Are almost always wrong. But ray dalio is not an economist. He's a fund fund manager with billions of dollars and thousands of clients on the line dalio has billions from the dotcom bubble in the 2008 recession. But now he's building up the mother of all shorts.

He can't afford to lose money. So you must take dalio seriously. Dalio recently disclosed a 10 billion dollar short position in europe and he's likely been building an even bigger short position on the us market. We're currently in one of the worst types of crises stagflation stagflation is when the economy is weak.

And has high inflation at the same time. The inflation rate has crossed over eight percent and the gdp has declined in the latest quarter. This is extremely concerning because taxation typically occurs right before a recession. Ray dalio has studied the economy over the past few centuries.

And has recognized a pattern. The cycle typically starts with an increase in government debt. Which boosts the economy in the short term this might sound. Logical in the short term.

But lending is a two sided transaction with creditors and debtors. The creditor is the one lending out the money and the debtor is the one receiving the debt when there's too much debt in the system. It's not possible for both sides of the transaction to survive. This is because one man's debt is another man's assets.

Whenever. The creditor lends out money they are loaning out assets. If the debtor is taking out too much debt this means that the creditor is low on assets and will rightfully want to earn more income. The only problem is that when debt levels are too high debtors.

Don't have the money to pay back the creditor. This will cause the debtor to sell assets to pay off the debt. An example of this is chinese property developer. Evergrand.

Which had to sell off properties in order to pay off its debt. When this happens the economy will reach a poor position. The central bank will see this weak economy and prints money to save the economy from crashing. While printing money might work in the short term it creates long term problems money is simply paper.

That is supposed to represent value when that paper's value is disrespected. Then its value will inevitably decline. So as a result of the central bank. Lowering interest rates prices will begin to rise.

So first debt levels. Become overextended then debtors default under debt putting the economy in a weak position. This causes. The central bank to print money to boost economic activity.

Throughout this time. We still have the same underlying problem of a weak economy. The only difference is that printing money adds. A new problem inflation that's where we are right now stagflation.

Because printing money doesn't boost the economy over the long term. We simultaneously have a weak economy and high inflation. The next step in the pattern is for the central bank to slow the economy by raising interest rates. Dalio has noticed that in the past doing so almost always leads to a recession or depression.

There's no way to stop it from happening. If the government continues printing more money it exacerbates. The problem of inflation. The only way to stop inflation is to destroy demand.

Which is done by pulling money out of the economy. So in other words stagflation is the middle course between the peak of a debt cycle in a serious economic slowdown. According to dalio. We are currently in stagflation so the next step in the pattern is a recession or depression are we close to having cyflation yeah we are insect.

We are stagnation is simply where you know you have inflation and yet at the same time uh you have high unemployment. Yeah you have economic weakness right in other words you you you have a stagnant economy stagnant yeah essentially means growth is reduced growth right low growth and with high inflation and that happens through this monetary situation that i'm describing in which the central bank tries to deal with a middle course. In other words. What does.

The central bank want not too high inflation. And not too low growth. And so. When there's a lot of debt because one man's debts are another man's assets.

It becomes very difficult a balancing act and that is when you have stagflation when you produce it so just like in the six of the uh 1960s late 60s. We spent a lot of money on guns and butter. We called it the vietnam war and social programs and so on we wrote too many checks relative to the money. We had in the bank.

Which was gold at the time 1971. The devaluation then they print a lot of money into that stagnation stagnation. So stagflation is trying to is the middle course um. When there's two different.

So. The fed. The interviewer cut off dalio at the end. But dahlia was going to say that stagflation precedes recessions the last time we had stagflation was in the 1960s due to the vietnam war and social programs.

The government took out debt to purchase food and weapons. However. The us government. Didn't have the money to pay off this.

Debt so they printed. Money this led the us to have a weak economy and high inflation at the same time also known as stagflation. The 1970s was unprecedented at the time and set the stage for the us to run out of money in 1971 dalio explained on twitter at the time. The united states was spending a lot more money than it was earning by writing a lot more of these paper money checks than had gold in the bank to exchange for them.

As people turned these checks into the bank for gold. Money the amount of gold in the. Us started to dwindle it soon became obvious that the us. Couldn't keep its promises for all the existing paper money so people holding dollars rushed to exchange them before the gold ran out dalio indirectly pointed out the two different types of money commodity money and fiat money commodity money is money that obtains its value through its substance take gold as an instance of this over the past few centuries.

People have been using gold for transactions. This is because gold has significant value as a scarce metal with unique chemical properties in contrast to this fiat money is money that is backed and issued by the. Government the us. Dollar is an example of fiat money because its value is purely determined by the us government 1971 was a time in which there was a mass conversion from fiat money to commodity money.

Stagflation puts economies at risk of destroying their fiat. Money especially. If the government decides to continue printing money zimbabwe's hyperinflation in 2008 is a perfect example of this the zimbabwe dollar experienced. A daily inflation rate of 98 because the government made the mistake of printing more and more dollars fiat money.

Only is value because people believe in it if people stop believing in the us dollar. The value of the dollar will tank. And when the dollar tanks. More people become skeptical causing the dollar's value to drop even more.

This is a positive feedback loop that the fed is incredibly concerned about so how serious of a recession are we talking about here. The answer can be summed up into a car analogy think about what makes a good and bad car driver a good car driver would gently press on the gas and brake causing the car to steadily move forward at the relatively constant pace. There's going to be external events outside of the driver's control. Like traffic lights and pedestrians.

However as long as the good driver prepares ahead of time and slowly eases on the brake. The ride will be smooth for the passengers. This is how most of you drive or at least. I hope so a bad driver would slam on the gas and brake leading to drastic changes in speed such a ride would be horrible for the passengers with the car lurching backward and forwards frequently the federal reserve has been a terrible driver they slammed the gas in 2021 causing the car to lurch forwards now they are in the process of slamming.

The brakes. Which will consequently cause the car to lurch. Backwards the fed printed money at an annual rate of 15. Trillion dollars in 2021.

This led corporate pre tax profits to surge by 25. Which is the largest increase since 1976. Post tax corporate profits increased even more. At 37 percent.

The biggest increase since 1948 now the fed is cutting the money supply at an annual rate of 11. Trillion dollars. Not surprisingly we're about to experience a crisis of that magnitude. But to the downside in the case of the 1970s.

The us entered two recessions with one starting in 1974 and the other starting in. 1979 the only reason why the us. Survived. This crisis was because of fed chair paul volcker in 1979.

Volcker raised interest rates to stop inflation this caused the economy to experience sporadic movements with the gdp mainly decreasing. When volcker was in. Office but more importantly foreign countries. Experienced even more pain than the us.

Foreign country's debtors were put into 10 year long depressions dalio explained how inflation was reduced by people and companies being painfully squeezed and reducing spending that's always the case and will be the case this time as mentioned earlier. The capital markets overextended in 2021 as a result of money printing dalio knows this because of his bubble gauge that he uses to see if stocks are overvalued as you can see in this graph. Dalio has his own bubble gauge that categorizes bubbles into percentiles. The 1920s represented a period in which the bubble gage hit the 99 percentile of bubbles.

The 1990s also did the same staying within the 99th percentile for several years before crashing. The 2020s was in the 85th percentile of all bubbles. Before the recent crash lowered it to the 40th percentile. So according to dalio's gauge stocks are actually relatively undervalued.

The bubbly companies have actually dropped below the mean. According to dalio's gauge with that being said dalio still sees further downside in the bubble. Stocks the 1920s and 1990s were quite similar to the 2020s. So dalia was using history as a basis for his prediction.

All three periods saw a massive jump in the valuation of growth socks due to easy monetary policy. This allowed him to examine the patterns of the past to make a prediction dalio mapped out the two year treasury bond yield in the nasdaq in all three periods in comparison to the 1920s and 1990s. The current bubble still has more downside another gauge that dalio uses is the leverage gauge his leverage gauge assesses the amount of options positions and margin debt in the market the leverage gauge currently puts us in the 50th percentile of the data set so it is roughly in line with the average. Some investors might assume that this means that there is little to no downside.

But dalio doesn't think that he has noticed that bubbles typically overcorrect. Which brings us back to the car analogy similar to the economy swinging back and forward bubbles typically swing further than the fundamentals. Suggest the leverage in the market is currently about average which might seem fine. But bubbles typically overcorrect to the 20th.

If not 10th percentile dally was set to make billions from the incoming overcorrection. He reportedly has a 10 billion short position on a variety of european stocks the stocks that he is shorting are similar to those in the euro stocks 50 index. Which is a european index that tracks the top 50 largest stocks. Because the sec doesn't require investors to disclose short.

Positions we don't know if dalio has a short position on the us. Market that being said i wouldn't be surprised if he did especially given his european short position not only that but in addition to a recession. Dalio believes that there is a 40 chance of a civil war breaking out in the us. This video is simply just the first part of two videos.

The next part will discuss why dalio sees a civil war breaking out how this will tie into world war three and much more if that sounds interesting to you hit that subscribe button. So you are notified when my next video is released let me know what you think about dalio's short thesis are you protecting your portfolio like dalio if you enjoyed this video please hit the like button and subscribe and i'll see you in the next one you.