Donald Trump’s election marks a long-term turning point for markets, according to Ray Dalio, founder of the world’s biggest hedge fund firm Bridgewater Associates.
“There is a good chance that we are at one of those major reversals that last a decade,” Dalio wrote in a Tuesday post on LinkedIn.
Here are some excerpts from Dalio’s note (emphasis added).
“We believe that we will have a profound president-led ideological shift that is of a magnitude, and in more ways than one, analogous to Ronald Reagan’s shift to the right. Of course, all analogies are also different, so I should be clearer. Donald Trump is moving forcefully to policies that put the stimulation of traditional domestic manufacturing above all else, that are far more pro-business, that are much more protectionist, etc.
“Whereas the previous period was characterised by 1) increasing globalization, free trade, and global connectedness, 2) relatively innocuous fiscal policies, and 3) sluggish domestic growth, low inflation, and falling bond yields, the new period is more likely to be characterised by 1) decreasing globalization, free trade, and global connectedness, 2) aggressively stimulative fiscal policies, and 3) increased US growth, higher inflation, and rising bond yields.”
We’ve likely reached the end of a 30-year top in bond prices:
“As for the effects of this particular ideological/environmental shift, we think that there’s a significant likelihood that we have made the 30-year top in bond prices. We probably have made both the secular low in inflation and the secular low in bond yields relative to inflation. When reversals of major moves (like a 30-year bull market) happen, there are many market participants who have skewed their positions (often not knowingly) to be stung and shaken out of them by the move, making the move self-reinforcing until they are shaken out. For example, in this case, many investors have reached for yield with the upward price moves as winds to their backs, many have dynamically hedged the changes in their duration, etc. They all are being hurt and will become weaker holders or sellers. Because the effective durations of bonds have lengthened, price movements will be big.”
Fears over Trump’s economic team might be overblown:
“Our very preliminary assessment is that on the economic front, the developments are broadly positive — the straws in the wind suggest that many of the people under consideration have a sufficient understanding of how the economic machine works to run reasonable calculations on the implications of their shifts so that they probably won’t recklessly and stupidly drive the economy into a ditch. To repeat, that is our very preliminary read of the situation, which is too premature to take to the bank. Of course, we should expect big bumps resulting from big shifts regardless of who is engineering this big ideological shift.”
Last week, before the election results, Bridgewater predicted stock markets would plummet should Trump win the election. Dalio later wrote to clients that he had more questions than answers on how markets would react.
The firm also noted its concerns about the effects of globalization, which influenced Brexit and the US presidential election by mobilizing a populist vote.
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