During a live interview with Barry Ritholtz for his “Masters In Business” podcast on Monday, Bridgewater Associates CEO – who has been on a seemingly never-ending media tour to promote his new free e-book “A Template For Understanding Big Debt Crises” – once again expounded upon his “1937” markets thesis: That is, his theory that the US economy increasingly resembles the late-cycle dynamic from the 1930s where equity prices topped out as the Federal Reserve tightened monetary policy. Like the 1930s, the global economy is awash and debt, and populist politicians gaining power and influence in the West.
But more interesting than Dalio’s retread of his calls for a recession to begin some time during the next two years, he also repeated a claim he first made back in September, which has been getting more attention since BlackRock CEO Larry Fink said something similar earlier this month: That the US dollar’s days as the dominant global reserve currency are numbered.
Echoing Fink’s claims, Dalio explained that widening US deficits will soon alienate foreign buyers of US Treasurys, sending yields soaring higher while causing the dollar to depreciate by as much as 30% (though at least the Fed would no longer have any trouble meeting its inflation target).
Bloomberg‘s Brian Chappatta reviewed Dalio’s remarks in a column published Monday, where he cited previous comments by the hedge fund billionaire where Dalio said the loss of the dollar’s reserve status would be America’s “worst nightmare.” Dalio believes other rivals to the dollar will emerge to take its place, but refused to speculate about which currencies they might be.
“The role of the U.S. dollar will diminish, and the returns on U.S. dollar-denominated debt will suffer,” he said. “Then I think you will see the emergence of other currencies,” though he declined to identify which ones, saying it was “too big a topic to get into.”
Dalio also shared how he first came to understand currency crises when he was clerking on the floor of the New York Stock Exchange. He recalled the day in 1971 when President Richard Nixon shocked markets by severing the dollar’s link to gold.
“Money would get you gold, and it was a breakdown – it was a default,” he said. “I remember thinking when I was going to walk in on Monday morning to the New York Stock Exchange, this is a big crisis, and I thought the stock market would fall a lot. And the stock market went through the roof.”
In response to a question about his outlook for markets, Dalio – who said back in January that anybody caught holding cash would “feel pretty stupid” – warned that the entire world is “leveraged long”, and that asset returns in the coming years would be middling to negative for the foreseeable future.
“When you’re at a zero interest rate in the US, a zero interest rate in Europe and a zero interest rate in Japan, I think we’ve squeezed out a lot of assets. I think the world by and large is leveraged long. Meaning the buying of debt – corporate debt. One of the biggest sources of returns on assets was the fact that the interest rate was low relative to the return on equity. There were a lot of buybacks and mergers and acquisitions by companies buying companies. Then you had corporate tax cuts…all of those things have pushed asset prices to the level where it’s difficult to see if you could squeeze more.”
Regardless of whether a recession does materialize to tank markets – or if the Fed simply obeys the whims of President Trump by slashing rates and running back to the safety of QE4 – Dalio is certainly right about one thing.