Ray Dalio: Everything Changed In The Last 10 Days

It's becoming difficult to keep track of Ray Dalio's flipflopping in the past few weeks.

As we reported yesterday, in an interview with the FT, Bridgewater's co-chief investment officer, Bob Prince, echoed Goldman's co-head of equity sales, warning that "there had been a lot of complacency built up in markets over a long time, so we don't think this shakeout will be over in a matter of days" and added that "We'll probably have a much bigger shakeout coming."

Surprisingly, Bridgewater's bearish reversal followed just two weeks after Ray Dalio mocked market skeptics, telling his Davos audience anyone holding cash will "feel pretty stupid".

"We are in this Goldilocks period right now. Inflation isn’t a problem. Growth is good, everything is pretty good with a big jolt of stimulation coming from changes in tax laws. If you’re holding cash, you’re going to feel pretty stupid."

Fast forward to this weekend, when B-water's co-CIO Prince was no longer mocking cash holders, and instead predicted that "the broader economic backdrop was setting the stage for more turbulence later this year."

To this we responded that "we are curious just which principle of Ray Dalio it was to recommend one thing and just a few days later to turn around and pitch the exact opposite."

To our surprise, Dalio actually decided to address precisely this, and in a LinkedIn post this morning, he explained not only "what’s happening within the context of the classic short-term debt/business cycle", and where we are in it, but why Dalio changed his mind so abruptly in the span of 2 weeks, or as he put it "about 10 days ago", which changed his entire outlook on the US economy.

Dalio begins, as he usually does, by providing the following idealized snapshot of the business cycle:

In the “late-cycle” phase of the short-term debt/business cycle, when a) an economy’s demand is increasing at a rate that is faster than the capacity for it to produce is increasing and b) the capacity to produce is near its limits, prices of those items that are constrained (like workers and constrained capital goods) go up. At that time, profits also rise for those who own the capacities to produce those items that are in short supply. Then the acceleration of demand into capacity constraints and rise in prices and profits causes interest rates to rise and central banks to tighten monetary policy, which causes stock and other asset prices to fall because all assets are priced as the present value of their future cash flows and interest rates are the discount rate used to calculate present values. That is why it is not unusual to see strong economies accompanied by falling stock and other asset prices, which is curious to people who wonder why stocks go down when the economy is strong and don’t understand how this dynamic works. If the prices for stocks and other assets that do well when growth is strong continue to decline (which is typical), that and the credit market tightening leads demand to fall until demand is significantly less than the capacity to produce, which leads interest rates to fall and central banks to ease as their concerns about economic weakness supersede their concerns about inflation; that causes stock and other asset prices to rise. Such is the nature of the “short-term market and business cycle.” That is why it is classically best to buy stocks when the economy is very weak, there is a lot of excess capacity in the economy, and interest rates are falling (and to sell stocks when the reverse is the case).       

Where are we now? While Dalio admits it is unclear "precisely where we are", it is "clear that we are past the top in the bond market."

We know that we are in the “late-cycle” part of the short-term debt/business cycle with the conditions I described at the beginning now existing, but we don’t know precisely where we are—i.e., we don’t know exactly how far we are from the top in the stock market and then the economy, though it is clear that we are past the top in the bond market. While squinting and doing calculations to try to figure that out, we know that we won’t get it precisely right, but we hope to get it as by-and-large right as we have in past times.

What are the key corporate considerations in a late cycle economy? For one, whether profits are rising faster than rates:

As for the calculations we are doing, classically, if the spurt in growth in profits (which is good for equities) is faster than the rise in interest rates (which is bad for asset prices) that will be marginally bullish, and if there is a lot of cash still on the sidelines (which there is) that causes one last spurt in equities prices, which is also bad for bonds (raising interest rates) and leads to Fed tightening, which makes the classic top. For the most part, that will be the most important determinant of the exact timing of the top in stocks.    

And here, a surprising mea culpa from the billionaire founder of the world's biggest hedge fund:

"About 10 days ago, that’s where I thought we were. However, recent spurts in stimulations, growth, and wage numbers signaled that the cycle is a bit ahead of where I thought it was."

Dalio is of course referring to the February 2 payrolls report, and specifically the jump in hourly earnings, which rose the most since 2009. That was just the beginning as he explains next:

These reports understandably led to the reactions in bonds, which affected stocks as they did. Then on Friday, we heard the announced budget deal that will produce both more fiscal stimulation and more T-bond selling by the Treasury, which is more bearish for bonds. And soon ahead, we will hear about a big (and needed) infrastructure plan and the larger deficits and more Treasury bond selling that will be needed to fund them. In other words, there is a whole lot of hitting the gas into capacity constraints that will lead to nominal rate rises driven by the markets. The Fed’s reactions to them and the amount of real (inflation-adjusted) rate rises that will result will be very important, so we will be monitoring this closely.

The Fed's reaction will also be to the market, which took one look at these rapidly changing events and suffered a historic move, entering a correction from all time highs in the short period on record.

But wait, there's more: in this case a recession scheduled to hit some time in 2019/2020:

What we do know is that we are in the part of the cycle in which the central banks’ getting monetary policy right is difficult and that this time around the balancing act will be especially difficult (given all the stimulation into capacity constraints and given the long durations of assets and a number of other factors) so that the risks of a recession in the next 18-24 months are rising. While most market players are focusing on the strong 2018, we are focusing more on 2019 and 2020 (which is the next presidential election year). Frankly, it seems to be inappropriate oversight to not be talking about the chances of a recession and what that recession might look like prior to the next election.

Finally, here is what according to Dalio is different in this business cycle, and why he is especially nervous this time round. As the billionaire writes,"there are two important differences that concern him:

  1. there is such a big gap between the haves and the have-nots (which creates social and political sensitivities) and
  2. the powers of central banks to reverse contractions are more limited than they have ever been (because interest rates are so low and QE is less effective).

"For these reasons" Dalio concludes, "I worry about what the next economic downturn will be like, though it is unlikely to come soon."

Of course, if it comes soon, Bridgewater is getting ready: as we reported on Friday, the hedge fund has been quietly building its biggest short position ever, which as of last week had grown to over $13 billion in European corporate shorts.  It's not done: this morning Bloomberg added that Bridgewater added to the basket by shorting $1 billion shares of Europea's largest manufacturing company, Siemens. It will hardly stop here.

And just like that, the world's biggest hedge fund, and biggest risk-parity fund, just turned incrementally more bearish.

Comments

Laowei Gweilo Give Me Some Truth Mon, 02/12/2018 - 11:40 Permalink

to be fair, that's not really what Dalios said...

 

watch the video

he was talking about the future, not the preset (at Davos) or the past... the future 'blow off' 

he was predicting 'we're at the late cycle' and because there is a lot of cash on the side lines

and IN THE COMING FUTURE, more of that cash will deploy, and more and more cash will deploy 'because if you're holding cash you're going to feel pretty stupid' [so more and more cash will deploy] and we'll get a market blow off

 

-_- kinda important context

he wasn't talked about holding cash now or in JAN or even last year -- the entire context of that conversation was Dalios predicting the late cycle market blow off that he said was coming

  

In reply to by Give Me Some Truth

hedgeless_horseman Give Me Some Truth Mon, 02/12/2018 - 11:41 Permalink

 

He lost me when he states, "Growth is good; inflation is good" 

He is heavily invested in the carnival/casino/market...

What is the con?  The con is that economic growth is both good and real.  It is most often neither.  The long con is nominal returns versus real returns

What keeps the con going?  Apart from greed?  Money printing.  

Please, understand that if the amount of money in a closed system doubles, the value of each monetary unit halves, and the price of everything, including stocks, increases 100%. [and Ray looks like a genius]

https://www.zerohedge.com/news/2017-01-13/what-can-we-learn-looking-car…

If we don't have inflation (money printing) then it is a hell of a lot harder for a fund manager to generate positive returns.

In reply to by Give Me Some Truth

aurum4040 hedgeless_horseman Mon, 02/12/2018 - 12:19 Permalink

I am more inclined to believe its the criminal developments via the Rep Memo. Moreso the fact that Trump released it. The money changers and deep state are firing back. To suddenly think numbers actually matter in the market is just ludicrous. After 9 years of unicorns and rainbows. Dont think so.    

In reply to by hedgeless_horseman

Justin Case Cry Baby Moe Mon, 02/12/2018 - 11:21 Permalink

You don't have to be an economist to figure out what happens when you raise interest rates, increase Gov't spending and reduce taxes. I don't know what could be worse for the economy. The buyers of US debt are dwindling. There are alternatives to doing business and trade then just USD. If Saudi's turn to Yuan payments for oil, that is going to be a spike in the USD coffin. Less acceptance and moar USD printing is a bad scenario for the very near future. Markets can come down 80% and that might still be considered over valued. Never seen P/E ratios like this, well there was one dot com company I recall had a 5000 x P/E ratio in 1999. We all know what followed.

In reply to by Cry Baby Moe

SDShack Justin Case Mon, 02/12/2018 - 12:43 Permalink

People need to stop thinking there are any "functioning" markets, because they don't exist, and haven't existed for about a decade now. We are now in a perpetual World Wide Debt Ponzi. We have evolved from just trying to protect everyone by keeping the bubble inflated to culling the herd. Japan was written off years ago, as have the BRIICS recently. Brexit shows the Euro is failing as more and more EU states are now fighting to contain their own _exit parties. DT and MAGA is just another example of the "every man for himself" mentality sweeping the globe. The target now is the Yuan/Ruble. The sham budget agreement that increased spending and reduced taxes verifies this. There is a reason why the USSA spends more on the security state then all other nations combined, yet defense spending is being increased. It is to further advance the security state to defend the Petro$ at ALL costs against anyone and everyone! 

I have always said, beware when sociopaths start turning on each other because that is the tell that the endgame is coming. Just like bailouts on bailouts with TARP, and "weaker" parties like Bear-Stearns and Lehman were "sacrificed", the same will be done on a global scale going forward. Only this time, it will be sovereigns that will be sacrificed to protect the USSA and the Petro$, forcing all that "sovereign" money to be redistributed to the Petro$ as the last "safe harbor". This is how the Fed keeps the Debt Ponzi going and why they are not worried about who is going to buy US Treasuries. Everyone and everything will be sacrificed to protect the Petro$, even if this means WWIII to persuade "investors". Plan accordingly. 

In reply to by Justin Case

gdpetti Cry Baby Moe Mon, 02/12/2018 - 13:35 Permalink

Yes, which is what I was doing by the end... the biggest takeaway is the fear these puppets have in the investing public seeing through their BS... same with the Fed, other CBs, MSM, religion, professors of crap, scientists publishing  mostly crap etc... their job is to keep the public thinking they know what they are doing, but articles like this one easily point out that 'the emperor wears no clothes'... they are just members of the club and follow orders... they are being 'outed' like all the OWO and its minions...  no longer needed for their masters NWO.

In reply to by Cry Baby Moe

cheech_wizard Mon, 02/12/2018 - 10:25 Permalink

Note to Ray: Here's my latest conspiracy theory. I just came up with this after my morning cup of coffee.
The most recent market sell-off was completely engineered by the Federal Reserve in order to provide additional tax revenue to the Federal Government. (Of course, bonuses all around to be had at the Federal Reserve had to be negotiated first as Janet Yellen's parting gift...) This will repeat endlessly whenever the Federal Government needs to bolster it's balance sheet.

Standard Disclaimer: It's as plausible as the rest of the bullshit I read from all the so-called experts.

Give Me Some Truth cheech_wizard Mon, 02/12/2018 - 11:19 Permalink

Has anyone seen the line item on government revenue from "capital gains tax receipts?" This, I suspect, is a large part of any growth in government revenue.

If the stock market is inflating at a record pace (and home values in many markets) it follows that Uncle Sam and local governments are making a killing whenever anyone cashes out a portion of their portfolio.

Also, at state and local levels "sales tax" receipts go up or stay the same largely because the price of those things that are being taxed have gone up. That is, a 10-percent local tax (our tax) on groceries and sundries produces more revenue than it did last year or the year before.

In reply to by cheech_wizard

wholy1 Mon, 02/12/2018 - 10:27 Permalink

yo, all you predatory/parasitc "traders" contributing NOTHING to REAL productivity - may the PRIVATELY-held [NOT]Federal[NO]Reserve PPPT off-shore ops bust everyone of your sorry asses!

cheech_wizard Mon, 02/12/2018 - 10:27 Permalink

Second note to Ray: "there is such a big gap between the haves and the have-nots (which creates social and political sensitivities)"...

Standard Disclaimer: I'm sure there is a bullet out there somewhere with your initials on it. Just saying.

DipshitMiddleC… Mon, 02/12/2018 - 10:31 Permalink

when the next down turn happens there wont be a recovery

 

the jackboots have turned all police forces into paramilitary forces for a reason

 

its going to be a fascist police state that strikes dissenters down violenty.

 

"Force without mercy"

 

 

Cloud9.5 DipshitMiddleC… Mon, 02/12/2018 - 13:16 Permalink

Dip, I have no doubt that the state will assume its fallback position of tyranny.  History is full of examples. In WWII, we disenfranchised Americans of Japanese descent and sent them to concentration camps.  In WWI the government arrested hoarders and took their supplies.  Gold was confiscated during the depression.  Lincoln suspended habeas corpus and arrested thousands that might be southern sympathizers.

I have no doubt that in an unfolding crisis, millions will flood FEMA camps.  Out of fear and desperation they will shed any vestige of their remaining civil rights in an effort to survive.  Many would jump at the chance to join the marauding forces fanning out through the countryside searching for food and fuel.

What is different this time is the simple fact that the entire population is totally dependent on just in time supply chains and the grid.  When the grid goes down and the supply chains break any semblance of order will be shattered.  The authorities will find themselves besieged by millions of desperate dangerous people that will do anything to survive.  Washington will fall to its dependents that live just a few blocks down the street.

The thinning will start almost immediately.   Convoys will be attacked.   Depots will be raided.  The military will try to protect infrastructure.  When their families begin to starve they will dissert. The police will form up around warlords.  Local communities will circle the wagons and form up militias to protect themselves.

In reply to by DipshitMiddleC…

Obscene FRN Call Cloud9.5 Mon, 02/12/2018 - 14:39 Permalink

Bbbbbut ...mah Bitcoin!!

Btw, my daughter is married to a Marine. They live on base. Situation you describe already is the new normal. One modest earthquake disruption of highway, rail and pipelines to soCal ...and it's going to be Mad Max.

Relying on LEO for more than revenue shakedown is already a joke, wealthy people hire private security. You can expect to be rear-ended at an intersection just to get you out of a locked vehicle as part of an ambush.

They hate us for this freedom.

In reply to by Cloud9.5