On today’s show, I have to share something important with you. I just posted a report for National Intelligence subscribers about an indicator of an economic downturn, with a timeline. We may be looking at two years, based on a weighted consideration provided by Ray Dalio, who leads the world’s largest and most successful hedge fund.
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As you know, I read Ray Dalio’s book, Principles. And I’ve been reading a ton of stuff he’s written, letters to investors and editorial/opinion pieces, and interviews. Ray Dalio’s been rocking my world, because not only does he have an excellent financial track record, he also has continuously improved his ability to make good decisions based on data. And that’s what really stood out to me, is that Ray could make good decisions based on the way that his data sets were pointing. And data is like just like any other information — trash in, trash out. If you put garbage data in your models, your conclusions are going to be garbage. Same thing with intelligence — trash in, trash out — and that’s part of what makes creating good intelligence so difficult. As an analyst, I’m wholly dependent on what intelligence collectors are providing me. If our SIGINTers or HUMINTers are providing me reliable intelligence information, then my intelligence products are going to be more reliable.
And this is what Ray Dalio understands and why he built these computer algorithms to help him make decisions. I talked about that on the 24 January episode. If you haven’t listened to that yet, be sure to.
I didn’t talk about this principle on that 24 January episode, but Ray talks about making weighted considerations. We see lots of predictions, lots of forecasts, lots of prognosticating. And what Ray says is not every analyst is made equal, and therefore not every prediction or forecast is made. In so many words, we should weight our consideration of a prediction based on the track record of who said it.
And all this is why when Ray Dalio makes a comment about the future, I listen. He was interviewed by CNBC during Davos — and I’m still catching up on all the Davos coverage — and here’s what he had to say…
This is included in today’s report and it will also be in Friday’s National Intelligence Bulletin.
For a long time, for years, we’ve kind of had this belief that eventually things would get bad again. 2008 bad, or worse, and those were some dark days.
And we know that we’re overdue for a recession. They happen, on average, every 6-8 years. 2008 plus eight is 2016, although it’s arguable that we ever really got out of recession. And the only reason why we didn’t have an economic collapse is because trillions of dollars were pumped into the system. That’s artificial. That’s not organic growth, and we didn’t really grow our way out of the last recession.
So in this case, I’m giving Ray Dalio his proper weight. I’m considering what he’s saying, and if that’s currently our key assumption — that a man
who runs the largest and most successful hedge fund in history is able to more accurately predict the future than anyone else — if that’s our key assumption, then we have two years to get stuff straight before another potentially really bad period of American history.
And we know that the Federal Reserve has to cut interest rates by three percent to help get the economy out of a recession, and the Federal Funds Rate is just above one percent right now. I talked about this a week or two ago on of the intelligence reports — the Federal Reserve is in a race to get interest rates back up to three percent before the next recession so they have enough interest rate to cut. And they’re probably not going to make it.
And not only are they probably not going to make it, but they’ve barely started unwinding all this quantitative easing — trillions of dollars floating in the stock market, bank accounts, and the economy — and so we’re still flush with QE. Point being, if we have a repeat of 2008, they’re going to be pumping even more money into the system to spur economic growth — potentially another round of bailouts — and by the way, we may be talking state bailouts this time around.
We look at all these pension shortfalls in states like California and Illinois and other states, and their pension systems are predicated on seven percent growth in the stock market, per year, depending on that growth to fund their pensions. The S&P is up 24% in the past year. And maybe the stock market continues to grow, but if it’s true that we’re going to have another economic downturn in two years, then these pensions are going to be out of breathing room, especially if there are layoffs due to budget cuts. That’s less money being fed into these pension systems, and so I’m just saying that some of these states will multi-billion dollar shortfalls are going to have a tough time paying all these people.
Illinois, Kentucky, Colorado, New Jersey, Connecticut, and probably California have pensions funded below 50%. 22 states have pensions that are funded below 70%. Moody’s says that federal and state pension shortfalls are seven trillion dollars behind. When you include pension and benefits shortfalls, the U.S. Government is behind by $20.4 trillion dollars, that just a small potion of what we call unfunded liabilities.
And given today’s sociopolitical climate — all the stuff we’ve been covering week in and week out in our intelligence reports — then the next recession could be very bad. And we also need to consider the likelihood of Nancy Pelosi becoming Speaker of the House in January 2021, and the Democrats also taking the Senate, because history says that’s a distinct possibility. So consider this your early warning of what could happen in the future.
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Because the truth is that the world is not ending, but we’re in for a rough period of time. And so the best thing we can do is to get prepared for it, and maintain some reasonable expectations of the future.