market folly

Bridgewater Associates founder Ray Dalio recently appeared on Bloomberg to share his thoughts.  He said he doesn't care whether the Federal Reserve raises by 25 basis points, but he doesn't see the reason for it.

Dalio notes that quantitative easing has a diminishing scale of returns as it will work less than it did last time.  He goes on to say, "We will have a downturn" and that it will be worrisome because the Fed won't really have the tools to fight it.

He says the environment we're in means that if you can't have interest rate moves, you'll have currency moves.

Dalio says that, "What worries me is what the next downturn looks like with asset prices where they are and the lesser ability of central banks to ease monetary policy."

He feels the Fed is too worried about the short-term debt cycle and not enough about the long-term debt cycle and he doesn't get it.  Dalio notes,

"The United States is in the midpoint of its short-term debt cycle.  Capacity utilization, GDP gap and, so as a result, we're talking about whether the Fed should tighten or not.  That's what central banks do in the middle of it.  And we're near the end of a long-term debt cycle.  Because that cycle of being able to raise -- you have interest rates going to zero.  You have spreads that are -- have come down.  So the spreads that have come down means that asset prices have gone up.  In other words, so now the expected return of asset classes is -- are all very low.  Cash, we know that bonds are going to two and a quarter percent.  You know that you're going to get for the next 10 years two and quarter percent on your bonds.  The equity price premiums look like three and a half or four percent on that.  So all of the asset classes now are aligned in normal risk premiums, that kind of thing.  That's why if interest rates rise faster than it's discounted in the markets, those markets are discountable."

On China, he says "they have to rebuild a new economy to replace the old economy."  He says China had the equity bubble as speculators rushed in, but he says this is normal for emerging economies.  He says China is going to be "just fine."

Over the next 10 years, Dalio says you're gonna have returns that are probably gonna average around 3-4% and it's a major pension fund problem.

Embedded below are videos of Dalio's interview on Bloomberg:

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For more from this manager, head to Ray Dalio on how the economic machine works.