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Ray Dalio, Bridgewater's Co-Chairman and Co-Chief Investment Officer speaks during the Skybridge Capital SALT New York 2021 conference in New York City on Sept. 15, 2021.BRENDAN MCDERMID/Reuters

Ray Dalio, the billionaire investor who built Bridgewater Associates into one of the world’s biggest hedge funds, said a “perfect storm” is forming that will spread economic pain as the U.S. Federal Reserve raises interest rates.

Mr. Dalio, who handed over control of the US$150-billion firm to a new generation of investors this month, said government stimulus programs during the pandemic have created a bubble.

Domestic tension in the U.S. population caused by “irreconcilable differences” and a yawning wealth gap, combined with international conflicts, are contributing to the perfect storm, he said.

Bridgewater’s Ray Dalio steps back, but his philosophy persists

“The Fed and the government together gave enormous amounts of debt and credit and created a lurch forward. A giant lurch forward and created a bubble. Now they’re putting on the brakes. So now we’re going to create a giant lurch backward,” Mr. Dalio said at the Greenwich Economic Forum.

To fight inflation, Mr. Dalio said the Fed will continue raising rates. “And there’ll be real pain, of course,” he added.

Interest rates above 4.5 per cent could tip the economy into a downturn, he said. “I don’t know whether that’s 4.5 per cent or the economy could not take an interest rate much higher than that before it’s going to be negative.”

Last week, Bridgewater announced that Mr. Dalio had handed over control of the US$150-billion hedge fund firm to a new generation, although he remains a meaningful owner of it.

The 73-year-old investor will keep his seat on Bridgewater’s operating board of director and will mentor the firm’s chief investment officers.

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