While most of the rest of the world is debating “when” rather than “if” an FOMC rate hike is coming, Bridgewater Associates founder Ray Dalio sees a much more troubling scenario unfolding.
According to Dalio, the next major move by the Federal Reserve will be easing rather than tightening, and the Fed may be ill-equipped to combat the coming end of a secular debt-powered global economic supercycle.
Classical Economic Cycles
The typical classical economic cycle revolves around the spread between short-term interest rates and the returns that can be generated from longer-term investments such as stocks. “Because short-term interest rates are normally below the rates of return of longer-term assets, you’d expect people to borrow at the short-term interest rate and buy long-term assets to profit from the spread,” Dalio explained.
While it’s typically true that long-term investments such as stocks provide higher rates of return than short-term interest rates, long-term investments periodically suffer periods of severe underperformance that keep perpetual borrowers at bay.
According to Dalio, these cycles of economic growth followed by periods of economic contraction are driven by central banks manipulating interest rates.
Secular Trend
However, the danger that Dalio sees in these cycles is…
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