Ray Dalio: Fed raised rates to the point where they're hurting asset prices

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01. there's the short term debt cycle long term debt cycle productivity we're in the late stages maybe the seventh eighth inning of the business cycle right we're in the part of the cycle where there's been a lot of monetary easing central banks built bought fifteen trillion dollars worth of assets push them up a lot we have the benefit of a corporate tax cut all that stimulation and as a result we're in the late part of the cycle where there's a tightening of monetary policy and you know so it's kind of the late part of the cycle with assets of fully priced and then in terms of the longer-term debt cycle we're at a point where interest rates are comparatively low the capacity of central banks to ease monetary policy is limited United States is limited in other countries it's limited so that's where we are and we're in a position also where we have the emerging power on China competing with the United States and established power as an effective competitor and that's very much like the late 1930s so that's at what I think we are let me just go back for once I'm in 1930 is there complicated time but but specifically on the interest on the issue of the Fed and interest rates in terms of where we are in the cycle there is a debate as you know about whether interest rates should get hiked and how strong the economy really is or isn't what do you think right now built the Fed expects the REA to raise one more time this year and probably three two or three times next year I think that there's a problem in terms of asset prices I think that rate of increase would not be able to be made because we've raised interest rates to a level where it's hurting asset prices we have now a flat yield curve we have in other words the you can now get in a two to five year note you can get about three percent and you have a no price rested no material price raise so we're in a situation right now that the Fed I think will have to look at asset prices before they look at economic activity it's a difficult position because that's stimulation that they have in the form of those tax cuts are is a big stimulation in to the capacity limitations as we have low slack so that there the economy itself will pressure them to raise rates I think probably too much I think we have a supply demand problem for bonds that will particularly come next year in the year after in other words because of that tax cut and the deficits will have to sell a lot more bonds and the United States itself can't absorb that quantity of bonds so we're gonna have to sell those bonds to investors in other countries you look at the portfolio's of those and they have a lot of those they're sort of overweight in that bonds so I think there's a supply demand imbalance in a difficult position for the Federal Reserve that's just a risky situation just to put a fine point on it though it sounds to me like you're recommending that if you were Jay Powell you might slow down similarly to what the president suggested yes I I would look at what is discounted in the curve and realized that that's discounted in all asset prices it's discounted in bonds it's discounted in equities it's this down in real estate private equities that rate of change in them and I would keep it certainly not faster than that and I would keep it probably less than that I think the you know the risks are asymmetric on the downside because if we have a little bit overshoot in the inflation rate you're going to be in a position where it's not going to be a problem who cares if you have two and a half percent or something it's not going to run out of control but if you have a downturn the first in asset prices and then you have a downturn in the economy it's it's an asymmetric risk it's a serious risk we have an economic polarity and populism which is an issue if you have a downturn I think the conflict is going to be greater I think that's a big issue and I think also the tools are not as effective on the downside so I would err on the side of being easier and monitoring let me ask you let me ask a question about it in the car if you're if you're concerned about asset prices one of your peers Dan Loeb recently just wrote we have delivered our portfolio reducing our tech exposure meaningfully and grown our short book we expect to be net sellers over the next few months if markets rally as an investor out there right now how cautious are you well I as I said I think we're in the we've gotten a lot of the good news behind us and I think that assets are fully priced and I think there's asymmetric risks so like I said we're well I don't talk about our positions but I think I I don't I think the upside position is not as strong and relative to the risk rate never made it much sense to me but you said we don't have the tools to address a downturn some people think we need to race raise rates to get to a point where we can cut them if we need to cut them which I don't know if that does that make any sense here that we need that's right that's how that sounds like pretty that sounds like pretty bad logic to me but you know what there so if you're up there at six you know you can keep cutting until like but when you're all the way down near zero you don't have a lot of cuts that you can make in case there is a downturn but is crazy yeah I mean but I'm telling you that what it what's built into the curve what's built into all the markets is an existing interest rate right so you raise that that way is that's not good I think the Federal Reserve should use more macro prudential policies in other words there are parts right now there are some bubbles emerging there are some issues in terms of places but macro prudential policies what what that means is it has a regulatory authority that can deal with certain bubbles as they're emerging to try to be more targeted than using interest rates as a whole you