Ray Dalio – New world order (2020 Stock market crash)

Ray dalio, billionaire investor and manager of Bridgewater Associates, the worlds largest hedge fund recently came out and announced that the Coronavirus pandemic would launch a global recession, much like the 1929 market crash. He both mentioned this in a recent Ted talk and through his Linkedin profile.

Dalio undertook a study, 18 months ago on the rises and declines of empires, as he was seeing unusual changes in the economy. Through this study, he concluded that we are experiencing the end of the long-term debt cycle, much like the 1930s recession which ended in 1932 with unemployment rising upwards 25%. This being through:

      1)     High levels of indebtedness and low interest rates; diminishing the central banks ability to positively influence the economy.

      2)     Large wealth gaps and political divisions; growing populist movements in Europe and the US.

      3)     Rising world power (China) challenging overextended world power (US); Chinas GDP being the largest as of 2014 and growing.

These transition periods often lasted around 10 to 20 years, with the latest period being 1930 – 1945, and we all know how that one ended.

Dalio has often undertaken historical studies, understanding cause-effect relationships in the economy, to then understand where we are in the cycle. It appears that most thing evolve upwards (improve over time) with cycles around them, like an upward-pointing corkscrew, he mentions.

Coming back to where we are, and where we are heading. The central banks after the 2008 recession initiated the QE program, printing money and stimulating the economy through lowered interest rates, nearing 0% (having 10 trillion dollars of loans at negative interest rates). These initiatives push financial assets prices and the economy up, which widens the wealth gap (2). This widening wealth gap then leads to greater dissatisfaction and increased populism, i.e. Trump (2016), European rise of populism.

Also studying the quality of education and level of indebtedness, the US is worsening compared to big emerging economies (China and India). (3)

The US, having the reserve currency of the world, this after the Bretton Woods system which was set by the allied forces after WWII, created the new world order of this long term debt cycle (1945 – 2020). The position as reserve currency places great privilege and is a very powerful position to be in for a country, but all reserve currency have ceased in the passed and come to a traumatic end for the country that enjoyed this special privilege.

With increased tension between the US and China, and the Chinese economy surpassing the US economy, in the midst of a global pandemic caused by China, it will be interesting to see the outcome of such a situation in the coming years.