Updated: Oct 11
Ray Dalio is one of the greatest investors of our time. He has served as co-chief investment officer of Bridgewater Associates since 1985. Bridgewater Associates is one of the world’s largest hedge funds, with allocations from the biggest pension funds across the globe.
Ray’s net worth is estimated at $20 billion. He has an MBA from Harvard Business School, and has written multiple books including Principles: Life & Work, which was listed on the New York Times Best Seller List.
Ray is a Global Macro investor. That means he studies macroeconomic and geopolitical data to analyze and predict moves in financial markets. This approach allows him to hold long or short positions in stocks, bonds, commodities, futures, or whatever kind of financial instrument that empowers him to best express his views.
His goal is to find the financial instruments that will maximize the return if his prediction is correct while minimizing the risk if his prediction is wrong.
One of the keys to this type of investing is in the asymmetry. He is looking for “heads I win big, tails I lose a little.” If he makes enough bets that are separate and distinct in their outcomes, and they are all asymmetric, he will win over time. And he has... He has consistently won since he started Bridgewater back in 1975.
In Ray’s most recent book, Principles for Dealing with the Changing World Order, he makes the case that the United States is on the verge of losing its status as the world’s economic super power.
He believes that the US dollar will soon lose its status as the world’s reserve currency and China will eventually emerge as the next economic super power.
RAY BELIEVES THERE ARE THREE MAJOR FORCES DRIVING THIS SHIFT:
The creation of a lot of debt and the printing of a lot of money because of the massive deficits that the United States is running each year.
The large wealth gap that produces populism on the left and populism on the right, which leads to internal conflict. With no place for compromise in the middle, democracies begin to crumble.
As the reigning economic super power struggles with internal conflict and a crumbling democracy, another nation rises up. And this leads to a power struggle. With the former super power distracted from all the internal conflict, a new winner eventually arises and that winner determines the new world order.
To come to this thesis, Ray studied 500 years of history and identified a pattern of economic cycles that last about 75 years. He studied the ten most powerful empires that existed over that 500-year period, and he focused on the rise and fall of the last three reserve currencies:
The rise and decline of the Dutch Empire and the Dutch Guilder
The rise and decline of the British Empire and the British Pound
The rise of the US and the early decline of the US dollar
Source: Principles for Dealing with a Changing World Order by Ray Dalio
Dalio’s theory is that “The Big Cycle” begins after a victor arises from a world war, and the victor determines the New World Order. Because no one is willing to challenge the new power, a period of peace, prosperity and productivity follows and great wealth is created. As wealth is created, money is borrowed to fuel growth and magnify returns, and this leads to an economic bubble.
The economic bubble eventually bursts, and this leads the government to printing massive amounts of money. The printing of money leads to a weakened currency and this eventually leads to a weakened economy.
As the empire struggles with all the internal conflict, the massive debt eventually needs to be restructured, so the nation either defaults on its debt or further devalues its currency to enable it to pay the debt off. While all the debt and political restructuring takes place, another nation arises and begins to grab the economic power from the distracted nation.
Dalio defines “The Big Cycle” as something that is predictable, because it is simply a repeat of what has happened multiple times in the past. Eventually, the rising nation grabbing power from the distracted nation leads to another war. In Dalio’s terms, there are 5 types of wars: trade wars, technology wars, geopolitical wars, capital wars, and military wars. As the winner emerges from the war, the New World Order is established, and the cycle begins again.
That is Ray Dalio’s “The Rise and Fall of Empires” summarized in 90 seconds! (a more in depth explanation can be found on Ray's youtube channel: https://youtu.be/xguam0TKMw8?si=l1NpoAP7PX_TGk5q- 40 million views!)
IS RAY RIGHT? IS THERE A COUNTERPOINT TO HIS PERSPECTIVE?
Only time will tell if Ray Dalio’s prediction is accurate. But there are some data points on China’s economy that are worth considering:
China’s GDP has flatlined.
Threatened by weaker global demand, China’s exports have declined
China’s Consumer Price Index has been declining since 2021 and recently entered into deflationary territory
China’s youth unemployment was the highest ever recorded in July of 2023
China’s currency hit a 16-year low relative to the US dollar in mid-August of 2023
In addition to the points just mentioned, China’s aging population puts its economy at risk. One-fifth of China’s population is over 60 years old, and China’s property market is seeing home price contraction.
SO THERE ARE TWO SIDES TO EVERY STORY…
And we are not in the business of making predictions. We simply look at the data and try to make reasonable conclusions based on the data we observe, and here they are:
Only time will tell if Ray Dalio is correct. But there is one thing we agree with: the United States’ debt is on an unsustainable path. The United States will likely be forced to dramatically raise taxes, default on its debt or weaken the US dollar so dramatically that the end result is the same for investors in US Treasury debt: they will end up with less wealth than when they originally loaned money to the US government. We don’t believe this will happen immediately, but we do believe it could happen over time.
Identifying return streams with unique and distinct returns sources, protected against the risk of a falling US dollar will become an important component of a well-balanced portfolio in the future.
To hear how we help our clients have a ten out of ten level of confidence that no matter what happens the stock market, the economy or the world around us, they will reach their financial goals, call 847-923-9015 or schedule a financial planning discussion with the link below.
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