After speaking on a panel at the World Economic Forum in Davos, Ray Dalio joined the folks at CNBC this morning.
Dalio is the head of Bridgewater Associates, the world’s largest hedge fund with $US150 billion assets under management.
Last year, Dalio released a video explaining the world’s economic machine works. It’s a cycle in which the use of either credit or money and the generation of debt creates different market cycles — recessions, depressions, boom years etc.
Since then, he’s been using that language to structure the way he describes our global macro environment. That, then, informs the way he invests.
He reiterated all of this on Squawk Box, saying: “I think we go so quickly thinking ‘where does the economy go next’ instead of thinking how it works.”
So here’s today’s engineering lesson — some of which he talked about on his panel — and how investors should use the machine.
Dalio said that the US right now is in the middle of the short term debt cycle where assets will return about 4%. He calls this, “the boring years,” and compared it to the economy in 2004 or 2006.
Southern Europe is different from the US because it could not print money. The region was in a debt bubble — debt rising faster than income — and it couldn’t last forever, but unlike the United States, those countries couldn’t print money.
That means no one would fund Southern Europe’s debt. Now it must be rolled over, but that means a depressed economy for quite a while — a very different position in the cycle from the U.S.
China on the other hand, Dalio said, is going through a much-needed tightening of monetary policy.
Now, since everyone’s connected you need to understand all of this while building your portfolio, Dalio explained. So how do you invest in these years?
China’s tightening, the U.S. is growing slowly, Southern Europe’s depressed — we’re in a world where people want to buy financial assets. It’s a hunt for yield. There’s a lot of demand for liquidity.
At the same time, longer term debt and liabilities are eating money.
“If I could say one thing to your investors, it’s try to achieve balance,” said Dalio.
As an investor you need to diversify your portfolio and understand that in the type of world we’re living in, your returns are going to look like this: 1% on cash, 3% on bonds, 4% on equities.
It’s a low yield world, and you should plan accordingly.