Ray Dalio Warns Fed Bubble Could Send Gold, Bitcoin Soaring

Core Viewpoint - Ray Dalio warns that the Federal Reserve's decision to halt quantitative tightening signals the start of a dangerous cycle of "stimulating into a bubble" rather than addressing economic weaknesses [1][2]. Federal Reserve Actions - The Fed will end quantitative tightening on December 1, 2025, maintaining a balance sheet of $6.5 trillion and redirecting agency security income into Treasury bills instead of mortgage-backed securities [2]. - Dalio perceives this shift as significant, occurring alongside large fiscal deficits and strong private credit creation, rather than merely a technical maneuver [2]. Market Conditions - The S&P 500 earnings yield stands at 4.4%, slightly above the 10-year Treasury yield of 4%, resulting in an equity risk premium of just 0.4% [3]. - Current economic conditions contrast sharply with previous quantitative easing periods, as the economy is growing at 2% annually, unemployment is at 4.3%, and inflation exceeds the Fed's 2% target, currently over 3% [4]. Investment Implications - Dalio suggests that the current easing will inflate a bubble rather than mitigate a downturn, with AI stocks already identified as being in bubble territory according to his indicators [5]. - The combination of significant fiscal deficits, shortened Treasury maturities, and central bank balance sheet expansion exemplifies "classic Big Debt Cycle late cycle dynamics" [5]. Market Liquidity Insights - Analysts note that while discussions around QE and QT are prevalent, actual liquidity began to increase between October and December 2022, coinciding with the end of tightening [6]. - Concerns are raised that crypto markets, which are sensitive to liquidity conditions, may not find a bottom until actual quantitative easing is initiated, rather than just halting tightening [6].