Arrival of the Financial Crisis in 2019 – Dario and Roger’s advice
What risk lies ahead?
The global decline in stock values that occurred in February 2018 was triggered by fears of rising long-term interest rates in the U.S. After the decline, the financial and capital markets have shown some stability, however, the market is still volatile with the yield for the 10-year U.S government bonds closing 3 per cent level, which could trigger a big stock drop.
The rapid decline in the market is a concern, but an even more fearful event is recurrence of a global recession. The financial crisis that occurred in 2008 has recovered over the past decade. The recovery cycle, generally considered to take 10 years, was over, which makes us more anxious.
Some of the renowned American investors’ prediction that “Financial crisis is coming between the end of 2018 and 2019”, has drawn great attention, along with the concern about the current market instability.
Dalio predicts: “Recession occurs in 2019”
Ray Dalio, an emperor of hedge funds, is a Bridgewater Associate founder whose hedge fund manages almost $162 billion. His prediction made a sensation. During a debate held on 21st February at Harvard University, he said: “The probability of a recession prior to the next presidential election would be relatively high, 70% or something like that.”
Before that, he also stated on 12th February: “Recession is highly likely to occur in 2019.” Dalio, who is highly trusted by investors because of the precise predictions exemplified by the U.S financial crisis, which occurred in 2008, and the European market crisis attributed to debts, said that the trigger for the next economic recession would be “Mr Trump accelerating sweeping tax cuts or global stimulus measures, which will cause a sharp reversal.” A series of his measures will overheat the U.S. economy, which will cause tightening of monetary measure and FRB will raise interest rates. Consequently, the asset values will sharply decline. This the scenario is called “Trump Risk.” Dalio analyzed: “ The U.S economy is at the pre-bubble stage. It could quickly morph into a bubble, following by a bust.”
Dalio had a negative view on the market due to the possibility of “Trump risk.” Why? Firstly, President Trump and North Korean leader, Kim Jon Um will play a chicken race over denuclearization. Secondly, The U.S Congress will fail to raise the statutory debts in autumn of 2017, which lead the government to go into default, which will result in a loss of trust from the nation. That said, his prediction of a sharp decline did not happen. Even so, Dalio still firmly believes that President Trump will be a cause of the next recession.”
Amid the potential risk, what would be the best investment strategy? The hedge fund billionaire who owns net assets of $17,7 billion suggested: “Do not jump onto the band wagon”, and adding: “If you are not scared, sell it, and if you are scared, buy it. When the stock goes up, people buy it. It means it is too high, and when people think it is the worst, it is less high.”
Dalio also stated: “You can not beat professional investors who put in several billion dollars for the information. You cannot compete with them. All comes from the “Global macro” method that he admires. It is a concept for taking an action in accordance with your share price prediction based on the meticulous research on the market demand that is triggered by macroeconomics, monetary policy, history, and social trends under the current international situation.
Lawrence Summers, former Vice President of Development and Economics, who was one of attendees in the debate at Harvard University, admiringly said: “Dalio’s advice is worth while listening to.”
Potential Dangers: End of Economic Recovery and Increase of debts
S＆B Global Rating reported that the second longest economic recovery period will continue until Summer of 2019. In contrast, the research conducted by The U.S. Bank of America, Merill Lynch, surveyed investors in February suggested that the majority thought that the global economy is in late cycle. Guggenheim Partners, a U.S investment firm, forecasted in January “next recession will come by the end of 2019 or 2020.” The timeline is almost the same as that of Dalio.
Economic recession may not come, however, at least to say, many investors are sharing the view that “the Trump administration’s spending will cause an overheating economy and FRB will fail to stop the acceleration, which could bring a significant decline.” Lloyd Blandfein, CEO of The Goldman Sachs Group, Inc., is one of the advocators.
What is the difference between Dalio and Rogers?
A legendary investor, Jim Rogers, who is renowned as “Global macro investment method,” believes that “market crash is coming.” “Since the last crash, the world has been laden with debts. America will be the largest debtor,” he pointed it out on 8th February.
On the other hand, Rogers emphasized that “ the former Federal Reserve Board Chairman, Yellen, said that market crisis will never happens in her lifetime, but it is a mistake. It’s coming. It will be the worst crisis in my lifetime.”
Comparing with Dalio who said that “the Federal Reserve will trigger the crisis by raising interest rates in order to speed down the President Trump’s economy policy”, Roger stresses: “Global debts increased more despite of tighter financial regulations.” Similarly, Yale University’s fellow, Stephen Roach warned of the debts expansion, on CNBC, the U.S economy broadcasting service, on 13th February.
Roger’s analysis: What is a safe heaven?
Rogers’ insight is especially being focused on by the masses. He said that the US dollar will be a safe heaven from 2018 to 2019 and it will be driven by anxiety about the market uncertainty, not by the U.S economic fundamentals.
“Actually, the US dollar is not a safe heaven because the U.S is the largest debtor nation in the history of the world, and the debts is still expanding”, he said, and added, “The excessive purchase of the US dollar could lead to a bubble.” The value of the US dollar is lower in the current market, however, if the financial crisis will occur, Roger’s forecast may happen.
As you know, many famous investors have predicted the next financial crisis coming is just around the corner, saying that Trump administration’s spending spree will lead FRB to raise interest rates. In March, if the FOMC decided to raise interest rates, how would the market react? Does a rally in stock occur? Would it be the prelude for the 2019 financial crisis?