Tuesday, May 16, 2017

Ray Dalio Worried About The Big Picture?

Evelyn Cheng of CNBC reports, Manager of the world's biggest hedge fund says the long-term economic picture 'looks scary':
Ray Dalio, founder of Bridgewater Associates, is feeling OK about markets and the economy right now, but he is getting really worried about the future.

"Big picture, the near term looks good and the longer term looks scary," Dalio wrote in a LinkedIn blog post Friday.

"We fear that whatever the magnitude of the downturn that eventually comes, whenever it eventually comes, it will likely produce much greater social and political conflict than currently exists," he said.

Bridgewater manages $150 billion.

Dalio listed four reasons for his pessimism:
  1. Economic growth "at or near its best" with no major economic risks in the next two years.
  2. "Significant long-term problems" such as high debt levels and limited central bank power "that are likely to create a squeeze." Required payments for social programs including pensions and health care are also increasing.
  3. Social and political conflicts "near their worst for the last number of decades."
  4. "Conflicts get worse when economies worsen."
Productivity necessary for raising living standards is low, while social tensions over income inequality and politics are increasing, the hedge fund manager said.

"Since such tensions are normally correlated with overall economic conditions, it is unusual for social and political tensions to be so bad when overall economic and market conditions are so good," he said.

U.S. stocks are at record highs, while political conflict is elevated based on a Federal Reserve Bank of Philadelphia index created by looking at newspaper articles, Dalio noted.

"The idea of conflicts getting even worse in a downturn is scary," he said.

To be sure, Dalio said asset prices "look about right to us." He expects low returns from investments, which is slightly better than holding cash.

"There are no debt crises on the horizon," Dalio said. The overall global economy "is at equilibrium."
Last month it was Paul Tudor Jones warning us to be very afraid of these markets. Now we have Ray Dalio warning us that the big picture in the near term looks good but "the longer term looks scary".

Are you confused? What do I keep warning you, always ignore these billionaires and their public warnings, except this time, Dalio backs it up with research and plenty of charts.

And I agree with him, longer term, the world is scary but I will go a step further and say that things might unravel a lot quicker than he claims in the near term.

Forget the political disarray that's going on in Washington.  I've never seen such chaos at the White House. Even senior Republicans are coming out to voice their concerns.

Politics is politics, it's a circus and noise. Focus your attention on the US economy. I warned all of you a month ago the next economic shoe is dropping and that you should be focusing on leading economic indicators that are rolling over, not lagging or coincident economic indicators that show the economy humming along.

Over the weekend, Zero Hedge posted a comment, "It Fell Off A Cliff": Morgan Stanley's Macro Indicator Just Crashed The Most Since Dec. 2008, stating this:
Step aside Citi US Economic Surprise Index, which after a "surprising" streak of negative economic data, recently crashed to the lowest level since October 2016...


... and make way for Morgan Stanley's ARIA, a monthly US macro indicator based on data collected through primary research on key US sectors (consumer, autos, housing, employment, and business investment).


 The reason why this particular index will likely feature prominently in financial commentary in the coming days and weeks, is that as Morgan Stanley's chief economist Ellen Zentner writes, "ARIA appears to have fallen off a cliff in April, with a 0.72% decline, the largest since December 2008."

As Zentner expains, weakness was led by sharp declines in the investment and housing components, although even as the bank's data on business and residential investment was weaker, the consumer, employment, and autos components posted modest to moderate gains in April.

What was the main driver for the collapse: "Business formations were this month's biggest drag, as they looked to have reversed an earlier post-election surge. If not for that, ARIA would have come in slightly positive in April at +0.13%."
I will let you read the rest of the comment here but the main point is the US economy is definitely slowing and this does not bode well for risk assets and the global economy going forward.

But why are stocks continuing to climb despite clear evidence the US economy is slowing? For this, I will refer my institutional readers to the latest video clip which Cornerstone Macro's François Trahan put out earlier today, "Eco Data Continues To Be Disappointing And Yet The Market Is Rising ...," as he does a great job explaining why P/Es  are a lot more cyclical in this cycle and why the slowdown will catch up to credit spreads, and this will spread to the stock market once this happens.

So, keep your eyes on the iShares iBoxx High Yield Corporate Bond ETF (HYG), because it's been on a tear since it bottomed out early last year after a major pullback that started in the summer of 2015 (click on image):


As the economic slowdown feeds into corporate debt markets, you will start seeing stocks selling off too and major multiple compression.

One thing I'd like to bring to your attention is why P/Es are behaving cyclically in this cycle. Last week, I discussed whether capitalists can afford a trumped recovery, alluding to a very insightful paper published by Shimshon Bichler and Jonathan Nitzan.

I urge all of you, especially the economic machines at Bridgewater to read that paper and my comment to really understand why a major bear market is underway. I ended that comment stating:
[...] there will be another crisis, that much I can guarantee you. The next economic shoe is dropping in the US at a time when the rest of the world is very fragile. Will Kyle Bass be right about China's looming credit crisis? He was spectacularly wrong on Japan but he might be right about China.

And remember a crisis in China will reinforce global deflationary headwinds, which is music to capitalists' ears as long as it doesn't develop into a full-blown debt deflation crisis and Great Depression type high unemployment.

In fact, Jonathan and I discussed this doomsday scenario and he said the system cannot support high unemployment like we had during the Great Depression. "This would threaten capitalists' hold on power and we would have a major crisis before reaching that point."

I told him that I see a bleak future where inequality gets much worse (due to rising unemployment and pension poverty, technological advances, etc.), debt deflation, one crisis after another (China, Europe, etc.) and something is going to give eventually or else the system will implode.

Then he showed me Figures 9 and 13 from his paper A CasP Model of the Stock Market (click on images)




Basically, when systemic fear is high, like now, capitalists look at current, not future profits. The first chart does not bode well for stocks going forward and the second one doesn't bode well for employment growth, so expect some type of 'strategic sabotage' to maintain capitalists' hold on power.

Take the time to carefully read A CasP Model of the Stock Market, it is excellent and has a lot of information for everyone, including institutional investors.
Great, so we all know another crisis is on its way but when will it strike? After all, timing is everything in order to make a killing being long or short these markets.

I've long maintained these central bank/ corporate buyback controlled markets will remain irrational longer than most can stay solvent. The liquidity in the financial system is truly unprecedented so don't expect things to unravel that fast.

Later this week, I will go over top funds' Q1 activity (read my last comment here). I will show you how top quantitative hedge funds taking over the world don't give a dime about Ray Dalio, Paul Tudor Jones or where the economy is headed. They are playing trends using sophisticated (and not-so-sophisticated) quantitative models, and they control these markets, for now.

By the way, since I'm talking about Bridgewater, I can share with you that fund's top positions as of the end of March (click on image):


And where the fund significantly upped its stakes in Q1 (click on image)


As always, please remember this data is lagged and unless you're a professional trader and investor, don't bother buying or selling any stock based on top funds' 13-F filings. If you don't know what you're doing, you will get burned, and even these top funds get burned in these markets.

Case in point, check out shares of Express Scripts Holding Company (ESRX), a top holding of Bridgewater and many other top quantitative hedge funds which increased their position in Q1 as the shares declined (click on image):


Now, when you have Bridgewater, Blackrock, Renaissance Technologies and Two Sigma all significantly increasing their stake in a company as shares drop in price, it's typically a good sign but it doesn't mean the pain has ended as they all lost money on this trade (we don't know if they're adding now or dumped it).

Anyway, I'm getting off track and I'll go over top funds' Q1 activity later this week. If you have anything to add to this comment, feel free to reach out to me at LKolivakis@gmail.com.

Below, CNBC reports on how Ray Dalio, founder of Bridgewater Associates, is feeling alright about markets and the economy right now, but he is getting really worried about the future. That's why he gets paid the big bucks to worry about the big picture and how his fund will navigate what lies ahead.

And discussing the lack of volatility in the markets and what investor sentiment is signaling, with Chris Retzler, Needham Growth Fund manager, and Richard Bernstein, Richard Bernstein Advisors CEO & CIO. Bernstein thinks it's unheard of to have a bear market with this much liquidity.

He's right, there is unprecedented liquidity driving risk assets higher and a lot of investors are positioned very defensively, which allows the quants to ramp up this market, for now. 


No comments:

Post a Comment