“Conditions in the global economy look pretty sunny,” says Ray Dalio, the founder of Bridgewater Associates, “and this is likely to keep supporting equity prices for a while, particularly if investors take their cash hoards and invest them in the markets this year.” However, he is worried that, as growth improves, “central banks will find it tough to raise rates without sparking a recession in a couple of years’ time”.
In the long run, Dalio thinks that political issues are now more important than macroeconomic ones. So investors should spend less time focusing on monetary policy and more on analysing issues such as “the next election in France or in the UK, or how hospitable Jeremy Corbyn will be to capital”. The surge in political risk is made clear by the fact that global support for populist parties has risen from 7% in 2010 to 35% in 2016. A swing of this magnitude “has apparently only ever happened once before, in the 1930s”, just before World War II.
What’s behind the backlash?
Dalio believes the issue is rising inequality. We now have “multiple economies”, he says. And while “the elite live in an expanding economy, for the bottom 60%, 80%, there is a depressed economy that is not growing well”. Automation could make things worse – “we’re headed for a world where you’re either going to be able to write algorithms and speak that language or be replaced by algorithms”. A final risk comes from global debt levels. Dalio doesn’t expect a 2008-style credit crunch. However, he does envisage “a tightening financial squeeze, which is going to hurt the bottom 60% more and more, particularly when we have the next recession”.