(Bloomberg Opinion) -- The world today looks most analogous to the late 1930s, Ray Dalio, the founder of Bridgewater Associates, told my Bloomberg Opinion colleague Barry Ritholtz on Monday. That’s a bit foreboding, to say the least.
Like 80 years ago, financial markets are in the late stages of this short-term business cycle, given that the Federal Reserve is tightening monetary policy as U.S. equity prices reach record highs, Dalio said during a live taping of the “Masters in Business” podcast. He also sees rising “political polarity” in the form of populist candidates. On top of all that, the world is awash in debt, a longer-term problem without an easy solution given that interest rates in many developed-market economies remain near record lows and central banks have already purchased trillions of dollars worth of assets.
Dalio, who has a new book, “Principles for Navigating Big Debt Crises,” somehow maintains a calm demeanor given the sort of conclusions he’s drawn. In September, I wrote about how Dalio effectively described America’s worst nightmare: the dollar losing its place as the world’s reserve currency. His concern — shared by BlackRock Inc.’s Larry Fink, among others — is that swelling U.S. budget deficits will eventually irk big buyers overseas. Dalio said two months ago that “You easily could have a 30 percent depreciation in the dollar” as the Fed has little choice but to monetize the national debt.
Dalio repeated these issues and implications during the live podcast. “The role of the U.S. dollar will diminish, and the returns on U.S. dollar-denominated debt will suffer,” he said. “Then I think you will see the emergence of other currencies,” though he declined to identify which ones, saying it was “too big a topic to get into.”
He also gave a glimpse into how he first came to understand currency crises. He was clerking on the floor of the New York Stock Exchange in 1971, he recalled, when President Richard Nixon shocked markets by severing the dollar’s link to gold.
“Money would get you gold, and it was a breakdown — it was a default,” he said. “I remember thinking when I was going to walk in on Monday morning to the New York Stock Exchange, this is a big crisis, and I thought the stock market would fall a lot. And the stock market went through the roof.”
Bridgewater, the world’s largest hedge fund with about $160 billion in assets, has been a steady holder of gold through the two largest bullion-backed exchanged-traded funds, Bloomberg News reported last week. Dalio has said that investors should consider placing 5 percent to 10 percent of their assets in gold as a hedge against political risks.
One of Dalio’s main points, backed up by the rise in global debt, is that the entire world is “leveraged long.” Low interest rates fueled buybacks, acquisitions and increasing stock prices. That can’t last forever. Broadly, “You need to prepare for lower expected returns in the future,” Dalio said. “You can expect lower returns and more taxes. That’s going to be the nature of the beast.” The only answer, he said, is to try to balance portfolios.
Dalio says he’s transitioning into what he describes as the “third phase” of his life, where the joy comes from passing along what you’ve learned and to see others be successful. Based on his worldview, it sounds as if being a constant winner in the markets will be a difficult endeavor.
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Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.
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