'Excessive imbalances': Why Ray Dalio just turned crazy bearish on markets

Billionaire investor and markets guru Ray Dalio just told investors it's too late for the US to repair trade relations with China, as the broken relationship means markets are heading for a great reset. 

Dalio says the die is cast because unsustainable and excessive global trade imbalances mean the monetary and world order is on the brink of break down, according to a post on X.

Others such as US hedge fund Apollo Global have delivered blistering warnings the US economy is spiralling into a summer recession of empty store shelves and mass layoffs, unless President Trump executes a major tariff walk back.

If the forecasts come true their consequences will spill across the local economy as Australia's two major trading partners, China and the US, are now in a circular firing squad. 

What's the problem of global imbalances?

The problems of global trade imbalances and Trump's trade war as a symptom of this are nothing new. However, it's worth understanding imbalances as the cause of the Great Financial Crisis of 2009 and various asset price movements we now see as symptoms of them. 

Former Bank of England Governor and economics professor Mervyn King perhaps explains it best. 

He has long warned the result of China's giant trade surpluses with the US is an imbalance in capital flows, which forces interest rates too low in the West, with major consequences. 

Moreover, the problem is only worsening as China posted the largest trade surplus in economic history in 2024, near US$1 trillion. 

According to King, the global imbalances caused the GFC of 2009 and pushed the global economy to lurch from one debt crisis to another ever since the period of "Great Moderation" between the mid-1980s and 2007, which was marked by low asset price volatility, modest inflation and steady GDP growth. 

King says the structural trade deficits in developed countries, including the US, amount to an ongoing negative drag on demand, so to ensure domestic demand, minus a trade deficit, matches the capacity of economies to produce, the central banks in deficit countries cut rates to boost demand. 

This internal policy turbocharged the geopolitical imbalance as external trade deficits were also accelerating the disequilibrium.

The internal imbalances were amplified because in deficit countries, spending was too high relative to present income, and in the surplus countries (China and Germany), spending was too low relative to future incomes. 

But the policy of central banks to bring forward spending in deficit countries from the future to the present by cutting rates has reached its limits, as central banks now must inject ever more stimulus to maintain the same rate of growth of aggregate spending. 

The consequence is increased spending and lower interest rates to address trade imbalances (under the Keynesian approach favoured by governments) doesn't stimulate demand enough, but instead creates a 'liquidity trap' or 'stagflation' where more money supply pushes up prices, but insufficiently boosts growth. 

Importantly, it also encourages the accumulation of debt, credit being channelled into speculation, and excess risk-taking in the search for yield, as symptoms of the GFC and other problems or asset price movements the world still produces since the pandemic in particular.

Tariff man's plan

In response to the imbalances, Dalio is using X to call for an unspecified monetary reset. 

The founder of Bridgewater Associates has also previously said he's avoiding paper assets like US government bonds and prefers hard assets such as bitcoin and gold. He's also calling for the US government to - improbably - more than halve its fiscal deficit to 3% of gross domestic product. 

Whereas the plan of President Trump and Treasury Secretary Bessent is to address the imbalances via tariffs.

Last Friday morning at Washington's Institute of International Finance, Bessent spoke of little else but imbalances and disequilibrium as being at the heart of the global economy's problems.

Trump has also pressured the Fed to cut rates as the US seeks to refinance debt at the short end of maturity terms and worries less about rates rising at the long end as a consequence of the inflationary impact of tariffs. 

As a result, the yield curve has steepened, with a sell-off in bond markets and a rise in borrowing rates, the biggest stick the markets have in forcing Trump to abandon his plans. 

As a final word of warning, the US tried tariffs in response to the financial crash of 1929 in a much less globalised world. However, it ultimately killed the Golden Goose of free trade, leading to a global depression that spread from the US to Europe as the problems came to a head in World War II. 

This scenario is still highly unlikely, although Trump's unhinged demands - including for Canada to join the US - are troubling.