- Aug 25, 2006
- Reaction score
- Political Leaning
- Very Conservative
Bridgewater Stays Gloomy for 2012 - WSJ.com
My favorite guys are out with their forecast for 2012. These wouldn't be the most popular guys at a party. They see continued growth in gold and treasuries and further declines in equities and Europe. Dalio believes strongly in his deleveraging thesis and believes we have a long way to go before we are out of it. I'd love to hear your thoughts, opinions, and rebuttals. I'll follow-up shortly with a more in-depth opinion of my own but I put a lot of faith in what these guys say so I can't see myself disagreeing with anything significant. Bridgewater is the world's largest hedge fund and their Pure Alpha Strategies is one of the best funds in the world. It returned +25% in 2011 while the S&P was flat, the HFRI was -5%, and the MSCI was down.Bridgewater Associates has made big money for investors in recent years bystaying bearish on much of the global economy. As the new year rings in, thehedge fund firm has no plans to change that gloomy view.
Robert Prince, co-chief investment officer at Bridgewater, and his managersat the world's biggest hedge fund firm are preparing for at least a decade ofslow growth and high unemployment for the big developed economies. Mr. Princedescribes those economies—the U.S. and Europe, in particular—as"zombies" and says they will remain that way until they work throughtheir mountains of debt.
"What you have is a picture of broken economic systems that areoperating on life support," Mr. Prince says. "We're in a seculardeleveraging that will probably take 15 to 20 years to work through and we'rejust four years in."
In Europe, "the debt crisis is [a] long ways from over," he says.The economic and financial morass will mean interest rates in the U.S. andEurope will essentially be locked at zero for years.
In this bleak environment, Mr. Prince says stocks remain vulnerable to"air pockets" from shocks, such as bad news out of Europe. But forlonger-term investors looking out over the next decade, he says, equities maybe a good buy. There is even money to be made in U.S. Treasurys, despiteinterest rates near record lows, and gold is likely to resume its climb ascentral banks print money to bolster their economies. Mr. Prince says.
The views of Bridgewater are keenly watched by other investors, given thefirm's elevated status in the competitive world of hedge-fund investing.Bridgewater's flagship Pure Alpha Strategy fund is considered one of the topfunds in the world. As of the end of November, it was up 25% since the start ofthe year, according to people familiar with the situation. The average macrofund had lost 3.7%, according to Hedge Fund Research.
Currently, the fund is positioned for higher gold prices, stronger Asianemerging-market currencies and lower yields across high-quality government bondmarkets, Mr. Prince says.
In 2011, it profited from owning gold, but cut back on that position duringthe third quarter. It correctly pivoted from being bearish on U.S. Treasurysearly in the year to positioning for a rally. It also benefited from rallies incore European bond markets and avoided ugly losses sustained by other macrofunds that had bet the euro would fall against the dollar. Instead, it rightlybet that the euro would fall against the Japanese yen.
Founded in 1976 by Ray Dalio, Bridgewater manages $125 billion and has 1,400employees. Mr. Prince, 53 years old, joined in 1986. The firm's clients areinstitutions such as pension funds and endowments, along with foreigngovernments and central banks.
Pure Alpha has been up each year since 2000, and has recorded just threenegative calendar years since 1991. In 2008, the fund returned 9.4% after fees,and after a 2% gain in 2009—its smallest of the decade—Bridgewater posted a44.8% return in 2010.
From its offices by the Saugatuck River in Westport, Conn., Bridgewaterplays much the same field as other so-called macro funds. But it tends to bemore diversified than its competitors, with numerous smaller bets across a hostof currencies, government bonds, stocks and commodities.
In a conference room at Bridgewater's headquarters, where the water from theSaugatuck appeared to almost lap at the glass walls, Mr. Prince paints a grimpicture of the challenges facing the U.S. and European economies.
Recent better-than-expected news on the U.S. economy is unlikely to be thestart of a healthy expansion, he says. The uptick in economic growth has beenfueled by a decline in the savings rate, which, without material income andemployment gains, is unlikely to be sustainable as long-term credit growth alsoremains weak, he says.
The problem for the U.S, says Mr. Prince, is that it is on the wrong side ofa long-term debt cycle.
"We were in a leveraging-up period for 60 years, from the early 1950sto 2008," he says. This debt bubble was self-reinforcing on the way up,and "when it tipped over, it set about a self-reinforcing process on theway down."
As evidence for the long slog facing the U.S economy, he notes that thelevel of leverage, as measured by comparing household income to net worth, isstill higher than it was before 2008.
"The most likely environment is moderate growth with wiggles up anddown and this is one of those wiggles up," he says.
Against this backdrop, the Federal Reserve will need to do more quantitativeeasing—buying of government bonds—but Mr. Prince says the purchases willprobably be sporadic.
Europe, meanwhile, is headed into a potentially deep recession, with policymakers boxed in by an interconnected banking and sovereign-debt crisis.
"You've got insolvent banks supporting insolvent sovereigns andinsolvent sovereigns supporting insolvent banks," he says.
In the U.S., leveraged investors who can borrow money at rates near zerocould find a good deal in Treasurys, Mr. Prince says.
Mr. Prince points to the example of Japanese government bonds. An investorwho was leveraged three-to-one and bought Japan's bonds at a 2.5% yield in themid 1990s would have earned a compound average annual return of 12% a year for15 years, he says.
Meanwhile, gold prices should resume a rally amid continued printing ofmoney by the Fed and other central banks, Mr. Prince says. Those effortseffectively devalue those countries' currencies compared with gold.
Mr. Prince also thinks stocks are attractive from a long-term perspective,especially compared with bonds or cash. Broadly, discounted earnings-growthrates, which reflect the expectations about future earnings implied by currentprices, are negative, he says.
A moribund economic outlook "is pretty priced in right now," hesays. "If we have a long, drawn out deleveraging process withoutsubstantial air pockets, chances are equities are a pretty good bet, ironically."