Bridgewater - Ray Dalio Talks Up Risk Of Ruin

February 13, 2015
Forbes

Excerpts from Bill Ackman's Boys & Girls Harbor Investment Conference:
When asked about the current market environment, Dalio said he is worried about so-called tail risks, unexpectedly severe market moves like the 2008 crisis, as the Federal Reserve contemplates a rise in interest rates. With investors chasing ever scanter yields and driving up the price of perceived safe assets like U.S. stocks, bonds and real estate, Dalio said “what I think going forward over the next few years is that the risk of a downside is material.”

Furthermore, Dalio said he believes expectations for corporate profits are running far too high and not accounting for the drag of rising rates. He characterized profit margin expectations as ”unsustainable” and argued asset prices are at risk over the next three years. “I always think about what is the biggest tail risk,” Dalio said before stating Bridgewater is long bond exposure.

If Dalio is correct in his view of rising rates and declining profit margins, one of those “risk of ruin” or “risk of not coming back” nightmares he fears, it will have a dramatic negative impact on the work that activists like Ackman undertake.

Dalio’s forecast of declining profit margins would cast a pall over the standalone, leveraged businesses that activist investors have created in recent years. But he could also be wrong.