Ray Dalio spoke about transparency and how he enjoyed being challenged by creating an open environment where people can freely express their opinions, he said today in a CNBC interview. Then the 65 year old head of the world’s largest hedge fund engaged in public remarks on the economy many fund managers only say behind the scenes or are said in hushed terms.

Ray Dalio predicts the next market crash

Although he noted the U.S. economy is “relatively isolated” to a certain degree from the rest of the world, which is in the middle of a bout of global de-leveraging, Ray Dalio provided an estimate as to when the next market crash might occur.

“We’re coming to the end of effective monetary policy,” Ray Dalio said. “My concern is when the next downturn will come,” which would “probably not be for a year or 18 months when we could have another downturn.”

Ray Dalio Brings Stock Investors Back Down To Earth

As reported numerous times on ValueWalk, fund managers are watching very closely how U.S. Federal Reserve Chairwoman Janet Yellen is handling what has been characterized as defusing a time bomb. Her moves to withdraw artificial stimulus from the U.S. economy is generally considered among fund insiders to be a much more difficult task than turning on the monetary facet and liberally adding money that had the net result of inflating assets such as the stock market and real estate values, which rose particularly fast in wealth communities as opposed to middle and working class areas.

Ray Dalio acknowledges Yellen’s attempt to ending stimulus

Ray Dalio approved of Yellen’s handling of the situation to date and acknowledged that ending stimulus will be more difficult than starting what critics call an addiction that, if not addressed, could lead to a much more severe market crash than that which was experienced in 2008.

Ray Dalio cautioned Yellen on reducing stimulus too soon, saying he “would wait to see the whites of the eyes of inflation” before withdrawing stimulus.  It was here that Dalio expressed optimism. “I see no real reason for a problem in the United States now other than too tight … monetary policy. And I don’t think you’ll get to too tight of monetary policy.”

Ray Dalio on market spreads

But Ray Dalio noted a key point that is being watched as a crisis trigger: market spreads along the yield curve and in risk assets. The world has very little spread left, he said, pointing to the differential between the short end of the yield curve and the long end. The interest government pays to borrow money for ten years hovers around 2.5 percent, compared to literally zero real interest rates for short term government bonds.

With this environment as a backdrop, Ray Dalio put forth a returns expectation for stocks that brings equity markets back towards their mean of normalized 8 percent historic returns. Dalio said stocks might only generate 4 percent return going forward, which might be difficult for investors with double digit returns expectations to understand.