Sydney Australia

Bridgewater Associates, is the world’s largest hedge fund with over $125 billion. The firm is run by CEO Ray Dalio, who shared a lot of previously unknown insights, in the upcoming book The Alpha Masters by Maneet Ahuja.

The major contributors to growth, such as mining exports and investments in the domestic mining industry have been crucial. These two growth contributors will likely continue to help the economy for several years to come.

He notes that capex in the mining sector has risen from 1% to 5% of GDP, while manufacturing and other sectors have declined. While most analysts focus on the mining exports to emerging markets like China, Dalio notes that investment in the domestic infrastructure has been also been a key driver of GDP for the country.

Excluding mining, the economy is far from robust. The employment sector is extremely weak, and the reason that unemployment is at 5% is due to a drop in the participation rate.

According to our sources Dalio is concerned about the Australian economy, which has fared the global debt crisis so far, fairly well. He notes that personal debt levels are rising as deleveraging has not hit the country. The personal debt levels are higher than the US pre-crisis and is the highest in history of the country.

However, the slip in home prices is taking a slight toll on consumer spending. The Government has helped reduce the scale of the slide through various incentives.

The Central Bank of Australia (officially the RBA or Reserve Bank of Australia) has been lowering rates to try to help this problem, with a 50 basis point cut recently. Inflation is also moderating, and the RBA noted that it averaged 2.5% in 2011. The core CPI was as high as approximately 5% in 2009.

The market expects further interest rate reductions in the future; however, Dalio thinks that rates will go lower than the market’s current estimate of a 50 basis point cut, due to the weakness of the domestic economy.

In regards to China, Australia’s large trading partner, Bridgewater thinks that Government tightening is over, as reserve requirements and interest rates have declined recently. Credit costs remain high, and conditions are still tight for Chinese banks.

As for the US economy, Dalio thinks that inflation has tamed, which will be the focus of a future article.