Ray Dalio is the widely admired founder and former CIO of Bridgewater Associates. The world’s largest hedge fund by AUM.
I share his framework of thinking in first principles which I developed independently more than 10 years ago and which serves as the basis of my investment framework.
Ray Dalio’s insights on management and cultural matters which he regularly posts on Linkedin and Instagram are highly inspiring and I am looking to implement most of them.
When it comes to investing I have no clear assessment yet.
A lot of large-picture insights are insightful and most likely correct but I witnessed several instances in which Bridgewater’s predictions have not been correct.
Bridgewater did not sell before Corona but invested straight through it and only took some bearish positions on European equities relatively late. They admitted a mistake in March 2020 but might(?) have been able to profit from the pursuing rebound.
Ray Dalio is bullish on China, given it is a rising power that is overall well-managed and has high work ethics. He might underestimate the communist tendencies of Xi Jinping who appears to deviate strongly from his predecessors.
He predicted in September 2022 that equities on average would fall approx. 30% (which implies an S&P 500 of 3,000) due to valuation effects and lower income.
I would be interested to know what their current take is and if they maintain their bearish outlook or if they adjusted it due to e.g. (temporary?) decreasing inflation, continued fiscal spending, and the necessity to hedge against long-term inflation via equities.
As Bridgewater is a fund it is possible to follow Bridgewater’s actual allocations with some delay through their 13-F filings that get summarized by sites like Whalewisdom.
By doing so we could determine if there is any deviation between public predictions and allocations.
Given that Ray Dalio transitioned into a mentorship role it is uncertain how involved he stays with macroeconomic discussions at Bridgewater.
Ray Dalio in his latest opinion, has reflected back on his predictions and changed his near term outlook, his most recent position is:
Near term: if there isn’t a big supply/demand imbalance in which the amount of government debt sold overwhelms the amount of demand for these debt assets, it appears that a period of tolerably slow growth and tolerably high inflation (a mild stagflation) is most likely. He cites, the uncertainty about this at the moment is significant because the things we don’t know are greater.
Long term: his view is the same as before, governments will most likely enter a debt spiral cycle due to increases in deficits, forcing the central banks to print money and buy the debt. Because of a supply-demand imbalance. This will benefit asset holders, but will crush the savings and credit of the people who most need it.
His reason to change his near-term outlook to a more positive one:
The Fiscal stimulus done by the governments increased household wealth and income significantly, at the expense of their own balance sheet. This has caused that even with all the monetary tightening, household wealth is still pretty high.
This is also the reason for his long-term outlook, as he thinks the fiscal deficits will get out of control due to this fiscal spending.
There was a big government-engineered shift in wealth from 1) the public sector (the central government and central bank) and 2) holders of government bonds to 3) the private sector (i.e., households and businesses). This made the private sector relatively insensitive to the Fed’s very rapid tightening to a more normal monetary policy. As a result of this coordinated government maneuver, the household sector’s balance sheets and income statements are in good shape, while the governments are in bad shape.
By the way, despite me seeing this dynamic happening and studying those cases, I failed to fully appreciate how much the improved financial condition of the private sector would soften the impact of the Fed’s tightening because I was too focused on how the last 12 tightening cycles (since 1945, when the new world and currency order began) worked.
My take: I always have great respect for Ray Dalio, so every time he posts something it makes me question my own thinking and arguments. At the moment I think his argument to change a bit his near term outlook (he is still not predicting a boom in the economy) is very valid , and something I have heard from some other analysts too, so I will probably like to gather a better understanding of this too. The only question I have at the moment is the distribution of this wealth, IMO if its mostly concentrated in e.g the top 5-10% with a much lower propensity to spend it, it will likely not have that prolonged positive effect on spending.
Ray Dalio on why he thinks currently cash is good instead of trash as before.
He uses these criteria to evaluate the appeal of cash
the levels of interest rates relative to prospective inflation rates (i.e., the real interest rate),
whether the Fed is likely to tighten or ease rates based on whether inflation and growth are higher (which will make them tighten) or lower (which will lead them to ease) than the Fed wants them to be,
the attractiveness of the expected cash return relative to the attractiveness of other investments based on their prospective returns, and
the supply-demand picture for cash and bonds.
He will prefer cash when:
a) interest rates are rising and the risk-free interest rate is more than 1 percent above the inflation rate (the more above 1 percent, more he would want to lend), and
b) when the real interest rate is at or above the economy’s real growth rate – or said more simply, when the interest rate is above the economy’s total growth rate (i.e., inflation plus real growth).
Currently, all of these factors apply, cash offers good returns without price risks, additionally he also thinks it keeps the money as dry power:
Cash is still more attractive than bonds: he would need about 5-5.5% treasury bond yield to start getting interested in long bonds, but due to the supply/demand imbalance of treasuries, he thinks yields above this level could be needed to attract buyers, until the economy falls. With yields rising, cash will also get more returns and bond prices will fall more.
As for the stocks: the analysis needs to be done by individual companies, but currently, the whole stock market only offers about 5-5.5% return, not an attractive yield relative to cash. Especially if yields continues to go up, stock prices will fall more.
Ray Dalio says he believes that the economy will gradually ease and the FED might eventually react to that by cutting rates just a bit.
The private sector has been strong after years of intentional wealth transfers into it by the government.
He sees the long term inflation rate at 3-3.5% and thinks long term bonds will trade at approx current levels between 4.5-5% or maybe a bit lower in case the FED will ease but acknowledges uncertainties about demand and supply issues and upcoming maturities.
I guess the issue will come if at some point this is not sustainable and needs to work in reverse, and a transfer from the private sector wealth to the government is needed to continue financing it, or to strengthen the government balance sheet. Meaning less spending, more taxes, more liquidity to treasuries than private assets, deleveraging.
I don’t think this is the most popular decision or path, and I kind of understand/agree with the arguments (including from Ray) that the FED will need to become a buyer eventually, even if they don’t want to or inflation is not where they want it to be.
So, I agree that while short term it seems everything will remain relatively stable, the long term is not a pretty picture from the debt point of view, since the government is not the only sector highly indebted. Private debt to GDP is still a significant 200%+, stable since 2008, due to the help Ray just mentioned all these years, at the expense of the government, if not it would probably be much worse already.
Good point on that reversion of wealth transfer. Another way to transfer wealth back is by devaluing peoples savings (Inflation).
My first guess on private debt to GDP is that this could be controlled relatively easily but the effect would be a slowdown of the economy. So if businesses decide to invest less in e.g. factories, r&d, marketing they can reduce their debt levels on the expense of growth and jobs. If households decide to spend less to pay down their debt consumption and demand for goods will be hit.
Both business and private sectors will be affecting each other as the economy is slowing down which is exactly what we are expecting to happen due to higher costs of debt.
The question remains if debt can decrease faster than GDP hence the private debt to GDP ratio will drop but I think judging from other economies in which a deleveraging happened like Japan it should be possible.
It could be easily controlled in theory, but imo is one of the most painful solutions even if its the best one, it could cause years of stagnant growth like Japan in the 1990’s, even fighting deflation for years too. And, Japan also was only able to reduce a bit, so one could imagine what economic contraction would be needed to reduce it below 100%.
Japan also trying to fight the consequence of deflation got its governments hightly indebted, so I don’t think governments are really able to manage this outcome that well.
I also think that consumers and companies don’t choose to deleverage by their own, they will not have the own will to stop spending or investing. They usually do it after new financing or refinancing becomes very difficult, or after asset prices collapse causing their wealth to decrease too. So, this process usually happens after they are forced to do it, and when the economy is already in a weak place.
That’s why I think inflation is the most likely option, and the most popular among politicians. The US already did it in the 1940’s, debt to GDP was also very high because of the war, they implemented yield curve control, and let inflation run hot for years (index increased 90% from 1940s to 1952).
All of this could also be avoided with a “miracle” in productivity, and while we have AI currently, at this point I am still unsure this will be enough tbh. We also had the internet in the 2000’s and it didn’t do much for this or productivity. But this could be different.
And there also exists the point that this is not only a US problem, a lot of countries are facing similar issues with debt currently, so the US might continue to be the best place to be after all of this because of the dollar dominance. So while the dollar could devalue a lot against goods, it could end up being even stronger against other currencies.
In a recent opinion article Ray Dalio sees the chance of “some sort of civil war” which could be also non violent and involve people being forced to take sides, keep their heads down or move to other states within the U.S as above 50%.
He says he is confident that we will know if the brink will be crossed within next year.
In the article he linked parts of his book on changing world orders in which he describes how an increasing wealth gap leads to the raise of populist leaders and increasing popularization/extreme positions which leads to both sides engaging in existential fights at all costs with a tendency to ignore all norms, truth & the rule of law.
Once one side is successful the internal order of a country can be radically changed.
The strongest historical leading indicator for an civil war is when the government runs out of money and fails to fulfill its functions or need to cut costs and raise taxes (the U.S. can choose the easier way of printing money as of now)
He also says that internal and external conflicts often happen at the same time or in close succession as external powers want to take advantage of the chaos of an internal conflict or people who won an internal conflict want to unite the country with an external conflict.
As of October 2023 shortly after the start of the Israel-Hamas war he saw the chances of a larger world war involving major powers US and China at 50%. He did not specify a timeframe for this to happen.
Asseessment
I am still undecided if I think those cycles repeat always over time or if we live in a time with unprecedented technological progress, interconnection of countries, wealth and overall sophistication and ability to handle those situations that makes it less likely that a civil war or world war would occur.
That said I think current observable trends are undeniably moving in the direction that Dalio describes and his theories cannot be discounted and have to be taken as serious possibilities or threads.
Thinking about an asset class which helps to protect against changing world orders I would say crypto might be very powerful due to its decentralized and autonomous nature.(as long as it is not banned by major countries)
Reading this piece by him, I admit he makes a very compelling case, all those leading indicators (government debt, huge deficits, huge wealth gap) are all very present and relevant in the US today.
However, I think an internal conflict seems way more likely than an external one still.
Your reasons for doubting a repeat of the cycle are valid, but I would think that in 500 years, the world has also undergone extreme changes, yet these events have continued to recur always.
I believe these conflicts are more deeply rooted in human nature, psychology, or behavior, which ultimately does not really change that much over time
I remember when Ray Dalio first proposed these ideas a few years ago. Many thought he was being radical and extreme, but time has increasingly proven him more right than not.
