The economy may be in fine shape now, having grown an average of 4.8 percent in the second and third quarters last year, but it's unclear how long the party will last, says Ray Dalio, founder of Bridgewater Associates, the world's largest hedge fund.
"I worry about the downside because the downside will come," he said at the World Economic Forum in Davos, Switzerland,
CNBC reports.
Dalio has good reason to be concerned. Since 1950, the U.S. economy has suffered a recession every five years on average, though it's only every eight years since 1982. The last recession ended in 2009.
Dalio recommends that the Federal Reserve continue to exercise patience in scheduling its first interest rate increase, suggesting it wait until it "sees the whites of the eyes of inflation."
The personal consumption expenditures price index watched closely by the Fed rose only 1.2 percent in the 12 months through November.
Dalio agrees with many other experts that central bank easing is losing its effectiveness. "We're in a new era in which central banks have largely lost their power to ease. If you get a downturn in the economy, the effectiveness of monetary policy will be less," he said.
As for the economy,
Charlie Bilello, research director at money management firm Pension Partners, shares Dalio's worry about the downside.
"While the U.S. economy has certainly fared better than its global peers, an acceleration we have yet to see, with real GDP still showing the slowest post-war recovery in history and real wage growth telling the same story," he writes on the firm's website.
Several indicators signal weakness, Bilello says. "First, inflation expectations in the U.S. have been falling precipitously over the past year," he notes.
"Second, the yield curve in the U.S. is flattening," Bilello adds. "Third, like Europe and Japan, U.S. long duration yields have plummeted over the past year. The 30-year Treasury yield is at a new all-time low, below the crisis lows of 2008. Fourth, credit spreads in the U.S. are widening."
Fifth, defensive sectors have led the stock market since the beginning of 2014.
"Collectively, these factors suggest that the U.S. is not immune to a global slowdown. Indeed, it is already starting to feel the effects if we look at anything except the S&P 500. From easy monetary policy to plummeting yields and inflation expectations, the U.S. looks very much like its global peers."
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