Author: Jun knowledge
“The year 2022 will be mainly a response to 2020. It is most likely that there will be a strong rebound in growth and a sharp rebound in inflation. The above situation has already been priced in by the market and will happen on a global scale.”
“The most important thing is to understand the pattern of the world you are in. This usually lasts for 10 years. It contains about two major cycles. They determine the general trend and direction of the market. If you know the type of paradigm you are now in, then you will know What to invest and avoid.”
“In the past 5 to 10 years, I have discovered three major forces that have never appeared since 1930 to 1945. They have already had a significant impact on things, and I believe they will also affect the next 5 to 10 years.”
“The first force is the long-term debt and capital market cycle, and the most important thing to pay attention to is the dollar debt cycle . The second force is the internal order and disorder cycle, caused by the widening of the gap between rich and poor, values, and politics. Third. Power is the chaotic cycle of the external order. The current situation is that China is rising and may even surpass the United States to become a world power. “
“China is the world’s largest trading country. In addition to the increasing internationalization of the renminbi, China is opening its capital market to the world to provide more attractive investment for global investors. For me, 2020 is to affect all these conditions and point to the future. What kind of decisive year will ten years be? In the next ten years, China’s currency, stock, and credit markets will have a comparative advantage over Western countries.”
“When I look at the supply and demand of U.S. debt, it seems that there is not enough buying demand. This may force the Fed to raise interest rates, or print more money and buy debt, and ultimately lead to a depreciation of the U.S. dollar. Either situation is negative for U.S. dollar bonds. And it is relatively good for China’s capital market. Ultimately, non-dollar assets are more attractive than U.S. dollar assets.”
“I believe we have seen the end of the 40-year bond bull market, especially the dollar bond bull market. I also think that cash, or short-term debt, will be a worse investment. So short-term debt should be borrowed rather than held as an asset. .”
” Throughout history, the winners of science and technology competitions are also winners of economic and geopolitical wars . This will result in a large amount of resources being used in the next generation of artificial intelligence, quantum computing, semiconductors, neuroscience, biotechnology, environmental protection and clean energy. I I believe these are huge investment opportunities. Given the scale effect, both China and the United States will be the best choices for pursuing these goals.”
“Later this year, the imbalance between supply and demand will be large. At the same time, the economy may accelerate growth and inflationary pressures will increase. The Fed may need to intervene and print more money to maintain it. Then there will be a dilemma. When interest rates increase. It will hit the financial market hard, and this kind of damage will happen very quickly and it will be transmitted to the economy.”
“Referring to history, the Fed will definitely act and must act. When a country has no money and faces rising interest rates and harms the economy, it has always responded by printing banknotes and devaluing currencies. This behavior will repeat itself.”
“Having a well-diversified investment portfolio is essential. An optimized and diversified asset class balances each other, ideally to make them globalized and have currency assets diversified. A diversified investment portfolio is expected to return relative to cash. Is positive, while the expected return on cash is negative. However, if it is not an actively managed portfolio, the rate of return will be relatively low.”
“It is best to have a diversified form of wealth storage, which includes Bitcoin. Bitcoin has proven itself in some important ways in the past ten years, that is, it has not been hacked and is widely accepted, but Bitcoin is also at risk. For example, the risks of banning and supply and demand. The important thing is not to bet on a certain asset alone. Everyone should have a certain proportion of assets similar to hard currency in their investment portfolio.”
” I think for most investors, the most important thing for them is to balance their investment portfolio . Investment in China should also start with equilibrium. We call this an all-weather strategy that can reduce risks without reducing returns, and then On top of the all-weather strategy, we superimpose an active management investment strategy. For investors, the most important thing is to know how to diversify their investment well.”
On the evening of March 22, Dalio, the founder and co-chief investment officer of Bridgewater, the world’s largest hedge fund, landed on Wall Street and shared the world economic outlook and investment principles with Chinese investors. Global market hotspots and Dalio’s latest insights on Chinese assets have an in-depth dialogue.
Dalio said that he has been based on global macro investment for the past 55 years, betting on all highly liquid markets in the world, but will not invest in illiquid assets such as private equity and real estate because he likes to adjust positions according to changes in circumstances .
Although he believes that the trend in the next 5 to 10 years is more important, this time the focus is to share with Chinese investors the outlook for the global economy and market in the coming year. He said that next year’s market performance will be mainly a response to the “post-epidemic era”. The most likely scenario is a strong economic growth rebound and a sharp increase in inflation, which will occur on a global scale. The market has already been priced. .
The most important thing is to understand the current paradigm in order to know what to invest and what to avoid
In this sharing, Dalio summed up his previous “paradigm” theory that has tended to be perfect. He reiterated that a new paradigm appears in the global economy every 10 years. The most important thing is to understand the paradigm we are in now, that is , the type of environment .
Each paradigm contains approximately two major cycles, which will determine the general trend and direction of the market. For example, the 1970s were a decade of inflation, turning bonds into a bear market, while the 1980s was the opposite. If you understand the current paradigm, you will know what to invest in and what to avoid.
He said that in the past 5 to 10 years, the United States has emerged from 1930 to 1945, that is, the three major forces that have never existed since the inception of the Second World War. “They have already had a significant impact on things, and I believe they will also have an impact. The next 5 to 10 years”.
The United States is entering a high debt cycle, and the dollar is bound to depreciate
The first force is long-term debt and capital market cycles.
Among them, credit is a stimulus for debt, and debt is an inhibitor. The long-term debt cycle will come to an end when the debt is so large that it is no longer profitable for the holders and the issuing government does not have enough credit to borrow all the funds it needs.
Dalio believes that the U.S. is on the verge of a difficult situation where U.S. debt is “highly indebted and cannot be sold quickly.” This change began in the subprime mortgage crisis in 2008, when the benchmark interest rate dropped to a historical low of 0%. The previous occurrence was between 1930 and 1945.
Since the creation of a new world order in 1945, it also brought about the latest dollar debt cycle. The dollar became the world’s main reserve currency and supported the global financial market. However, the United States is currently at a record high as the ratio of debt to GDP. At the same time, the Fed prints a lot of money and purchases debt to “monetize” it, which will trigger the depreciation of the dollar and related reactions.
The internal order of the United States is tilting towards disorder, and the gap between rich and poor, values, and politics is widening
The second force is the internal cycle of order and disorder, which is caused by the widening of the gap between the rich and the poor, the gap in values, and the political gap.
He said that the distribution of generally good economic achievements is uneven, especially in the capitalist system. Good economic growth usually leads to a huge gap between rich and poor and excessive debt. These gaps lead to huge wealth conflicts and ideological differences.
“Who wins this battle will have a major impact on taxation, capital flows and the market.” It is worth noting that the last time the wealth gap brought about a huge political divide occurred from 1930 to 1945, and it was accompanied by the intensified disorder of the world war.
At present, 0.1% of the highest-income people in the United States hold almost the total wealth of the bottom 90%, which is the highest since 1930. The income situation is also showing a similar huge fragmentation. The ideological conflict in the United States is also the strongest in history, which will affect the economy and Taxation policy, etc.
Dalio always likes to be “outspoken.” In January of this year, he reiterated that the United States is in a “terrible financial situation and terrible division” and needs revolutionary changes, otherwise it will be on the verge of a terrible civil war, that is, the internal order is tilting toward disorder.
In the next 10 years, China’s currency, stock and credit markets will have comparative advantages
The third new force mentioned by Dalio is closely related to the rise of China, namely: the “chaotic cycle of external order” . The last time another great power emerged to challenge the existing great powers in the “Thucydides Trap” was in the 1930s, and history once again came to a critical juncture.
With reference to history, from the development trajectory of the Dutch Empire and the Dutch Guild, the British Empire and the British Pound, to the United States and the U.S. Dollar, and China and the Renminbi, “the rise and fall cycles of these empires and the changes in reserve currencies coincide with the previously described cycles.” .
In other words, now may be the beginning of the devaluation of the US dollar, and the renminbi is becoming a more international currency. China is opening up its capital markets to the rest of the world, offering many more attractive investments to global investors: “For me, 2020 is a decisive year that will affect all these conditions and indicate what the next 10 years will look like. The future. In 10 years, compared with Western countries, China’s currency, stock and credit markets will be in a relatively advantageous position.”
Non-dollar assets will be more attractive than U.S. dollar assets, and global investment in U.S. bonds is overweight
Looking to the future, Dalio believes that the United States will generate a large amount of debt and will have to sell it as debt assets, making the global investment in US assets, especially US bonds, excessive.
On an incremental basis, China will generate much less debt and currency. At the same time, the world’s assets in China are still at a low level. This makes China’s interest rate, currency exchange rate, and other asset pricing relatively attractive:
“All these forces are beneficial to China’s balance of payments, currency, and capital markets. At the same time, don’t forget that China and the United States deal with the new crown epidemic in different ways. Compared with the high chaos in the United States, China’s civil order is significantly more stable, which is beneficial. Capital flows into China, not into the United States.”
He believes that for these reasons, U.S. debt is tilting toward the balance of oversupply, which may force the Fed to raise interest rates, or print more money and buy debt, which will eventually lead to a depreciation of the U.S. dollar. “Either situation is negative. U.S. dollar bonds are relatively favorable to China’s capital market.”
What’s more, the Biden administration will not only fail to prevent ideological differences within the United States, but will worsen the contradiction between Democrats and Republicans. This unstable factor will appear in the mid-term congressional elections two years later and the presidential election four years later. It has a major impact on fiscal and monetary policy, affecting Wall Street, and ultimately making non-dollar assets more attractive than U.S. dollar assets.
The 40-year bond bull market is over, it is best to borrow money to invest in diversified assets, including new technologies
Dalio said that the 40-year bond bull market, especially the dollar bond bull market, has ended, and cash is a worse investment, “so short-term debt should be borrowed rather than held as assets.”
In other words, his ideal method is to have a series of diversified assets, and the source of funds is cash financing , that is, borrow money to invest in risky assets.
He believes that the two major factors of nature and technology will continue to have a huge impact on the market:
“In terms of natural behavior, throughout history, droughts, floods, and epidemics have all had a huge impact. These may become more important in the future. As far as technology is concerned, they and the innovations behind them have been and are still It’s the greatest influence, and it’s more important than all the other issues I just mentioned.”
Historically, winners of technological competitions are also winners of economic and geopolitical wars, which will result in a large amount of resources being used in the next generation of artificial intelligence, quantum computing, semiconductors, neuroscience, biotechnology, environmental protection, and clean energy:
“I believe that these are huge investment opportunities, and it is wise to invest in these areas. Given the scale effect, both China and the United States will be the best choices for pursuing these goals. In the next five years, there will be more risks of cyber attacks. Security will become a hot area.”
When the Fed has to raise interest rates, a small amount will hit the financial market hard
In the question-and-answer session, in response to the previously mentioned “the end of the 40-year bull market in western countries’ bonds,” Dalio explained that the real interest rates in the United States, Europe, and Japan are all significantly lower than 0, and the nominal interest rates are mostly lower than 0, which represents bonds. The invested capital can hardly be recovered. “The bond market is currently in a dangerous early stage. The worst result of the cycle is that bond holders will bear all capital losses.”
He believes that the current bond market is under great selling pressure, but buyers are relatively insufficient. If all bond holders sell bonds, there will be an extreme scenario. Later this year, the imbalance between supply and demand in U.S. bonds will be magnified to severe. degree. At the same time, economic growth may accelerate, and inflationary pressures will rise together. The Fed needs to step in and print more money to maintain it. The international credit of the US dollar may be shaken:
“Then the Fed will face a dilemma. Interest rates don’t need to increase very high to hit the financial market. This kind of damage will happen very quickly, and then it will be passed on to the economy. Therefore, the central bank will have to decide how much money to print. And how much depreciation of the U.S. dollar, the 1930s and 1970s are the best precedents in history.”
The Fed will definitely save the market, and the commodity super cycle is unhealthy when the currency is over-issued
Dalio mentioned a few years ago that the first stage of monetary policy is to cut interest rates, the second stage is quantitative easing, and the third stage is the mutual support of fiscal and monetary policies. The United States and major central banks around the world are undoubtedly going through the third stage.
Regarding the question of whether the Fed will control the yield curve, Dalio did not directly answer the question. He just said that “referring to history, the Fed will definitely act and must act.” He said that when a country has no money and faces rising interest rates to harm the economy, it has always responded by printing money and devaluing its currency by the central bank, and this behavior will repeat itself.
The problem is that the United States has entered the logic of the central bank’s massive printing of money to rescue the market. “We have now begun to establish a new paradigm to generate a large amount of debt and a large amount of money.” This also made him think about the commodity super market predicted by Wall Street. The cycle is “not healthy”.
Because on the basis of currency oversupply, the price increase of bulk commodities is mainly related to currency inflation, not supply and demand inflation. The latter is the “normal cycle” of supply shortage but strong demand. Contrary to supply and demand inflation, currency inflation may occur when economic activity is weak, and it happens to be happening right now:
“People who buy and hold commodities are mainly to combat currency inflation. For example, during the Weimar Republic in Germany in the 1920s, even bricks and stones were used as a form of wealth storage. So when currency inflation entered an extreme form , The commodity super cycle happened. I don’t think the commodity super cycle happened because the demand for commodities was too strong.”
Rising interest rates in the future will affect the stock market, so having a diversified portfolio is essential
Dalio once wrote: “In my life, I have seen a lot of bubbles. I have studied more bubbles in history. So, I know what I mean by bubbles, and I have systematized a set of bubble indicators. To assist in testing every asset market.”
In response to the current situation where global stock market valuations are close to or at the highest level in history, he pointed out that since March last year when the economic pulsation dropped significantly, the central bank invested all funds, and these funds immediately entered financial assets, causing the prices of all financial assets to rise. .
When the price of risky assets rises, the expected future returns relative to bonds fall. Taking the stock market as an example, the expected return on the stocks of the S&P 500 Index is about 3%. The current U.S. 10-year Treasury bond yield is slightly higher than 1.50%, and the risk premium is not large. “If interest rates start to rise, it will not take long to affect the stock market, so having a well-diversified investment portfolio is essential.”
Bitcoin is a new type of wealth storage method but it is at risk. Don’t bet on a single asset
The concept of diversification also includes the diversification of wealth storage forms, which involves his research “new favorite” Bitcoin.
Dalio stated that Bitcoin has proven itself in some important ways in the past decade, that is, it has not been hacked and is widely accepted. But Bitcoin also faces risks, such as the regulatory worries of being banned and the risks of supply and demand. This is consistent with his position in previous months.
Therefore, he did not abandon gold because of Bitcoin. He still recommends that people put 5% to 10% of their funds into gold. He said, “The important point is not to bet on a certain asset alone. Everyone should have a certain percentage of assets that resemble hard currency in their investment portfolio, in case you have a credit and money crisis.”
For most investors, the most important thing is to balance the portfolio
Dalio emphasized: “I think for most investors, the most important thing for them is to balance their investment portfolio.”
This is the “all-weather strategy” invented by Bridgewater, which can reduce risks without reducing returns, and then superimpose an active management investment strategy on top of the all-weather strategy, because “if it is not an actively managed investment portfolio, this This rate of return will be relatively low”.
He pointed out that “good diversification” means that different asset classes are balanced with each other. “The ideal situation is to make them global and diversify their currency assets.” A well diversified investment portfolio has a positive expected return relative to cash. , And the expected return on cash is negative.
When asked what assets he likes most in China, Dalio said frankly:
“Investors need to pursue balanced investments and then make tactical adjustments. In most cases, investors have to find their own balance and build an all-weather portfolio. For investors, the most important thing is to know how to do well Diversify investment.”