Ray Dalio warns of 'serious problems' and a bond 'blow-off' as a repeat of the late 1930s looms

Key Points
  • Hedge fund kingpin Ray Dalio is warning that current conditions remind him of the Depression-era environment.
  • He cited three factors: Ineffective central banks, high levels of debt and the U.S.-China conflict.
  • Dalio previously predicted a "paradigm shift" that would benefit gold.
  • His biggest funds are losing money this year.

Hedge fund titan Ray Dalio is worried that the current landscape is starting to resemble Depression-era conditions that could hammer investors.

In a LinkedIn post Thursday, the billionaire Bridgewater Associates founder said high levels of debt and central banks' ineffectiveness are two of the key factors that need watching. The U.S.-China conflict is adding to the problems as an existing power battles an emerging one.

"If/when there is an economic downturn, that will produce serious problems in ways that are analogous to the ways that the confluence of those three influences produced serious problems in the late 1930s," Dalio wrote.

Ray Dalio on why he thinks the world is on the brink of a 'paradigm shift'
Ray Dalio on why he thinks the world is on the brink of a 'paradigm shift'

The post was consistent with a previous warning he delivered about a "paradigm shift" in which gold will serve as a profitable hedge as investors get caught holding too much risk.

In the latest essay, he spoke of how central banks are being forced to keep interest rates low and "print money to buy financial assets" in order to prop up markets and make huge fiscal deficits affordable. He said there are "strong deflationary forces at work" as capacity has surged.

"These forces are creating the need for extremely loose monetary policies that are forcing central banks to drive interest rates to such low levels and will lead to enormous deficits that are monetized, which is creating the blow-off in bonds that is the reciprocal of the 1980-82 blow-off in gold," he said.

Dalio's firm, which manages $124.7 billion for clients and is the largest hedge fund operation in the world, has performed poorly this year. Bridgewater's Pure Alpha fund was recently off 6% year to date and Pure Alpha II is down 9%, according to Bloomberg News.

Dalio directed readers to study the economic and investing conditions of 1935-45 as "there is a lot to be learned by understanding the mechanics of what happened then (and in other analogous times before then) in order to understand the mechanics of what is happening now. It is also worth understanding how paradigm shifts work and how to diversify well to protect oneself against them."

Read the full Dalio LinkedIn post here.