Ray Dalio: Europe Headed for a "Lost Decade"

Yesterday at the Council on Foreign Relations in New York, hedge fund manager and founder of Bridgewater Associates Ray Dalio was pessimistic on the state of Europe.

He said that southern Europe was headed for a “lost decade” amid the euro zone crisis, with almost no economic growth and overall European losses on debt reaching as high as $2 trillion.

From the Wall Street Journal:

“I think we're going to have a bad set of economic conditions,” Dalio said. “You'll go through 10 years of cycles, very much like Japan, where you'll have bull markets and bear markets.”

But he added lost decades could be survived and typically took about 15 years to work through.

He compares the situation in Europe to that of Japan in the early 1990s, when the stock and housing bubbles burst. Japan's growth slowed for perhaps a decade and a half, and the job market suffered. And it is also similar to the Latin American debt crisis, he said, another lost decade where the nations could not repay their excessive debt.

Dalio originally indicated that he believed Greece had a 50-50 chance of leaving the euro zone, but then he changed the chances to 60-40, with the odds in favor of them staying.

Actually, he found Germany more likely to exit the euro zone. And his reasoning was the fact that the southern nations are the ones with the votes that affect monetary policy.

His views on China were also slightly bearish, though he believed the nation had more opportunity to hoist itself from the hole.

From the Wall Street Journal:

Dalio said if China were socially stable, its economy “will have its undulations like we have our contractions.” Those movements could take China's growth rate to as low as 4 or 5%, he said. But he added that while China's capital markets don't function as smoothly as those in the U.S., “the power exists to then create that kind of shift and move things up.”

And as for the U.S., it's just a matter of finding a balance for monetary and political policy – something that may not be as easy as it sounds.

Dalio does believe the U.S. is headed to recovery. He compared it to the aftermath of a destructive car crash, with time spent recovering in an intensive care unit. Things are finally getting fixed.

But there's still concern to be had. If the decision-making becomes too politicized, there could be problems.

And policymakers may just not understand what policy mix is right for the system. He called their understanding “imprecise.”

So how do you play this? Well, according to Dalio it's not with oil or even gold. It's focus on “risk parity” – diversity and a balance of asset classes.

“I play the game of betting against others, so it's like going on the poker table, and I know how difficult that game is. [There are] very few winners. If I'm not engrossed in it and we're not engrossed in it, I'm worried and I do worry about it when I am engrossed in it.”

“So the average investor and most people should not be playing that game. They're going to lose at the poker table.”

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