Ray Dalio on how the next financial crisis will differ from the last

Ray Dalio, the founder,
co-chief investment officer, and co-chairman of Bridgewater
Associates.
Reuters / Ruben
Sprich

• Ray Dalio, the founder and co-chief investment officer
  of Bridgewater Associates — the world’s largest hedge fund —
  spoke with Business Insider CEO Henry Blodget at Business
  Insider’s Ignition conference on Monday.
• Dalio outlined why the next financial crisis will be
  different from the last, and placed great emphasis on a
  successful trade war resolution.
• The comments come two months after a separate interview in
  which Dalio walked Blodget through the next recessionary scenario
  that will rock the global economy.

When Ray Dalio talks about the future of
the global financial landscape, everyone should listen.

That’s because Dalio — founder and co-chief investment
officer of Bridgewater Associates — has proven prescient in the
past. This was never truer than when he repeatedly sounded the
alarm on the credit collapse that tanked markets a decade ago — a
proclamation that many investors ignored at their own
peril.

But those same market participants should soon have a
chance to redeem themselves, at least if Dalio’s latest warnings
are valid.

In a discussion with 
CEO Henry Blodget at
Business Insider’s IGNITION conference in New York on
Monday, Dalio was asked if a reckoning is near.

The hedge fund legend was initially cagey in his response,
electing to lay out what he sees as ongoing debt cycles of
differing lengths. He argued that both are getting old in age,
but wasn’t ready to jump to a worst-case conclusion.

“We’re in about the seventh inning of the short-term debt
cycle,” Dalio told Blodget in front of conference attendees.
“They’re tightening monetary policy. Asset prices are fully
priced. And we’re in the later stages of a long-term debt cycle,
because the capacity of the ability of central banks to ease
monetary policy is limited.”

Dalio also noted that the global landscape is in the middle
of a so-called geopolitical cycle that’s seeing the emerging
nation of China challenge the unquestioned supremacy of the US.
He said these developments are why Chinese relations have been so
instrumental in driving markets lately.

When pressed by Blodget on the matter of an imminent collapse, Dalio was
reluctant to compare the current situation to the one preceding
the last financial crisis. He instead saw a much more gradual
situation playing out — one that should still be viewed with
caution.

“The nature of this dynamic is more of a squeeze,” said
Dalio. “This doesn’t look like 2008. In 2007, we would look at
the financial statements of entities and see that they weren’t
able to pay debt, and that we were headed for a big debt crisis.
Now it’s not the same.”

Dalio did note, however, that mounting leverage will come back to
bite markets eventually. He warned that massive debt loads could
pose major issues down the line. 

“It looks more like it’ll be a big squeeze, because there’s a
certain amount of indebtedness,” he said. “We also have a great
deal of obligations, like pension and healthcare. Both companies
and the government are borrowing a lot of money — particularly
the government.”

Also of great concern to Dalio is the ongoing trade conflict
between the US and China. He’s fearful that a further escalation
of the situation could unleash negative side effects upon the
market.

Ultimately, the path forward will be determined by how
realistically investors are willing to look at these mounting
headwinds. Not every negative factor is created equally, and
Dalio said it’s important for market participants to do their
homework on what could actually have an impact — starting with
the trade war.

“A lot depends on how we deal with each other,” he said. “And a
lot of that depends on us looking at what’s true and how the
machine works.”