This Is What Scares Ray Dalio The Most

Exactly one year ago, a bulled up Ray Dalio, head of the world's largest hedge fund made a prediction he would probably rather forget: "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," Ray Dalio told CNBC in January 2018 during last year's Davos event.

But the soundbite that Dalio was most memorable for, was the following: "There is a lot of cash on the sidelines. ... We're going to be inundated with cash," he said. "If you're holding cash, you're going to feel pretty stupid."

Ironically, at the end of 2018, cash was the only asset class that generated a positive return, making anyone holding anything but cash pretty stupid... which incidentally was not the $150BN Bridgewater, whose Pure Alpha returned 12% in 2018, confirming that anyone who listens to bombastic hedge fund forecasts without reading the fine print is set to underperform.

So fast forward to today when Ray Dalio was once made the speaking round at Davos, and revealed the answer that all investors ask themselves every now and then: "what scares most the billionaire founder of the world's biggest hedge fund?"

The answer: the next downturn in global growth, which will hit both markets and the economy, when central banks will have virtually no ammo to spark another rebound. Dalio's comments come at a time when investors are increasingly concerned about a serious global economic slowdown, which shadow consensus has pegged for early 2020.

The iconic investor reaffirmed the IMF's latest earning, predicting "substandard growth rate" in the US, Chinese and European economies next year, which would warrant easier monetary policy, but he agreed with moderator Maria Bartiromo that there was dangerously little "wiggle room" for cutting rates to be effective.

Speaking at a panel discussion on the first day of the World Economic Forum, Dalio said: “The US, Europe, China – all of those will experience a greater level of slowing, probably a greater level of disappointment. I think there’s a reasonable chance that by end of that, monetary policy and fiscal policy will have to become easier relative to what is now discounted in the markets."

"What scares me the most longer term is that we have limitations to monetary policy, which is our most valuable tool, at the same as we have greater political and social antagonism," Dalio said during a panel discussion at the World Economic Forum (WEF) in Davos on Tuesday. "So, the next downturn in the economy worries me the most," he explained.

“So the next downturn worries me the most. There are a lot of parallels with the late 1930s. In 1929-1932 we had a debt crisis, and interest rates hit zero. Then there was a lot of printing of money and purchases of financial assets which drives financial assets higher."

Of course, everyone knows what event followed the Great Depression in the late 1930s.

“It creates also a polarity, a populism and an antagonism. We also had at that time the phenomenon of a rising power, like China, dealing with conflict with an existing power. These types of political issues are now very connected to economic issues in policy.

The 69-year-old billionaire also offered his take on record corporate debt levels: "When we cut corporate taxes and made interest rates low enough that it was attractive enough to buy financial assets, particularly by companies having mergers and acquisitions, that caused a lot of growth in corporate debt. And that growth in corporate debt was used to finance the purchases. That is going to be less."

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Not surprisingly, the socialist, wealth redistribution ideas of Democratic Socialist Alexandra Ocasio-Cortez also made an appearance.

In discussing the outlook for a slowing world economy, Dalio said that next year will see "the beginning of thinking about politics and how that might affect economic policy beyond. Something like the talk of the 70 percent income tax, for example, will play a bigger role."

Even though Dalio didn’t mention Ocasio-Cortez by name it is clear he was referencing the young Congresswoman who has taken the media (and financial) world by storm: “There’s an element, yeah, where people are going to have to start paying their fair share,” AOC told Anderson Cooper on 60 Minutes on Jan 6. “Once you get to the tippy tops, on your 10 millionth dollar, sometimes you see tax rates as high as 60 or 70 percent.”

As Bloomberg amusingly notes, AIC's proposal is "anathema to at least some of the global elite gathered in Davos this week" as the fortunes of a dozen Davos attendees have soared by a combined $175 billion, a Bloomberg analysis found. The same cannot be said for people on the other end of the social spectrum: A report from Oxfam on Monday revealed that the poorest half of the world saw their wealth fall by 11% in 2018.

The ongoing rise of populism was also cited as a pressing concern for both Dalio and other panel participants, including Goldman Sachs CEO David Solomon and UBS Chairman Axel Weber, with nationalist and far-right parties making significant electoral gains worldwide in recent months.

Echoing a point he has made repeatedly over the past two years, Dalio said these types of political issues - together with growing protectionism - bear a striking resemblance to market conditions during the final years of the Great Depression in the late 1930s.

"These types of political issues are now very connected to economic issues. So I think that's the character of the environment that we are in," Dalio said.

For those who are time strapped and don't have one hour to listen to the full Davos panel, Dalio recapped most of his key points in the following CNBC interview on Tuesday morning.