“We Will Have A Downturn”, Dalio Warns, Return To QE Inevitable

printing QETyler Durden:  Last week, we took a look at why zen master Ray Dalio’s All Weather fund has had a tough time riding out the series of violent thunderstorms that have shaken the market of late.

In short, “the historical relationships between asset classes (volatilities and correlations) that are used to construct optimal “risk-parity” funds in order that ‘risk’ is balanced and hedged across bonds and stocks (for example) broke down dramatically.”

Or, visually:

Fresh off a -4.2% performance for All Weather in August, Dalio sat down Wednesday with Tom Keene and Michael McKee for an interview on Bloomberg TV.

After conceding that last month was indeed “lousy”, Dalio went on to discuss the outlook for asset prices and the global economy ahead of an expected Fed rate hike cycle. The arguments will be familiar – especially to those who frequent these pages – but are worth recapping nonetheless.

First, there’s the familiar idea that central banks are effectively out of ammunition and even if the will to ease is there (and make no mistake, in today’s centrally planned world where every central banker from Washington to Tokyo has gone Keynesian crazy, we imagine that the will to ease will always be there), actually having the scope to do so is another matter.

From Bloomberg:

“I don’t care whether they raise 25 basis points,” Dalio said Wednesday in an interview with Tom Keene and Michael McKee that was broadcast on Bloomberg radio and television. “What scares me, or what worries me, is what the next downturn in the economy looks like, with asset prices where they are and a lesser ability of central banks to ease monetary policy.”

He predicted that returns across asset classes over the next decade will only average 3 percent or 4 percent. Narrower spreads will make it much harder for asset purchases to have a big effect on the market, he said.

And then there’s the argument – which we’ve been making for longer than we can remember – that paradoxically, because ultra accommodative monetary policy hasn’t proven effective at engineering a robust global recovery by resuscitating demand, but has instead served to perpetuate a global deflationary supply glut

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