RAY DALIO: The US Economy Is Facing A Rare Set Of Circumstances That Will Be Bad For Markets

dalio panel

[credit provider=”Dealbook screenshot”]

At the Dealbook conference, Ray Dalio, Steve Schwarzman and David Rubinstein just wrapped up a panel on investing and markets.Of particular interest was Ray Dalio, the hedge fund god who has been killing it throughout the crisis.

And so you have to be intrigued that he’s bearish.

He’s not wildly so (thinks stocks will do better than bonds) but his basic idea is that risk premiums are maxed out, and have to come down. In other words, people have paid up max dollar for all risk assets thanks to the Fed dropping rates to rock bottom. Now that will reverse.

His novel set of circumstances he sees is an economy that faces austerity (due to the Fiscal Cliff, etc.) coupled with a  Fed that’s mostly blown its bazooka, and can’t get much more juice out of QE (he believes that QE does less and less because the Fed can’t push that much that much more money from bonds into riskier assets).

So the novel set of circumstances are:

  • Yields can’t go down anymore.
  • Austerity is coming.
  • Economy is running out of steam.
  • QE is losing its efficacy.
  • Rate turn probably finally coming late in 2013.

So there you go: Rates going up, austerity coming, Fed out of bullets. Bad for risk assets.

Below are our notes from the panel


— Dalio: The world is still in deleveraging.

— Dalio: Sounding bearish: Risk premiums are likely to expand.

— Rubinstein: Likes energy and healthcare.

— Rubinstein: Likes China. Suggests buying non-European assets off of distressed European banks.

— Rubinstein: Investing in sub-Saharan banks.

— Schwarzman: Likes energy. China. Looks like it’s turned, though tough to call bottoms.

Questioner: What are you steering clear of?

— Rubinstein: There are certain countries that we don’t invest in: Russia. Also not keen on Russia.

— Dalio: It all comes down to interest rates. As an investor, all you’re doing is putting up a lump-sump payment for a future cash flow.

— In all deleveraging, you get through them by having an interest rate that’s lower than the growth rate.

— The big question is: When will the term structure of interest rates change? That’s the question to be worried about.

— Dalio: Effects of QE diminishing as we do more rounds.. We’re facing austerity. And growth is flagging. This is an unprecedented risk the economy is facing. A slowdown with very little room to manoeuvre.

— Dalio: Back up in rates will probably happen in late 2013.

— Dalio: The yield curve is certainly at the bottom. And so we’re squeezed on where they’ve gotten us in terms of.