Bridgewater co-founder shares his thoughts on markets
Ray Dalio has been humbled by the stock market drop. He says coronavirus caught his firm off-guard as they failed to appreciate the risks. There is talk they're down 20%.
At least we know he was telling the truth here:
Even with the drop, Dalio is one of the all-time great investors and economic thinkers. He's out with a new note published today about zero interest rates.
Long-term interest rates hitting the hard 0% floor means that virtually all asset classes go down because the positive effects of interest rates falling won't exist (at least not much). Hitting this 0% floor also means that virtually all the reserve country central banks' interest rate stimulation tools (including cutting rates and yield curve guidance) won't work. The printing of money and buying of debt assets that central banks are now allowed to buy almost certainly won't work much (because bonds can't be pushed much higher and they are also less likely to be sold to buy other assets of entities that are in financial trouble). Further, with this hard 0% interest rate floor, real interest rates will likely rise because there will be disinflation or deflation resulting from lower oil and other commodity prices, economic weakness, and more credit problems. If that plays out in the typical way, rising credit spreads will raise debt service payments to weaker credits at the same time as credit lending shrinks, which will intensify the credit tightening, deflationary pressures, and negative growth forces. God help those countries that have these things and a rising currency, too.
Dalio writes about coming asset sales because of revenue shortfalls and the needs for cash. He reminds us that most investors and businesses are levered long.
He says what's necessary is a big fiscal stimulus but highlights the risk that governments will handle it badly. Dalio says it's key to ensure lending continues and that current programs are far too small.
"I'm seriously concerned by what I see, which is that a number of companies and industries will have debt problems that will likely lead to restructurings," he writes.
