World's Biggest Hedge Fund: "We Are Bearish On Almost All Financial Assets"

One month ago, in a surprising reversal, we reported that Bridgewater was outperforming peers this year even after losing money in April, largely as a result of a a massive derisking, i.e. turning bearish. As Bloomberg further added, "the fund has also reduced its net long bets on U.S. equities to about 10 percent of assets from 120% earlier this year, and that overall, the fund is net short equities."

And now we know why.

In one of Bridgewater's latest Daily Observations authored by co-CIO Greg Jensen, the firm writes that "2019 is setting up to be a dangerous year, as the fiscal stimulus rolls off while the impact of the Fed's tightening will be peaking" a point echoed yesterday by the head of the Indian central bank, Urjit Patel, who warned that unless the Fed ends its balance sheet reduction which comes as a time when the Treasury is soaking up dollar liquidity by issuing substantial amounts of Treasuries to fund the Trump budget, the tightening in financial conditions could lead to a global conflagration started by emerging markets.

And since asset markets lead the economy, Bridgewater continues, "for investors the danger is already here" and explains as follows:

Markets are already vulnerable, as the Fed is pulling back liquidity and raising rates, making cash scarcer and more attractive - reversing the easy liquidity and 0% cash rate that helped push money out of the risk curve over the course of the expansion. The danger to assets from the shift in liquidity and the building late-cycle dynamics is compounded by the fact that financial assets are pricing in a Goldilocks scenario of sustained strength, with little chance of either a slump or an overheating as the Fed continues its tightening cycle over the next year and a half.

To justify his point, Jensen notes that markets are pricing in that the world is pricing in a "goldilocks" world at the start of 2020, with 2.4% growth, 3.0% 10Y yields and 2.8% Fed Funds rates, which is essentially "an extrapolation of current conditions, with expected growth and inflation near perfect levels. The yield curve is priced to be flat, oil to be at $62, and the dollar to be down 3.5% against developed world currencies."

Looking at pricing dynamics, the world's largest hedge fund also notes that "expectations are for inflation to remain at fairly benign levels just above the Fed's 2% target, and options pricing reflects little investor demand for protection against the potential for the economy to bubble over. On the other hand, it also shows virtually no chance of deflation, which is a high likelihood in the next downturn."

Needless to say, Bridgewater is skeptical: "we doubt this picture of calm priced into markets will actually play out."

But what is most ominous, is Bridgewater's forecast beyond the end of 2019, when mysteriously most other permabullish projections are cut off. As Jansen writes, "while such strong conditions would call for further Fed tightening, there's almost no further tightening priced in beyond the end of 2019. Bond yields are not priced in to rise much, implying that the yield curve will continue to flatten. This seems to imply an unsustainable set of conditions, given that government deficits will continue growing even after the peak of fiscal stimulation and the Fed is scheduled to continue unwinding is balance sheet, it is difficult to imagine attracting sufficient bond buyers with the yield curve continuing to flatten."

With all of the above in mind, Bridgewater has one simple message: sold to you.

"We are bearish on financial assets as the US economy progresses toward the late cycle, liquidity has been removed, and the markets are pricing in a continuation of recent conditions despite the changing backdrop."

Don't worry though: Dennis Gartman remains bullish.

Comments

LawsofPhysics Tue, 06/05/2018 - 09:16 Permalink

"Financial assets"...  LMFAO!!!

paper/digital PROMISES...

trust motherfuckers, have these useless overcompensated paper-pushers fucked us over before?

Fuck em, JUMP YOU FUCKERS!

 

Haus-Targaryen NoDebt Tue, 06/05/2018 - 09:53 Permalink

I used to spend copious amounts of time pouring over CB minutes, Bloomberg Terminal ad inifinitum, read literally every piece of financial news I could get my hands on when I was writing my dissertation on the screwup that is the euro. 

I saw the laws of economics, and basic supply (e.g., the eurosystem being a "market" for certain financial assets) and demand get violated again and again and again due to central bank intervention. 

But for the ECB dropping cash over all the banks and "sovereigns" in Europe ... the euro would have ceased to exist sometime in 2011. 

Your thesis is likely correct once again. 

In reply to by NoDebt

brushhog Helena Bonham-Carter Tue, 06/05/2018 - 17:05 Permalink

 He's bearish on financial instruments, bullish on cash as he said he expects deflation. Markets, as in everything in life, cannot get away from natural principles. The laws of nature rule us all in the end....even the Clintons, the Rotheschilds, and the Vanderbuilts. How long can you inhale without exhaling? If you let your body breath naturally you inhale maybe 2 seconds, exhale 2 seconds? The breaths come smoothly, effortlessly, and you barely notice whether you are inhaling or exhaling.
 Now if you engage your conscious mind and force yourself to inhale as long as you can [ and this is what central planners are doing to the economy ] you will inhale longer, you'll keep going until it gets very uncomfortable and still you'll squeeze a little more in before exhaling in a loud, explosive gust. The exhale will be long, explosive and uncomfortable because you forced an inhalation that was unnatural. Thats what markets are going to do.

Some power hungry human beings are so arrogant, and so foolish, that they believe they can take over and breath for the economy. Like a child playing a game who tries to consciously breath his body instead of letting it happen normally. We can only hope that at some point, humanity will mature to the point that we no longer tolerate this kind of nonsense.

In reply to by Helena Bonham-Carter

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In reply to by bobcatz

GoldenDonuts Haus-Targaryen Tue, 06/05/2018 - 15:43 Permalink

The belief that the regular European has in his/her government (slave master) is unbelievable to me.  It's bad enough in North America but the absolute worship of power is shocking in your average European.  The value of the Euro should be zero.  How do the non German countries continue impoverishing themselves so that BMW can sell cars in Euros instead of Marks is a mystery to me.

In reply to by Haus-Targaryen

GPW Oldguy05 Tue, 06/05/2018 - 15:59 Permalink

There is no hope.  When only 12,000 people in the US can be convinced to sign the petition to "end the Fed" then all hope is truly lost.  Proof enough that the never ending propaganda that the Government and the Fed are  here "to help all the people" has been totally effective. 

American's are largely ignorant of how the Federal Reserve (a bank owned operation) has been screwing them over since 1913 largely through an intentional degradation and inflation of the currency.

Sad.

 

 

 

 

In reply to by Oldguy05

HRClinton BaBaBouy Tue, 06/05/2018 - 14:01 Permalink

Too simple, too 1D for real life. Need more than gold. E.g.

DIY + Barter + Gold + Crypto + Appreciating* Assets + productive RE.

* Art, gems, collectibles.

Anything of economic value that can be priced in fiat, but traded directly for other assets -- and thus avoid fiat completely.

What one asset won't do for you, another one will. Because real life is too fluid and unpredictable to be tied to only one type of asset.  One asset investments are for fools and sleazy shills.

In reply to by BaBaBouy

1033eruth AynRandObjectivist Tue, 06/05/2018 - 10:50 Permalink

I wish you could give some insight as to WHAT will precipitate this "loss of control".  They control the money supply and they've been inflating it in perpetuity to prevent the "loss of control".  Everything will be balanced on the backs of taxpayers in the guise of inflation but its just like the boiled frog.  When will Americans decide that the RATE of inflation is no longer tolerable?  The results are that it drives more Americans down the economic ladder who IN TURN become socialists because their economic hardship makes the "rich" (anybody with more money than they), the enemy.  

Also we have a full court press from the propaganda media that everybody is a victim therefore due compensation and they all shout from the mount of moral superiority.

Inflation is the path of least resistance since its been completely acceptable by the American public to date with zero backlash.  

In reply to by AynRandObjectivist

AynRandObjectivist 1033eruth Tue, 06/05/2018 - 11:18 Permalink

My guide for all things human is history. They will lose control because they always have before. The rise of socialism really frightens me and I think it will continue with the next crash. They will blame capitalism and go towards something that is more "fair" and "equitable" instead of blaming or bothering to understand the real culprit, CRONY capitalism. Ultimately this leads to a constitutional crisis and a major battle between the patriots and the progressive pieces of shit. It doesn't end well and we all know that. But there is a price to pay for distorting market forces for this long.  

In reply to by 1033eruth

Space_Cowboy AynRandObjectivist Tue, 06/05/2018 - 17:16 Permalink

Well put.  I'm sitting in California (family obligations and work) watching exactly what you describe, it's almost surreal.  The first thing that stands out to me is now many people have been brainwashed into believing the propaganda being pumped out by controlled media.  To make it worse most of these socialist idiots have no clue that the government has to take from someone else to give them anything; hence the exorbitantly high taxes.

 

They also try to justify socialism through making things "equal" for "everyone" when really they're taking more from predominantly White middle class Americans, and handing it over to the lower class and immigrants (mostly illegal).  Another point they miss out on is that the crony capitalists have already flown the coop; and have a million and one ways to get out of their tax obligations because the system is setup that way (this is key).

 

The one thing the virtue signalers out here will never admit to and cover up, is the fact that they live off the fruit of 3rd-world cheap labor brought in by most illegal migrants.  This is not only in agriculture, but also in hospitality, restaurants, and construction.  The other benefit they get is that they hand out CA Driver's Licenses like candy, and have them vote Democrat in every election, besides the usual ballot stuffing.

 

Right now, they're trying to fast-track CA Lt. Gov. Gavin Newcomb to become the new CA governor, it's blatantly obvious.  The leftist asshat states he'll "Ban Military-style Ammunition", WTF does that mean?!  Death by a thousand cuts to the 2nd amendment, indeed.  I really do wonder if there are many conservatives/libertarians anymore willing to stand up to this nonsense in CA, or they've already left.  Ironically, it's most of the liberals that have been priced out and spread their ideology to traditionally conservative states, not good and quite possibly by nefarious design.

 

I have quietly observed leftists through work and living environment, and there's one blatantly obvious characteristic that stands out to me, and helps makes sense of this maddening situation.  They tend to get pumped with a false sense of superiority, claiming they have a monopoly on "intellectualism"; yet this same sheer amount of arrogance is what blinds to them to their own manipulation of mind and body, by TPTB.  If true Patriots that believe in the founding principles of this Constitutional Republic (NOT Democracy), don't stand up, this country will be lost to idiocracy, and a roll-out of automation backed by Universal Basic Income a.k.a massive welfare state.

In reply to by AynRandObjectivist

AynRandObjectivist Space_Cowboy Tue, 06/05/2018 - 17:48 Permalink

My utopian hope is that California implodes well before the nation does and serves as a stern warning for what liberalism (surrogate of socialism) does to productivity. I was born and raised in San Francisco, but got the hell out of there 5 years ago. It's an insane place. I don't believe the conservatives/libertarians can muster a fight nor do I think they need to. CA will cannibalize itself and someday the pendulum should swing back.  

In reply to by Space_Cowboy

Space_Cowboy AynRandObjectivist Tue, 06/05/2018 - 19:11 Permalink

You make an interesting point, and you're not the only one I've spoken with that was a native of the SF Bay area that has reflected the same sentiment.  The "old" California if you want to call it that - before the whole tech boom / ardent leftistm spread - is what I admired, since I've lived between the Midwest (outside of St. Louis in Southern Illinois), and California (SF Bay area and So Cal area).  I'm currently live in the SF Bay area and have been for about 6 to 7 years.  Just within that small amount of time, I've seen drastic changes to this area regarding real estate prices, increased taxes, huge demographic shifts, and most alarming a spreading "groupthink" of hard leftism cognitive dissonance.

 

I actually agree, I do think California will cannibalize itself and/or collapse, which I don't mind if it's for the better; but I'll admit I'm as prepared as I can be in the area that I'm in.  I'm not an alarmist, but if SHTF out here, well, you know how rowdy it gets over in the East Bay, and I don't know how far that would spread in a pro-longed civil riot (for lack of a better term).  As an American with patriotic/libertarian leanings I really do feel like the last man standing out here, but it should be fun to watch, and I'll be happy to keep you guys updated on the latest shenanigans from the ground, lol. 

In reply to by AynRandObjectivist

buzzsaw99 Tue, 06/05/2018 - 09:19 Permalink

conflagration is what is going on inside hitlary's diaper right now.

The blood of a fetus will keep you alive, even if you are an inch from death, but at a terrible price. You have slain something pure and defenseless to save yourself, and you will have but a half-life, a cursed life, from the moment the blood touches your lips...