We're going to have to sell a lot of bonds, you build up a bubble, you're likely to have some kind of dislocation. I think we're building kind of a bubble unless, if you've been living under a rock, you know that the federal reserve has been printing. Substantial amounts of money over the past few months. Ultimately, this money printing has increased financial assets all across the board and is culminating to create an unprecedented situation.

Ray dalio, the founder and cio of the largest hedge fund in the world. Bridgewater associates recently spoke about how he thinks the fed has forced the financial markets into a corner. Dalio is an expert in macroeconomics, which has helped him successfully manage 150 billion dollars over the past few decades, countries have literally gone to dalio for his economic insight because of his renowned expertise. Now, this isn't just a trap for the federal reserve, but also for investors like you and me, this video will go in depth into what these changes are and how the fed just trapped themselves in a major way.

Welcome to caskins academy, if you're new to the channel, please consider subscribing for more content like this and let's get right into it. First of all, this isn't going to be one of those doom and gloom videos that tell you that a crash is coming precisely on august 13, 2021 at 11 a.m. Eastern time correctly, timing, market crashes is basically impossible and i'm not here just to spread fear, as some others have done with that being said, our current situation is very strange and there will be some serious implications from these events. Over the past few months, the federal reserve has been enacting high levels of quantitative easing or essentially, the purchasing of massive amounts of bonds.

This additional buying power from the government has artificially inflated bond prices, as some of you may already know, bond prices and bond yields are inversely related when bond prices go up, bond yields must go down and when bond prices go down, bond yields must go up as A result, bond yields have been suppressed to incredibly low levels as of right now, the 10-year treasury yield is roughly 1.5 percent. At the same time, the inflation rate is easily much higher than 2 percent. Essentially, while bond investors might think they're going to make money. The truth is that the real returns are negative nominal returns, which are the returns before inflation are positive at 1.5 percent per year, but real returns, which are the returns that account for inflation, are literally negative because of this bonds are a joke of a financial instrument.

Right now, the logical move right now would be to have the federal reserve sell some of its bonds in order to combat the artificially high bond prices. We've already seen this start to happen. In fact, the fed has already made the decision to start selling off corporate bonds and corporate bond etfs that it purchased during the middle of the pandemic. Additionally, the fed has already begun inching towards the discussion of slowing down bond purchases, with the information that you just saw, you might think that the fed may be tapering off on bond purchases.

However, ray dalio thinks that the fed is actually in a completely different situation. He believes that instead of the feds selling bonds, the fed will be soon forced to purchase bonds that might sound crazy at first, but a deeper dive shows that it actually makes a lot of sense as i've covered earlier. Bonds are not attractive at all right now. One of the reasons why bond prices are so high is that large institutions have loaded up treasury bonds in order to stay conservative that way.

If the pandemic worsens, then these institutions can sell those bonds and support their businesses. Once these large institutions and investors begin selling bonds to purchase other financial assets like domestic stocks, real estate and international stocks, bond prices will collapse. This is because nobody wants to purchase bonds when there are inflationary pressures, because inflation guarantees negative real returns at the current rate. Not only that, but other financial assets have the potential to generate significantly higher returns in order to prevent the selling power from leading to a crash in bond prices, the fed will have to buy bonds which artificially increases the money supply.

So, instead of tapering off like the fed, is planning to do, the fed will have to continue inflating bond prices and create more inflation in the financial markets. This type of inflation is called monetary inflation, which is when there's a consistent increase in the money supply. The real issue is that we have a supply demand issue of uh bonds because we're going to have to sell a lot of bonds to those um in the world who own bond inventories and they have uh very low interest rates on negative real interest rates and They're overweighted in u.s bonds and they're gon na have to buy a lot more and um. That is also coming at a time when chinese capital markets, other capital markets, are becoming more attractive.

That creates a supply demand issue that can create a monetary inflation because um there will not be enough demand to buy those bonds, and that means that it's likely that the federal reserve will not be able to taper or cut back and might actually have to increase To prevent interest rates from going up and that's a classic monetary inflation, you might think that the fed will let bonds crash, but the bond bubble popping would drastically impact every other asset class. When interest rates are low, then borrowing money pays off big time. That's not a surprise, since interest rates near zero make it so that borrowing capital is practically free. The federal reserve wants interest rates to continue at low levels, which will exacerbate bubbles in every other asset class.

For example, people in institutions are buying up real estate, since borrowing is so cheap at the moment. Additionally, more margin, debt in stocks, cryptos and commodities is piling on, and, lastly, businesses are continuing to borrow money in order to expand, since borrowing is so enticing at these low rates. However, if interest rates take a sudden turn upwards assets that were artificially inflated by low rates are going to take a sudden turn downwards. I think you're going to see the continued inflation in in and other assets, and it pays to borrow a lot.

I know like in to borrow houses right now i mean to buy i'm seeing interest, only loans being made when there's basically no interest rate. In other words, you don't have to break that pay back your principal anytime soon and you j and the interest rates are so low. So there's a lot of money being thrown around that way. Those are the things that concern me more because you build up a bubble.

You saw the reaction in the markets when the fed just even hinted at tightening. I don't think they can tighten a lot without having a big negative effect. Now the fed can't just let interest rates rise that would lead to an entire crash in all financial assets, which is why dalio mentioned how the fed will have to purchase bonds to prevent this from occurring. Dalio thinks that investors can make immense profits before this event.

Actually occurs by investing in chinese related assets. The pandemic hit the u.s hard, while china already recovered quite a while ago. As a result, in an effort to meet high demand, us businesses have begun importing more and more chinese goods. This leads to an uneven balance of payments for both countries.

Each country has a balance of payments which shows all of their international transactions. A balance of payments includes two portions, the current account and the financial account. The current account includes all the international trades of goods and services, along with transfer payments. On the other hand, the financial account includes investments in foreign financial assets such as stocks, because china has been exporting goods in the us lately, their current account isn't a surplus.

In other words, chinese businesses now have a huge supply of u.s dollars. These u.s dollars are going to have to be used for importing u.s goods into china. Investing in u.s financial assets or converting us dollars to chinese yuan either way the u.s dollar in comparison to the chinese dollar must appreciate. This is because, when chinese businesses use their us dollars to purchase goods or financial assets, this leads a us dollar to depreciate.

Due to the expanding money supply, additionally, if there's an excess of us dollars being converted to chinese wen, this devalues the dollar. Because of this situation, dalio believes that chinese assets are great for hedging against inflation in the u.s dollar. First, the best alternatives or other asset classes, but also, let's say china, for example. I think the situation that we're in is quite similar to the going from the late seven late 60s into the early 70s, when there was a different core inflation rate in the united states versus uh, germany and japan.

It's different balance of payments situation, we're in a basically a balance of payments deficit they're at a balance of payment surplus position. That means that um they chronologically are worried about imported inflation and there's favorable capital flows. So i think that that's negative for the dollar, particularly against asian currencies in terms of u.s financial assets, dalio thinks we are in a bubble. This bubble makes it difficult for investors to find unique investment opportunities, since a lot of stocks are trading at premium valuations.

I'm more worried about the inflation in financial assets and what that means for returns and bubbles that are developing because there's a massive amount of liquidity around and it's being thrown around um so that it's you know it's a different, difficult environment uh for uh those returns To be uh justified, i think we're building kind of a bubble so um, i think inflation in financial assets and so on is um as an issue related to liquidity, larry summers, the former secretary of treasury and current harvard economics, professor also joins dalia, to explain how He sees the future of the economy. Changing drastically larry equated our current situation to driving a car 100 miles per hour when the road is empty. However, the road won't always be empty and our car will run into an accident along the way we're driving our car. At 100 miles an hour on a road that is empty right now, but won't always be empty and i don't know what form the accident will come.

But when you're driving 100 miles an hour, it's probably not actually the fastest way to get where you're going. Because you're likely to have some kind of dislocation, like i mentioned earlier, this isn't going to be one of those typical doom and gloom videos. The truth is that a crash may never come. The only aspect that is clear right now is that lower long-term, real returns in financial assets seem very likely.

In the past year, people have enjoyed outstanding capital gains. However, don't expect these types of returns to continue for the general market? There will be some stocks that will rise substantially, but those types of opportunities will be much more difficult to find. This is because, when asset prices rise, the expected rates of return decrease the relationship between future returns and current prices in the stock market is inversely correlated. This is similar to the fact that higher bond prices lead to lower yields.

Similarly, when the stock market rises, the expected future rates of a term decrease overall financial assets in general will likely have lower long-term real returns. Long-Term returns are going to be lower on assets. We've been saying that for some years and people who've been in asset markets have done very, very well because even lower cap, even higher capitalization ratios price earnings ratios asset price to rent ratios have been taking place. When you have the liquidity and you drive down real rates and you drive asset prices up that doesn't mean they come down.

It just means liquidity drives those for their particular future returns during this complicated macroeconomic environment. Investing is more important than ever. I recently published three exclusive reports on my patreon, including an 11 page, a 12 page and a two page report on three different stocks, all of which, i can confidently say, will likely succeed in our current macroeconomic status. If you're interested in that, including my buy and sell reports, my new 25 000 portfolio, which i have a goal of growing to 100 000 exclusive valuation spreadsheets in my main portfolio, check out my patreon in the first link down below.

I will also leave a link to the full interview i use down below. If you enjoyed this video, please hit the like button and subscribe and i'll see you in the next one.