Ray Dalio’s downturn fears were recently put forward during the World Economic Forum’s annual meeting in Davos last month.
“What scares me the most longer term is that we have limitations to monetary policy — which is our most valuable tool — at the same time we have greater political and social antagonism” – Ray Dalio
Ray Dalio’s downturn fears might be worth looking into, bearing in mind Ray Dalio’s Pure Alpha posted gains of 14.6% in 2018, which represented Stella returns bearing in mind that all the major stock indexes ended the year in the red.
“What scares me the most longer term is that we have limitations to monetary policy — which is our most valuable tool — at the same time we have greater political and social antagonism”
RAY DALIO
Ray Dalio’s downturn fears were put forward in a panel discussion at the World Economic Forum’s annual meeting in Davos
Ray Dalio reiterated that a limited monetary policy toolbox, rising populist pressures and other issues, including rising global trade tensions, are similar to the backdrop present in the latter part of the Great Depression in the late 1930s.
While no two periods in history are identical there are some eerie similarities with the 30s and now. The widening wealth inequality, underemployment, polarized politics, and trade protectionism are present today. One contrast from the 30s and now is that there is a new cold war and a nuclear arms race (although no senior diplomat or politicians will admit it).
But the crux of Ray Dalio’s fear of a next downturn is based on the hedge fund king’s view that the Fed, the buyer of last resort will be less able to impact the market with monetary easing as it did during the previous financial crisis of 2008.
“limited monetary policy toolbox, rising populist pressures and other issues, including rising global trade tensions, are similar to the backdrop present in the latter part of the Great Depression in the late 1930s”
RAY DALIO
The current Fund rate of 2.5% and the Fed’s bloated $4.2 trillion of assets on its balance sheet means the Fed could be out of ammunition to tackle the next downturn. During the previous 2008 financial crisis, Fed fund rates were around 5%, quantitative easing was little known and the largest buyer of US treasuries and US trading partner was China.
“All it took for the Fed to lose its nerve was a stock price decline of 20% in the last quarter of 2018, pressure from Wall Street’s member banks and a displeased White House”
So what a difference a decade makes, the Fed could indeed have a limited monetary policy toolbox to tackle the next crisis and it is for that reason that Ray Dalio’s fear of a next downturn could be justified.
Ray Dalio’s fear of the next downturn is also concerning the Fed who recently adopted a monetary policy U-turn
All it took for the Fed to lose its nerve was a stock price decline of 20% in the last quarter of 2018, pressure from Wall Street’s member banks and a displeased White House. But what will the Fed do when it is faced with a real crisis. For that reason, Ray Dalio’s fear of the next downturn could be about exposing the almighty Fed as the emperor with no clothes.
