Bridgewater Associates Founder Dalio: Investment Logic in the Face of Debt Crisis and Sino-US Standoff

Original Title: The Art of the Deals and the Forces Behind Them

Original Author: Ray Dalio

Original Translation: Block unicorn

Foreword

The first phase of the China-US trade deal was quickly reached in a very reasonable manner (it is reasonable to be optimistic about future negotiations). Donald Trump and his team are now on a Middle East tour in Saudi Arabia to finalize investment deals (I believe they will succeed, and it seems that other reasonable trade deals will follow suit shortly. Later on, he and his team will attempt to reach a good budget agreement with Congress (I am not very optimistic about this). Meanwhile, the Iran deal and the Russia-Ukraine deal are in the works, and I think these agreements will make some progress.

In my view, there are two types of situations: a) Daily issues often attract people's attention, affect their emotions, and lead to short-term market fluctuations; b) Major issues and forces that drive changes in the world order. Although both require attention, the major issues and forces that drive everything are the most important, so we cannot let short-term, attention-grabbing events make us overlook those major forces and issues that will determine how the story unfolds. This perspective is particularly important when making bets on the future through investments.

As for the major issues and forces, I will reiterate the five major forces driving almost everything and what they look like in my view. They are:

1) The debt/currency force that drives the market and the economy and determines the monetary order;

2) The domestic wealth and values gap force that determines the political order;

3) The international order/disorder force that determines the world order;

4) Natural disasters (droughts, floods, and pandemics), and;

5) The force of human inventions, especially new technologies.

Approaching Crisis

These forces are each in different forms, which makes the current situation radically different from when these forces are in different forms. Regardless of who the leaders are, their forms determine the environment they must address and the choices they must make. More specifically:

1) Regarding the debt/currency force that drives the market and the economy and determines the monetary order.

The US government and some other governments are now burdened with huge debts and deficits, and the market and the economy will be largely dependent on these conditions, even more so than on daily news and specific leaders' choices. In other words, this excessive indebtedness will require the government to obtain more funds through fiscal means (i.e., through taxation and spending) and/or through more debt monetization, which will have significant effects in some way. This is because the laws of monetary reality indicate that when government debt is already high and the debt is growing faster than the demand for debt assets (such as bonds), adjustments must be made through spending cuts, increased tax revenue, and/or implementing looser monetary policies (which are unfavorable to creditors). This is true regardless of who is president. There will be much contention about what should be done (e.g., the struggle between President Trump and congressional leaders and Fed Chair Powell). This will create a lot of news and lead to many short-term fluctuations. Anyhow, as I outlined in my new book "How Countries Can Go Bankrupt: Big Debt Cycles," either the budget deficit is reduced to around 3% of GDP or it is not, which will have huge consequences for debt and monetary value. At the same time, the US is the world's only large capital market (almost half of the global market) and the largest consumer nation in the world. It has proven itself to be a steadfast capitalist environment that respects investment instruments as a wealth storage mechanism, still possesses a rule of law, entrepreneurial and innovative culture, and relatively free speech, which together constitute the "American Exceptionalism." Keeping funds flowing into the US and creating mutually beneficial investment deals can greatly improve this situation. Everything depends on how this is managed.

2) The Power of the Wealth Disparity and Value Gap within a Country in Shaping the Political Order.

These have led to irreconcilable differences, with little willingness to compromise, manifesting as the rise of populism, the emergence of populist leaders, the classic rise of more authoritarian leadership, the weakening of democracy, and the weakening of the rule of law as populist and authoritarian leaders, in pursuit of what they consider necessary change, engage in struggles with the opposition. The relative power balance between the President and the judiciary and legislative branches, as envisaged in American democracy as we know it, may be tested. Furthermore, the issues of the bottom 60% of the population remain unresolved, and inevitable political and media opposition will almost certainly intensify soon.

3) The Power of the International Order/Disorder Forces in Shaping the World Order.

The absence of a single dominant superpower — coupled with more countries having resolute populist leaders, facing the aforementioned issues, inclined to fight for their own interests, more towards victory than harmony — leads to more unilateral rather than multilateral decisions and increased conflict. During this time, the risks of trade, technology, geopolitics, and military conflict are greater, leading to more aggressive and defensive behavior by nations. This prompts securing domestic production and other essential sources. Multilateralism is receding while bilateralism (bilateral deals) is on the rise, with the U.S. and China each responding in their ways. The country offering the best deals to other nations will obtain greater and better outcomes. How this is managed will be crucial to the change in the world order.

4) The Power of Natural Disasters (Droughts, Floods, and Pandemics).

The situation is evidently worsening, which will cause significant economic losses and equally massive physical losses. How nations and people adapt will be crucial.

5) The Power of Human Invention and Creation, Especially New Technologies.

This will greatly enhance human cognitive abilities in most fields and is likely to be used to bring about massive improvements and massive harms. In short, the overall situation portrayed by numerous objective indicators is that the existing monetary, domestic political, and international geopolitical order is deteriorating and declining, accompanied by an increasingly severe threat from natural disasters, as well as tremendous technological progress. Meanwhile, most of these factors are being recognized and addressed by a unique right-wing/capitalist U.S. president and his administration.

What actions are we taking to address these issues?

Reaching agreements, including: a) Implementing tariffs aimed at increasing tax revenue and bringing better business to domestic producers and American exporters; b) Attracting significant foreign capital into the U.S.; c) Promoting better global investment.

· Reduce government regulation to increase productivity.

· Reduce government waste and improve government asset management.

· Reduce the budget deficit and address the government debt issue, although it is currently unclear how to accomplish this.

· Utilize power to challenge the established legal and regulatory system to achieve the goals of the president and his hard-right voter base while not losing the necessary swing voters.

How to deal with these situations and forces? This is the biggest question.

Will these situations and forces be handled properly or mishandled? In other words, is it reasonable or out of control in dealing with these situations? Does Donald Trump's extreme transactional approach and friend-enemy negotiating style indicate that he and his administration can handle our problems properly? His announcement of a 145% tariff on China on "Liberation Day" was only an effective ruse that ultimately led to a two-day, highly productive meeting and a very wise short-term agreement followed by serious negotiations? Events to date support the view that Donald Trump is handling the important and long-ignored problems in a relatively unstable but effective manner. But frankly, it's too early to draw conclusions at this point.

A few suggestions: on the brink of crisis

Remember, news should be viewed with value and considered against the backdrop of great forces that collectively determine the direction of major cyclical changes, most importantly the monetary order, domestic political order, global geopolitical order, climate change, and technological change (i.e., the five great forces). Remember, we are on the edge of major changes in the monetary, domestic political, and international orders, and it all depends on whether these things are handled in a smart, cooperative way. Remember, in investing, it is important:

1) Develop a well-thought-out investment plan, including smart diversification, and stick to it;

2) Do not react after the fact to news and market fluctuations without careful consideration.

Finally, the views expressed here are solely my own and do not necessarily represent the views of Bridgewater Associates.

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