At this point in time, it was almost time for an economic recession to break out sometime before the end of 2020. Ray Dalio is one of those who have resigned to this fate.
Founder and Co-Chief Investment Officer of Bridgewater Associates – the world's largest hedge fund – said this recently at a panel in Davos.
In recent months, it has been a favorite area for any follower of Dalios Punditry. He believes that we are in the seventh or eighth inning of a short-term debt cycle that needs to be dealt with painfully.
But it is external forces that disturb Dalio. The drivers that go beyond what we would normally associate with a recession. He specifically refers to political and social issues that currently complicate matters in the US and abroad.
Dalio argues that when it's time for the Federal Reserve to intervene and loosen conditions again ̵
"There will be a significant slowdown in the US during this period," Dalio said Tuesday during a podium discussion hosted by Maria Bartiromo of Fox Business. "The bigger problems are really related to politics and related economic policies."
Dalio's current view is based on the immense debt burden that US companies have accumulated over the past decade. It's an invoice that will pay off sooner than later with rising borrowing costs, and Dalio does not expect it to be beautiful.
If conditions move south, this could be accompanied by diverging political developments and intensifying market struggles. In this context, Dalio referred to the 70% income tax on the recently superpowered by Alexandria Ocasio-Cortez super rich, although he did not mention the politician by name. He simply emphasized it as an example of something that could spark social conflict and serve as a headwind for companies.
When it's time for the US to overcome the next economic gap, Dalio warns that the nation, compared to history at least, could be severe in terms of interest rate hikes. In fact, the whole exam reminds him of the time around the world economic crisis.
"We have monetary policy restrictions, which is our most valuable instrument," said Dalio. "At the same time, we have a stronger political and social antagonism, which is why I am most worried about the next downturn in the economy."
He continued, "There are many parallels between the late 1930s and from 1929 to 1932 we had a debt crisis – interest rates dropped to zero, then a lot of money was printed and money bought brought their prices higher Polarity, Populism and Antagonism. "
Aside from the conditions under which the next major economic downturn will occur in the US, Dalio is also focusing heavily on China and how it will cope with the end of its own cycle.
Put simply, Dalio believes that the emerging nation will perform well in the long run, especially as its monetary policy is Chinese yuan.
"The debt is in their currency," said Dalio. "You can handle this cycle, but there is a weakening there."
But a short-term debt crisis will continue, he argues. If you want to do business in China, the enormous debt burden will eventually increase, even if it is ultimately resolved.
"If you take a 2-, 3-, 4-year perspective, this will be a problem," he said. "I think the capital flows and the nature of this balance of payments issue will be a factor in the coming years, but if you have a debt reduction, it will make the country healthier."