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Ray Dalio: The Bull Market Is On Its Last Legs

The King of the Westport Woods is seeing bears.

Volatility reigns supreme on Wall Street, as investors weigh the competing forces of strong corporate earnings and indicators of impending inflation, like data issued Tuesday from the National Federation of Independent Businesses showing that small businesses are raising prices at the fastest pace in nearly four years.


Bridgewater’s Ray Dalio is one investor reevaluating markets based on these figures and other forces, like the recent corporate tax cut, which suggest to him that the economy is growing well above its long-term capacity and that equities may have already reached their business-cycle peak. He writes on LinkedIn Monday that we are in a classic “late-cycle” phase of the current economic expansion, when demand is growing faster than the economy’s ability to produce goods and services. This causes “profits to also rise for those who own the capacities to produce those items that are in short supply.” But the party won’t last forever, “as capacity soon becomes overly constrained and prices begin to rise,” leading central banks to raise interest rates and the value of stocks to fall inversely to the discount rate.

Taking a subtle jab at the president, he points out that this process is “why it is not unusual to see strong economies accompanied by falling stock and other asset prices, which is curious to people who wonder why stocks go down when the economy is strong and don’t understand how this dynamic works.”

However, the question remains: just how close are our nearly decade-old expansion and bull market to their denouements? Will profits rise faster than interest rates for the time being, luring cash from the sidelines and pushing stocks higher, or will inflation begin to rise quickly enough for the Fed to enact steep rate hikes, triggering a bear market or even a recession? Dalio thinks we’re closer to the end than he did just weeks ago, writing:

Recent spurts in stimulations, growth, and wage numbers signaled that the cycle is a bit ahead of where I thought it was . . . Then on Friday, we heard the announced budget deal that will produce both more fiscal stimulation and more T-bond selling by the Treasury, which is more bearish for bonds. And soon ahead, we will hear about a big (and needed) infrastructure plan and the larger deficits and more Treasury bond selling that will be needed to fund them. In other words, there is a whole lot of hitting the gas into capacity constraints that will lead to nominal rate rises driven by the markets. The Fed’s reactions to them and the amount of real (inflation-adjusted) rate rises that will result will be very important, so we will be monitoring this closely.

That so much depends on how the Fed will react to sharp changes in fiscal policy and indicators of nascent inflation is surely one reason for the capriciousness of stock markets of late. After all, there remain three vacant seats of the FOMC, and while Trump’s appointment of Jerome Powell as Fed Chair signaled there’d be a continuation of Janet Yellen’s slow-going approach to hiking interest rates and unwinding the Fed’s balance sheets, Trump’s other nominations to the board, Randal Quarles and Marvin Goodfriend, are expected to be in favor of taking a much harder line on rising inflation.

Goodfriend’s Senate confirmation is in doubt after Rand Paul announced his opposition and Banking-Committee Democrats unanimously opposed him, but the pick shows that Trump is willing to nominate dedicated inflation-fighters, even if such decisions risk his beloved stock-market rally.

In other words, investors have little to go on when attempting to answer the most important question at this stage of the business cycle: just how fast will the Fed go? The president seems instinctually inclined towards whatever policies will keep stocks moving higher, but so far has nominated more hawks than doves to the FOMC. And with a month left until we get the first Powell-led decision on interest rates, that leaves plenty of time for investors to drive themselves crazy trying to divine how an inscrutable FOMC will react to often contradictory data.

Christopher Matthews is a writer who splits his time between New York City and Accra, Ghana, with an interest in the intersection of markets, the economy, and public policy. He previously held staff positions at Axios, Fortune Magazine, and Time Magazine, and has been published in Forbes and Debtwire.


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