Dalio Calls End of Central Bank Era, Time to Head to Party Exit

  • Sees start of a ‘late-cycle phase’ of balancing tightening
  • Central banks helped economy to deleverage with low rates

BlackRock’s Miller Says Central Banks Fear Taper Tantrum

Famed hedge-fund investor Ray Dalio called time on the era of central bank stimulus, saying the global economy is heading toward a new stage where markets won’t get the same level of support from monetary policy makers.

“The directions of policy are reversing,” with central banks slowing the flow from their proverbial punch-bowls of stimulus, Dalio, chairman of Bridgewater Associates, the world’s largest hedge fund, wrote in a July 6 note. “Our responsibility now is to keep dancing, but closer to the exit and with a sharp eye on the tea leaves.”

Comments from central bankers “clearly and understandably” signaled that stimulus will be tapered, Dalio wrote, ushering in “the end of that nine-year era of continuous pressings down on interest rates and pushing out of money that created the liquidity-fueled moves in the economies and markets.”

  • The Federal Reserve is debating when in coming months to start shrinking its balance sheet, in addition to continuing its gradual campaign of raising rates.
  • European Central Bank officials have stopped warning of a potential rate cut, and last month considered removing a pledge to increase bond buying if needed.
  • The Bank of Japan has significantly scaled back the volume of purchases of government bonds, while maintaining its zero percent target for 10-year yields.
  • Central banks in smaller economies, including the U.K. and Canada, are also shifting gears toward raising rates or removing stimulus.

Dalio didn’t detail what he sees as the impact for stocks, which have hit record highs around the world this year, or bonds, where government yields remain below historical averages and credit premiums are similarly low. But, he suggested that investors face a riskier period.

It is “the beginning of the late-cycle phase of the business/short-term debt cycle, in which central bankers try to tighten at paces that are exactly right in order to keep growth and inflation neither too hot nor too cold, until they don’t get it right and we have our next downturn,” Dalio wrote.

The hedge fund manager also credited central bankers with engineering “beautiful deleveragings” that left the economy in better shape. Because of balance-sheet repair, he doesn’t foresee a “big debt bubble bursting any time soon.”

“Though we do see an increasingly intensifying ‘Big Squeeze.’”

— With assistance by Simon Kennedy

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