Dalio: The Federal Reserve's end of quantitative tightening= stimulates the economy in a bubble. The US "big debt cycle" has entered the most dangerous stage!

Bridgewater Associates founder Ray Dalio issued a warning that the Federal Reserve's decision to end quantitative tightening (QT) may be adding water to the bubble and creating an even bigger bubble. In an article posted on LinkedIn on Wednesday, Dalio pointed out that the current loose monetary policy implemented by the Federal Reserve at a time when asset valuations are high and the economy is relatively strong means that ending QT is "stimulus into a bubble" rather than the traditional "stimulus into a depression." Federal Reserve Chairman Jerome Powell recently stated that as the banking system and economy expand, the Federal Reserve "will increase reserves again at an appropriate time." According to Dalio, this suggests that quantitative easing (QE) is making a comeback - just packaged as a "technical operation." Dalio believes that the U.S. is now in the most dangerous phase of the "long-term debt cycle," and the market should not ignore this fact. When the supply of U.S. government bonds exceeds demand, the Federal Reserve "prints money" to buy bonds, and the Treasury shortens the term of bond sales to compensate for the gap in demand for long-term bonds. These are typical dynamics of the late stage of the "long-term debt cycle." Dalio expects that in a liquidity-rich environment, long-duration assets (such as technology and AI stocks) and inflation-hedging assets (such as gold) will benefit, but this "liquidity bubble" will eventually face challenges of accumulating risks and tightening policies. QE Transmission Mechanism: Relative prices driving market flows Dalio explained in detail the market transmission mechanism of quantitative easing. He pointed out that all financial flows and market fluctuations are driven by relative attractiveness rather than absolute attractiveness. Investors make choices based on the relative expected total returns of different assets, with the expected total return equal to the asset yield plus price changes. Using the current market as an example, the yield on gold is 0%, while the yield on 10-year U.S. bonds is about 4%. If the expected annual price increase of gold is lower than 4%, investors would prefer bonds; conversely, they would prefer gold. Considering inflation factors, central bank increases in money and credit supply can increase inflation expectations, thereby increasing the attractiveness of gold relative to bonds. QE implementation typically creates liquidity and lowers real interest rates. If liquidity primarily flows into financial assets, it will push up asset prices, lower real yields, expand valuation multiples, compress risk spreads, and raise the price of gold, leading to "financial asset inflation." This effect will widen the wealth gap between holders and non-holders of assets. Unprecedented "Stimulus in a Bubble" Dalio emphasized that the environment in which the Federal Reserve is implementing QE is fundamentally different from in the past, significantly increasing policy risks. Historically, QE has been deployed during economic recessions or extreme weakness and has typically exhibited the following characteristics: declining and reasonably valued asset valuations, economic contraction, low inflation, severe debt and liquidity issues, and wide credit spreads. However, the current situation is entirely opposite. Asset valuations are at high levels and continue to rise, with the S&P 500 earnings yield at 4.4% while the nominal yield on 10-year U.S. bonds is 4%, yielding around 1.8% in real terms, with an equity risk premium of only around 0.3%. The economy is relatively strong, with average real growth over the past year at 2% and an unemployment rate of only 4.3%. The inflation rate is slightly above the target level at around 3%, and deglobalization and tariff costs are putting upward pressure on prices. Credit and liquidity are ample, with credit spreads near historical lows. Implementing QE in this environment constitutes "stimulus into a bubble." Monetization of Government Debt, Replaying the Liquidity Craze on the Eve of the 1999 Crisis? Dalio believes that with fiscal policy highly stimulative - massive debt stock and deficits financed through large-scale issuance of government bonds - QE is actually monetizing government debt rather than simply providing liquidity to the private sector. If the Federal Reserve's balance sheet starts to expand significantly, rates are lowered, and fiscal deficits remain large, we will consider this as a typical monetary-fiscal interaction between the Federal Reserve and the Treasury, resulting in the monetization of government debt. This makes current policy "look more dangerous and more inflationary." Dalio warns that in the short term, the market may experience a "liquidity melt-up" similar to the eve of the bursting of the dot-com bubble in 1999 or the 2010-2011 period of QE. In Dalio's view, the current U.S. policy combination - expanding fiscal deficits, restarting monetary easing, relaxing regulations, and the prosperity of AI - is forming a situation of "super-loose with growth at stake." Although such policies often create asset prosperity in the short term, they also often mean: bubbles expand faster, inflation is harder to control, and risks accumulate deeper. And when policies are forced to reverse, the cost will be greater. He expects QE to lower real interest rates, increase liquidity by compressing risk premiums, boost price-earnings multiples, particularly benefiting long-duration assets (technology, AI, growth stocks) and inflation-hedging assets like gold. Once inflation risks re-emerge, tangible asset companies such as mining and infrastructure may outperform pure long-duration tech stocks. This article was republished from "Wall Street View", GMTEight Editor: Jiang Yuanhua.