Ray Dalio: a big squeeze is on the way

The global economy is in for a "big squeeze", according to one of the world's most successful hedge-fund managers. Ray Dalio of Bridgewater Associates says we're running out of room to boost growth through monetary policy for two main reasons.

Firstly, overall debt levels can't go much higher than they are now. Secondly, debt can't be made much cheaper than it already is interest rates are "approaching their maximum lows" and quantitative easing can't force rates down much further, as credit spreads are "compressing". Every country faces similar problems. "Japan is closest to its limits, Europe is a step behind it, the US is a step or two behind Europe, and China is a few steps behind the US."

However, Dalio doesn't expect a crash imminently. Most economies are still growing and "their growth rates are neither dangerously rapid nor dangerously slow". Also, the debts are "largely in the hands of central bankers who can roll them forward".

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However, he does see "an intensifying financing squeeze emerging from a combination of slow income growth, low investment returns and an acceleration in liabilities". These rising debts are mainly due to large pension and healthcare liabilities as the baby-boom generation retires.

Dalio suggests avoiding bonds. If interest rates rise by more than markets expect, it will have a negative effect on bonds and all asset prices. Indeed, says Dalio, it would only take a one percentage point rise in US government bond yields to "trigger the worst price decline in bonds since the 1981 bond-market crash". That in turn would hammer share prices, which have been boosted by low interest rates. In that case, "holding non-financial storeholds of wealth like gold could become more attractive".