After flipping to a considerably more bearish view on where developed markets are in the business cycle earlier this month following the spike in average hourly wages, when he commented that everything had apparently changed in just a few days, Bridgewater founder Ray Dalio on Tuesday said during an interview with Bloomberg that central banks, most notably the Federal Reserve and ECB, will enjoy another year of two of the “goldilocks” scenario of strengthening growth and low inflation.
“We are in the Goldilocks part of the cycle, where it’s not too hot and not too cold,” he said. “We have growth and we don’t have an inflation problem. That’s the beautiful part of the cycle.”
But after that period is over, they will struggle to balance growth and inflation, adding that the US is further ahead in the economic cycle than Europe. The importance of getting policy just right during this shift will leave room for a dreaded policy error.
“Should we be concerned about inflation? I’d ask you – because it’s too low or because it’s too high? Isn’t it a funny question. There was a lot of concern that it was too low. Should we be concerned that it’s too high? We’re still struggling to get to 2%.
“In Europe is it a problem that there’s too much inflation, or too little inflation, I don’t know – you never get it perfect but it’s pretty good so I’m not concerned. What I am concerned about is, as we get into the later parts of the cycle, the challenge for central banks will be to get it perfectly.”
“When we have growth and we don’t have an inflation problem, that’s the beautiful part of the cycle. As we move into the later part of the cycle, which we’re moving toward, the breaks start to get applied.”
In Europe, Dalio expects the European Central Bank will wind down quantitative easing, but might wait to act on interest rates.
Dalio famously said during a speech at Davos in January that investors holding cash would be left “feeling pretty stupid” thanks to the combination of low inflation and strengthening growth that is creating a “just right” scenario for markets, adding that economic growth is in the late stage of the cycle, but could still continue improving for another year or two.
In a declaration that is puzzling considering Bridgewater’s massive Europe short, Dalio expressed admiration for ECB chief Mario Draghi and the European economy more generally – applauding central bankers for guiding it through a “beautiful deleveraging”. Draghi, Dalio said, should be “congratulated” for steering Europe through the financial crisis. Notably, Dalio declined to answer questions about Bridgewater’s recent $ 22 billion bet (it has since shrunk modestly) against some of the Continent’s biggest companies – a position that has increased from a “tiny” $ 700 million position in October.
The European economy is coming off its best annual growth in a decade. Earlier today, Bundesbank President Jens Weidmann said the ECB could end its massive quantitative easing program – which it has been slowly tapering for a year now – by the end of 2018. He also said a rate hike in 2019 isn’t out of the question, per Reuters.
And here are Bridgewater’s biggest positions:
Of course, for all we know, Bridgewater could also have a substantial long position open in Europe via options and other alternatives to equities that regulators wouldn’t require it to disclose. Some traders have suggested that Bridgewater’s short could be part of a broader macro strategy to bet against global companies that are heavily reliant on their US business – which could be disrupted by the Trump administration’s crackdown on trade.
Earlier this month, Dalio and Bridgewater co-head of equity sales Bob Prince offered a surprisingly bearish take on market complacency, saying he expected this month’s shakeout to continue for the foreseeable future. Dalio later chimed in, writing a LinkedIn post where he declared that everything had changed in the past 10 days.
Watch the full Dalio interview below: