Ray Dalio, founder and co-chief investment officer of Bridgewater Associates, is the first to admit that he cannot predict the extent or the economic impact of the Coronavirus outbreak.
“Let me be clear that I’m a ‘dumb shit’ when it comes to pandemics,” the hedge fund manager wrote in a LinkedIn post on Thursday. “I, and we at Bridgewater, don’t have a clue as to what extent this virus or ‘pandemic’ will spread, we don’t know where it will spread to, and we don’t know its economic or market impact.”
The outbreak of the Coronavirus, which was first observed in early December, sent global stock markets into a sharp decline at the beginning of this week, as the number of reported cases continued to grow. As of Sunday, the World Health Organization had recorded a total of 2,014 cases of infection by the virus, including 1,985 cases in the Greater China region. By Thursday afternoon, U.S. health officials had confirmed the first person-to-person transmission of the virus in the United States.
Writing that “what we don’t know is much greater than what we do know,” Dalio said he wanted to “make sure that [Bridgewater’s] portfolios are either well diversified or hedged so that we don’t have any inadvertent big bets that we don’t have a good likelihood of betting on well.”
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First, however, the Bridgewater co-chairman wanted to “study a bunch of [pandemics] to see how they work.”
These included half a dozen major disease outbreaks in the 20th and 21st centuries, including more recent pandemics such as the H1N1, or Swine Flu, outbreak, and the SARS pandemic of the early 2000s. Dalio also analyzed “the last big one,” the Spanish Flu which infected hundreds of millions at the tail end of World War I.
“Regarding the first two, which were also the much smaller ones, on the days in which there were big bad headlines about disease outbreaks, the markets acted in a risk-off way that is consistent with falling growth and flight-to-quality — i.e., equities declined, and gold and bonds rose (as we’ve seen over the last couple days,” Dalio wrote. “However these reactions faded and there became no clear or big sustained market moves as other influences such as monetary policies and economic activities that weren’t associated with the virus were much more important.”
But the Spanish Flu — which was estimated to have killed some 50 million people between 1918 and 1919 — had a “much larger” impact on markets and economies.
“The impacts of the war and the pandemic are hard to disentangle in market and economy charts, but it looks like positive developments in the war… were overshadowed by the pandemic, marking the end of an equity rally,” Dalio wrote.
With the current outbreak of Coronavirus, the Bridgewater founder observed “strong falling growth and flight-to-quality market action,” with equities selling off globally amidst a rally in bonds, gold, and the U.S. dollar versus the yuan.
“The outbreak of the coronavirus and its effect on markets highlight” the importance of diversification, Dalio wrote. “When you don’t know, the best investment strategy is to be smartly diversified across geographic locations, across asset classes, and across currencies.”