Getty Images/ Roy Rochlin
- Ray Dalio, the founder and co-chief investment officer of Bridgewater Associates — the world’s largest hedge fund — sees a paradigm shift taking place in markets in the near future.
- He explains why the source of this shift is zero- and low-yielding debt that investors have become addicted to amid unprecedented monetary stimulus.
- Dalio breaks down why this is creating a potentially disastrous situation, and makes alternative recommendations for investors looking to steer clear of such toxic debt.
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In a new LinkedIn post, Ray Dalio — the founder and co-chief investment officer of Bridgewater Associates — shared his thoughts on the late-stage US economy and how markets are likely inching closer to a "paradigm shift."
Dalio discussed the typical causes of these monumental movements — and attributed the one he sees coming in the near future to the same historical forces that have upended the economy in the past: unsustainable debt growth.
The instability around debt arises from a culmination of investor over-zealousness and extrapolation. In this case, Dalio thinks the flawed idea that borrowing and buying in markets will continue unimpeded, unintentionally creates a recipe for disaster.
Then, when incomes don’t rise quickly enough to service the liabilities, debtors pay the price and vicious shift occurs.
"I think that it is highly likely that sometime in the next few years, 1) central banks will run out of stimulant to boost the markets and the economy when the economy is weak, and 2) there will be an enormous amount of debt and non-debt liabilities (e.g., pension and healthcare) that will increasingly be coming due and won’t be able to be funded with assets," Dalio wrote.
He argues that this phenomenon will hasten currency depreciation and monetized fiscal deficits. Dalio says zero- and negative-yielding debt is ultimately ineffective for funding massive government liabilities.
"The enormous amounts of money in no- and low-returning investments won’t be nearly enough to fund the liabilities, even though the pile looks like a lot," Dalio wrote. "That is because they don’t provide adequate income. In fact, most of them won’t provide any income, so they are worthless for that purpose."
The chart below convey the enormity and swelling nature of US liabilities:
Ray Dalio/Paradigm Shifts
In consequence, investors have been pushed into riskier assets as the search for real returns becomes desperate. But these trades are quickly becoming crowded, and are likely to experience decreasing returns going forward.
"In such a world, storing one’s money in cash and bonds will no longer be safe," Dalio penned, starkly warning investors of the looming danger.
For these reasons, he thinks the best spots to park cash are in assets "that do well when the value of money is being depreciated and domestic and international conflicts are significant, such as gold."
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