Ray Dalio in his latest opinion, has reflected back on his predictions and changed his near term outlook, his most recent position is:
- Near term: if there isn’t a big supply/demand imbalance in which the amount of government debt sold overwhelms the amount of demand for these debt assets, it appears that a period of tolerably slow growth and tolerably high inflation (a mild stagflation) is most likely. He cites, the uncertainty about this at the moment is significant because the things we don’t know are greater.
- Long term: his view is the same as before, governments will most likely enter a debt spiral cycle due to increases in deficits, forcing the central banks to print money and buy the debt. Because of a supply-demand imbalance. This will benefit asset holders, but will crush the savings and credit of the people who most need it.
His reason to change his near-term outlook to a more positive one:
- The Fiscal stimulus done by the governments increased household wealth and income significantly, at the expense of their own balance sheet. This has caused that even with all the monetary tightening, household wealth is still pretty high.
This is also the reason for his long-term outlook, as he thinks the fiscal deficits will get out of control due to this fiscal spending.
There was a big government-engineered shift in wealth from 1) the public sector (the central government and central bank) and 2) holders of government bonds to 3) the private sector (i.e., households and businesses). This made the private sector relatively insensitive to the Fed’s very rapid tightening to a more normal monetary policy. As a result of this coordinated government maneuver, the household sector’s balance sheets and income statements are in good shape, while the governments are in bad shape.
By the way, despite me seeing this dynamic happening and studying those cases, I failed to fully appreciate how much the improved financial condition of the private sector would soften the impact of the Fed’s tightening because I was too focused on how the last 12 tightening cycles (since 1945, when the new world and currency order began) worked.
What’s Happening with the Economy? The Great Wealth Transfer
My take: I always have great respect for Ray Dalio, so every time he posts something it makes me question my own thinking and arguments. At the moment I think his argument to change a bit his near term outlook (he is still not predicting a boom in the economy) is very valid , and something I have heard from some other analysts too, so I will probably like to gather a better understanding of this too. The only question I have at the moment is the distribution of this wealth, IMO if its mostly concentrated in e.g the top 5-10% with a much lower propensity to spend it, it will likely not have that prolonged positive effect on spending.