Daily Brief - 3 things that worry Ray Dalio (Dec 13, 2021)

Civil war in America. Conflict with China. Inflationary spiral. These are the top three risks Ray Dalio, the founder of the largest hedge fund in the world, worries about as he navigates the investing landscape. And relatively speaking, the prospect of a US hyperinflation seems the rosiest outlook he holds.

His recent book, Principles for Dealing With the Changing World Order, is not for the faint of heart (or, at 572 pages, really anyone with a penchant for Twitter-length nuggets). His concern ranges from the demise of the US dollar through an inflationary spiral, armed conflict in America and another clash of superpowers.

Btw, if you can’t find the time to read the voluminous work, Jack Hough at Barron’s hosted an excellent podcast in his Streetwise series with Ray Dalio, digging into all these issues in less than 20 minutes.

Particularly with respect to the US, Dalio is concerned about the rising polarity that led to questioning of some of the most fundamental tenets of our democracy: election rules and outcomes. “When the causes that people are behind are more important to them than the system, the system is in jeopardy,” he says in the interview with Jack Hough.

Dalio’s second fear is China. He sees the two countries in a tie. “China is now roughly tied with the US in being the leading power in trade, economic output, and innovation and technology and it is a strong and quickly rising military and educational power. It is an emerging power in the financial sector but is lagging as a reserve currency and financial center”, he writes.

If the US continues to decline and China continues to rise, he argues, what matters most is whether or not each can do so gracefully.

Finally, there is the issue of inflation. He argues that one of the superpowers of the central bank is that most people don’t understand the relationship between monetary policy and the value of their money. “People will look at how much they’re worth in nominal dollars, not in inflation-adjusted dollars. So they’ll say, ‘I’m safe,’ as they lose 4, 5, 7 percent per year.”

The central bank has been (perhaps forcibly) flexing this muscle a lot lately. Dalio writes that chronic U.S. deficits could lead to an inflationary spiral where Treasury buyers lose confidence, and the Federal Reserve must create vast amounts of new money to sop up Treasury supply. Having just hit a 39-year high at 6.8%, inflation data give some credence to his hypothesis.

In the end, it was this last fear that has convinced him to take another look at cryptocurrencies. He’s keen to avoid cash and nominal US Treasuries.