World’s largest hedge fund fears Fed hike may roil markets

Right now, the prices of stocks and other risky assets are high and expected returns are low relative to “traditional levels,” but not in relation to the ultralow interest rates and high liquidity that exist today, Dalio and Dinner wrote. But if interest rates rise and liquidity declines significantly, “that picture will change.”

And while cash returns are “terrible,” most investors haven’t given much thought to how quickly capital losses can occur and what sort of risk premium they should demand.

Moreover, investors aren’t paying much attention to the risk that, in a downturn, central bankers have little room for maneuver. In the end, they say they don’t have the answers, either, and that is why they’re taking a cautious approach.

“Please understand that we are not sure of anything but, for the reasons explained, we do not want to have any concentrated bets, especially at this time,” they conclude .... http://www.marketwatch.com