Ray Dalio laid out his vision of the future ahead, and apparently, it is not all doom and gloom since it depends on how we are with each other, according to Ray Dalio’s recent interview.
The esteemed global macro investor also gave insights into his thought processes, helping him make better investment decisions.
For Ray Dalio, history makes part of the crystal ball equation predicting future events. He then identifies and determines several major macro and geopolitical cycles, plotting where we likely lie within those cycles today.
“I am a global macro investor who has to place bets where things come along that I never saw before, and they surprise me, and it costs me money,” he said.
“I am a global macro investor who has to place bets where things come along that I never saw before, and they surprise me, and it costs me money”
“After studying history, I understood the event happened many times before,” said Ray Dalio.
He noted the rise and decline of reserve currencies and the massive Debt Monetization, the internal conflict popularising left and right, and the Great Power Conflict all happened before in history.
“Acts of nature, droughts and pandemics troubled great powers, killing more people than wars,” he said.
New technologies of past centuries, the transition from horse-drawn power to the internal combustion engine, enabled rail, naval and air travel, which powered the Industrial Revolution.
Turn of the century technologies, the computer internet, the digital revolution and the current robotisation, and simulated human intelligence, AI of the current era.
Those cycles, geopolitical, economic, technological or environmental, have been present since time immemorial.
“Acts of nature, droughts and pandemics troubled great powers, killing more people than wars”
Ray Dalio laid out his vision of the future by determining where we lie within the dynamics of the cycles
He defines the current era as irreconcilable differences concerning the internal conflict between left and right, the debt issue and the Great Power conflict historically led to wars.
But Ray Dalio does think that a crash or war is inevitable. “I think it all comes down to how we deal with each other,” he said.
He believes that we have more resources than we have ever had in the world, and how we deal with each other, whether we are going to fight about those things or whether we are going to reach an amicable compromise, will determine the future.
“What we do now will determine what happens,” he said.
But he warns that things can spiral into doom.
“The issue in this dynamic is that the polarity becomes so great that the decision-making becomes so bad that a good outcome becomes difficult,” he said.
“It is a cycle, and you can see the stages we are in from the symptoms”
– Ray Dalio
Drivers of the future, Ray Dalio laid out his vision
“When I look at countries, it is the same as individuals. Do they earn more than they spend, and are they operating well together?
And are they at risk of a war?
Those are going to be the drivers of the future.
The climate issue is 8 trillion dollars a year, equivalent to 8% of the world GDP,” he said.
So Ray Dalio sees an economic component and an environmental component. He believes technology will have a giant effect and thinks the interrelation between those is vital for a stable system.
“It is a cycle, and you can see the stages we are in from the symptoms,” he said.
Ray Dalio lays out the six stages of a typical cycle in his book, The Changing World Order.
He studies these cycles and where we are in them, which helps him make wise investments.
“Studying the thirties history helped me make good decisions in 2008 because I understood the dynamics,” he said.
“Immunise your liabilities and understand how to diversify well” – Ray Dalio
Ray Dalio laid out his vision for the trajectory of interest rates and yields
When I look at the bond rates, you have to have interest rates high enough that they satisfy the creditor without them being so high that it hurts the debtor.
He noted that the US will need to sell a large volume of bonds because the government continues to finance its 36 trillion dollar deficit with debts.
“You have to sell many bonds, and there are issues of supply and demand for those bonds,” he said.
Ray Dalio believes bond risks will continue, citing Japan which needs higher interest rates, which is causing bond losses.
“In times of conflict, foreign nations are reluctant to lend to each other. We may not accept each other’s money,” he said.
Africa now prefers holding their reserves in gold.
“Gold is a mirror image alternative to bonds, and it is the third largest currency of reserve banks,” he said.
In terms of the dynamics of massive debt monetisation and great power conflict, Ray Dalio likes gold.
Ray Dalio laid out his vision for regular investors
He recommends investors first build a rainy day fund to immunise themselves against losing their jobs or other emergency expenses.
“Think of your returns in real returns and whether you diversified well,” he said.
The holy grail for investing, Ray Dalio laid out his vision
“Diversification, I find fifteen good uncorrelated return streams,” he said.
Good diversification means reducing your risk by 80% without reducing your expected returns.
That means you improve your return risk ratio by a factor of five,” he said.
“Immunise your liabilities and understand how to diversify well,” he said.
He believes uncertainties will rise and recommends investors start thinking about the companies that will win and lose from robotics and AI.
If AI turns out to be as good as it has been promoted, then the bond market is dead. If every job is replaced with robots or AI, no loan is safe.
Dalio recommends diversification in terms of asset class and countries.
His four quadrants template of diversification consists of rising or declining inflation and growth.
“Tightness or looseness of money policy raises or lowers all boats,” he said.
“He sees every asset as a lump sum payment for future cash flow. So, you need to ask. What are the determinants of those future cash flows?” he said.
