The annual gathering of the world’s elite in Davos, Switzerland always provides great insights on the markets from really bright people.
This year, Ray Dalio was among the luminaries gathered in the Swiss Alps.
Dalio is the founder of the world’s largest hedge fund, Bridgewater Associates. His fund manages over $150 billion and counts the World Bank among its investors.
Dalio’s funds have an outstanding long-term track record. Last year, many of his funds again thumped the S&P 500 Index. Thus, he’s a guy whose views I always want to hear – especially when it comes to the Federal Reserve.
Dalio Sees Asymmetric Risks
As readers know, the Fed raised rates by a quarter point in December.
That was the first such upward move since the global financial crisis in 2008. The Fed also hinted that another four hikes were in the cards for 2016.
Yet Dalio threw cold water on that idea in an interview with CNBC. He said growth in the U.S. economy and elsewhere was slowing and that stock markets could be in for tough times.
“The risks are asymmetric on the downside, because asset prices are comparatively high at the same time there’s not an ability to ease,” Dalio said. Thus, when the next financial crisis hits, the U.S. will need movement from Congress on fiscal policy in addition to anything the Fed will do.
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Dalio also thinks we’re seeing a “dollar-denominated debt squeeze.”
Basically, a far-too-richly valued U.S. dollar is killing anyone who took out dollar-denominated debt and is now having to repay the debt in a declining currency.
I personally think the Fed should make a bold statement about a too-strong dollar and its terrible consequences before the “squeeze” Dalio is talking about leads to a global deflationary spiral.
What Would Dalio Do?
For his part, Dalio believes the Fed rate hikes are one and done. In fact, he believes the Fed will have to reverse course soon. Conditions will get bad enough that the Fed will launch QE4, a fourth round of quantitative easing.
And that’s if the Fed wakes up.
Currently, Dalio doesn’t think the Fed is concerned enough about the global deterioration across all asset classes – many of them previously uncorrelated – all moving in the same direction (down) in the current environment.
Obviously, such movements could get out of control in a worst-case scenario. If such a spiral occurs, I personally think the Fed will even move rates into negative territory.
Let’s hope it doesn’t get that bad and that the world’s central bankers heed the wake-up calls from Dalio and others.