Source: Finance Association
① He believes that no matter who wins the general election half a year from now, the US is likely to have a huge political conflict; ② At the same time, Japan, the US, and the Eurozone will continue to drive debt contraction through debt monetization. Under such circumstances, the more prominent characteristic will be inflation rather than depreciation; ③ Dalio is not optimistic that the Fed can reach the inflation target.
In an interview with “Nikkei News” this week, the founder of the Qiaoshui Foundation and a well-known Wall Street “evangelist”, Ray Dalio updated his views on topics that global investors are concerned about, such as the state and prospects of the US economy and society, and trends in major currencies such as the US dollar.
Meanwhile, with regard to the US election, which is about to reach the “match point,” Dalio also warned that regardless of whether Biden or Trump wins in the end, they will face challenging domestic conflicts and international geographical conflicts at the same time.
America is in the classic “fifth phase”
Faced with the immediate problems, Dalio did not forget to review the “six-stage theory of a country's internal cycle” in the “Principles.” Among them, the “fifth stage” is characterized by huge differences in wealth and values, driving a polarized society tit-for-tat — that is, a stage on the verge of a “civil war,” but it has not yet broken out.
Dalio said that the US is in the classic “fifth phase”. The characteristics of this stage also include excessive debt issuance caused by factors such as natural disasters (droughts, floods, pandemics, etc.), major technological changes, and geographical conflicts, and a new pattern of the international order. America is on the verge of great turmoil, but it has not really fallen into it. What to do next depends on Americans, especially American leaders.
The reason why the previous “civil war” needs to be quoted is because Dalio believes that the most likely type of civil war in the US is not the one where people shoot at each other, but rather the state and local governments refuse to follow the instructions of the federal government, and at the same time, the federal government's handling of this chaotic and dysfunctional approach.
Regarding the upcoming US election, in addition to the many challenges the two candidates will face, Dalio also raised deeper concerns: the Republican Party is now controlled by the extreme right, and people are also worried that the Democratic Party is more influenced by the extreme left than the moderate left. This means that no matter who wins the election, the US is likely to have a huge political conflict.
The dollar and the outlook for US inflation
Precisely because he sees inflation as a result of “relieving debt pressure,” Dalio bluntly said he doesn't believe the Federal Reserve can achieve the so-called 2% inflation target.
He said that just like what is happening in Japan, the US, and the Eurozone — the issuers of the three major reserve currencies in the world are actively promoting depreciation, and their debts are shrinking along with them. The results of this depreciation are more likely to be reflected in more inflation and higher gold prices, rather than a sharp depreciation of one currency in relation to another. He also believes that monetizing debt will continue to be a trend in the next few years.
At the same time, Dalio pointed out that the US economy is supported by the deterioration of the government's balance sheet and profit and loss statement, so the US government will continue to issue a large number of bonds to deal with the deficit. This is also the reason why it is difficult for the inflation rate to return to the target of the Federal Reserve or other major central banks.
The attractiveness of Japanese stocks has declined
Even in the face of the Japanese media, Dalio bluntly stated that “Japanese stocks are not as attractive now as they used to be.”
He said that based on price factors, Japan is still an attractive market, but with monetary policy tightening, the appeal of Japanese stocks is naturally different from the past.
Dalio also anticipates that the Bank of Japan can only slowly push forward with a stricter monetary policy, because the Bank of Japan itself has very large positions in bonds, and raising interest rates too drastically may cause huge losses. Meanwhile, the Japanese government and the Bank of Japan may push the depreciation of huge debt by keeping policy interest rates relatively low compared to inflation and nominal growth. This also means that yen bonds will continue to be a very bad investment; relatively speaking, stocks will be better.
Furthermore, 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.
editor/tolk