Ray Dalio (Trades, Portfolio) appeared on CNBC on Nov. 15. Dalio heads Bridgewater, one of the foremost and largest hedge funds in the world. I tend to watch interviews and panels where Dalio appears. He doesn't discuss Bridgewater's specific positions, but often you can derive a tremendous amount between what he says and by perusing its 13-F. GuruFocus tracks this 13-F, and its most recent iteration was discussed by James Li here.
What's going on now?
First Dalio talked about the situation as it is now. He reiterates that we are in the seventh or eighth inning of the business cycle. Lately he has been advocating gold and appeared to stress we are more near the end of the cycle. He explained how central banks bought $15 trillion worth of assets, which pushed prices up significantly. Because we are in the late part of the cycle there is now a tightening monetary policy being implemented by the Fed.Â
Dalio also touched on global economies being in a long-term debt cycle. Interest rates have been coming down for decades and there is now very little capacity for central banks to lower interest rates.
Finally, he added that the emerging power, China, is competing with the established competitor, the U.S., which adds another important dimension to global relationships and economic outlook.
Dalio identifies a problem
The Fed is expected to raise rates one more time this year. It is expected to raise rates two or three times next year. Dalio believes this path is too aggressive, and it is hurting asset prices. He pointed to the flat yield curve:
A five-year will get you 3%, and you have no material price risk. The Fed will now have to look at asset prices before economic activity. The stimulation in the tax cuts is a problem for them. This will almost force them to raise rates.
Meanwhile the U.S. will have to sell far more bonds in the coming years. U.S. institutions can’t absorb the kind of volume that will be put on the market by the government. Therefore foreigners will need to buy those. But foreigners are already holding a lot of it.
This may result in a supply demand imbalance (i.e., resulting in higher interest rates paid on U.S. debt).
Should the Fed slow down?
Dalio would certainly not raise rates faster. He did something very interesting where he puts the risks into context.
He believes overshooting in inflation rates will not be a problem (2.5% or so). Or at least he considers it a minor problem. But on the contrary, a downturn or recession poses a very serious risk.
A downturn could be a problem because there is already a populism problem. This could be exacerbated further.
How cautious is Dalio?
Dalio believes assets are fully priced. There is assymetric risk. He probably means the risks to the downside are large compared to the prospective gains.
Big parts of the high-yield debt markets have gone into leveraged loans and CLOs.
Much of it is private. There are parts of that market, BB and BBB type of debt, that is more than fully priced.
Because there are many index funds and ETFs, something like a downgraded GE could induce some contagion risk
View the full interview below:
Disclosure: no positions in any stocks mentioned.
