In economic and political terms, today's environment has a lot in common with the late 1930s, warns Ray Dalio, founder and co-chief investment officer of Bridgewater Associates, the world's biggest hedge fund. Writing on social media site LinkedIn, Dalio says that he sees three major parallels with that era which are likely to "produce serious problems" if and when a downturn arrives.
Firstly, central banks have reached the limits of monetary policy cutting rates further or buying more assets can't be expected to boost economic growth at a time when the world remains heavily indebted. Secondly, wealth inequality is creating polarisation in politics. Finally, a rising world power China is challenging the US, the current world power.
These issues are driving central banks to take ever more radical steps to drive bond yields down (and thus drive bond prices higher). Dalio notes that the current surge in bond prices, which is being driven by strong deflationary forces, closely mirrors the surge in gold prices that happened between 1980 and 1982 amid rocketing inflation. That was finally halted by a drastic shift in monetary policy under then-Federal Reserve chairman Paul Volcker.
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Dalio stated in another note earlier this summer that he believes we are heading for a "paradigm shift" with "monetisations of debt and currency depreciations" as governments struggle to cope with the next downturn. He suggests that investors own gold to diversify portfolios away from bonds and shares.
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