Ray Dalio lays out his final warning in his recent podcast, where he reiterates events which played out in the past, the creation of a lot of debt and money, internal and external conflict with rising powers, Russia and China challenging the hegemonic world order.
“These events haven’t happened in my lifetime but did before in history,” said Ray Dalio.
Debt fuelled spending Ray Dalio lays out his final warning
“If you spend more than you earn, you have to borrow, which creates debt,” he said. Ray Dalio noted that the debt first appears as credit, giving households buying power.
“But you have to pay it back, which becomes depressing,” he said.
“To avoid that, central banks print money, and it depreciates the value of money,” he added.
Ray Dalio explains the scenario where a lot of money and credit go out to the population, boosting buying power.
But if the level of goods and services supplied doesn’t adjust to the extra credit-fuelled demand, then inflation rears its head.
“These events haven’t happened in my lifetime but did before in history”
RAY DALIO
“The Fed and the government produced a giant amount of inflation,” said Ray Dalio.
If you take the quarter inflation rate, it is closer to 12%,” he said.
Inflation erodes people’s buying power and is like a hidden tax.
“That seems more acceptable to people than money just taken out of their pocket,” said Ray Dalio.
If inflation comes from money printing and everyone gets checks, it is more acceptable.
But those holding money like money market funds and bonds funds have an asset which erodes their buying power.
“Those bond funds are down about 10%, and inflation is up over let’s call it 8% so they lost 18% of their buying power,” said Ray Dalio.
“The reality is you don’t get more stuff from higher inflation so it bids it out of the hands of people who don’t get it.
We are seeing a time now where you lose buying power to inflation, and you have seen the Fed tighten money in credit and raise interest rates, and when they do that, it creates less buying power.
You get inflation from both ends, the higher prices and the higher interest rate you have to pay and less availability of money, so it is a squeeze similar to the 1970s,” he said.
“You get inflation from both ends, the higher prices and the higher interest rate you have to pay and less availability of money, so it is a squeeze similar to the 1970s”
RAY DALIO
Ray Dalio lays out his final warning about the inflation risks of holding cash
“Investors think cash is safe, and they don’t pay much attention to inflation, then they realise that by holding cash, they are losing buying power,” said Ray Dalio.
“So then they shift, selling out their cash or bonds, and they put that to other things which contribute to inflation,” he added.
Ray Dalio talks about a pendulum mindset swing from workers or contractors wanting inflation-linked contracts.
Investors start questioning whether their investments are sheltered from inflation.
“In the early stages, those actions tend to be self-reinforcing producing more inflation psychology,” he said.
Ray Dalio notes central bankers always tend to overreact, creating opportunities for investors.
The 80s and 70s were completely falling inflation and high interest rates.
“The worst assets to own in the 70s were bonds, but they were the best in the 80s, so you see the pendulum swings,” he said.
“Education levels are an indication of well-being and economic behaviour”
– Ray Dalio
Political polarity is the greatest since 1900; Ray Dalio lays out his final warning
He sees a one in three chance of civil war in the USA
The risk of neither party accepting losing the election is significant.
“We have left our generation with debts, a broken-down infrastructure, and fighting,” he said.
What are Ray Dalio’s predictors of the future success of countries?
Countries with relatively educated, skilled populations are more productive and able to add value.
“Education levels are an indication of well-being and economic behaviour,” he said.
Countries that adhere to the Rule Of Law, and respect it tend to perform well.
“Corruption levels are another good indicator,” he said. “There is a negative 52% correlation between the growth of a country and its corruption over the next decade,” added Ray Dalio.
“The USA is reasonably good, and Russia is bad.
He noted that Russia’s land is rich in natural resources, 40% higher than the US.
“It does a pretty good job of having an educated population, and it is not heavily indebted,” he said.
“Holy Grail is 10 to 15 uncorrelated return investment streams” – Ray Dalio
Ray Dalio lays out his final warning of escalating tensions between the great powers
“History has shown that when those decide the rules of the game, there will be disagreements,” he said.
Ray Dalio notes what matters is how disagreements are resolved, either through arbitration or a world governing agency.
“We are in a situation of escalation, where one side says I am going to do this, if you do that, the world is breaking up. Resolving disagreements through diplomacy and negotiating is breaking down,” he said.
The world is aligning with the axis of East versus West.
Ray Dalio sees a greater than one in three chance of global war.
He also sees a strong possibility of bad stagflation because of the dynamics.
Holding cash, Ray Dalio lays out his final warning
He believes currencies are not ideal, late in the tightening cycle
He doesn’t like bonds because they are debts, and the interest rate will not reach an inflation rate.
Ray Dalio likes a well-diversified portfolio.
“Holy Grail is 10 to 15 uncorrelated return investment streams,” he said.
He recommends that investors not let one losing investment wipe them out.
Ray Dalio does not like debts.
Debt for consumption is bad because assets go away, leaving obligations.
Living above your means is not a good idea.
If you are going into debt to invest, you better be sure that the returns on the investment will be higher than you have to give back in terms of money and interest you have to pay.
The best investments are the ones which impact your life, like owning your home, investing in things you know, and your own business.
