Hedge fund legend Ray Dalio says we are entering "a risky environment" in which investors will need to find a safe store of value as major economies draw closer to printing money to finance government spending.
Mr Dalio, who founded $US160 billion ($235 billion) macro hedge fund Bridgewater, said low or negative interest rates on the US dollar, yen and euro suggested they were drawing closer to a third phase of monetary policy where government spending is financed with printed money.
"We'll have large deficits and then there will be more monetisation of that," he said at the Sohn Hearts & Minds investment conference in Sydney on Friday.
"There will be a limit to pushing that and then there will be the politics. Of course, as investors that will have a big impact on returns of asset classes."
Mr Dalio said in a low-return world, asset classes were competing for capital while pension funds faced the challenge of meeting higher returns than what was likely.
“We are in an environment where we are selling dreams. We are no longer selling earnings. You gotta believe.”
But he says the “big issue” is where to store wealth and in what currency as developed market currency yields plunged into zero or negative territory.
“We pay a lot of attention to stocks bonds, private equity, venture capital and real estate but we don’t pay enough attention to currencies and capital flows.”
“We are coming into an environment where the return of money is becoming more important than the return on money.”
Risky environment
He said it was time to think about alternatives to the major developed world currencies and to consider diversification.
Investors also had to consider geopolitical and capital flow issues in deciding where to store their wealth.
"It's a risky environment," Mr Dalio said.
Mr Dalio said the world of free money had helped those with financial assets get wealthier
but left behind those who didn't.
“Any of us in the investment area are trying to make money so you bid everything up.”
He said technology was also leading to greater wealth inequality.
"The main thing about technology is that increasingly it's becoming intelligent and the uniqueness of the individual is less and less great."
"That is contributing to that wealth gap. Computers are cheaper and employees are difficult."
Debt sag
He said he did not expect there to be a big debt crisis on the horizon because there was no wave of maturities that required refinancing.
Instead, he says there will be a prolonged “squeeze” or “sag”.
“We reduced interest rates, we had corporate tax rates, margin expansion so the share that went to capital is large relative to that which went to workers.”
Mr Dalio said economic wealth creation was ultimately driven by productivity but political cycles were intertwined with the longer-term debt cycles.
He said the way democracy worked was changing in the age of social media. In the United States, he said the half a million swing voters were once influenced by debates were now targeted by "mind manipulation" via social media.
Internationally, the US and China were clashing on four fronts - trade, geopolitics, technology and capital. He said there was also "a decoupling" among entities dependant on goods and services from both countries.
This article was originally posted on The Australian Financial Review here.
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Concerns about Chinese influence in politics and universities may be at fever pitch, but the reality is that some of Australia’s retirement savings will help fuel a predicted $US600 billion ($885 billion) inflow into mainland stocks over the next decade.
Friday’s Sohn Hearts & Minds conference is barely in the rear view mirror, but already Hobart’s Federation Concert Hall is almost entirely booked solid for next year’s event, taking place on November 13 for the first time on the Apple Isle. At $3500 a ticket, that shows how popular the thing’s become.
The majority of investors who attend the Sohn Hearts & Minds conferences in Australia are there to learn about the dozen or so stock tips from leading fund managers as well as make very large donations to a range of medical research institutes.
Developed economies are not heading for another debt reckoning or recession, but are in a risky environment where governments are likely to print money to fund their spending, warns Ray Dalio, the founder of $180bn giant hedge fund Bridgewater Associates.
Veteran investor Howard Marks says the abandonment of the WeWork float, the poor performance of US IPOs in 2019 and the punishment of bad news in US debt markets are all early signs that discipline is starting to return to financial markets, and investors may no longer be rewarded for holding the riskiest assets.
Philip King might seem an unlikely ally for Reserve Bank governor Philip Lowe. The chief investment officer at Regal Funds Management has been knocking out returns in the teens to mid-30s for a growing roster of funds for the past 15 years.
The top-performing fund manager from last year's Sohn Hearts and Minds investment conference has criticised the buy now, pay later (BNPL) sector as operating in a "fuzzy" regulatory zone and engaging in a game of trying to be acquired before a regulatory crackdown.
Beeneet Kothari, the New York hedge fund manager who pitched the best-performing stock recommendation at the prestigious Sohn Hearts & Minds Conference in 2018 — has warned investors of the risks faced by one of Australia’s favourite tech stocks, Afterpay Touch.
Buy now pay later providers like Afterpay and Klarna are risky businesses operating in a "fuzzy legal area", and are likely to be regulated in coming years or be swamped by larger companies, says US fintech investor Beeneet Kothari.
Tribeca Investment Partners’ Jun Bei Liu provided one of the star performers for last year’s Sohn Hearts and Mind conference with China-based education group New Oriental Education and Technology, which has gained 81 per cent in the last year.
TDM Growth Partners' Hamish Corlett reckons the reversal of fortunes for the once high-flying WeWork may be a reality check for fast-growing private companies with complex ownership structures, and the torrent of money that has propelled valuations ever higher.
Rob Kapito, co-founder of $10 trillion investment giant BlackRock, says a global shortage of investable assets will help the sharemarket grind higher over the long term as dips in equity and bond markets are quickly met by investors hungry for returns.
Rob Kapito, the head of the world's largest money manager BlackRock, says there is more than $US50 trillion ($73 trillion) in cash sitting idle in portfolios around the world due to a lack of investment opportunities and weak returns.
Oaktree Capital’s Howard Marks has warned that it is time to take a defensive approach to investing, opting for bonds over stocks, investing in the US rather than emerging markets and choosing larger, more stable companies to invest in over smaller growth stocks.
When the founder and co-chairman of the world’s largest hedge fund likens the global environment to that of the 1930s and sees the current tensions between the US and China as something wider, more permanent and more threatening than a trade conflict it is disconcerting.
