Ray Dalio Sees End Of Supercycle, Issues A Dire Warning

History repeats itself, Dalio notes, as he draws chilling comparisons to 1937

As the U.S. Federal Reserve prepares to tighten monetary policy, perhaps providing clues to raising interest rates in upcoming Fed meetings, Ray Dialo has surveyed the unusual economic environment and has found a troubling historical economic equivalent: 1937.  Given a troubling corollary, Ray Dalio has determined that “we do not want to have any concentrated bets, especially at this time,” a March 11 strategy note written by Ray Dalio and Mark Dinner says. A copy of the memo was reviewed by ValueWalk.

Perhaps one of the most diversified hedge and largest funds in the world with $165 billion under management, Bridgewater Associates is known to invest in most assets utilize a variety of strategies, including algorithmic approaches – and is looking at all investment classes, including stocks, and thinking that risk is just too significant to be concentrated in exposure.

In a relatively rare strategy note written by Ray Dalio, the founder of the famous hedge fund notes that U.S. Federal Reserve tightening is marking the end of a super cycle and central bankers are faced with tough choice. It can do what is economically best for the world, which is a loose monetary policy, or what is best for the U.S., which might mean tightening.

Ray Dalio: End of a long term debt cycle

The economy is approaching the end of a long term debt cycle that is little understood, Ray Dalio writes,  as he says he has more faith in the Fed’s ability to tighten than ease – and this is part of the problem.  If the economic environment changes, the Federal Reserve needs the ability to lower interest rates if necessary.
With rates near zero in an expanding economy, the Fed doesn’t have much room to maneuver.  This is particularly true as Ray Dalio says, at the end of a cycle, central banks are “pushing on a string” and their ability to stimulate the economy is more likely to fail than succeed.

The report observes the Fed has set inside expectations that a rate hike will occur in June or September and that it might be difficult to deviate from this guidance.

Economic comparisons to 1937

It is this tightening that has Ray Dalio concerned as he focuses back on a 1937 analog where debt limits reached their bubble top, interest rates hit zero, money printing kicked off “beautiful deleveraging,” stocks rallied regardless, the economy seemingly improved and then the central bank tightened. Sound familiar?
It happened in 1937 and Dalio draws comparisons to the 2008 crash and today to point to historical equivalents.

Ray Dalio is a student of history, perhaps one of the best noncorrelated fund manager to successfully deliver returns regardless of market environment. He now says the prices of risk assets such as stocks are high, yet the expected are low. If interest rates were to rise and liquidity fall, Ray Dalio isn’t exactly sure of anything, particularly what might tip the proverbial cart, but he notes that all assets are risky at this point.