The U.S. economy and stock market has been performing very well to date, and it seems difficult to believe anybody who thinks that this speeding train will slow down anytime soon.
But suppose that “anybody” is Ray Dalio, founder and former manager of Bridgewater Associates – could it be worth considering? His merit comes from Bridgewater’s growth from Dalio’s apartment into a hedge fund monster with an AUM of $150 billion, as well as his unique view on the world’s economy.
His view on the economy allowed Bridgewater to anticipate – and profit – from the 2008 financial crisis (or, as Dalio calls it, a “deleveraging”). Although he doesn’t openly anticipate a crisis coming, he does see a few conditions similar to the last crisis, such as an accumulation of debt in excess of assets and income.
Leverage at this rate will continue growing the markets while making the economy increasingly vulnerable to higher interest rates. Dalio believes this case will be similar to the end of the 1930s; not when the economy imploded, rather when the Federal Reserve tightened monetary policy and extended the depression.
The Federal Reserve is currently struggling to find a balance between two extremes. The first is the short-term need for higher interest rates to counter inflation, while the second is the long-term need for lower interest rates to work off the debt and maintain high asset prices.
In his best-selling book Principles: Work and Life, Dalio explains that “finance people see the world differently from the way economists do.” The views of “finance people” are typically derived from trading and industry experience rather than broader, more formal economics. Financial professionals tend to give more credence to financial factors such as debt, asset prices, interest rates, and cash flows, while economists consider employment and investment on a macroeconomic scale.
In context of America’s changing political landscape, Dalio states that less regulation, lower taxation, and lower volatility are driving stocks higher while increasing wealth and spending, but warns that this does not indicate higher long-term growth or sustained returns. He shares: “If we do have an economic downturn, I worry we will be at each other’s throats.”
“If we do have an economic downturn, I worry we will be at each other’s throats.”
Dalio’s greatest worry is that lower corporate taxes and higher stock prices do not change the status of the bottom 60% of households, who own little assets and are currently experiencing wage stagnation. These factors, coupled with expanding profit-margins in the short-term, might increase resentment and political polarization.