Ray Dalio Admits QE Won't Work, Asks For More Anyway
While not as dire as his Davos forecast, in which he warned that "if assets remain correlated and things continue to move in the “wrong” direction, "there’ll be a depression", earlier today Ray Dalio released a new Op-Ed in the FT in which the manager of the world's largest hedge fund (excluding Apple's Breitburn of course), once again implores the Fed and other central banks to stop tightening and boost global easing.
The reason for this is what while Dalio admits the U.S. business cycle, now in its seventh year, reflects a need to tighten monetary conditions and hike rates, the bigger threat is the long-term debt supercycle, as according to Dalio we are "near the end of the expansion phase of a long-term debt cycle, which typically lasts about 50 to 75 years."
The irony of Dalio's Op-Ed is that he admits that QE has reached its limits...
What I am contending is that there are limits to spending growth financed by a combination of debt and money. When these limits are reached, it marks the end of the upward phase of the long-term debt cycle. In 1935, this scenario was dubbed “pushing on a string”. This scenario reflects the reduced ability of the world’s reserve currency central banks to be effective at easing when both interest can’t be lowered and risk premia are too low to have quantitative easing be effective.
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[Now] the expected returns of bonds (and most asset classes) are relatively low in relation to the expected returns of cash.
As a result, it is difficult to push the prices of these assets up and it is easy to have them fall. And when they fall, there is a negative impact on economic growth.
When this configuration exists — and it is also the case that debt and debt service costs are high in relation to income, so that debt levels cannot be increased without reducing spending — stimulating demand is more difficult, and restraining demand is easier, than is normally the case.
... even as he urges the Fed and its peers to do more:
It is because of the long-term debt cycle dynamics that we are seeing global weakness and deflationary pressures that warrant global easing rather than tightening.
At such times the risks are asymmetric on the downside and it behoves central banks to err on the side of waiting until they see the whites of the eyes of inflation before tightening.
Since the dollar is the world’s most important currency, the Fed is the most important central bank for the world as well as the central bank for Americans, and as the risks are asymmetric on the downside, it is best for the world and for the US for the Fed not to tighten.
It is "best for the US", or best for the world's biggest hedge fund?
All of this, of course, has previously duly explained in the latest Matt King letter, in which he observes that we have now entered a liquidationist regime where thanks to EM selling of reserve assets, the global markets are collectively seeing asset prices decline while liquidity exits. However, unlike Dalio, King has the intellectual honesty to admit that the centrally-planned farce is effectively over, and that any can-kicking will only make the final rout that much more destructive.
For Dalio, whose career is to manage assets while piggybacking on a 75 year supercycle of central bank generosity, continued asset declines are a career killer and he knows it.
So what explains Dalio's disingenuous appeal to the US central bank?
This: "Hedge fund billionaire Ray Dalio’s key All Weather Fund, which aims to perform well in both good and bad markets, suffered annual losses for the second time in three years in 2015. The All Weather Fund returned -7% in 2015."
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