Ray Dalio’s hedge fund is once again putting its money where its famous founder’s mouth is.
Dalio has long warned investors and the general public that the U.S. and Europe are in a state of secular decline, and that China will soon rival (if not eclipse) the U.S. as a global superpower. He also has warned investors against betting on U.S. stocks, and said that he favors “real” assets, like real estate or commodities.
And in an interview with the Financial Times published Monday, Bridgewater Chief Investment Officer Greg Jensen — who shares the CIO role at the hedge fund giant with his co-CIO, Bob Prince — revealed that Bridgewater, the massive hedge fund founded by Dalio back in the 1970s, has opened bets against U.S. and European corporate debt following its successful bet against U.S. government debt.
Bridgewater manages more than $150 billion, making it the world’s largest hedge fund by assets under management.
The firm also has bet against U.S. stocks this year.
“We’re in a radically different world,” Jensen told the FT.
According to Jensen, the bet against corporate bonds is based on the firm’s view that inflation will be much more stubborn than the Federal Reserve presently anticipates, which will eventually force the central bank to accelerate the pace of its interest-rate hikes. The Fed and a number of other central banks are raising interest rates and tightening monetary policy after years of easy-money policy. On Tuesday, the Reserve Bank of Australia raised its benchmark interest rate by a higher margin than most economists covering the central bank had expected. The European Central Bank also signaled plans to start raising interest rates for the first time in more than a decade.
If this happens, the Fed “may tighten in a very strong way, which would then crack the economy and probably crack the weaker [companies] in the economy.”
While the U.S. economy likely won’t return to the relatively robust growth rate of the last five years, Jensen claimed that nominal growth — that is, growth leaving out an adjustment for inflation — should “hold up,” and the weakness in the economy won’t be “self reinforcing.”
He added: “We think nominal growth will hold up. The real economy will be weak, but not a self-reinforcing weakness.”
However, higher rates will lead to higher borrowing costs for corporations and consumers alike, making it more difficult for struggling companies to secure financing, which could hurt bond prices.
Bridgewater is best known for these kinds of “macro” bets — that is, bets on bonds, currencies and stocks that are based on broad economic trends, as opposed to picking and choosing individual stocks to buy or bet against.
While some investors are hoping that the Federal Reserve might make enough progress in the fight against inflation to slow, or briefly halt, its rate hikes during its policy meeting in September, Cleveland Fed President Loretta Mester has indicated that she wouldn’t support such a proposal. Investors will be closely watching a batch of inflation data set to be released on Friday to see how prices evolved during May.
When it comes to its bearish outlook, Bridgewater is hardly alone: the Organization for Economic Cooperation and Development cut its global growth forecast on Wednesday, one day after the World Bank cut its forecast for 2022.
Jensen also isn’t the only fund manager who is skeptical of the Fed’s ability to combat inflation. Tim Magnusson, a senior portfolio manager at hedge fund firm Garda Capital Partners, has told MarketWatch that he thinks inflation could remain stubbornly north of 7% annualized at the end of 2022. Magnusson was one of a handful of fund managers who last year correctly anticipated that inflation was about to break higher after three decades of relatively subdued price pressures.
Bridgewater refused to disclose the size of its corporate-bond bets, and Jensen didn’t share any other details about the trade with the FT. The firm didn’t return a request to comment from MarketWatch.
As we noted above, corporate bonds have already taken a beating since the start of the year. The SPDR High Yield Bond ETF JNK, -0.59%, which allows retail investors to bet on (or against) high-yield U.S. corporate debt, has fallen more than 11% since the start of the year. The SPDR Euro High Yield Bond UCITS ETF JNKE, -0.26%, which tracks a basket of high-yield European corporates, has fallen more than 10% during the same period.