Since stepping back from day-to-day management of Bridgewater Associates and its $160 billion AUM, Ray Dalio has been focusing his energies on the role of doomsayer, telling seemingly anybody who would listen (and plenty of financial journalists have) about why the modern geopolitical climate is eerily similar to that of the late 1930s.
However, Dalio has been careful to preface his pessimism with the warning that the looming debt crisis is still a ways off. In fact, he expects the good times to persist for at least another 18 months or so as President Trump's tax cuts and regulatory reforms continue to work their magic. Eventually, the pain will follow, he says - but for now, we're still in the seventh inning of the current economic cycle (and what a long inning it has been).
But while Dalio has preferred to keep his projections vague, focusing more on his analysis of the mechanics behind debt crises, in an interview with the Financial Times, Bridgewater co-CIO Bob Prince offered a more pessimistic outlook, suggesting that the market has arrived at an inflection point, and that last week's market turmoil was just the latest indication that investors are coming around to the idea that earnings growth, one of the bull market's last supporting pillars, may has peaked. And as company will soon be facing difficult yoy comps, it's difficult to imagine how the strong corporate earnings narrative will survive.
"A lot of optimism about future earnings growth has been baked into equity valuations. But we are at a potential inflection point where the economy is moving from hot to mediocre," Mr Prince said in an interview.
And while Prince doesn't foresee monetary tightening leading to "bombs going off" in the immediate future, he expects that there will be "pressure" ahead, as major central banks continue "turning the screws" on the global economy.
Mr Prince, who manages Bridgewater’s $160bn of assets alongside founder Ray Dalio and co-CIO Greg Jensen, said: "We are now approaching the stage where monetary tightening could produce, perhaps not a big downturn, but more pressure."
Most bourses regained their footing on Friday, and US Treasury yields have fallen from the seven-year highs they touched at the peak of the bond rout. But Mr Prince cautioned that more turbulence was likely, given how major central banks, led by the Fed, were turning the screws on monetary policy.
Once the selloff has begun in earnest, nobody will remember the events of last week.
"This week could fade into history and we won’t remember it, but we are clearly shifting from an era of monetary easing to monetary tightening," he said. "If that [a growth inflection point] is what is happening, then this won’t be a one-week event."
And while his boss might disagree, Prince said the US economy will likely avoid a sharp downturn like the one we saw ten years ago. Instead, investors should expect a slow grinding downturn followed by a tepid recovery as neither the federal government nor the Federal Reserve will have the tools available to try and ease the economy out of its tailspin.
"The risks of a sharp downturn are somewhat mitigated by the fact that we’re not overleveraged, but the risks of a prolonged downturn are greater," Mr Prince said. "What will pull us out of it?"
Assuming developments in the geopolitical realm continue progressing along their current path, maybe Prince's boss's '1937' thesis will be proven correct.