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Dow Futures on Edge as Billionaire Ray Dalio Warns of ‘Big Squeeze’

Ben Brown
Last Updated March 4, 2021 2:40 PM
  • Dow Jones Industrial Average (DJIA) futures were flat on Wednesday, pointing to a nervous stock market open.
  • With US stocks at record highs, billionaire hedge fund manager Ray Dalio warned that growth is unsustainable and a “big squeeze” is coming.
  • In the same week, Dalio released a provocative essay entitled The World has Gone Mad and the System Is Broken.

After hitting record highs in two consecutive days, Dow (DJIA) futures contracts traded flat on Wednesday, indicating a nervous stock market open.

As stocks hover at all-time highs, billionaire hedge fund manager Ray Dalio added his voice to the chorus of investors sounding the oversold alarm. Speaking to CNBC, Dalio said investors are “buying dreams”  rather than evaluating the fundamental value of companies.

“They’re selling dreams. They’re not selling earnings, and they’re not even selling a path to earnings.”

Dalio warned that “a big squeeze” is looming and the Federal Reserve can’t keep pumping cash forever.

Dow futures on knife edge

Dow Jones Industrial Average (DJIA) futures  swung in and out of positive territory overnight, settling flat ahead of the opening bell.

Dow DJIA stock market futures Wednesday
Dow Jones Industrial Average (DJIA) futures struggled for direction on Wednesday. Source: Yahoo Finance

S&P 500 futures  and Nasdaq Composite futures  also struggled for traction. Bitcoin traded at $9,359.

Dalio: investors are “buying dreams”

The billionaire’s warning comes on the same day he released a damning essay on the state of the global economy, entitled The World has Gone Mad and the System Is Broken. In it, he blamed the Federal Reserve’s loose monetary policy for artificially inflating stocks beyond their fundamental value.

“[Investors] have an enormous amount of money to invest that has been, and continues to be, pushed on them by central banks that are buying financial assets in their futile attempts to push economic activity and inflation up.”

He specifically mentioned the bizarre phenomenon of companies securing billion-dollar valuations without making a penny in profit. They’re not selling earnings, he said, they’re “selling a dream.”

“More companies than at any time since the dot-com bubble don’t have to make profits or even have clear paths to making profits to sell their stock because they can instead sell their dreams to those investors who are flush with money and borrowing power.”

And he’s not wrong. US stocks are at all time highs but corporate earnings slumped for the third-straight quarter.

Dow Jones record highs: unsustainable?

Dalio ended his provocative essay with a warning:

“This set of circumstances is unsustainable and certainly can no longer be pushed as it has been pushed since 2008.”

If he’s right, the Dow Jones’ upside may be limited. He’s now one of a string of investors sounding the alarm. Infamous ‘Big Short’ investor Michael Burry warned of a stock market bubble in September. Even Warren Buffet appears to be bracing for a downturn, with a record pile of cash sitting on the sidelines.

On the flip side, you don’t have to look far to find stock market bulls on the other side of the equation. Fundstrat’s Thomas Lee predicts “fireworks” before the end of the year and at least one analyst thinks we’re at the beginning of a new bull market .