Bridgewater warns on US downturn

bridge to nowhere

by Chris Becker

Not so much another bear that’s hitting the airwaves as this broad market correction carries on, but one of the best foxes in the business. I’m a big fan of Ray Dalio at Bridgewater (manages around $160 billion) and when he talks, you should listen.

The long upward march in asset values since the nadir of the GFC in 2009, due mainly to the Fed’s nearly endless QE programs and record low interest rates mean future returns will be bleak indeed, according to Dalio – around 4% p.a.

Some texture via ZH:

This is a problem, he explains in this brief clip, as monetary policy relies on that transmission mechanism of apparent wealth creation to keep the dream alive. In Europe and Japan there is no “spread”, Dalio notes, and in the US it is miniscule – which means monetary policy is practically ineffective.

Dalio thinks the “beautiful deleveraging” is still in place in the short term, but that air pockets ahead still beckon:

… his “biggest concern is when the next downturn comes in 1-2 years,” the central bank must be on the ‘tighter’ side of market expectations to be capable of providing its life-giving elixir once again. 

 

Last night’s data dump from the US maybe showing some signs of weakness and that the Fed might not be raising rates anytime soon. First, construction spending retracted

Heres Calculated Risk’s take:

  • Private residential spending has declined recently and is 48% below the peak in early 2006 – but up 54% from the post-bubble low.
  • Non-residential spending is 20% below the peak in January 2008, and up about 48% from the recent low.
  • Public construction spending is now 14% below the peak in March 2009 and about 7% above the post-recession low.
  • On a year-over-year basis, private residential construction spending is now up 4%. Non-residential spending is up 9% year-over-year. Public spending is up 2% year-over-year.

This was a weak report – well below the consensus forecast of a 0.5% increase – and there were also downward revisions to spending in June and July.

ConstSpendYoYAug2014
Further, the closely watched ISM manufacturing index printed a surprising decline for September  last night – although still very expansive at 56.6 points – down from the burgeoning 59 print last month. Both of these followed a slowdown in the momentum of the housing market, with year on year price growth decelerating at 6.7%, falling last month and forecast to fall to 5-something% in the coming year.
This is still not enough for the bears to chew through overall market sentiment, current correction notwithstanding, although Black Swans are circling (as are the media vultures) over the recent Ebola cases in the US.

For those who have missed it, please watch Bridgewaters take on how the modern economy works:

Comments

  1. Nonsense. Green shoots are everywhere and the roots of recovery are now firmly growing in fertile organic soil.

    Bankers are rubbing their hands together with the prospect of rising interest rates.

    The American dollar is soaring!

    People who once flipped real estate are now busy flipping burgers. Houses are cheap and jobs are plentiful.

    Just watch out that you don’t step into that smelly pile of manure.

  2. I’ve given it some thought……..and put the lot in $US last month, the lot.

    I seriously cannot think of anythng else to buy, in order to protect capital, yet with some likely apreciation overtime in $A terms.

    • A couple of months ago I put 50% into unhedged USD ETFs. The gains at least more than outweighed the losses in the Oz ETFs, but the net combined gain is pretty meagre right now. Marginally better than a bank account. (To be fair, the US ETFs did drop a whopping 2.5% today).

      I’m happy to stay 50/50. I intend to return to Oz someday so I just want some diversification.

  3. That “How the economy works’ video from the 30 minute mark tells me all I need to know! Everything that our local economies are doing at the moment is absolutely wrong…..as if we didn’t already know!

  4. Peak Margin Compression… Can’t screw down inputs any more, debt loads are but a higgs boson particle in some other universe and PE is starting to eat its own flesh.

    skippy…. it has that hollow ring to it… eh.

    PS. what does Pat Robertson have to say about Ebola in Texas?

    PSS. Kinda the whole reason behind TPP… need profits in perpetuity thingy….

  5. I watched the ‘How the economic machine works’ video again.

    There is at least one logical flaw (I suggest there are a number). He claims wealth redistribution from the rich to the poor is deflationary.

    It then follows that wealth redistribution from the poor to the rich should be inflationary. Which is clearly rubbish. Everyone knows that the lower your income, the higher a percentage of your income will be spent.

    The financial sector (and tax policy that penalises labour more than investment) in the West has spent decades redistributing income from the poor (or at least the middle class) to the rich. Now we’re expected to believe that reversing this, even a little bit, will be deflationary?

    I call bulls**t. Aside from that glaring point, the video is pretty good.

    • Shared this video and they were also scratching their head on that one. But yes, overall an interesting explanation of the economy. I wonder where we are in the credit cycle?

    • Some are deep in the false Austrian school premise that the money supply is connected to inflation. That premise by Milton Friedman has been debunked since the 1980s. Consumption and inflation are inversely linked, whereby the increase in inflation reduces consumption and vice versa. But an excess quantity of printed cash, whether through t-bills or bank loans, does not lead to inflation because the money supply is not equivalent to price levels. Inflation is about the price levels of supply and demand, and perception of expectations about the future. Having extra cash at the macro level is not the same thing as having extra cash at the micro individual level. The money supply is more dispersed among the nation’s population, so individual stock of the money supply is inconsequential to change macro price levels. H/T Cynthia

      skippy… at the end of the day its about sanctity e.g. this whole thing is about some divine notion of money. Me wonders why…

    • They have gutted the middle class, and they will pay the price. A healthy middle class is key to economic strength, not a handful of uber rich.

  6. Much play is made of the iron ore price falling from US$135 to US$77 but no allowance is made for the fall in the AUD$ falling from $1.03 to $0.88. Maybe the message is somewhat jaundiced by our bias lets get real and be objective , the message is bad enough without gilding the lily.

  7. General Disarray

    PS. what does Pat Robertson have to say about Ebola in Texas?

    Probably something aboutf Ebola being caused by homosexuals, feminists, abortionists, and pagans.