Ray Dalio: A 'Lost Decade' Coming For Stock Investors

Hey guys, welcome back to the channel! Interesting topic for today's video: Ray Dalio is coming out and he is certainly doubling down on his views around the shutdown and the economy moving forward. His fund, Bridgewater Associates, came out last week and said that pretty much a reversal of the strong growth seen over the years in the US corporate profit margins could lead to a lost decade for equity investors.

Now, we know that Ray Dalio and Bridgewater Associates have basically been everywhere recently, talking about how they believe that we are actually due for some really big economic changes coming out of the shutdown and have actually pictured the situation much worse than what most people do. But it's really interesting to see them come out and, you know, say that we're going to lose equity investors, that they're going to have a lost decade—like that's a very big call.

They say that the margins, which have produced a big chunk of the excess return of equities over cash, could face a shift that would go beyond the current cyclical downturn in earnings. So what does this mean? Well, first of all, let's talk about profit margin. Profit margin is essentially talking about how much of your revenue do you get to keep.

So, for example, if Apple sells an iPhone for $1,000, it might cost them $750 to actually build that iPhone and advertise and distribute and all that sort of stuff. So if they can sell it for $1,000 and it cost them $750, then they've got $250 out of the $1,000 that they get to keep. So they've got a 25 percent profit margin.

Now, what we've seen over the past 10 years is a bit of an economic boom time. So essentially, everyone's getting a little bit richer. You know, unemployment's been really low, so everyone's making a good healthy wage. You know, corporate profits are going up and asset prices are going up. Everyone's just getting a little bit richer. And because everyone individually is getting a little bit richer, what it means for companies out there is it means that they can start to charge a little bit more and a little bit more for the same product.

So that's them boosting their profit margins. Now what Ray Dalio's fund has said is that the margins, which have provided a big chunk of the excess return of equities over cash, could face a shift that would go beyond the current cyclical downturn in earnings. So, while we're seeing a downturn in corporate earnings now because of the shutdown and businesses haven't been up and running recently, Bridgewater Associates are basically saying, "No, no, no, it's gonna be worse than that."

They're seeing this event not only as, you know, a business shutdown but a real economic downturn. Like a real economic downturn where unemployment rates obviously stay high, people are earning less, so therefore they start reining in their spending, asset values drop, etc. Which means that the flow in effect is that companies start to make lower earnings and they can't make those nice, high profit margins anymore because, quite frankly, no one's willing to pay those high prices for products because spending is reduced from a practical level.

Do you think that we're headed into a global depression? Yes, but I want to be careful about what I use the word, you know, like to be work though the word is an evocative word. Yeah, it’d be scary and so on. So what do you mean by a depression? Okay, something like happened in the 1930s. So, just to repeat, 1929 to 1932 there was a fall in the economy and a very double-digit unemployment rate and a magnitude—a fall in the economy—like about ten percent. Do I think we're in that? Yes.

So how does this all relate to the idea of having a lost decade in the stock market? Well, what it's kind of referring to is, firstly, what we're seeing with the stock market right now is that the current market values are just so detached from reality; it's insane. If you look at historical valuation measures—like what we've been talking about in the last few videos—investors that are, say, buying into the S&P 500 right now essentially are saying that right now we are willing to pay twice as much for our stocks as historical normals would allow us to.

So essentially, what they're saying is the outlook right now for the stock market is pretty much two times as good as historical normal conditions. Now personally, I don't agree with that and obviously neither does Ray Dalio or Bridgewater Associates. So, what they're saying here with the idea of the lost decade is that if investors were to really wake up and recognize that this is much more of a serious economic event—one in which, you know, we aren't just going to see corporate earnings and corporate profit margins just bounce back to the levels that they are at, say, six months ago—if that doesn't happen, if we don't see that beautiful, perfect recovery, then it's likely that the stock market will get repriced quite harshly.

And because it is a full economic downturn, an economic event where unemployment is high and incomes are low and spending is low, then it might take some time for conditions to return to the way that they were even six months ago. So what this lost decade business is all about is essentially saying that we might be at a period of time where, if you were an investor now, it might take you several years—if the market were to fall—it might take you several years to get back to where you were.

Kind of like when we talk about those investors that were buying just before the start or even leading up to the start of the GFC in 2008 and 2009; it took them a good six years to get back to where they once were. Now, interestingly, to add to the comments out of Bridgewater, they also said that globalization, perhaps the largest driver of developed world profitability over the last few decades, has already peaked.

Now, the US-China conflict and global pandemic are further accelerating moves by multinationals to reassure and duplicate supply chains with a focus on reliability as opposed to just cost optimization. Now, I found this really interesting because to me, this actually makes a lot of sense. Because what we've been going through with the lockdown, companies have realized that there is a real value in having that reliability of manufacturing over just being as cost-effective as possible in the manufacturing process.

So, even though it’s more expensive, there is a real value in having some manufacturing overseas but some manufacturing at home, so your manufacturing chain is diversified. And we've already started to see that—you can even look at a case example like Intel, where Intel has announced that they're actually going to put significant investments in hometown manufacturing as opposed to just going the ultimate cost-efficient way of just going to an overseas factory and getting all their products manufactured over there.

And, obviously, with what Bridgewater said in this quote, they believe that this trend is going to continue and get bigger and bigger—so much so that they went out on a limb and said that they think the peak of globalization is already past us. Maybe overseas manufacturing will become less of a thing in the future. So it's interesting because it kind of makes sense of what we've seen even just from the shutdown.

There is a definite power for a country to be relatively self-sufficient. So overall, I think there are some really interesting insights coming out of this note from Bridgewater and I have to say that it kind of does make sense. Now, I don't know if we will see a full decade of low stock market return, so I don't think I could go out on a limb and predict that. But it's really interesting because their rationale does make sense based on the economic figures that we are currently seeing.

So overall, I'd love to hear what you guys think on this. Do you feel as though the market will be in for a rough time? Not maybe not only in, say, the next three or six months or whatever, because that's all up in the air, but I'm thinking more over the next year, the next two years, five years, ten years. I'd love to hear from you guys.

Obviously, the other side of the coin is that at the moment we are seeing from central banks, particularly the Fed over in the United States, they're basically coming out and saying, "We're going to do everything in our power to help this market along and help the economy along as much as possible for the foreseeable future." So that's kind of the argument on the flip side.

But I'd love to hear your thoughts. Do you reckon that, you know, the market is just going to stay strong and the Fed will just keep supporting it? Do you feel as though we are going to see a period of maybe not just a short term but a long term period of sustained low returns in the stock market in the future? Do you agree with what Ray Dalio and Bridgewater have come out and said here? Do you agree with Ray Dalio's rationale behind the whole shutdown?

I'd be super interested to hear what you guys have to say about this. Definitely drop that stuff down in the comment section below. Of course, leave a like on the video if you did enjoy it. It really helps me out. I super appreciate it; it definitely does help the video out in the YouTube algorithm, and it's the easiest way to support the channel, so I super appreciate it.

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But I think that'll just about do me for today. Thanks very much for watching, guys, and I'll see you all in the next video.