Ray Dalio Reflects on the Past Year and the Challenges Still to Come
Ray Dalio says coronavirus will “destroy” parts of the market
Bridgewater Co-Chair Ray Dalio Tweets Coronavirus Is A Unique Event That Will Crush Investors Not Protecting From the Worst.
The billionaire investor commented on the outbreak on Tuesday in a LinkedIn post, highlighting his views on the outbreak itself, its economic impact and the market response. He noted his aversion to betting on events mired in uncertainty, adding that he prefers to defend against dark risks..
The worst-case coronavirus scenario resembles that of the Spanish flu of 1918, and investors must guard against the coronavirus rising to a similar level, Dalio writes. Those who underestimate the development of the epidemic are more likely to suffer, he added..
«It seems to me that this is one of those once in 100 years of catastrophic events that wipes out those who provide insurance against it, and those who do not take insurance to protect themselves from it, because they see it as a bet that they may be accepted because it almost never happens», – written by the investor.
He later urged insurance companies to insure themselves against the outbreak of the coronavirus and investors selling out-of-cash options contracts to fund hedging strategies. Companies with healthy cash flows represent the other side of the spectrum, taking off on a wave of volatility, «as many market participants have been pushed out», the investor writes.
Dalio’s comments came the same day the Federal Reserve issued its first emergency rate cut since 2008. The 50 basis point adjustment looks like a shot in the foot for consumer spending as virus fears rise, and Fed Chairman Jerome Powell has given further signal to continue stimulus if the outbreak intensifies..
Increasing liquidity doesn’t matter much if consumers «don’t want to go out and buy», Dalio warned. On Tuesday, U.S. rates fell to the 1% -1.25% range, an unexpected low after three rate cuts in 2019, and hints that the central bank will keep rates stable until inflation picks up. Bridgewater co-founder said the Fed has the option to cut the rate further should the coronavirus spreads further, but other countries cannot use the same tools..
«In Europe and Japan, monetary policy is almost exhausted, so it is difficult to imagine how pure monetary policy will work, Dalio writes. – So it seems to me that containing economic damage requires coordinated monetary and fiscal policy, aimed more at specific cases of enterprises with limited debt / liquidity, rather than more complete rate cuts and a significant increase in liquidity».
Despite investor warning «imagine the worst-case scenario and protect yourself from it», Dalio does not expect the outbreak to create a long-term economic rut. Investor expects a V-shaped recovery in asset prices and economic activity after a drug appears or the virus is contained.
Dalio writes that history knows the most deadly pandemics, which are «much more serious emotional events», than the driving forces behind a sustained economic downturn or even a century-old Spanish flu epidemic.