Legendary hedge fund manager Ray Dalio was recently interviewed by Barron’s – he shared his take on the US deleveraging process and Europe.
In what might be a surprising reaction to those from the Austrian school of economics, Dalio said the US has done a “beautiful” job deleveraging. He defines beautiful deleveraging as one that balances the three available options – austerity, debt restructuring, and money printing.
Europe, on the other hand, he says is “probably the most interesting case of deleveraging in recorded history:
Normally, a country will find out what’s best for itself. In other words, a central bank will make monetary decisions for the country and a treasury will set fiscal policy for the country. They might make mistakes along the way, but they can be adjusted, and eventually there is a policy for the country. There is a very big problem in Europe because there isn’t a good agreement about who should bear what kind of risks, and there isn’t a decision-making process to produce that kind of an agreement.
We were very close to a debt collapse in Europe, and then the European Central Bank began the LTROs [long-term refinancing operations].
Dalio does not see a major trend in the markets. He’s neutral on bonds, commodities, and is bullish on gold in the long term. He cites an average duration of fifteen years for deleveraging processes to run their course, when asked by Barron’s if it was unusual that we were in year four of this unwinding.