Look at the stock market’s gains over the past two years, and you wouldn’t be blamed for thinking things are roses and daisies.
Certainly, back-to-back S&P 500 returns of over 20%, including a 24% gain in 2024, are impressive.
However, stock market returns, especially into the tail end of 2024, are masking a big and growing problem.
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While inflation is lower than it was in 2022, it continues to crimp working Americans’ budgets. Meanwhile, the Federal Reserve’s monetary policy in 2023 prompted surging interest rates on houses, autos and credit cards, further pressuring consumers. Toss in the steady stream of layoffs this past year, and you’ve got a good argument that the U.S. economy is wobbly.
That fact isn’t lost on the billionaire and legendary hedge fund pioneer Ray Dalio.
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Dalio founded Bridgewater Associates, a hedge fund managing more than $112 billion of assets. Recently, he offered up his take on the U.S. economy.
Given his long experience and track record of success in navigating economic pops and drops, his comments raised a lot of eyebrows.
Ray Dalio, founder and CIO mentor at Bridgewater Associates, recently offered a stark assessment of the U.S. economy.
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Cracks in the U.S. economic armor are forming
The U.S. economy grew 2.3% in the fourth quarter. That was a solid showing, but it also marked a deceleration from the GDP of 3% and 3.1% in the second and third quarters, respectively.
So far, data from the first quarter suggest that the economy has weakened.
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The Atlanta Fed’s first-quarter GDP tracker was recently revised to a negative 2.8% after disappointing personal-consumption spending and inflation-adjusted private fixed-income data were reported last week.
The measure will likely rebound as more data become available. Still, the negative reading has captured attention and sparked recession worry, given that most consider a recession to be two consecutive quarters of negative GDP.
There’s a good argument that the U.S. economy isn’t as healthy as last year. Inflation peaked above 8% in 2022, prompting the most hawkish Federal Reserve monetary policy since Paul Volcker crushed inflation in the 1980s.
That strategy mostly worked. Consumer Price Index inflation fell to 2.4% in September 2024, providing the necessary wiggle room for the Fed to shift gears and cut interest rates. Fed Chairman Jerome Powell continued easing, further reducing rates in November and December.
Inflation has rebounded to 3%, however, putting the Fed’s dovish shift on pause. Powell held rates steady in January, and CME’s FedWatch tool rates chances of a cut at the next meeting on March 19 at only 7%.
The prospect of slowing GDP and rising inflation puts stagflation chatter back front and center.
It doesn’t help that the jobs market has gotten shakier. Unemployment is still relatively low at 4%, but there’s been a steady drumbeat of layoffs this past year, especially in high-paying technology jobs. According to Challenger, Gray, & Christmas’s recent report, 407,000 tech jobs have been lost since 2022.
And let’s not forget the topic that was most talked about this week: the tariffs threatened by the Donald Trump administration.
Uncertainty about whether tariffs will fuel more inflation and slow economic activity because of negative impacts on productivity is a focus of many, including former Treasury Secretary Robert Rubin.
Ray Dalio delivers hard-nosed message on the U.S. economy
Dalio has seen his share of good and bad economies since founding Bridgewater in 1975, including the 1970s inflation spike, the savings-and-loan crisis in the 1990s, the internet bust in the early 2000s, the Great Recession in 2008 and the Covid tumble in 2000.
What he’s seeing now isn’t encouraging: Dalio says the most pressing issue facing America today is out-of-control debt.
The U.S. government had already lost sight of austerity before Covid, but massive post-Covid spending, while necessary, catapulted debt ratios, and spending appetite remained high.
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As a result, Dalio is pounding the table, urging the government to cut debt now or face a crisis, perhaps sooner rather than later.
“If you don’t do it, you’re going to be in trouble,” Dalio said on Bloomberg’s Odd Lots podcast. “I can’t tell you exactly when it’ll come; it’s like the heart attack. … You’re getting closer. My guess would be three years, give or take a year, something like that.”
So far, buyers have largely shown up to absorb all the Treasury securities we’ve been issuing to fund the federal budget, but Dalio is concerned that soon we’ll hit a tipping point where there are too few sellers for too many bonds.
“Nowadays with sanctions and too many bonds and so on, when I calculate who are the buyers and how much do we have to sell, I find a big imbalance and I know how that works,” said Dalio.
If buyers disappear, interest rates will rise, further taxing the economy. If it gets bad enough, the U.S. government could consider something otherwise unthinkable, a restructuring of its debt, suggests Dalio.
What’s an investor to do given such a concerning backdrop? Everyone’s situation is different, but Dalio thinks owning gold in portfolios makes some sense.
‘What you don’t know about the future is far greater than anything that anyone knows about the future. So we always have to be humble. What you need is a proper diversification to create a portfolio,” said Dalio.
Dalio thinks 10% to 15% is a prudent allocation to the yellow metal, adding, “That kind of little bit of gold serves as a protection and diversifies the portfolio. And what I think the most important thing is is that you don’t have much of an exposure.”
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