The Daily Update - US recession warnings

Ray Dalio, the Chairman of the hedge fund Bridgewater Associates, has told an audience at the Harvard Kennedy School's Institute of Politics that there is a strong possibility that the US will be in recession before Donald Trump stands for re-election in 2 years’ time. Dalio believes that ‘The probability of a recession prior to the next presidential election would be relatively high, 70% or something like that’. He acknowledges that at the moment the US economy is growing, however, believes ‘for various reasons, there has been a lot of stimulation hitting the gas’, which in turn raises the risk of interest rates hurting all asset prices. Earlier this month Dalio, whilst speaking at the World Economic Forum, also said that ‘It just takes a little change in interest rates to have a bear market’, adding ‘Recent spurts in stimulations, growth, and wage numbers signalled that the cycle is a bit ahead of where I thought it was’.

Dalio’s view comes after media reports over the last few weeks suggest that Bridgewater’s Pure Alpha fund has been building up USD22bn in short positions in some of Europe’s biggest companies such as Airbus, Siemens and Unilever. Whether these shorts are core positions, a bet on fund flows, or even a hedge that makes them ‘less long’ overall is not known.

However, Bridgewater Associates are not the only ones who believe there is a good chance of a recession in the next 24 months. Over the last few months, Guggenheim Partners have predicted that the next recession in the US would take place in either 2019 or 2020. In a note published late last year, Scott Minerd, the Global CIO of Guggenheim Investments wrote that ‘predicting recessions well in advance is notoriously difficult’, ‘Using history as a guide, however, we believe that is possible to get an early read on when the next recession will begin by analysing the late-cycle behaviour of several key economic and market indicators. Risk assets tend to perform well two years out from a recession, but investors should become increasingly defensive in the final year of an expansion’.

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