Billionaire investor Ray Dalio has issued a stark warning that the Federal Reserve’s signaled shift in monetary policy could ignite a “1999-style ‘melt-up'” in financial assets.
Dalio Warns Against Fed’s Quantitative Tightening
In a detailed post, the founder of Bridgewater Associates argued that the Fed is dangerously “fueling a bubble, not fighting a bust,” marking a critical departure from its historical role in responding to crises.
Dalio's concern centers on the Fed’s recent announcement that it will slow its balance sheet runoff, known as Quantitative Tightening (QT).
While the Fed has described this as a “technical maneuver,” Dalio interprets it as a definitive easing move that is happening at precisely the wrong time.
Quantitative Easing Is ‘Stimulus Into A Bubble’
He contrasted today’s economic conditions with previous crises, noting that past Quantitative Easing (QE) programs were a "stimulus into a depression."
In those instances, like 2008 or the Great Depression, asset valuations were low, the economy was weak, and unemployment was high.
“Today, the opposite is true,” Dalio wrote, pointing to high asset valuations, a strong economy, low unemployment, and inflation that remains above the Fed’s target. “So, QE today is stimulus into a bubble.”
Dalio predicts this liquidity injection will boost long-duration assets, such as tech and AI stocks, as well as inflation hedges like gold.
Market Could Mirror 1999 Reaction With Excess Liquidity
He compared the potential market reaction to “late 1999 or 2010-2011,” forecasting a “strong liquidity melt-up that will eventually become too risky and will have to be restrained.”
The investor framed the current strategy as part of the “classic Big Debt Cycle late cycle dynamic,” where the central bank begins to monetize large government deficits.
He characterized the combined fiscal and monetary looseness as a “bold and dangerous big bet on growth, especially AI growth,” which he warned is “more dangerous and more inflationary” than past stimulus efforts.
S&P 500 Nears 7,000 Mark
S&P 500's last 52-week high stood at 6,920.34 points; however, it ended 0.37% higher at 6,796.29 on Wednesday. With just 200 points away from the 7,000 mark, some analysts bet that the S&P 500 could surpass that.
While the S&P 500, Dow Jones, and Nasdaq 100 closed higher on Wednesday, the futures were lower on Thursday.
The SPDR S&P 500 ETF Trust (NYSE:SPY) and Invesco QQQ Trust ETF (NASDAQ:QQQ), which track the S&P 500 index and the Nasdaq 100 index, respectively, rose on Tuesday. The SPY was up 0.35% at $677.58, while the QQQ advanced 0.65% to $623.28, according to Benzinga Pro data.
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Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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