Ray Dalio outlines his bubble criteria in his recent piece entitled, “Are We In A Stock Market Bubble,” posted on LinkedIn. 

“Having been through many bubbles over my 50+ years of investing, about 10 years ago I described what in my mind makes a bubble, and I use that to identify them in all markets, not just stocks,” wrote Ray Dalio.

With chatter about billionaires investors and insiders selling Ray Dalio outlines his bubble study criteria as a timely read.  

Think about it. The bubble is in bonds, sovereign debts, collateral in a fiat debt currency system. 

Moreover, if that paper collateral becomes worthless because the rate of inflation is greater than the bond yields, then central banks are forced to buy sovereign bonds, to suppress the yields, thereby preventing a government default. In other words, central banks will create more currency to buy the bonds and suppress the yields that investors don’t want to own. 

“The bubble is in bonds, sovereign debts, collateral in a fiat debt currency system”


But this leads to the unintended consequences of a vicious cycle of currency debasement and higher inflation as the purchasing power of the currency withers on the vine.

Investors were not falling over each other to buy Argentinian sovereign bonds when the yields were over 40% and inflation was over 100%.

Typically, when an Empire is in check, its final move is to make war, and it will even sacrifice its colonies to gain a strategic win on the battlefield to keep its king on the hegemonic throne. 

Europe could be the US’s gambit in WW3. 

If war, more currency creation and higher inflation are dead ahead, cash is trash, and bonds are not a good investment. 

So, where is capital flowing?

“Europe could be the US’s gambit in WW3”


Ray Dalio outlines his bubble criteria could be a heads up for investors in these tumultuous times

“I define a bubble market as one that has a combination of the following in high degrees:

  1. High prices relative to traditional measures of value (e.g., by taking the present value of their cash flows for the duration of the asset and comparing it with their interest rates).
  2. Unsustainable conditions (e.g., extrapolating past revenue and earnings growth rates late in the cycle when capacity limits mean that that growth can’t be sustained).
  3. Many new and naive buyers were attracted because the market has gone up a lot, so it’s perceived as a hot market.
  4. Broad bullish sentiment,” wrote Ray Dalio. 

Ray Dalio explained the more bullish the sentiment, the more people have already invested, so they are likely to have fewer resources to keep investing and are more likely to sell. 

Ray Dalio Bridgewater has been a global macro investor for over 50 years and founded Bridgewater Associates from his two-bedroom apartment in NYC. Ray Dalio ran Bridgewater for most of its 47 years, building it into the largest hedge fund in the world and the fifth most important private company in the US, according to Fortune Magazine.

“The Mag-7 is measured to be a bit frothy but not in a full-on bubble”
Ray Dalio

Is the market in a bubble, according to Ray Dalio outlines his bubble criteria?

“Sentiment in the market is now neutral to slightly positive—not in bubble territory,” he said. 

When Ray Ray Dalio examines whether the US stock market is in a bubble based on his study of market bubbles, he believes the US market is still not in bubble territory.    

Some parts that have rallied the most and gotten media attention don’t look very bubbly. The market as a whole is in the mid-range (52nd percentile). As shown in the charts, these levels are not consistent with past bubbles,” he wrote. 

“The Magnificent 7, has driven a meaningful share of the gains in US equities over the past year. The market cap of the basket has increased by over 80% since January 2023, and these companies now constitute over 25% of the S&P 500 market cap. 

The Mag-7 is measured to be a bit frothy but not in a full-on bubble

The valuations are slightly expensive given current and projected earnings, sentiment is bullish but doesn’t look excessively so, and we do not see excessive leverage or a flood of new and naive buyers,” he said and added,

“Looking at the Magnificent 7, we are reading Alphabet (NASDAQ: GOOG) and Meta (NASDAQ: META) as somewhat cheap, and Tesla (NASDAQ: TSLA) as somewhat expensive” – Ray Dalio

“That said, one could still imagine a significant correction in these names if generative AI does not live up to the priced-in impact.” 

Ray Dalio then walks the reader through all the bubble gauge indicators for the entire US stock market and compares how recent conditions stack up to historical bubbles. 

“Our readings suggest that, while equities may have rallied meaningfully, we’re unlikely to be in a bubble.

For the Mag-7, some of our readings look frothy, but we do not see bubbly conditions in aggregate. 

We have somewhat lower confidence in this determination because we don’t have a high-confidence read on how impactful generative AI will turn out to be, and that is a significant influence on the expected cash flows of many of these companies,” he added. 

Mag-7, Ray Dalio outlines his bubble criteria

“Looking at the Magnificent 7, we are reading Alphabet (NASDAQ: GOOG) and Meta (NASDAQ: META) as somewhat cheap, and Tesla (NASDAQ: TSLA) as somewhat expensive. We’d call the group in aggregate fair priced.

The value read is based partly on analyst expectations for growth, so we assume that analysts are making reasonable predictions for growth driven by generative AI. This is an area where we have lower confidence because there is so much inherent uncertainty and because it is not our area of expertise,” he wrote. 

Ray Dalio outlines his bubble criteria in a nutshell, stocks and other risk assets are not in bubble territory, but Mag 7 looks frothy

That makes sense, bearing in mind the seismic shift from public to private assets could be in its infancy, given the current geopolitical uncertainties, escalation of wars and potential for stagflation.