Ray Dalio, founder of world’s largest hedge fund, on the next financial meltdown


The hedge-fund legend was initially cagey in his response, electing to lay out what he sees as ongoing debt cycles of differing lengths.

He argued that both were getting old in age, but he wasn’t ready to jump to a worst-case conclusion.

“We’re in about the seventh inning of the short-term debt cycle,” Dalio told Blodget in front of conference attendees.

“They’re tightening monetary policy. Asset prices are fully priced. And we’re in the later stages of a long-term debt cycle, because the capacity of the ability of central banks to ease monetary policy is limited.”

Dalio also described the global landscape as being in the middle of a so-called geopolitical cycle that’s seeing the emerging nation of China challenge the unquestioned supremacy of the US.

He said these developments are why Chinese relations had been so instrumental in driving markets lately.

When pressed by Blodget on the matter of an imminent collapse, Dalio was reluctant to compare the current situation to the one preceding the most recent financial crisis.

He instead saw a much more gradual situation playing out – one that should still be viewed with caution.

“The nature of this dynamic is more of a squeeze,” Dalio said.

“This doesn’t look like 2008. In 2007, we would look at the financial statements of entities and see that they weren’t able to pay debt and that we were headed for a big debt crisis. Now it’s not the same.”

Dalio did say, however, that mounting leverage would come back to bite markets eventually. He warned that massive debt loads could pose big issues down the line.

“It looks more like it will be a big squeeze because there’s a certain amount of indebtedness,” he said.

“We also have a great deal of obligations, like pension and healthcare. Both companies and the government are borrowing a lot of money – particularly the government.”

Also of great concern to Dalio is the ongoing trade conflict between the US and China. He’s fearful that a further escalation of the situation could unleash negative side effects upon the market.

Ultimately, the path forward will be determined by how realistically investors are willing to look at these mounting problems.

Not every negative factor is created equally, and Dalio said it’s important for market participants to do their homework on what could actually have an impact – starting with the trade war.

“A lot depends on how we deal with each other,” he said. “And a lot of that depends on us looking at what’s true and how the machine works.”

This story first appeared in Business Insider. Read it here or follow BusinessInsider Australia on Facebook.

BusinessInsider.com.au



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