World on the Verge of Economic Collapse
The U.S. stock market is having a terrible start this year, as the S&P 500 index plunges nearly 10% since entering 2016. With worldwide economic collapse being a real possibility, billionaire investor Ray Dalio says that the U.S. Federal Reserve could start quantitative easing, rather than raising interest rates again.
Ray Dalio, founder of the world’s largest hedge fund Bridgewater Associates, was at the World Economic Forum in Davos, Switzerland and told CNBC, “I think a move to a quantitative easing would bolster psychology.” (Source: “Ridgewater’s Dalio: Fed’s Next Move Toward QE, Not Tightening,” CNBC, January 20, 2016.)
Ray Dalio: The Risks Are Asymmetric on the Downside
Recovery in the U.S. economy seemed to be going well with solid job gains in the labor market and solid GDP growth rates. With that in mind, the U.S. Federal Reserve raised its benchmark interest rates in December 2015, marking the interest rate increase since the financial crisis in 2008/2009. Moreover, the Federal Reserve is forecasting as many as four Fed rate hikes in 2016.
The impact of the Fed rate hike on equity markets wasn’t substantial at first, but after entering the New Year, investors started turning to risk-off mode. The Dow and the S&P 500 both lost about 10%, while the NASDAQ dropped 13% since the beginning of this year.
Ray Dalio thinks that this kind of market movement is pushing the world toward a global economic collapse and the Fed should reconsider its plan for future rate hikes. He predicts, “we’re going to have a lower level of growth in six months from now…about 1.5%.” (Source: Ibid.)
“The risks are asymmetric on the downside,” said the hedge fund manager. “Because asset prices are comparatively high at the same time there’s not an ability to ease.” He believes that the problem of asymmetric risk exists not just in the U.S., but also around the world, meaning “every country in the world needs an easier monetary policy.” (Source: Ibid.)
Ray Dalio: U.S. Dollar Undermined in the Long Term
Note that China had some major stock market crashes in the beginning of this year. Moreover, as the largest consumer of many commodities in the world, China’s slowdown in economic growth could trigger a worldwide economic collapse. Dalio believes that the situation in China, particularly with its currency, will have an impact on the U.S. For example, if the Chinese yuan shows significant weakness, we could see “more imported deflation” to the U.S., which will “make things more difficult,” he says. (Source: Ibid.)
Looking at the currency in the U.S., Ray Dalio is not very optimistic in the long run. He said that the emerging countries that owe the U.S. dollar are going to buy the dollar and create a short squeeze temporarily.
But Ray Dalio concludes that “once that squeeze is over, it undermines the dollar longer term.” (Source: Ibid.)