Legendary investor, economist, market historian and billionaire Bridgewater founder and Co-CIO Ray Dalio knows a thing or two about the market, with his hedge fund earning more than $50 billion for his investors thus far.

So when he speaks, it’s worth listening. And right now Dalio sees tough times and a massive bear market ahead for investors.

The debt cycle, Dalio says, explains financial market performance following this pattern:

  1. Healthy debt growth
  2. The growth goes too far, creating a bubble
  3. The bubble bursts
  4. A recession follows
  5. Usually the recession ends and we return to healthy growth
  6. Sometimes, central banks have to step in to restore growth by pushing interest rates to zero

Per Banyan Hill:

“Because you hit zero interest rates, monetary policy can’t be the same. And they inevitably print money to buy financial assets, pushing those financial assets up in value. And that is what we’ve been through.”

History shows this sixth stage rarely happens. The first time was from 1929 to 1933. The second time was in 2008.

Both times, central banks propped up the economy a little. They also supercharged financial assets.

Dalio says: “The period that we are now in looks a lot like 1937.”

This is not good news for investors.

Dalio-bear market-debt cycle

Debt cycles are tied to politics. When times are tough, populists take charge.

We saw that in the U.S. with President Donald Trump’s election. Brexit is an example of populism, as is Italy and several other countries.

These periods are prone to international conflicts, including trade wars.

But there’s even more bad news. Dalio notes that:

“Over the last 500 years, there were 16 times when an emerging power developed to become comparable to an existing power. And in 12 of those times there were shooting wars, which determines which country is dominant and which one has to be submissive.”

He compares China’s current position of challenging the U.S. to the way Germany and Japan rose to challenge the weakening British Empire and other countries that won World War I. That’s another parallel to 1937.

The chart above shows a bear market began in 1937. The S&P 500 Index fell 56% in 13 months.

Bear Markets Take Time to Unfold

No matter what analysis I use, I keep finding the minimum target for the current market is a 40% decline. This is a bear market.

Bull traps are part of a bear market. A bull trap develops when prices rise sharply.

Investors believe the worst is over. They turn bullish and buy. Then prices fall to new lows, trapping the bulls with losses.

Bull traps look like the day after Christmas, when the Dow Jones Industrial Average rose more than 1,000 points. It was the biggest one-day gain in history. Analysts proclaimed the end of the bear market.

Just a week later, the Dow lost 660 points in one day, the eighth-biggest one-day decline in history.

Then another big up day followed a better-than-expected employment report.

Increased volatility like that is bearish. Bear markets take time to unfold.

The bear market that began in 1937 didn’t end until 1942, when the U.S. went on the offensive in World War II. The world that investors knew at the beginning of the decline had changed forever.

This bear market won’t end until we know how the trade war ends. And we are at least months away from knowing that.