Ray Dalio’s bearish outlook was explained further in his latest interview with Goldman Sach senior strategist within Global Macro Research, Allison Nathan.
As the macro data starts trending downwards (crashing) a string of top-notch investors are sending up distress flares. Sam Zell property billionaire said in January “for the first time in my life, I bought gold because it is a good hedge”. Then there is Rothchild’s viewed point that now is not an appropriate time to add to risk. Moreover, Jeffrey Gundlach, the bond king points to the inverted yield curve as trouble ahead.
“The wealth of the top one-tenth of 1% of the population is about equal to that of the bottom 90% of the population, which is the same sort of wealth gap that existed during the 1935-40 period”
So Ray Dalio’s bearish outlook makes a timely read and perhaps it might give investors a heads up on what to expect as corporate earnings season kicks off.
The crux of Ray Dalio’s bearish outlook is based on being near the end of the short-term debt cycle which is also known as the business cycle
The rate of debt growth and spending is slowing argues Ray Dalio.
“At the same time, pension and healthcare liabilities will increasingly becoming due, which will intensify the squeeze in the same sort of way that debts coming due does” said Ray Dalio.
Moreover, the fact that the economy is late in the long-term debt cycle is a further reason for Ray Dalio’s bearish outlook
Late in the long-term debt cycle has been defined by Ray Dalio as a situation where the central bank runs out of stimulants left in the bottle.
“pension and healthcare liabilities will increasingly becoming due, which will intensify the squeeze in the same sort of way that debts coming due does”
Political polarity in a US election year is another reason for Ray Dalio’s bearish outlook
Ray Dalio views this political polarity as a clash between socialism and capitalism.
But a Russian academic and former KGB analyst Igor Panarin believes that deeper problems are festering away. Igor Panarin predicted in 2008 that the economic and moral collapse in the US will trigger a civil war and the collapse of the US.
US President Trump is governing a multicultural, multiracial country and he finds himself in deep water with his “go back home” comment to Democratic congresswomen of color born in the USA.
So is this more than political polarity and is the US tinkering on something more serious as forecasted by the former KGB analyst?
“The clash between the rich capitalists and the poor socialists in the next downturn will be ugly” – Ray Dalio
Ray Dalio talks about substantial wealth, income, and opportunity gaps, which most likely will either lead to big changes in policies. That is “not good for the capital markets and the capitalists” said Ray Dalio. But will these “big changes in politics” spill out onto the streets in a class/race war? Ray Dalio acknowledges the serious challenges ahead. “The clash between the rich capitalists and the poor socialists in the next downturn will be ugly” said Ray Dalio.
Increasing geopolitical risk, especially as China continues to emerge and challenge US leadership in many areas is another reason for Ray Dalio’s bearish outlook
“This period is most analogous to the late 1930s, when we were also at the end of short- and long-term debt cycles, so monetary policy was limited, the wealth gap was similarly wide, populism was on the rise, and the existing world powers of the UK and the US were being challenged by the emerging powers of Germany and Japan. Each of those factors—the downward pressures coming from the maturing IOUs, central banks not having much power to stimulate, the large wealth and political gaps within countries, and the challenging of leading world powers by strong emerging world powers—lead to difficult consequences,” said Ray Dalio.
What does Ray Dalio’s bearish outlook mean for markets?
“This confluence of factors will create a risky environment over the next couple of years. This is especially true because several influences that produced the ups in markets and economies will be fading or reversing,” said Ray Dalio.
The sugar-coated years of company stock buybacks and corporate tax cuts will be in the rear mirror.
“The big rise in profit margins over the last two decades from about 7% of revenue to about 15% today, which also shifted wealth from workers to the capital markets and capitalists, is unlikely to continue,” said Ray Dalio.
“Monetary policy will have less power to stimulate” he added.
“I think there will be slow growth rather than a meaningful recession in the near term” – Ray Dalio
Ray Dalio warns that all of this will be happening when substantial unfunded liabilities in the form of public pension funds and healthcare liabilities will be coming due, which can only be met with higher taxes and/or the monetization of fiscal deficits.
“So, looking forward, I see several factors that have been supportive of markets no longer existing and an environment of greater risk” said Ray Dalio
What is Ray Dalio’s bearish outlook going to look like?
“I think there will be slow growth rather than a meaningful recession in the near term” he said.
“ I think the downturn will be like a big squeeze in a politically challenging environment, much more akin to what we saw in the late 1930s”, he added.
That means investors will be more susceptible to political risk, currency devaluations, and so forth.
Ray Dalio sees cash over the long run as the worst-performing asset class and therefore the riskiest asset class and he recommends investors to diversify well.
People seem to think that going to cash reduces risk. But that’s only the case from a standard deviation perspective. When interest rates are negligible—below the inflation rate/nominal GDP growth—and you pay taxes on that, you’re not getting any return. Cash over the long run is the worst-performing asset class and therefore the riskiest asset class. So where do you go? To me, going to anyone asset increases risk. “So the best way to deal with the challenging environment I foresee is by diversifying in areas that have intrinsic diversification” said Ray Dalio.
“For example, I think gold and Chinese assets are two assets that are now underweighted in portfolios,” said Ray Dalio.
But owning Chinese assets seems out of lockstep with Kyle Bass quiet panic recommendation of staying out of Hong Kong, which is today politically associated with China.