1. How to use GuruFocus - Tutorials
  2. What Is in the GuruFocus Premium Membership?
  3. A DIY Guide on How to Invest Using Guru Strategies
Holly LaFon
Holly LaFon
Articles (8313) 

Ray Dalio: We’ve Just Had a Taste of What the Tightening Will Be Like

Article by Bridgewater Associates founder Ray Dalio, first published on LinkedIn

February 05, 2018 | About:

What we are seeing is typical late-cycle behavior, though more exaggerated because the durations of investment assets (i.e., their sensitivities to interest rate changes) are greater.

Here’s what happened.

Over the past week or so, we had reports of strong growth and rising wages (good things!), which sent bonds and stocks down (bad for most investors) due to justifiable fears that the Fed will tighten faster than is priced in the credit markets. The surge in growth and wages came because of both the fiscal stimulation and the rekindling of animal spirits, thrusting the economy into late-cycle capacity constraints, which is leading to the expectations of faster Fed tightening. In other words, fiscal stimulation is hitting the gas, which is driving the economy forward into the capacity constraints, which is triggering interest rate increases that are hitting the brakes, first in the markets and later in the economy. This confluence of circumstances will make it difficult for the Fed to get monetary policy exactly right. This is classic late-cycle behavior (when it’s difficult to get monetary policy exactly right, which leads to recessions), though it is more exaggerated because the durations of assets are uniquely long, which means that when interest rates are low, prices of assets are more sensitive to changes in interest rates than when interest rates are high.

To be clear, we are not claiming to be smart about this. In fact, the opposite is true, as this is happening sooner than we expected. Still, these big declines are just minor corrections in the scope of things (see charts of stocks and bonds below), there is a lot of cash on the side to buy on the break, and what comes next will be most important. As shown, the recent price declines are not even noticeable within context of the bigger and longer term picture

AAMAAQDGAAgAAQAAAAAAABGAAAAAJDNlNzg4Yjk0

AAMAAQDGAAgAAQAAAAAAABHDAAAAJGVlMzJkZjFk


Rating: 5.0/5 (1 vote)

Voters:

Comments

Please leave your comment:


Performances of the stocks mentioned by Holly LaFon


User Generated Screeners


dfish133Piotroski Value
pbarker46Begin here, Dividend Stocks
investrule1Large Cap Growth
Paapapop1
pbarker46Basic Materials
HOLKLSUTop 20 Rising Rates, Tax Refor
msubraFuture-Growth-20%+
msubraGrowth-20%+
msubraGrowth-12%+
Innerwestgame
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)

GF Chat

{{numOfNotice}}
FEEDBACK