Ray Dalio: Recession Risk Rising In The Next 18-24 Months

It’s been a long time since stock market investors were rattled, but February’s trading action has served as a friendly reminder that bull markets don’t last forever.

Ray Dalio, co-chairman and CIO of Bridgewater Associates — reportedly the largest hedge fund in the world — gave his LinkedIn followers a friendly reminder this week about what the end of market cycles tend to look like. 

The classic debt/business cycle downturn is typically preceded by late-stage indicators such as an economy reaching the limit of its production capacity, triggering price, profit and wage increases, Dialo said. Rising inflation triggers rising interest rates, which tend to negatively impact stock prices.

“That is why it is classically best to buy stocks when the economy is very weak, there is a lot of excess capacity in the economy and interest rates are falling (and to sell stocks when the reverse is the case),” the 68-year-old billionaire said. 

Dalio said it’s difficult to pin down exactly where the economy is in the current cycle, but recent strength in growth and wage numbers suggest it's further along in the classic cycle than he assumed just a few weeks ago.

“What we do know is that we are in the part of the cycle in which the central banks getting monetary policy right is difficult and that this time around the balancing act will be especially difficult (given all the stimulation into capacity constraints and given the long durations of assets and a number of other factors), so that the risks of a recession in the next 18-24 months are rising,” he said. 

Instead of focusing on the strong near-term environment in 2018, Dalio said prudent investors should already be considering the possibility of a recession before the next presidential election in 2020.

Each market cycle is unique, and the current one is throwing economists some curveballs. Political and social sensitivities in the U.S. are heightened due to the top-heavy distribution of wealth, Dialo said. In addition, central banks are as powerless as ever to combat an economic downturn after they threw the kitchen sink at the 2008 financial crisis — in the form of cutting interest rates to zero and providing unprecedented stimulus via quantitative easing, he said. 

“For these reasons, I worry about what the next economic downturn will be like, though it is unlikely to come soon."

Dialo assured readers that the economy appears much less vulnerable to a severe disruption than it was in the years leading up to the last financial crisis.

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