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Morning Brief: Bridgewater’s Dalio Warns About Recession Risks

The head of the world’s largest hedge fund firm says the risks of a recession in the next 18-24 months are rising.

Bridgewater Associates’ Ray Dalio warns we are in the “late-cycle” of the short-term debt/business cycle. In his latest LinkedIn post — seemingly his favorite form of public communication — the head of the world’s largest hedge fund firm says while he is not sure “precisely where we are” from the top of the stock market and economy, it is clear we are past the top in the bond market.

He explains that if the spurt in growth in profits, which is good for equities, is faster than the rise in interest rates — which is bad for asset prices — that will be ”marginally bullish.” He adds if there is a lot of cash still on the sidelines, which he says there currently is, that will cause one last spurt in equities prices. This would also bad for bonds and lead to Fed tightening, “which makes the classic top.”

This scenario, he says will be the most important factor in determining the exact timing of the market top for stocks. Dalio’s posting took place in the morning before the stock market surged around 1.5 percent on Monday.

Dalio also warned in his post that the risks of a recession in the next 18 to 24 months are rising. “While most market players are focusing on the strong 2018, we are focusing more on 2019 and 2020,” Dalio added. “Frankly, it seems to be inappropriate oversight to not be talking about the chances of a recession and what that recession might look like prior to the next election.” One reason for his concern: At this point in the cycle, it is difficult for the central banks to get monetary policy right.

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Separately, on Friday Bloomberg reported that Bridgewater more than quadrupled its short position in European Union companies, to at least $13.1 billion, citing EU regulatory filings. The hedge fund giant has earlier reported $3.2 billion in EU short bets as of February 1. Specifically, Bridgewater is now short 44 EU companies, up from 20 a week ago. In the most recent week, it built a larger-than-$1 billion short position in oil giant Total SA, now its largest disclosed short bet in Europe. It is also short Airbus, BNP Paribas, ING Groep, and Banco Santander.

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Carl Icahn and billionaire investor Darwin Deason said on Monday that they will oppose Xerox’s recent deal to cede control of the iconic photo copy maker to Japan’s Fujifilm Holdings Corp. In an open letter to Xerox shareholders published on a blog post, Xerox’s two largest investors assert the deal “dramatically undervalues Xerox and disproportionately favors Fuji.” Under the deal, Xerox would combine with a joint venture and Fujifilm would wind up owning 50.1 percent of the company. The two investors add: “The current Board of Directors has overseen the systematic destruction of Xerox, and, unless we do something, this latest Fuji scheme will be the company’s final death knell.”

___ Coatue Management and Glade Brook Capital Partners led the $200 million, Series E financing of Instacart, a grocery delivery company, according to tech news website Techcrunch.com. Instacart is now valued at $4.2 billion, according to Bloomberg. Interestingly, one of the shareholders is Whole Foods, which was recently acquired by Amazon.com, now a competitor of Instacart. Valiant Capital, which like Coatue and Glade Brook is led by a member of the broad Tiger Management crowd, made an investment in the company back in the fourth quarter of 2014.

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