Hey everyone kevin here bear ray dalio with bridgewater capital has become even more bearish. I didn't think it was possible, given that in 2019, ray dalio told us that we were in the ninth inning of an economic cycle and that we were in for a great deleveraging. Well, bridgewater capital, just today, has released more information on why they are more interested in cash than financial assets for 2022.. Folks, we got ta talk about this one, let's hop right in, but keep in mind.

If any of this stresses, you out make sure to get life insurance in as little as five minutes by going to medcan.com life or click the link in the description down below you can also sign up for crypto brokerage, ftx and save money, while trading crypto at Medkevin.Com ftx us all right folks. Here we go, i'm going to give you the summary of this first ray dalio and bridgewater capital talk about how we received this adrenaline shot of money that went into our economy, and this has led to a self-reinforcing cycle of more spending and more income growth. I'm going to show you this picture first because it makes more sense to go through it this way, so, basically the more money we have and the more credit we have added together, so money plus credit plus income equals more spending. So if we have more of all three of these, we end up spending more money and we end up buying more stuff like stocks and real estate.

The problem with this cycle is when it reverses and we end up with less money, less credit and lower incomes. Then spending goes down and financial assets purchases go down right. This makes complete sense, but right now we are in a cycle that is self-perpetuating and self-reinforcing of consistently more spending and higher asset prices. At least that's been the trend for the last couple years.

Not so much the last eight weeks since some stocks have been trending down, but for the past two years that's been about the trend they say. The result of this is because of the federal reserve and fiscal stimulus, the likes of which we've never seen before. But this is now creating a very difficult choice for the federal reserve and they have this choice to tighten or the ability to respond slowly to the changes in the marketplace, and the problem with this, according to bridgewater capital, is that markets right now are assuming that The federal reserve is going to be able to perfectly handle this transition to a lower period of inflation without substantial issues. In fact, i'm going to jump ahead slightly here.

Bridgewater capital here says that markets right now we're pricing, in that the federal reserve's rates are going to do this right here, where i just drew that red line and interest or inflation is going to do this, where that solid red line is so, in other words, The market is expecting this smoothness, but the market is not pricing in the potential risk that, as rates go up, inflation does not actually come down or does not come down smoothly, and potentially rates have to go up substantially more and the market, in other words, is Being too optimistic, so let's look at some of the verbiage that bridgewater capital uses here. First bridgewater again explains this recirculation of how more spending leads to more incomes. The problem here is everything in our economy. Is a cycle remember folks.

When people spend money, what happens they spend money and thanks to the velocity of money, five or six dollars circulating the economy? You go buy a cup of coffee at starbucks. You spend a buck or five dollars that circulates to the point where that money could be used up to - let's say thirty dollars, uh worth worth of money. So it's like thirty dollars worth of income is created for people out of five dollars of spending. So the more we spend, the more incomes actually go up and the more incomes go up.

The more we can spend, which means inflation, can actually in a self-reinforcing self-sustaining way, continue to go up up up up up up up up up up up up up up up up up up up up up up up now. This is a really bearish outlook. I've personally always considered that well wait a minute. You know inflation like i've used before in the analogy, if somebody's going to sell you an apple pencil for a hundred dollars where apple does and now apple raises their price to 110, that's 10 inflation.

Are they really gon na next year, raise it to 121 or another 10? And the theory here is that, well, if we keep spending thanks to the way the velocity of money works yeah, the answer could be: yes, we could be creating a self-sustaining cycle of inflation, and this is actually more bearish than with the research that i've been reading Anywhere else uh - and so i'm not super happy about this now uh, what's what's really important uh, to keep an eye on as well is that we really need to see consumers reject paying these higher prices in order for inflation to stop in order for prices to Stop going up and that's not happening right now, so in other words, incomes going up and spending going up, reiterates incomes and spending going up to where we could potentially get this sort of runaway cycle of higher levels of inflation. I know this is a sort of a u-turn from from what we experienced last year, where we were expecting inflation to be transitory, but the reality is, the data has changed, the inflation is not transitory, it's getting worse and what we're waiting for is. When is inflation going to inflect back down? That is the big thing that we're waiting for, because, in my opinion, there are three scenarios that we could face. I'm going to tell you these three scenarios.

I do want to quickly also just as a tangent mention that, yes, the total velocity of money appears to be lower, but in my opinion, that's because a lot of cash is sitting in banks not getting used in rev and overnight is getting parked in the reverse. Repo facilities - and that is artificially keeping the velocity of money low, which is misleading, in my opinion, potentially investors like kathy wood, who says oh okay, money and the velocity of money's down well yeah, but how much is sitting in the reverse repo markets anyway. In my opinion, there are three scenarios that we go through. Number two is a disinflationary recovery, so addition disinflationary recovery, a number one is an inflationary crash or recession, we'll call it, and then you have a uh deflationary would be the last option here.

A deflationary crash right, so these these are the three options that we really have best case scenario is a disinflationary recovery. That's basically, what bridgewater capital is saying is getting priced in. Is this disinflationary recovery, which is a good thing and in my opinion, you want to buy in a deflationary recovery, disinflationary recovery where inflation's going down once inflation starts inflating down until then, stock prices could, in theory, continue to trend down no guarantees. Obviously the worst case scenario, though, obviously, is some form of a crash, an inflationary style crash where the feds lost control, and they have to react very aggressively, which is what bridgewater capital is suggesting that the fed's going to have to act really aggressively.

That could also lead by the way to a deflationary crash after an inflationary crash, so like one could lead to three which is wild uh or you could just have a deflationary crash where we just have too much disinflation too fast. But it's more likely that one would lead to three but anyway, so so bridgewater capital goes on to say the following here. They say that when unemployment is high, a lot of spending goes to business profits and a lot of it goes to putting people back to work. Okay, that's when unemployment is high, but what happens when you have low on unemployment, which is what we have now well, when you have low unemployment, you end up seeing wages go up, but the problem is: when wages go up.

What happens? People have more money when people have more money and at the same time, their living expenses are going up. What happens? People demand more pay because their living expenses went up, cost living goes up, they demand more pay, they get more pay. What do they do? They could spend more because their incomes have gone up, and so you get this self-fulfilling potential. Wage price spiral is essentially what ray dalio was talking about here now in bridgewater capital albe believe i believe they did not mention the wage price spiral here, because jerome powell, the federal reserve, says we are not seeing any signs of a wage price spiral yet and Of course, we've got other folks at the federal reserve, downplaying uh the the potential impact of the federal reserve having to tighten and, in my opinion, they're doing that because they don't want to create instability in the marketplace.

So they have to sell hope which hopefully they're right now uh ray daly and bridgewater capital here use the phrase quote: expansions don't die of old age, they're murdered and they believe that's true because, ultimately, in order for the federal reserve to reduce inflation, one of two Things has to happen number one. We either need productivity to go up substantially, so that way you create real growth. Best case scenario, productivity skyrockets, but they believe that such a level of productivity growth is highly unlikely. Therefore, the only way to lower inflation is to slow nominal spending by draining liquidity, that is raising interest rates and withdrawing reserves, and it can't be counted on to slow on its own because of the self-reinforcing dynamics.

So, in other words, because companies continue to be able to raise prices like in my kimberley clark video this morning, the dangerous report for the stock market uh, because companies can continue to raise prices, people demand more money for for pay for labor and they keep spending And spending more agreeing to pay those prices, we're not. This is why we're seeing such good earnings right now - and this is why we keep seeing margin expansion because again the numbers keep getting better and better and better for companies, but that actually reiterates the self-sustaining cycle of inflation. Now over here, ray dalio and bridgewater capital talk about how much cash there is on the sidelines right now how much households are holding in cash? You can see we're at a substantially higher level than where we have been in the past 20 years, right here, uh as uh as a percentage of cash holdings. How the bottom 60 percent of households net worth in in the united states is uh almost at the levels that we saw during the dot-com era bubble.

That reserves at banks is at the highest levels we've ever seen and that the amount of cash at banks compared to actual lending that's happening is is 1.7 times higher than what we're usually seeing some form of of a baseline around 100 over here between the 2000 To 2010 era and then even even higher compared to 2010 to about 2020 we're about 50 percent higher than that time. Now, let's take a quick little pause here for a moment and just think about what ray dalio and bridgewater capital have told us right now. So we've got more cash on the sidelines, which means people have the capacity of spending more money on stuff and people have more wealth which reiterates inflation. If people keep spending, then people might earn more again reiterating them to spend more self-reinforcing cycle.

So far, that's what we've learned from bridgewater capital that we're in a self-reinforcing cycle according to them, hopefully they're wrong. We also know, according to my opinion, that there is a chance that we go into an inflationary crash where the fed is forced to over tighten and then the market crashes uh. And we go into a recession. We go into a deflationary recession which could come after an inflationary crash which would be bad or hopefully the best case scenario.

Is we go into a disinflationary recovery? That's when i buy back in once. I start getting proof that there's a disinflationary recovery and obviously, when that time comes, i am sending all the alerts to everybody in the stocks in psychology of money group link down below. But folks i want to make this clear as well. Some folks are wondering: hey kevin, how come you're sad when prices are going down if you're in cash? Well, because i don't want to go into a recession, i think all of our net worths, combined whether you're in cash or in stocks, gets hurt.

When we go into a recession, either scenario one or three i would rather us not go into recession, go into a disinflationary recovery buy back into the market and if i missed out on 10 20, oh well, i take my big l and we go back to A normal market that's best case scenario, so i'm cheering for this market not to crash, and so i'm looking for evidence that we're not having a crash. Unfortunately, in this video we're reviewing why ray dalio is so bearish and that's what we're going to talk about now because ray dalio says: we've got some problems. The ray dalio says: what we can do right now is consider how sensitive markets might be to interest rates. Actually going up - and i thought this was quite fascinating - so ray dalio and bridgewater capital suggest that markets might be more sensitive to rate increases in the past, but the real economy might actually be less sensitive to tighter policy.

Why? Because people have more cash, you don't have to go borrow as much see as listen to this, but in terms of the real economy, the improvement in household balance sheets, particularly those in the middle class, implies a greater degree of resilience to monetary tightening, as households are Less dependent on low interest rates to fund spending, in other words, again remember how they're, like hey households, have all this cash. What happens when rates go up? Well, it should reduce demand right. Maybe not maybe rates go up, but people don't care that rates went up because they have all this extra cash, so they keep spending anyway. Inflation keeps growing wall rates, go up, that's the worst freaking case scenario and with this quote diminished economic sensitivity to a rise in interest rates, combined with a cautious approach approach to raising rates, because we're worried about covid we don't want to over, tighten or whatever bridgewater Capital believes that there's an added risk to falling behind the curve and acid markets getting even further ahead of themselves, followed by a more significant tightening and an even bigger impact on the markets over time put simply, there are two things here that bridgewater capital is saying Number one rates going up is probably not going to reduce inflation.

In fact, inflation can just keep running in a self-fulfilling cycle number two, because the fed's going to be a little more. Oh, we don't want to shock the markets uh. We don't want to raise rates too quickly because they're going to play that dance because of covid or politics or whatever, there's actually the risk that more danger gets priced into the market. Whether that means the stock market goes up a little bit more in the short term or a lot in the short term or uh.

The market doesn't price in the real risks that we're facing more it's entirely possible according to bridgewater capital that, ultimately, the fed ends up, creating a situation where inflation gets so far out of hand that they have to tighten in a more significant manner in the future. Ultimately, leading to a larger market crash, they say for investors. These circumstances create two unique risks relative to the past four decades. First, there is a risk that asset values will fall in real terms due to a sustained rise in inflation.

And second, there is a risk that the central banks will fail further uh or fall further behind the move in inflation and have to aggressively catch up. In the very near term, policy accommodation would tend to have benign effects on the lines of a mid-cycle transition. However, too much policy delay would risk over-extending the moves, lowering yields, lengthening durations and making the longer-term risk for falling behind and then catching up, much bigger. So, in other words, radially on bridgewater capital, english are saying the longer we wait, the worse it's going to get, and so what are they doing? Folks? Well, uh: let's, let's take a look at this uh, it's quite bearish, despite this uniquely interesting and potential volatile set of unfolding conditions, the markets are discounting neither significant tightening or high inflation, so in other words, they're, like the market, is basically blind to these risks.

Right now now i already explained this chart earlier. So let's go on to what ray dalio is doing. They say that quote: we have grown significantly less bullish on assets versus cash across the developed world in aggregate with significant differences across countries and those significant differences are in china and the united states. They believe there's a lot more downside risk in the united states than in china right now, so they're bullish on cash and china.

Why? Because take a look at this over here, i'm going to give you the summary they take. They look at the chinese stock market as falling at the same time as the chinese markets are actually stimulating, they're becoming more stimulative, because china and china is becoming more accommodative because they want to grow the economy. They're talking tax cuts, tax and fee cuts, boosting the real economy promoting consumption at the same time as stocks are at record lows in china, uh and and bond returns are high when bond returns are high uh. That generally means yields are very low, because prices went up, so yields become very, very low, they've fallen below us yields and when the yields are very low, it's like you're making no money on those, because the market's growing, potentially more slowly, right and so they're making This argument that maybe china's the market to invest in right now, which is quite interesting, uh and it makes sense because they're looking at this, going hey u.s stock market's at record highs.

Uh bonds are getting crushed over here. Fixed income's, getting crushed like the actual value of bonds, are getting crushed. Why would you invest in u.s stocks right now, when you have tightening ahead of you and you have policies at the top of the market? Basically, when you have policy support for you in china at the bottom of the market potentially is is their argument, and this is why they're very interested in potentially china, or just literally cash versus real estate and stocks in the united states. It's it's pretty bearish.

This is a pretty bearish report, but they make a point. They make a point that i haven't really considered, and that is the combination of the fact that, because people have more cash, the market might be a lot less sensitive to interest rates going up, meaning the fed's gon na raise rates to one percent and i've been Saying this on the channel, i just didn't make the direct connection as well as they did here. I've been saying on the channel like okay, so interest rates go up to one percent, then what people are gon na go? Okay? Who cares? Let's keep spending, keep partying, keep spending money and inflation keeps going higher right. What happens in that case? Well, then, the fed gets really aggressive and what, if we go to four or five percent in terms of interest rates, at some point, it's gon na hurt if real estate rates imagine if mortgage rates went from three and a half percent to six or seven percent Anyway, folks, thanks so much for watching this video appreciate it.

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