RAY DALIO ON THE END OF THE BUSINESS CYCLE AND BOND BEAR MARKET

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01. I don't need to tell you there's a lot of happy talk about the global economy and financial markets here in Davos you've said at Goldilocks I've heard it from a lot of other people but you're already looking forward to the next downturn and even to the election in 2020 how come what we always have cycles of minutes so we are in a perfect situation right inflation is not a problem growth is good there's but we have to keep in mind what part of the cycle we're in the capacity utilization the unemployment rate so we're going to have a where are we where are we in there where we're we're in the late stage of the cycle where you know that's a period of time that might go for two years or something in that Pacific when the operating rate gets high enough that the central banks think that they should begin to put on the brakes that's wait the punchbowl away that's right another word to you it's like euphemism right you know economic capacity is built at a certain rate and then there's the growth in demand so think of that as like driving behind a truck that's you know the truck is going a 50 miles an hour and if you're driving at 70 miles an hour that's fine until you get close to that capacity right then you can't have the car or the economy drive to the face that same 70 miles an hour it's got to slow down and so the central bank starts to put on the brake and that's the part of the cycle so from 2008 until central banks started to put on the brake we had one kind of an environment so now we are closer to its capacity constraints and with that closeness to its capacity constraints we're going to have a still a lot of stimulation and that stimulation is going to look great it's gonna be great and it's particularly short-term stimulation in the form of the the all the things that we now have form for all the tax reform what it means for corporations and there's a lot of cash on the sidelines investors have cash on the sidelines bank stuff cash consumers have guests and they can feel that they're being left out it feels stupid to own cash in this kind of environment so I think that that's gonna be great for earnings and it's gonna be great for that stimulation of growth and we have to look just beyond that to say what is monetary policy going to be in that and what is how difficult is monetary policy so now let's take a look at that because that's we could look at step one that's kind of the blow off stage of everything well hang on before we get to monetary policy for how long do you think we're going to let's call it enjoy this perfect environment and when I say we I don't mean just the financial community clearly that's good for risky assets if earnings are going to be great presumably that's good for stock prices right yeah but companies are raising wages doing some hiring they're doing some investing so some of it's trickling down to let's call it the real economy so how long will people be able to enjoy that I think that spurt and if you look at all the tin it will be a 12 to 18-month kind of spurt and then while that's happening then the central bank will have to tighten monetary policy and a feel as though it has to tighten monetary but it will feel like it has to tighten monetary policy and with that it's very delicate because if you look at the history there is a if markets if there's a tightening of monetary policy so that interest rates rise at a rate that's faster than is reflected in the curve yield curve right the yield curve it's a surprise it's a surprise and what I mean is you could look at what the interest rate is discounted for every month forward for god knows how to how far and all assets are priced off of that in other words you know how a bond is priced off of that you know how equities are priced off of that all assets private equity all is priced off of that so if it rises faster historically we've seen this when it rises faster than its discounted in the curve it's a negative because it has a negative present value effect on asset prices in addition there's the slope of the yield curve which matters because and if you look at where 10-year rates are let's say 2.6 percent as you start to get closer to that and that yield curve flattens then that causes a constraint in the economy and a constraint in lending so it we have a situation now because of assets but having a long duration there's a there's a sensitivity to that there's also a lot more interest rate sensitivity and economy assets themselves are more sensitive like a 1% rise in bond yields will produce the largest bear market and bonds that we've seen since the 1980-81 period has that bear market started are we in it I think we're in it we're in it yes so I think we're really I think we're an environment which is really good for stocks and bad for bonds and and and and and that kind of blow off when did we enter that bear market when the when the tenure across two-and-a-half well we well we know I mean we know where the bottom was okay and so it depends how you define a bear market so what I'm trying to say I think is monetary policy will be delicate not to affect interest I think the Fed will not only tighten at a rate which is faster than its discounted in the curve I think they'll right tighten at a rate which is probably faster than they are even signaling