Source: Zero Hedge
Over the past week, Twitter has suddenly become the preferred venue of financial giants to post their ad hoc thoughts and observations. We already noted the tweetstorm by Jeffrey Gundlach who launched a brand new twitter account on the same day as his Ira Sohn conference, and now it appears to be Ray Dalio’s turn who after years of keeping quiet on the social network, blasted off 4 tweets in rapid succession – accounting for a quarter of his entire activity on Twitter – this morning, to wit:
This is new for me and a lot more fun than I imagined because of the back and forths. If you want to know what you’ll see from me here…
I’m particularly interested in seeing the world through the eyes of smart people who see things differently from me, idea-meritocratic decision-making, economics/markets, ocean exploration, neuroscience, and music (especially the blues).
he concluded with the following link to his latest thoughts on the global economy:
If you want to know what I think is the big picture for the world economy and markets, it’s linked here: https://t.co/HJ8pjWA0bH
— Ray Dalio (@RayDalio) May 12, 2017
So what does the man who several years ago predicted, incorrectly, a beautiful deleveraging think now about the “Big picture” state of the global economy? He is no longer quite as optimistic, because in his LInkedIn post, he writes that while “big picture, the near term looks good” … “the longer term looks scary.” His reasons:
- The economy is now at or near its best, and we see no major economic risks on the horizon for the next year or two,
- There are significant long-term problems (e.g., high debt and non-debt obligations, limited abilities by central banks to stimulate, etc.) that are likely to create a squeeze, Social and political conflicts are near their worst for the last number of decades, and
- Conflicts get worse when economies worsen.
And while Dalio writes that he has “no near-term economic worries for the economy as a whole” he is increasingly worried “about what these conflicts will become like when the economy has its next downturn.”
His gloomy conclusion: “Downturns always come. When the next downturn comes, it’s probably going to be bad.”
What follows next is a summary breakdown of Bridgewater’s big picture of “where we are within out own template” and why Dalio is suddenly as pessimistic as we have ever seen him.
Where We Are Within Our Template
To help clarify, we will repeat our template (see www.economicprinciples.org) and put where we are within that context.
There are three big forces that drive economies: there’s the normal business/short-term debt cycle that typically takes 5 to 10 years, there’s the long-term debt cycle, and there’s productivity. There are two levers to control them: monetary policy and fiscal policy. And there are the risk premiums of assets that vary as a function of changes in monetary and fiscal policies to drive the wealth effect.
The major economies right now are in the middle of their short-term debt cycles, and growth rates are about average. In other words, the world economy is in the Goldilocks part of the cycle (i.e., neither too hot nor too cold). As a result, volatility is low now, as it typically is during such times. Regarding this cycle, we don’t see any classic storm clouds on the horizon. Unlike in 2007/08, we don’t now see big unsustainable debt flows or a lot of debts maturing that can’t be serviced, and we don’t see monetary policy as a threat. At most, there will be a little touching the brakes by the Fed to slow moderate growth a smidgen. So all looks good for the next year or two, barring some geopolitical shock.
At the same time, the longer-term picture is concerning because we have a lot of debt and a lot of non-debt obligations (pensions, healthcare entitlements, social security, etc.) coming due, which will increasingly create a “squeeze”; this squeeze will come gradually, not as a shock, and will hurt those who are now most in distress the hardest.
Central banks’ powers to rectify these problems are more limited than normal, which adds to the downside risks. Central banks’ powers to ease are less than normal because they have limited abilities to lower interest rates from where they are and because increased QE would be less effective than normal with risk premiums where they are. Similarly, effective fiscal policy help is more elusive because of political fragmentation.