Ray Dalio's Warning for the Economic Crisis and U.S. Recession

The biggest issue is that there's more spending than we have income, and that's a problem. So then the question is, where are you going to get the money from, right?

Dahlia is probably the world's most well-known macroeconomic investor, having started Bridgewater Associates in 1975 and over time building it into the world's largest hedge fund. Yet, when Ray Dalio talks, the investing world listens. Recently, Ray appeared for an exclusive 25-minute interview on CNBC, where he gave us his updated thoughts on where he thinks the economy stands right now, where we are in these short and long-term debt cycles, as well as where he believes markets are headed across the next few years.

With inflation running hot, interest rates rising, the economy weakening, and stock markets falling, let's firstly hear Ray's opinion on exactly where we are along the economic cycle.

"I mean these things happen over and over again. We're now in the 12th and a half cycle. You know how the cycles work—your 12 and a half cycles since 1945. 1945 was the New World Order, you know, new monetary system and you know what happens. So let me take you through it quickly."

"You get a funky economy, weakness, and so on, so what we had of course in 2020 with the combination of COVID and then also the move from the right to the left—it was a distribution of wealth. And so how did you do that? The government had to send out a bunch of checks. And the Federal Reserve—where'd the government get the money from? The Federal Reserve lent it. So we have an imbalance and of course that put a lot of money in the system."

"You've got the demand; you've got the cycle, classic cycle, right? Stimulation, credit becomes debt, then you have inflation, then you have a tightness monetary policy. And so where are we? So we now are in a classic spot where we've got a relatively high real interest rate. Real interest rates went from a minus 175 basis points to plus right, 175 basis points. Right? You've got a cash rate that's relatively high. Cash used to be trash; now cash is relatively attractive. And if cash is relatively attractive, well you know the boom times are over."

So, it's pretty clear Ray says we're well past the top of the short-term debt cycle and now we're experiencing the contraction.

"The last ten years before COVID were obviously a boom time. Interest rates were low, money was cheap to access, and there was a lot of optimism and economic growth. But of course, in 2020 we got a big shock to the economy. America saw internal political conflict a year later and switched political allegiances. The Democrats took power. The Federal Reserve printed a lot of money to combat the economic weakness. This drove growth, increased demand, but also increased inflation. And now we've pushed the good times as far as they can go. We can no longer push the economic stimulus button."

So as it goes with all cycles, we now face the contraction.

"You have the classic movement of course, as rates go up and money becomes tight. You lose the parts of the economy, the parts of the market that are the bubble parts that needed the cash flow, right? Right? So you see the tech stocks come down, all of that come down. You see private equity, you see venture capital—because they needed cash—all of that comes down. So we've hit the top of the short-term cycle where everything gets a bit bubbly and now we're starting to slide down the other side of the slope."

"It does still seem like we're pretty early in the process because, as Ray notes, what we've really seen so far is just the bubble areas truly suffering. The Fed pushed interest rates up, and as investors started to feel the pressure, the money came out of all the speculative assets. Cryptocurrency is the classic example. All the speculative tech stocks that weren't producing any cash flow have now crashed. Private equity that's very reliant on debt, venture capital—all of these areas that got a little bit greedy over the past five years are now falling away under the pressure of tighter monetary policy."

So that's the early stage of the contraction, but as Ray is about to explain it looks as though things are starting to get a little bit nastier.

"So you could see which sectors are going down. You can see which stocks are going down, right? You see the tech stocks; you see residential real estate going down. And we're having something close to a stag—let's say a stagflation, meaning maybe three and a half. I think you're going to see inflation come down to this, and then because of the way it's calculated it'll go up a bit. And so you see that kind of in an environment with something close to maybe a one percent growth rate, right? Something like that."

Ray trips over his words a little bit here, but essentially what he's seeing happen is a stagflation type environment. Remember, stagflation is just a combination of economic stagnation and high inflation. It's economic weakness at the same time as high inflation.

Usually, this doesn't happen because usually inflation comes about as a result of a booming economy—interest rates are low, unemployment is low, demand is up, and business is booming. Workers start wanting more money for the same work, and overall inflation starts to rise. That's usually how it goes. But stagflation is an unusual economic scenario where inflation is high in an economy that's struggling, and unemployment is rising.

This is a particularly painful situation for those controlling monetary policy, as actions to control inflation, like raising interest rates, will only make a bad economic situation worse. And that's what Ray Dalio is anticipating happening in the United States.

As he said, he predicts inflation to not quite get back down to where the Fed wants it—maybe down to about 3.5% temporarily—but will then rise. But at the same time, he also sees the economic growth staying quite low, as he said, maybe about one percent annually.

So that's Ray's thoughts on the current situation now placed in the short-term debt cycle. But on top of the short-term cycle, we also have a long-term debt cycle that rises and falls about once every 75 years or thereabouts.

While everyone is currently focused on the short-term debt cycle, Ray also cautions that he is seeing problems emerge for that big long-term debt cycle.

But what's also happening in that cycle is, since 1945, we then have the accumulation of a lot of debt and money. Okay, so we deal with things like the debt ceiling—that's the only matter. Does it matter how much debt we have? And then you have a situation where there used to be a free market supply and demand, but now you've got the Federal Reserve who is now taking it; buying it on the balance sheet.

So it's not the supply demand. So you've got that dynamic, very, very classically going.

"I don't think people are paying enough attention to the big cycle. They're the short-term cycles since World War II. They've averaged about six or seven years, plus or minus about three years. That's what we're in—a classic one of those. But we keep building up the debt."

As you've probably heard about in the news, alongside short-term problems, the US has also seen a tremendous pile-up of its national debt due to the economic chaos of the pandemic, and more specifically, the lockdowns that stopped people from working.

The US government had to very quickly inject a lot of money into the economy to ensure people still had money. This, of course, came in the form of stimulus checks, but it also came in the form of major growth investments, like infrastructure projects to create jobs.

But how did the government get all this money? Well, they went further and further into debt by selling fresh government bonds to the Fed, who printed about four trillion dollars of what some might say is new money, which then triggered the massive inflation we're seeing today.

But the thing is because the US is still spending more than it earns, and because the debt ceiling is already being hit, so they can't add fresh debt to replace the old debt, there is now a non-zero possibility that they might default on their debt, which would trigger the downslope of the long-term debt cycle.

The US also faces the problem of reduced demand for their freshly printed bonds internationally, which also adds to the issue. Long story short, while there's no crisis yet, some wheels are in motion that can trigger the downslope of that long-term debt cycle.

So how does Ray see this predicament?

"But I think that this type of recession is not a bad recession. It's a lot less bad than I thought it would be because of the fact of how it's distributing and shrinking that credit. At the same time, though we have a real issue for the United States—debt in the world, because we're selling all this debt. You know, if you look at wealth instead of GDP, wealth is a much better indicator of things. GDP is like looking at revenue—on how much did you sell? We have borrowed a lot of money, okay? And now we're having a problem selling that money around the world, right? And it's also happening that this political situation, the geopolitical situation, is weakening the demand for U.S bonds."

I find it interesting that Ray is definitely surprised that the recession hasn't quite been as bad as what he thought it was going to be, but as we're discussing before, you can hear in his voice that some of these issues around the US national debt, the current deficit, the debt ceiling, and the weakening demand for U.S bonds really do have him concerned for the future.

"I think the big—the biggest issue is that there's more spending, and I would say there probably needs to be more spending than we have income, and that's a problem. Right? Governments run the same as your household or a business in that—with two exceptions—they can print money and they can tax. Right? So then when you spend more than you earn, the question is, and they're going to spend more than they're going to earn, where are you going to get the money from? Are you going to get it from taxes? And if you get it from taxes, people fight because they don't want to give up their money. Or are you going to get it from printing the money?"

"And so how do you achieve that balance? Because it's—do you spend less? Well, it's a tough environment to spend less. You have to spend more on defense, you have to spend more on rebuilding. The green initiative is expensive. I mean, education is expensive, and so on. So there's a dilemma that she is sitting in, that we—or we as a country are sitting in. So, you know, how do you solve that problem?"

"I think that, um, you know, if you were to, let's say, take the bigger picture, there's a lot of things that you can invest in that will produce returns. And I think, for example, I don't think we invest nearly as much in the basic things like great education and making sure that certain areas that do not have conditions that are substandard can conditions. So to invest in those things that are going to produce productivity, education is a good thing, infrastructure is a good thing, other things—but it's a—this is part of a cycle, a big cycle that has happened over and over and over again."

Unfortunately, the interviewer cuts right off at this point, but he's absolutely right. People like to throw stones and blame everything and everyone else around them, but at the end of the day, the problem the US faces is that it spends more than it earns.

In Ray's opinion, there's not enough spending going towards fundamentally improving productivity, such as investment in education and infrastructure, which helps close that deficit and reverse it in the long run.

This is very much the subject of Ray's two big YouTube videos, which I'll leave linked down in the description if you'd like to learn more. But long story short, earning less than you spend is always a problem because it means that you have to keep borrowing and borrowing and borrowing until you get to where we are today, where debts are astronomical and become unmanageable.

But with that said, I do have one more clip for you guys, and this one is Ray Dalio's thoughts on where the stock market sits at the moment. Does he see it falling further?

"Where do you think the stock market is? Do you think that we have priced in what could be a, you know, a recession? Or what is a recession? Did we see the worst of it in October? Where are we right now in terms of value?"

"I think the markets, as a whole, look that they were obviously, um, I would say the interest rate changes were obviously a had to come. The impact on the other markets had to come. They have come; they have been into the price. So now you're going to have probably a tightening or a tighter monetary policy than existed, and that's a net negative for the stock market, but not in such a big number that it's like a big bearish thing."

"So when I look at the market as a whole, I would say, okay, well now it seems closer to fairly priced—probably still a bit high given that whole picture."

So there you go. Because Ray still sees problems on the horizon, he thinks that we're still likely to see more pressure on the stock market in the years to come.

But overall, guys, they are Ray Dalio's updated thoughts on the US economy and what he thinks we need to do about it. Do you agree with Ray? Definitely let me know your opinions down in the comments section below.

Otherwise, thanks very much for watching, guys. If you did enjoy this video, please leave a like and subscribe to the channel if you'd like to see more. If that was just for today, thanks for watching. See you guys in the next video.