BRIDGEWATER: CAUTIOUS ON 2012
Out of all the opinions out there heading into 2012, the only one that might be worth actually listening to is Bridgewater’s. That’s the world’s largest hedge fund run by Ray Dalio. Dalio has racked up enormous returns over the years using a global macro approach. The strategists at BW are not entirely optimistic heading into 2012, but still find value in gold and treasuries (via the WSJ):
“Robert Prince, co-chief investment officer at Bridgewater, and his managers at the world’s biggest hedge fund firm are preparing for at least a decade of slow growth and high unemployment for the big developed economies. Prince describes those economies—the US and Europe, in particular—as “zombies” and said they will remain that way until they work through their mountains of debt.
“What you have is a picture of broken economic systems that are operating on life support,” Prince said. “We’re in a secular deleveraging that will probably take 15 to 20 years to work through and we’re just four years in.”
In Europe, “the debt crisis is [a] long ways from over,” he said. The economic and financial morass will mean interest rates in the US and Europe will essentially be locked at zero for years.
In this bleak environment, Prince said stocks remain vulnerable to “air pockets” from shocks, such as bad news out of Europe. But for longer-term investors looking out over the next decade, he said, equities may be a good buy. There is even money to be made in US Treasurys, despite interest rates near record lows, and gold is likely to resume its climb as central banks print money to bolster their economies, Prince said.”
Source: WSJ
I think I agree with this, 10 years of very slow growth sounds about right. The system is broken, but the debt is a symptom, not the true cause. The system is broken politically, there hasn’t been will to deal with the changing world for 30 years now. The problems have been patched with ever increasing amount of debt. Given that for 30 years nothing was solved, I am not optimisitc that will suddenly find leaders who will see the light and have the courage to pursue it. So, we’ll continue as zombies. That is the path of least resistance.
In my mind, growing healthcare costs (currently a third of the GNP by some estimates) due to aging population is going to be the big factor. Given that medical professionals are already well represented in the 1%, this dynamic is going to make demand for non-medical sector even weaker.
This is the year of bad or worse choices apparently if you have a bearish mindset.
Easy to get crushed in long duration treasuries if we have an unexpectedly strong year of growth with not that much available reward if you are right.
The proverbial a return of principal rather than a return on your principal kind of year.
If the 30 yr drops from 3% to below 1% the price of the bonds will actually go up quite a bit – like 80%. However, the risk if that a rise to 5% would cost you half your money. If the bond market has a blip that pushes the 30 yr up above 4%, I would definitely be a buyer.
Great article. This is a free link to it. Hope it works for everyone:
http://www.efinancialnews.com/story/2012-01-03/bridgewater-takes-grim-view-of-2012
Nope.
Try this one instead, folks:
http://www.google.com/url?url=http://www.efinancialnews.com/story/2012-01-03/bridgewater-takes-grim-view-of-2012&rct=j&sa=X&ei=xnkET4PKFKjY0QGrqsCcAg&ved=0CDAQ-AsoADAA&q=Bridgewater+Takes+Grim+View+of+2012&usg=AFQjCNFC0HFWtWnKKinB9l9M1Ex0iKAoIg&cad=rja
Cullen, thanks for this analysis. The whole article at WSJ is worth reading.
However how do you reconcile strength in both UST and Gold at the same time. Lately they have been moving in opposite directions: UST has become the favored risk-off play and Gold the risk-on play.
Besides with a Balance-sheet Recession position, shrinking M3, from a MMT viewpoint how can we say that Gold will go up “as central banks print money”?
Here is an example of Cullen’s recommendation for a trade pairing gold and long bonds from 2011-07-18 with explanation (not sure of when/if he would have closed or reduced those trades):
http://www.marketwatch.com/story/the-perfect-hedge-for-this-crisis-2011-07-18?dist=afterbell
It sure looked great through about mid-September and would probably still have a tidy profit depending on weighting through today based on a quick glance at a chart.
Interesting!
I don’t remember reading that recommendation here.
Curiously, the long Treasury and gold is the almost the exact recommendation of Porter Stansberry, who would definitely have to be considered one of the hyperinflation fearmonger crowd.
Any stats on how that trade turned out, and it is still a smart trade today?
There is a very massive sentiment among Republicans for a return to a gold standard. If conservatives (not Romney or Gingrich) ever take power, this will happen. If the USA returned to a gold standard, what would the price of gold have to be? The minimum price would be the US gold reserves divided by the dollars in circulation, and this would be orders of magnitude larger than current prices.
At the rate Europe is going, it might be desperate enough to return to gold before the US does. A bet on gold could be a bet on the chance that the world returns to a gold standard, and the profits would be absolutely HUGE if this happened.
Me thinks that a return to gold becomes more likely if there is a real deflationary collapse. Such a collapse would eliminate most of the dollars in circulation, and make a return to gold much more practical.
Exertia,
Fed policy causes the interest rate on cash and cash equivalents (T-bills) to go to zero, so investors look for higher returns elsewhere, causing bubbles in equities and commodities. You can see that over the past 2.5 years many risk markets have had a very high correlation with the size of the Fed’s balance sheet. When the flow of zero interest bank reserves into the systems stops, so does the buying of risk assets.
Some good articles here today:
http://www.thetrader.se/
Ah, Bridgewater… I know it well enough.
Just a word of warning: This guy Ray Dalio is a little kooky, and his company has something of a cult personality to them. Now that he’s rich, he writes his discourses and philosophies on business. (Ever hear the expression “When you’re rich you’re eccentic, but when you’re poor you’re crazy” or something like that?) Just trying to apply to this company was a NIGHTMARE; I had to read and memorize the entire pamphlet on company philosophy, and after I was interviewed and denied the job, they told me that it sounded like I was reading it off, like I didn’t “believe it” enough. And bear in mind, this was JUST FOR THE MAILROOM POSITION.
Then again, screw ‘em, because I didn’t feel like joining a cult, anyway.