Bridgewater founder Ray Dalio, at a critical moment facing the U.S. presidential election, shares his perspective from “Principles for Dealing with the Changing World Order”, drawing lessons from history, in the hope of guiding investors to handle future uncertainties with sound principles. He also mentioned that this election will examine whether the U.S. is capable of a smooth transition of power, and if not, whether foreign forces will attempt to take advantage of the U.S. in its weakened state?
The U.S. is at a pivotal point in the cycle
In his book “Principles for Dealing with the Changing World Order,” Dalio helps readers to understand the patterns of history and hopes to find better ways to cope with the future. He divided the rise and fall of empires into six stages, including the former British Commonwealth and the current U.S. and China, which are all going through the same cycle. He believes that the U.S. is currently at a crucial point in the fifth stage of the big cycle and on the brink of the sixth stage, a time of extraordinarily high risk. Although he is not predicting that the U.S. will fall into these conflicts, he believes the possibility of such an event happening is lower than it not happening. Still, Dalio emphasizes that constant vigilance and preparedness in the event of such occurrences are his consistent thoughts and positions.
Source: Principles for Dealing with the Changing World Order
What happens at the end of the fifth stage?
During the late fifth stage, protests become more frequent and increasingly violent. As there is not always a clear boundary between benign protest and the beginning of a revolution, those in power often have to balance allowing protest without granting freedom to resist the system. Leaders must handle this delicately, as when demonstrations begin to transition into revolution, a typical dilemma arises, granting the freedom of protest and suppressing protest are both risky for leaders, either of which could lead to a more powerful revolution capable of overthrowing the system.
When widespread discontent emerges, and those in power allow it to grow, it may boil over to the point where it explodes when those in power try to cover it up. The conflicts in the late fifth stage usually reach their climax, leading to violent battles, marking the transition to the period of formal civil war identified by historians, which Dalio refers to as the sixth stage in the big cycle.
Flaws of Democratic Countries
Dalio believes that the “one person, one vote” democratic process has a downside, i.e., leaders are elected through popularity contests, and the people do not generally scrutinize their abilities as most organizations would when seeking suitable candidates. Democracy requires consensus decision-making and compromise, which requires many people with different viewpoints to cooperate well within the system. This ensures that parties with crucial constituencies are represented, but like all large committees composed of people with differing views (and potentially disliking each other), the decision-making system is not efficient.
The greatest risk for democratic countries is that they can produce such dispersed and confrontational decisions that they may become ineffective, leading to poor outcomes, which in turn can lead to revolutions led by populist dictators, representing the majority of the population who aspire to have a strong democracy.
Civil wars are inevitable. Therefore, rather than assuming that “a civil war will not happen here” (as most people in most countries would think after a long period without a civil war), it is better to remain vigilant.
Who is the Most Suitable Leader?
Dalio believes that different stages require different types of leaders to achieve the best results. For example, the best leaders in the first stage are “consolidators of power”, his ideal examples being Tang Taizong of China and Napoleon of France.
The fifth stage is a turning point, with one path potentially leading to civil war/revolution and the other, ideally, leading to peaceful coexistence and prosperity. Obviously, the path to peace and prosperity is the ideal but more difficult to achieve. This path requires a “strong peacemaker” who will spare no effort to unite the country, including reaching out to the opposition, involving them in decision-making, and reshaping the order in a way that most people consider fair and functioning well. Historical cases of this are rare. In a previous interview, he said outright that neither Republican nor Democratic candidates are what the country needs.
(Founder of Bridgewater Hedge Fund Warns U.S. on the Verge of Civil War, Ray Dalio: The Most Important Election of My Lifetime)
Should We Exit the Market First?
Dalio finally puts forth another of his principles:
When in doubt, get out immediately. If you don’t want to get caught up in a civil war or war, you should take your profits and run. This usually happens in the late fifth stage. As history can attest, when situations worsen, the exit door usually closes. The same goes for investments and currency, as countries during this period would impose capital controls and other measures.
Lastly, he stated that these are merely his personal views, not representing those of Bridgewater. He also hopes that everyone lives in interesting times and has good principles to deal with them.