For some inexplicable reason, Ray Dalio still thinks the the world not only underwent a deleveraging, but that it was "beautiful." Not only did McKinsey prove that to be completely false two years ago, but for good measure the IIF confirmed as much last week, when it revealed that global debt has hit a record $217 trillion, or 327% of GDP...
... while Citi's Matt King showed that with no demand for credit in the private sector, central banks had no choice but to inject trillions to keep risk prices from collapsing.
And now, replacing one delusion with another, the Bridgewater head has penned an article in which he notes that as the "punch bowl" era is ending - an era which made Dalio's hedge fund the biggest in the world, and richer beyond his wildest dreams - he would like to take the opportunity to "thanks the central bankers" who have 'inexplicably' been "more maligned than appreciated" even though their aggressive policies have, and here is delusion #1 again, "successfully brought about beautiful deleveragings."
"In my opinion, at this point of transition, we should savor this accomplishment and thank the policy makers who fought to bring about these policies. They had to fight hard to do it and have been more maligned than appreciated. Let’s thank them."
They fought hard to print $20 trillion in new money? Now that is truly news to us.
That said, we can see why Dalio would want to thank "them": he wouldn't be where he is, and his fund would certainly not exist today, if it weren't for said central bankers who came to rescue the insolvent US financial system by sacrificing the middle class and burying generations under unrepayable debt. Still, some who may skip thanking the central bankers are hundreds of millions of elderly Americans and people worldwide also wouldn't be forced to work one or more jobs well into their retirement years because monetary policies lowered the return on their savings to zero (or negative in Europe), as these same "underappreciated" central bankers created three consecutive bubbles, and the only reason the world is in its current abysmal socio-political and economic shape is due to the cumulative effect of their disastrous policies which meant creating ever greater asset and debt bubbles to mask the effects of the previous bubble, resulting in unprecedented wealth and income inequality, and which have culminated - most recently - with Brexit and Trump.
In fact, the only thing of substance in Dalio's note is the realization that the era of musical chairs is almost over: "our responsibility now is to keep dancing but closer to the exit and with a sharp eye on the tea leaves."
Dalio leaves off by, what else, echoing Yellen: "no big debt bubble bursting any time soon" (wait, wasn't he just thanking them moments ago for fixing things?) although mercifully he doesn't say "in our lifetimes", however he at least realizes that a "big squeeze" is coming. We hope, for Bridgewater's sake, that Dalio knows how to navigate capital markets as skillfully when there are no central banks to hold his hand and punch his trade tickets.
His full LinkedIn letter below:
Central Banks’ Reversals Signal the End of One Era and the Beginning of Another
For the last nine years, central banks drove interest rates to nil and pumped money into the system creating favorable carries and abundant cash. These actions pushed up asset prices, drove nominal interest rates below nominal growth rates, pushed real interest rates on cash negative, and drove real bond yields down to near zero percent, which created beautiful deleveragings, brought about balance sheet repairs, and led to more conventional economic conditions in which credit growth and economic growth are growing in relatively good balance with debt growth. That era is ending.
Central bankers have clearly and understandably told us that henceforth those flows from their punch bowls will be tapered rather than increased—i.e., that the directions of policy are reversing so we are at a) the end of that nine-year era of continuous pressings down on interest rates and pushing out of money that created the liquidity-fueled moves in the economies and markets, and b) the beginning of the late-cycle phase of the business/short-term debt cycle, in which central bankers try to tighten at paces that are exactly right in order to keep growth and inflation neither too hot nor too cold, until they don’t get it right and we have our next downturn. Recognizing that, our responsibility now is to keep dancing but closer to the exit and with a sharp eye on the tea leaves.
Wonderful Monetary Policies
Generally speaking (depending on the country), it is appropriate for central banks to lessen the aggressiveness of their unconventional policies because these policies have successfully brought about beautiful deleveragings. In my opinion, at this point of transition, we should savor this accomplishment and thank the policy makers who fought to bring about these policies. They had to fight hard to do it and have been more maligned than appreciated. Let’s thank them.
As you know, looking ahead, we don’t project a big debt bubble bursting any time soon (because of the balance sheet repairs that have taken place), though we do see an increasingly intensifying “Big Squeeze” (see the Big Picture).
PS: We look forward to Dalio's letter when the current tightening episode ends in a global recession and the biggest crash yet, and wonder if he will still be in the same grateful mood.