Billionaire investor Ray Dalio founded the giant hedge fund Bridgewater Associates out of his apartment in 1975. The money manager believes we are late in the current economic cycle. Asset prices, not purely economic fundamentals, to lead policy.
Interest Rates Leading to the Next Recession
For investors in Canada, the Fed’s decision to hike or hold interest rates is critically influential. The Bank of Canada increased its benchmark interest rate to 1.75% on October 24th – the highest in nearly a decade.
For Canadians, with near record household debt of 169%, rising borrowing costs is of concern. In fact, “credit market debt as a proportion of household disposable income increased to 169.1 per cent as growth in debt outpaced income,” for the second quarter of 2018, according to CBC.
Fed to Look at Asset Prices before Economic Activity
Back to Ray Dalio, who explains,
“We’re in a situation right now, where the Fed will have to look at asset prices before they look at economic activity. It’s a difficult position.”
Furthermore,
“I think we’ve gotten a lot of the good news behind us. I think that assets are fully priced and I think that there are is asymmetric risk.”
Finally,
“I think the upside position is not as strong, relative to the risk.”
Ray Dalio worries the authorities (Fed) need to be more prepared and to think beyond the next interest rate hike or cut. For investors, looking at declining US stocks almost daily, valuations are becoming more attractive. Also, given Dalio’s warnings, asset price fluctuations should be front of mind. With the midterm elections in the rear view, President Trump is focused on policy and an ongoing trade spat with China.
Canada, for its part, is feeling the pinch of rising rates. Finally, as Fed officials look to keep inflation in check without derailing the economy, asset prices could be the ultimate precursor to Fed policy.
