Ray Dalio Sees Major Decade-Long Shift from Trump Presidency

Ray Dalio, Chairman and CIO of Bridgewater Associates, weighed in Donald Trump's Presidency one week after his election. Dalio sees a major reversal that can last a decade.

Dalio notes whereas the previous period was characterized by 1) increasing globalization, free trade, and global connectedness, 2) relatively innocuous fiscal policies, and 3) sluggish domestic growth, low inflation, and falling bond yields, the new period is more likely to be characterized by 1) decreasing globalization, free trade, and global connectedness, 2) aggressively stimulative fiscal policies, and 3) increased US growth, higher inflation, and rising bond yields.

He think that there's a significant likelihood that we have made the 30-year top in bond prices. In addition, he said we have probably made both the secular low in inflation and the secular low in bond yields relative to inflation.

"When reversals of major moves (like a 30-year bull market) happen, there are many market participants who have skewed their positions (often not knowingly) to be stung and shaken out of them by the move, making the move self-reinforcing until they are shaken out," he commented. "For example, in this case, many investors have reached for yield with the upward price moves as winds to their backs, many have dynamically hedged the changes in their duration, etc. They all are being hurt and will become weaker holders or sellers. Because the effective durations of bonds have lengthened, price movements will be big."

He said it likely that the Fed (and possibly other central banks) will increasingly tighten and that fiscal and monetary policy will come into conflict down the road. Relatively stronger US growth and relative tightening of US policy versus the rest of world is dollar-bullish.

He said all this, plus fiscal stimulus that will translate to additional economic growth, corporate tax changes, and less regulation will on the margin be good for profitability and stocks, though for domestically oriented stocks more than multinationals, etc.

The question will be when will this move short-circuit itself—i.e., when will the rise in nominal (and, more importantly, real) bond yields and risk premiums start hurting other asset prices. "That will depend on a number of things, most importantly how the rise in inflation and growth will be accommodated, that we don’t want to delve into now as that would take us off track," he said.

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