The Changing World Order
December 2021
While most investors learn from life experience, Ray Dalio studies history to make predictions about the future. He uses a macro investing style that favours risk allocation over asset allocation. This has proven to be very successful as he created the worlds largest hedge-fond Bridgewater Associates, navigating through financial crisis (most notably the 2008 meltdown) with incredible foresight.
In his new book “Principles for Dealing with the Changing World Order”, Dalio takes the reader on a journey from ancient empires to current affairs, in a quest to understand how the world works. It turned out to be a very eye opening read that takes us a few steps back in order to move forward.
His approach for understanding the economic machine is based on evolution which generally causes changes towards improvement, cycles and indicators to determine where we are in the timeline. He beliefs that all empires go through the Big Cycle that repeats as long as there are humans.
Coming out of a war, a population creates new rules and forms of governing that lead to a productive society and an economic upswing. The next generation takes the wealth for granted and loses the determination in hard work while producing great works of art and culture. The optimism and increased borrowing of money (because in the future there should be enough) inevitably creates a financial bubble. From then on, everything goes downhill.
After the bust, governments will start printing money and thereby devaluing its worth. Rises in political tensions cause major conflicts in the form of revolutions and wars. On rare occasions this can be solved peacefully. Either way, the empire loses its power and a New World Order is created. With it, the cycle repeats.
This happened to the Dutch Empire, the British Empire and the United States over the last 500 years. If we zoom in on the USA, it becomes clear that the last stages are very close. This can be seen through the extreme polarisation of the population and emerging conflicts. For example one recent survey showed that 15 percent of Republicans and 20 percent of Democrats thought the country would be better off if large numbers of the other side “just died.”
Further indicators if a country is on the rise, the top or the decline can be quantitatively measured. If education or innovation levels are low, a country is most certainly on the decline while the remaining reserve currency status (US dollar) and the role as a financial center (New York City) may give a different impression.
Dalio describes in detail the next big empire that will replace the United States as the world leader: China. When he visited the country 37 years ago, its leaders marvelled at a handheld calculator that he gave them. Now having some of the most innovative industries, they are only a few years away from winning the technology war. And whoever wins the technology war, according to the author, will most likely win the military war.
The conflict is not just between military standing, but most importantly ideology. This is exemplified in a tweet that the last manager of the Houston Rockets (Daryl Morey) put out. In it, he supported Hong Kong’s pro democracy movement but pulled it down shortly afterwards. China hold the whole league responsible (collectivism) and dropped all NBA games from the state television while the American side criticised him for not standing up for free speech (individualism).
While both countries are preparing themselves for the worst, from a strategic point the USA would rather attack sooner as the country is declining and China would wait for its vastly rising military power to catch up. The dangers of modern warfare and the inevitability of mutually assured destruction when attacking may turn out to be helpful in the prevention of World War 3 in favour of a standoff.
America’s role as the world leader will be put to a test with the handling of Taiwan. China is an unstoppable force for change to Taiwans current status and the US an immovable object against it. Wether Biden will fight to defend the country or risk humiliation is uncertain. Dalio draws parallel between this and the British loss of the Suez Canal which signalled the end of the British Empire in favour of the USA in 1956.
In a footnote Dalio proposes a simple yet revolutionary idea in order to improve the chances of peaceful resolutions. He envisions a series of publicly aired disagreements between world leaders, similar to presidential debates. The developments over the last years both internal and external showed that the world is lacking empathy for the other side.
Time to break out of the cycle.
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