Ray Dalio never misses an opportunity to tell a room full of absurdly rich people how their unchecked greed and unwillingness to lift their heel from the throat of the poor could usher in a global revolution.
And what better venue for this than the IMF’s annual meeting in Washington?
Oddly enough, Dalio holds back on the Greta Thunberg-style chiding of his audience (fortunately for them, he has no childhood left to ruin), and instead touches how the US and Chin’s efforts to battle the post-crisis slowdown continue to impact the global economy and the economies and their respective spheres of influence.
Once again, Dalio presents his views within the framework of his ‘1937’ theory: That is, that there are a number of factors that make the modern investing environment similar to that of the 1930s. Once again there is an emergent power (China) rising up to take on the existing hegemon (the US). Risk assets have reached bubble-level valuations thanks to a flood of easy credit.
While many economists in the US continue to warn that the slowdown abroad and its ramifications for the US, Dalio sees it the other way around: As the business cycle peaks, “you have this sag,” Dalio explains, and that emanates out to impact all of the US’s economic allies, just like it does to China’s.
“And as Ben and I–we talk about these things regularly. Like we said there are four kinds of war–as Ben said and we agree: there’s a trade war, there’s a technology war, there’s a currency capital war and there is a geopolitical war. In other words – so that’s a phenomenon that’s happening at the same time. So internally we have a lot more conflict. So now if you play that out, you say this cycle is not — this is the best that we get. This moment. We are at the best the cycle is not going to continue forever — the expansion. you have this sag, then you have elections and you have politics which becomes greater extremity. And so on monetary policy it’s not going to be a so effective. Imagine if you had a downturn and you have it not as effective monetary policy. Then there has to be coordination. So how do you get coordination in this kind of political environment? You have to have a coordination between fiscal and monetary policy to be able to do something. And you can and then you have to have political coordination between the various factors to make decisions of what policy should be. So, I think that that’s the landscape broadly speaking in the world and we are in that kind of self-reinforcing sag. Because as one country — as China slows and United States slows and they all have their headwinds that makes it not as good for the others who deal with those cuts. So that look that’s what the environment looks like to me.”
Last we heard from him, Dalio had appeared to ease up on his dour economic forecasts by declaring that he saw only 40% chance of a recession in the US over the coming year, a rosy forecast that many (including us) joked was inspired by a visit to Burning Man. He still apparently believes that China is a safer bet than the US right now.
Suddenly, one of the other panelists raised another topic and took the discussion in a different direction – one which Dalio was blithe to explore: the surge in corporate credit since the crisis. Instead, Dalio advised investors to avoid stocks and corporate credit and stick with gold during the “big sag” as the decade of easy credit has left corporate balance sheets in a dangerously levered state.
I — let me describe the corporate, okay? What’s happened is corporate balance sheets for a variety of reasons have borrowed a lot of money. As interest rates went down a lot of money’s available and the return on equity was higher than the return — the cost of funds. There has been a lot of buying leveraging up. And there’s been a market developing, like in the form of leveraged loan market in which essentially you can borrow money with hardly any interest rate and almost the promise that you will never have to pay back principal because you’ll keep rolling it over and over and over. And they’re doing that because of a spread. So the notion is like you can borrow the money and if that you don’t have to roll over the principal, you don’t have any interest, you don’t have much in the way of debt service payments. So now you look at that and you say that’s pretty wild. That’s pretty crazy. And that is — there were elements of that existing and of course. But there’s the Central Bank on that who will sort of take care of all that and because they’ll provide the money and no and so we have and then we have the negative interest rate environment and so those extremities that we’re reaching are not such that you’re as likely to have a debt crisis in terms of I look at the debt service payments. But you have a lot of — you’ve limited, you’ve reached the limits almost of that being able to happen. And then you have those obligations so that creates this big sag — then it’s likely to create a big bust.
Watch the clip of Dalio speaking below: