Saturday, May 29, 2010

Recent Comments from Ray Dalio

                       El Greco, The Vision of Saint John

There is an interesting interview with Ray Dalio of Bridgewater Associates in this week's Barrons. As you probably know already from earlier Barrons interviews of Dalio, Bridgewater is a very large hedge fund that specializes in global credit.  Here are some of the highlights that I found particularly interesting:

The Recovery and the Next Recession

"But it is a fragile recovery ... and it goes back to the fact we still have too much debt ... between now and 2012, the economy will probably go down again."

Contagion from Europe

“The European situation is a particularly risky one for a number of reasons. ... the size of the debt dwarfs that of any other debt crisis."

The Deflationary Environment

"My point is, in developed countries there is too much of most things at the moment, and that’s creating a deflationary environment.  There is too much manufacturing capacity. There is too much labor. There is too much housing stock."

Currencies of Developed Countries

"I want to minimize my exposure to the major developed countries’ currencies — the U.S. dollar, the euro, the British pound and the yen — because those countries have a lot of debt, and they are going to need to print more and more money and will have more sluggish growth rates. I prefer the yen to the others.”

Bonds of Developed Countries

Apparently Dalio intends to hedge the currency risk:  "As Europe’s economy weakens and its debt crisis worsens, the printing of money does not mean that it will produce an accelerating inflation because simultaneously there is also less being purchased, and the surpluses are already causing deflationary pressures. That is why, contrary to almost everybody’s belief, I believe the bonds in countries that can print money will be good investments.”

No Inflation Anytime Soon

“The depreciation of the major currencies and the printing of money will not cause a significant general level of inflation anytime soon. The printing of money will offset the deflation that is coming from the weak demand for goods and services due to weak credit growth."

As I read this, he does not expect aggregate inflation "anytime soon" but leaves open the question of the timeline by which inflation may enter the equation later.

Bridgewater's Portfolio

“Our portfolio is mostly skewed to Treasury bonds, gold and emerging-market currencies, especially Asian currencies. We also hold commodity assets that are limited in supply and that high-growth emerging countries need."

This looks like a response to the present deflationary environment and anticipation of future currency deflations. Hard to say, but perhaps it also reflects an anticipation of inflation beyond the time horizon of "anytime soon".