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although economists frequently make mistakes ray dalio is not an economist he is a fund manager who is putting his clients money billions of dollars on the line welcome to finance simple where money is made easy and today we'll discuss radialis expectations of a global collapse dalio made billions off the dot-com bubble and the recession of 2008 but he is currently constructing the mother of all shorts you must take dalia seriously because he can't afford to lose money in europe dalio just revealed a 10 billion dollar short position and you can bet that he's been accumulating an even larger short position in the u.s market the u.s economy is in trouble and we are showing all the signs of stagnation stagflation is one of the worst economic crisis and the precursor to recession stagflation occurs when there is both high inflation and a poor economy the gdp fell in the most recent quarter and the inflation rate has surpassed eight percent given that stagflation often precedes a recession this is very alarming after researching the economy for several millennia ray dalio found a pattern typically the cycle begins with a surge in public debt which temporarily strengthens the economy in the short run this can seem sensible but landing is a two-sided process with creditors and borrowers both sides of a transaction can survive when there is too much debt in the system too much debt being taken on by the debtor indicates that the creditor has few assets and should therefore seek to increase revenue the main issue is that when debt levels are excessive debtors lack the resources to reimburse creditors and must begin to sell assets an instance of that is chinese property developer evergrand which needed to liquidate properties so they could repay that when this happens the economic system will attain a negative position the central bank will see this vulnerable economic system and print cash attempting to keep the system from crashing while printing cash may seem to help for a brief time it creates long time problems inflation then borrowers default on debt placing the economic system in a more vulnerable position printing money only lessens the value of the money money is paper and no longer based on hard assets like gold when the central bank is flooding the market with meaningless currency and driving interest rates down the market becomes saturated with the valued currency now we have the issue of the valued currency and never address the underlying issue too much debt we are currently in a stagnation we have a poor economy rising unemployment and excessive inflation because printing money doesn't help the economy in the long run the central bank slowing the economy by raising interest rates is the next phase in the process in the past dalio has seen that doing so almost always results in a recession or depression nothing can be done to prevent it from happening the inflation issue gets worse if the government keeps printing more money by taking money out of the system one can eliminate demand which is the only method to end inflation stagflation then is the state that exists between the peak of a debt cycle and a significant economic slowdown the last time we saw a stagflation like this was the late 1960s dalio explains that the government spent a lot of money on weapons due to the vietnam war and social programs to quell the rising unrest at home however the u.s government had to print money since it lacked the funds to settle this debt as a result the u.s experienced stagflation a period of both high inflation and sluggish economy the 1970s were historically unique at the time and they helped to prepare the us for financial collapse in 1971.
the two basic sorts of money commodity money and fiat money were subtly mentioned by dalio money that derives its worth from its constituent parts is called commodity money take gold as an illustration people have been transacting with gold for several centuries this is so that it can retain its high value as a rare metal with distinctive chemical characteristics fiat money in contrast is money that the government backs in issues a prime example of fiat currency is the us dollar whose value is solely set by the us government a significant transition from ophea to commodity money took place in 1971.
if the government decides to keep producing money stagflation puts economies at risk of erasing their fiat money the 2008 hyperinflation in zimbabwe is a prime illustration of this the government made the error of printing more and more dollars which resulted in a daily inflation rate of 98 percent for the zimbabwean dollar people only place value on fiat currency because they believe in it the value of the us dollar will plummet if people lose faith in it additionally as the value of the dollar fails further more people start to doubt it the fed is really worried about a positive feedback loop in this situation how severe of our recession are we currently discussing the solution can be encapsulated by a car analogy consider the characteristics of good and terrible drivers a good driver would softly apply the brake and gas pedals to move the automobile ahead at a generally consistent speed there will be outside factors such as people and traffic signals that are beyond the driver's control the ride will be comfortable for the passengers nevertheless if the excellent driver plans ahead and gently utilizes their tools according to the outside factors bad drivers would abruptly adjust their speed by slamming on the throttle and braking the car would frequently lurch backwards and forwards making the ride quite uncomfortable for the passengers the federal reserve has performed poorly behind the wheel in 2021 they slammed on the gas sending the vehicle lurching forward they are currently hammering on the brakes which will send the vehicle lurching backwards in 2021 the fed printed 1.5 trillion dollars worth of currency annually this cost a 25 increase in company pre-tax earnings the highest increase since 1976.
corporate earnings rose by a whopping 37 percent after texas the highest gain since 1948. the fed is currently reducing the money supply at a rate of 1.1 trillion dollars per year we're set to go through a crisis of a similar size we will see those same record-setting movements but to the downside the capital markets overextended in 2021 as a result of money printing according to dalio who uses his bubble gauge to determine whether stocks are overvalued due to easy monetary policy growth stock valuations significantly increased during each of the three decades this gave him the opportunity to look at historical patterns and anticipate the future in all three instances dalio plotted the nasdaq yield on two-year treasury bonds there are still more negative aspects of the current bubble than there were in the 1920s and the 1990s the leverage gauge is yet another tool that dalio employs his leverage indicator evaluates the market's availability of option positions and margin debt dalio stands to profit immensely from the impending overcorrection according to reports he short 10 billion dollars worth of equities listed in europe he is shorting stocks that are comparable to those in the euro stocks 50 index an indicator that measures the top 50 largest stocks in europe we are unaware of whether dalio holds a short position in the u.s market because the sec does not require investors to report their short positions having said that i wouldn't be shocked if he did especially considering his short position in europe furthermore dalia thinks there is a 40 probability that the us would see a civil war in addition to a recession those were dalia's thoughts on the looming global crisis how are you going to protect your portfolio will you apply his suggestions always stay focused on learning and developing discipline get educated make a plan and stay the course if you found this informative smash the like button please share it with a friend comment down below and let us know what would you like to have made finance simple next and definitely subscribe so you don't miss new content keep your head up ears open and always search for knowledge see you soon
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