Billionaire Ray Dalio's URGENT Message to Investors [Bridgewater].

hey everyone kevin here bear ray dalio

with bridgewater capital has become even

more bearish i didn't think it was

possible given that in 2019 ray dalio

told us that we were in the ninth inning

of an economic cycle and that we were in

for a great deleveraging well

bridgewater capital just today has

released more information on why they

are more interested in cash

than financial assets for 2022.

folks we gotta talk about this one let's

hop right in but keep in mind if any of

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ftx us all right folks here we go

i'm going to give you the summary of

this

first

ray dalio and bridgewater capital talk

about how we received this adrenaline

shot of money that went into our economy

and this has led to a self-reinforcing

cycle of more spending and more income

growth i'm going to show you this

picture first because it makes more

sense to go through it this way so

basically the more money we have and the

more credit we have added together so

money

plus credit plus income equals

more spending so if we have more of all

three of these we end up spending more

money and we end up buying more stuff

like stocks and real estate the problem

with this cycle is when it reverses and

we end up with less money less credit

and lower incomes then spending goes

down and financial assets

purchases go down right this makes

complete sense

but right now we are in a cycle that is

self-perpetuating

and

self-reinforcing of consistently more

spending and higher asset prices at

least that's been the trend for the last

couple years not so much the last eight

weeks since some stocks have been

trending down but for the past two years

that's been about the trend they say the

result of this is because of the federal

reserve and fiscal stimulus the likes of

which we've never seen before but this

is now creating a very difficult choice

for the federal reserve

and they have this choice to tighten or

the ability to

respond slowly to the changes in the

marketplace and

the problem with this according to

bridgewater capital is that markets

right now are assuming that the federal

reserve is going to be able to perfectly

handle this transition to a lower period

of inflation without substantial issues

in fact i'm going to jump ahead slightly

here bridgewater capital here says

that markets right now we're pricing in

that the federal reserve's rates are

going to do this right here where i just

drew that red line

and interest or inflation is going to do

this where that solid red line is so in

other words the market is expecting this

smoothness but the market is not pricing

in the potential risk that as rates go

up inflation does not actually come down

or does not come down smoothly and

potentially rates have to go up

substantially more and the market in

other words is being too optimistic so

let's look at some of the verbiage that

bridgewater capital uses here first

bridgewater again explains this

recirculation of how more spending leads

to more incomes the problem here is

everything in our economy is a cycle

remember folks when people spend money

what happens they spend money and thanks

to the velocity of money five or six

dollars circulating the economy you go

buy a cup of coffee at starbucks you

spend a buck or five dollars that

circulates to the point where that money

could be used up to let's say thirty

dollars uh worth worth of money so it's

like thirty dollars worth of income is

created for people out of five dollars

of spending so the more we spend the

more incomes actually go up and the more

incomes go up the more we can spend

which means inflation can actually in a

self-reinforcing self-sustaining way

continue to go up up up up up up up up

up up up up up up up up up up up up up

up up

now this is a really bearish outlook

i've personally always considered that

well wait a minute you know inflation

like i've used before in the analogy if

somebody's going to sell you an apple

pencil for a hundred dollars where apple

does and now apple raises their price to

110 that's 10 inflation are they really

gonna next year raise it to 121 or

another 10

and the theory here is that well if we

keep spending thanks to the way the

velocity of money works yeah the answer

could be yes we could be creating a

self-sustaining cycle of inflation and

this is actually more bearish than with

the research that i've been reading

anywhere else uh and so i'm not super

happy about this now uh what's what's

really important uh to keep an eye on as

well

is that

we really need to see consumers reject

paying these higher prices in order for

inflation to stop in order for prices to

stop going up and that's not happening

right now so in other words

incomes going up and spending going up

reiterates incomes and spending going up

to where we could potentially get this

sort of runaway cycle of higher levels

of inflation i know this is a sort of a

u-turn from from what we experienced

last year where we were expecting

inflation to be transitory but the

reality is the data has changed the

inflation is not transitory it's getting

worse and what we're waiting for is when

is inflation going to inflect back down

that is the big thing that we're waiting

for because in my opinion there are

three scenarios that we could face i'm

going to tell you these three scenarios

i do want to quickly also just as a

tangent mention that yes the total

velocity of money appears to be lower

but in my opinion that's because a lot

of cash is sitting in banks not getting

used in rev and overnight is getting

parked in the reverse repo facilities

and that is artificially keeping the

velocity of money

low which is misleading in my opinion

potentially investors like kathy wood

who says oh okay

money and the velocity of money's down

well yeah but how much is sitting in the

reverse repo markets anyway in my

opinion there are three scenarios that

we go through

number two is a disinflationary recovery

so addition disinflationary recovery a

number one is an inflationary

crash or recession we'll call it and

then you have a uh deflationary would be

the last option here a deflationary

crash

right so these these are the three

options that we really have best case

scenario is a disinflationary recovery

that's basically what bridgewater

capital is saying is getting priced in

is this disinflationary recovery which

is a good thing and in my opinion you

want to buy in a deflationary recovery

disinflationary recovery where

inflation's going down once inflation

starts inflating down until then stock

prices could in theory continue to trend

down no guarantees obviously

the worst case scenario though obviously

is some form of a crash an inflationary

style crash where the feds lost control

and they have to react very aggressively

which is what bridgewater capital is

suggesting that the fed's going to have

to act really aggressively that could

also lead by the way to a deflationary

crash after an inflationary crash so

like one could lead to three which is

wild uh or you could just have a

deflationary crash where we just have

too much disinflation too fast but it's

more likely that one would lead to three

but anyway so so bridgewater capital

goes on to say the following here they

say that when unemployment is high a lot

of spending goes to business profits and

a lot of it goes to putting people back

to work okay that's when unemployment is

high but what happens when you have low

on unemployment which is what we have

now well when you have low unemployment

you end up seeing wages go up but the

problem is when wages go up what happens

people have more money when people have

more money and at the same time their

living expenses are going up what

happens people demand more pay because

their living expenses went up cost

living goes up they demand more pay they

get more pay what do they do they could

spend more because their incomes have

gone up and so you get this

self-fulfilling potential wage price

spiral is essentially what ray dalio was

talking about here now in bridgewater

capital albe believe i believe they did

not mention the wage price spiral here

because jerome powell the federal

reserve says we are not seeing any signs

of a wage price spiral yet and of course

we've got other folks at the federal

reserve

downplaying uh the the potential impact

of the federal reserve having to tighten

and in my opinion they're doing that

because they don't want to create

instability in the marketplace so they

have to sell hope

which hopefully they're right

now uh ray daly and bridgewater capital

here use the phrase quote expansions

don't die of old age they're murdered

and they believe that's true because

ultimately

in order for the federal reserve to

reduce

inflation one of two things has to

happen number one we either need

productivity to go up substantially so

that way you create real growth best

case scenario productivity skyrockets

but they believe that such a level of

productivity growth is highly unlikely

therefore the only way to lower

inflation is to slow nominal spending by

draining liquidity

that is raising interest rates and

withdrawing reserves and it can't be

counted on to slow on its own because of

the self-reinforcing dynamics so in

other words because companies continue

to be able to raise prices like in my

kimberley clark video this morning the

dangerous report for the stock market uh

because companies can continue to raise

prices people demand more money

for for pay for labor and they keep

spending and spending more agreeing to

pay those prices we're not this is why

we're seeing such good earnings right

now and this is why we keep seeing

margin expansion because

again the numbers keep getting better

and better and better for companies but

that actually reiterates the

self-sustaining cycle of inflation

now

over here

ray dalio and bridgewater capital talk

about how much cash there is on the

sidelines right now how much households

are holding in cash you can see we're at

a substantially higher level than where

we have been in the past 20 years right

here uh as uh as a percentage of cash

holdings how the bottom 60 percent of

households net worth in in the united

states is uh almost at the levels that

we saw during the dot-com era bubble

that reserves at banks is at the highest

levels we've ever seen and that the

amount of cash at banks compared to

actual lending that's happening is is

1.7 times higher than what we're usually

seeing some form of of a baseline around

100 over here between the 2000 to 2010

era and then even even higher compared

to 2010 to about 2020 we're about 50

percent higher than that time now let's

take a quick little pause here for a

moment and just think about what ray

dalio and bridgewater capital have told

us right now so we've got more cash on

the sidelines which means people have

the capacity of spending more money on

stuff and people have more wealth which

reiterates inflation

if people keep spending then people

might earn more again reiterating them

to spend more

self-reinforcing cycle so far that's

what we've learned from bridgewater

capital that we're in a self-reinforcing

cycle according to them hopefully

they're wrong

we also know according to my opinion

that there is a chance that we go into

an inflationary crash where the fed is

forced to over tighten

and then the market crashes uh and we go

into a recession we go into a

deflationary recession which could come

after an inflationary crash which would

be bad or hopefully the best case

scenario is we go into a disinflationary

recovery that's when i buy back in once

i start getting proof that there's a

disinflationary recovery and obviously

when that time comes i am sending all

the alerts to everybody in the stocks in

psychology of money group link down

below

but folks

i want to make this clear as well some

folks are wondering hey kevin

how come you're sad when prices are

going down if

you're in cash

well because i don't want to go into a

recession i think all of our net worths

combined whether you're in cash or in

stocks

gets hurt when we go into a recession

either scenario one or three

i would rather us not go into recession

go into a disinflationary recovery buy

back into the market and if i missed out

on 10 20 oh well i take my big l and we

go back to a normal market that's best

case scenario so i'm cheering for this

market not to crash

and so i'm looking for evidence that

we're not having a crash unfortunately

in this video we're reviewing why ray

dalio is so bearish and that's what

we're going to talk about now because

ray dalio says we've got some problems

the ray dalio says

what we can do right now

is consider how sensitive markets might

be to interest rates actually going up

and i thought this was quite fascinating

so ray dalio and bridgewater capital

suggest that

markets might be more sensitive to rate

increases in the past but

the real economy might actually be less

sensitive to tighter policy why because

people have more cash you don't have to

go borrow as much see as listen to this

but in terms of the real economy the

improvement in household balance sheets

particularly those in the middle class

implies a greater degree of resilience

to monetary tightening as households are

less dependent on low interest rates to

fund spending in other words again

remember how they're like hey households

have all this cash what happens when

rates go up well it should reduce demand

right maybe not maybe rates go up but

people don't care that rates went up

because they have all this extra cash so

they keep spending anyway inflation

keeps growing

wall rates go up that's the worst

freaking case scenario and with this

quote diminished economic sensitivity to

a rise in interest rates

combined with a cautious approach

approach to raising rates because we're

worried about covid we don't want to

over tighten or whatever

bridgewater capital believes that

there's an added risk to falling behind

the curve and acid markets getting even

further ahead of themselves followed by

a more significant tightening

and an even bigger impact on the markets

over time

put simply

there are two things here that

bridgewater capital is saying number one

rates going up is probably not going to

reduce inflation in fact inflation can

just keep running in a self-fulfilling

cycle number two

because the fed's going to be a little

more oh we don't want to shock the

markets uh we don't want to raise rates

too quickly because they're going to

play that dance because of covid or

politics or whatever

there's actually the risk that more

danger gets priced into the market

whether that means the stock market goes

up a little bit more in the short term

or a lot in the short term or uh the

market doesn't price in the real risks

that we're facing more

it's entirely possible according to

bridgewater capital that ultimately the

fed

ends up creating a situation where

inflation gets so far out of hand that

they have to tighten in a more

significant manner in the future

ultimately leading to a larger market

crash they say for investors these

circumstances create two unique risks

relative to the past four decades

first there is a risk that asset values

will fall in real terms due to a

sustained rise in inflation and second

there is a risk that the central banks

will

fail further uh or fall further behind

the move in inflation and have to

aggressively catch up in the very near

term policy accommodation would tend to

have benign effects on the lines of a

mid-cycle transition however too much

policy delay would risk over-extending

the moves lowering yields lengthening

durations and making the longer-term

risk for falling behind and then

catching up much bigger so in other

words radially on bridgewater capital

english are saying the longer we wait

the worse it's going to get and so what

are they doing folks well uh let's let's

take a look at this

uh it's quite bearish

despite this uniquely interesting and

potential volatile set of unfolding

conditions the markets are discounting

neither

significant tightening or high inflation

so in other words they're like the

market is basically blind to these risks

right now now i already explained this

chart earlier

so let's go on to what ray dalio is

doing they say that quote we have grown

significantly less bullish on assets

versus cash across the developed world

in aggregate with significant

differences across countries and those

significant differences are

in china and the united states they

believe there's a lot more downside risk

in the united states than in china right

now so they're bullish on cash and china

why because take a look at this over

here i'm going to give you the summary

they take

they look at the chinese stock market as

falling at the same time as the chinese

markets are actually stimulating they're

becoming more stimulative

because

china and china is becoming more

accommodative because they want to grow

the economy they're talking tax cuts tax

and fee cuts boosting the real economy

promoting consumption at the same time

as stocks are at record lows in china uh

and and bond returns are high when bond

returns are high uh that generally means

yields are very low because prices went

up so yields become very very low

they've fallen below us yields and when

the yields are very low it's like you're

making no money on those because the

market's growing potentially more slowly

right and so they're making this

argument that maybe china's the market

to invest in right now

which is quite interesting uh and it

makes sense because they're looking at

this going hey u.s stock market's at

record highs uh bonds are getting

crushed over here fixed income's getting

crushed like the actual value of bonds

are getting crushed

why would you invest in u.s stocks right

now when you have tightening ahead of

you and you have policies

at the top of the market basically when

you have policy support for you in china

at the bottom of the market potentially

is is their argument and this is why

they're very interested in potentially

china or just literally cash versus real

estate and stocks in the united states

it's it's pretty bearish this is a

pretty bearish report but they make a

point they make a point that i haven't

really considered and that is the

combination of the fact that because

people have more cash

the market might be a lot less sensitive

to interest rates going up meaning the

fed's gonna raise rates to one percent

and i've been saying this on the channel

i just didn't make the direct connection

as well as they did here i've been

saying on the channel like okay so

interest rates go up to one percent then

what people are gonna go okay who cares

let's keep spending keep partying keep

spending money and inflation keeps going

higher right what happens in that case

well then the fed gets really aggressive

and what if we go to four or five

percent in terms of interest rates at

some point

it's gonna hurt if real estate rates

imagine if mortgage rates went from

three and a half percent to six or seven

percent

anyway folks thanks so much for watching

this video appreciate it if you found it

helpful consider sharing it and we'll

see in the next one thanks bye