Hedge fund legend Ray Dalio says we are entering “a risky environment” in which investors will need to find a safe store of value as major economies draw closer to printing money to finance government spending.

Mr Dalio, who founded $US160 billion ($235 billion) macro hedge fund Bridgewater, said low or negative interest rates on the US dollar, yen and euro suggested they were drawing closer to a third phase of monetary policy where government spending is financed with printed money.

“We’ll have large deficits and then there will be more monetisation of that,” he said at the Sohn Hearts & Minds investment conference in Sydney on Friday.

“There will be a limit to pushing that and then there will be the politics. Of course, as investors that will have a big impact on returns of asset classes.”

Mr Dalio said in a low-return world, asset classes were competing for capital while pension funds faced the challenge of meeting higher returns than what was likely.

“We are in an environment where we are selling dreams. We are no longer selling earnings. You gotta believe.”

But he says the “big issue” is where to store wealth and in what currency as developed market currency yields plunged into zero or negative territory.

“We pay a lot of attention to stocks bonds, private equity, venture capital and real estate but we don’t pay enough attention to currencies and capital flows.”

“We are coming into an environment where the return of money is becoming more important than the return on money.”

Risky environment

He said it was time to think about alternatives to the major developed world currencies and to consider diversification.

Investors also had to consider geopolitical and capital flow issues in deciding where to store their wealth.

“It’s a risky environment,” Mr Dalio said.

Mr Dalio said the world of free money had helped those with financial assets get wealthier but left behind those who didn’t.

“Any of us in the investment area are trying to make money so you bid everything up.”

He said technology was also leading to greater wealth inequality.

“The main thing about technology is that increasingly it’s becoming intelligent and the uniqueness of the individual is less and less great.”

“That is contributing to that wealth gap. Computers are cheaper and employees are difficult.”

Debt sag

He said he did not expect there to be a big debt crisis on the horizon because there was no wave of maturities that required refinancing.

Instead, he says there will be a prolonged “squeeze” or “sag”.

“We reduced interest rates, we had corporate tax rates, margin expansion so the share that went to capital s large relative to that which went to workers.”

Mr Dalio said economic wealth creation was ultimately driven by productivity but political cycles were intertwined with the longer-term debt cycles.

He said the way democracy worked was changing in the age of social media. In the United States, he said the half a million swing voters were once influenced by debates were now targeted by “mind manipulation” via social media.

Internationally, the US and China were clashing on four fronts – trade, geopolitics, technology and capital. He said there was also “a decoupling” among entities dependant on goods and services from both countries.

by Jonathan Shapiro