In an interview with Barron’s, Ray Dalio, the founder of Bridgewater Associates who stepped down from its helm recently, said that there are “five big forces driving what is happening now”—a subject he also explores in his latest book, Principles for Dealing With a Changing World Order. Those forces include high debt levels, supported by central banks which are buying up a lot of that debt, and geopolitical turmoil, both internal and between different countries, as well as severe natural occurrences, such as droughts. But on the positive side, the fifth driving force is man-made advancements in innovation and technology, which Dalio believes is the strongest force, helped along by AI and the evolution of venture-capital markets that offer resources to pioneering entrepreneurs.
From an investment perspective, while it’s necessary to keep investments in reserve-currency countries, Dalio sees opportunities in emerging markets such as Singapore, Indonesia, and Vietnam, which all have strong finances and a solid internal order that can withstand foreign conflicts. He predicts India will have the highest growth rate in the world over the next decade, and points to certain regions in the Middle East and Africa as places to watch. When asked about China, Dalio believes there are opportunities there as well, given that many investors still have a negative view of some of the shifts China’s economy is undergoing, and that Chinese stocks could offer greater diversification to an investor’s portfolio.
Though Dalio expects the Fed to slow down on their interest rate hikes, he warned that tighter credit has a “lagged effect” which is only now starting to affect the economy, and that households likely feel the pain until about nine months from now. But as credit tightens, public borrowing will get squeezed out, and the private sector will face much higher borrowing expenses. However, spending is still going to happen in full force—for ESG initiatives, rebuilding infrastructure—and as the Fed and other central banks attempt to shrink the money supply, the global economy “will go through a withdrawal shock.” At that point, as the Fed tries to balance out the supply and demand for debt assets, private credit will contract, the economy will weaken, and the Fed will try to monetize debt by printing more money. At that point, real rates will fall, money will be “more plentiful” and growth-company equities will be very appealing.
In order to face the trying times ahead, Dalio suggests first looking at “investment returns net of inflation” because investors will be taxed on the decreased value of their money. And cash isn’t a safe investment, he reiterates. Instead, focus on going long on stocks and assets that always rise during good times. “The world is leveraged long,” he told Barron’s, adding that “most investors are long assets with borrowed money supporting those positions…after they get squeezed and have to sell, or when the Fed starts printing money and monetizing debt again, that will be the time to buy.”