Okay, so it took a while to figure out what Ray Dalio has been speaking about, but as of this morning (11/3), I think I understand.
NOTE: My source for this opinion is Ray Dalio's 9/19/2017 YouTube video entitled, "Promoting meritocracy, bitcoin, markets and his career" (link)
The 2008 crash was akin to a crash in the 1930's. In Dalio's "How The Economic Machine Works" video, this happened at the top of one of the curves (I don't know yet whether it was a short debt cycle or based on the long debt cycle). As a result of the 2008 crash, the Fed started printing money like crazy and buying assets (Fed can only buy assets to flood money into the market -- it cannot give money to individuals -- which as a result, created a gross distortion from those "upper class" who were invested in the market, but the rest of the economy presumably did not benefit from this flood of cash).
However, as far as the business cycle was concerned, the Fed's printing of money (and the lowering of interest rates to zero) helped to create a significantly less painful deleveraging. In other words, it lessened the effects of the crash and allowed a "soft landing" or a "beautiful deleveraging," as the video would put it. From there, the Fed continued to keep interest rates at near-zero, and it continued printing and pumping money into the economy. This created the stock market boom we have had from 2008-2017.
As a result of this, the Fed believes they have done their job and now they are looking to tighten monetary policy to get rid of the trillions in assets that they have pumped into the economy (e.g., via bonds, etc.). Dalio thinks this is a huge mistake because a majority of the citizenry (60% of the economy, or "not" the "1%'ers") HAVE NOT BENEFITED FROM THE FED'S PRINTING OF MONEY.
Dalio believes that if the Fed tightens monetary policy, while the economy for the 1%'ers will simply top off the debt cycle (ease off the growth in a healthy way so as not to create a spike in inflation), this will be a disaster for the rest of the US economy. In other words, if the Fed tightens monetary policy, this will create a sharp deleveraging and debt crisis for most Americans (60% of the economy) who will default on their loans and will not be able to live without free-flowing credit. This will cause a sharp crash, social discord, and WAR (who cares with whom; it'll be war and social upheaval).
In sum, Dalio has been going on talk shows and being vocal to the Fed to tell them to hold off tightening monetary policy. Keep the credit flowing, keep the loans flowing. Don't kill the economy by thinking they could tighten monetary policy. Things are not that great for the majority of Americans to think that they could increase interest rates and believe that won't have unintended consequences.
Taking this logic one step further, there is both good news and bad news from Dalio's messages. You cannot discount that most of America has not yet recovered from the 2008 deleveraging. This means that if the Fed continues to keep a loose monetary policy (keeping the credit flowing and perhaps even continuing to print cash or do whatever they would do to counter the bad economy for 60% of Americans, this means that there is still much growth to experience in the markets. On the flip side, continue to pump money into the market, and we'll create a financial bubble yet again. Perhaps this is why Dalio has said that he sees strong instability in the bond markets over the next 5-10 years (meaning, there is so much money pumped into the bond markets that they are overinflated).
What I do not understand yet, though, is if bonds yields are at historic lows, and if bonds have significant downside risk, what asset class(es) would one invest in to counter a sharp decline in stock prices if the Fed tightens monetary policy (this could cause a significant shrinking of the bond market).
Posts
