When the Federal Reserve finally raises interest rates, there could be heck to pay in the stock market, says Ray Dalio, founder of Bridgewater Associates, the world's largest hedge fund manager.
Indeed, we could see a repeat of 1937, he and colleague Mark Dinner wrote in a note to investors obtained by the
Financial Times. In that year, the Fed tightened policy prematurely after the crash of 1929. This led to the Dow Jones Industrial Average falling by one-third in 1937 and continuing to decrease in 1938.
"We don't know — nor does the Fed know — exactly how much tightening will knock over the apple cart," the duo said.
"What we do hope the Fed knows, which we don't know, is how exactly it will fix things if it knocks it over. We hope that they know that before they make a move that could knock over the apple cart."
The Fed has kept its federal funds rate target at a record low of zero to 0.25 percent since December 2008.
"If one agrees that either a) we are near the end of the developed country central bankers' ability to be effective in stimulating money and credit growth or b) the dollar is the world's reserve currency and that the world needs easier rather than tighter money policies, then one would hope that the Fed will be very cautious about tightening."
David Stockman, White House budget director under President Reagan, sees things a little differently. Things aren't looking good for the financial system and the economy, and the Federal Reserve bears much of the blame, he told Bloomberg TV.
"We're in a more dangerous financial environment than at any time in our history," he told
Bloomberg TV. "The market is putting in a top, the bottom is falling out of the economy."
The S&P 500 index stands within 3 percent of its record high. As for evidence of a slumping economy, Stockman pointed to sluggishness in China, Japan and Europe.
"Commodity prices are collapsing, it's a sign of deflation worldwide, and we won't escape it." U.S. consumer prices slid 0.1 percent in the 12 months through January.
Stockman lambasted the Fed for its low-rate policy. The central bank has used low inflation as an excuse not to raise rates, Stockman said.
But, "inflation isn't the issue," he said. "Interest rates impact all financial pricing in the world—tens of trillions of dollars of cash stocks and bonds. The Fed has fundamentally distorted all those prices."
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