Ray Dalio sees turbulence ahead as he highlights a sigma event where several forces collide, disrupting cycles and changing the rules of the game.
Machines breakdown, and so do systems, and the latter is at an inflexion point with a high probability of breaking apart, which is why Ray Dalio sees turbulence ahead
Ray Dalio sees five events that have not happened in our lifetime but have played previously in history.
Excessive public deficits financed with elevated levels of central bank currency creation contribute to financial and economic woes.
Moreover, those with easy access to money printing acquire assets and benefit from asset inflation, while those furthest away end up with inflation, a currency crisis, and a cost of living crisis.
This leads to wealth inequality, social friction, class wars, and internal conflict, which could lead to a civil war.
“The largest wealth gap since the 30s is producing populism of left and right, particularly when there are financial difficulties,” said Ray Dalio.
“The largest wealth gap since the 30s is producing populism of left and right, particularly when there are financial difficulties”
You don’t need to be a news junky to figure out that something is wrong.
Retailers in the world’s largest consumer economy, the US are having a dismal year with store closures reaching 8,000. US retailers are calling it the retail apocalypse. Online sales are not making up for the shortfall in consumer spending.
So despite the US’s record low October unemployment rate of 2.7% hourly earnings have been in a decline for 6 months in a row.
But dig deeper into the unemployment data and you’ll figure out why. In a few words, millions of working age people who are structurally unemployed (out of work for 6 months or longer) have been statistically eliminated from the unemployment data.
So the official data is skewed (cooked).
“Giving money to be used for consumption will merely diminish the value of money and not increase the size of the pie”
Great power conflict is another reason why Ray Dalio sees turbulence ahead
“Great power conflict where a rising power challenges an existing power largely in the form of China and, to some extent, Russia is another event currently playing out,” he added.
“There is a cycle, and after the war, there are winners, and the winners determine the rules of the game,” said Ray Dalio.
As competitive rivals evolve, they are no longer willing to submit to the existing hegemon’s rule of the game, and conflict breaks out again.
Natural events are also why Ray Dalio sees turbulence ahead
Droughts, floods, and climate extremes result in crop failures and famine.
“Conflict, climate change and economic shocks are the main drivers of hunger, but pressures on food security are compounded by soaring food prices this year.,” wrote the World Food Programme, June 2021.
“The crisis in US regional banks is a wider problem affecting the financial system” – Ray Dalio
Fourth-revolution; Ray Dalio sees turbulence ahead
Fourth-revolution technology, robotics, AI, and digitalisation of everything displaces more jobs than they create as the army of unemployed increases.
The current system can not survive if only 5 percent of the working population has skills in demand in the technological revolution.
Debt crisis; Ray Dalio sees turbulence ahead
For investors, debt is an asset based on the ability of an entity, a business, a government, and an individual being able to service the interest on that loan.
But if a systemic crisis unfolds, with mass unemployment, that would lead to bankruptcies, loan defaults and sovereign debt default on a macro scale.
The central bank’s solution has been to print more money, and further debase the currency, causing more inflation and a cost of living crisis.
But if a worker can’t remain economically active, his debts become worthless, and on a macro scale, the currency becomes worthless, in a fiat debt system.
Ray Dalio sees turbulence ahead in the bond market
“The crisis in US regional banks is a wider problem affecting the financial system,” said Ray Dalio.
“Banks take in deposits and then buy debt in the form of making loans or buying government bonds,” he said.
Rising interest rates cause the value of that debt to fall and cash depositors to seek better returns on their savings.
But banks loaded up on treasuries when long-maturity treasuries were yielding around 1%, considered a good deal when interest rates were zero or near negative.
Conservative investors underestimated the maturity risk of holding bonds in a low-interest-rate environment.
There is no such thing as a safe haven asset, an asset has a price, and if you overpay for it, you will get screwed.
Banks are experiencing a liquidity crisis, and Ray Dalio believes central banks will print money to prevent defaults and bank runs.
“If there is an intolerable amount of defaults, it crashes everything.
So they print the money,” he said.
“The Holy Grail to investing is 10 or 15 uncorrelated income streams”
– Ray Dalio
World leverages long on bonds Ray Dalio sees turbulence ahead in global markets
“So the world is leveraged long, meaning they own stuff, and they borrowed money to own it, and it is going down in value,” he said.
“The big issue is that printing money devalues the money. If you are holding a bond, you are either not going to get back that money in full, or you will get back money worthless,” he said.
“The debt will be bad one way or another,” he added.
He sees no good reason to own debt since investors will lose to inflation.
“Looking at the yields, investors realise they are losing to inflation by holding that bond. The other side of that is they want to borrow and buy stuff, which creates an imbalance where it is terrible to be a lender and a creditor, and it is good to be a borrower and do that,” he said.
Tech companies sell a dream but have to make a profit, and money has to be invested. You will see all of that change radically.
Financial assets have no intrinsic value, only value is what it can buy. When thinking about safety, you have to look at purchasing power.
Investing comes in tiers; Tier one, tier two, and tier three on risk.
Tier 1 If everything goes wrong, I am okay. It could be inflation, depression or losing my job.
Whatever it is, I got that thing covered.
Next level, what is my best bet?
Are you going to be in a place where people are financially strong? Are they earning more than they spend and have a good balance sheet?
I learned how to improve my return relative to risk,” he said.
How to invest as Ray Dalio sees turbulence ahead
“The Holy Grail to investing is 10 or 15 uncorrelated income streams.
You don’t want more than 10% of your money in one thing.
Fear of sanctions results in transactions conducted in other currencies, and then the dollar as a store of wealth changes,” he said.