Ray Dalio‘s stock market reversal view suggests that 2019-2020 is likely to be a riskier and more dangerous period for investors. “There is no longer enough power in monetary easing to reverse it”, said Ray Dalio in a recent interview.
Ray Dalio’s stock market reversal view and the challenges that it could pose for investors going forward was explained in the context of the short and long-term debt cycle.
“There is no longer enough power in monetary easing to reverse it”
RAY DALIO
Ray Dalio’s stock market reversal view and the challenges that it could pose for investors going forward was explained in the context of the short and long-term debt cycle.
“What I mean by dangers is that we at the latter stage of the short debt cycle and the latter stage of the long-term debt cycle. Short debt cycle means that we are in the stages of the cycle where you are having a combination of the tightening of monetary policy and interest sensitivity to asset prices and that creates short-term vulnerability.
Put another way, the Fed’s series of rate hikes is weighing down on stock prices which could also put down the aging bull market in stocks”.
Ray Dalio’s stock market reversal view was also put forward in terms of the long-term debt cycle. “You are in the latter stage of the long-term debt cycle because you are close to zero interest rates and a lot of the power of monetary easing through quantitative monetary policy buying financial assets is more behind us than in front of us. You are late along and there is not enough power to reverse it” said Ray Dalio.
So Ray Dalio’s stock market reversal view is true with respect to monetary policy transition from accommodative to tightening.
“What I mean by dangers is that we at the latter stage of the short debt cycle and the latter stage of the long-term debt cycle”
RAY DALIO
Ray Dalio’s stock market reversal view can also be observed on the political landscape
The rise of populist governments is likely to mean more political uncertainties for investors in 2019. What if France’s “yellow vest” movement, a rage against government spreads within Europe and beyond? “Also in a world with more populism, rich and poor are at odds the leaders are more populist and it is a little more difficult to run the government in a harmonious way so there is more conflict” said Ray Dalio.
Ray Dalio’s stock market reversal view could also be applied to the changing geopolitical landscape. Deteriorating US-China relations underscores the above. Up until recently, the US perceived China as an invaluable global trading partner. But today the US administration views China as a competitive rival, a strategic threat to US hegemony and global dominance. “The global landscape is in the middle of a so-called geopolitical cycle that’s seeing the emerging nation of China challenge the unquestioned supremacy of the US.
He said these developments are why Chinese relations have been so instrumental in driving markets lately” said Ray Dalio. Moreover, Ray Dalio is fearful that a further escalation of the situation could unleash negative side effects upon the market.
“It looks more like it’ll be a big squeeze because there’s a certain amount of indebtedness” – Ray Dalio
Is Ray Dalio’s stock martket reversal view doublespeak for an imminent collapse?
When pressed on the matter Ray Dalio was reluctant to compare the current situation to the one preceding the last financial crisis. “The nature of this dynamic is more of a squeeze” said Ray Dalio. “This doesn’t look like 2008. In 2007, we would look at the financial statements of entities and see that they weren’t able to pay the debt and that we were headed for a big debt crisis. Now it’s not the same”.
Ray Dalio did note, however, that mounting leverage will come back to bite markets eventually. He warned that massive debt loads could pose major issues down the line.
“It looks more like it’ll be a big squeeze because there’s a certain amount of indebtedness” he said. “We also have a lot of obligations, like pension and healthcare. Both companies and the government are borrowing a lot of money — particularly the government” said Ray
Ray Dalio warns investors about being complacent in a rapidly changing world
Ray Dalio’s stock market reversal view could also be viewed through a prism of changing company fortunes which could be ushered in by disruptive technologies of the Fourth Revolution.
“Most businesses that are Dow Jones Industrials that were a measure of top businesses that existed 10 to 20 years ago no longer are good businesses the world changes and evolves. I don’t think that one can just sit on good businesses and be comfortable doing that” said Ray Dalio.
“A small percent of someone’s portfolio 5-10% should be in gold – there is a lot of debt” – Ray Dalio
How can investors protect their wealth if Ray Dalio’s market reversal view is accurate and that we are on the cusp of a serious financial and economic downturn?
“A small percent of someone’s portfolio 5-10% should be in gold – there is a lot of debt. Ray Dalio believes that the US is going to need to borrow more money. The fiscal policies that existed created a lot of corporate tax cuts which are stimulative for the economy and at the same time there has got to be a lot more borrowing to finance the debt” said Ray Dalio.
Ray Dalio also believes that the US government will finance the debt with bond sales. This will create a supply-demand imbalance for bonds which will make bonds a riskier asset. “So the USD is risky, the Euro is risky, the Japanese Yen is risky, there is a lot of debt around. You could be in a situation where money as an asset is not that appreciated. Equities and bonds are tied to that same financial structure. Gold is a diversifying asset in the form of money” said Ray Dalio.
So Ray Dalio’s stock market reversal view can be seen from many angles and the outcome will “depends on how we deal with each other” said Ray Dalio.
“And a lot of that depends on us looking at what’s true and how the machine works” added Ray Dalio.
