Dalio Warns Of “Nightmare” Where Dollar Is No Longer Reserve Currency

Dalio Warns Of “Nightmare” Where Dollar Is No Longer Reserve Currency

Bridgewater Associates Founder Ray Dalio discusses the possibility of another economic downturn, central bank policy and populism. He speaks to Bloomberg’s Erik Schatzker on “Bloomberg Daybreak: Americas.” (Source: Bloomberg)

Dalio Says Next Economic Downturn Is ‘Couple of Years’ Away

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Q2 hedge fund letters, conference, scoops etc


We just lived through the aftermath of a big debt crisis the kind of thing that you say in your book comes along every 70 years or so. But we're in the midst of another bubble. Is that. We're in the midst of another cycle.

No I don't. I don't think we're in the midst right now of another bubble. Let me maybe clarify. When you had zero interest rates. You have a different type of debt crisis you have more likely to have a depression. So I think the period that we're in is very similar to the 1935 1940 period. Let me just explain that in a minute. 1929 to 1932 we had a debt crisis and interest rates hit zero. 2007 to 2009. We have a debt crisis it hits zero. Then both of those cases there's only one thing for central banks to do and that is to print money and buy financial assets.

They print money buy financial assets in both those times that pushes financial asset prices up puts a lot of liquidity in and also contributes to a greater wealth gap because those who own financial assets benefit when those who don't own financial assets as a result in both periods of time of the wealth gap and the economy not improving for a large segment of the population. We have populism. So the last time that we would say when was populism popular it would be in that period of time. That populism issue is an important issue. So as we look forward and we say when the next downturn comes which will happen probably in a couple of years we're going to have a different type of downturn very similar to the one that happened in 1937 to the 1940 period. We were in the part of the cycle now that the Fed and other central banks in varying degrees are beginning to tighten monetary policy.

Asset prices are sensitive to monetary policy because of the duration of those assets as lengthened. And so the central banks have to be very careful not to raise interest rates much faster than is built into the curb. But with that populism we have an issue. So if we think about what the next downturn will be like the downturn I think will be very different than the one in 2008. It'll be one in which I think that the social and political problems will be great because of that wealth gap and populism I think there'll be more conflict. Right now times are good and we're sort of at each other's throats in that. I also think I also worry. About the effectiveness of monetary policy in reversing that because monetary policy has interest rates and we can't lower interest rates as much and it has quantitative easing the purchases of financial assets to push other financial assets out and get put it into the system. And that is at its maximum.

So when we have an economic downturn we're not going to have to be as effective. I think also the downturn in art form of debt crisis won't just be debts. It'll also be pension obligations health care obligations unfunded obligations. So and I think one more thing and I think it will be about us having to sell a lot of Treasury bonds to the rest of the world. And I think that that'll also be an issue about two years out. So I would say two years out.

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Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver

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