Dalio: Stock Market Drop Is a ‘Taste’ of What Fed Tightening Will Bring


Breitbart: Ray Dalio: “Over the past week or so, we had reports of strong growth and rising wages (good things!), which sent bonds and stocks down (bad for most investors) due to justifiable fears that the Fed will tighten faster than is priced in the credit markets.

The surge in growth and wages came because of both the fiscal stimulation and the rekindling of animal spirits, thrusting the economy into late-cycle capacity constraints, which is leading to the expectations of faster Fed tightening.

In other words, fiscal stimulation is hitting the gas, which is driving the economy forward into the capacity constraints, which is triggering interest rate increases that are hitting the brakes, first in the markets and later in the economy.  This confluence of circumstances will make it difficult for the Fed to get monetary policy exactly right.  This is classic late-cycle behavior (when it’s difficult to get monetary policy exactly right, which leads to recessions), though it is more exaggerated because the durations of assets are uniquely long, which means that when interest rates are low, prices of assets are more sensitive to changes in interest rates than when interest rates are high.

Despite this warning that the Fed will have trouble getting policy right, Dalio appeared to downplay the importance of the recent declines.

“Still, these big declines are just minor corrections in the scope of things” more …

Opinion: The damage from the 2008-9 financial crisis is still being felt.

From 1975 to 2007 the government forced banks to loan money to prospective home owners who had no way to pay the loans back. The bad mortgages were packaged up with good mortgages and sold as government agency bonds with a 5-6% interest rate and a AAA rating.

Banks and investors loaded up.

When the bad loans began to default in 2007, major banks began to fail and the Federal Reserve stepped in to protect the banks.

The Fed created over $4 trillion in new money and bought the toxic bonds from the banks leaving the Fed with the debt and the banks loaded with cash. The process, called quantitative easing, had never been done before.

The financial markets rallied for 9 years.

As the economy slowly recovered the Fed stopped printing money and waited for a time that it could unwind the debt.

For the past two years Fed chief Janet Yellen and the Federal Reserve Governors have been proudly making speeches about how they and Barack Obama saved the world from financial Armageddon. Speech after speech called for higher interest rates despite the fact that the Fed’s desired 2% inflation, the main reason to raise interest rates, was not forthcoming.

Now the Fed wants to unwind its debt by unloading the bonds. When large amounts of bonds are sold, interest rates go up, while at the same time, team Trump is planning massive infrastructure spending that will cause the Treasury to issue more bonds which will cause already unprecedented debt levels to rise.

If we do get a market crash at some point it will necessarily be followed by a recession and another round of QE stimulus to lower rates again. The mess is now so deep that it can only be delayed because there isn’t enough money in the world to pay off the debt without printing even more money, and that could collapse the US dollar.

For Bible prophecy students this is a fascinating runway to what we know will happen. We know that after the rapture of the church, 4 apocalyptic events, symbolized by 4 horsemen found in Revelation 6, will begin:

  • White Horse: Leader of a new global government (Rev. 6:1-2)
  • Red Horse: War (Rev. 6:3-4)
  • Black Horse: Financial collapse (Rev. 6:5-6)
  • Pale Horse: Death from disease and wild animals (Rev. 6:7-8)

And then things get worse.