Bridgewater Sees ‘Dangerous Dynamic’ as Largest Economies Slow
Bridgewater Associates LP, the hedge fund founded by Ray Dalio that manages about $120 billion in assets, said the global economy is facing the threat of a self- reinforcing decline after the world’s largest economies slowed in recent months.
Global growth has slowed to about 1.9 percent “in the past few months” from around 3.3 percent as Europe deleverages and China’s economic is cooling, the Westport, Connecticut-based firm estimated in its second-quarter report, a copy of which was obtained by Bloomberg News. Bridgewater also said the European debt crisis has been poorly managed, bringing Europe closer to a “debt implosion” or a currency collapse.
“The breadth of this slowdown creates a dangerous dynamic because, given the inter-connectedness of economies and capital flows, one country’s decline tends to reinforce another’s, making a self-reinforcing global decline more likely and a reversal more difficult to produce,” Bridgewater said in the report.
Bridgewater, which had three of the industry’s 12 best- performing funds last year, said Europe is in the “most critical” stage of a global deleveraging process, as deteriorating finances in France and differences with Germany make it less likely that the region’s strongest economies will pick up the tab to solve the region’s debt crisis.
The International Monetary Fund last week cut its 2013 global growth forecast to 3.9 percent from the 4.1 percent estimate in April, as Europe’s debt crisis prolongs Spain’s recession and slows expansions in emerging markets from China to India.
Euro-area bonds fell today after Moody’s lowered the outlook to negative for the Aaa credit ratings of Germany, the Netherlands and Luxembourg. Moody’s cited “rising uncertainty” over Europe’s debt crisis. It left Finland as the only country in the 17-nation euro region with a stable outlook for its top ranking.
“We think that the popular assumption that the Germans and the ECB (which requires agreement of the key factions within it) will come through with money to make all of these debts good should not be taken for granted,” Bridgewater said. “We think there are good reasons to doubt that the European bank and sovereign deleveragings will be prevented from progressing to the next stage in a disorderly way.”
Financial markets have begun to discount weaker economic growth, as evidenced by the rise in credit spreads, fall in bond yields and lower future earnings expectations, Bridgewater said.
United Parcel Service Inc., the world’s largest package- delivery company, today cut its full-year forecast after a drop in international package sales dragged quarterly profit below analysts’ estimates. Yesterday, McDonald’s Corp. reported second-quarter profit that trailed analysts’ estimates amid slowing U.S. same-store sales and said the restaurant chain may miss its full-year operating income growth target.
The Standard & Poor’s 500 Index has declined 4.1 percent since the end of the first quarter, and global stocks are down 8.2 percent.
A “meaningful deleveraging for an extended period of time” is now priced into the market, Bridgewater said. With this pricing at a “midpoint of discounted expectations,” individual markets have an equal probability of outperforming or underperforming.
Bridgewater, which uses a macro strategy as it seeks to profit from economic trends, placed diversified bets in 2011 after predicting a flight to safer assets such as U.S. Treasuries and German bonds. Dalio’s Pure Alpha hedge fund made $13.8 billion for clients last year helping the manager beat rivals such as John Paulson, who posted a record loss of 51 percent in 2011 in one of his biggest funds. Bridgewater money for institutional investors such as pension funds, endowments and foreign governments, according to its website.
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