Ray Dalio (Trades, Portfolio), founder of the famous Bridgewater hedge fund, appeared on Bloomberg for a lengthy interview on April 3. I know, I know it isn’t the most productive thing to listen to all of these talking heads. However, Ray Dalio (Trades, Portfolio) is someone who I like to listen to. His firm does incredible work and he always appears very thoughtful about current circumstances and the different scenarios that can unfold. He talks about his book A Template For Understanding Big Debt Crises. You can download it for free here. The book is absolutely worth reading but here are the most interesting things Dalio told Bloomberg:
There is an inflationary depression unfolding in Turkey and Argentina and emerging markets more broadly.
It is getting to the place that there is enough blood in the street to go look for value. In its 13-f Bridgewater discloses large exposures to emerging market ETFs like the Vanguard FTSE Emerging Markets (VWO, Financial) Ishares Core MSCI Emerging Markets (IEMC, Financial).
More directly relevant to those who are primarily U.S. investors Dalio believes that when you hit zero interest rates you are more likely to have a depression. This is not that surprising but as we’ve been languishing at very low-interest rates for a very long time now it is easy to become complacent and no longer feel threatened by this state of affairs.
Dalio argues we hit zero interest rates 1929 and 2007-2008 period. Central banks then printed money bought financial assets. They put in a lot of liquidity (Dalio views this as the right solution) but also observes it drives the wealth gap. As the economy doesn’t improve populist surges (happened during both periods). When the next downturn comes (a couple of years) we will have a different type of downturn compared to what we are used to. Dalio thinks it could be like the 1937 to 1940 period.
Monetary policy has interest rates and QE and both are sort of maxed out. There is a lot of government debt but also pension obligations (that aren’t always considered). This will create a lot of social conflicts.
The U.S. will have to sell treasuries to the rest of the world in about two years. American’s can’t buy them all. This will be more of a dollar crisis than a debt crisis and more of a political and social crisis. Foreigners don't care about inflation but about currency depreciation. The U.S. currently has the privilege of borrowing in its own currency and it is risking that by borrowing too much.
You could easily have a 30% depreciation in the U.S. dollar
The U.S. has fiscal stimulation that is good for the time being but its positive effects diminish in about 18 months or two years. But the borrowing hasn’t gone away by then.
We are nine years into the cycle. We are in the seventh inning of this game. Dalio is not particularly worried right now.
How do you invest?
Dalio doesn’t think most people should be active investors. It is a professionals game. If they do, they need to go opposite their instincts.
From its 13F two clear trends that stand out to me are massive exposure to emerging markets and a sizeable position in gold. Bridgewater also owns Celgene an M&A target in case you missed it. Individual names include a lot of energy names and other value stocks.Here's a Gurufocus position map of the largest holdings.
The author is long Celgene.