Ray Dalio Sees “Great Sag” Ahead for Market
Ray Dalio, founder of the world’s biggest hedge fund, is particularly well known for his market insights and predicted the 2008 crash. He sees some rough times ahead now.
No matter how prosperous things are, there are always people preaching gloom and doom, and they are out there in force these days. Our current bull market has been going on for over a decade now and that fact alone will cause some people to be pessimistic, thinking that the end must be near based upon the law of averages.
While we may look upon the past and view the way that prior bull markets have ended, each situation is different and the current one is especially so. Whenever we look to compare things with the past, and especially with things like the average length of bull markets or business cycles, we really can’t find a lot of relevance other than to observe that this one ending is certainly possible.
In seeking to predict the timing of this though, the length of time that it has been going on actually may be seen to be lending support to it continuing, not ending, provided that the conditions behind it remain stable enough.
The only accurate way to make these predictions is to look to refine what we are comparing enough and then look to predict these things individually, things like macroeconomic data that we may visit the past with and see how we fared before. This is hard to do though because there are so many variables out there and we need to be careful not to overstate things, such as people did with the worry over inverted yield curves.
With regard to the stock market, we know that we’re benefiting considerably from the manner in which we accumulate stock positions overall. The reason why stocks go up over time isn’t so much due to economic growth, as it is much more a matter of investment growth, and we certainly have upped our game with the way that we save for retirement these days.
People don’t really save that much overall, but many people still save a decent amount for their retirement, by being basically forced into doing this by default. While company pensions once dominated the retirement savings scene, individual retirement accounts such as IRAs and 401(k)s now get the lion’s share of it, forcing people to save or retire in squalor.
This isn’t going to be going away, regardless of what happens, although our ability to save will depend on economic conditions to some degree. We could counter some of this at least by just digging deeper, spending less on other things to replace the shortfall, but stock prices aren’t just governed by inflows and beliefs play an even bigger role.
A good example of this would be the way that the stock market reacts to interest rates. If the Fed puts the rate up, this usually means that the economy is performing too well, and while rate increases do affect business to some degree, it doesn’t produce an effect anywhere near what the stock market prices in, where whatever concerns we have become amplified.
We need to realize this, otherwise we won’t be measuring the risk of a pullback properly, perhaps thinking that a certain circumstance may only produce modestly bad effects. This may be true, but the market usually overreacts to these things pretty significantly.
When the Mood of the Market Sours, This Serves to Amplify Whatever Caused It
A great example of this would be to compare the fourth quarter of 2018 with the first quarter of 2019. These quarters were strikingly similar as far as the fundamentals go, with the same Fed rate as well as the same macroeconomic environment. One quarter lost 20% and the other gained almost that much.
The only thing that distinguished these two very different quarters for the stock market was what we can call investor sentiment, where investors were in a bleak mood during the losing quarter and were on a better one once the new year hit.
There is also the effect of momentum, and when prices are declining, they are more likely to continue to do so for a while, and if they are climbing, they are also more prone to do more of it.
We might look upon the market and think that everything looks pretty good right now, but there is one thing that is looming, starting in 2020, and that is the strong possibility that we’ll have a Democratic president who will be keen on making changes that will reverse our bullish course.
It is not that the economy and the market always does poorly with a Democrat in the White House, but Republicans in general tend to be more friendly to the economy due to their making it more of a priority. An example would be with President Trump’s corporate tax cuts which stimulated the economy, tax cuts which all of the leading Democratic candidates for 2020 want to cut back on or do away with.
Hedge fund guru Ray Dalio has been predicting a greater populist movement in United States politics for a while now, and we are really seeing this prediction blossom with the popularity of Elizabeth Warren and Bernie Sanders in the race.
Sanders already put a scare into Hilary Clinton last time around, and while he’s not in the top 2 so far this year, Warren sure is, and looks like the front runner right now.
In spite of several of Warren’s planks being unrealistically extreme, her getting elected would be a disaster for the economy and the stock market, as she would do everything in her power to look to sabotage both. On the scale between Adam Smith and Karl Marx, she clearly sits much closer to Marx, the father of communism, and has much disdain for Smith, considered the father of the market economy.
Warren isn’t even close to being a communist, but she’s far closer than anyone that has ever been in this position before, with a good to very good chance of becoming president right now. At one point, not that long ago, her winning the presidency was a long shot, but that growth in populism that Dalio has been talking about has really taken off since.
Raising Taxes Not Only Punishes the Wealthy, This Punishes Everyone
Dalio spoke again about this at the IMF conference that is underway, and sees this growth as a result of what many perceive to be inequality in the distribution of wealth. The nature of capitalism requires that those with capital grow it, and the percentage of people that hold most of this capital is a very small one.
Dalio cites the fact that the top half percent of people have more wealth than the bottom 90%, and this does rile up a lot of people. We may even agree that we should do more to promote a wider distribution, but the problem is that coming up with a solution that actually improves things overall rather than making things worse is a lot more challenging than it may appear.
If we imagine a situation where one person owns a company and employs 1000, and has more wealth than the 1000 put together, or even many times their collective wealth, we can’t just try to make this rich owner give a lot of it up, or even give up very much of it. If we overdo this, and it doesn’t take that much to overdo it, then the business will suffer, and many of those who had no wealth but at least earned enough income from this arrangement to live comfortably will suffer through lower wages or even losing their jobs.
The workers usually don’t understand the way this all works very well and resent the owner and want the government to close the gap between themselves and the baron. This is likely what is behind the populist movement that Dalio has feared, and we are clearly seeing what the ramifications of this collective misunderstanding may amount to when we look at the platforms of Warren and Sanders, and even to a lesser extent at Biden’s.
Even Biden will be seeking to constrict our current level of prosperity, and for one thing is seeking to reduce Trump’s cuts, at a time where our economy is in a rather precarious position with the Fed already bailing water. It won’t take all that much of a bigger hole in our ship to have it actually sinking, and especially won’t fare very well with Warren looking to torpedo it from several different angles.
While some are concerned about the corporate debt load out there and the potential for this to bring down the house like it did in 2008, Dalio understands that this really isn’t much of a threat right now, at least while interest rates remain low, and there really isn’t much of a risk that they will spike enough anytime soon.
He is concerned about geopolitical tensions though, and this is indeed what we need to be worried about, and this includes geopolitical tensions in the United States. The wealth gap was a springboard for a lot of protests during the financial crisis of a decade ago, and this time they won’t be speaking from tents, they will be doing so at the ballot box, where this anger has much more of an opportunity to produce change.
Dalio believes that the coming election will be a battle between the capitalists and the socialists, with the stock market hanging in the balance. Unless Trump is re-elected, which at this point appears to be unlikely, Dalio believes that the market won’t crash but will take a serious hit, a “great sag” as he puts it.
If Trump loses, we’re virtually assured of a good-sized sag. Depending on who the Democrats send in to battle him, we could see a modestly sized sag or a pretty big one indeed.
Someone needs to step up on the side of explaining capitalism better, and we only wish that people like Ray Dalio, who do understand it, would do more. In the upcoming battle between capitalism and socialism, if we don’t understand capitalism that well and don’t understand the negatives of socialism either, and we make the wrong choice here, we will have to live with the aftermath, which doesn’t just affect the top 1%, it affects the other 99% even more.
The very wealthy can easily endure whatever happens but the rest of us are not in such a good position. During the last crisis, everyone got hurt, and the wealthy got hurt more, but those with little or no wealth, the ones banging their drum now, experienced most of the actual pain, and are now clamoring for more. As the old saying goes, be careful what you wish for.
Editor, MarketReview.com
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