Reaction & Commentary
Largest hedge fund yet when Ray dalio talks the investing World listens and recently Ray appeared for an exclusive 25-minute interview on CNBC where he gave us his updated thoughts on where he thinks the economy stands right now where we are in these short and long term debt Cycles as well as where he
Believes markets are headed across the next few years so with inflation running hot interest rates Rising the economy weakening and stock markets falling let’s firstly hear Raise opinion on exactly where we are along the economic cycle I mean these things happen over and over again we’re now in the 12th and a half
Psycho you know these Cycles you know how the Cycles work your 12 and a half Cycles since 1945 1945 was the New World Order you know new monetary system and you know what happens so let me take you through it quickly you get a funky economy weakness and so on so what we
Had of course in 2020 with the combination of covid and then also the move from the right to the left it was a distribution of wealth and so how did you do that government had to send out a bunch of checks and the Federal Reserve where’d the government get the money
From the Federal Reserve lent it so we have an imbalance and of course that put a lot of money in the system you’ve got the demand you’ve got the cycle classic cycle right stimulation credit becomes debt then you have inflation then you have a tightness monetary policy and so
Where are we so we now in a classic spot where we’ve got a relatively High real interest rate real interest rates went from a minus 175 basis points to plus right 175 basis points right you’ve got a cash rate that’s relatively High cash used to be trash now cash is relatively attractive
And if cash is relatively attractive well you know the boom times are over so it’s pretty clear races is well past the top of the short-term debt cycle and now we’re experiencing the contraction the last 10 years before covert were obviously a boom time interest rates
Were low money was cheap to access and there was a lot of optimism and economic growth but of course in 2020 we got a big shock to the economy America saw internal political conflict a year later and switched political allegiances the Democrats took power the Federal Reserve
Printed a lot of money to combat the economic weakness this drove growth increased demand but also increased inflation and now we’ve pushed the good times as far as they can go we can no longer push the economic stimulus button so as it goes with all Cycles we now
Face the contraction you have the classic movement of course as rates go up and money becomes tight you lose the parts of the economy the parts of the market that are the bubble parts that needed the cash flow right right so you see the tech stocks come down all of
That come down you see private Equity you see Venture Capital because they needed cash all of that comes down so we’ve hit the top of the short term cycle where everything gets a bit bubbly and now we’re starting to slide down the other side of the slope and it does
Still seem like we’re pretty early in the process because as Ray notes what we’ve really seen so far is just the bubble areas truly suffering the FED pushed interest rates up and as investors started to feel the pressure the money came out of all the speculative assets cryptocurrency is the
Classic example all the speculative tech stocks that weren’t producing any cash flow have now crashed private Equity that’s very reliant on debt Venture Capital all of these areas that got a little bit greedy over the past five years are now Falling Away under the pressure of tighter monetary policy so
That’s the early stage of the contraction but as Rey is about to explain it looks as though things are starting to get a little bit nastier so you could see which sectors are going down you can see which stocks are going down right you see the tech stocks you
See the you see real estate going down residential real estate goes down and we’re having something close to a stag let’s say a stag pleasure meaning maybe three and a half I think you’re going to see inflation come down to this and then because of the way it’s calculated it’ll
Go up a bit and so you see that kind of in a an environment with something close to maybe a one percent growth rate right something like that right right trips over his words a little bit here but essentially what he’s seeing happen is a stagflation type environment and
Remember stagflation is just a combination of economic stagnation and high inflation its economic weakness at the same time as high inflation and usually this doesn’t happen because usually inflation comes about as a result of a booming economy interest rates are low unemployment is low demand is up and business is booming workers
Start wanting more money for the same work and overall inflation starts to rise that’s usually how it goes the stagflation is an unusual economic scenario where inflation is high in an economy that’s struggling and unemployment is rising this is a particularly painful situation for those controlling monetary policy as actions
To control inflation like raising interest rates will only make a bad economic situation worse and that’s what Ray dalio is anticipating happening in the United States as he said he predicts inflation to not quite get back down to where the FED wants it maybe down to about 3.5 temporarily but will then rise
But at the same time he also sees the economic growth staying quite low as he said maybe about one percent annually so that’s Ray’s thoughts on the current situation now placed in the short-term debt cycle but on top of the short-term cycle we also have a long-term debt
Cycle that rises and falls about once every 75 years or thereabouts and while everyone is currently focused on the short-term debt cycle Ray also cautions that he is seeing problems emerge for that big long-term debt cycle but what’s also happening in that cycle is since 1945 is that we then have the
Accumulation of a lot of debt and money okay so we deal with things like the debt ceiling that’s the only matter does it matter how much debt we have and then you have a situation where there’s used to be a free market supply demand but now you’ve got the Federal Reserve who
Is now taking it buying it on the balance sheet so it’s not the supply demand so you’ve got that Dynamic very very classically going I don’t think people are paying enough attention to the big cycle they’re the short-term Cycles since World War II they’ve averaged about seven six or seven years
Plus or minus about three years that’s what we’re in a classic one of those but we keep building up the debt so as you’ve probably heard about in the news alongside short-term problems the US has also seen a tremendous pile up of its national debt due to economic chaos of
The pandemic and more specifically the lockdowns that stopped people from working the US government had to very quickly inject a lot of money into the economy to ensure people still had money this of course came in the form of stimulus checks but it also came in the form of major growth investment like
Infrastructure projects to create jobs but how did the government get all this money well they went further and further into debt by selling fresh government bonds to the FED who printed about four trillion dollars of some might say new money which then triggered the massive inflation we’re seeing today but the
Thing is because the US is still spending more than it earns and because the debt ceiling is already being hit so they can’t add fresh debt to replace the old judette there is now a non-zero possibility that they might default on their debt which would trigger the downslope of the long-term debt that
Cycle the US also faces the problem of reduced demand for their freshly printed bonds internationally which also adds to the issue long story short while there’s no crisis yet some wheels are in motion that can trigger the downslope of that long-term debt cycle so how does Ray see
This predicament but I think that this type of recession is not a bad recession it’s a lot less bad than I thought it would be because of the fact of How It’s Distributing and and shrinking that credit at the same time though we have a real issue for the United States debt in
The world because we’re selling all this debt you know if you look at wealth instead of GDP wealth is a much better indicator of things GDP is like looking at revenue on how much did you sell we have borrowed a lot of money okay and now we’re having a problem selling that
Money around the world right and it’s also happening that this political situation geopolitical situation is weakening the demand for U.S bonds I find it interesting that Ray is definitely surprised that the recession hasn’t quite been as bad as what he thought it was going to be but as we’re
Discussing before you can hear in his voice that some of these issues around the US national debt the current deficit the debt ceiling and the weakening demand for U.S bonds really do have him concerned for the future I think the big the biggest issue is that there’s
More spending and I would say there probably needs to be more spending than we have income and that’s a problem right governments run the same as your household or a business in that with two exceptions they can print money and they can tax right so then when you spend more than you earn
The question is and they’re going to spend more than they’re going to earn uh where are you going to get the money from are you going to get it from taxes and if you get it from taxes people fight because they don’t want to give up
Their money or are you going to get it from printing the money and so how do you achieve that balance because it’s do you spend less well it’s a tough environment to spend less you have to spend more on do on defense you have to spend more on rebuilding the green
Initiative is expensive I mean we could education is expensive and so on so there’s a dilemma that she is sitting in that we or we as a country are sitting in so um you know how do you solve that problem I think that um you know if you
Were to let’s say take the bigger picture there’s a lot of things that you can invest in invest in that will produce returns and I think for example I don’t think we invest nearly as much in in the basic things like great education and making sure that certain
Areas that do not have conditions that are substandard can conditions so to invest in those things that are going to produce productivity education is a good thing infrastructure is a good thing other things but it’s a it it this is part of a cycle a big cycle that has
Happened over and over and over again unfortunately the interviewer Cuts right off at this point but he’s absolutely right people like to throw stones and blame everything and everyone else around them but at the end of the day the problem the US faces is that it spends more than earns and it Rey’s
Opinion there’s not enough spending going towards fundamentally improving productivity such as investment in education and infrastructure which helps close that deficit and reverse it in the long run and this is very much the subject of Rey’s two big YouTube videos which I’ll leave linked down in the
Description if you’d like to learn more but long story short earning less than you spend is always a problem because it means that you have to keep borrowing and borrowing and borrowing until you get to where we are today where debts are astronomical and become unmanageable
But with that said I do have one more clip for you guys and this one is Ray dalio’s thoughts on where the stock market sits at the moment does he see it falling further where do you think the stock market is do you think that we
Have priced in what could be a you know a recession or what is a recession did we see the worst of it in October where are we right now in terms of value I think the markets as a whole look that they were obviously um I would say the interest rate changes
Were obviously a had to come the impact on the other markets had to come they have come they have been into the price so now you’re going to have probably a tightening or a tighter monetary policy than existed and that’s a net negative for the stock
Market but not in such a big number that it’s like a big bearish thing so when I look at the market as a whole I would say okay well now it seems closer to fairly price probably still a bit High given that whole picture so there you go
Because Ray still sees problems on the horizon he thinks that we’re still likely to see more pressure on the stock market in the years to come but overall guys they are Ray dalio’s updated thoughts on the US economy and what he thinks we need to do about it so do you
Agree with Ray definitely let me know your opinions down in the comments section below otherwise thanks very much for watching guys if you did enjoy this video please leave a like And subscribe to the channel if you’d like to see more if that was just for today thanks for
Watching see you guys in the next video
