‘I think it will be more severe in terms of the social, political problems. And I think it will be more difficult to handle … It won’t be the same in the terms of the big-bang debt crisis. It’ll be a slower growing, more constricting sort of debt crisis that I think will have bigger social implications and bigger international implications.’
That’s billionaire Ray Dalio, the founder of the world’s largest hedge fund, Bridgewater Associates, expounding on what the next financial crisis, which he sees as inevitable, will look like.
In an interview with CNBC, Dalio said he believes the current economic cycle is in the seventh inning, which he extrapolated to mean it probably has another two years or so to run.
It’s now time, however, to start thinking about what the next downturn will be like, he said. To that effect, Dalio on Monday published a book, “A Template for Understanding Debt Crises,” that’s available as a free PDF.
In the interview, Dalio likened the current environment to 1935-1940, while the 2008-2009 crisis period echoed the start of the Great Depression in 1929-1932. Like the start of the Depression, the financial crisis left monetary policy makers no choice but to print money and buy financial assets, pushing the prices of those assets up and exacerbating the wealth gap.
That’s helped stoke the populist sentiment around the globe, which has implications for any fiscal policy response to future crises, while quantitative easing and ultralow rates have already been largely maximized. That underscores the need for the formulation of a monetary policy 3.0 that’s aimed at getting individuals to purchase assets.
Meanwhile, investors should be on their toes, he said.
“I’d be more defensive rather than more aggressive,” Dalio said, warning that risk will increase over the next two years because much of the cash that had been resting on the sidelines has been deployed and the benefits of the corporate tax cuts signed into law late last year are already factored in.
In January, Dalio had warned investors that “if you’re holding cash, you’re going to feel pretty stupid.” Stocks unraveled in late January and early February, with the S&P 500 SPX, +0.37% and Dow industrials DJIA, +0.44% falling into correction territory. The S&P 500 moved back into record territory last month, while the Dow remains not far off its all-time high from late January.
Dalio subsequently said the selloff showed that the cycle was a bit ahead of where he thought it was.
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