Ray Dalio On Developed Nations And Emerging Markets

On CNBC this morning, Bridgewater Associates founder and CIO Ray Dalio spoke about the world economy and how it has split into two parts. “We have the debtor, developed world – U.S., Europe, Japan – countries that are overly in debt,” Dalio said. “Then we have the emerging world. Basically it's 50/50 – the developing world accounts for 53% of GDP. The emerging world is booming.” Over the next 18 months, Dalio estimates that we're going to see an inability for China and other booming countries to slow their economy, which will lead to an accelerated inflation rate that they will struggle to contain, leading to another shift in monetary policy. As far as U.S. equities are concerned, Dalio said that they could benefit from this monetary shift. “First, [they are] still comparatively cheap, but more importantly the flow is beneficial to them,” he said. “They benefit from currency devaluation. Currency devaluation is essentially the printing of money.” Dalio said that he thinks that there are too many portfolios with a concentration in the stocks and bonds of developed countries, relative to other assets. “I think the key thing is diversification; generally speaking, diversifying into assets that are underweighted,” Dalio said, adding that he didn't think that investors have enough gold in their portfolios. “I think the main thing for investors is that if they diversify their assets into other assets, it will lower the risk of their portfolio.” That, Dalio said, goes for the big, sovereign and institutional investors as well as individual investors. With regard to our nation's recent economic issues, Dalio believes that the Federal Reserve saved us from another depression. “[At various] times [there comes] the need for the government to print money and buy assets,” Dalio said. “That's what Ben Bernanke did….[which] helped put money back into the economy.” Dalio refers to 2010 and 2011 as “transition” years. “You can print a lot of money,” he said, “….and it doesn't produce a lot of inflation. It's what we call the sweet spot of the cycle.” Dalio also took a moment to explain the dangers of reinforcing a negative cycle. “Let's say you have a 10-year debt and you can't make payments,” he said. “[You] need to write it down by 30% to make the payments, [but] that 30% is a hit to someone's net worth, [which] reinforces a negative cycle.” But if you could write it down 3% each year for 10 years, it would be a much easier problem to solve. Finally, with regard to municipal bonds, Dalio said that he is not interested in holding those things. “[But] I want to be clear: I'm not a muni expert,” he added.