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Dalio warns on new era with globalisation in retreat

Donald Trump’s election victory heralds the beginning of a new era that will be marked by the retreat of globalisation and rising bond yields, according to Bridgewater’s Ray Dalio.

Mr Dalio, the founder of the world’s biggest hedge fund group, said in a note on Tuesday that “there is a good chance that we are at one of those major reversals that last a decade”, similar to the outbreak of stagflation in the 1970s and the shift back to strong, non-inflationary growth in the 1980s.

Although the iconoclastic hedge fund manager, whose firm manages about $150bn, stressed that the new era might not be anything like the 1970s or 1980s, he warned that it could last a decade and would also be characterised by aggressive government spending, and quicker US growth accompanied by accelerating inflation.

“As for the effects of this particular ideological/environmental shift, we think that there’s a significant likelihood that we have made the 30-year top in bond prices,” Mr Dalio wrote in the note posted on LinkedIn.

Many investors have jumped to the same conclusion, triggering the worst week for bond markets since the “taper tantrum” in 2013, when the Federal Reserve first warned it would begin to scale back its bond-buying stimulus programme. The global fixed income market has lost $1.5tn of its value between the US election last week and Monday, until some stability re-emerged on Tuesday.

Many analysts expect the bond sell-off to eventually resume, given Mr Trump’s plans to stimulate the economy through aggressive tax cuts and infrastructure spending, which will have to be financed by borrowing.

There’s a good chance that the ‘craziness’ factor will be smaller and play a lesser role in driving outcomes than many had feared

“We may now be on the verge of the most significant shift in the macro environment since the global financial crisis,” noted Willem Buiter, Citi’s chief economist. “We have spent almost a decade in a secular period of slow but steady growth, uniform policy and suppressed volatility. All that looks like changing now with policy shifting to a far more diversified basis.”

Mr Dalio also argued that the bond rout will continue, given that reversals of major secular trends — like a three-decade bond bull market — tend to badly hurt investors caught wrongfooted by the sell-off, “making the move self-reinforcing until they are shaken out”.

After years of “reaching for yield” in a low-rate environment, many money managers bought debt with long duration, making them more sensitive to moves in interest rates, he noted.

“Also, it’s likely that the Fed — and possibly other central banks — will increasingly tighten and that fiscal and monetary policy will come into conflict down the road,” he wrote. “The question will be when will this move short-circuit itself” and starts hurting other markets, like stocks.

On the emerging administration of Mr Trump, Mr Dalio said that his “very preliminary” impression was that on the economic side of things the developments were broadly positive, with the people touted for senior positions unlikely to wreck the US economy.

“The straws in the wind suggest that many of the people under consideration have a sufficient understanding of how the economic machine works to run reasonable calculations on the implications of their shifts so that they probably won’t recklessly and stupidly drive the economy into a ditch,” he noted.

We may now be on the verge of the most significant shift in the macro environment since the global financial crisis

“There’s a good chance that the ‘craziness’ factor will be smaller and play a lesser role in driving outcomes than many had feared,” he added.

Mr Dalio’s views are closely followed in part because of how much money he runs, but also because his idiosyncratic approach led Bridgewater to positive returns in the financial crisis, even as other hedge funds suffered deep losses and had to block investor withdrawals.

Bridgewater, founded in 1975, operates three main funds: its actively-managed Pure Alpha fund, the All Weather “risk parity” fund, and Optimal Portfolio, a fusion of the two which launched in February 2015.

Through the end of October, Pure Alpha is down 0.6 per cent, and the All Weather fund has gained 12.6 per cent, according to a person close to the company.

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