Ray Dalio's 3 Concerns With The Stock Market

i was watching yahoo finance yesterday and they had ray dalio come on and speak about the three major forces he sees shaping the us economy right now he gave a pretty straight to the point message that could have been debated as a warning and i found it very interesting so in this video i want to break down and explain what he said and how we can use it to our advantage so let's roll the clips i do i do research um and so i this is a study that i've been doing and then i decided to share it with people because i think it's so important um those three forces are first the long-term debt and monetary cycle which i mean the creating a lot of debt monetizing it and the implications of that which reverberate through the system in terms of all the markets and everything the second is this conflict this polarization this wealth gap and how we're at each other's throats and i looked at the wealth gap and i looked at a lot of measures of conflict going back in time and i found that they were in the 1930-45 period the printing of money as i described in debt monetization was also in the 1930-45 period and the third big influence is the rise of china so the rise of a great power challenging an existing great power the united states so those three factors required me to then go back in history and i i wanted to study the rises and declines of reserve currency empires so i needed to go back far enough that i would have a few so i had to go back 500 years so i could see the rise and decline of the dutch empire and its reserve currency the rise and decline of the british empire and its reserve currency the rise and beginning of decline for the united states and its reserve currency and china and that's so those are the forces and that's what i did which you're referring to and that by the way that's available for anybody to read on linkedin let's start from the top and talk about why he thinks these are the three biggest factors affecting the global economy right now number one the long-term debt and monetary cycle what he means by creating debt and monetizing it is printing money giving it to businesses and then having them pay interest on this newly printed money when governments introduce more money into the system it leads to inflation this is one of the implications ray is worried about because right now the us is printing a lot of cash and it looks like they might have to print even more sometime soon the second force is the wealth gap and the conflicts that spawn from it i'm sure many of us have heard that we are now in a case-shaped recovery which means that the rich are getting richer while the poor are getting poorer it's actually reported that the top 643 richest people in the united states have grown their net worth by 845 billion dollars in the first six months of the illness all while the level of hunger in u.s households has almost tripled in the last year and millions are currently left without work it's this wealth gap that leads to the conflicts that we are seeing today and obviously there are more factors but wealth inequality plays a serious role here these conflicts and all this money printing are also what happened in the 1930s during the great depression and rey is saying we're seeing the same things again right now the third force is that china is challenging the us trump has made it very clear that china is an adversary and the rise of china is threatening the u.s as the leader on the global stage i personally don't think china will replace the us as the reserve currency in the short term but rey is saying that the decline of the us as the reserve currency has already started and that the pressure is on for the u.s to remain in the number one spot now i kind of skipped a point there so this one is rey has been studying the rise and decline of previous world superpowers and their reserve currencies i don't want to make this video an hour long and explain the rise and fall of these empires so to put it short the us wasn't always number one the dutch and the british came before and before them there were many more empires who held the number one place in the world but eventually this place always shifts hands rey is simply saying that the us is currently showing the same signs that the previous world leaders have shown when they were on their way out and ultimately lost their spots as the world's reserve currency now before this next section rey was asked why he was referring to the 1930s during the great depression and if he is concerned that we may be seeing something similar again and when it's even more concerning when i went back to find the 500 years and the times that repeated over and over again and what i found was um there's a cycle there's a big cycle you know you start a new world order in 1945 we began a world order after the war they decided how the world would be divided they created the dollar as the world's reserve currency and so on and then um because there's so much fighting and there's and then you've established a power that is a dominant power you have a period of peace and prosperity and then that gets extrapolated and it leads to more debt fear of bad times diminishes opportunities of borrowing and getting in debt particularly if you have a reserve currency because the world wants to save in that reserve currency and that gets the country deeper and deeper in debt and so you have those debt increases and you have bubbles but you have prosperity and bubbles are really fun they're really enjoyable they're great but then you get to the point that there is a limitation to that and those limitations start become apparent when the central bank can't easily produce money and credit that starts when you hit zero interest rates because then you can't do it the same okay then you go to what that's monetary policy one is interest rate monetary policy when that doesn't work anymore you go to the next type of monetary policy which is printing money and buying financial assets but that financial purchases of financial assets and other things widen the wealth gap because those who have financial assets do better than those who don't have financial assets and you have a wider and wider wealth gap and when you have that wider wealth gap and then you have another downturn in an economy that's a formula for a lot of conflict and so that's what we see so what does a central bank then do it if it taxes it takes money out of the economy to it's that's not good it's a problem and if it cuts expenses that's worth that's a problem so the central bank always through history this goes back literally thousands of years the central bank um or the entity that controls money then prints more money because think of it we got all those checks in the mail and we needed to get all those checks in the mail but um you you can't take it away from anybody so where does it come from and what are the implications so that happens for logical reasons and it often happens at the same time as there's a rising power externally as a competitor which is um a challenge in that environment so yes it's a um it's it's it's one of those times and i think people are not aware of it because um i learned uh from my experiences that many things that happened in my lifetime that surprised me never happened in my lifetime before but they happened many times before and in history and that if i would go back in history i could see that the first time that happened was in 1971 i was clerking on the floor of the new york stock exchange and richard nixon gets in front of the camera and um says we're not going to give you the gold and the values the dollar and and and i walked on the floor of the stock exchange i figured there was a big crisis and i walked on the floor of the stock exchange and the stock market was up four percent which was the most in couple of decades and i said wow that's surprising and then i found out that um roosevelt did the exact same thing on march 5th 1933 and what was done in those two times is the same thing that was done on april 9th of this year when the federal government and the federal reserve decided to produce a lot more money and credit so yes you need these perspectives and i want to pass that along which is why i'm passing along that research on the linkedin the first point here is that there is this big cycle the world created the current world order after the second world war the nations essentially decided who was going to control what which led the us to becoming the world's superpower and reserve currency before world war ii the british were actually the reserve currency and they held at the number one spot in the world the war effectively ended the old cycle and began the one that we are in today the next point here is periods of prosperity lead to more debt raise says after times of severe conflict there are periods of prosperity where fear of bad times starts to diminish which increases the opportunities to borrow money and go deeper into debt and this actually happens on a smaller scale in our economic cycles with the banks when we are in a recession and the economy isn't doing so well banks typically are less willing to lend money however when the economy is doing well banks land much more freely this free lending from the banks is actually what helped spark the financial crisis of 2008 but to simplify he says periods of prosperity create less fear of bad times which increases the willingness to land which leads to much more debt in the economy however he then moves on to say that there are limitations to this system and that this limit starts when the central banks can't easily print money and credit which starts when interest rates hit zero this is because lowering interest rates is the easiest way to get the economy going without having to introduce new cash into the system when money is cheap to borrow you see a lot more people borrowing i mean just think about our mortgages if a mortgage is 20 it means you're paying a ton of interest on your loan to buy a home which would deter a lot of new buyers however when interest rates are below 2 like they are right now it means that the interest you're paying on your home is less than inflation which in turn means that you're actually making money on the loan through your home appreciating more than you're losing by paying interest this causes people to go and take on loans much more willingly since the money is cheap to borrow and easy to get access to cheap access to money is meant to get people lending and spending which helps the economy get moving again this is why the fed lowered interest rates to near zero almost instantly back when the illness was first starting and as ray dalio says monetary policy one is interest rates now while we're on interest rates i just want to point out that interest rates actually started dropping before the illness even took place this chart right here shows us that interest rates were sitting at 2.4 percent in july of 2019 then dropped to 1.55 percent by december 30th this tells me that the economy was already starting to slow down even before we all got hit because why else would the fed decide to do this other than to get more money flowing in the economy if we zoom out we can also see the trend of interest rates since the 1980s where they peaked at around 20 percent since then interest rates have fallen during or following every recession which we can see are represented by these little gray boxes once the recession is over interest rates have not been able to climb back to where they were previously this ultimately causes a slow downtrend on our interest rates and as we can see before we got hit in 2020 we didn't have much room to work with because interest rates were already so low this simply means that monetary policy 1 lowering interest rates wasn't that effective and we had to move to monetary policy 2 right away monetary policy 2 is printing money and buying financial assets rey says this widens the wealth gap because it's the wealthy who own financial assets or in other words it's the wealthy who own the market this is also why the stock market is sitting near all-time highs right now is because the u.s has already started doing monetary policy too what this also means is that the people who do not own stocks take no part in the stock market bailout which means only the rich benefit while the poor get next to nothing for help and they don't benefit at all this is also how the billionaires have seen their net worth skyrocket from their company's valuations growing in the market while the poor line up for food thus creating a k-shaped recovery and ultimately widening the wealth gap this gap creates conflict between the classes and if we experience another downturn in the economy it will only continue accelerating the next point is central banks can't increase taxes or cut back spending the reason for this is because the last thing you want to do in a recession is take more money out of the economy which is what taxes do you want as much money flowing as possible to give the economy the best chance at coming back let's put it like this imagine if you were just getting by right now and you were just making your monthly payments then the government decides to increase your taxes which causes you to start missing on all of your payments that's the same thing here just on a corporate level and instead of missing a car payment they let workers go to cut payroll costs so increasing anyone's taxes to get more money for the government to deploy in a recession is not ideal but the government also can't cut back on spending to try and save more money because again you want as much money flowing as possible that would be like the government stopping in your bridge construction project to cut back on spending to try and help the economy when in reality all it would do is cost more working class people their jobs so cutting back spending is also out of the question so the last option that the government is left with is to print more money because they can't get more money from taxes when they can't save more money by cutting back on spending therefore the only option left is introducing more money into the entire system which is exactly what we saw with the stimulus checks he then goes on to say that the governments are currently doing what they did in 1933 during the great depression and in 1971 when they removed the link between the us dollar and gold now i don't think i need to explain what the great depression was but what i do want to point out is that during the 1970s the u.s experienced a lot of inflation it peaked at about 13.3 percent in 1979 and a lot of this inflation is said to be attributed to the decoupling from gold and all of the government printing this inflation right here is what i personally think ray dalio is warning us about and i will explain more as to why a little bit later on in the video now right before this next clip rey is asked if we need to rethink monetary policy and if we should focus on giving it to those who need it most instead of bailing out the stock market and so we're in a new era okay of monetary policy three as i call it monetary policy three will mean that the free market will play a much less role in determining those capital market flows that the government as we come into the future will be thinking how do i get that money to those who need it the most so it'll be a highly political decision much more political than it was in the past and that the central bank then will monetize those political decisions so monetary policy three means there's that type of cooperation so you so those are the two dimensions of the big big change environment you're going to see um much more government influences and direction of where money goes which will have a big impact on not only the economy but of markets you have to watch what they're going to spend their money on and they have to watch where they're going to get their money from what taxes and so on means the government will play a bigger bigger role and it also means that there'll be much more debt that is monetized and that has implications for the value of financial assets it has infil implications for the value of the currencies and so on as ray just said monetary policy three is to get money flowing to those who need it most however it's going to be the governments who choose who are the ones who need it it will not be the free market this means that we are going to see much more government involvement and how this money is spent and it will largely depend on who gets elected since the government is choosing who needs the money the most investors will have to pay attention as some industries will receive more funding than others for example joe biden wants to introduce a 2 trillion renewable energy stimulus plan which will obviously benefit any company in that industry whereas it will also most likely harm the oil industry so what rey is saying is we're going to have to pay attention to who gets elected where is the money going and where the government gets the money from governments work on tax paying dollars so who is the government going to tax specifically to get this money if biden taxes the oil industry and gives subsidiaries to green companies then that will obviously hurt oil profits while helping renewables the final point here is that there will be much more debt which will have implications on financial assets and the overall currency and let's stick with the joe biden example if he were to print that 2 trillion dollars up front for his green new deal then that means that the us dollar would continue being devalued from the money printer injecting more money into the system and in this section rydalio is simply warning us to watch all the government spending and to be prepared to hedge against it or to participate in where the government is choosing to allocate that money essentially we need to be adaptable and ready to adjust our investments accordingly based on what the government is doing with all of this extra capital now right before this final section rey is asked how should investors respond well i think first the most important thing um is to realize first uh cash is a risky asset um i think so many people think if i go to cash i'm going to be safe because it's much less volatile but please realize in this environment of producing a lot more cash the real returns go down it's a seductive risk risky asset because let's say relative to inflation you might get taxed two percent a year and as you're taxed two percent a year that's a huge amount of money over time but it's a subtle tax so first watch that think about okay currency issue or the value of money issue then in terms of that yes you will want to diversify to storeholds of wealth and what the number one the second big thing is diversify well if you diversify well you lower your risk without lowering your expected returns if you know how to do that well but i would say you know uh what are the three main things i don't know diversify diversify diversify i would say um so i would say those would be kind of the main headlines um that i'd like to pass the first point here is that ray says cash is a risky asset and he says this because in this environment of producing a lot more cash the returns of holding it go down dramatically this all leads back to the government printing more money and that printing devaluing our currency and devaluing our cash therefore even though we may not see the effects of devaluation in our bank accounts we will see it in how far our cash is able to go this leads us to thinking about the value of money issue because as i just said our cash won't be able to do as much for us since it is currently being devalued so how do we hedge against this devaluation of our cash well we have to diversify it into storeholds of wealth the number one storehold of wealth historically has been gold and if we take a look at ray dalio's portfolio we can see that he has 19.8 percent of his portfolio in gold right now which means that he is viewing gold as one of these store holds to diversify in he then goes on to say that if you know how to diversify well then you can lower your risk without lowering your expected returns if we take a look at the price of gold we can see that it bottomed at 1 495 an ounce on march 16th and it is now sitting at 1 911 dollars which is a return of 27.8 percent in the same time the dow has returned 43.6 so gold hasn't returned as much as the overall market however ray is talking about cash and he is telling us to diversify our cash into storeholds rather than having it sit on the sidelines so i believe where he was once holding cash he is now holding gold to hedge against the devaluation of currency and instead produce gains on it his final point is diversify diversify diversify and as we can see rey has been heavily diversifying in his own portfolio i mean his largest positions are mostly etfs right now so his money is spread all over and is exposed to multiple countries and currencies what i got from this interview is that rey is very concerned about the state of the us economy and its position as the currency reserve it also sounds like he thinks the us is going to be forced to print its way out of this economic crisis and that there is more printing to come he is warning all of us that he thinks the devaluation of the us dollar is a real possibility and that we should be preparing for it so let me know what you all think in the comments below and whether you think it's time to be diversifying our cash positions and moving into gold or do you think that rey is being a little bit too bearish right now also please consider subscribing to my channel if you would like to see more in-depth videos about the markets and the overall economy but with that being said thank you all so much for watching and i really hope to see you all again in my next one

Channel: Daniel Pronk

Views: 248,345

Keywords: daniel, investing, stock market, learn, how to, calgary, buy, sell, Daniel Pronk, Learn To Invest, Investing Basics, Beginner, Investing for beginners, Ray Dalio, Economy, US economy, US stock market, Inflation, Stimulus, Stocks, Gold, Bonds, Cash, inflation ray dalio, gold ray dalio, Warren Buffett, billionaire, hedge fund, Economy state, buy now, sell now, Ray dalio stocks, ray dalio portfolio, stock market now, stocks dropping, stock crash, stocks crashing

Id: dtiLe3JBel0

Length: 22min 19sec (1339 seconds)

Published: Tue Oct 27 2020