October 6, 2016

Ray Dalio: The Coming Big Squeeze

Slides taken from Ray Dalios speech at the Federal Reserve Bank of New York’s 40th Annual Central Banking Seminar on Wednesday, October 5, 2016.

“The biggest issue is that there is only so much one can squeeze out of a debt cycle and most countries are approaching those limits,” Dalio said.

“In other words, they are simultaneously approaching both their debt limits and central banks’ ‘pushing on a string’ limits,” he said. “Central banks are approaching their ‘pushing on a string’ limits both because interest rates are approaching their maximum lows, and because the effectiveness of [quantitative easing] is approaching its limits as the risk premiums and spreads are compressing. Also, the wealth gap and numerous other factors make lending to spenders more challenging.”

“Holders of debt believe that they are holding an asset that they can sell for money to use to buy things, so they believe that they will have that spending power without having to work,” he said. “Similarly, retirees expect that they will get the retirement and health care benefits that they were promised without working. So, all of these people expect to get a huge amount of spending power without producing anything. At the same time, workers expect to get spending power that is equal in value to what they are giving. They all can’t be satisfied.”

“As a result of this confluence of conditions, we are now seeing most central bankers pushing interest rates down to make them extremely unattractive for savers and we are seeing them monetizing debt and buying riskier assets to make debt and other liabilities less burdensome and to stimulate their economies,” he said. “Rarely do we investors get a market that we know is over-valued and that approaches such clearly defined limits as the bond market now.”