What scares Ray Dalio the most?
As reported by CNBC, during a panel discussion in Davos, Switzerland, Ray Dalio said, “What scares me the most longer term is that we have limitations to monetary policy — which is our most valuable tool — at the same as we have greater political and social antagonism.” He added, “So, the next downturn in the economy worries me the most.”
Dalio said that the rates are almost zero in Europe (HEDJ) and Japan, and in the US (SPY) (DIA) rates are near 300 basis points, so the overall ability for the central banks to avert a downturn is limited. Usually, central banks lower interest rates to bump up the economy. However, when the rates are already at low levels, the maneuverability of banks goes down.
Rising populism and income gap
In addition to economic and fiscal concerns, Dalio also highlighted that rising populism along with the income gap is also a concern here and “these types of political issues are now very connected to economic issues.” He, thus, believes that the next downturn will not be similar to the ones we have recently seen due to a mix of these factors. He also drew a parallel to the current situation to the late 1930s when interest rates hit zero and money printing drove financial assets higher.
Investors not prepared for the downturn
Even previously Dalio had warned that investors are not prepared for the next downturn. As reported by CNBC, Dalio said, “the world by and large is leveraged long.” He thus believes that the next bear market could be very painful, as most are not prepared for it. Dalio has previously recommended having a balanced portfolio of assets to weather a financial crisis. His all-weather asset allocation formula includes 30% stocks, 40% long-term US bonds (AGG), 15% intermediate US bonds, 7.5% gold (GLD), and 7.5% other commodities (XME). This portfolio, Dalio notes, needs to be re-balanced annually.
You can read Dalio’s Advice on How to Prepare for the Next Downturn for more on this topic.