Ray Dalio, the founder and co-chief investment officer of Bridgewater Associates — the world’s largest hedge fund expressed his view on next financial crisis and recession in result of that. Among the financial analysts and historians, 1930 is term as era of Great depression. Dalio outlined what he believed would be the upcoming scenario to destabilize the world’s economy while drew parallels between today’s financial situation and that of the 1930s.
Dalio has creditable history when it comes to predicting financial trends. He repeatedly cried on the “mounting credit collapse” more than a decade ago, that triggered the world’s worst financial situation in the history. He also wrote a book on financial crises and how we can predict the upcoming recession. So when he has something to say on the future of investments, every person concerned to the market listen.
His new book discusses every bit of the credit crisis throughout history. He laid out his scenario for how the current financial cycle would effect and end. According to him, we have entered into the complex part of the cycle in which central banks are gradually removing the subsidy that has helped for economic revival by tightening their purse strings.
He predict for the next recession. He blame restrictive monetary conditions for the next recession. He says, We’re about in the seventh inning of a nine-inning game. We’re in the later part of the cycle, the part of cycle in which monetary policy is tightening and there’s not much capacity to squeeze out of the economy. As interest rates tend to rise, if they rise faster than is discounted in the curve, it can hurt asset prices. And asset prices are fairly fully priced at this level of interest rates. At some point, we’re going to have a downturn because that’s why we have recessions. Nobody ever gets it perfectly.
Investors may know that a downturn is coming but it’s not realistic to accurately time such an event. Even Jeremy Grantham, financial market legend comment that timing markets can be a fool’s errand. So while Dalio is also hesitant to give an exact year for financial disaster. He estimate around two years for such a downturn. He further add, “I think it’s maybe in two years.”
Dalio thinks that now and in the past, the lowering of interest rates to minimum range has created a wealth divide. It happens because the rich people are more exposed to financial assets which have historically gotten the biggest boost from such monetary conditions. He added that conditions to the 1930s were quite similar.
“It’s caused populism, because that process creates a gap between the rich and the poor,” Dalio told Blodget. “Right now, the top one-tenth of 1% of the population’s net worth is equal, about, to the bottom 90% combined. That’s very similar to the late ’30s when we had that stimulation. Doesn’t mean that the same outcomes have to happen,” he continued. “But it does mean that I think we have to be alerted to the fact that, going forward, in a downturn, monetary policy will not be able to be as effective as it was last time, so we have to be cautious.”