Last week, as the market was in free fall amid a perfect storm characterized by a concurrent selloff in bonds and stocks and a Minksy moment for the VIX, Ray Dalio took to LinkedIn to “explain” the problem.
I’m not entirely sure who he thinks his audience is these days, because the post was so superficial as to be barely worth reading. All he did was reiterate the policy dilemma created by rising inflation expectations and a late cycle dynamic that puts the Fed in a position where they have to choose between hiking to curb price pressures at the risk of making a “mistake” (i.e. hiking the economy into a recession) on the one hand and falling behind at the risk of the curve bear steepening aggressively on them possibly catalyzing a disorderly unwind of the bond trade on the other. To wit:
Over the past week or so, we had reports of strong growth and rising wages (good things!), which sent bonds and stocks down (bad for most investors) due to justifiable fears that the Fed will tighten faster than is priced in the credit markets. The surge in growth and wages came because of both the fiscal stimulation and the rekindling of animal spirits, thrusting the economy into late-cycle capacity constraints, which is leading to the expectations of faster Fed tightening. In other words, fiscal stimulation is hitting the gas, which is driving the economy forward into the capacity constraints, which is triggering interest rate increases that are hitting the brakes, first in the markets and later in the economy. This confluence of circumstances will make it difficult for the Fed to get monetary policy exactly right.
He closed on a “happy” note which is something of a break with recent Dalio precedent. Here he is telling you that this was but a blip on the radar screen:
To be clear, I’m not claiming to be smart about this. In fact, the opposite is true, as this is happening sooner than I expected. Still, these big declines are just minor corrections in the scope of things, there is a lot of cash on the side to buy on the break, and what comes next will be most important. As shown, the recent price declines are not even noticeable within context of the bigger and longer term picture.
Ok, I mean I’m not sure that’s exactly as comforting as he meant for it to be because he’s basically saying what a lot of other folks are saying, which is that this is likely just a preview of something worse.
Well on Sunday, FT is out with a new interview with Dalio’s co-cult-leader Bob Prince who sees some rough shit on the horizon (Bob doesn’t put it that way, but that’s the gist of it). Here’s FT:
Bob Prince, co-chief investment officer at Bridgewater, said last week’s market turbulence, which helped trigger record outflows from global stock funds, was set to continue.
“There had been a lot of complacency built up in markets over a long time, so we don’t think this shakeout will be over in a matter of days,” Mr Prince, who runs Bridgewater’s $160bn of investments alongside the fund’s founder Ray Dalio, said in an interview. “We’ll probably have a much bigger shakeout coming.”
“Last year equity markets had a free run. But this year we are going from central banks contemplating tightening policy to actually doing it,” Mr Prince said. “We will have more volatility as we are entering a new macroeconomic environment.”
Sorry Bob, but the punchline here is just too obvious: let’s all pray that Bridgewater doesn’t accidentally exacerbate this “much bigger shakeout” because as we saw over the last two weeks, risk parity can become programmatic problematic…
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“Nobody’s right if everybody”s wrong”