Monday, July 25, 2011

Timing a collapse

Bridgewater Associates, a hedge fund founded and managed by Ray Dalio, is a “macro-“ investors . In other words, he looks at the broad economic trends, rather than specific industry or company trends and makes investment decisions from there. Bridgewater is known (New Yorker) to march to the beat of a different drummer. But with 1,100 employees and $94 billion under investment, you would suspect that they may have a few insights.

Of course, as I have myself experienced, because of the artificial gamesmanship displayed by the U.S. Treasury, and other world central bankers, macro insights are notoriously difficult to time correctly. It was a little difficult to predict the extent that both the Bush and Obama administrations would through money at the financial industry and pump the stock market at the cost of the general tax payer: particularly given that it has been sort of a political death wish for both administrations. Even with that noted problem, last year Bridgewater returned nearly 45 percent ($15 Billion) on its most aggressive fund, and overall had their best year since founding 36 years ago.

In a very good piece by the New Yorker, they note that Ray Dalio went to the U.S. Treasury in 2007, and warned them of a coming meltdown in 2007. He was ignored.

At the end of the article, he makes another general assessment. Noting that much of the U.S. stimulus package is due to end, the general indebtedness of the Western Economies, and the pressure on the Chinese and other developing countries to keep inflation in check, there will soon be continuing trouble:

John Cassidy, The New Yorker, 25 July 2011 (hat tip: Zerohedge via Smart Economy)

Now that the slowdown appears to have arrived, Dalio thinks it will be prolonged. “We are still in a deleveraging period,” he said. “We will be in a deleveraging period for ten years or more.”

Dalio believes that some heavily indebted countries, including the United States, will eventually opt for printing money as a way to deal with their debts, which will lead to a collapse in their currency and in their bond markets. “There hasn’t been a case in history where they haven’t eventually printed money and devalued their currency,” he said. Other developed countries, particularly those tied to the euro and thus to the European Central Bank, don’t have the option of printing money and are destined to undergo “classic depressions,”Dalio said. The recent deal to avoid an immediate debt default by Greece didn’t alter his pessimistic view. “People concentrate on the particular thing of the moment, and they forget the larger underlying forces,” he said. “That’s what got us into the debt crisis. It’s just today, today.”

Dalio’s assessment sounded alarmingly plausible. But when one plays the global financial markets a thorough economic analysis is only the first stage of the game. At least as important is getting the timing right. I asked Dalio when all this would start to come together. “I think late 2012 or early 2013 is going to be another very difficult period,” he said.

Bridgewater has noted (zerohedge) that we will get there much quicker with all sorts of other unknown contractual spinoffs if the U.S. debt ceiling is not raised.

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