Founder of the world’s largest hedge fund says ‘magnitude’ of the next downturn will be epic

Published: May 15, 2017 9:47 a.m. ET

Ray Dalio of Bridgewater Associates has some good news for Wall Street investors, and some bad news.

First the good news: The founder of the world’s largest hedge fund, which boasts $102 billion under management, says the global economy is “at or near its best,” with few, if any major risks, on the horizon. Against, the backdrop of ever-rising equity prices, including the Dow Jones Industrial Average DJIA, +0.37% the S&P 500 index SPX, +0.47%  and the Nasdaq Composite Index COMP, +0.44% hovering around all-time highs, the short-term picture looks halcyon. Even London’s benchmark FTSE 100 UKX, +0.62%  closed at a record on Friday.

“The economy is now at or near its best, and we see no major economic risks on the horizon for the next year or two,” Dalio wrote in a post on LinkedIn Friday.

Now, the bad news: over the longer term, Dalio’s outlook isn’t so sanguine.

“So we fear that whatever the magnitude of the downturn that eventually comes, whenever it eventually comes, it will likely produce much greater social and political conflict than currently exists,” he writes.

Presently, global markets appear to be stabilizing more than eight years after the global financial system was brought to its knees. Central bankers have underpinned much of the growth in equity markets by keeping benchmark borrowing costs ultralow, Dalio said.

President Donald Trump has vowed to implement an array of policies that will stoke fresh animal spirits in the U.S. economy, and equity investors world-wide appear to have pinned at least some of their hopes on those pro-business policies coming to fruition.

Check outHere’s why the stock market isn’t freaking out about the Comey firing

But Trump isn’t the only catalyst behind the bullish sentiment in the market, with corporate earnings offering a more upbeat outlook—on a relative basis—and the aforementioned improvements in other areas of the globe also underpinning the market optimism.

See: Is Donald Trump boosting the economy? Goldman finds mixed signals

Dalio’s concerns, however, are that debt is building in the system and other obligations, including pensions and health-care entitlements, could create a slow and steady “squeeze” for the economy and the market. Instead of one big shock or halting swing lower, Dalio predicts this will “come gradually” undone “and will hurt those who are now most in distress the hardest.”

Lofty valuations for equity benchmarks and the unnaturally low levels of Wall Street’s fear gauge, the CBOE Volatility Index VIX, +0.96% which touched a more than 23-year low earlier in the week, have all fostered a sense of unease that the cyclical bull market that has extended into a ninth year will come to a crashing halt.

Read: This could be the bull market’s last hurrah

“The US is in a period of exceptional political uncertainty as the new administration’s policies continue to take shape,” Dailo said, alluding to some of the latest drama that has played out in the White House after Trump fired former Federal Bureau of Investigation Director James Comey.

The hedge fund maestro is saying that investors may have two more years to gather ye equity rose buds while ye may. In truth, no one truly knows when the music will end but it may be wise to pay attention to what the so called smart money is thinking.

Check out the rest of Dalio’s blog here.