When they talk, one must listen. Amid all the global crisis, their fund was up 25% in 2011 and 45% in 2010.

Ray Dalio’s Bridgewater Associates, the world’s largest hedge fund, made big money for investors in recent years by staying bearish on much of the global economy. The fund’s CIO Robert Prince said in a recent interview (via WSJ) that “the debt crisis in Europe is a long way from being over”. Below are the interview’s highlights:

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

“We were in a leveraging-up period for 60 years, from the early 1950s to 2008. 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.”

Europe

… is headed into a potentially deep recession, with policymakers boxed in by an interconnected banking and sovereign-debt crisis.

“You’ve got insolvent banks supporting insolvent sovereigns and insolvent sovereigns supporting insolvent banks.”
 
Gold, Asia, Euro


Currently, the fund is positioned for higher gold prices, stronger Asian emerging-market currencies and lower yields across high-quality government bondmarkets, 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. Treasuries 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.


… gold prices should resume a rally amid continued printing of money by the Fed and other central banks.


US Treasuries

In the U.S., leveraged investors who can borrow money at rates near zero could find a good deal in Treasuries.

… points to the example of Japanese government bonds. An investor who was leveraged three-to-one and bought Japan’s bonds at a 2.5% yield in themid 1990s would have earned a compound average annual return of 12% a year for 15 years, he says.



Stocks

… thinks stocks are attractive from a long-term perspective, especially compared with bonds or cash. Broadly, discounted earnings-growth rates, which reflect the expectations about future earnings implied by current prices, are negative.

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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