(Bloomberg) -- Recent central bank actions mean capital markets are no longer “free,” according to Bridgewater Associates's Ray Dalio, founder of the world's largest hedge fund.
“Today the economy and the markets are driven by the central banks and the coordination with the central government,” said Dalio, speaking at the Bloomberg Global Asset Owners Forum on Thursday. As a result, “capital markets are not free markets allocating resources in traditional ways.”
The Covid-19 pandemic brought economic activity to a standstill and sent markets spiraling downward in March. The Federal Reserve's unprecedented multi-trillion dollar response eased concerns and helped fuel a shock recovery in financial markets even as the U.S. economy continues to struggle.
Dalio said the U.S. now has the worst wealth gap since the 1930s, adding that central banks will need to continue to pump money into the economy.
“You're going to see central bank balance sheets explode, they have to because the choice is the sinking ship,” he said.
Dalio also said that investors should favor stocks and gold over bonds and cash because the latter offer a negative rate of return and central banks will print more money.
Over the last several months, Dalio has written a series of extensive essays that have called for reforming capitalism so that it benefits everyone. He has also said that the U.S. is in “relative decline” as China's power rises.
Dalio, who counts some Chinese government entities as Bridgewater clients, reiterated his concern about the U.S.'s ability to compete with China.
“China is growing, becoming powerful playing the game in the best way it knows how. We have a different system we're playing the game the best way that we know how. And my main issue is how well are we playing the game?,” he said mentioning the quality of education as one example.
“It's a very impressive system,” he said referring to China. “They are very smart, wise people with great historical perspectives.”
Read more: Bridgewater's Assets Shrank 15% in Virus-Fueled Trading Slump
Bridgewater's flagship Pure Alpha II hedge fund struggled this year, falling 20% through May, amid the market chaos caused by the coronavirus pandemic.
The firm got hit by the crisis at “the worst possible moment” because its portfolios were positioned at the start of the year to benefit from rising markets, Dalio told clients in mid-March.
The Westport, Connecticut-based firm managed about $138 billion at the end of April, down from about $160 billion at the start of the year.
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