Ray Dalio says the global geopolitical landscape is set for big changes. Photo / Getty Images
To make money betting on the future, Ray Dalio delves into the past. As one of America's richest men, and founder of the world's biggest hedge fund, being well versed in history has proved lucrative.
"Studying the Great Depression in the 30s allowed me to anticipate the 2008 financial crisis and do very well in it," says Dalio who, at the age of 72, remains co-chief investment officer of Bridgewater Associates.
If the past can provide valuable insight, then trouble is brewing for the global economy - or so Dalio believes.
He puts the risk of US civil war in the next decade at 30 per cent, believes stock markets are soon headed for difficult times and predicts the Chinese "empire" will become the dominant global power, leapfrogging America and transforming the geopolitical landscape.
His book, Principles for Dealing with the Changing World Order published in November, is a 500-page study of how empires have risen and fallen. The US is the next to decline, according to Dalio, who is starry-eyed about China.
After launching Bridgewater out of his two-bedroom New York apartment at just 26, Dalio himself has amassed a US$20 billion fortune, according to Forbes, built on spotting big geopolitical and economic trends.
It makes him the 36th richest person in America and within the top 100 globally, while Bridgewater still holds the record for hedge fund returns.
Little about Dalio's first investment, at 12 years old, suggested he was going to become a hedge fund titan managing around US$150b in assets. The son of a jazz musician, he made money as a child doing odd jobs in New York state, including a newspaper round and caddying. The cash made from the latter went towards his first stock market investment.
"I bought a company that was the only company that I'd heard of, that was selling for less than US$5 a share," the somewhat gaunt Dalio says, sitting in front of black and white wallpaper of an opera house. "It was a company that was about to go broke but some other company acquired it, and it tripled. Because it tripled I thought: this game is easy."
It was a "naive strategy", Dalio admits, but it got him "hooked on the game".
Despite admitting he is still hooked, the finance pioneer signalled last September that he will bow out "in a year or two".
It may come at a good time. Dalio cemented his status on Wall Street by outperforming during the 2008 financial crisis, but coronavirus has proven trickier to navigate.
Bridgewater suffered hefty losses of US$12.1b in 2020, according to LCH Investments, as many other hedge funds shone amid pandemic-induced market volatility.
Meanwhile, former co-chief executive Eileen Murray filed a lawsuit against the Connecticut-based hedge fund over compensation, alleging it attempted to "silence her voice". A settlement was reached in October 2020.
Reports suggest the first half of 2021 proved to be stronger for Bridgewater, however, putting it on track to be in the black for the full year.
According to Dalio's crystal ball, stock markets are set for a strong 2022, before faltering come 2023.
Powered by huge Covid stimulus, global stocks have come out of the pandemic relatively unscathed - the MSCI World Index has surged 33 per cent since the start of 2020. Dalio predicts 2022 will be a "transition year" with "less volatility, less up, less down and growing pressures".
But he warns that 2023 will be the "beginning of a more difficult year" as pressures mount on a number of fronts, namely inflation.
While economies in the West are expected to continue a brisk post-Covid recovery in 2022, as long as omicron doesn't spoil the party, the surge in inflation is becoming a headache for policymakers.
Central banks initially insisted that rapid price rises would be 'transitory', yet many now fear inflationary pressures will be more persistent and dangerous.
In December the Bank of England and US Federal Reserve took hawkish turns in response to inflation worries, with the former hiking interest rates and the latter quickening the pace of its tapering.
The Fed's rate-setters now forecast six rate rises in the next two years, a sharp increase to tackle inflation that could roil markets.
"Right now stocks have more attractive yields than bonds but as interest rates rise, that'll begin to squeeze the difference," Dalio says.
"In 2023 the effects of the stimulation are going to fade so we're going to have slower growth and more inflation, and that has political consequences.
"We're in a relatively euphoric period, because of all the money and credit that has been created."
But that will "wear off" and market conditions will soon "be less good". When that happens, Dalio adds: "it'll be difficult for the central banks to be able to balance the economic trade offs with the monetary inflation trade offs at that point in time, and so there'll be more political conflict too. That'll be setting itself up for the 2024 [US] elections."
Pivoting to politics, Dalio warns the next presidential vote will "be the elections in which neither side accepts losing".
He believes there is a 30 per cent chance of civil war erupting in America in the next decade, given the huge political polarisation that has poisoned the country, crescendoing in pro-Trump supporters storming Capitol Hill last January.
"In the United States, there's real reason to believe that the populists of the left and populists of the right are gaining greater control, and will not respect and work toward the common answers, the rules of the game.
"The January 6 incident is only the tip of the picture, so there are significant risks in which rule of law and decision by the courts on how to handle that could be abandoned."
Dalio's book estimates that the US is about 70 per cent through the same rise and fall cycle that previous empires have suffered, such as Britain's. And, historically speaking, it is time for a new superpower.
The period around the second world war is the last time the investor observes similar conditions that established a new global order and US hegemony: large debts with low interest rates and money printing, big political conflict due to large inequality and the rise of a new world power - this time in China.
At times Dalio sounds in awe of Beijing. Bridgewater manages US$5b in investments for the state and is looking to expand in the world's second largest economy, according to Bloomberg.
He has attracted criticism for a fascination with China, writing in his book of how its policymakers have achieved "remarkable advances". Is an authoritarian regime becoming the global dominant power not a concern?
Dalio bats away the question: "They wisely believe that occupying and controlling an area is not a good thing because you can't fight against an indigenous population."
He believes Taiwan's fight for its independence is the "biggest issue", which has the possibility of sparking military conflict between the US and China.
And what does Dalio see in this turbulent future for post-empire, post-Brexit Britain? Very little of global importance.
Britain will be "not a great world power" but sidelined to the role of a US ally, providing "unique but not especially big support". Neither, he believes, will the UK be at risk of the same explosive domestic political strife as the US.
"There's a lot of political tension [in the UK] and pulling in both directions. However, the risks of actually the democratic system breaking down are less than those in the United States."
Some may think Dalio's starkest warnings for the US are overblown. But ignore them at your peril: he's made a lot of money getting it right.
'This decision has not been made lightly'.