Ray Dalio: Where Could the Business Cycle Head?

On Thursday, Ray Dalio expressed concerns about the length of the current business cycle. He was speaking at IMF’s Annual Meeting 2019. Since the financial crisis, the global real GDP growth rate has expanded for 11 consecutive years. Based on IMF data, the global GDP could continue to expand until 2024. In the IMF’s recent World Economic Outlook report, it expressed concerns about the global GDP growth rate. Based on the report, the global real GDP rate will likely rise at the slowest pace this year since the sub-prime crisis.

Ray Dalio: Where Could the Business Cycle Head?

Dalio said, “This cycle is fading, we are now in the world in what I would call a ‘great sag’.” The negative interest rates might lead to a big sag instead of a big bust. He was referring to the $17 trillion bonds that have a negative yield. Dalio also said, “Europe is at the limitation of that, Japan is (“too”) and the U.S. doesn’t have much to go on for that.” He thinks that the business cycle’s growth and depression phases are complementary.

Dalio’s take on the wealth gap

The wealth gap has widened in the US. According to Dalio, the “top one-tenth of 1% of the population” has net worth almost equal to the bottom 90% in the US. The uneven distribution of wealth is an important demographic shift. He compared the current situation to 1930.

Based on the Federal Reserve Bank of St. Louis’s economic research, the top 10% of Americans had 67% of the total US wealth in 1989. At that time, “the next 40% owned” 37% of the total wealth. The remaining 50% owned nearly 3% of the total wealth.

In 2016, the figure tilted towards rich Americans. In the same year, “the top 10% of Americans owned” 77% of the total wealth. The next 40% of the population only owned 22% of the US wealth. Interestingly, 50% of the US population only owned 1% of the total wealth. The reports also suggest uneven income distribution. Read Leon Cooperman: Trump Is Better than Elizabeth Warren! to learn more about income distribution in the US.

US-China challenge

The ongoing conflict between the US and China reminds Dalio of “a rising power challenging an existing power” in 1930. Based on an IMF report, China could become the world’s largest economy by 2030. Earlier this year, President Trump promised that China can’t overtake the US under his leadership.

China’s trade surplus with the US was around $420 billion in 2018. So far in 2019, the trade surplus is at $231.6 billion. Even with the 2018 pace, after 52 years, the trade surplus could balloon to the current US GDP value. So, China is on a trajectory to overtake the US economy. However, the trade war dented the Chinese economy. In the third quarter, China’s GDP grew 6%. For the first two quarters of 2019, the GDP growth rate was 6.4% and 6.2%, respectively.

In the next decade, China could be the largest market for Boeing (BA). China will likely overtake the US in aviation by 2022. Notably, Boeing’s share prices are sensitive US-China trade talks. China is also a critical market for Apple (AAPL). If China overtakes the US economy, it could become the most important market for Apple products.

Dalio’s view on monetary policy

Dalio said that coordination between fiscal and monetary policy is very important. However, coordination has become difficult with the current political environment. For example, President Trump accused the Fed of a stronger dollar. To continue the current expansion rate, he might provide another fiscal stimulus.

The current expansion rate is key to President Trump’s re-election chances in 2020. On the other hand, Democratic candidate Elizabeth Warren purposed higher taxes on rich Americans. According to Warren, the taxes will help to reduce the wealth gap. However, these kinds of steps might impact the Fed’s economic control.