Bridgewater's Ray Dalio at the World Economic Forum in Davos: Liquidity Will Flow into Risk Assets
Last Friday, Ray Dalio, one of the world's foremost investors, participated in a Bloomberg debate at the World Economic Forum in Davos, Switzerland.
While most of Wall Street was focused on the epic verbal throw-down between Carl Icahn and Bill Ackman, which occurred live on CNBC, Dalio's commentary at the debate may have been overlooked. His outlook on the economy and markets for 2013, however, was extremely illuminating.
Interestingly, Dalio's view mirrored that of Appaloosa Management's founder David Tepper who gave Bloomberg a wide-ranging, exclusive interview last Tuesday. Tepper and Dalio are both at the very apex of the hedge fund universe and among the most respected market minds in the world.
Tepper founded Appaloosa in 1993 and the firm has grown into one of the largest and most successful hedge funds in history. In the process, the University of Pittsburgh and Goldman Sachs (NYSE: GS) alumnus has become a billionaire many times over. In his Bloomberg Television interview, Tepper was unequivocally bullish on the U.S. stock market.
Among the factors he cited was a low earnings multiple for the S&P 500, combined with a flood of liquidity from global central banks and unattractive yields in fixed income. He said that the gap between equity valuations and the valuation of the bond market was the biggest he has ever seen. "There's never been this big of a gap in the history of my life at least."
With growth running at 2% to 3% and the economy seemingly on solid, if not spectacular footing, Tepper argued that the excess liquidity in the financial system will flow into equities and other risk assets. He said that there will be a great shift of both new money and old money into stocks. The new money will be generated by incremental savings and traditional capital formation while the old money Tepper refers to is currently allocated in fixed income.
In combination, these two sources of liquidity amount to a mountain of cash looking for a home with the best risk-adjusted return potential. According to Tepper, stocks are the obvious choice because of low historical valuations and a dearth of attractive alternatives in the current interest rate environment.
In addition to this dynamic, Tepper was extremely upbeat about the forward-looking prospects for the economy. The hedge fund manager told Bloomberg Television's Stephanie Ruhle that "this country is on the verge of just an explosion of greatness."
Based in Westport, Connecticut, Bridgewater Associates was founded by Ray Dalio in 1975. Over the years, the hedge fund has become one of the most powerful and influential investors on the planet. Dalio's firm currently manages approximately $130 billion in global investments, making it the largest hedge fund in existence today. In the world of alternative investments, Ray Dalio's success is nearly unprecedented.
His comments at Davos paralleled Tepper's arguments in some significant respects. Speaking about current economic conditions, he said "what's happened now is that because of all the money that has been added to the system, there is a great deal of liquidity in the world. So there is money in corporations, in households. Liquidity is all over the place, a lot of it."
Like Tepper, Dalio sees a great shift in capital flows occurring this year. Particularly, he said that the transition will occur "later in the year and beyond." His reasoning for this shift also mirrors the thesis laid out on Bloomberg Television by David Tepper last week.
He said, "The returns of cash are terrible. So as a result of that, what we have is a lot of money in a place -- and it needed to go there to make up for the contraction in credit -- but a lot of money is getting a very bad return. That, in this particular year, in my opinion, will shift. And the complexion of the world will change as that money goes from cash into other things."
According to Dalio, another catalyst for this transition in capital flows is the containment of the European sovereign debt crisis. He said that currently, "the imbalances of Europe have largely been rectified. They have been rectified because the amount of borrowing is now consistent with the ability to fund that. And so the tail risks were taken off the table and that less risky environment is going to create that kind of a shift I think."
Dalio and Tepper not only share a similar view of current conditions, but their conclusions are also largely the same. They both see huge amounts of liquidity in the system, a lessening of downside risks, and poor returns on cash and fixed income investments. In this environment, they conclude that money will flow into risk assets.
Dalio called the present situation "a bubble in liquidity" and like Tepper, he doesn't like bonds. He said, "there is too much liquidity and so bonds are a poor investment, they will have a poor return. Cash will have an even worse return, that's assured."
Therefore, Dalio thinks that the risk markets will see huge inflows in the back half of 2013 and into 2014. Although the Bridgewater founder said that he thinks the main theme for 2013 will be transition and that it might not be a memorable year from a historic perspective, his outlook certainly appears to be very bullish over the next couple of years.
He said, "I think the shift of the cash, that massive amount of cash will be what will be a game changer...into stocks, into everything. It will mean more purchases of goods and services and financial assets. It will be into equities, it will be into real estate, it will be into gold, it will be into a lot of...just basically everything."
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