TIP174: Billionaires Ray Dalio & Bill Gross and Their Expectations for 2018 (Business Podcast)

Episode Summary

Executive Summary: The episode examines whether the long post-2008 bull market can continue as the Fed and other central banks shift from quantitative easing to tightening. Using clips from Ray Dalio and Bill Gross, Preston and Brian argue that abundant global liquidity, low yields, and policy coordination have kept asset prices elevated, but QT may raise volatility and eventually pressure stocks, bonds, and housing.

Main Topics: Ray Dalio’s shift on markets and liquidity (Priority: 5/5): Dalio’s late-2017 comments suggest equities were not yet expensive relative to cash and bonds because massive global QE had inflated asset prices. He argues 2017 marks a transition from easing to tightening and therefore a new, riskier regime. Global central-bank coordination (Priority: 5/5): The hosts emphasize that Fed tightening is happening alongside or against other central banks, especially in Europe and Japan. They debate whether this coordinated policy environment was unforeseen in earlier bearish models. Quantitative tightening and volatility (Priority: 5/5): A major thread is that QT may be the inverse of QE: if QE was 'short volatility,' QT may be 'long volatility.' The hosts expect more market turbulence as balance-sheet reduction progresses. Bond-market risk and rates (Priority: 4/5): Bill Gross’s comments are used to show rising Treasury yields could be a bear market for bonds while still leaving total returns near flat. The speed of rate increases is framed as the key risk to equities. Equity valuations in a low-yield world (Priority: 4/5): The discussion argues that high equity multiples may not be extreme when compared with near-zero cash and bond yields. Liquidity is said to force capital into stocks, supporting continued gains. Portfolio positioning and risk management (Priority: 4/5): Preston describes shifting toward low-volatility ETFs, using tighter stops, and avoiding concentrated stock risk. Brian supports bracketing positions and preferring steady gains over chasing home runs. Labor market, wages, and policy constraints (Priority: 3/5): The hosts note unemployment near 4% as historically low, but wage growth remains muted. They discuss how this complicates the Fed’s mandate and could affect inflation and future rate moves.

Key Arguments: The market’s post-2015 rally was driven less by fundamentals than by global liquidity from central banks. Dalio’s view changed from fearing one Fed hike would break markets to accepting that equities can remain supported in a liquidity-rich environment. Quantitative tightening is uncharted territory, so even if the pace is gradual, it could produce more volatility than investors expect. Bill Gross argues bond yields can rise meaningfully without devastating total returns, but a fast move higher would spill into equities. Because Europe and Japan remain accommodative, global capital may continue flowing into U.S. assets, supporting stocks and the dollar-relative yield trade. Low unemployment alone is not enough to force the Fed’s hand; wage growth and inflation are the key missing signals. A defensive portfolio approach—low-volatility exposure plus tight stops—is presented as prudent while policy normalization unfolds.

Data Points: Bull market duration referenced: 9 years - The hosts describe the post-2008 rally as one of the biggest bull markets lasting nine years. Ray Dalio interview date: October 26, 2017 - The Bloomberg clip cited by Preston is dated to late October 2017. Global QE purchases referenced by Dalio: $15 trillion - Dalio says central banks put out roughly $15 trillion in purchases/liquidity. 10-year real interest rate: about 0.5% - Dalio notes 10-year real rates are near a half-percent, implying very low real yields. 10-year break-even inflation rate: about 1.8% - Dalio cites the market’s 10-year inflation expectation as a low 1.8%. US federal tax rate: 21% - Brian references the newly lowered corporate tax rate as part of the U.S. investment case. Unemployment rate: 4% - Preston highlights the unusually low U.S. unemployment rate at the start of 2018. Historical unemployment comparison: Only around the 2000 bubble did unemployment get this low - The hosts say this level has been rare over roughly 30–40 years. 10-year Treasury yield: 2.55% - Bill Gross refers to the 10-year Treasury yield around this level in January 2018. Bill Gross year-end range: 2.75% to 2.80% - Gross says the 10-year Treasury could rise to this range over the year. Potential high-end 10-year Treasury scenario: 3.0% to 3.6% - Gross says 3% is possible, and Preston notes Gross’s GDP-based logic could imply 3.6%. Nominal GDP estimate: close to 5% - Gross says nominal U.S. GDP may approach 5% in coming quarters. Typical nominal GDP / 10-year spread: 140 basis points - Gross cites the historical spread between nominal GDP and the 10-year Treasury since 2009. ETF volatility example: about 8% - Preston says his Russell 3000 exposure has roughly 8% volatility. Russell 3000 / SP500-like performance: ~25% market move up over 12 months - Brian refers to the market’s large run-up over the prior year. Walmart minimum wage: $11 per hour - Brian notes Walmart’s wage increase as a possible sign of labor-market tightening.

Pivotal Quotes: "we are now in a transition, a whole different environment" — Ray Dalio: Dalio explains why 2017 marks a shift from easing to tightening globally. "if one tightens, they've all got to tighten" — Ray Dalio: Dalio’s argument that central-bank policy moves together across countries. "quantitative easing was short volatility" — Unnamed Fed chairman reference by Preston: Preston uses this to suggest QT may imply higher volatility ahead.

Implications: Investors should expect a regime shift: QT may increase volatility, bond yields could grind higher, and asset prices may remain supported only as long as global liquidity stays abundant. Conservative sizing, diversification, and tighter risk controls look prudent.