Thursday, January 21, 2016


Manager of the worlds largest hedge fund, Ray Dalio Says

Dalio begins by noting that the Fed's move to inflate financial assets by pumping money into the system means there's an "asymmetric risk on the downside."

The rationale is simple: the trillions in fungible, excess cash the Fed unleashed in the wake of the crisis has driven asset prices into bubble territory and at this juncture, there's essentially nowhere to go but down.  !!!!!!

That, Dalio says, will create a "negative wealth effect", the opposite of Bernanke's infamous virtuous circle wherein Americans would supposedly spend more and thus boost the economy if only the Fed could repair the damage their 401ks suffered in 2008. Dalio also said he's concerned that the Fed isn't concerned.

"If Assets Remain Correlated, They'll Be A Depression"

As for the fact that the historical relationships between asset classes (volatilities and correlations) that are used to construct optimal "risk-parity" funds in order that 'risk' is balanced and hedged across bonds and stocks have all broken down dramatically causing funds like Bridgewater's vaunted "All Weather" portfolio to sink, Dalio warned that if assets remain correlated and things continue to move in the "wrong" direction, "they'll be a depression."

Goldman Sachs says a ballooning debt bubbling in Asia is creating the "third wave" of the financial crisis.

Bill Gross, the worlds former bond king had this to say yesterday:

Davos fiddles while global markets burn. Monetary policy increasingly ineffective. Fiscal stimulation non-existent.

The widening in high yield is suggestive of an economy that is ready to roll over and with the manufacturing sector already reeling and China growth concerns growing uglier by the day, the fears are well justified.

We should all be very concerned that this cycle could prove to be not only different, but more severe than past cycles. Should a slowdown today be swifter and deeper, more akin to 2008 than 2002, we should all be concerned about the ability of the central bank to create enough monetary stimulus to stem a crisis.

"The situation is worse than it was in 2007," said William White, chairman of the OECD's review committee and former chief economist of the Bank for International Settlements (BIS). That toxic addition to debt gets an airing as well, as White says the Fed is in a "horrible quandary."

"Things are so bad that there is no right answer. If they raise rates it'll be nasty. If they don't raise rates, it just makes matters worse," he said.

The reigning bond king, Jeff Gundlach, on Wednesday afternoon, attributed some of what seemed like indiscriminate selling to "margin calls," adding that, "This is not stopping any time soon." We heard from Gundlach at length last week and his overall message is that things are going to be tough in 2016.

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