Renowned Investor Ray Dalio Warns of Looming US Debt Crisis

Traders' Opinions

Economic

In a recent interview, billionaire investor Ray Dalio, founder of Bridgewater Associates, the world's largest hedge fund, sounded the alarm on the United States' economic stability. Dalio highlighted the nation's vulnerability to a "late, big-cycle debt crisis"¹², citing persistently high inflation, elevated real interest rates, and political fragmentation as the main contributing factors¹.

Dalio's warnings come at a time when the US government has just reached a deal to suspend the borrowing limit. However, the investor believes this agreement falls short of addressing the core issue and won't alleviate the mounting concerns³. According to Dalio, the deal fails to resolve the primary problem of excessive debt and a scarcity of buyers³.

The respected investor cautioned that the US economy is heading for a turbulent period, stating that the nation is only at the beginning stages of the impending debt crisis¹². With the burden of debt continually increasing, accompanied by a shortage of interested buyers, the financial stability of the country appears to be under significant strain¹².

Moreover, Dalio expressed deep concern over the political fragmentation in the United States, emphasizing its potential impact on social stability¹. The increasing polarization and division within the nation's political landscape could exacerbate the economic challenges and further complicate efforts to find effective solutions¹.

Dalio's assessment of the current economic landscape paints a bleak picture, predicting that the situation will deteriorate further¹. His observations align with the growing apprehension among economists and investors who fear that the United States is on the brink of a substantial financial crisis.

While some experts may question the severity of Dalio's warnings, his track record as a successful investor lends credibility to his concerns. Bridgewater Associates' reputation as a leading hedge fund further underscores the gravity of his assessment.

The US government, policymakers, and economists now face the daunting task of navigating the treacherous waters of rising debt, stubborn inflation, and social divisions. Finding a comprehensive and sustainable solution to address these issues will require a concerted effort from all stakeholders involved.

As the nation stands on the precipice of a potentially dire economic situation, the insights and perspectives shared by figures like Ray Dalio serve as crucial reminders of the urgent need for proactive measures to avert a full-blown crisis. The course of action taken in the coming months will undoubtedly shape the future economic landscape of the United States.

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Warren Takunda

Traders' Opinions

Central Bank

Bank of Japan (BOJ) watchers, economists who closely monitor and forecast the central bank's policy adjustments, have revised their predictions following Governor Kazuo Ueda's recent indication of maintaining the current monetary stimulus despite increasing inflationary pressures. As a result, expectations for a policy change have been pushed back, highlighting the cautious stance of the BOJ.

The BOJ's monetary policy framework revolves around yield curve control (YCC), a strategy implemented in 2016 to guide short-term interest rates at -0.1% and target the 10-year government bond yield at 0.5% above or below zero2. This mechanism aims to manage the shape of the yield curve and facilitate the achievement of the BOJ's 2% inflation target2. However, some investors are testing the central bank's commitment to capping bond yields by speculating on a potential rate hike2.

A recent survey of economists indicates that over 90% of respondents anticipate no change to the BOJ's policy at the upcoming June meeting1. Instead, the majority now view July as the most likely month for a policy adjustment1. Furthermore, the survey reveals that more than half of the economists surveyed believe there is an increased likelihood of the BOJ achieving its inflation goal, which could potentially pave the way for policy changes1.

The BOJ's commitment to maintaining its current policy stance aligns with Governor Ueda's cautious tone and his warning against premature policy changes, even in the face of rising prices2. This approach is aimed at ensuring stability and avoiding any disruptive impact on the economy. The central bank's focus remains on carefully monitoring economic indicators before considering any adjustments to its existing measures2.

Yield curve control has been a crucial aspect of the BOJ's policy framework, helping to manage interest rates and bond yields. However, the recent speculation and bets on a rate hike indicate some skepticism among market participants regarding the BOJ's commitment to capping bond yields2. The central bank's ability to navigate these expectations while maintaining stability will be closely observed.

While economists and market participants eagerly await the next BOJ policy meeting, scheduled for June, the central bank's decision-making will continue to heavily depend on key economic indicators and progress towards its inflation target. With Governor Ueda's recent dovish tone and the majority of economists predicting a delay in policy adjustments, the BOJ seems determined to proceed cautiously in light of evolving market dynamics and economic conditions12.

As financial markets remain on alert for any shifts in the BOJ's policy stance, the central bank's commitment to yield curve control until 2024, as suggested by recent reports, aims to provide stability and reduce uncertainty in the foreseeable future[^7^]. The effectiveness of these measures and their impact on Japan's inflation trajectory will be crucial in shaping the future of the country's monetary policy.

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Justin

Economic

GDP growth slows again

GDP growth in Australia has been slowing since 2Q22 when the reopening of the economy temporarily lifted economic activity dramatically. Since then, the Reserve Bank of Australia (RBA) has been engaged in a battle to try to squeeze rampant inflation out of the economy, while simultaneously trying to avoid tipping the economy into a sharp recession. So far, this seems to be working.

Following a 0.2% quarter-on-quarter increase, the annual growth rate in 1Q23 has slowed to 2.3% year-on-year from 2.6% in 4Q22, and we expect it to slow further. Household consumption has driven the decline in growth, with occasional fluctuations from inventories or net exports adding volatility. But the key observation in the latest set of data is that really nothing, including business investment, is picking up the slack from consumption. There are no obvious factors in the pipeline that could lift the numbers in the coming quarters. So growth will probably slow a little further, or at best pootle along at similar low growth rates over the next couple of quarters. That means that full-year GDP growth should come in at about 1.7% according to our latest calculations, though probably a little lower rather than higher if we consider the balance of risks.

Contribution to QoQ GDP growth (pp)

If it's slowing, then RBA policy must be working...

While no one wants to see the economy drifting into recession, the slowdown we are seeing is evidence that the RBA's tightening (which they added to earlier this week taking the cash rate target to 4.1%), is working.

Admittedly, the labour market has yet to show much evidence that it is also cooling sufficiently to help bring wage growth and hence service sector inflation back to a more manageable growth rate. And headline and core measures of consumer inflation are also taking their time to drop back to an acceptable rate. But today's numbers do add ammunition to the view that current policy is working. These other, lagging indicators should fall into line, given time and a little patience.

All of this suggests to us that the current cash rate is probably high enough and that market expectations for further tightening may be a bit overdone. A more rapid rate of inflation decline in the coming months should help support our view.

Source: ING

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Justin

Central Bank

Economic

BoC tightening is back

We have had a surprise 25bp interest rate increase from the Bank of Canada, which takes the target for the overnight rate to 4.75% having been on hold at 4.5% since last hiking at the January meeting. Only around 10bp was priced beforehand with one-third of economists looking for an increase, but odds had certainly risen in the wake of Australia's own 25bp non-consensus rate rise earlier this week.

The accompanying statement talks of activity being stronger than expected, the housing market picking up and labour conditions remaining tight, which combined means "excess demand in the economy looks to be more persistent than anticipated". Meanwhile, there was an acknowledgement that the annual rate of Consumer Price Inflation picked up for the first time in 10 months and there are concerns that "inflation could get stuck materially above the 2% target". The Bank therefore decided to hike "reflecting our view that monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2% target".

Tightening cycles in Canada, US and eurozone

Bank of Canada Surprises with a Hike and Hints at More to Come_1

There was little in the way of forward guidance other than to say it will continue to evaluate inflation, wage and demand dynamics. Nonetheless, having restarted hiking after a five-month period the odds certainly favour at least one additional move. Markets are fully discounting a further 25bp hike at the July policy meeting with a decent chance of another in September with rates staying 50bp higher through to year end. We would agree that a 25bp hike in July looks very likely, but are less convinced on a September move at this stage. The BoC themselves acknowledged inflation is likely to slow to “3% in the summer” and that “financial conditions have tightened back to those seen before the bank failures in the United States and Switzerland”. Given that monetary policy tends to take effect with long lags we are wary about pushing too aggressively ahead with more rate hikes.

Loonie’s momentum getting even stronger

The BoC hike today sent USD/CAD lower and the pair is now aiming at testing the November 2022 lows at 1.32/1.33. Below that, we’d be looking at 1.30 as the next key resistance level for the pair.

As discussed above, we don’t see reasons to push back against market expectations for another 25bp hike in July at this stage. Since this is fully priced in, there is arguably limited direct implications for CAD in terms of further hawkish repricing, especially considering we are not convinced another hike in September will be delivered. However, the resumption of the tightening cycle is keeping loonie’s risk-adjusted carry very attractive – as shown below.

Volatility-adjusted 3-month carry in G10

Bank of Canada Surprises with a Hike and Hints at More to Come_2

Our pre-BoC forecast for USD/CAD had 1.30 as an end-3Q target. We now think the chances of 1.30 being hit earlier this summer are quite elevated. Later in the year, a negative re-rating in US growth expectations and prospective Fed cuts late in 2023 can impact CAD negatively and we expect it to lag other procyclicals later in the year. But fresh BoC tightening means that USD/CAD may trade closer to 1.25 than 1.30 by year-end.

Source: ING

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Owen Li

Commodity

Energy – China's crude oil imports recover

China's crude oil imports recovered to 51.44mt or around 12.16MMbbls/d (up 17% month-on-month and 12% year-on-year) in May 2023, as some of the refineries increased their utilisation rate after concluding maintenance. Demand slowdown from China has been a major concern for the crude oil market recently, and a recovery in oil imports is likely to provide some comfort to the oil market. Higher refinery utilisation has also increased refined product supplies in the Chinese market, with China reverting to being a net exporter of refined products last month. Among other energy products, natural gas imports into China increased 17.3% YoY to 10.6mt in May as lower gas prices in the Asian market supported demand for storage.

In its latest short-term energy outlook report, the Energy Information Administration (EIA) revised higher domestic oil production estimates, as the decision by OPEC+ to extend output cuts could push oil prices higher and bring more investments into exploration. The administration revised higher the production estimates to 12.61MMbbls/d for 2023 compared to earlier estimates of 12.53MMbbls/d and output of 11.88MMbbls/d in 2022. For 2024, production estimates are revised higher to 12.77MMbbls/d compared to earlier estimates of 12.69MMbbls/d. On the other hand, U.S. demand for crude oil is revised down from 20.47MMbbls/d to 20.42MMbbls/d on slow demand for distillates – although this is still higher than the 20.28MMbbls/d of consumption in 2022.

Meanwhile, the American Petroleum Institute (API) reported that the U.S. crude oil inventories decreased by 1.71MMbbls over the last week, in contrast to market expectations for the addition of around 350Mbbls. Cushing crude oil stocks are reported to have increased by 1.53MMbbls. On the products side, API reported that gasoline and distillates inventories rose by 2.42MMbbls and 4.5MMbbls respectively over the week ending 2 June. The more widely followed EIA report will be released later today.

Metals – Chinese copper concentrate imports at record highs

China released its preliminary trade data for metals this morning, which shows total monthly imports for unwrought copper fell 4.6% YoY to 444kt in May, largely on account of higher domestic production of the refined metal. Cumulatively, unwrought copper imports fell 11% YoY to 2.14mt in the first five months of the year. Meanwhile, imports of copper concentrate rose 16.7% YoY to a fresh record of 2.56mt last month, with year-to-date imports up 8.8% YoY to 11.31mt from January to May this year. In ferrous metals, iron ore monthly imports rose 3.9% YoY (+6.3% MoM) to 96.17mt last month, while cumulative imports are up 7.7% YoY to 480.7mt from January to May.

On the exports side, China's unwrought aluminium and aluminium products shipments fell 29.7% YoY to 475.4kt last month while year-to-date exports declined 20.2% YoY to 2.32mt in the first five months of the year. Exports of steel products jumped 41% YoY to 36.4mt from January to May this year.

Meanwhile, data from the Mines and Geosciences Bureau shows that nickel output in the Philippines rose 5.4% YoY to 3.9dmt in 1Q23 despite only a few mines being in production. The bureau reported that only 13 out of the nation's 33 operating mines reported output for the above-mentioned period, as some were impacted by unfavourable weather conditions while few were undergoing scheduled maintenance. However, the bureau remains optimistic about the outlook for the mining industry over the long term, following the expected recovery of the global economy and strong demand for nickel ore.

Agriculture – Chinese soybean imports surge

The latest trade numbers from Chinese Customs show that soybean imports in China rose 24.3% YoY (+65.6% MoM) to a record high of 12.02mt in May. The imports surged sharply as the delayed cargoes (due to last month's strict inspections) were finally unloaded at ports. Cumulatively, soybean imports rose 11.2% YoY to 42.3mt over the first five months of the year.

Weekly data from the European Commission show that soft wheat shipments from the EU reached 28.9mt for the season as of 4 June, up 11.4% compared to 25.9mt from the same period last year. Morocco, Algeria, and Nigeria were the top destinations for these shipments. Meanwhile, the EU's corn imports stood at 24.6mt, compared to 15.3mt reported a year ago.

Source: ING

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Damon

Economic

With U.S. stock market volatility back at pre-pandemic lows, you'd be forgiven for wondering where the market angst had gone.

Wall St's 'fear index', the VIX gauge of implied S&P500 equity volatility, closed below 14 on Tuesday for the first time since February 2020 - more than 5 points below its 33-year average. The S&P500 eked another closing high for the year, with 2023's tech-led gains seemingly broadening out to a outperforming small cap Russell 2000 that gained 2.7%.

A widely expected pause in the Federal Reserve's brutal rate rise campaign next week is clearly helping the mood, with futures now showing only a one-in-five chance of another tightening on June 14.

News of another sharp drop in the New York Fed's index of global supply chain pressures in May helps that cause.

And despite lacing updated world forecasts with caution and some question marks over 2024, the Organisation for Economic Cooperation and Development and the World Bank both lifted their 2023 global growth forecasts over the past 24 hours.

What's more, the OECD saw Fed rates peaking after just one more hike to the 5.25-5.5% range and "modest" cuts next year.

While dire Chinese export numbers for May might question those growth scenarios, they also cut across thoughts of a fresh inflation spur from the country's re-opening this year.

Oil prices remain lower on the week despite new Saudi output cut plans and year-on-year prices are still falling at 36%.

The Fed's April report credit conditions will be watched closely later for any more signs the banking stress of the previous month crimped lending.

Wednesday sees another test of the central bank 'pause' thesis, however, with markets putting 50-50 chance on the Bank of Canada resuming its rate hikes after a four-month hiatus. The Canadian dollar pushed higher ahead of the policy decision.

Elsewhere, the withering slide of Turkey's lira since last month's re-election of President Tayyip Erdogan went up several gears on Wednesday as it plunged a further 7% - almost doubling losses seen since the vote.

The weakening comes as heavy intervention to artificially prop up the currency before the election - which further drained reserve coffers and central bank IOUs - is expected to be abandoned by new finance minister Mehmet Simsek.

Crypto tokens such as bitcoin steadied after hitting 3-month lows on Tuesday when U.S. regulators expanded their crackdown on crypto exchanges to the Coinbase platform, the second lawsuit in two days against a major crypto exchange.

More broadly, U.S. stock futures, European and Asia bourses were steady to lower on Wednesday. The dollar was a touch lower and bonds were steady.

Events to watch for later on Wednesday:

* Bank of Canada key policy interest rate announcement

* U.S. April trade balance. Federal Reserve issues Consumer Credit report for April

* Britain's Prime Minister Rishi Sunak travels to Washington to meet with U.S. President Joe Biden

* U.S. corporate earnings: Campbell Soup, Brown-Forman Fearless VIX, China Miss, Canada Hike?_1

Fearless VIX, China Miss, Canada Hike?_2

Fearless VIX, China Miss, Canada Hike?_3

Fearless VIX, China Miss, Canada Hike?_4

Source: Yahoo

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Cohen

Economic

Even if some yearn for pre-pandemic familiarity after three years of global economic disruption, the euro zone may not want or need to go back there.

One of the biggest questions in world markets is just how durable the changes wrought by COVID-19 - and the compounding energy shock that followed Russia's invasion of Ukraine - will be on economic behaviour, growth and inflation around the world.

There are usually two camps - one assuming an eventual return to a slow-growth square one; another sketching a volatile world of higher inflation, borrowing costs and 'geo-economic' realignment.

Policymakers still battling the related inflation spike and debt piles say it's too early to tell. And this week's World Bank update described the global economy as still 'hobbled' by three years of shocks and with its outlook still 'precarious'.

Bond fund giant Pimco's five-year view talks of a possible end to an era of "volatility-suppressing policies", leaving markets in for a bout of "heightened volatility" and aftershocks.

And yet there are scattered signs that the pre-pandemic world is re-emerging as energy prices and inflation gradually subside, worker shortages ease and cross-border travel revives.

The New York Federal Reserve's index of global supply chain pressures fell to its lowest level in May in the 25-year series.

And even in financial markets - also contending with a year of steep interest rate rises and pockets of banking stress - Wall Street's 'fear index' of equity market volatility fell to its lowest close this week since before the onset of the pandemic in 2020.

The picture in Europe - on the front line of the Ukraine conflict and forced into a natural gas rethink amid Russia's pipeline cuts - has been even harder to parse.

Consensus on the euro zone economic cycle has flipped twice in just six months - from recession angst to relief and back.

And now, suggesting a more unwelcome return to pre-2020 trends, the latest economic numbers are starting to register disappointment and underperformance again too.

As interest rates surge after years at near-zero levels, economic 'surprise' indexes for the bloc have plummeted to their most negative since the aftermath of the Ukraine invasion and the gas price explosion last summer.

That's happened even as global equivalents continue to match forecasts and the U.S. version has pushed back higher into consensus-busting territory. So much so, the gap between euro zone and U.S. surprise indexes is at its widest since 2020.

In the markets, the euro's surge since the final quarter of last year is fading again against a re-charged dollar. So too is the outperformance of euro zone stocks over the past year. Euro Economic Misses May Mask Pandemic Reboot_1

Euro Economic Misses May Mask Pandemic Reboot_1

Euro Economic Misses May Mask Pandemic Reboot_2

'Bull case'

With renewed cyclical angst, comes the old handwringing.

Long-held doubts have resurfaced about Europe's place in a potentially deglobalising world, with high debt and an ageing workforce. Added to that are fears for the competitiveness of its industry as China goes up the value chain and competes, while Europe still lags the now AI-fueled U.S. digital economy and struggles to retain access to pricey commodity imports.

But there's a more positive take. And that riffs on how the pandemic thunderbolt may have shaken the zone from its torpor.

In a report this week entitled "The Bull Case For Europe", TS Lombard economist Davide Oneglia insists the shift in euro zone fiscal and monetary policy mix due to the pandemic may have "profoundly positive" effects on long-term growth and assets.

"The old (euro zone) export-led growth model is dead - but this is good news," he said, adding that the new wave of public investment, greening of the economy and tight job market strengthen domestic demand amid signs of a productivity revival.

"Market narratives about euro zone long-term growth seem overly pessimistic," he said. "Don't fear the demise of the old, dysfunctional euro zone growth model."

Oneglia's main point is that a decade of balanced budget pressures, loose money and reliance on "internal devaluation" to regain competitiveness is over. And it's no longer optional anyway in a world reshaped by technological decoupling from China, which now becomes a rival for industrial markets rather than an export market.

The pandemic was a 'watershed', he said. The big picture was an entire change of model that trumps cyclical hiccups.

What's more, the end of the zero-interest period could also help boost aggregate productivity as it pulls the plug on a large number of 'zombie' companies - indebted, loss-making firms kept alive by extraordinarily cheap borrowing - and frees up capital for newer, more innovative startups.

If successful, the euro zone may never be going back to the pre-pandemic world. Euro Economic Misses May Mask Pandemic Reboot_4