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Warning: Ray Dalio says markets are in for a ‘great sag’

Ray Dalio runs the largest hedge fund in the world – Bridgewater Associates. Bridgewater is famous for actually making money during the GFC, so it’s pretty safe to say that when Dalio makes a prediction, people stop what they’re doing and listen.

According to a report in the Australian Financial Review (AFR), Dalio is not too optimistic about the global economies’ immediate future. The AFR reports that Dalio was speaking at a panel discussion last week about his worry that the business cycle is “fading” and that the global economy was headed into what he calls a “great sag”.

“This is the best that we get – this moment. We are at the best. The cycle is not going to continue forever, the expansion. You have this sag,” Dalio is reported to have said. He added:

I think that that’s the landscape broadly speaking in the world and we are in that kind of self-reinforcing sag. Because as … China slows, and the United States slows – and they all have their headwinds – that makes it not as good for the others who deal with those countries.

He also adds that monetary policy is quickly becoming impotent in being able to deal with any downturns, because of the historically low interest rates and massive bond-buying programs around the world.

And that’s not the only problem that low interest rates might cause. The AFR also reports that the International Monetary Fund (IMF) is estimating “nearly 40 per cent of the corporate debt in eight leading countries – the US, China, Japan, Germany, Britain, France, Italy and Spain – would be impossible to service from corporate cash flows if there was a downturn half as serious as that of a decade ago.”

No wonder Dalio is not feeling overly confident about the future.

Foolish takeaway

I think the lesson to be drawn from these comments is to focus on high-quality, wide moat companies that are not overburdened with debt in your own portfolios. Low interest rates have meant borrowing money is almost free these days, but there are companies out there who have gorged themselves on cheap credit to the detriment of their shareholders.

In my opinion, if you just concentrate on the fundamentals with companies that have used debt effectively and with restraint, things will be ok!

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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