On Ray Dalio's Latest Shocking Warning

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Jonathan Burton of MarketWatch reports that the founder of the world's largest hedge fund thinks the world is going to change ‘in shocking ways’ in the next five years: 

Ray Dalio certainly is no radical idealist, but in his frequent writings and media appearances the veteran investor consistently calls for Americans to rewrite their longstanding contract with capitalism so that it is fairer and more generous to more people.

Otherwise, he predicts, life in the U.S. could become more difficult: mountainous debt that stunts economic growth; fewer opportunities for ordinary citizens to get ahead financially; and a worldwide lack of trust in the U.S. dollar that diminishes Americans’ purchasing power and could lower their standard of living.

Dalio is the founder of Bridgewater Associates, the world’s largest hedge-fund firm, which has made him a billionaire. So it’s not surprising that he champions capitalism as a proven way to expand economic growth and living standards.

“Capitalism and capitalists are good at increasing and producing productivity to increase the size of the economic pie,” he says.

Then Dalio stands this tenet on its head. Capitalists don’t divide the economic pie very well, he says, and so today the capitalist system, the foundation of the U.S. economy, is not working efficiently and effectively enough for all.

“Capitalism also produces large wealth gaps that produce opportunity gaps, which threaten the system,” Dalio says — a system that has been and still is key to the health and success of U.S. business, workers, government and investors alike.

Unless the U.S. takes steps to make systemic repairs designed to provide greater opportunity for more Americans to achieve personal growth and financial security, the consequences likely will be painful for the country, as Dalio explains in this recent telephone interview, which has been edited for length and clarity:

MarketWatch: You have written and spoken about three big domestic and international problems facing the U.S. over the next five to 10 years and how a failure to address these challenges could threaten America’s standing in the world. What are these three pressing problems?

Ray Dalio: I look at it mechanically, like a doctor looking at a disease. If asked what is the issue here, I would say that it is a certain type of disease that has certain patterns which are timeless and universal, and the United States is broadly following that progression.

There are three problems that are coming together, so it’s important to understand them individually and how they collectively make a bigger problem. 

There is a money and credit cycle problem, a wealth and values gap problem, and an emerging great power challenging the existing dominant power problem. What’s going on is an economic downturn together with a large wealth gap and the rising power of China challenging the existing power of the United States.

It’s a fact that there has been a weakening of the competitive advantages of the United States over the last couple of decades. For example, the United States lost a lot of the education advantage relative to other countries, our share of world GDP is reduced, the wealth gap has increased which has contributed to our political and social polarization.

But we haven’t lost all of our competitive advantages. For example in innovation and technology, the United States is still the strongest, but China is coming on very strong and at existing rates will surpass the United States. Militarily, the U.S. is stronger but China also has come on very strong and is probably stronger in the waters close to China that include Taiwan and other disputed areas. Finances for both countries are challenging, but for the U.S. more so. The U.S. is in the late stages of a debt cycle and money cycle in which we’re producing a lot of debt and printing a lot of money. That’s a problem. As a reserve currency status, the U.S. dollar DXY, 0.78%  is still dominant though its being threatened by its central bank printing of money and increasing the debt production problem. 

MarketWatch: Focusing on the money and credit problem, excessive debt can be a killer for businesses and families, but most people don’t seem to recognize that debt plays havoc with their country’s finances as well. Government runs the money printing press, which buys time, but eventually something’s got to give.

Dalio: If you look at the history — for example, the Dutch Empire, the British Empire — both experienced the creation of debt and the printing of money, less educational advantages, greater internal wealth conflict, greater challenges from rival countries. Every country has stress tests. If you look at British history, the development of rival countries led them to lose their competitive advantages. Their finances were bad because they had accumulated a lot of debt. So, after World War II those trends went against them. Then they had the Suez Canal incident and they were no longer a world power and the British pound is no longer a reserve currency.  These diseases almost always play out the same way.  

The United States’ relative position in the world, which was dominant in almost all these categories at the beginning of this world order in 1945, has declined and is exhibiting real signs that should raise worries. There’s a lot of baggage. The U.S. has a lot of debt, which is adding to the hurdles that typically drag an economy down, so in order to succeed, you have to do a pretty big debt restructuring. History shows what kind of a challenge that is.

I just want to present understanding and facts. There’s a life cycle. You’re born and you die. As you get older you can see certain things that are symptoms of being later on in life. To know the life cycle and to know that these symptoms are emerging is what I’m trying to convey. The United States is a 75-year-old empire and it is exhibiting signs of decline. If you want to extend your life, there are clear things you can do, but it means doing things that you don’t want to do.

MarketWatch: Let’s put it bluntly: Is capitalism broken?

Dalio: I wouldn’t say broken as much as I’d say it has problems that have to be fixed. As I said, I’m not ideological, I’m mechanical. I look at everything operationally like a machine and what has been shown is that capitalism is a fabulous way of creating incentives and innovation and of allocating resources to create productivity. All successful countries have uses for it. For example, communist China has chosen capitalism, which has been essential to its growth.

But capitalism also produces large wealth gaps that produce opportunity gaps, which threaten the system in the ways we are seeing now. Wealth gaps give unfair advantages to the children of rich people because they get a better education, which undermines the equal opportunity notion. As the number of people who get equal opportunity diminishes, this reduces the possibility of finding talented people in that population, which isn’t fair and undermines productivity. Then the have-nots want to tear down the capitalist system at a time of bad economic conditions. That dynamic has always existed in history and it’s happening now. 

The capitalist system is based on profit-seeking being the resource allocation system, which generally works well but doesn’t always. So, capitalism and capitalists are good at increasing and producing productivity to increase the size of the economic pie, but they’re not good at dividing the economic opportunity pie. Socialists are generally not good at increasing productivity and the size of the economic opportunity pie, but they are better at dividing the pie. 

We now have too much emphasis on distributing wealth and getting it from producing debt and printing money, and not enough from increasing productivity. Wealth cannot be created by creating debt and money. We have to be productive together, so we have to look at the good investments that we can make together that make total sense, like in education, and create equal opportunity in order to be productive.

We have to be in this together. The system needs to be reengineered to do this. But if we don’t do this engineering well, we’re going to spend in an unlimited way and deal with that by creating debt that won’t ever be paid back, and we will risk losing the reserve currency status of the dollar. If we get into that position — and we’re very close — things will get much worse because we are living on borrowed money that’s financing our consumption. 

MarketWatch: About the dollar being threatened as the world’s reserve currency — what does “close” mean, and what would the decline of this status mean for Americans?

Dalio: Within the next five years you could see a situation in which foreigners who have been lending money to the United States won’t want to, and the dollar would not be as readily accepted for making purchases in the world as it is now.

We have to realize that we’re spending more than we’re earning. Every individual, every company and every country has an income statement and a balance sheet. The income statement is how much is your earnings are relative to your expenses. If your earnings are greater than your expenses, great, you will increase your balance sheet. If your earnings are less than your expenses, then you have to draw on your balance sheet. 

The United States doesn’t have a good income statement and balance sheet in dealing with the rest of the world. It is running a deficit to the rest of the world that is financed by borrowing money so that we are producing liabilities. Our living standards are based on our spending, not on our income statement or balance sheet. If the U.S. loses that ability and it doesn’t force itself to be more productive, one day it will lose that ability to borrow and then will have to cut spending, which is painful.

When that pain happens at a time when you have the population at each other’s throats over money, that’s a toxic combination. People can’t take a downturn and have less buying power. So, necessarily the poor will have to be getting money from the rich and the rich are going to want to prevent that, and then if it gets bad enough, that it messes up productivity. 

MarketWatch: What steps do politicians and business leaders need to take now to create and implement reforms that will fortify the U.S. balance sheet and the dollar’s status?

Dalio: In brief, productivity and equal opportunity are most needed. If we could at least agree that we must have these things, that would be great. What we have now is a situation in which we’re fighting each other, we are not providing equal opportunity, and we are losing our productivity gains. 

One of the greatest problems is that everybody’s fighting for their cause. When the causes people are fighting for are more important to them than the system that binds them together, the system is in jeopardy. This seems to now be happening. Everybody has their cause and they’re almost losing sight of the overall picture. Democracy depends on compromise. It’s the notion of compromise and working together and being able to have a negotiation to get what the most people want rather than have one side beat the other.

You really have to take the relative parties and make them agree on what’s going to be best. The group has got to be bipartisan and they have to be knowledgeable. Bring together parties of opposing ideologies who are also knowledgeable, not just smart but who are on the ground, to come up with a  plan together that all can support so that we’re productive, increasing the size of the pie and dividing it well. It would be great if whoever the president is could draw upon people from both parties and different perspectives.

MarketWatch: As Americans prepare for a presidential election in November, the three major problems you mentioned earlier would seem to be important factors for voters to consider.

Dalio: Yes. The world is going to change in the next five years in shocking ways in relation to the three big issues we have been talking about. 

First, there’s a debt-money cycle — what is the value of money? What will happen to the debt? Will the dollar retain its value? The finances of this — who is going to pay for it? How? What will work? That’s number one.

Second, the wealth, opportunity and values gaps will have to be dealt with. Are we going to be at each other’s throats in a way that is harmful or are we going to be working together even if things get worse? 

Third is the rising of a great power in China to challenge the existing power of the United States. Will this be well handled?

We will be dealing with these issues in the next presidential term, which will have a huge effect on our outcomes. The last time those three things existed as they do now was the 1930 to 1945 period. That’s the last time you had zero interest rates and money printing. That’s the last time you had the wealth and political gaps as large as they are today, and it was the last time you had rising powers challenging the existing world order. This and many analogous times before it help to give us perspective. 

MarketWatch: These and other domestic and international challenges will clearly affect Americans financially. What would be a smart, proactive strategy for investors to both protect a portfolio and take advantage of market opportunities?

Dalio: First, worry as much about the value of your money as you worry about the value of your investments. The printing of money and the debt should make you aware of that. That’s why financial asset prices have gone up — stocks, gold — because of the debt and money creation. You don’t want to own the thing you think is safest — cash. 

Second, know how to diversify well. That includes diversification of countries, currencies and assets, because wealth is not so much destroyed as it shifts. When something goes down, something else is going up so you have to look at all things on a relative basis. Diversify well and worry about the value of cash. 

Americans look at the value of everything in U.S. dollars, but they don’t look at the value of the dollar. You’re in an environment where you have to be cautious about that, because the easiest way out for government is to do what the U.S. just did, which is to borrow and print a lot of money. They don’t have to get it from anyone, because when they raise taxes they have to get it from somebody and that somebody squawks. The population doesn’t pay much attention to the debt and the printing of money. They all appreciate the giving of money. So you hear the population say, “I need more money,” and get angry if they don’t get it. So you’ve got to give them more money, and it’s easier not to take it away from someone else. 

Ray Dalio is at it again, talking about the crisis of capitalism. 

Recall, back in January 2019, I discussed Dalio and the limits of capitalism. 

One of the best quotes after I wrote that comment came from Jonathan Nitzan, professor of political economy at York who shared this:

Conventional economics associates income -- and therefore its distribution -- with factor productivity. This theory, formulated by J.B. Clark in 1899, remains dominant. Its main claim is that if the Dalios of this world earn 25,000 times the salary of their workers, it is only because they are 25,000 times more productive, and if society wants to reduce this inequality gap, it can do so only by making workers more productive.

The problem with this 'modest proposal' is threefold.

First, their claims to the contrary notwithstanding, economists do not know how to measure factor productivity, and therefore have no proof whatsoever that that this "productivity" correlates with income.

Second, income does correlate, and rather tightly, with measured hierarchical power -- see the 2018 article of Blair Fix on 'The Trouble with Human Capital Theory' (http://bnarchives.yorku.ca/568/).

Third and finally, calls by "enlightened investors" to do something about growing inequality betray their built-in schizophrenia: on the one hand, their very quest for power forces them to increase income inequality without end, while, on the other hand, they realize that ultimately, this very process is bound to spell their own demise. 

Jonathan is absolutely right, the very problem with capitalism is it flourishes when capitalists are in power and inequality continues to rise and if we divide the pie more fairly, it will impact the very elite who are warning of rising inequality.

These days, Dalio isn't a good capitalist as the hedge fund firm he founded is reeling after suffering massive losses thus far this year:

Of course, like a good capitalist, he responded to his own internal crisis:

And his lieutenant has a plan to come out of this mess:

We shall see if Bridgewater bounces back, I think this year is a write-off unless markets continue to deteriorate, which is a real  possibility:

Interestingly, Dalio is criticizing and warning of the very capitalist system which has propelled him and other hedge fund and private equity moguls to the elite club of global billionaires.

Let me give you my quick comments on what Ray Dalio spoke about at the top of this comment:

  • First, Ray Dalio is impressive and formidable. I met him long ago and he has a strong character, can be very intimidating when he disagrees with you and for good reason, he built the most successful hedge fund franchise to a global powerhouse (I still consider Ken Griffin to be the real king of hedge funds). 
  • But as smart as Ray Dalio is, he's an intellectual lightweight when it comes to understanding what ails capitalism. And I'm not saying this to denigrate the man. Long before Ray, there was another formidable and intimidating mind who literally wrote the book on what ails capitalism. His name? Karl Marx and if you really want to understand (and save) capitalism, you'd better read Das Capital a few times. The other book I keep mentioning on my blog is C. Wright Mills' classic, The Power Elite. If you really want to understand modern day capitalism, read this book too, it will open your eyes and I guarantee you will become more informed and a better trader/ investor/ citizen of the world once you understand who is making all the decisions in the background.
  • The reason why we are so fixated on what Ray Dalio has to say is because we live in a world where people glorify the rich and famous. Ray Dalio and George Soros are two of the richest hedge fund managers, we'd better pay attention to what they say. The same goes for Bill Gates and Jeff Bezos. I say bullocks! I'd rather read what real intellectual powerhouses like Charles Taylor or Martha Nussbaum have to say about the world we live in.
  • Having said this, Ray Dalio and George Soros are part of the power elite, so it is worth paying attention to what they have to say, always with a critical eye.
  • In his comments above -- and I'm not just saying this to be critical -- there's a lot I disagree with. For example, the US debt bomb is inherently bad and will ultimately lead to the decline of Pax Americana and the greenback. Rubbish! The US economy has grown the most when debt was rising, and declined the most when fiscal conservatives took over and tightened the purse strings. I'm not saying that debt is good, it's good when used productively and harnessed to build long-lasting growth.
  • I don't buy the argument that America's lenders will stop lending to the US. And where will they go? There's a reason why everyone invests in US stock and bond markets. They are the biggest, most liquid and the most transparent markets in the world. They have the best growth companies listed on their exchanges as well as many unlisted but domiciled in the US. And in a world of ultra low rates where all investors are starving for growth, that puts the US at a competitive advantage over everyone else. Importantly, America will always have a current account deficit and that necessarily means it is running a capital account surplus which benefits Wall Street and Ray Dalio and his macro team at Bridgewater know this all too well (or they should). This is why I am a long-term bull on the US dollar and think a lot of dollar bears have it all wrong.
  • What about the rise of China? What about it? China is an economic powerhouse but China remains a communist country. There is an indissoluble incompatibility between being a communist country and creating the top technological firms in the world, unless of course, you steal technology from abroad. Ray is right about one thing, there most definitely is a geopolitical showdown going on right now, but it's China not the US, that stands to lose the most over the coming decade(s). And that power struggle might threaten China's power elite and their quest to maintain social order in a system that is already strained and faces huge demographic problems.
  • What about Ray's comments on rising inequality? He's right about that, has been beating this drum for some time, but the problem is we live in a world of financial communism, not capitalism. Let me explain. After each and every crisis, the Fed and other central banks lower rates and are now engaging in massive quantitative easing (QE), inflating their balance sheets to unprecedented levels. This isn't debt in the traditional sense. Central banks are making a killing off these transactions because they're buying assets on the cheap, holding them indefinitely on their books, waiting for the cycle to turn. But in doing so, they are creating asset inflation and housing inflation, not widespread consumer price inflation which can only come via sustained wage gains. 
  • Asset inflation benefits asset managers, especially elite hedge funds and private equity funds front-running the Fed and other central banks. It doesn't benefit the rest of the population in any meaningful sense. Sure, 401(k) balances have risen since March lows and some Robinhoodies are making a killing trading Tesla and tech shares but these are paltry gains compared to what the elite are making. Not just hedge funds, private equity funds too stand to make the most as the Fed buys junk bond debt so they can load their companies up with debt and pay themselves big fat dividends. Just remember what the pigs said in George Orwell's Animal Farm: "We are all equal, but some animals are more equal than others". Except nowadays, the pigs controlling everything aren't the Apparatchiks of the old Soviet Union, they're the greedy pigs on Wall Street.
  • It's not all black and white, the world is far more complex than I'm portraying it but it's fair to say the pandemic has been a boon for tech moguls, Wall Street's elite and some corporate titans buying back their shares with free money the Fed is providing by snapping up high yield and investment grade bonds.
  • Meanwhile, the people on Main Street are hurting as restaurants, retail stores, hotels, bars and casinos close, many for good. A whole new class of permanently unemployed people are rightly wondering who's going to bail them out?
  • Good question and here's my answer. No matter who wins the next election, get ready, we will see universal basic income (UBI). It's coming, not because the ultra wealthy elites want it, they don't, but because it's a way to assuage the masses while the elites continue to make off like bandits. Karl Marx once noted "religion is the opiate of the masses". Today's capitalists have taken that one step further: "government handouts will be the new opiate of the masses". In short, let them have their crumbs, watch their Netflix, play with their TiKTok app, spend hours perusing nonsense on Instagram, pretty much anything to lobotomize and assuage the masses so we can continue to steal trillions and become richer than ever.

I realize some of you might find my opinions harsh but if you want to see harsh, look at the Fed's unorthodox policies and how central banks have systematically screwed pensioners all over the world while enriching financial speculators.

In fact, Jeroen Blokland recently posted this on LinkedIn, on how the traditional 60/40 portfolio won't work as well buffering during downturns because bond yields are at ultra-low levels:


I replied:

"Central banks have been systematically screwing pensioners by forcing everyone to take on more risk in search of yield. The result of all this financial repression will be catastrophic for those who don’t have access to a gold-plated defined benefit plan, which is the majority of the global population." 

I stand by those comments, we are entering a period where private and public pensions are at risk, as are the trillions in private savings in 401(k) plans.

Pension poverty is a big theme of this blog, it is deflationary because it exacerbates rising inequality. The more people retire with little to no savings, the worse off it is for the economy and governments trying to generate sales and income taxes.

Anyways, I've rambled on way too much but tried to give you all my thinking on important trends and issues and why I take a lot of what Ray Dalio says with a grain of salt. 

If it's one thing I'd like all you young financial analysts to develop is critical thinking, don't be intimidated by any hedge fund or private equity hot-shot, form your own opinions and don't be afraid to stick your neck out.

If you get your head handed to you, that's fine, it's all part of the long game. 

Lastly, if you don't think the next Supreme Court Justice matters for capitalists, think again:


Below, Bridgewater founder Ray Dalio spoke to Bloomberg's Erik Schatzker last week stating that very large deficits are on the way no matter who is elected in the 2020 presidential election and says he's very concerned about U.S.-China tensions. Take the time to watch this clip.

Update: Just to make my point on elite hedge funds front-running the Fed and markets. There’s a reason why Ken Griffin is the undisputed king of hedge funds. Not only is he smart as hell and hires top talent, he literally controls almost half of all retail trading, giving his firm unprecedented knowledge of total retail positioning.

Doubt Ray Dalio will bring this up in his next rant on capitalism.

One LinkedIn contact shared this with me:

Executing trades is now free for retail, but it is not without a catch. The broker-dealers compensate the loss of revenue by selling their order flow. The buyers of this information use huge computers and advanced mathematical techniques to analyze trades and detect aggregate trends that they take advantage of. They do it very successfully.

Which will eventually bring a question to regulators: if front-running a customer order is forbidden, are you allowed to front-run the aggregate value of many customer orders? How much mathematical transformation is needed to deviate from a one-to-one relationship? What algorithm makes it admissible?

The current regulatory environment and reflection are left behind by technological advances and the ethical questions they bring. Where is the frontier at which quantitative trading become illegal? The data used? Complexity can both extract value and drown a fish.

Very wise insights.

Finally, it's worth noting, not all billionaires are the same. Some are quietly doing incredible deeds:

Now that's a humble and wise billionaire we can all learn from! 

(Note: To their credit, Ray Dalio and his wife Barbara have signed The Giving Pledge).

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