Ray Dalio is one of the world's most successful fund managers, yet the 62-year-old American insists that investing is simple. "I'm just like a guy who has been in a lot of battles over a long period of time and I have seen them repeatedly occur," he told the Council of Foreign Relations recently.
Dalio, whose Bridgewater Pure Alpha Fund returned $35.8bn between 1975 and 2011 more than any other hedge fund ever says that: "Everything repeats over time so if you know how the economic machine works you can predict the results."
Right now, says Dalio, we are in a period of deleveraging. So we should look back in history to see what's happened in similar periods. "In all periods of deleveraging you're going to have a combination of four things", says Dalio. "You're going to have certain amount of transfer of wealth, a certain amount of debt write down, a certain amount of austerity and a certain amount of printing money."
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
What differs is the relative amount of each component you have, says Dalio. That matters for investors, because austerity and debt write downs are deflationary, while printing money is inflationary. It also matters for society, says Dalio, because too much austerity ends in depression.
But while Dalio expects the deleveraging process to last another 15 years, there will still be periods of rising markets. "Often when a crisis seems worse, we are looking at the start of a bull market." He cites three occasions to back up his point: 1933, the lowest point of the Great Depression; 1971, when Nixon pulled America out of the gold standard; and 1982, when Mexico defaulted.
In all three occasions central bankers printed money and gave stock markets a boost, says Dalio. "In various ways when you're in deleveraging and you have austerity and you realise there is too much debt, everyone gets depressed and stocks fall. Then they print money and people get happy. After all the new money has to find a home." Just days after the interview, the Federal Reserve launched its third batch of quantitative easing, sending markets soaring and arguably proving Dalio right.
-
Is Donald Trump's re-election a wake-up call for Europe?Donald Trump will turbocharge the US economy – and expose Europe's weakness
-
German chancellor Olaf Scholz's coalition collapses – what went wrong?EU Economy After Olaf Scholz fired a key minister, Germany's coalition has collapsed. But political turmoil in the country couldn’t have come at a worse time
