When the @experts@ get it wrong7 Aug 2023 12:11
What Ray Dalio got wrong (and what happens next)
Ray Dalio expected interest rates to have a much different impact on the US economy. But that doesn’t mean the risk of a debt crisis has disappeared.
Ray Dalio’s retirement last year from the hedge fund he founded, Bridgewater Associates, has given the billionaire more time to indulge his other great passion: history.
Dalio has made a study of economic cycles over the last few centuries and credit cycles over the last 100 years, frequently warning that the build-up in debt seen across Western economies will eventually spark a major crisis.
Ray Dalio is the founder of the world’s largest hedge fund, Bridgewater.
But the veteran investor now admits he got something wrong: the stunning resilience of the private sector in the face of one of the fastest interest rate tightening cycles in living memory.
“I failed to fully appreciate how much the improved financial condition of the private sector would soften the impact of the Fed’s tightening because I was too focused on how the last 12 tightening cycles (since 1945, when the new world and currency order began) worked,” Dalio now says.
The cause of Dalio’s mistake is what he now calls the great wealth transfer, which occurred during the pandemic and saw government central banks take on debt to fund stimulus payments, and central banks print money to buy a lot of that debt.
“As a result of this co-ordinated government manoeuvre, the household sector’s balance sheets and income statements are in good shape, while the government’s are in bad shape. (this is not true in Oz)
“In the US and globally, the central governments’ balance sheets and income statements are bad and getting worse because the governments ran and are still running large deficits. They also have big losses on the government bonds they bought to fund the government debts and, with their balance sheets where they are, are losing money where interest rates are.”
Dalio’s diagnosis helps put two key recent events in global markets in context. The first is the downgrade of the US government’s credit rating by Fitch, which was directly related to the ballooning size of its deficit.
The second event is last week’s jump in 10-year US treasury yields from around 4 per cent to 4.2 per cent, after the US government said it would increase the size of a debt sale this week.
Bond yields have since retreated to 4.06 per cent after US jobs numbers came in a bit softer than expected. But as Barclays’ head of economic research, Christian Keller, says, the volatility in US Treasuries during a week when US economic data suggested the Goldilocks soft-landing was still in play, points to the potential for more volatility as investors wrestle with what the long-term health of government finances mean for asset prices.
“Such longer-term fiscal dynamics typically … are an uninspiring, dull topic, lingering in the background, and seemingly do
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