Ray Dalio, the founder of the world’s biggest hedge fund Bridgewater Associates, in an exclusive interview with Business Today has said that India should have the highest growth rate in the near future if various indicators and prevailing global factors are considered. Dalio said as India’s neutral stand on geopolitical tensions is a good thing.
He said that the country was opening up to the global capital markets and if that continued, it would be good for the capital market in India, in terms of capital flows.
Here are a few excerpts from his interview:
- US Federal Reserve and central banks’ stand on interest rate hike
RD: The inflation rate and the bond yield will have to be high enough to satisfy creditors. So that, bond holders can get higher returns that are above the inflation rate. That’s the current challenge for US Fed because debtors do not want to receive interest rates that are too high.
I think we’re going to have an inflation rate that is probably in the vicinity of 5 per cent-ish. But it’s a very uncertain inflation rate because of all the shocks that we have around it.
The real rate, in other words, the rate above inflation that the interest rate is now at is in the vicinity of 1.5 per cent, a little bit higher than that. So that would mean that they would be probably approaching a 6 per cent, risk-free rate. And the Federal Reserve will put the short-term rate up towards that level. That level of interest rate is very harmful, very damaging to the economy.
- Interest rates and inflation
The world, the United States is going to spend a lot more money than it is taking in. In the United States, we will have a budget deficit, which is in the vicinity of 5 per cent of GDP. As is now planned, the Federal Reserve will also sell its bonds, and short-term debt to the tune of about 5 per cent of GDP. That’s 10 per cent of GDP. So that’s going to create a very tight set of circumstances.
At some point, we see that there’s not a demand for that, for various reasons. The real rates are not high enough, the bond market is going down, investors are losing money in it, and so on. And so, there’s a mismatch there. So that will shrink private credit. So those conditions create a bad set of conditions for growth.
- Balancing growth and inflation
We need money for poverty alleviation, building infrastructure, repairing Ukraine, spending money for climate change. The big difference between individuals and governments is the governments don’t have that constraint because they can print money. So, I think we have this trade-off. Whenever in history, you have a lot of debt and a lot of financial assets, it becomes very, very difficult for those to be balanced. And we’re now in a shift.
The prior decade, we had falling interest rates. Cash was very cheap, free, almost. And so, the whole investment landscape was very much built around that. Now we’re having this adjustment away from that. So central banks try to balance growth and inflation.
- How investors are managing with high interest rates
I think that what you’re going to see is a classic sequence of events, where the interest rate rise is high enough that it is good for the creditor, but bad for the economy. And that when economic conditions become a bigger worry than inflation, you will see them come in and print more money and the value. So, I think it’s very important for investors over the long term, to not hold debt instruments. Over the short term, as long as those exist, then I would say neutral or slightly attractive.
- Investment during high inflation, interest rates
Whether whichever country you’re in, whichever currency you’re denominated in, look at the returns relative to inflation. Too many people look at just the level of returns, and they don’t pay enough attention to inflation. Generally, stay away from debt assets, debt denominated assets. Third, have a well-diversified portfolio. Diversification reduces risk without reducing expected returns, if you do it well.
- Changing dynamics in global politics
It is now Russia and China. And there are five kinds of wars. There is a trade war, a technology war, a geopolitical influence war, a capital and economic war, and a military war– five of those. We are in the first four of those. If we never go to a military war, we still having damage happening. Because we are still in an environment where globalisation, as we know it, is declining. Because right now in fears of those wars, there is the desire for self-sufficiency. It used to be that the world would come close to producing items and trading items, wherever it was most efficient. That is now changing.
I think India has a great potential. India, I use indicators, we use indicators of the next 10 years growth rate. Some of the indicators are the cost of an educated person. In other words, what is the education level, but also how expensive are they? Barriers to trade and capital flows, level levels of corruption, many different indicators. And on balance, India should have the highest growth rate of any country. And it’s opening up to the global capital markets. If that continues, that’ll be efficient for the capital markets in India, and capital flows.
India is largely taking a neutral position in these conflicts. It of course, needs to develop a very strong leading economy related to technology. It is not the two main competitors in technology development. Big technology platforms and all of that are still of course, the United States and China. And those are going to be cutting edge areas.
India’s level of indebtedness, a number of indicators indicates that it should do very well over the next 10 years. But it’ll be important to have a modernisation, particularly of the capital markets, to bring in the efficiencies.
- Tech stocks on NASDAQ (Facebook stocks are down by 40-50%)
So, there was a bubble in tech stocks. Mostly, what’s happening is that a number of these have negative cash flows. That means they didn’t have earnings that will support those prices. And in many cases, they didn’t have earnings. And they relied on either borrowing money to make up the gap or raising venture capital or private equity money. And free money was basically free and plentiful. Money was basically the paradigm. And so, you’re now seeing those companies who have negative cash flows, being severely hurt. Because if the money doesn’t come in, then they’ll go broke, they’ll run out of money, they have to contract and so on. And we’re seeing that happen.
If we look at climate change, or even the environment for pandemics, you know, that’s something that’s also worrying. The surprises for climate are not going to be on the upside, they’re going to be worse.
Climate remediation is estimated to cost $9 trillion a year in order to reach goals which probably won’t be reached, and who’s going to pay for that money? That’s very expensive at this time. So, I think between now and 2024, it’ll become an increasingly difficult period, but there’ll be good inventions, and there’ll be good developments.
