Ray Dalio On The “Self Reinforcing Global Decline”

The world’s largest hedge fund is not as san­guine about the hope that remains in the mar­kets today. The firm’s founder, Ray Dalio, who has writ­ten exten­sively on the good, bad, and ugly of delever­ag­ings, sounds a rather con­cerned note in his lat­est quar­terly let­ter to investors as the “devel­oped world remains mired in the delever­ag­ing phase of the long-term debt cycle” and has spread to the emerg­ing world “through dimin­ished cap­i­tal flows which have weak­ened their growth rates and under­mined asset prices”. Between China, Europe, and the US, which he dis­cusses in detail, he sees the lack of global pri­vate sec­tor credit cre­ation leav­ing the world’s economies highly reliant on gov­ern­ment sup­port through mon­e­tary and fis­cal stim­u­la­tion. The breadth of this slow­down cre­ates a dan­ger­ous dynamic because, given the inter-connectedness of economies and cap­i­tal flows, one country’s decline tends to rein­force another’s, mak­ing a self-reinforcing global decline more likely and a rever­sal more dif­fi­cult to pro­duce. After dis­count­ing a rel­a­tively immi­nent return to nor­malcy in early 2011, mar­kets are now pric­ing in a mean­ing­ful delever­ag­ing for an extended period of time, includ­ing neg­a­tive real earn­ings growth, neg­a­tive real yields, high defaults and sus­tained lower lev­els of com­mod­ity prices. Lastly he believes the common-wisdom — that the Ger­mans and the ECB will save the day — is misplaced.

via Ray Dalio’s Bridgewater On The “Self Re-Inforcing Global Decline” 

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