Ray Dalio’s Bridgewater Associates picked up in November where it left off in October, when the world’s largest hedge fund firm’s posted very strong gains in its main macro funds.
As a result, one of the funds is now back in positive territory, while the other is just shy of profitable.
Specifically, the firm’s Pure Alpha I strategy returned about 1.20 percent in November and is now up 0.19 percent for year. Just two months ago it was down 6.7 percent. Pure Alpha II rose 1.75 percent in November, cutting its loss for the year to just 0.23 percent. It was down more than 10 percent at the end of the third quarter.
On the other hand, All Weather, Bridgewater’s risk parity fund, lost 2.50 percent in November. This reduced its gain for the year to 9.46 percent. The fund was up more than 14 percent at the end of the third quarter.
We don’t know what has driven the recent reversal in the Pure Alpha funds. Dalio has long warned about a slow-growing economy and has asserted the multi-decade bond rally is over. In September 2015, Dalio predicted that returns across many asset classes would average only about 3 percent to 4 percent over the next decade.
In a speech in early October 2016 he once again stressed that we are in an abnormally slow growth environment and that “monetary policy tools will be much less effective going forward.”
However, in a letter published November 15 — one week after the election — Dalio sounded a more optimistic theme. He stressed Bridgewater did not handicap the presidential elections, preferring “not to bet on whether or not” Donald Trump would be elected or whether or not he would be prudent if elected “because we didn’t have an edge in predicting these things,” adding, “we try to improve our odds of being right by knowing when not to bet, which was the case.”
In general, Dalio expects an ideological shift to the right whose magnitude will rival that of the Ronald Reagan administration. “Donald Trump is moving forcefully to policies that put the stimulation of traditional domestic manufacturing above all else, that are far more pro-business, that are much more protectionist, etc.,” he elaborates.
Dalio says that the previous period was characterized by increasing globalization, free trade, and global connectedness; relatively innocuous fiscal policies and sluggish domestic growth; low inflation; and falling bond yields. The Trump period, by contrast, will more likely involve a decline in globalization, free trade, and global connectedness; aggressively stimulative fiscal policies and increased U.S. growth; higher inflation; and rising bond yields.
“The main point we’re trying to convey is that there is a good chance that we are at one of those major reversals that last a decade,” he says, likening it to the 1970-71 shift from non-inflationary growth to the 1970s decade of stagflation and the 1980s shift to disinflationary strong growth. “We are just saying that there’s a good chance that the economy/market will shift from what we have gotten used to and what we will experience over the next many years will be very different from that.”
How will this impact the markets? The macro maven asserts there is a “significant likelihood” we have hit the 30-year top in bond prices and a secular low in inflation and bond yields relative to inflation. “When reversals of major moves (like a 30-year bull market) happen, there are many market participants who have skewed their positions (often not knowingly) to be stung and shaken out of them by the move, making the move self-reinforcing until they are shaken out,” Dalio warns.
He stresses, for example, the fact that many investors have reached for yield “with the upward price moves as winds to their backs.” However, he says they will become weaker holders or sellers as they experience big price movements. “Also, it’s likely that the Fed (and possibly other central banks) will increasingly tighten and that fiscal and monetary policy will come into conflict down the road,” Dalio added.
He points out that the combination of stronger U.S. growth and relative tightening in the U.S. would be bullish for the dollar. “All this, plus fiscal stimulus that will translate to additional economic growth, corporate tax changes, and less regulation will on the margin be good for profitability and stocks, though for domestically oriented stocks more than multinationals, etc.,” Dalio elaborates.
He says the big question is, when will the rise in bond yields and risk premiums start to hurt the prices of other assets?
“That will depend on a number of things, most importantly how the rise in inflation and growth will be accommodated, that we don’t want to delve into now as that would take us off track,” he adds.
As for whether the Trump administration will be what he describes as “capable or incapable”? Well, on the economy, Dalio says developments “are broadly positive.”
Dalio stresses this assessment was “preliminary” and “too premature to take to the bank,” coming one week after the election and before Trump named key members of his cabinet, including Treasury secretary and the team of economic advisors, many of whom are successful billionaires from Wall Street. Still, Dalio sounds cautiously optimistic that the Trump administration’s policies just may work out and be good for certain markets.
