# Ray Dalio's Changing World Order



## MrBlackhill (Jun 10, 2020)

A short video summary here : 




What do you think? Turbulence and wars to come? Buy China stocks? Reduce US stocks?


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## james4beach (Nov 15, 2012)

You might also want to read his essays on the topic:

All essays from Ray Dalio (Changing World Order in many parts)
Intro article to the series

I read his full essay. I would never change my investment approach based on a particular bet or forecast, such as "the US is in downfall"... we have no idea if that's really true and he could be wrong. He does seem to think the US is in decline.

Dalio has given investment advice relating to this issue. His main advice is to *diversify*, among

asset classes
countries
and currencies
It's good advice. Don't just hold domestic stocks, and make sure you own stocks for many countries. Don't just hold US stocks. Don't just hold cash / bonds denominated in a single currency. Make sure you own assets of various countries and have some foreign currency exposure.


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## Rusty O'Toole (Feb 1, 2012)

Correct but tardy. The US and Canada have been on the skids since the sixties or seventies, Britain even longer.


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## MrBlackhill (Jun 10, 2020)

james4beach said:


> You might also want to read his essays on the topic:
> 
> All essays from Ray Dalio (Changing World Order in many parts)
> Intro article to the series


Yes, I've seen the full essay but I didn't have time to read it yet. It's on my to-do list.



james4beach said:


> His main advice is to *diversify*


Yes, but that advice is not new information. We've always been told to diversify to mitigate risk, but I don't want that, I want to pick up on trends and opportunities, while being diversified. Diversification is meaningless. You can be equal-weighted in all sectors and all countries and that would be called diversification, but it would be less profitable than being diversified with more weight in some sectors and countries. After all, at the moment, most people have much more weight in US exposure and in tech sector and that's what allowed them to outperform.

Ray Dalio is making a bet because he's seeing a pattern. If his observation is right, then it's a bet with a high likelihood to happen. That's like a basic technical saying the stock is about to drop because its RSI is 80 and then it's about to rise because its RSI is 20. It's a real pattern for many stocks, but this simple technique/observation has its limitations, obviously.

And then when people see patterns, are those patterns inherently true due to Ray Dalio's explanations or are those patterns created by the market psychology due to a belief that there's a pattern?

And yes China is on a rise, but I must admit that I hope it won't become the world power. First, I'd prefer that the European Union to be the world power over the US, but that won't happen since it's not a single country. I'd also be glad if it would be some alliance between Japan and South Korea (and maybe Taiwan?), but again, at the moment, these countries taken alone are not powerful enough to become a world power. But China becoming a world power? That's even worse than US even if I'm pretty ashamed by what's happening in the US.

Anyways, with all the big worldwide companies which are from the US, I don't think there's going to be a change in the economic power in the next 20 years. I agree though that China is catching up dangerously fast.


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## MrBlackhill (Jun 10, 2020)

MrBlackhill said:


> Diversification is meaningless.


What I mean here is that it's the basics of investing. That's like telling someone : "To make a cake, you need flour, eggs, sugar, milk, butter and baking powder." Ok, that's a start, but how much of each to make a good cake? And then what special ingredients could I add for an even better cake? And what kind of flour, sugar, butter, etc.? And how do you cook those ingredients?


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## Jimmy (May 19, 2017)

MrBlackhill said:


> Yes, I've seen the full essay but I didn't have time to read it yet. It's on my to-do list.
> 
> 
> 
> ...


I agree. EM are now ~ 13% of the world market cap. More importantly they are growing much faster than the developed world and have more room to grow.

I think you need to diversify to get exposure to these and other growth areas primarily and lower risk secondarily. A good basket of stocks in a few different industries in the US, CAN, EM and maybe a little EU is all you need for diversification these days that will also give you a few x market beating performance

The traditional assets like bonds, gold ,etc and other under performers allow more diversification but their lousy returns now are just a waste of time over the long run.


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## james4beach (Nov 15, 2012)

MrBlackhill said:


> What I mean here is that it's the basics of investing. That's like telling someone : "To make a cake, you need flour, eggs, sugar, milk, butter and baking powder." Ok, that's a start,


And yet, some people don't even get this far. If you listen to multiple interviews from Dalio you will see that his main emphasis is on diversification and not being overly exposed to a single currency.

This is more relevant to his US audience because many domestic investors are entirely exposed to US stocks/bonds with little else. Americans tend to not think that they need global diversification.

"Why would I invest in poorly performing Europe & EM when the S&P 500 is blowing them away?" -- is a thing you will often hear

One of the techniques Dalio endorses for diversification is "risk parity", which is a great framework for diversifying between asset classes. In fact, all of my money is invested according to risk parity. Both All Weather and the Permanent Portfolio are, more or less, risk parity methods. There's also an ETF called RPAR which uses the technique (there are many variations of it).


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## AltaRed (Jun 8, 2009)

One of the important messages from Ray is the long range outlook. I think his vision is probably correct (and especially directed to Americans) BUT it is a generation or more in the making. For people who think they can create alpha by actively rotating through sectors and/or geographic regions, his outlook will fall on deaf ears. That is fine. That is what makes the market BUT I suspect in the long run, a 100% allocation to VBAL or VGRO or VEQT will accomplish about the same thing....if for no other reason is that virtually on one is going to beat the AA ETF approach on a CAGR basis over 20+ years. Few are that smart and/or that lucky.

An old white guy (me) has seen too much of this rhetoric over 30 years of investing.


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## OneSeat (Apr 15, 2020)

AA ETF?


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## AltaRed (Jun 8, 2009)

OneSeat said:


> AA ETF?


Asset Allocation ETF as in Vanguard VBAL and VGRO.


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## Juggernaut92 (Aug 9, 2020)

I think at the end of the day people want to get the biggest gains. If the S&P 500 is not cutting it then they will go somewhere else. i would think that would be the mindset. I did have a question though. Would you guys be against investing in emerging markets (especially China) because of all the negative news they get?


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## MrBlackhill (Jun 10, 2020)

Ray Dalio is pretty cautious about his opinion on China, he's definitely not against it.


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## james4beach (Nov 15, 2012)

Juggernaut92 said:


> I think at the end of the day people want to get the biggest gains. If the S&P 500 is not cutting it then they will go somewhere else. i would think that would be the mindset. I did have a question though. Would you guys be against investing in emerging markets (especially China) because of all the negative news they get?


I try to ignore all the news. I'm not opposed to EM and would add them to my foreign portfolio if they showed technical strength.

My plan is to monitor the two year & three year returns of the US, Europe/Japan, and emerging markets. I will weight most heavily into whichever is the top performer. The US has been the winner of this test since 2013 but at some point that will change again.

So if emerging markets are the strongest, according to that test, yes I will invest in them, using BMO's ZEM


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## hfp75 (Mar 15, 2018)

The whole thing is driven by interest rates and rates are controlled by the central banks interpretation of inflation / CPI.

The Fed just redesigned the formula for calculating inflation which should hold it lower for longer. So, I think the impact on interest rates on 'possible' inflation has been abated for the time being and the near future. Not saying if things went crazy adjustments wouldn't happen, but for Yellen era 1-2% inflation nothing will change (rates wont rise) and if there is indeed Powell era (hoping for) inflation of 2-3 or 4%, I still don't see rates changing. Powell era inflation will be averaged down to present at 2% even though its 4%. (reality is that Powell could be gone in 2 yrs before that happens) 

Long and short, low rates are here well past 2022 unless something goes awry. Markets are demonstrating the effect of the lower bound of rates, due to people having a lower expectation of ROI / alpha. People want 2.5%+ and will chase it to the market and buy a stock. As everyone does this prices rise for stocks in general (indexes). Doesn't mean that market is healthy, means people want ROI / Alpha. Bond Yields are low and the duration on the curve is no longer inverted and has slightly risen (which is good). I would bet, that if the long end starts to rise the Fed/BoC/ECB will just buy (or increase volume) 10 yr bonds vs short duration bonds and thus bring down the middle of the curve. (in fact they could be doing this now already that we don't know about)

Central Banks are controlling everything right now.

Risk should = reward, but that paradigme is not working properly right now.

As it relates to EM, I do think that there is room for growth in EM. SE Asia could do quite well but they could also just coast where they are now. China is not yet in a position to be an independent economy, they are still US feeder just like us (Canada). Everything is hinging on the USA, IMHO.

If people could get a higher & safer return from the bond market they would leave the stock market. Markets would react if safe (AAA) yields were to rise on the short end of the curve.

These are trying times and I fear that a lot of people have taken on above average risk to try and simply get a better return. People are not looking at the risk side, they are just looking at the return.

* I will mention that after markets recovered, we decided that capital preservation was a higher priority than capital appreciation and we are stockless. Yes I have missed out on some growth, but our current situation is different than in '08 and I am still positive for the year and I sleep well at night. I am following the PP and thus my risk to stocks is only 25% - which is low considering some of my past AA. When the time comes and I feel confident in markets I'll reenter.


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## John L. Dejesus (Dec 12, 2020)

james4beach said:


> You might also want to read his essays on the topic:
> 
> All essays from Ray Dalio (Changing World Order in many parts)
> Intro article to the series
> ...


But he's not much of a believer in the global investing thesis. For him, it's a bunch of narratives people make up and people believe. Yes, financial bubbles and crashes happen. And there is fear and angst. But when that happens, markets tend to correct fairly quickly.


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## MrBlackhill (Jun 10, 2020)

John L. Dejesus said:


> But he's not much of a believer in the global investing thesis.


I'm not so sure I understand.

Ray Dalio's portfolio has a lot of exposure to Emerging Markets, particularly China. He tells people to diversify throughout countries and currencies.

Side note, China was the only big country to increase its GDP in 2020.






Bridgewater Associates Portfolio | Ray Dalio 13F Holdings & Trades


Heatmaps of the top 13f holdings and a list of the largest trades made by Bridgewater Associates, the hedge fund managed by Ray Dalio.




hedgefollow.com


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## londoncalling (Sep 17, 2011)

*Ray Dalio on Changing World Order: Current Economic & Geopolitical Challenges | #𝐒𝐀𝐋𝐓𝐍𝐘*







An in depth assessment of our current economic cycle. I am a follower of Dalio and find his interviews insightful.


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## scorpion_ca (Nov 3, 2014)

Is there any similarities here? $3.1B in EM. World's richest family reveals US$5B worth of stock picks - BNN Bloomberg


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## MrBlackhill (Jun 10, 2020)

scorpion_ca said:


> Is there any similarities here? $3.1B in EM. World's richest family reveals US$5B worth of stock picks - BNN Bloomberg
> 
> View attachment 22219


Where to invest at the moment, in order:

Emerging markets
Developed market ex-US
US
Preferably in Small Caps instead of Large Caps, preferably in Value instead of Growth, ideally in Small Cap Value.

And if you want volatility protection, then Short Term Bonds.

Yup, that table definitely makes sense.

But be careful about the value of that table. Walton family owns Walmart. That $5B in investment is just a tiny part of their portfolio for diversification purposes. Their net worth is over $200B. That's as if I would should you where I've put the bottom 2% of my portfolio.


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## AltaRed (Jun 8, 2009)

I follow Ray's Changing World Order on an occasional basis. Thought some would find his Changing World Order charts of some interest.


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## londoncalling (Sep 17, 2011)

Thanks @AltaRed. I am currently working my way through the book that go with link you posted. A lot going on geopolitically. We certainly live in interesting times.


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## m3s (Apr 3, 2010)




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## AltaRed (Jun 8, 2009)

londoncalling said:


> Thanks @AltaRed. I am currently working my way through the book that go with link you posted. A lot going on geopolitically. We certainly live in interesting times.


Certainly is when one condenses it all down to something a person has some chance of wrapping their head around. One big question I have that I likely won't live long enough to see is whether China can reach its full potential or whether its system of government will constrain and cap it. We can already see where politics can (and has) capped their mega companies lest they become a threat to their autocratic, if totalitarian, rule. Ray may be giving China more credit than they will actually achieve.


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