Dalio: 6 Signs Of A Market Crash On Its Way

In this video Ray Dalio shows us 6 signals to watch out for in terms of a bubble forming and a crash on its way...

Ray Dalio, he’s an investor who runs the largest hedge fund in the world called Bridgewater. One of his specialties is looking at market cycles. Are markets poised to crash, are they poised to go up, what are the patterns that we can see.

In this video we go over Dalio’s 6 signals that he uses to determine if the stock market is in a bubble. But he’s not just looking at bubbles, he’s looking in particular for bubbles that are about to pop and crash the market…

Sign 1: Prices Are High Relative To Traditional Measures

First is the prices relative to traditional measures. So one of the easiest ways we can do this is simply by looking at the p/e ratio. If we look at the S & P 500 p/e ratio we can see that it’s sitting at a high amount right now, 45.3. This is much higher than the average that we see of 15 across time.

But Dalio makes a good point, and says we have to compare this to other asset classes, this way we have something to measure it against. So in order to do this we have to do a little bit of math so stick with me.

The p/e ratio currently is 45.3 if we do a little bit of algebra and reverse it, this implies and earnings yield of 2.2%. So if there was no growth in the market we would get a 2.2% return.
But we need to include growth and right now business growth in the USA is around 2% over the past 10 years.

So if we add the 2% growth on to the 2.2% earnings yield we get a total return of 4.2%! Now if we take a look at the bond market, bonds are currently yielding around 1.5%. That’s the 10 year treasury.

So if we compare the return we get in the stock market relative to the return we can get in the other main asset which is bonds, the stock market is not overly expensive. That is why Ray Dalio when he looked at this first measure, he got somewhat frothy conditions relative to previous market bubbles. That’s for the market as a whole.

However if you look at emerging tech, it’s a different story in terms of price and that reads frothy. So note that one down and let’s move on to the second measure, which we’ll have in Dalio’s own words.

Sign 2: Prices Are Discounting Unsustainable conditions

And as you can see right now, in terms of supply and demand, the way investors are buying it’s in a relatively sustainable way in terms of the overall market. In terms of emerging tech, that’s where we have a bit of a problem. There’s a frothy amount of unsustainable investing going on there….

Sign 3: New Buyers Have Entered The Market

With signal 3 Dalio takes a look at the new buyers that have entered into the market. Ones that generally don’t know too much about investing, have no experience and are simply investing because they see their friends making money in the stock market.

The example Dalio gives is let’s say you’re at a cocktail party for work. And people come up to you and they start talking about their recent investments in the market. And you ask them well have you ever invested before? They say no. Did you buy the stock at a reasonable price? They say, I don’t know how to calculate intrinsic value. You ask, do you even know what a stock is and they fumble around for an answer.

You find out that they’re simply investing because the stock market has been on a 12 year bull run and has made people rich. When you have a lot of new investors entering the market, with little understanding of it, it’s a signal of a bubble. Right now, in the total market, levels are at a frothy amount and in emerging tech it’s showing big signs of a bubble. So many new investors, buying, simply in the hopes of becoming rich. This leads us to the 4th sign which is.

Sign 4: There Is Broad Bullish Sentiment

This is a signal where, the general vibe in the market is that you can only make money. The stock market will only go up, there’s lot of quick profit to be made, you just need to be invested in the market.

___

DISCLAIMER: It's important to note that I am not a financial adviser and you should do your own research when picking stocks to invest in. This video was made for educational and entertainment purposes only. Consult your financial adviser. * Some of the links on this webpage are affiliate links. This means at no additional cost to you, we earn a commission if you click through and make a purchase and/or subscribe. This has no impact on my opinions, facts or style of video.

[ktube]

My p0rtfolio is plummeting significantly, I’ve lost about $320k within a few months and I'm not confident about picking st0cks anymore. Are there really no other options for me to gain from the stock market?

[Riggsnic_co]

I'm not kidding when I say that the market crash and high inflation have me really stressed out and worried about retirement. I've been in the red for a while now and although people say these crisis has it perks, I'm losing my mind but I get it Investing is a long-term game, so focus on the long run.

[vincentmccall]

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” - Peter Lynch

[lawsonjames]

Knowledge is power. Information is liberating. Education is the premise of progress, in every society, in every family.

[bellajohn]

I APPRECIATE THIS VIDEO
THIS IS EXACTLY WHAT I NEED AS MOTIVATION

[utopia]

We are in a bubble but bubbles can last for awhile.

[matthewstewart]

I predict 50% of the predictors are wrong.

[BTS-zqvy]

What is meant by "emerging tech"? Something like BIGC, QS, PLTR and many other new tech issues that are not yet making profits? vs. old techs like MSFT, FB, APPL, etc?

[maddog]

We have the signs of deflation. We are seeing them signs after hyperinflation.

[rebelinvestmentmanagement]

If you read into Dalio’s comments over the last few months you realise he’s warning of a giant economic upset at some point soon…

[stlouisix]

Dalio's intakes are brilliant👍✌💪👏

[sonicbroom]

This is a game of musical chairs and the thing is, there are going to be no chairs at all when the music stops.

[thomassimard]

What has really been in the news as one of the most profitable investments? I really wanna understand much about one

[matteowatteo]

Anybody else uncomfortable with the current valuations and speculation? It's as though market gravity no longer exists. There can be no soft landing from the current conditions. There are bubbles everywhere. You can make a small fortune in today's market if you start off with a large one.

[whiterabbit]

Its not just middle class & newbies frothing the market, how much of this stimulus has missed its intended recipients & been redirected for huge gains in the coming market Rallies there for it is safe to assume there will be a time of considerable upside before the rug is pulled out from under!

[Qwuiet]

I predict there will be car crashes on the road everyday.
Signs: 1)reopening people can’t wait to party again 2)more sales of alcohol because of pent up demand 3) money printing increases demand of alcohol

[TheExpert]

99 per cent of retail investors entering the stock market do not do that 'expecting to get rich'. They do that to make up for inflation, at least partly. So that if you have a spare 10 k in your account, you still have that 10 k at the end of the year, or maybe, with some luck, even some 11 ir 12 K – instead of 8.5 K due to inflation.

[al]

Im going all in on SOXS 🤞

I believe semiconductor sector will be crashing soon. ATH on sooo many stocks. IMO it has to

It almost appears to be a setup for the shorts to pounce. Similar to what happened to bitcoin.

[ryanjackson]

Keep riding the wave baby... all the way to Hawaii

[JohnSmith-zoir]

It's interesting that the elephant in the room was not addressed, namely the federal reserve and the length of each cycle.

You will note in the Money Supply and Interest Rate graph, that the time period of each cycle is over decades and the more interference from the Fed, the longer the cycle.

So if you look at the start of each surge in the money supply and then how long it takes before you see a surge in interest rates, it is multi-decades. And the surge in interest rates is usually to fight inflation.

The first surge in money supply was in 1930 and it took until 1960 (30 years later) for it to show up as a surge in interest rates.

The second surge in money supply took place in 2010, so if history repeats itself, then it will only show up as inflation in 2040. And why is this?

It's the elephant in the room ... the Reserve banks of the world including the Fed.

You will note in the graph that when the Fed embarked on a short period of quantative tightening (reduction in money supply from slowing the buy-back of debt) in 2018 and then having to end it inside of 12 months in 2019, there was a slight increase in interest rates.

The market reacted negatively, especially global markets, because the $USD as the world's reserve currency just made everyone's debt more expensive.

So the Fed stopped quantative tightening and went straight back to quantitative easing taking the money supply in 2020 to higher levels than in 1930.

The lesson learned. The Reserve Banks can't do interest rate rises and quantative tightening at the same time.

On this basis, we need to wait for a rebalancing of supply and demand created by shut downs and supply chain disruption which began pre-pandemic (another two years for rebalancing).

This will take short-term inflationary pressures out of the equation created by lack of supply. This is cost-push inflation bought about by the decrease in the aggregate supply of goods and services due to lockdowns and there is also some demand-pull inflation with people stocking up due to uncertainty of supply.

Next I would do three things simultaneously.

1. Keep interest rates low.
2. The Reserve banks must do a flexible quantative tightening program.
3. In conjunction with points one and two, the reserve banks must introduce macro prudential measures, such as imposing tougher lending standards on the banks like the higher risk investment mortgages, interest only loans etc.

The macro prudential measures have a similar effect to increasing interest rates without actually raising them and it enhances bank stability and balance sheets by reducing risky sectors. A reduction in investor buying also dampens real estate prices and adds supply for new home buyers.

Only once all these measures take effect, then the banks can slowly start to raise interest rates.

SUMMARY
Rebalancing of supply and demand will help keep inflation at bay.
No significant interest rate rises to take place, while quantative tightening is taking place.
Macro prudential tools to be used to dampen demand for risky sectors and strengthen bank balance sheets.

Based on this, interest rates and inflation will remain low for another decade or more.