Remember Ray Dalio's "Depression" Warning: This Is Where We Stand Now

Tyler Durden's picture

In recent weeks, Ray Dalio - a vocal proponent of QE4 and certainly against any form of monetary tightening - has been about as doom and gloomy as we have ever heard the head of the world's biggest hedge fund. Just last week, we reported that the founder of Birdgewater, when speaking before the New York Fed, voiced his latest warning about the potential losses that would befall asset holders if interest rates rose by just 1%. Recall from his speech that "if interest rates rise just a little bit more than is discounted in the curve it will have a big negative effect on bonds and all asset prices, as they are all very sensitive to the discount rate used to calculate the present value of their future cash flows. That is because with interest rates having declined, the effective durations of all assets have lengthened, so they are more price-sensitive."

And the punchline:

... it would only take a 100 basis point rise in Treasury bond yields to trigger the worst price decline in bonds since the 1981 bond market crash. And since those interest rates are embedded in the pricing of all investment assets, that would send them all much lower.

Using a Goldman calculation which we showed earlier in the year, we estimated that the impact of a 100bp shock to interest rates - the same one that Dalio envisions - and assuming a total US bond market size market size of $40trn, in line with estimates...


... the market value lost would be roughly $2.4 trillion. 

However, it is not just rising rates that trouble Ray Dalio. Recall that in an interview Ray Dalio gave to CNBC's Andrew Ross Sorkin and Becky Quick in late January during this year's Davos boondoggle, the Bridgewater founder made an even more stark warning: he said that if assets remain correlated and things continue to move in the “wrong” direction, “there’ll be a depression.” (3:35 in the clip below).

So, nearly one year later, where are we now? Sadly, it appears that at least one half of Dalio's warning is being validated and is something traders should be concerned about, because as Citi's Matt King reveals in his latest report today Asset correlations are not only higher, but the correlations themselves are becoming more correlated.


In case someone missed the message, here it is again...

Yet while traditionally rising cross-asset volatility has been resulted in volatility spikes, that is no longer the case due to outright vol suppression by central banks.

... or maybe vol is still present: one just needs to look elsewhere...

... and at different products, like the volatility of volatility.

Where does this repressed volatility come from? By now everyone should know the answer: central bank policies, of course.

And while central banks may have given the superficial impression of stability by pressuring volatility, they have also collapsed liquidity in the process, leading to less liquid markets, a surge in "gappiness", and "jerky moves that are typical of penny stocks."

And as the flow chart on the right shows, the greater the cross asset correlation, the lower the vol, the greater the repression, the more trading illiquidity and wider bid ask-spreads, and ultimately increased "gap risk", which becomes a feedback loop of its own.

* * *

All of the above means that nearly one year after Dalio's stark warning, the cross-asset correlations have grown even greater, and continue to rise with every passing day as central banks are forced to intervene increasingly more forcefully to suppress volatility - as of this moment, global central banks inject a record $2.5 trillion in fungible liquidity every year - in the process further fragmenting and fracturing an illiquid market which, as City wrily notes,  is only fit for "penny stocks."

The good news, at least for the time being, is that Dalio have not liquidated his $150bn+ exposure; when considering that we now live in a world in which vol targeting and risk-parity funds such as Bridgewater's All Weather fund, are some of the biggest marginal price setters, this may be the only thing preventing the market's terminal breakdown, and the onset of the depression which Dalio himself predicted at the start of the year.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Angry White Guy's picture

It really is Winter in Amerika.

Lumberjack's picture

Hell is freezing over...


DHS Shuts Down Investor Visa Center Run By Hillary Clinton’s Brother


The Department of Homeland Security has quietly terminated the investor visa center run by Hillary Clinton’s brother, Anthony Rodham.

Rodham’s Virginia Center for Foreign Investment and Job Creation, run out of a small office in McLean, was shut down on Sept. 29 without any fanfare.

USCIS states two reasons a regional visa center can be closed: first, if the center doesn’t submit the required documentation, and second, if the center does not promote economic growth. It’s unclear exactly why the center has been terminated. USCIS did not respond to a request for comment from Law360.

JRobby's picture

"the center does not promote economic growth" (Laugh Track Deafening!!!!!!)

Meanwhile, it is pretty amazing that the correlations all start to line up when the price movements for EVERYTHING are all focused on THE FED. So no shock.

Nobodys Home's picture

Mr. Yellen is a friend of the nations most famous rapist.
They talk about the grandkids, which jets they like the most, How to instigate NIRP and still keep us all happy. They care about our future. They really do! That's why there is an 8x10 apartment modeled by those wonderful bus ticket providing emergency helpers at feeema for each of us. Schooling too! They watch over us via the web, satellites, facial recognition, retinal scans, Shaws card swipes, ...They have been working on improving this system since 1913! Longer really....

Nobodys Home's picture

Karma's a bitch! Let's see how Gazprom does!
Karma really is a bitch. I know her. Her sisters name is Sky. Her brother's name is Star. Yah ..kinda girly I thought. Can't argue with old ex hippie liberals though.
How come your family isn't protesting the war! Pick one! Get down to Walmart NOW!

Ham-bone's picture

The ingredients for growth are simply crapping out. Consider, as of 2008, the US Census Bureau estimated the total US population would be 439m by of 2014, the US Census Bureau has downgraded US population growth by <-41m> to 398m by 2050.

The bulk of the downgrade is among the 0-24yr/old population growth. Census Bureau now estimates 0-24yr/old growth through 2050 to be 28 million less than in their '08 est., (2050 0-24yr/old total population was est. to be 141m and is now est. to be 113m).
The remainder of the downgrade came among the 25-44yr/old population...there was a was a sight increase among the 45+yr/old population segment.

Due to birthrates remaining below Census Bureau estimates, further downgrades are almost a sure thing and nearly all the downgrades will again be among the population of young and all "growth" more correctly called "longevity" as the old are living decades longer than previous generations. The Census still estimates the 0-24yr/old population to grow by 8 million by 2050...would not be surprised to see this cut in half by the next updated estimate.

Interest rates have been correlated to population growth and the rising and now decelerating demand due to that growth. This is true on a US basis ( and true on a global basis ( Checking on population growth and the distribution across demographics explains why the Fed can not significantly raise again, at least within our lifetimes.

Globally, population growth is ending starting from the bottom. The global 0-4yr/old population is est. to decline by <-5m> from now through 2030...and it only really gets worse from there.

Perhaps the true goal at this point should be minimizing the secular contraction rather than accelerating dependence on NIRP, monetization, and the debt fueled lunacy now necessary to synthetically achieve GDP "growth".

Nobodys Home's picture

Nah. Lets just import people that work cheap, won't integrate and fuck a lot....errr...I mean refugees that need asylum from dastardly war torn countries that we didn't screw up at all and Worship the american dream.

On a long enough timeline the survival rate for everyone drops to zero. Just live the dream my peeps!

gregga777's picture

We have been in a depression* since the beginning of the Greater Depression, not the Great Recession**.

* depression: a permanent reduction in the long term economic growth trend.

** recession: a temporary reduction in economic marked by a strong rebound and resumption of the long term growth trend.

gregga777's picture

Everyone on Con Street is a swindler. They all fail to acknowledge that growth is dead. Perpetual growth is predicated on cheap, infinite petroleum resources. Unfortunately, this is a finite world and cheap petroleum resources are gone. On average all that remains are petroleum reserves that require ever increasing energy to extract.

When 100% of the extracted petroleum is used to extract, process and transport the petroleum the game will be up. We've already passed the 50% point. The energy gained from petroleum is a fast diminishing return. [See for details.]

No growth means no more wealth gains. In fact, the economy is probably already contracting though that's hidden in the deeply flawed GDP calculations. GDP shows that government spending to dig and fill holes is a gain to GDP. How insane is that?

So, good luck and all that!

Nobodys Home's picture

Years ago I wrote a paper showing 2050 was the year it totally falls apart.....That was before China became such an energy superuser.....Now? 10 to 20 more years? Who knows? Maybe oil does get created in huge quantities continuously. But I'm not thinking those guys are right on that one.

Life of Illusion's picture







Nobodys Home's picture

Or the changes in SEC rules allowing for gates and liquidations.

Is there a couple pills I could take for that?

Yah...cyanide!.....or buy a nail gun.

buzzsaw99's picture

this maggot thinks just like yellen. as long as asset prices don't go down a depression is impossible.

khakuda's picture

In other words, Ray, without endless free money assets are overpriced?

Guess what?  That means they are overpriced now.

Bug.  Windshield.

Nobodys Home's picture

I hate charts that have one variable going right and one going left. How the hell am I supposed to turn my head? Lets see...if I fold my computer screen into a tetrahedron and move the corners like one of those paper beaky things kids make for their I see....Imagine one variable the opposite way! EEMAGINASHUN!!!!! Yay!
I think I'll do some forex on the Swiss Franc! Looks wicked Good!
If I only had some money...and an account...I'd be destitute!

alexcojones's picture

Remember, Remember the Election in November

DT for Vendetta

Nobodys Home's picture

I think I have Kurtosis!
I have a real problem with outliars and the frequency of their deviations in the population. I'm tired of this leptokurtic distribution! Fuckem! Fuckem All!

Leonard should say that on the big bang theory :)
Yah...I know....the lil woman watches is sometimes funny...and sometimes Fucking Nerdy GAY!!!!!!!!!
Oh...sorry nerdy gay trigger warnings here!

GotNuttin&#039;todo's picture

It is all word salad. Dalio and his ilk make Emeril Lagasse look like the kid selling lemonade on the street corner. They speak doublespeak and wax eloquent in front of the cameras, but backstage ask "Was Amazon up or down today". It is all total bullshit. If anyone out there knew WTF they were talking about we wouldn't be in this mess. Think I'll go fishing & learn something useful ... like how to survive.

A82EBA's picture

Stock up on Berkley Gulp 3 inch white shrimp..Trout, Redfish and Flounder love'em!

Also use 2 ft fluorocarbon as leader..invisible to fish

RayKu's picture

Bovine gastrointestinal excrement indeed. They have lost control of the beast and have no idea how to get it back.

RogerMud's picture

the only thing you need to know about corellation:
when everything goes to infinity, correlation goes to 1.

conraddobler's picture

I mostly talk politics and spirituality now but I first was woken up starting in 2007 as I saw the whole mortgage crisis comming.

Wall Street cocks up and corrupts EVERYTHING it touches it's like a major demon with the FED representing Satan, the MIC is another one.

I am bad on names and its not important anyhow just struck me.

If I was going to play things now I'd seriously consider currencies as that I think is where all the money will be made, shorting stocks is tricky as hell in this enviroment, lots of shields, mostly people lying prostrate on them on that front but eventually they may be right, who knows.

Currencies I think though seem to be what you could play just by knowing the fundamentals of a country and then knowing how it might have to surf the comming tidal waves.

The rates at which various countries will have to print is one of the places I'd look for some good opportunites.  Bond markets are manipulated still eventually that short will come in, probably after the last short is incinerated.

I long ago quit worrying about the monetary aspects of this but I don't begrudge those who still play that.