Ray Dalio, one of the most successful hedge fund bosses of all time, is very concerned about the future of the United States.
Thomas Peter / Reuters
- Ray Dalio of Bridgewater Associates is known for making successful investments on a global scale.
- Dalio has studied the rise and fall of empires and warns that the US is in trouble.
- Investors should stay balanced, consider the effects of inflation, and keep little money.
Almost 50 years later, Ray Dalio remembers his reaction to the news that the US would no longer allow dollars to be exchanged for gold. He was sure it would be a catastrophe for the markets.
But when he went public the next morning, the markets shot up after a currency depreciation. The Dow Jones Industrial Average posted its biggest point gain ever. Dalio decided on the spot that he had to study history to understand what had happened – and to make sure he wasn’t back on the wrong foot.
“I’ve learned to go back to previous cases,” Dalio told Insider in an exclusive interview. “Studying the Great Depression, for example, enabled us and me to predict the financial crisis of 2008 and do well in the process. We made a lot of money when most people lost. “
The founder and co-chief investment officer of Bridgewater Associates, the world’s largest hedge fund, recently turned to issues even more important than currency devaluations and recessions to answer questions like the rise and fall of empires and war.
That is the subject of his new book “Principles for Dealing with the Changing World Order”.
The book covers the history of the Dutch, British and American empires over the past 500 years, with an emphasis on their currencies as they became the world’s reserve currencies. He also looks at the Chinese, Indian, German, French, Japanese, and Russian empires.
Dalio concludes that they have all gone through relatively predictable economic, debt, and political cycles, and that empires were on the verge of decline, even after about 250 years. He says the combination of rising inequality, massive national debt and a dysfunctional political system, combined with China’s rise as a rival, are all problems for the US.
He told Insider he wants people to be aware of the cycles of history and understand the danger the country is in.
“We are at a critical point,” he said. “Either we will overcome our differences and work together, or we will have some form of internal civil war and / or external war,” he said.
In other words, the most important factors that determine the health of an empire are its financial strength, internal order, the rise of a competing power, natural events and the human ability to innovate – these are the only things that can be overcome these challenges.
He argues that these challenges are getting worse in the US as China is on the rise and its citizens enjoy higher incomes and longer life expectancies than ever before.
“The places I want to invest have good income statements and balance sheets, they are polite to each other to be productive. And they have minimal risk of external war, ”he said. “You have to grow the cake well, be productive, and divide the cake well so that productivity and benefits come from it for the majority of people.”
The scale of these threats makes diversification all the more important, he says. He urges investors to ensure their portfolios are balanced and deliver stable returns after inflation and taxes – two concerns that are becoming more pressing today.
“Balance leads to low risk without diminishing returns,” he said of the approach he developed with Bridgewater’s All Weather Fund. “Diversification is free lunch. ”
He also recommends staying fully invested and avoiding cash.
“Don’t think of cash as the safest asset, but rather a very bad asset as it has a very clearly negative return relative to inflation. You are losing purchasing power, ”he said. He explains that the Federal Reserve must keep interest rates low to continue printing money and creating debt, and investors must respond.
“You have to watch out for inflation and don’t see security as cash,” he said. “Instead, you can have a liquid and diversified portfolio of assets.”
