Ray Dalio, the billionaire founding father of hedge fund big Bridgewater Associates, has warned that the US authorities’s rising debt ranges might hit Treasury bonds, arguing that traders ought to transfer a few of their cash to international markets.
In an interview with the Monetary Instances, Dalio described his wide-ranging considerations concerning the US, together with its debt load, the chance of what he calls a “civil war” and the potential for the nation to change into concerned in one other worldwide battle, which he warned might deter international traders from shopping for US bonds.
“I am . . . concerned about Treasury bonds because of the high debt levels, which high interest rates are adding to,” he mentioned.
“I’m also concerned about the softening demand to meet supply, particularly from international buyers worried about the US debt picture and possible sanctions,” Dalio mentioned. If the US have been to impose sanctions on extra international locations — after doing so towards Russia following its invasion of Ukraine — then that would cut back worldwide demand for Treasuries, he added.
Dalio’s warnings come amid rising concern amongst some commentators concerning the US’s debt pile. The Congressional Funds Workplace forecasts US debt-to-GDP will rise above its second world battle excessive of 106 per cent by the top of the last decade and hold rising, whereas the watchdog’s director has warned of a Liz Truss-style market shock if the federal deficit is ignored.
Federal Reserve chair Jay Powell mentioned “the US is on an unsustainable fiscal path” almost about its debt in an interview with the information programme 60 Minutes earlier this yr.
In the meantime, borrowing prices have climbed this yr, with yields on 10-year Treasuries leaping from 3.88 per cent to 4.35 per cent as traders drastically reduce their expectations of rate of interest cuts.
Nonetheless, some traders consider such considerations are overblown. They argue the flood of recent Treasury debt on provide this yr has largely been properly absorbed by non-public traders, with bigger public sale sizes thus far having little impact on yields.
Due to the US’s debt and the potential impression of additional battle, Dalio mentioned traders ought to look to maneuver a few of their cash outdoors the nation.
Though “the best parts of the United States are still the best parts of the world for capitalism and innovation”, the dangers the nation confronted have been on the rise and make geographic diversification essential, he mentioned.
“Countries that earn more than they spend and have great balance sheets, have internal order and are neutral in the geopolitical conflicts . . . look attractive,” Dalio added.
He recognized international locations equivalent to India, Singapore, Indonesia, Malaysia, Vietnam and a few Gulf states as doubtlessly engaging locations to take a position. He added that gold was additionally an excellent diversifier.
Dalio, 74, stepped down as chair of Connecticut-based Bridgewater, which is the world’s largest hedge fund and manages $112.5bn in property, in 2021. He stays an adviser to the three co-chief funding officers and is a member of the board, whereas his analysis, supported by a staff at Bridgewater, is shared with traders.
Among the many dangers recognized by his analysis is what Dalio believes is the rising probability of a US “civil war” — the chance of which he places at someplace between 35-40 per cent.
“We are now on the brink,” he mentioned. However we “don’t yet know if we will cross over into much more turbulent times”.
The civil battle Dalio imagines was not essentially one through which individuals “grab guns and start shooting”, though such a state of affairs was doable, he mentioned.
As a substitute he sees it as an acceleration of the political polarisation in American politics that has taken place in latest a long time. This civil battle could be one through which “people move to different states that are more aligned with what they want and they don’t follow the decisions of federal authorities of the opposite political persuasion”.
He additionally believes this yr’s US presidential election is an important one in his lifetime and can decide whether or not the dangers he sees — which additionally embody local weather change and the impression of the extra widespread use of synthetic intelligence — will spiral uncontrolled.
This election could be a take a look at of “can democracy work well? Will there be an acceptance of the rules and an ability to work well under those rules?” he mentioned.
“[Republican candidate Donald] Trump will follow more rightist, nationalistic, isolationist, protectionist, non-regulatory policies — and more aggressive policies to fight enemies internally and externally, including political enemies. [President Joe] Biden, and even more so the Democratic party without Biden, will be more the opposite, though they too will play political hardball,” he added.
Dalio declined to again a candidate, however did reveal that he not too long ago attended a Taylor Swift live performance.
“I saw how she brought people of all sorts — and many nationalities — together. It felt like it would have been impossible to fight,” he defined. “I say this partly as a joke, but if she ran for president and would listen to great advisers, I’d consider supporting her.”
