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Interview Transcript
Ray Dalio: With current foreign-exchange policy, and us being in the middle part of the economic cycle, volatility is coming down. So, interesting – as volatility has declined to the lowest level we have ever seen. They think they can take on larger positions, and so when the markets are not moving much, what you have is a leveraging up of positions, to a large extent. Whether it’s leveraged enough to carry trades, when volatility is low, you figure that which has a higher interest rate is something very attractive, relative to that that doesn’t, and you have a lot of convergence trades and leveraging up spreads. That’s also reflected, for example, in private equity...If you look at it, it looks a lot like 1998 and 1994. So, we’re embedding a lot more risk within the system because we're treating risk as dependent on recent volatility and we're reaching for return in an environment with too little volatility to squeeze returns out of.
Recent low volatility is contributing to excess market risk
Founder, President & CIO, Bridgewater Associates
Recent low volatility is contributing to excess market risk
December 7, 2007 | In Business & Economics
Discuss
Ron Sipherd on January 8, 2008, 7:16 AM
My unsystematic perception is that the stock market has been unusually volatile in the last several months, with three-digit swings in the Dow Industrials more common than in the past. Even after adjusting for inflation I would have said volatility is up, which undercuts the premise of the headline. I also wonder if the US is "in the middle part of the economic cycle", unless Mr. Dalio defines it differently from how I understand those terms.
Ron Sipherd on January 8, 2008, 12:16 PM
My unsystematic perception is that the stock market has been unusually volatile in the last several months, with three-digit swings in the Dow Industrials more common than in the past. Even after adjusting for inflation I would have said volatility is up, which undercuts the premise of the headline. I also wonder if the US is “in the middle part of the economic cycle”, unless Mr. Dalio defines it differently from how I understand those terms.
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