A History Lesson from Ray Dalio

Ray Dalio published his “Paradigm Shifts” on July 17. I recommend it for any investor who wants an intelligent, dispassionate history of investing broken down by decade. Ray Dalio and Bridgewater, the hedge fund he founded, have the money and the track record to back up his assertions. Is another paradigm shift happening now?

What does Ray Dalio have to say about paradigms?

Dalio says that “understanding which types of paradigms exist and how they might shift is required to consistently invest well.” Bridgewater/Dalio are macro-investors, meaning they keep and make their money by anticipating major global investment trends and acting on them with large sums before the events have occurred. Their two main investment funds are the All Weather Fund (built to be immune to changes in paradigms) and the Pure Alpha Fund (tactical trading fund that seeks to take advantage of changing paradigms).

His latest article describes how each decade, starting with 1920, had a major investment trend and that the following decade brought the opposite or least expected trend. A recent example of trend reversal is the 2000-10 decade which he calls “Roaring: From Boom to Bursting Bubble.” The trend reversal has led to the current Reflation Decade, where central banks are trying to stimulate inflation.

Three metrics to watch

Dalio does talk about “three equilibriums” that are useful for understanding the context for where we are today. The three are:

  1. Debt and income — are incomes able to cover interest payments
  2. The economy’s high/low operating rate — prosperity vs. recessions
  3. Projected returns from cash (low) to equity (high) — also known as a risk premium

A paradigm shift occurs when these metrics become fundamentally unsustainable. According to Dalio, none of the three are currently flashing red, although debt/income is getting close.

The Decades

Here are the titles assigned to each decade by Dalio and his team of researchers. They are interesting for historical context.

  • 1920’s: Roaring: From Boom to Bursting Bubble – (1929 was the start of the great depression)
  • 1930’s: Depression – (Followed by a big recovery, rate cuts, and an increasing wealth gap)
  • 1940’s: War and Post-War – (War efforts juiced the economy and asset prices followed)
  • 1950’s: Post-War Recovery – (A financially conservative post-war mindset set the stage for risk-takers to win the decade through equities)
  • 1960’s: From Boom to Monetary Bust – (The Fed is faced with a major balance of payments problem)
  • 1970’s: Low Growth and High Inflation – (Fed prints money, delinks the dollar from gold, and inflation takes off)
  • 1980’s: High Growth and Falling Inflation – (The Fed bails out US Banks from an emerging market debt crisis, rates fall, stocks and bonds do very well)
  • 1990’s: Roaring: From Bust to Bursting Bubble – (Started with a recession, ended in a tech bubble, yet still posted big returns for stocks for the decade)
  • 2000′: Roaring: From Boom to Bursting Bubble – (Too much debt and the Great Recession made this the worst economic decade out the nine profiled here)
  • 2010’s: Reflation – (Central banks aggressively print money to stimulate the economy and to introduce inflation, yet inflation fails to turn up)

You can read the full article here including the details listed on each decade. The history lesson is worth reviewing even if it does not provide us with all of the answers.

What is Bridgewater doing?

Dalio ends his article by recommending gold for the decade ahead based on his view of the upcoming potential paradigm shift in the value of the US dollar. The latest Bridgewater filing shows that he holds less than a 4% overall position in gold. At Osbon Capital we can track purchases of gold all over the world through our access to Bloomberg’s private database. This is valuable to provide additional context to what might seem like very bold statements.

Worth knowing – but not ready for action

The new decade starting in 6 months does not arbitrarily usher in a new paradigm. Expansions, monetary policy and inflation do not follow discreet 10-year patterns. Changing courses too early might mean missing a big upward move in stocks, or a big upward move in bonds. Additionally, gold does not have any yield and can’t be used by investors for anything practical outside of a financial purpose. I wrote about Ray Dalio and paradigm shifts because he provides a good history lesson and is a voice worth being aware of.

Weekly Articles by Osbon Capital Management:

"*" indicates required fields