Client Portals

A History Lesson from Ray Dalio4 min read

A look into the past investment decades and where we are today

Jul 24, 2019 - John Osbon ( 5 mins to read)

John Osbon

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 INSIGHTS
delivered to your inbox

DISCLAIMER

This communication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”

“Historical performance is not indicative of future results. The investment return will fluctuate with market conditions.

Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.

Investment strategies, philosophies, allocations and holdings are subject to change without prior notice.

This communication is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice.

While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.

Adviser does not endorse the statements, services or performance of any third-party vendor.

Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.

Any IPO alerts are purely informational and should not be construed as recommendations to invest.

Adviser is not licensed to provide and does not provide legal, tax or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.

Any case studies or hypothetical client profiles are for demonstration purposes only. They illustrate the breadth and depth of the many clients we represent at various life stages. Any similarities to actual Adviser’s clients past or present are strictly coincidental. Individual advice and results will vary based on each client’s circumstances, objectives and prevailing economic conditions.