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Rate cuts won’t lead to pickup in consumer activity: Ray Dalio

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Reactions to the coronavirus will probably cause a big short-term economic decline followed by a rebound, says billionaire investor Ray Dalio. He, however, feels there won’t be a big sustained economic impact.

In his latest blog, he shared his thoughts on coronavirus and its impact on economy, market and investment. Here are the key highlights:
Worst-case scenario
History has shown that even big death tolls have been much bigger emotional affairs than sustained economic and market affairs. “My look into the Spanish flu case, which I’m treating as our worst-case scenario, conveys this view; so do the other cases,” he said.
​Idle cash
The world is now leveraged long with a lot of cash still on the sidelines -- ie, most investors are long equities and other risky assets and the amount of leveraging that has taken place to support these positions has been large because low interest rates relative to expected returns on equities and the need to leverage up low returns to make them larger have led to this.
No V-shaped
No V-shaped recovery
The actions taken to curtail business activities will certainly cut revenues until the virus and business activity reverse, which will lead to a rebound in revenue. That should (but won’t certainly) lead to V- or U-shaped financials for most companies. However, during the drop, the market impact on leveraged companies in the most severely affected economies will probably be significant.
Who will win, who will lose?
Who will win, who will lose?
The markets will probably not distinguish well between those which can and cannot withstand well the temporary shock and will focus more on their temporary hit to revenues than they should and underweight the credit impact — eg, a company with plenty of cash and a big temporary economic hit will probably be exaggeratedly hit relative to one that is less economically hit but has a lot of short-term debt.
​Once in 100 years
​Once in 100 years catastrophe
It seems that this is one of those once in 100 years catastrophic events that annihilates those who provide insurance against it and those who don’t take insurance to protect themselves against it because they treat it as the exposed bet that they can take because it virtually never happens.

​Coronavirus fallout
Those who sold deep-out-of-the-money options planning to earn the premiums and cover their exposures through dynamic hedging if and when the prices get near in the money, etc. The markets are being, and will continue to be, affected by these sorts of market players getting squeezed and forced to make market moves because of cash-flow issues rather than because of thoughtful fundamental analysis.
​Ineffective central
​Ineffective central banks
As far as central bank policies are concerned, interest-rate cuts and increased liquidity won’t lead to any material pickup in buying and activity from people who don’t want to go out and buy, though they can goose risky asset prices a bit at the cost of bringing rates closer to hitting ground zero.

​What matters
​What matters most
The most important assets that you need to take good care of are you and your family. As with investing, you will imagine the worst-case scenario and protect yourself against it.
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