As a value investor, it’s a risky business to try to time the market. Those who attempt to do so seem to do just as well at predicting the economy as those who don’t.
In general, it is best to focus on the fundamentals of any given company to find bargains. However, it can still be very useful to keep an eye on the macro outlook - not to predict what will happen, but to figure out the range of possibilities that might take place.
In an interview with Bloomberg, Bridgewater chief Ray Dalio (Trades, Portfolio) gave his outlook on recent economic developments.
Three macro factors to consider
Dalio believes that there are three forces that are currently acting on the macro economic outlook.
Firstly, interest rates worldwide are at all time lows. In Dalio’s words, we are now at the part of the debt cycle where it seems likely that a lot more money is going to be printed. This is significant, because for several decades, central banks have had the ability to create demand simply by injecting more money into their economies. Now that we are at ultra low rates, it’s not clear that they will be able to continue to do so. Of course, we have real life examples of negative interest rates that suggest that monetary policymakers might attempt to keep going lower, but that invites its own set of thorny issues. So in addition to bringing rates down, central banks began buying financial assets after the 2008 financial crisis. Dalio believes that this has caused assets like stocks to rise over the last decade, and has widened the wealth gap.
The widening of the wealth gap is the second lever that Dalio considers to be important. The post-World War II peace dividend created a lot of wealth, and this wealth has become increasingly unequally shared among the population. Dalio believes that this has contributed to a widening political gap, which contributes to gridlock within the U.S. system.
The third factor he identified is the (relatively) recent rise of China as a dominant economic force. Since the collapse of the USSR in 1991, the United States has enjoyed an effective monopoly. Since the election of President Donald Trump in 2016, U.S.-China relations have gotten increasingly frosty, and Dalio thinks that the trade tensions of the last few years will continue to get more severe.
One significant economic development that investors should keep their eyes on is the decoupling of U.S. industry from Chinese labour. Companies that depend on Chinese supply lines now have an additional risk factor to consider - what happens if a business’s margins get hammered by a new tariff? Will American companies be able to rely on Chinese demand to support their activities? These are all questions that investors will need to add to their usual stock checklists going forward.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Seth Klarman: The Uses and Misuses of Leverage
- Howard Marks: How to Define Your Risk
- Bill Ackman Is Positive on Real Estate
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