Legendary billionaire Ray Dalio told a crowd at Davos that the next economic meltdown scares him more than anything - here's what he said, and why he's so worried

Advertisement
Legendary billionaire Ray Dalio told a crowd at Davos that the next economic meltdown scares him more than anything - here's what he said, and why he's so worried

Davos Banner

Advertisement

ray dalio

Getty Images / Roy Rochlin

  • Ray Dalio, the founder and co-chief investment officer of Bridgewater Associates - the world's largest hedge fund - recently spoke on a panel at Davos.
  • The investing billionaire shared why the next economic recession has him more scared than anything, and explained why it reminds him of the Great Depression.
  • Dalio also shared his outlook for China, which is saddled with a debt load that's similarly exorbitant when compared to the US.

At this point, it's been all but accepted that an economic recession will strike at some point before the end of 2020. And Ray Dalio is among those resigned to this fate.

The founder and co-chief investment officer of Bridgewater Associates - the world's largest hedge fund - said as much during a recent panel at Davos.

It's well-traveled territory for any follower of Dalio's punditry over the past several months. He thinks we're in the seventh or eighth inning of a short-term debt cycle, which will need to be unwound in painful fashion.

Advertisement

But it's external forces that worry Dalio. The drivers that exist beyond what we'd normally associate with a recession. He's specifically referring to political and social issues currently complicating matters in the US and abroad.

Dalio argues that when it comes time for the Federal Reserve to step in and ease conditions once again - something it's repeatedly done over time to stimulate post-crisis growth - all bets will be off.

"In the US, there will be a significant slowing in that particular period," Dalio said Tuesday during a panel discussion hosted by Maria Bartiromo of Fox Business. "The bigger issues really are connected to politics and the economic policies associated with that."

At the root of Dalio's current view is the immense debt load that US companies have accumulated over the past decade. It's a reckoning that's going to come due sooner than later as borrowing costs rise, and Dalio doesn't expect it to be pretty.

When conditions do start to go south, that could coincide with divisive political developments, amplifying the market's struggles. With respect to this, Dalio referenced the 70% income tax on the super-wealthy recently floated by Alexandria Ocasio-Cortez, although he didn't mention the politician by name. He was simply highlighting it as an example of something that could stir up social strife and serve as a headwind for companies.

Advertisement

As for when it comes time for the US to claw out of its next economic hole, Dalio warns the nation could be hamstrung relative to history, at least with respect to rate hikes. In fact, the whole ordeal reminds him of the era surrounding the Great Depression.

"We have limitations to monetary policy, which is our most valuable tool," Dalio said. "At the same time, we have greater political and social antagonism. That's why the next downturn in the economy worries me the most."

He continued: "There are a lot of parallels between now and the late 1930s. From 1929 to 1932 we had a debt crisis - interest rates hit zero. Then there was a lot of printing of money, and purchases of financial assets brought their prices higher. That also creates a polarity, a populism, and an antagonism."

Going beyond what conditions will surround the next major US economic downturn, Dalio is also acutely focused on China, and how it will deal with the end of its own cycle.

Put simply, Dalio thinks the emerging nation will be just fine in the long term, largely because its monetary policy is denominated in Chinese yuan.

Advertisement

"The debt is in their currency," Dalio said. "They can handle that cycle. But there's a weakening there."

But a short-term debt crisis will still sting, he argues. If you want to do business in China going forward, its enormous debt burden will flare up at some point, even if it eventually gets worked out.

"If you were to take a 2-, 3-, 4-year perspective, that's going to be an issue," he said. "I do think that capital flows, and the nature of that balance-of-payments issue, is going to be a factor in the years ahead. But whenever you're having a deleveraging, that's something that makes the country healthier."

{{}}