Aug 24

From the article:

Said differently, the risks of the world being at or near the end of its long-term debt cycle are significant.”
Leading to the conclusion that “We Believe That the Next Big Fed Move Will Be to Ease (Via QE) Rather Than to Tighten

Forget Rate Hikes: Bridgewater Says QE4 Is Next; Warns World Is Approaching End Of Debt Supercycle (ZeroHedge, Aug 24, 2015):

In a just released letter to clients, the head of the world’s largest hedge fund delivers one of his usual sermons about the economy as a perpetual motion machine, affected by central banks, and where interest rates are supposed to boost asset returns by being below “the rates of return of longer-term assets.”

None of that is terribly exciting and it is in fitting with what Bridgewater has said for a long time (incidentally, it is curious that just over the weekend, the FT released a piece in which a “US asset manager warns over risk parity” which is what Bridgewater’s bread and butter is all about).

What is exciting is the following part:

That’s where we find ourselves now—i.e., interest rates around the world are at or near 0%, spreads are relatively narrow (because asset prices have been pushed up) and debt levels are high.  As a result, the ability of central banks to ease is limited, at a time when the risks are more on the downside than the upside and most people have a dangerous long bias.  Said differently, the risks of the world being at or near the end of its long-term debt cycle are significant.

That is what we are most focused on.  We believe that is more important than the cyclical influences that the Fed is apparently paying more attention to.

We suppose this gis suppoed to justify the Fed’s preoccupation with hiking rates, and why Yellen has on more than one occasion spoken against soaring asset prices. And yet…

While we don’t know if we have just passed the key turning point, we think that it should now be apparent that the risks of deflationary contractions are increasing relative to the risks of inflationary expansion because of these secular forces.  These long-term debt cycle forces are clearly having big effects on China, oil producers, and emerging countries which are overly indebted in dollars and holding a huge amount of dollar assets—at the same time as the world is holding large leveraged long positions.

While, in our opinion, the Fed has over-emphasized the importance of the “cyclical” (i.e., the short-term debt/business cycle) and underweighted the importance of the “secular” (i.e., the long-term debt/supercycle), they will react to what happens.  Our risk is that they could be so committed to their highly advertised tightening path that it will be difficult for them to change to a significantly easier path if that should be required.

Leading to the conclusion that “We Believe That the Next Big Fed Move Will Be to Ease (Via QE) Rather Than to Tighten

Odd, that: it’s precisely what we have been saying since the announcement of the taper in 2013.

As for why stocks just took a major leg down once the letter hit, Dalio’s warning that the era of easy debt-funded returns is over, appears to be striking a chord…

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2 Responses to “Forget Rate Hikes: Bridgewater Says QE4 Is Next; Warns World Is Approaching End Of Debt Supercycle”

  1. Marilyn Gjerdrum Says:

    QE is out of steam. It might work for a few days, then the cycle will continue.
    There is too much debt with nothing behind any of it. QE in the US helped the worst of the wrongdoers of 2008-09, nobody else.
    Our debt level has gone up 50% since Obama took office………most of it from bush adm junk, like the Iraq war and the crash……
    The financials are going down next……..
    Look where QE took China from late June until now….. Nobody believes it any longer.
    Without trust, it cannot work, and nobody trusts the banks any longer…..Especially the central banks.
    What products do they offer? Debt and more debt…..
    Debt is only valuable if the debtor can afford to pay the loans.
    This is global, affecting every nation, and many will soon be unable to pay…….
    Idiots have been in power too long.

  2. Manfred Häberli Says:

    the argument is understandable, has some merits and deserves empathy but we have to accept the present as our Basis of decisions to be made and the wolrd as a living thing is not to be had without risk. It is for us to make the right decisions.

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