Looking At Ray Dalio’s Stock Market ‘Lost Decade’ Prediction


Ray Dalio’s recent prediction of a lost decade for stocks ahead, strongly resounded through the investing world. And it should be so as he correctly predicted the 2008 stock market crash and the current monetary reaction to the covid crisis and again, stock market crash. We explain what are zero stock market returns, what are the main factors that can contribute to such a situation and what can an investor do about it.

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Ray Dalio's Stock Market 'Lost Decade' Prediction Explained

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Good day for investors. Ray Dalio, Bridgewater recently came out with a message to their clients that it's very likely that there will be a lost decade for stocks in the next 10 years. And in this video, I really want to explain what does that mean? Why are they saying that and what you can do about it when it comes to investing your portfolio and your investment strategy.

The main reasons, the high in the lost decade projection forecasts are contracting of profit margins. So we'll see how corporate profit margins have really expanded over the last 20-30 years. And then the second main issue that they say put forward is the debt, the accumulated debt that will put away on profits on future growth on investments.

And that all in all might lead to the case alongside interest rates and everything valuations to the case that there is a lost decades for stocks ahead. It's very hard to determine what will be the main reason there are plenty of them. But the key is something else. The key is what will we do? And how will we approach this situation?

Let's start with the analysis. So on profit margins, this is 6, 7, max 8%, then recession, then still again in this range around 7%. Today, the profit margins of S&P 500 corporations are around 10-11, even 12% after the first tax cut. So profit margins are almost double what used to be the case. If these profit margins return to this normality, then S&P 500 stock's earnings would be hit really bad and that would lead to a decline in stock values and likely to lost decade in stocks. If we take a look at taxes, corporate taxes in the United States, Donald Trump recently a few years ago lowered the tax rate to 21%.

Before that, it was 45%. And before that, it used to be even 53%, 40% in the war and stayed that high after the war until the debt burden became smaller. It was even lower in the beginning of the last century. But this, the difference between this and that plays a huge importance when it comes to profits that later through valuations lead to stock prices. And with lower taxes, it means that the government needs to find In itself from other sources.

If we look at the federal deficits of the US government, we see how the situation hasn't been that good at all over the last 20 years. So despite the big deficits, corporate taxes have been lowered, that enabled higher profit margins for corporations and higher stock prices. A reversal in the situation would lead to a negative effect on stocks.

Then there are other factors. If we have high inflation, let's say stagflation. Then companies, not all of them will not be able to transfer the price increases of the input costs onto their customers, especially if there is high competition. So inflation will do good for some companies for some businesses, but overall, in a situation of high inflation, earnings might suffer, stocks might still be the predominant asset to safeguard your wealth. But then we also have to look at what is Ray Dalio saying.

Are we looking at nominal returns or real investment returns? If we are looking at real investment returns, that's we have to adjust the return by inflation. And that always lowers current inflation is 2%, if it goes to 5-6%, the stock market yes might go up 6% to adjust for that inflation, but the real return would be 0. So that's another thing to keep in mind.

Also, interest rates. If you have high interest rates, then when people are looking at treasuries comparing it investing, that puts away on stock prices. When we have zero interest rates, then even 1%-2% dividend as we discussed in the recent Nike video, is something attractive and pushes stock prices up because demand is up. If that changes, that's another factor why we might see declining stock prices or flat stock prices, especially real returns in the long term.

Further on the margin side, this is also different than it was the case 40 years ago. So we had top S&P 500 companies, Exxon, Philip Morris, Walmart, General Electric, Merck, Coca Cola, AT&T, so a lot of companies that have a high capital intensity, where the business leads to lower margins and high competition.

However, today we have Microsoft, Apple, Amazon, Facebook, Google. So really the tech dominant stocks that allows also for higher margins. So this might be something that would prevent Ray Dalio's thesis from happening. There is always a pro and con side to whatever and whenever it comes to investing.

Further, the second issue that they mentioned is corporate debt. And we can see here how really corporate debt escalated since interest rates started going down. Especially since the last financial crisis in 2008-2009, when interest rates were brought to zero, which created a landing Bonanza in stocks and corporations, because everybody is attracted by free money, everybody loves free money and the debt levels simply doubled, or even more over the last years.

It's likely that these debt levels will even increase more now that the Fed is buying corporate bonds. So this is a big issue because if interest rates change from the current zero, so those cannot go lower, then this will be a bigger and bigger burden on companies.

Further, let me show you something that the cost companies are doing but can't do forever. You cannot take loans forever. So, March, end of March 2020, Shell secured the 12 billion credit facility to safeguard the dividend. So they did whatever they could to pay the dividend, but just a little bit later, shell cuts the dividend.

After a month, even after the $12 billion loans that they took, they had to cut the dividend for the first time since World War 2. When you have a dividend stock that's pressured by debt, and debt costs increase or businesses get into trouble, then yes, this will weigh on to the stock market. And also there are many different businesses out there. So one thing is the stock market, the other things are individual businesses.

And if we look at Shell's debt look at what happened over the last 15 years, it was 7.5 billion the long term debt in 2005. And then we had the crisis, it jumped to 34 billion or so higher oil prices investments, they try to lower it a little bit. But then again, a jump, especially when oil prices declined, lower it a little bit and now jumping again to pay the dividend to keep the impression.

But this tells me okay, we are in trouble because such a big increase, it cannot continue forever. And if you see here, when there is trouble, the debt grows at a very, very high rate. When things are good either declines at a very, very small rate, high rate growth, small, small, small just cosmetical changes but the real story is this huge increase in debt.

And there are many companies that have similar problems that will weigh on their future earnings, future growth capacity, and that's something that we have to give credit to Dalio for pointing out and might be a reason why many stocks will certainly lead to negative returns over the long term.

Now what to do, we must keep in mind and if you read Ray Dalio Principles, in the first hundred pages, he mentioned a few times how he loves playing the market. So if you love playing the market, trying to be smarter than other people on the market, then yes, then you have to worry about the next lost decade that's coming and not achieving any returns from the stock market.

However, if you are an investor, if you're buying businesses, if you're buying good businesses, what we do on this channel, so please subscribe, and click that notification bell to be notified when a new video comes out. If you want to do that, like Warren Buffett, if you want to own great businesses, then it's a different story and you really don't care about the lost decade for stocks, you care about other things.

So, Bridgewater Pure Alpha 1991, the benefit both Ray Dalio is selling and telling you now about stocks. He's selling other asset classes and he tries to prevent these drops that the S&P and stocks have. And that's his business. He's doing a great job at that. But he didn't do much better than the S&P 500. Compared to Warren Buffett and owning great businesses, Warren Buffett increased the value of Berkshire from 7000 to 271,000-272,000 in the same period. That's almost 40 times.

Ray Dalio, S&P 500 returns about 7-8 times in the same period. 40 times, owning great businesses, not caring about what markets do and 7 times Bridgewater, okay, less volatility, I do a great job at that would say, Ray Dalio versus the s&p 500. However, Let's see where is the opportunity coming within this lost decade, especially if people start thinking about stocks as Ray Dalio does, as an asset class, not as individual businesses.

We see here that the COVID crisis, the bear market, we have red Apple crashed, we have blue, the S&P 500 down and we have green Berkshire Hathaway down. So all those stocks when there was a crisis when everybody was selling crashed, similar onto similar levels. After the crisis, the recovery was much more divergent Apple exploded, the S&P 500 was even and Berkshire is still down.

So this is where when there is issues when there will be issues, we have to find the best businesses because the market will punish the good, the great, the mediocre and bad businesses at the same likely level. So this is an opportunity that the lost decade we have have, especially if we have many, many crisis ahead.

Onto the solution. What is the solution? Focus on investing in businesses not thinking about the stock market. You start to focus on cash flows. Where will this business be in five to 10 years? Not, where will the stock be in six months? Is this a good buy now? Where will the business be? What are the competitive advantages?

And we are back to Warren Buffett's story, how he did what he did over the last 50, even 30 years, 20 years. That's investing versus speculating. It's up to you to decide what do you want to do, you want to speculate or you want to build something forever, no matter what the stock market does.

If you want to build something forever, please subscribe to this channel. Click that notification bell. If you want to learn more about such a mindset. There is my free stock market course that you can find the link in the description below where all the important videos that I do and I write the report on that will later do a free handbook, you can read, you can learn more about investing. So don't forget to subscribe to the course, too.

If you're interested in my investments, how I structure my portfolio, in stock market research on sectors, on countries, which is what I do professionally and you are a sophisticated investor, please check my stock market research platform. Don't forget to check other videos. Thank you for watching, looking forward to your comments and I'll see you in the next video.