- Bridgewater Associates is bearish on nearly every financial asset, it said in a recent note to clients.
- “2019 is setting up to be a dangerous period for the economy,” the giant hedge fund said.
- Analysts from JP Morgan have also noted the risks of a systemic market correction in 2019 are building.
- Bridgewater said earlier this month that a major driver of the stock market is nearing its end.
Bridgewater Associates, the world’s largest hedge fund, is sounding the alarm on nearly every financial asset.
“We are bearish on almost all financial assets,” the firm said in a note to clients last week that was seen by Business Insider and first reported by ZeroHedge. “Markets are still pricing in Goldilocks conditions, compounding the risks.”
“2019 is setting up to be a dangerous period for the economy, as the fiscal stimulus rolls off while the impact of the Fed’s tightening well be peaking,” the firm continued. “And since asset markets lead the economy, for investors the danger is already here.”
The Bridgewater view echoes a similar refrain offered by JP Morgan’s team of global macro strategists.
“2018 seems to still lack a few ingredients” for a systemic shock, the analysts said. “It should be different in 2019, however.”
Like Bridgewater, the JPM analysts pointed to the continued withdrawal of monetary stimulus by the US Federal Reserve, as the catalyst most likely to upset the current “goldilocks” environment.
They noted the rapid buildup in global debt, amid an era of unprecedented central bank stimulus in the wake of 2008’s global financial crisis.
“About a dozen countries have seen their total indebtedness rise by over 50 percentage points of GDP over the past decade,” the analysts said.
The debt buildup manifested itself across three areas — government borrowing, corporate leverage and household debt — the third of which is the most prevalent in Australia.
“Against this leverage backdrop, it may be impossible to prejudge which sector in which country will represent the first canary” in the proverbial debt coal-mine, JP Morgan said.
But with the US Fed currently on pace to continue its tightening cycle, Bridgewater says markets are nearing a key tipping point.
Earlier this month, the hedge fund said a crucial market driver is at 10 o’clock. Once the “dial” – represented visually in Bridgewater’s note by an arrow within a feedback loop – reaches 12, liquidity will tighten in earnest. And that’s when the going will get really tough.
Extrapolating from current conditions, Bridgewater – which currently manages about $US150 billion, according to its website – says the yield curve for Treasury bonds should remain flat, with oil hitting $US62 a barrel and the dollar slumping 3.5% compared to other major currencies.
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