Bridgewater’s Big Picture – MarketWatch

NEW YORK (MarketWatch) — Readers appear fascinated by my occasional accounts of the huge ($150 billion under management) Connecticut-based Bridgewater Associates’ incisive Daily Observations service.

It’s one of the more remarkable business stories around. Daily Observations was reportedly the door-opening product with which founder Ray Dalio built Bridgewater’s money management and hedge fund business. It’s not unusual for investment newsletters to morph into small money managers, but Dalio did it on an institutional scale. Recently, a subscription to Daily Observations has been $10,000-plus a year.

Bridgewater is now apparently moving to restrict the service to clients, so this may be the last column I write about it.

For a qualified member of the Wall Street Establishment, Bridgewater has an unusually radical view of the world. It’s arresting but not impossibly apocalyptical — at least if you remember the 1970s, which in effect Bridgewater thinks we are repeating.

In other words, the American economic system can survive — give or take a few fortunes.

Recently, I wrote about Bridgewater’s view that a U.S. dollar/debt crisis was looming. (See my May 18 and May 11 columns.)

Just in the last few days, Bridgewater has discussed more aspects of its analysis. It thinks that U.S. households are particularly vulnerable right now, saying:

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“U.S. households have fewer calls on future wealth (fewer assets) than ever before, but thanks to the high valuation of the assets we do have, due to an abundance of liquidity and low interest rates, we think we are wealthier than ever. The cycle will reverse itself when the secular liquidity and interest rate cycle turns.”

Which (whew!) is not just yet. Bridgewater says:

“…the recent sell-off in assets is not the beginning of sustained move in this direction now, but we do believe that a bubble-bursting market action that looks something like this (though with dollar weakness and hard assets like gold rising) will occur in one to two years….Households in the U.S. have spent tomorrow’s earnings…the squeeze on households will be extreme.”

Unusually for U.S.-based analysts, Bridgewater has been very aware of the effect of relative international interest and exchange rates. It wrote recently:

“The recent tightening in the U.S. relative to other countries has contributed to the [international] underperformance of U.S. stocks and bonds…Right now the U.S. dollar is benefiting from the relative tightening by the Fed and the higher level of U.S. interest rates because the U.S. economy remains strong and more tightening is expected…But if/when this tightening translates into a relative weakening of economic conditions, the dollar will be vulnerable to severe balance of payments pressures…. “

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This is a potential problem because Bridgewater expects a big bump when the U.S. government can no longer finance itself by foreign borrowing.

Also a factor, in Bridgewater’s view: the distortions created by China’s exchange-rate mercantilism — pegging its yuan to the U.S. dollar. The service comments:

“…in the past ten years China has gained market share in 100% of the countries that they export to. The U.S. is at the bottom of the pile. They have LOST market share in 93% of the countries that they export to. This is just one more example of the absurdity of the [yuan] peg to the U.S. dollar….Maintaining these currency valuations has required massive intervention, about $1.5 trillion in U.S. bond purchases by foreign central banks over the past three years, producing overpricing of both the dollar and U.S. bonds.”

This is serious — but (see above) not ultimately fatal, any more than was the collapse of the earlier Bretton Woods fixed exchange-rate system. Bridgewater writes:

“The inevitable price adjustments may initially hurt the U.S., but over time will enable the U.S. to benefit from the expanding global pie.”

The logic of Bridgewater’s analysis appeals to me, but (as I’ve said before) good arguments don’t always mean good investment results. Bridgewater itself says it has beaten global markets for fifteen years, which I have no reason to doubt.

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Calmly, Bridgewater currently rates itself neutral on U.S. equities, moderately bearish on U.S bonds.

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