that the Trump administration’s tough-on-China stance has become a bipartisan pose, pointing out that the actions aimed at Chinese telecommunications giant Huawei Technologies Inc. were made possible by new bipartisan legislation that enhanced the U.S. government’s ability to regulate incoming investment and exports.
That doesn’t mean that he is confident that the U.S. will be able to successfully negotiate its rivalry with China, which benefits from the cumulative wisdom of policy makers who have been managing the Chinese economy, and relations with the U.S., for decades.
“There is a very competent set of people” negotiating with the Trump administration, he said. “The continuity, the sophistication, the understanding of the US, the understanding of the circumstances, is very significant.”
Meanwhile, Americans should also be wary of whether U.S. policy makers have the wherewithal to manage the economy through the next recession. McCormick lamented that the response to the 2008 financial crisis mounted first by the Bush administration and then continuing in the Obama years wouldn’t be possible today.
“The tools available [to policy makers] are much more limited than they were during my time,” McCormick said. First, already low interest rates will make it difficult for the Federal Reserve to counter a recession, given that the fed-funds rate is not even 2.5%, and the Fed typically lowers rates by twice that much in response to recessions.
“But I think the most important thing is that they are more constrained than ever because of the politics of the day,” McCormick said.
“If you go back to those days of the financial crisis, the 2008 period, it was very controversial but ultimately both parties came together to take the steps that happened under President Bush and President Obama,” he added. “If you look at the level of polarization today in the United States, it’s difficult to see how you could get the alignment that is needed.”
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