Paradigm Shifts – Ray Dalio

“There is a tide in the affairs of men.
Which, taken at the flood, leads on to fortune;
Omitted, all the voyage of their life
Is bound in shallows and in miseries.
On such a full sea are we now afloat,
And we must take the current when it serves,
Or lose our ventures.”
-Brutus, Julius Caesar Act 4, scene 3

Have you been paying attention? Sea changes are afoot in the world, and moving at increasing speed.

In the article linked below, Ray Dalio, arguably the world’s most successful investor over the past several decades, warns of a coming tidal shift in economic and social forces that drive markets. He concludes that governments will have to massively inflate their monetary bases to fund massively under-capitalized liabilities coming due in the midst of increasing social conflict.

I have been echoing this sentiment for a number of years. My observations could be summarized as follows:

Nearly every government in the world is insolvent. Governments have expanded so enormously that their budgets exceed receipts to such a degree that they are only able to keep operating by issuing ever increasing quantities of debt. At this point, it is mathematically impossible to ever repay the incredible tally of debt governments have accumulated via economic growth.

Instead, the political and financial elite have another plan. Their plan has been to use central bank money creation to slowly inflate their way out of this mess. A “modest” 3% rate of inflation for 15 years would cut the current debt in half. Said another way, they planned to pay off creditors with newly created money, money that is worth less than the money they borrowed. It’s their only option. Please realize this newly created money steals wealth from you and I—the common man—by diluting our wealth and silently siphoning it to government creditors and those closest to the spigot of money. However, to do so, governments need an economy that is growing or at least stable.

Unfortunately, that is not the case. Central banks are starring into the abyss of a slowing economy and an over-levered, overextended financial system (hilariously brought about by zero-bound interest rates). So the plan to slowly inflate away the debt is being foiled while risks of another major financial crises loom.

At the same time, our omniscient monetary masters at the world’s central banks are between a rock and a hard place. Central banks have collectively grown their balance sheets by $20T over the past decade following the last global financial crises, all while keeping interest rates zero-bound. This means the two main tools of central banks to help with economic catastrophes—cutting interest rates and expanding their balance sheets—are already at or near their limits.

How will this all play out? As a Nassim Taleb acolyte, I won’t dare make any precise predictions. However, this much is clear: the monetary base is going to expand massively in order to service ever-increasing government liabilities and deficits and to stimulate the economy amidst a recession or another financial implosion. And in the face of a massive, domino-like bank insolvency crisis, and due to central banks’ impotence as described above, I wouldn’t be surprised to see radical measures taken by world governments such as seizures of public wealth in the form of bail-ins in which bank deposits are given haircuts, or “borrowing” from public pensions or other large pools of retirement funds to recapitalize the banking system, in addition to central bank stimulus and asset purchases similar to but larger in scale than TARP and QE.

So what are we to do? As Mr. Dalio astutely points out, some asset classes will perform well in a reflationary or crises environment, and he notably mentions gold for this purpose. I agree. I think nearly all scarce, equity-based assets (assets that you own outright, and ownership of is not another party’s liability) will do well in such an environment. And of course Bitcoin will likely be the best performing asset of all. I expect in five years time we’ll learn that Mr. Dalio, both his hedge funds and personally, owns Bitcoin, and began accumulating in 2018-2020. He’s too smart, too shrewd not to own Bitcoin in the midst of such a paradigm shift as described below.

Paradigm Shifts

One of my investment principles is: Identify the paradigm you’re in, examine if and how it is unsustainable, and visualize how the paradigm shift will transpire when that which is unsustainable stops.

Are you paying attention now?

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