In December 2007, Ray Dalio, founder and co-chief investment officer of Bridgewater Associates, the world’s biggest hedge fund, went to Washington to warn White House officials that the banking system was at risk of suffering trillions of dollars in losses. “It was initially perceived as… pretty kooky.” Of course, his warnings turned out to be entirely correct.
So what does he see lying ahead now? “I don’t think something as systemically threatening as that which occurred in 2008 is at our doorstep,” he tells Bloomberg’s Peter Coy. He monitors “seven indicators of bubbles”. Signs to watch for include asset prices being high relative to “traditional measures” and the existence of “broad bullish sentiment”. Other red flags include purchases “financed with high leverage” and buyers stocking up on inventories “to speculate or to protect against price appreciation”.
Today, he says, his bubble indicators are “flickering but not flashing”. Yet even if he is not expecting a full-blown repeat of the credit crisis, he is concerned about what will happen when the next recession hits.
Firstly, central banks have far less room to cut interest rates. They can do more quantitative easing, but this “has much less marginal effectiveness”. More worryingly though is that “we have right now a higher level of populism and a worse wealth gap, so that when we have a downturn, the rich and the poor, the left and the right, will be more at each other’s throats.” That will make it harder for politicians or central banks to act effectively.