Ray Dalio Warns: Investors Just Got "A Taste Of What Tightening Will Be Like"

Echoing his recent comments on how investors' exposure to low interest rates is extreme and warned that a rise in yields could spark the biggest crisis for fixed-income investors in almost 40 years.

“A 1 percent rise in bond yields will produce the largest bear market in bonds that we have seen since 1980 to 1981," Bridgewater Associates founder Dalio said in a Bloomberg TV interview in Davos on Wednesday. We’re in a bear market, he said.


However, as we explained last December, this is a low-ball estimate which "understates the potential losses" as it "does not include high-yield bonds, fixed-rate mortgages, and fixed-income derivatives", which would suggest that the real number is likely more than double the estimated when taking into account all duration products.

As a reminder, Goldman calculated the entire duration universe at $40 trillion as of the summer of 2016, resulting in $2.4 trillion in losses for a 1% move. By now the number is far, far greater.

Bridgewater Founder Ray Dalio warns today, Via LinkedIn.com, what we are seeing is typical late-cycle behavior, though more exaggerated because the durations of investment assets (i.e., their sensitivities to interest rate changes) are greater.

Here’s what happened, Dalio explains:

Over the past week or so, we had reports of strong growth and rising wages (good things!), which sent bonds and stocks down (bad for most investors) due to justifiable fears that the Fed will tighten faster than is priced in the credit markets.  

The surge in growth and wages came because of both the fiscal stimulation and the rekindling of animal spirits, thrusting the economy into late-cycle capacity constraints, which is leading to the expectations of faster Fed tightening.  

In other words, fiscal stimulation is hitting the gas, which is driving the economy forward into the capacity constraints, which is triggering interest rate increases that are hitting the brakes, first in the markets and later in the economy.  

This confluence of circumstances will make it difficult for the Fed to get monetary policy exactly right.  

This is classic late-cycle behavior (when it’s difficult to get monetary policy exactly right, which leads to recessions), though it is more exaggerated because the durations of assets are uniquely long, which means that when interest rates are low, prices of assets are more sensitive to changes in interest rates than when interest rates are high.

To be clear, we are not claiming to be smart about this.  In fact, the opposite is true, as this is happening sooner than we expected.  Still, these big declines are just minor corrections in the scope of things (see charts of stocks and bonds below), there is a lot of cash on the side to buy on the break, and what comes next will be most important.

As shown, the recent price declines are not even noticeable within context of the bigger and longer term picture.

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So it seems Dalio continues to suggest those holding cash are idiots, keep calm and carry on.


JibjeResearch Mon, 02/05/2018 - 12:31 Permalink

Hello Ray-Ray lolz ehehehe.....

You buy, you make money..

You sell, you make money...

You do nothing, you make money ... , this one is very hard for amateurs to get.


No.. worry... just get on the Nokia train...., it's on the runway .... 

Don't miss this one...., it's too easy .. man

Best ... :)

buzzsaw99 Mon, 02/05/2018 - 12:34 Permalink

okay, he says we can't hold cash, shouldn't be in bonds, and the stock market is going to crash.  we get all that, but what does he suggest?

Don Sunset Mon, 02/05/2018 - 12:36 Permalink

What comes next is what we get as a result of prolonged market manipulation by the FED.  We're eff'd, Ray.

Well, at least I'll get some kicks out of watching the latest generation of "investors" experience the greatest market crash of all time.  All these "investors" know is UP UP UP thanks to the FED.  Death to the CBs and their ponzi!

Ron_Mexico Mon, 02/05/2018 - 12:52 Permalink

" . . . there is a lot of cash on the side to buy on the break, and what comes next will be most important."

Um, seems like I've been reading article after article about how there's no cash left on the sidelines. Does paleface speak with forked tongue?

hibou-Owl Mon, 02/05/2018 - 12:55 Permalink

Pension schemes are on toast. If they are crying poor now after a massive run up in bond's, equities and property even a small correction will sink them.

Grey Army retail spend is going to slump. 

Brokenarrow Mon, 02/05/2018 - 13:05 Permalink

the biggest hedge fund in the world and this fuck has to have his face in the paper everyday. worse than that fat, gay-boy tepper. cramer is still the king of lying scum

mr bear Mon, 02/05/2018 - 18:47 Permalink

Dalio is right, That's why there'll be no more tightening until the Dow kicks 27,000 again.

The day the Fed embraced "transparency" was the day adult economic leadership left town.

Remember when the Fed spoke with one voice and dissent was squashed? Today, dissent on the Fed gets featured for an hour -- live, every morning -- on CNBC and Bloomberg. How does this help us?

Joe Dirt Thu, 02/08/2018 - 18:52 Permalink

i thought people bought bonds for the interest payments. They get the principal back at maturity? What's their bitch? So they get less interest than they get on their money now. You bought the safety ticket you take the ride. Or get a 12 month CD next time. 

Because there isn't much inflation except in the investment markets. So it's just brakes. Brakes are good to stop you from going off a bigger cliff.