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Ray Dalio on Monday painted an uncertain picture for the economy after the Federal Reserve took extreme measures to limit the economic fallout from the spread of COVID-19, which has delivered a crushing blow to a number of industries and threatens to throw the global economy into a recession.
In an unprecedented, Sunday night rate cut, the Fed slashed benchmark federal-funds rates by a full percentage point to a 0% and 0.25% range, and unfurled a batch of stimulus measures intended to dull the pain for the economy.
See: The Fed just declared its own national emergency as it aims to shield economy from the coronavirus
However, Dalio says that those efforts are worrying not relieving from his perspective.
Read: Wall Street fears ‘flashbacks to 2008’ with forced selling in $9 trillion U.S. corporate bond market
“The coronavirus was the thing to cause the downturn, which surprised me,” he wrote in a note sent to MarketWatch and then published on LinkedIn. “While it is an extremely serious infectious disease and that will produce many harmful economic impacts, these things alone don’t scare me; however, when combined with long-term interest rates hitting the hard 0% floor, that really worries me,” he wrote.
Dalio explained the state of affairs this way:
| The printing of money and buying of the debt assets that central banks are now allowed to buy almost certainly won’t work much (because bonds can’t be pushed much higher and they are also less likely to be sold to buy other assets of entities that are in financial trouble). Further, with this hard 0% interest rate floor, real interest rates will likely rise because there will be disinflation or deflation resulting from lower oil and other commodity prices, economic weakness, and more credit problems. If that plays out in the typical way, rising credit spreads will raise debt service payments to weaker credits at the same time as credit lending shrinks, which will intensify the credit tightening, deflationary pressures, and negative growth forces. God help those countries that have these things and a rising currency, too. |
Markets appear to agree with him, as most recently the Dow Jones Industrial Average DJIA, -8.11%, the S&P 500 index SPX, -7.45% and the Nasdaq Composite Index COMP, -7.56% were all down by around 8% after the opening drop of markets out of the gate triggered a stage 1 circuit breaker that halted trading for 15 minutes when the S&P 500 falls by 7%.
Dalio wrote that assistance needs to come from governments, and not central banks:
He noted that the U.S. House of Representatives will vote this week on a set of targeted measures. Those include free testing for the virus, expanded unemployment insurance and paid sick leave, among a number of other measures.
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“But these measures will be relatively small and offer modest support to those with economic problems. They will need to be much bigger,” he wrote.
The hedge-fund manager oversees some $160 billion in assets at Bridgewater Associates, which makes it the largest hedge fund in the world by assets under management.
Dalio’s note on Monday comes after he told the Financial Times in an interview (paywall) that his firm was caught flat-footed at the start of this crisis.
“We’re disappointed because we should have made money rather than lost money in this move the way we did in 2008,” he told the publication.
On Monday, he said he feared that investors may see a 2008-syle collapse of companies as the pandemic roils the market. “I’m seriously concerned by what I see which is that a number of companies and industries will have to debt problems that will likely lead to restructurings,” Dalio wrote.
Temporary shutdowns of businesses and curtailment of large gatherings have come fast and furiously as the infectious disease that was first identified in Wuhan, China in December and has infected 170,000 and claimed more than 6,500 lives, according to data compiled by Johns Hopkins University.
Read: New York City closes public schools starting Monday to fight coronavirus
