- Bridgewater Associates, L.P. Co-Chief Investment Officer & Co-Chairman Ray Dalio recently launched a new weekly newsletter on LinkedIn called “The Changing World Order”
Bridgewater Associates, L.P. Co-Chief Investment Officer & Co-Chairman Ray Dalio recently launched a new weekly newsletter on LinkedIn as part of a series called “The Changing World Order.” The newsletter features Dalio’s ongoing flow of research and perspectives about the economy, markets, life, and work.
In the first issue, Dalio explained how the times ahead will be “radically different from the times we have experienced so far in our lifetimes, though similar to many other times in history.”
Around 18 months ago, Dalio undertook a study of the rises and declines of empires along with reserve currencies and their markets, prompted by his seeing a number of unusual developments that had not happened before in his lifetime. But Dalio knew it had occurred numerous times in history. Dalio noticed the confluence of high levels of indebtedness and extremely low interest rates — which limits central banks’ powers to stimulate the economy. And he also noticed large wealth gaps and political divisions within countries, leading to increases in social and political conflicts. Plus China as a rising world power challenging the overextended existing world power of the U.S. causes external conflict.
“While it might seem odd that an investment manager who is required to make investment decisions on short time frames would pay so much attention to long-term history, through my experiences I have learned that I need this perspective to do my job well,” wrote Dalio. “My biggest mistakes in my career came from missing big market moves that hadn’t happened in my lifetime but had happened many times before. These mistakes taught me that I needed to understand how economies and markets have worked throughout history and in faraway places so that I could learn the timeless and universal mechanics underlying them and develop timeless and universal principles for dealing with them well.”
One of the biggest surprises for Dalio was in 1971 when he was 22 years old and clerked on the floor of the New York Stock Exchange as a summer job. On a Sunday night (August 15, 1971), President Nixon announced that the U.S. was reneging on its promise to allow paper dollars to be turned in for gold. This caused the dollar to plummet. When Dalio walked onto the floor of the exchange the next day, he expected market pandemonium and stock price drops. Rather than seeing the stock market fall, the stock market jumped 4%.
“I was shocked. That is because I hadn’t experienced a currency devaluation before. In the days that followed, I dug into history and saw that there were many cases of currency devaluations that had similar effects on stock markets,” added Dalio. “By studying further, I figured out why, and I learned something valuable that would help me many times in my future. It took a few more of those painful surprises to beat into my head the realization that I needed to understand all the big economic and market moves that had happened in the last 100+ years and in all major countries.”
Based on Dalio’s need to understand important things that are now happening — which had not happened in his lifetime but have happened many times before that — have resulted of 3 big forces and the questions that are prompted: the long-term money and debt cycle, the domestic wealth and power cycle, and the international wealth and power cycle.
The long-term money and debt cycle force section notes that over $10 trillion of debt was at negative interest rates and an unusually large amount of new debt will soon need to be sold to finance deficits. And at the same time, this is happening as major pension and healthcare obligations are coming due. In this case, Dalio wondered why anyone would want to hold debt yielding a negative interest rate and how much lower interest rates can be pushed.
In terms of the domestic wealth and power cycle, wealth, values, and political gaps are now larger than at any other time during Dalio’s lifetime. And by studying the 1930s and other prior eras when polarity was also high, Dalio learned that which side wins out (i.e. left or right) will have major impacts on economies and markets. Based on his examinations of history, when wealth and values gaps are large during an economic downturn — it is likely that there will be a lot of conflict about how to divide the pie. That leads him to question how will people and policymakers be with each other when the next economic downturn arrives. Along with the traditional tools being ineffective, printing money and buying financial assets (known as “quantitative easing”) also tends to widen the wealth gap since buying financial assets pushes up the prices thus benefitting the wealthy who hold more financial assets than the poor.
And the international wealth and power cycle is about the U.S. encountering a rival power: China. China has become a competitive power to the United States in a number of ways and is growing at a faster rate than the U.S. And if trends continue, it will be stronger than the U.S. in most of the most important ways that an empire becomes dominant. Dalio has seen both countries up close for most of his life and now sees how conflict is increasing fast — especially in the areas of trade, capital, geopolitics, and a variety of ideologies. So Dalio cannot help but wonder how these conflicts and changes in the world order that will result from them and what will transpire in the years ahead.
Over the next few weeks, Dalio is going to be sending out parts of the study on the rise and decline of empires and reserve currencies that have helped him put what is happening now in perspective.