Ray Dalio: returns are going to be lower

At an interview with Bloomberg at the World Economic Forum in Davos, billionaire hedge fund manager, Ray Dalio commented on market returns for 2017.  According to Dalio, returns are going to be low. Dalio also explained why he believes the current stock market rally in the US and the accompanying bond-sell-off are totally logical.


Dalio explained that the rally in bond (BND) (AGG) yields have lowered expected returns from debt, as the future stream of revenue would now be discounted at a higher rate. This is converse to the case that has been prevalent for some time now. The Fed’s ZIRP (zero interest rate policy) regime has been instrumental in artificially inflating asset prices (being discounted at a lower rate). With rates rising, prices would correct themselves, affecting expected return.


Stock market participants, on the other hand, seem to be pricing in the expected financial effects of a Donald Trump presidency on the US economy (SPY) (IWM) (QQQ). Right now stocks are modestly appealing but overall not very attractive to Dalio. He explained that he would like to maintain a wait and see approach to understand whether this current rally fizzles out or stays.

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So, with expected returns to be lower than what the current rally may seem to suggest, what investors should consider before investing is whether actual returns would exceed what we’re already discounting. According to Dalio, it’s a time for uncertainty, and for a relatively lower profile.

Helicopter money

The only possibility, as Dalio points out, which would change his opinion on suppressed returns going forward, is fiscal stimulation.

We’ve heard Dalio advocating the Fed on ‘helicopter money’ on several occasions in the past. He has an established reference for this measure as a tool to spur economic growth and spending – as opposed to the traditional bond-buying program that the central bank usually takes up. Dalio believes that helicopter money puts purchasing power directly in the hands of the spenders, while bond-buying puts it in the hands of investors and businessmen who may or may not spend.

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