Jeremy Grantham’s Nightmare Scenario

Ray Dalio explained a phenomenon of not opening our eyes to things that have not personally happened to us but have occurred many times to those that have lived before us. He refers to this as not understanding paradigm shifts.

By describing it as working off of assumptions that fit events investors personally experienced in their lifetimes while not realizing that a range of outcomes much wider than their specific hardwired scripts exist, Dalio warns that current market conditions are based on several biases that are rosy and don’t really account for how things can transpire when entire systems are in question.

The challenge is that investors don’t study the history of economics and finance before their time so they don’t know the precedence of what the markets are undergoing.

Ray Dalio and Jeremy Grantham liken our time to other periods of excessive credit creation and central bank monetization (QE and slashed interest rates), political division and extremism, and the rise of a new superpower to ruffle the feathers of the existing ones (China and the U.S.), and they say we should be concerned about the following:

  1. Governments have issued FAR MORE credit and bonds than there is a real demand for. Supply and demand will now need to balance out, and there are simply not enough buyers that are willing to own bonds at interest yields that guarantee a loss in real terms because inflation exceeds the bond yields.

This has birthed the idea of stagflation, which is taking hold.

  1. Inclusive capitalism and financial politicizing. There are billionaires, millionaires, and regular folks who refuse to invest with people and in companies that don’t meet ESG requirements, social justice ideologies, and racial equality agendas.

In other words, if the CEO is not a crusader of climate change like you are, the financials of the company don’t matter… money isn’t the highest priority, ideology is.

Jeff Bezos buying the Washington Post and Elon Musk trying to buy Twitter are clear examples of this.

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    Nothing explains the valuation reset of 2022 – where we see companies’ share prices slashed by 30%-80% in less than a year – like a paradigm shift of the following trends coming to an end:
    1. 500M Chinese farmers are making the transition to urban living. Nothing has allowed globalization and outsourcing by Western multinationals as much as the migration of Chinese farmers to the workforce of modern factories.

    That labor pool has been exhausted and fully capitalized upon, so we now have a LABOR SHORTAGE and product shortage not just in emerging markets but in the United States!

    This marks the first stages of the end of labor globalization.

    The healthcare crisis we’ve undergone in the past three years was a clear chance to see global governmental cooperation in overcoming the virus, yet we didn’t see unity. Instead, we saw isolation and nationalism.

    Globalization ending is a huge paradigm shift that most don’t even consider to be a possibility.

    1. Political obsession: after decades of indifference to political matters, people are now passionate about getting their ideas represented by the government and are willing to riot, protest, and put their own beliefs above the rule of law.
    We saw the refusal to concede election results in the world’s banner of democracy, and we saw the rise of violence in the streets of major cities.
    1. LONG-ONLY investing: one brilliant observation from both Ray Dalio and Jeremy Grantham is the idea of asset appreciation. For the past 40 years, we’ve been conditioned to think that if stocks do poorly for a while, we just diversify into bonds or real estate, but the notion of shorting as part of an overall strategy or looking away from the 60/40 model has not been discussed.

    With central banks extinguishing credit and tightening the supply of currency, Dalio maintains that current value will be valued more than future growth.

    Put differently, don’t expect the FED to bail you out every time prices go down.

    Best Regards,

    Governments Have Amassed ungodly Debt Piles and Have Promised Retirees Unreasonable Amounts of Entitlements, Not In Line with Income Tax Collections. The House of Cards Is Set To Be Worse than 2008! Rising Interest Rates Can Topple The Fiat Monetary Structure, Leaving Investors with Less Than Half of Their Equity Intact!

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