Nov 252013 0 Responses

Ray Dalio Interview and ICMC Market Outlook

Ray Dalio is one of the most successful and respected hedge fund managers in the world, having built his hedge fund company, Bridgewater Associates, into the largest hedge fund in the world with over $150 billion in assets under management. He is often credited with forecasting market events, including the 2008 credit crisis, and known for his deep understanding of how the “Economic Machine” works, having written an essay under that title in 2008. Recently Mr. Dalio gave an interview at the New York Times DealBook Conference in which he shared his thoughts on the current state of economy and investment markets. Below are some remarks from this interview, as well as his most recent letter to investors.

Mr. Dalio begins by pointing out what the difference between the effectiveness in how central banks operate today compared to the past:

“In the old days central banks moved interest rates to run monetary policy. By watching the flows, we could see how lowering interest rates stimulated the economy by 1) reducing debt service burdens which improved cash flows and spending, 2) making it easier to buy items marked on credit because the monthly payments declined, which raised demand (initially for interest rate sensitive items like durable goods and housing) and 3) producing a positive wealth effect because the lower interest rate would raise the present value of most investment assets (and we saw how raising interest rates has had the opposite effect).”

But Dalio points out that all that changed when interest rates hit 0%. Once that occurred, it restricted the Central Banks ability to influence the economy through interest rate changes, and so the Federal Reserve had to move to “printing money” through Quantitative Easing programs.

The problem with this, however, is that unlike changing interest rates, which have a broad economic effect, printing money can only influence financial assets (central banks can only purchase financial assets). As a result…

“The Fed’s ability to stimulate the economy became increasingly reliant on those who experience the increased wealth trickling it down to spending and incomes, which happened in decreasing degrees (for logical reasons, given who owned the assets and their decreasing marginal propensities to consume).

….. the marginal effects of wealth increases on economic activity have been declining significantly. The Fed’s dilemma is that its policy is creating a financial market bubble that is large relative to the pickup in the economy that it is producing.”

All that is to say that the Fed is facing an increasingly tough balancing act of risking another financial bubble by continuing to inflate financial asset prices through “money printing” with the risk of cutting off stimulus too soon and risking the economy slumping back into recession. All of this while facing the reality that its policies are simply losing their effectiveness.

Dalio goes on to say that in the wake of all this action by the Fed and the last 18-months of market bullishness…

 “….going forward most investors are not going to be able to produce alpha…(as)alpha is a zero sum game. As prices rise, expected future returns go down. So for example, the expected future return of equities is about 4 percent now, because of the price rise. Investors need to create a proper balance between stocks, bonds and cash because of the narrowing return rates between them.”

We quite frankly share these same concerns at ICMC and believe that proper diversification across multiple asset classes including hedge funds, hi-yield, natural resources, private equity, and real estate (in addition to stocks, bonds, and cash), coupled with a rigorous risk management program, are essential to safely protect investor assets from the unknown twists and turns that lay ahead.

We firmly believe that our all-weather allocation, incorporating all of the above listed asset classes, is well positioned to benefit from all market conditions while also protecting clients’ assets from unexpected shocks to the system.

If you would like to learn more about how we are currently allocating clients’ accounts, please feel free to email us at or call 972-387-0660.

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