Key Words: Founder of world’s biggest hedge fund warns of ‘big squeeze’ with investors ‘buying dreams rather than earnings’

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Ray Dalio, the founder of hedge-fund behemoth Bridgewater Associates, believes investors haven’t necessarily been investing on a firm footing and that’s a condition that will eventually have to be rectified.

‘They’re selling dreams they’re not selling earnings and they’re not even selling a path to earnings.’

Ray Dalio

The prominent investor, during a particularly downbeat CNBC interview on Tuesday, suggested investors are flush with cash because of monetary policy but haven’t been discerning about selecting investment strategies. They are “buying dreams rather than earnings and stocks,” he said.

His comments come as WeWork parent We Co. canceled a prominent public sale of stock amid a fervor over its business model and valuation.

At the same time, results for the third quarter have come in better-than-feared but have otherwise been weak on absolute terms.

Dalio, whose fund counts some $150 billion in assets under management, painted a particularly gloomy picture of financial markets that have managed to register all-time highs after a fitful past several months.

The Dow Jones Industrial Average DJIA, +0.13% on Monday recorded its first all-time closing high since July 15, joining the S&P 500 SPX, -0.09% and the Nasdaq Composite COMP, +0.12% in record territory, amid growing hope that a long-running trade dispute between China and the U.S., can be resolved.

Read: Are jobs and trade news blinding investors to stock-market dangers ahead?

The hedge-fund investor also said he believed that monetary policy is “stuck… you can’t raise rates because as a result of the stimulation companies and various entities have a lot more debt,” he said.

Hence, he warned that financial markets could be facing a “big squeeze.”

Dalio told CNBC at the Greenwich Economic Forum that he felt that companies will struggle to increase profit margins, which have been near records and with a greater likelihood of producing lower margins as companies struggle to cut costs further than they already have.

MarketWatch’s Mark Hulbert reported that U.S. corporations, on average, post a profit of 9.3 cents for every dollar of sales, citing U.S. Commerce Department data — translating to a profit margin of 9.3%. It has gotten only slightly higher than this over the past six decades: In the fourth quarter of 2011, it was 10%. The average since 1952 is 5.9%.

“There are not a lot of things to push that higher,” Dalio said, explaining that profit margins had gone up from 7% to 14%, by his estimates.

The 70-year-old investor also lamented the U.S. government’s budget deficit, which is just under $1 trillion in the just-closed fiscal year, according to the latest, almost official estimate by the Congressional Budget Office.

Check out an excerpt from of the interview below:

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