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The Next Crisis May Be Harder Than 2008: Dalio

Feb 05, 2019 | Lance Roberts |

The Next Crisis May Be Harder Than 2008: Dalio

Written by Lance Roberts via Real Investment Advice

[In a panel discussion at the World Economic Forum’s annual meeting in Davos on Tuesday, Dalio (founder of Bridgewater Associates) remarked that what scares him the most longer term is “that we have limitations to monetary policy — which is our most valuable tool — at the same time we have greater political and social antagonism.”]

He reiterated that a limited monetary policy toolbox, rising populist pressures and other issues, including rising global trade tensions, are similar to the backdrop present in the latter part of the Great Depression in the late 1930s.

Before you dismiss Dalio’s view, Bridgewater’s Pure Alpha Strategy Fund posted a gain of 14.6% in 2018, while the average hedge fund dropped 6.7% in 2018 and the S&P 500 lost 4.4%.

The comments come at a time when a brief market correction has turned monetary and fiscal policy concerns on a dime. As noted by Michael Lebowitz yesterday afternoon at RIA PRO:

In our opinion, the Fed’s new warm and cuddly tone is all about supporting the stock market. The market fell nearly 20% from record highs in the fourth quarter and fear set in. There is no doubt President Trump’s tweets along with strong advisement from the shareholders of the Fed, the large banks, certainly played an influential role in persuading Powell to pivot.

Speaking on CNBC shortly after the Powell press conference, James Grant [founder of Grant’s Interest Rate Observer] stated the current situation well:

Jerome Powell is a prisoner of the institutions and the history that he has inherited. Among this inheritance is a $4 trillion balance sheet under which the Fed has $39 billion of capital representing 100-to-1 leverage. That’s a symptom of the overstretched state of our debts and the dollar as an institution.

As Mike correctly notes, all it took for Jerome Powell to completely abandon any facsimile of “independence” was a rough December, pressure from Wall Street’s member banks, and a disgruntled White House to completely flip their thinking.

In other words, the Federal Reserve is now the “market’s bitch.”

However, while the markets are celebrating the very clear confirmation that the “Fed Put” is alive and well, it should be remembered these “emergency measures” are coming at a time when we are told the economy is booming. Larry Kudlow [director of the National Economic Council]:

We’re the hottest economy in the world. Trillions of dollars are flowing here and building new plants and equipment. Almost every other data point suggests that the economy is very strong. We will beat 3% economic growth in the fourth quarter when the Commerce Department reopens. […]

Of course, the reality is that while he is certainly “spinning the yarn” for the media, the Fed is likely more concerned about “reality” which, as the data through the end of December shows, the U.S. economy is beginning to slow.

As shown, over the last six months, the decline in the LEI has actually been sharper than originally anticipated. Importantly, there is a strong historical correlation between the six-month rate of change in the LEI and the EOCI index. As shown, the downturn in the LEI predicted the current economic weakness and suggests the data is likely to continue to weaken in the months ahead.

You can read the full article at Real Investment Advice: Dalio’s Fear of the Next Downturn Is Likely Understated | Real Investment Advice