Davos is always interesting in large part for the varied crowd of movers and shakers it brings out for the week to wintry Switzerland. One of the most unusual warnings this [particular year comes from the billionaire founder of the world’s largest hedge fund— Ray Dalio of Bridgewater Associates. He is out sounding the alarm about the next imminent recession while attending Davos’ World Economic Forum.
Dalio is not just pontificating about the usual U.S.-China trade dispute either. He declared that the kinds of geopolitical conflicts going on now have a suspiciously similar feeling to the market conditions prevalent in the last years of the Great Depression from the end of the 1930’s. Dalio warned:
“These types of political issues are now very connected to economic issues. So I think that’s the character of the environment that we are in. 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. So the next downturn in the economy worries me the most.”
This is driven by the continuing rise and shifting policies of populism around the globe, which is finally becoming a serious concern to equities and financial market participants. Far right and nationalist parties have made impressive political gains around the globe over the last few months. Their success has at last become impossible to overlook or ignore.
Peter Schiff of Euro Pacific Management Group is out sounding similar alarm bells for whoever will listen these days as well, with:
“And they think simply because the Federal Reserve is no longer hiking rates that they no longer have to worry about the Fed pushing the economy into a recession. Well, it’s too late for that. The rate hikes of the past have already guaranteed that the economy is headed for recession. It doesn’t matter whether they continue to raise rates in the future. The recession is a done deal. It’s just now you have that calm between the storm while investors are still clueless and haven’t yet connected those, what should be, very obvious dots.”
In the end, the entire feeble recovery of the past decade was built upon zero and sub-zero percent interest rates. This means that rates now at just over two percent are far too high to sustain the fragile recovery. It is simply no longer enough stimulus. When markets and investors became long-term accustomed to zero and now they have 2.25 percent interest rates, it is simply not low enough any longer.
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