For a long time, Ray Dalio's Bridgewater, the largest hedge fund (excluding the Fed of course [4]) was a firm believer that thanks to the "beautiful deleveraging [5]" thesis or namely a world in which nominal GDP growth is above nominal interest rates, driven lower primarily and some would say exclusively by the backstop of Fed purchases with the result being a decline in debt relative to GDP, there could be a way out of the Keynesian liquidity trap. Alas, as a result of the recent surge higher in rates due to fears of a taper, either now, or in the near-term future, this dynamic has changed and as Bridgewater reports in its most recent big picture summary, the "beautiful deleveraging" is now far less likely.
The corollary to this rate surge is that a necessary and sufficient condition would be a pick up in the broader economy to offset the rate increase. However, at a time when the Fed is actively considering not only tapering, but also unwinding QE and money printing entirely - a reflexive condition which also will continue to drive rates higher all else equal - such a pick up would need to take place without the benefit of the Fed's active money printing.
Which, in the eyes of Bridgewater, means the only way out is for the private sector to pick up loan creation where the Fed leaves off.
This, however, would need to happen at a time when rates continue to creep higher and as a result of the increasing debt service payments to the private sector, the impact on wealth and asset pricing would be adverse. In other words, someone else would need to step in if the Fed were to step out. Can this happen? Bridgewater's assessment is that for the private sector to be able to pick up the Fed's torch to the extent necessary, is "at the upper end of the range of reasonable possibilities."
The end result: "Bridgewater is now long bonds."
Whether this also means that the fund is bearish on overall growth, bullish on deflation, and very bullish that in the Taper is not only off the table but there is potential for even more easing by the Fed, is unknown.
What is known is that once the piggyback crew jumps on the Bridgewater bandwagon, which is now saying rates will drop (ostensibly leading to the end of the Great Rotation and perhaps the start of the Great Unrotation), expect to see some substantial price realignment between the two main assets classes: stocks and bonds.