Why the Next Downturn “Will Not Look Like 2008”
Why the Next Downturn “Will Not Look Like 2008” by Wolf Richter – Wolf Street
Nine years of scorched-earth monetary policies come home to roost.
There are always cycles. The current cycle started at the bottom of the Great Recession and will last “until central banks put on the brakes,” said Ray Dalio, founder of Bridgewater Associates, in an interview with Bloomberg. “We’re in a perfect situation, inflation is not a problem, growth is good, but we have to keep in mind the part of the cycle we’re in.”
We’re “in the late stage of the cycle, a period that might last two years,” he said without specifying how far we’re already into that late stage. We do know that the Fed is gingerly taking the foot off the gas though it hasn’t yet slammed on the brakes.
“When the operating rate gets high enough, when central banks think they should put on the brakes,” he said, “that’s part of the cycle.”
“From 2008 until the central banks put on the brake we have one kind of environment. So now we are closer to its capacity constraints… and we’re still going to have a lot of stimulation… in particular short-term stimulation,” and there is “a lot of cash on the sidelines” by investors, banks, consumers, and companies. “And they can feel that they’re being left out. It feels stupid to own cash in this kind of environment.”
He thinks this environment “is going to be great for earnings and great for stimulation of growth.” But “we have to look beyond that: What is monetary policy going to be in that?”
This short-term stimulus is producing a “spurt,” and this “will be a 12-to-18-month spurt,” and while that spurt is taking place, and while people feel stupid about holding cash, the central banks “will have to tighten monetary policy.”
“There is a lot more interest-rate sensitivity in the economy,” he said. “Assets themselves are more sensitive. Like a 1% rise in bond yields will produce the largest bear market in bonds that we have seen since the 1980 to 1981 period.”
Given that stimulus-driven spurt and the capacity constraints this spurt is running into, the Fed “will tighten at a rate that is probably faster than they’re signaling” because “they’re going to be concerned.”