Bridgewater founder Ray Dalio must still be feeling the after-effects from all those psychedelics he ingested during his latest stint at Burning Man, because his latest take on recession odds - which he shared with David Rubenstein during an interview on Bloomberg TV Thursday - is surprisingly low...
"I think that it's probably a 25% chance in each of those years...I think that the important thing is...it's important to understand how the economic machine works. While I'm looking at that, I want to take a few minutes and look at the important things that pertain to a recession."
To put that in context, it's down from where he was just two weeks ago. It's also far lower than the New York Fed's recession indicator. This means that for the first time in a while, Dalio is officially bullish on the US economy.
As he's been saying for years now, Dalio reiterated that central bankers will be ill-equipped to combat the next downturn. The world's largest central banks are still out of ammunition after failing to normalize monetary policy in the years after the financial crisis. And the market is still pricing in more rate cuts from the Fed on the belief that the 'midcycle adjustment' isn't over yet.
The Fed, ECB and BoJ "have to face the fact that when the next downturn comes there will not be the power to reverse it," Dalio said.
If Dalio had one word of advice for the Fed, it would be to cut interest rates slowly. Perhaps the central bank could do one 25 basis point cut at a time, without offering strict guidance on the timing of the next cut. Markets are already pricing in another 25 bp cut at the Fed's September meeting.
Though it hasn't done much to boost his firm's performance, Dalio said he's bullish on gold, which has climbed in recent months. He explained that he believes the precious metal will outperform as investors seek alternative forms of money, as central bank money printing begins to shake peoples' faith in fiat currencies.
Since publishing his manifesto about the flaws inherent in American capitalism, Dalio can't go a whole interview without sharing his plan for saving the American economy, and his talk with Rubenstein was no exception.
The hedge fund manager, who was the highest earning American in 2018, said the US needs to treat the wealth and income gap as a "national emergency" and raise taxes on the rich.
Because when it comes to determining the severity of the next downturn, these political and socio-economic considerations will be of paramount importance.
"A recession is two negative quarters of GDP, and we're going to be hovering fairly close to that level...but the bigger things are the absence of the effectiveness of central bank policy together with the wealth gap...the elections, which is an issue between capitalists and socialists or the rich and the poor, and the emergence of China in relation to the US."
"Those factors haven't existed since the 1930s, I think they're unique...so when we get to the recession it's important to understand how it will affect those things and how those things will affect it."
To accomplish this, Dalio said, we need political leaders who are focused not on petty partisan bickering, but on finding solutions.
But we think it's helpful to place Dalio's latest call in the context of Bridgewater's performance. Last year, Bridgewater posted double-digit returns while the equity benchmarks finished in the red, which helped to burnish Dalio's reputation as a prophet-like figure (even as he started the year warning that anyone who stayed in cash would come to regret it).
But now, his firm's flagship funds' YTD performance is in the toilet thanks to its 'paradoxical' bets on Treasurys (BW was short during this year's torrid rally).
So, we can't help but wonder: Is Dalio just talking his book?
Watch a clip from the interview below: