Ray Dalio: prediction

Transcript context

…Okay. No, I don’t believe it’ll be transitory. I believe that there are two main sources of inflation. There’s the usual supply and demand for goods — cyclical inflation — so that when there’s a demand for something that there can’t be a greater amount of supply being produced for it, there’s an upward pressure in that price, and that comes from strong demand pressing up against capacity limitations. That’s cyclical inflation, and it depends on how far the central bank accommodates that. That’s the cyclical inflation. The second is monetary inflation. When the production of debt is large, but the central bank produces more money and credit, that has the effect of devaluing the value of money and credit, which doesn’t show up, really, as it looks. It doesn’t look like it is going down as much as it looks like other things are going up so that you see things going up, as they are now, and that’s monetary inflation. I think right now we have both cyclical inflation and monetary inflation, so that if you look at the demand for everything, right now the demand is greater than the capacity. It’s really an excess demand issue, but provided by a lot of money and credit being put out. We also are running large deficits, and as we start to look farther forward, we have these very cheap interest rates, which means that it pays to buy things like, let’s say, houses. Practically, there’s no interest rate to speak of, and now a lot of loans are made on interest-only loans even. So, with hardly any interest rate, and not having to pay back principal payments in terms of the amount of ridiculousness that it’s gotten to that way, there’s a lot of demand for those kinds of things. Now, that could be cyclical, but I don’t believe, when I look forward, that our deficits will be primarily cyclical. I look then to the issues of politics, and the issues of the deficits, and the needs for money and credit or the desires for money and credit, and I think that they’ll be structural. Also, there are certain changes in expenses . . . for example, while I believe that climate change and moving to cleaner energy and other such moves is very good for our ecosystem in the long run, it’s also very expensive, and it makes less efficiency. So, that’s going to, at that same time, add to inflation. My worry or belief is that that will increasingly be built into the process, which we’re seeing, for example, in terms of changes in compensation, changes in many, many things. Everybody’s seeing inflation around them, and it’s not just something that’s going to settle back. If I take the cyclical piece, it’s going to require enough of a tightening — if you were to deal with that — enough of a tightening in monetary policy to stop that buying. And the consequences of that would be very bearish for markets, and it would be very bearish for the economy and, I believe, too bearish for the Federal Reserve to want to tolerate. stop that buying. And the consequences of that would be very bearish for markets, and it would be very bearish for the economy and, I believe, too bearish for the Federal Reserve to want to tolerate. That would only deal with the cyclical inflation pressures, whereas at the same time, we have the structural issues of those kinds of deficits that need to be monetized. For those reasons, I don’t believe it’s transitory, that we will go back to what we experienced before. If you had to describe it in its most fundamental terms, your advantage as an investor compared to other professionals — is it that you’re smarter, you process more information, you have better managerial methods? How would you pin down your unique advantage and expertise?…

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