During an interview with Nikkei Shimbun this week, Ray Dalio, the founder of Bridgewater Fund and a well-known Wall Street evangelist, updated his views on topics that global investors are concerned about, such as the state and prospects of the US economy and society, and the trends of major currencies such as the US dollar.
As for the upcoming US election, Dalio also warned that regardless of who ultimately wins, Biden and Trump will face both challenging domestic and international geopolitical conflicts.
The United States is currently in the classic "fifth stage"
Faced with the current problems, Dalio did not forget to revisit the "six stage theory of the internal cycle of a country" in the Principles. The "fifth stage" is characterized by significant differences in wealth and values, which drives a polarized society to confront each other head-on - a stage that is on the edge of a "civil war" but has not yet erupted.
Dalio stated that the United States is currently in the classic "fifth stage", which is characterized by excessive debt issuance caused by natural disasters (droughts, floods, pandemics, etc.), major technological changes, geopolitical conflicts, and a new pattern of international order. The United States is on the brink of great turmoil, but it has not truly fallen into it. The next path depends on the Americans, especially their leaders.
The reason why the preceding "civil war" needs to be in quotation marks is because Dalio believes that the most likely type of civil war in the United States is not the kind where people shoot each other with guns, but rather the state and local governments refuse to follow the instructions of the federal government, and the federal government's handling of this chaotic and dysfunctional situation.
For the upcoming US election, in addition to the many challenges that the two candidates will face, Dalio also raised deeper concerns: the Republican Party is now controlled by the far right, and people are also worried that the Democratic Party will be more influenced by the far left than the moderate left, which means that no matter who wins the election, there is a possibility of huge political conflict in the United States.
The outlook for the US dollar and US inflation
Because inflation is seen as a result of "easing debt pressure," Dalio bluntly stated that he does not believe the Federal Reserve can achieve the so-called 2% inflation target.
He said that just like what is happening in Japan, the United States, and the eurozone - the issuers of these three major reserve currencies are actively pushing for depreciation, and their debts are also shrinking together. The result of this depreciation will be more reflected in more inflation and higher gold prices, rather than a significant depreciation of a certain currency relative to other currencies. He also believes that debt monetization will continue to be a trend in the coming years.
Dalio also pointed out that the US economy is supported by the deterioration of the government's balance sheet and income statement to support the private sector. Therefore, the US government will continue to issue a large number of bonds to cope with the deficit, which is also the reason why inflation rates are difficult to return to the Federal Reserve or other major central bank targets.
The attractiveness of Japanese stocks has declined
Even when facing Japanese media, Dalio still bluntly stated that "Japanese stocks are no longer as attractive as before.".
He said that based on price factors, Japan remains an attractive market, but with tightening monetary policy, the attractiveness of Japanese stocks is naturally different from before.
Dalio also expects that the Bank of Japan can only slowly push for stricter monetary policy, as it has a very large position in bonds and raising interest rates too aggressively may lead to huge losses. At the same time, the Japanese government and the Bank of Japan may push for the depreciation of massive debt by maintaining policy interest rates at relatively low levels of inflation and nominal growth. This also means that Japanese yen bonds will still be a very bad investment, while stocks will be relatively better.
In addition, Japan's interest rate hike will also make it difficult to sustain the flow of Japanese capital into specific markets, which will also put upward pressure on US bond yields.