Thoughts on Ray Dalio’s Recent Warning that we are entering the War Stage of the Long-Term Economic Cycle.
The re-election of Chinese President Xi Jinping in October may very well usher in a new era for increased global tensions. Not since Chairman Mao has China elected a new leader for a third term. The government elected to abolish term limits for its president in 2018 and most felt this election was nothing but a formality. Xi’s “zero covid policy” has also seemed to shut down the country economically with its current debt crisis, a reeling real estate market and a stock market which looked like it may have bottomed in March yet hit new lows recently. Xi’s re-election and continued removal of potential opponents sent shock waves through the markets in late October. Many are seeing the Chinese market as being too unpredictable currently. However, one well known investment manager who is still extremely bullish about China’s long-term prospects is Ray Dalio.
Some may know of Dalio from his best-selling business management book “Principles”. Others may know him as one of the richest men in America and the manager of the largest hedge fund in the United States. Dalio believes these current headwinds are temporary and has continued to contribute capital to Chinese investments. While the U.S. has been raising rates and doing what they can to slow the economy to tame inflation, China has recently started to stimulate their economy.
How the Midterm Election May Affect Inflation and Interest Rates
Last week we wrote on how a balance of power tends to be best for the markets. When political parties are forced to work together, we all tend to be better off. Last week, we also recorded a video which delved into Ray Dalio’s principled thoughts on the long-term economic cycle from his book “The Changing World Order”. You can watch the video by following this link (How the Midterm Election May Affect Inflation and Interest Rates).
When we recorded this video and wrote the accompanying article, we did not know that Dalio would be publishing a similar article of his own. Most of the thoughts that follow are Dalio’s, but I wholeheartedly respect and agree with this line of thinking. He seems to be one of the few “sane” voices in America today and hopefully I can inspire others to also parrot his thoughts.
Why is Dalio Warning of War?
Last year, Ray Dalio assigned a 30% chance of a U.S. Civil war to occur in the 2020s because of ‘emotional’ political polarization, and last week he wrote, “when I say that I believe we are on the brink of civil and/or international war, I am not saying that we will necessarily go into them or that, if we do, it will happen very soon. What I am saying is that the different sides in domestic and international conflicts are preparing for war and if events are allowed to progress as they typically do, there is a dangerously high probability of us being in at least one of these wars (with the highest risk point being in 2025-26). The part of the cycle we are in now has occurred many times before, most recently in 1930-45. “
He further noted, “Most countries are now approaching the dangerous internal conflict part of the cycle. This is primarily due to the largest wealth, values, and political differences since the 1930-45 period. In the US, people are fighting over just about everything: who gets what money and where they get it from, how children should be taught in schools, whether the police should deal with crime strongly or leniently, who rightfully wins elections, what to do about gun ownership (in a country that is becoming increasingly violent), what to do about abortion…drugs…budget deficits…etc. And our leaders show no prospect of figuring these things out intelligently and in a way that will satisfy most Americans. The most sensible senators, House representatives, and governors who are inclined to work across party lines to intelligently figure out what’s best for most people are resigning and being replaced by extremists.”
Dalio warns not only of potential approaching civil war but also escalating conflicts with the U.S and China. He states, “we are seeing all the classic signs of being on the brink of military war, such as using economic warfare that is existentially threatening. For example, the recently passed U.S. bill that could cut off needed semiconductor chips to China, and Russia cutting off natural gas to Europe are analogous to the US cutting off oil to Japan in 1941, which led to the Japanese bombing of Pearl Harbor. There are also the classic big increases in military spending that typically come just before wars.”
Not Only Can We Avoid War, But We Can Have the Best Times Ever?
Dalio warns against what could potentially be a very dangerous period for us if we continue to elect and follow increasingly polarizing political leaders and abandon “rule following” to focus instead on “might makes right”. He follows this up with reasons for continued optimism in our future. He notes, “While these threats exist, the world is in the best position in history judging by most measures of well-being such as life-expectancy, real incomes, and real wealth, so if we handle these big worries well, things should be better than ever.”
Dalio tells us – “To have better times than ever we need to:
1) Get our finances in order through a mix of a) being more productive by investing in those things that make us more productive and benefit most people (such as education), and b) engineering a “beautiful deleveraging” that spreads out and reduces the real debt liabilities and assets relative to real incomes.
2) Develop a strong and smart political middle that represents the majority of people and can defeat the extreme populist minority so that we can work and live well together.
3) Have rival countries develop agreements and protocols that would minimize the chances of military wars.”
Dalio has much more to say and additional points in addition to these three. These three points seem to be the most important as we head into the midterm elections, however. The majority of the population that are more moderate can do more to listen to, debate and collaborate with those who may have an alternate point of view. We’ve let the vocal minority silence us, bully us and endanger our families. Hopefully more people will soon have the courage and humility to turn the tide. I sincerely hope that we can overcome the pride that keeps our leaders from effectively working together to have the best times ever.
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