'One of those once in 100 years catastrophic events': Billionaire Ray Dalio says coronavirus will 'annihilate' select parts of the market - and warns further emergency rate cuts will be futile
- The coronavirus is a once-in-a-lifetime epidemic that will squash those who don't defend for a worst-case scenario, Bridgewater co-founder Ray Dalio wrote in a Tuesday LinkedIn post.
- The billionaire investor pointed to insurance companies offering insurance against the outbreak and investors selling deep out-of-the-money options as those set to face the brunt of the virus' financial hit.
- Companies with healthy cash flows are becoming more attractive amid the wave of market volatility, he added.
- Dalio's post arrived just after the Federal Reserve issued its first emergency rate cut since the financial crisis. Such policies may prop up demand and asset prices, but coordinated monetary and fiscal policy targeting specific debt constraints would more efficiently contain economic fallout, he wrote.
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The coronavirus is a unique event that will crush investors who don't protect for the worst, Bridgewater Co-Chairman Ray Dalio wrote.
The billionaire investor commented on the epidemic in a Tuesday LinkedIn post, highlighting his perspectives on the outbreak itself, its economic impact, and markets' reactions. He noted his aversion to betting on events mired in uncertainty, adding that he prefers to insulate himself from murky risks.
Bridgewater's worst-case coronavirus scenario resembles the Spanish flu case from 1918, and investors should defend against coronavirus escalating to a similar level, Dalio wrote. Those who underestimate the epidemic's development are likely to suffer for it, he added.
"It seems to me that this is one of those once in 100 years catastrophic events that annihilates those who provide insurance against it and those who don't take insurance to protect themselves against it because they treat it as the exposed bet that they can take because it virtually never happens," the investor wrote.
He later called out insurance firms insuring against coronavirus fallout and investors selling deep out-of-the-money options contracts to fund hedging strategies. Companies with healthy cash flows represent the other side of the spectrum, steadily riding the wave of volatility "as many market players have been shaken out," the investor wrote.
Dalio's comments arrived the same day the Federal Reserve issued its first emergency rate cut since 2008. The 50-basis-point adjustment serves as a shot-in-the-arm for consumer spending as virus fears grow, and Fed chair Jerome Powell signaled additional stimulus is in the cards if the outbreak intensifies.
Though lower rates can prop up demand shortages and pad some risk-asset values, increased liquidity has little value if consumers "don't want to go out and buy," Dalio warned. The Tuesday cut pushed the federal funds rate range to 1%-1.25%, an unexpected low after three rate cuts in 2019 and hints that the central bank would hold rates steady until inflation picked up. The Fed still has some room to cut if coronavirus further chips away at demand, but other countries aren't able to employ the same tools, the Bridgewater co-founder said.
"In Europe and Japan, monetary policy is virtually out of gas so it's difficult to imagine how pure monetary policy will work," Dalio wrote. "So, it seems to me that containing the economic damage requires coordinated monetary and fiscal policy targeted more at specific cases of debt/liquidity-constrained entities rather than more blanket cuts in rates and broad increases in liquidity."
Despite warning investors to "imagine the worst-case scenario and protect yourself against it," Dalio doesn't expect the outbreak to create a long-term economic rut. The investor expects a V-shaped recovery in asset prices and economic activity once a cure is introduced or the virus is contained.
History shows the deadliest pandemics serving as "much bigger emotional affairs" than drivers of sustained economic downturn, Dalio wrote, even the century-old Spanish flu.
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