‘There is definitely a bubble in markets.’
— Ray Dalio
That was Ray Dalio, billionaire founder of hedge-fund behemoth Bridgewater Associates, speaking during an interview on CNBC Thursday morning.
Despite his bubble warning, Dalio said the current situation in markets doesn’t exactly resemble past bubble peaks like the ones investors witnessed in 1999 and 1929. Rather, according to several indicators he monitors, Dalio said the U.S. market is currently about 80% of the way there.
That doesn’t mean investors should bail out of stocks. Rather, Dalio recommended keeping an eye on the “weak hands” — that is, those investors who have relied too heavily on leverage to boost their returns.
“I want to reiterate, a lot can go up before the bubble bursts,” Dalio said.
The risk that these weak hands might be forced to capitulate, either because of a tightening of monetary policy or for some other reason like the adoption of a wealth tax, is a bigger threat to stock-market stability than the controversial circular financing that has become a key feature of the artificial-intelligence build-out, Dalio said.
In California, a union has proposed a referendum that could appear on the ballot next year calling for a one-time emergency wealth tax of 5% on billionaires living in the Golden State. The union will soon begin the process of collecting the 875,000 signatures needed to get the measure on the ballot.
Investors have also been using more leverage to juice their stock holdings recently. Data from Finra showed total outstanding margin debt owed to U.S. brokers hit another record high of nearly $1.2 trillion in October — although that figure looks less meaningful when compared with value of all U.S. publicly traded securities, which is also near record highs.
“A tightening of monetary policy is classic, but also something like wealth taxes can happen,” Dalio said.
US stocks tumbled on Thursday, wiping out earlier gains as AI darling Nvidia Corp.’s surprisingly strong earnings report failed to allay investor worries about lofty valuations.