Deleveraging could last another 15 years, says Ray Dalio

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."

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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.