Ray Dalio Discusses the Art of Trading and Its Underlying Forces
On the 14th of October, Ray Dalio, founder of the largest American hedge fund Bridgewater Associates, published an article titled “The Art of Trading and Its Underlying Forces” on LinkedIn. This is a summarized translation of the article.
(Background: Dalio warns the world that “the collapse of currency and world order” is more terrifying than an economic recession, indicating we are at a critical point.)
(Context: Trump announces a “national emergency”; tariffs severely impact Asian stocks, with the Nikkei index plummeting by 3%, and South Korea convenes an emergency meeting…)
Dalio’s article discusses how investors should analyze the current global economic environment in the context of the U.S.-China agreement and the Russia-Ukraine negotiations. Here is a translated summary.
The first phase of the U.S.-China agreement was executed swiftly and reasonably (bringing a sense of optimism for future negotiations). Trump and his team are currently on an investment tour in the Middle East, particularly in Saudi Arabia (I believe they will succeed, and it looks like other reasonable trade agreements will follow). Soon, he and his team will attempt to reach a favorable budget agreement with Congress (I am not very confident about this). Meanwhile, the Iran agreement and the Ukraine-Russia agreement are also in the works, which I believe will yield some progress.
This article is about how I believe people should view and respond to what is happening, from the perspective of a global macroeconomic investor who has closely observed some details in the recent agreements between China and Saudi Arabia.
In my view, there are a) daily issues that easily capture attention, influence emotions, and lead to short-term market fluctuations, and b) major issues and forces that are driving significant changes in the world order. While it is important to grasp both, the significant issues and forces that drive everything are the most important. Therefore, we must not allow short-term, attention-grabbing events to distract us from the major forces and issues that will drive the development of the story. This perspective is especially important when betting on what will happen in the future through investments.
As for those major issues and forces, I will reiterate the five forces that drive almost everything and how they appear to me. They are:
- The debt/money force that drives markets and economies and determines the monetary order.
- The force of domestic wealth and values gap that determines political order.
- The force of international order/chaos that determines world order.
- The natural forces (droughts, floods, and pandemics).
- The creativity of humanity, especially the power of new technologies.
At the Edge of Collapse
These forces are in their current shapes, which makes the situation very different from when these forces are in different shapes. Regardless of who leads, the shape they are in determines the circumstances leaders must deal with and the choices they must make. More specifically:
Regarding the Debt/Money Force that Drives Markets and Determines Monetary Order
The U.S. government and many other governments are now burdened with huge debts and deficits, and the conditions in the market and economy will largely depend on these situations, even more than on daily news and the choices of specific leaders. In other words, this over-indebtedness will require governments to raise more funds through fiscal means (i.e., taxes and spending) and/or through more debt monetization; regardless, this will have significant impacts. This is because a law of monetary reality states that when there is already a large amount of government debt, and the rate of increase of debt exceeds the demand for debt assets (such as bonds), some combination of spending cuts, increased tax revenues, and/or looser monetary policy (which is unfavorable to creditors) must be adopted.
It will be the case regardless of who is president. There will be a lot of fighting (e.g., between President Trump and Congressional leaders and Federal Reserve Chairman Powell). This will generate a lot of news and lead to many short-term fluctuations. Regardless, as I outlined in my new book “How Countries Go Bankrupt: The Big Cycle,” either the budget deficit will be reduced to around 3% of GDP, or it will not, which will have a huge impact on the value of debt and money.
At the same time, the U.S. is the only large capital market (accounting for almost half of the global market) and the world’s largest buyer of goods, and has proven to be a staunch capitalist environment that respects investment tools as a means of wealth storage, while still possessing the rule of law, a culture of entrepreneurship and innovation, and relatively free speech, collectively referred to as “American exceptionalism.” This helps create favorable conditions for capital inflow into the U.S. and mutually beneficial investment transactions. Everything depends on how well it is managed.
Regarding the Domestic Wealth and Values Gap Force that Determines Political Order
These gaps lead to irreconcilable differences and a nearly complete lack of willingness to compromise, manifesting in the rise of populism and populist leaders, the typical rise of more authoritarian leadership, the weakening of democracy, and the erosion of the rule of law, as more populist and authoritarian leaders struggle against opposition to make the changes they deem necessary.
The relative power of the president versus the judicial and legislative branches of government, as well as the democracy we know in America, may be tested. Additionally, the issues facing the bottom 60% of the population remain unsolved, and the inevitable political and media opposition will almost certainly increase quickly.
Regarding the International Order/Chaos Force that Determines World Order
The lack of a single dominant global power, coupled with more countries having hardline populist leaders who face the aforementioned problems, tends to lead these leaders to fight for their own interests, favoring victory over harmony, resulting in more unilateral rather than multilateral decisions and greater conflict.
In the meantime, the risks of trade, technology, geopolitical, and military conflicts are heightened, leading to more aggressive and defensive behaviors by nations. This entails ensuring reliable sources for domestic production and other needed goods. Multilateralism is declining, while bilateralism (bilateral agreements) is on the rise, with the U.S. and China both attempting to play this role in their own ways. Those who provide the best deals for other countries will reap greater and better rewards. How well this issue is handled is crucial to how the world order will change.
Regarding Natural Forces (Droughts, Floods, and Pandemics)
The situation is clearly deteriorating, which will be financially very costly, and there will also be tangible costs due to the damage caused. How people and nations adapt will be key.
Regarding Human Creativity, Especially the Power of New Technologies
This will greatly enhance human thinking capabilities in most areas, which are most likely to be used to generate significant improvements and tremendous harm.
In short, the overarching picture shown by numerous fair measures is that the existing monetary, domestic political, and international geopolitical orders are deteriorating and declining, while increasingly threatening natural behaviors and significant technological advancements accompany this. At the same time, most of these forces are recognized and addressed by a unique right-wing/capitalist American president and his administration.
What Is Being Done About These Issues?
Agreements include:
- Imposing tariffs aimed at generating tax revenue and providing better business for domestic producers and U.S. exporters.
- Attracting substantial foreign capital into the U.S.
- Promoting better global investment.
- Reducing government regulations to enhance productivity.
- Cutting government waste and improving management of government assets.
- Reducing budget deficits and addressing the government debt problem, although it is currently unclear how this will be handled.
- Using power to challenge established laws and regulatory systems to achieve the goals of the president and his hard-right constituents without losing the necessary swing voters.
How to Handle These Conditions and Forces? This Is the Biggest Question.
Will these conditions and forces be handled well or poorly? That is, will there be sound reasonableness or unstable madness in dealing with these situations? Does Trump’s extreme stance and adversarial negotiation style reveal that a person and a government can effectively manage our issues? Will his announcement of a “Liberation Day” to raise tariffs on China to 145% merely be an effective ruse, leading to two days of productive meetings and a very wise short-term agreement, followed by serious negotiations? So far, the developments support the view that Trump is addressing these important and long-ignored issues in a relatively unstable yet productive manner. But frankly, it is still too early to judge.
A Few Points to Remember: On the Edge of Collapse
Please remember that news must have value and should be assessed against the backdrop of the major forces that jointly determine the direction of significant cyclical changes, most importantly changes in the monetary order, domestic political order, world geopolitical order, climate change, and technological change (i.e., the five major forces).
Keep in mind that we are on the brink of significant changes in monetary, domestic political, and international orders, and it all depends on whether these matters are handled in a smart and cooperative manner.
Remember that in your investments, it is crucial to 1) develop a well-considered investment plan that includes wise diversification you are committed to, and 2) avoid reacting to news and market trends without careful consideration.
