A 2012 Macro View Of The Economy From The Masters Of The Universe

Posted By on January 5, 2012

Bridgewater Review For 2012


This Bridgewater review of 2012 is highly regarded.  I have highlighted it below…..everyone should print this out and post it in a viewable place.  These guys run the largest hedge fund in the world and are among the top 5 smartest managers anywhere.  They’re not always right, but they are right more often then anybody else we know of, year in and year out.    Capice!

Here Are Exerts From The Wall Street Journal:

Founded in 1976 by Ray Dalio, Bridgewater manages $125 billion and has 1,400 employees. The firm’s clients are institutions such as pension funds and endowments, along with foreign governments and central banks.

Robert Prince, co-chief investment officer at Bridgewater, and his managers at the world’s biggest hedge fund firm are preparing for at least a decade of slow growth and high unemployment for the big developed economies. Mr. Prince describes those economies the U.S. and Europe, in particular as “zombies” and says they will remain that way until they work through their mountains of debt.

“What you have is a picture of broken economic systems that are operating on life support,” Mr. Prince says. “We’re in a secular deleveraging that will probably take 15 to 20 years to work through and we’re just four years in.”

In Europe, “the debt crisis is [a] long ways from over,” he says. The economic and financial morass will mean interest rates in the U.S. and Europe will essentially be locked at zero for years.

The views of Bridgewater are keenly watched by other investors, given the firm’s elevated status in the competitive world of hedge-fund investing. Bridgewater’s flagship Pure Alpha Strategy fund is considered one of the top funds in the world. As of the end of November, it was up 25% since the start of the year, according to people familiar with the situation. The average macro fund had lost 3.7%, according to Hedge Fund Research.

Currently, the fund is positioned for higher gold prices, stronger Asian emerging-market currencies and lower yields across high-quality government bond markets, Mr. Prince says.

In 2011, it profited from owning gold, but cut back on that position during the third quarter. It correctly pivoted from being bearish on U.S. Treasurys early in the year to positioning for a rally. It also benefited from rallies in core European bond markets and avoided ugly losses sustained by other macro funds that had bet the euro would fall against the dollar. Instead, it rightly bet that the euro would fall against the Japanese yen.

Pure Alpha has been up each year since 2000, and has recorded just three negative calendar years since 1991. In 2008, the fund returned 9.4% after fees, and after a 2% gain in 2009, its smallest of the decade, Bridgewater posted a 44.8% return in 2010.

In a conference room at Bridgewater’s headquarters, Mr. Prince paints a grim picture of the challenges facing the U.S. and European economies.

Recent better-than-expected news on the U.S. economy is unlikely to be the start of a healthy expansion, he says. The uptick in economic growth has been fueled by a decline in the savings rate, which, without material income and employment gains, is unlikely to be sustainable as long-term credit growth also remains weak, he says.

The problem for the U.S, says Mr. Prince, is that it is on the wrong side of a long-term debt cycle. 

“We were in a leveraging-up period for 60 years, from the early 1950s to 2008,” he says. This debt bubble was self-reinforcing on the way up, and “when it tipped over, it set about a self-reinforcing process on the way down.”

As evidence for the long slog facing the U.S economy, he notes that the level of leverage, as measured by comparing household income to net worth, is still higher than it was before 2008.

“The most likely environment is moderate growth with wiggles up and down and this is one of those wiggles up,” he says.

Against this backdrop, the Federal Reserve will need to do more quantitative easing, buying of government bonds, but Mr. Prince says the purchases will probably be sporadic.

Europe, meanwhile, is headed into a potentially deep recession, with policy makers boxed in by an interconnected banking and sovereign-debt crisis.

“You’ve got insolvent banks supporting insolvent sovereigns and insolvent sovereigns supporting insolvent banks,” he says.

Meanwhile, gold prices should resume a rally amid continued printing of money by the Fed and other central banks, Mr. Prince says. Those efforts effectively devalue those countries’ currencies compared with gold.

A moribund economic outlook “is pretty priced in right now,” he says. “If we have a long, drawn out deleveraging process without substantial air pockets, chances are equities are a pretty good bet, ironically.”

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