Friday, 14 Dec 2012 08:10 AM

By Michael Kling

Next year will bring austerity and rising interest rates, predicts Ray Dalio, founder of Bridgewater Associates, the largest hedge fund manager.

Plus, the Fed is out of bullets.

Speaking at The New York Times DealBook conference, Dalio said austerity is coming due to Washington's inability to solve the fiscal cliff, Business Insider reported.

The Fed, meanwhile, has fired its “bazooka” and its continuing quantitative easing will have little impact.

Yields, already at rock-bottom levels, can't go down any more and will begin rising next year, probably in late 2013, he said, according to Business Insider.

"We're facing austerity. And growth is flagging. This is an unprecedented risk the economy is facing — a slowdown with very little room to maneuver."

Still, Business Insider reported that Dalio predicts stocks will outperform bonds next year.

Dalio agrees with other top investors who believe interest rates will pop a bond bubble and create a moneymaking opportunity when the finally increase, CNNMoney reported.

"The greatest fortune made in the next five years is probably going to be made by some group or individual who figures out when the interest rate market will turn," said David Rubenstein, co-founder of the Carlyle Group, according to CNNMoney.

Timing that interest-rate turn is the difficult part, Rubenstein said. "I don't know what will burst the interest rate bubble."

Stephen Schwarzman, chief executive of the Blackstone Group, recommended dropping junk bonds, which have fixed-interest rates, and buying floating-rate products, including debt from highly leveraged banks, as a protection against rising rates, CNNMoney reported.

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

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