Updated December 16, 2024. Ray Dalio is an extremely successful American billionaire hedge fund manager and philanthropist. Nonetheless, in a recent article Ray Dalio predicts end of long-term debt cycle as we have known it. This is the logic that Dalio uses to make his case.
Comparing 2020 To The Great Depression
The economy of 2020 is producing a lot of debt by the government. Also the economy of 1930 to 1945 was very similar. In 2020 we were seeing zero interest rates. In 2020, the Federal Reserve was buying the Treasury debt and getting that money to mostly Americans in some imperfect, but remarkably large way. The Europeans were doing the same with the European banks that are smaller banks than the U.S. banks. The World lives with about 70 percent US dollars and only a small percentage of Euros.
Problem Of Limited Number Of Banks
But the problem is that there aren’t many banks around the world. Consequently, the rest of the world is going to have gap holes that won’t be filled. The result is that the American printing of money and the borrowing will leave us with a lot of debt and monetization. But who will pay this?
Massive Debt On Our Hands
Ray Dalio thinks that we are in a New World that is most similar to the 1932 to 1945 world. We have a lot of debt on our hands, but Dalio believes that unfortunately a lot of the world will not get that money in credit.
In 2020, the debt figure is sitting at about $25.3 trillion dollars. That’s about 107% of the GDP. Dalio asks the question: with all the debt on our hands and with the printing press running, who at the end of the day will pay the bill?
Two years later in April 2022, the public debt of the United States was around 30.37 trillion dollars. Obviously the debate on how to handle the US debt is causing turmoil and friction between the Democrats and the Republicans.
Benefit From Inflation
Inflation is the secret way that the governments and central bankers can wipe out hundreds of billions of dollars of debt off the balance sheet very quickly. The US government’s debt is owed in US dollars so we can inflate our currency to pay off the debt.
We should align our interest with the two most powerful forces the human race has ever known: governments and central banks. We need to align our business plans so that we are on the same plan that they are on. To learn how to align your business plans, read Profit From Substantial Inflation Ahead.
Four Economic Driving Factors
Ray Dalio explains that the economy template that is being used has been used for the last one thousand years. Dalio predicts end of long-term debt cycle as we have known it. Dalio sees four factors that are the driving forces of our economy and our lifestyle.
Productivity
The first and the most powerful is productivity. Productivity comes from people learning and investing and doing things well. Productivity grows slowly at about 1 or 2 or 3% a year. In addition productivity is not volatile because knowledge is involved, but it grows. That raises our living standards over a period of time.
Short-Term Debt Cycle
Next there’s a short-term debt cycle. The short-term debt cycle is made up of recessions and expansions. The booms and recessions last about eight to ten years.
Long-Term Debt Cycle
Then there is a long-term debt cycle. The long-term debt cycle which goes on about once every 50 or 75 years. The long-term debt cycle is when you begin a new type of money and a new type of credit. This happened in 1945 when the New World order at the end of World War II with the establishment of the Bretton Woods monetary system. The Bretton Woods system defined all currencies in relation to the US dollar. The US currency was now effectively the world currency and the standard to which every other currency was pegged. Currently 70% of the money and credit that exists in the economy is running by dollars and what you have traditionally is a breakdown.
Interior & Exterior Politics
The fourth influence on the economy is largely how we deal with each other. This includes interior and exterior politics. The interior politics is how do you deal with the wealth gap? How do you deal with the value gap? Do you have a common mission? Do we have a American dream that we can agree on and that we are pursuing together? Or do we fight over wealth?
History Of Mankind & Revolutions
Dalio says that when we look at the history of mankind, what we see are revolutions. When we look at these revolutions, some revolutions are peaceful and sometimes they’re disruptive. But on a granular level, there is a wealth shift that needs to take place.
Examples are when Roosevelt shifted policies and changed taxes. In other countries, there was a turning over of democracy when Hilter came to power because of that gap. There are also external politics. Here we are look at the power between countries. A good example is a rising power challenging an existing power which results in a risk of war.
Possible End Of Short-Term Debt Cycle
Dalio says that right now, at least in the short-term debt cycle, it appears that we are coming to the end of that cycle. The chart below of the Dow Jones history gives a good indicator for the entire USA markets. As the graph shows, it has been 12 years with a bull market.
Big Possibility Of The End Of Long-Term Debt Cycle
If we look at the Dow long-term debt cycle of the United states that goes back 70 to 80 years, we get a better look at the long-term debt cycle which averages 50 to 75 years. Dalio points out that the United States has been exactly 75 years since the start of this current long-term debt cycle that we are in that started in 1945. If you look at the graph below you can see that things might be about to change. This is the reason why Ray Dalio predicts end of long-term debt cycle.
Where Are We Now?
Clearly, Ray Dalio predicts end of long-term debt cycle. The big question is this: are we in a part of the long-term debt cycle that is very similar to the 1930 to 1945? If we are, watch out. The ingredients are exactly the same as now with massive debt, low interest rates and the vast printing of money. To find out even more, watch this YouTube video: Ray Dalio: This Crisis Will Be Bigger Than The 2008 Recession.
The bad news is that this period of time from 1930 to 1945 wasn’t exactly the most fun or profitable period to be in for investors. As we recall this was the time of The Great Depression and the markets were quite volatile.
So now the question of what to do with investments during this time? Dalio says that the worst thing that one can do is think that they can time the markets. So what the individual investor needs to do is know how to diversify well and in a balanced way.
What Investments To Make?
Ray Dalio predicts end of long-term debt cycle as we have known it. The question is, what stock market investments would be correct? For years Ray Dalio has created something he calls the All Weather Portfolio. I invite you to read the specific details of Ray Dalio’s All Weather Portfolio.
Investing on a regular basis rather than trying to time a lump sum investment can help you become a more disciplined investor. You’re forced to invest regardless of whether the price is high or low. This takes some of the emotion out of investing and avoids any delays in putting your money to work.
Passive income is necessary for creating your retirement income. Most financial planners advise saving between 10% and 15% of your annual income. Please read my blog on How To Invest Wisely In The Stock Market. This article has my top four passive income strategies for stocks.
My Prediction Of The Markets
In my opinion the stock markets could fall further. I base my opinion on the large number of newly unemployed people that just came out for March 2020 and the fact that the consumer spending in the US in Q1 decreased. The 2019 Q4 consumer spending was $13,414 billion (USD). In the 1st quarter of 2020 it declined by 2% with wages and salaries, which is the largest part of incomes. Please look at the chart below. This not a good sign, especially when you consider that January and most of February of 2020 were good months. With most people self isolating in the homes, 2020 Q2 has the probability to be even worse than Q1.
Update: United States Consumer Spending 2020-2024
September 2024. Consumer Spending in the United States increased to 16106.40 USD Billion in the third quarter of 2024 from 15967.30 USD Billion in the second quarter of 2024. Consumer Spending in the United States averaged 6600.59 USD Billion from 1947 until 2024, reaching an all time high of 16106.40 USD Billion in the third quarter of 2024 and a record low of 1351.40 USD Billion in the first quarter of 1947.
Updated September 18, 2024. Finally, the Federal Reserve lowered its key interest rate by a hefty half percentage point Wednesday, moving ahead with its first rate cut in four years and cheering markets that expected an emphatic move amid a softening jobs picture.
December 9, 2023. US employers added 199,000 workers to their payrolls last month in November, the Bureau of Labor Statistics said yesterday. The unemployment rate unexpectedly ticked down for the first time since July, to 3.7%. But the economy looks like it is still too good for Powell. The upbeat numbers make it less likely that the Fed will lower interest rates in early 2024.
December 1, 2023. The Wall Street Journal believes that the Fed’s interest rate hikes are probably over, even though officials are reluctant to say so. The Fed’s Jerome Powell warns against prematurely declaring victory on inflation.
May 3, 2023. The Fed raised the interest rate 0.25% today for the 10th consecutive time. This will move the target range to 5% to 5.25%, which is a 16-year high to try to curb inflation.
April 26, 2023: First Republic Bank cast a shadow over the stock market yesterday. The regional lender, which experienced the unpleasantness of losing over $100 billion in deposit outflows last quarter, crashed to a record low. But the reality is that First Republic’s condition is so bad that they could potentially ask the US government to intervene.
Updated March 22, 2023: Awaiting the Fed’s interest rate decision. Many expect a smaller 25 basis point hike.
In the afternoon, Powell announced the decision of the monetary policy meeting. The Federal Reserve raised the interest rates by 25 basis points. This move brings the benchmark funds rate to a range of 4.75% to 5%. However, Fed Chair Powell indicates that future hikes are less likely in the wake of the recent bank failures.
Updated March 21, 2023:
This is the first day of a two monetary policy meeting for the Federal Reserve. At the closing stock market bell today the major averages climbed as the the U.S. Treasury Secretary made reassuring comments about shoring up the banking system. The Dow finished up close to 1%, while the S&P 500 and Nasdaq rose slightly more than 1%.
Many are expecting the FOMC to ratchet up its key interest rate by 50 basis points because the economy appeared to be surprisingly robust. But with three U.S. banks collapsing, the Fed policymakers may have to rethink their expectations. It seems that even more uncertainty may lie ahead.
Updated February 1, 2023:
The Federal Reserve made the decision to hike the interest rate by 0.25 percentage points in order to tame inflation. Powell said that if inflation follows the course they have predicted, the Fed will push the key rate to 5 to 5.25% and then pause. This means that there will be two more quarter hikes in March and May.
Updated November 10, 2022:
CPI for October 2022 was 7.7%, but less than the 7.9% that analysts had expected. It seems that inflation has more or less flatlined at an abnormally high level since spring 2022. As a result, the stock market rockets higher Thursday morning. Investors are hoping that the Federal Reserve may slow the pace of interest rates increases that have weighed on the market.
Updated November 2, 2022:
The Federal Reserve raised interest rates 75 basis points on Wednesday, bringing its federal funds rate target to a range of 3.75% to 4%.
U.S. employers added 261,000 jobs in October, down from September’s upwardly revised gain of 315,000, but above the 200,000 economists had expected, as jobs in health care, technical services, and manufacturing rose. The unemployment rate also climbed, edging up to 3.7% in October from 3.5% in September.
Updated September 14, 2022:
After a report for August 2022 which CPI came in higher than anticipated yesterday, the U.S. markets did a nosedive. The Dow and S&P 500 sank about 3% and the Nasdaq went down 4%. Core inflation rose to 0.6% in August, up from July’s 0.3% gain. If you look at the annual basis for core inflation, it accelerated to 6.3%, up for 5.9%. In conclusion, a higher than expected inflation rate will likely strengthen the Fed for more aggressive interest rate hikes. The FOMC will have a meeting on September 20-21, 2022 and will likely vote on a 75 bps rate hike.
Updated June 22, 2022:
As the chart below shows, consumer spending in the United States increased to $13,924.80 billion (USD) in the first quarter of 2022 from $13,818.40 billion (USD) in the fourth quarter of 2021.
Dalio believes are are in a New World with massive debt on our hands. I have to agree that Ray Dalio predicts of end of long-term debt cycle appears to be real.
Psychology Of A Market Cycle
The other chart I would like to post is a chart of the psychology of a market cycle. As we all know, the stock market was on a bull tear until late February 2020. Then it crashed. Then there was a bounce all the way up to 61.8% Fib level.
On the chart below, you can see the big bounce up to where it says “Return to normal.” I am expecting stocks to go back down and to at least to retest the lows of March 23, 2020.
Please stay safe and stay isolated as much as possible during and after the COVID-19. I will see you for my next blog. Best wishes to all….
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Last Updated on December 16, 2024 by Financial Goodness
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