Bridgewater Associates founder and co-chairman Ray Dalio is predicting the outbreak of the novel coronavirus, COVID-19, will “come and go” and leave a “big emotional impact” on the world but “probably will not leave a big sustained economic impact.”
In a blog posting on his LinkedIn page, Dalio forecasted that containment of the virus “will occur best where there are 1) capable leaders who are able to make executive decisions well and quickly, 2) a population that follows orders, 3) a capable bureaucracy to enforce and administer the plans, and 4) a capable health system to identify and treat the virus well and quickly.” He insisted the Chinese government will “excel” at this, but the major developed economies will “be less good but OK” and the less developed nations will be “dangerously worse.”
As for the economic impact of COVID-19, Dalio cited the Spanish influenza pandemic in the late 1910s in arguing a worst-case scenario for virus-induced fatalities will ultimately have little effect on the global economy.
“The fact of the matter is that history has shown that even big death tolls have been much bigger emotional affairs than sustained economic and market affairs,” he stated.
Dalio has little confidence in central bank rate cuts as a tool for building economic strength against the virus, noting that such actions “won’t lead to any material pickup in buying and activity from people who don’t want to go out and buy, though they can goose risky asset prices a bit at the cost of bringing rates closer to hitting ground zero.”
He added that the economic picture in the period immediately before the virus’ appearance in China will play a significant role in any post-virus environment.
“The world is now leveraged long with a lot of cash still on the sidelines — i.e., most investors are long equities and other risky assets and the amount of leveraging that has taken place to support these positions has been large because low interest rates relative to expected returns on equities and the need to leverage up low returns to make them larger have led to this,” he continued. “The actions taken to curtail business activities will certainly cut revenues until the virus and business activity reverse which will lead to a rebound in revenue. That should (but won’t certainly) lead to V- or U-shaped financials for most companies.”