Ray Dalio (Trades, Portfolio) is a billionaire investor and the founder of Bridgewater Associates, an investment fund with $123.5 billion in assets under management as of January.
In an interview at the Bloomberg Invest conference earlier this month, Dalio shared his thoughts on the artificial intelligence revolution, the economy and the various geopolitical power struggles, such as U.S.-China relations.
In this discussion, I have summarized his main points.
On artificial intelligence
Dalio said he started Bridgewater on the premise of writing down his “investment principles” and then “converting these to algorithms.”
He would then have a computer run these systems, side by side with him and “learn together.” Therefore, he sees generative AI as a “thought partner”. He believes the technology is “bigger than the internet revolution.” In terms of risk, he said the “problem isn’t the technology, but the people that use it.”
Dalio also questions whether it will be used to “raise living standards” or wage “war.” Either way, he believe the technology will take us through a “time warp” that, in the next five to 10 years, will result in a “very different world.”
The debt cycle
According to the investor, there are “short debt cycles,” which last, on average, between seven and 10 years. During a recession, interest rates are usually lowered and the Federal Reserve becomes “stimulative.” Then the economy grows and usually “some inflation occurs” (as we have seen in 2022 and 2023). This then causes the Fed to “tighten monetary policy,” which causes a recession and the cycle repeats.
Historically, we have had 12 of these cycles and are about “half way through number 13,” according to Dalio.
With regard to interest rates, they must be at a sufficient level to satisfy a “debtor and a creditor.” This means they must be high enough that the creditor gets a “real return.” If not, this creates a “free money” period like we saw in 2020, but also causes major issues such as inflation. However, interest rates must “not be too high for the debtor” or they will not be able to service the debt.
The guru believes we are at the “beginning of a debt crisis” due to the large debt and “shortage of buyers for this debt.”
With regard to interest rates, he believes they are at a level “they will stay at” for a period of time and “not likely rise much” from this point. The consequence is a “weaker economy” moving forward.
Deglobalization
Over the past 20 years, the world has moved toward globalization, which is where countries aim to manufacture products in the cheapest places and work with many trade agreements. However, Dalio said the world is now moving from “efficiency” to “self sufficiency” as countries worry about “being cut off.”
A prime example is Germany’s reliance on Russian oil and gas, which has been under threat since the start of the Russia-Ukraine conflict. This has led to Germany halting the opening of the Nord Stream 2 pipeline.
Deglobalization is also inflationary by nature. For example, the U.S. has announced a $50 billion CHIPs Act to build more semiconductor manufacturing facilities in the U.S. This is great for national security, but no doubt it will be more expensive per unit than in Taiwan and China.
As investors, it makes sense to be aware of any political or social risks when investing.
Macro forces
Dalio noted there are many macro forces that will impact the stock market, the economy and people's lives. The first is the creation of an “enourmous amount of debt,” which is around $31 trillion in the U.S. at the time of writing. The second is the “internal conflict” and “large wealth gaps,” which can cause a rise in populism. The third is the rise of a new power, namely China as it rivals the United States.
The rise of China
Since he first visited China in 1984, Dalio said China’s per capita income has increased by 28 times, which truly is an economic miracle.
Similarly, in the 1930s, Germany rose to challenge the U.K., which was the great power at the time.
Today, China is rising to challenge the U.S. as an economic power. Dalio said there are a number of irreconcilable differences between the two countries.
From an investment standpoint, China and the U.S. have taken turns banning each others' semiconductor products. In 2019, the Trump administration banned imports of Huawei’s telecoms equipment from China due to national security concerns. In turn, China recently banned Micron's (MU, Financial) DDRAM chips from being sold due to cybersecurity concerns. The U.S. has also banned certain AI chips from companies such as Nvidia (NVDA, Financial) from being sold in China due to fears they could be used in military applications.
From a geopolitical standpoint, Dalio said China’s proclamation that Taiwan is part of its country is disputed by the West and Taiwan’s independent governance. For investors, the location of the world's largest chip foundry, Taiwan Semiconductor Manufacturing (TSM, Financial), is of strategic importance.
Warren Buffett (Trades, Portfolio)’s Berkshire Hathway (BRK.A, Financial)(BRK.B, Financial) even purchased shares of Taiwan Semiconductor in the third quarter of 2022 before shedding 86% of its investment in the fourth quarter. At the annual shareholder meeting in May, Buffett cited “geopolitical concerns” and the “location” as reasons he sold the stock.
According to Dalio, another area of dispute between the U.S. and China is the Russia-Ukraine war. The U.S. and other Western allies have condemed the invasion and even provided weaponary to support an independent Ukraine. However, President Xi Jinping appeared with Russian President Vladimir Putin for three days of talks in March. This was believed to be a sign of China's support of Russia despite peace talks being cited.
The rise of populism
Historically, Dalio said when there have been large wealth gaps and a “not great financial system,” this has caused a rise in “populism.” A populist is a political person who will aim to “win at all costs.” While history does not always repeat, it does tend to rhyme.
A prime example is the rise of Adolf Hitler and the Nazi party during 1920s and 1930s. During this time, Germany faced economic challenges following the loss of World War I and huge reparations payments demanded to allies written in the Treaty of Versailles.
This led the Weimar Republic to print money to solve the issue, which resulted in hyperinflation and a devaluing of the currency. This sounds familiar to today's environment, albeit inflation is much less extreme.
The Nazi party took advantage of this political turmoil in order to rise to power and gain votes, which is the “rise of populism” Dalio referred to.
A positive is political extremism is not as strong as back in the 1930s, though we are seeing polarization on the right and left of political parties.
The solution, Dalio believes, is a “strong bipartisan middle.”
Climate change
Climate change is also a major issue. Dalio noted more people have “died from droughts and floods” than any of the aforementioned conflicts. He believes countries will cooperate on a “cosmetic level,” but not as deeply.
Final thoughts
Dalio has a saying: “If you worry, you don't have to worry. And if you don't worry, you have to worry.” Essentially, he means if you are aware of the risks beforehand, this puts you in a solid position to plan both your investments and life. The guru brought up a number of complex and highly impactful topics which could change the world as we know it.
As investors, I believe it is best to plan investments based on a probability distribution, where your assets should generate returns no matter the scenario.
