Do not react to news and market fluctuations after the fact without careful consideration.

Written by: Ray Dalio

Translated by: Block unicorn

Preface

The first phase of the US-China trade deal was quickly reached and completed in a very reasonable manner (the optimism for future negotiations is justified). Donald Trump and his team are now on a Middle East trip in Saudi Arabia to secure investment deals (I believe they will succeed, and it seems that other reasonable trade deals will follow). Soon, he and his team will attempt to reach a good budget agreement with Congress (I am not very optimistic about this). Meanwhile, the Iran agreement and the Russia-Ukraine agreement are brewing, and I believe these agreements will make some progress.

In my view, there are two scenarios: a) Daily issues often attract people's attention, affect their emotions, and lead to short-term market fluctuations; b) Major issues and forces that drive significant changes in the world order. While both require attention, the major issues and forces that drive everything are the most important, so we must not let short-term, attention-grabbing events distract us from the big forces and issues that will determine how the story unfolds. This perspective is particularly important when making investment bets on the future.

As for the major issues and forces, I will reiterate the five major forces that drive almost everything and what they look like in my view. They are:

1) Debt/money forces that drive markets and economies and determine the monetary order;

2) Domestic wealth and value gap forces that determine the political order;

3) International order/chaos forces that determine the world order;

4) Natural disasters (droughts, floods, and pandemics), and;

5) The power of human invention and creativity, especially new technologies.

Imminent Crisis

These forces are each in different forms, making the current situation starkly different from when these forces are in different forms. Regardless of who the leaders are, their forms determine the environment they must navigate and the choices they must make. More specifically:

1) On the debt/money forces that drive markets and economies and determine the monetary order.

The US government and some other governments are now burdened with massive debt and deficits, and the markets and economies will largely depend on these conditions, even more than on daily news and specific leaders' choices. In other words, this excessive debt will require governments to obtain more funding through fiscal means (i.e., taxes and spending) and/or through more debt monetization, which will have significant impacts in some way. This is because the laws of monetary reality indicate that when government debt is already high and the rate of debt increase exceeds the demand for debt assets (such as bonds), it must be addressed by cutting spending, increasing tax revenues, and/or implementing looser monetary policies (which are unfavorable to creditors). This is true regardless of who the president is. There will be much contention over what should be done (e.g., the tussle between President Trump and congressional leaders and Federal Reserve Chairman Powell). This will generate a lot of news and lead to many short-term fluctuations. In any case, as I outlined in my new book "How Countries Go Broke: The Big Cycles," budget deficits will either be reduced to around 3% of GDP or they will not, which will have huge consequences for the value of debt and money. Meanwhile, the US is the only large capital market globally (accounting for nearly half of the global market) and the largest commodity buyer in the world, proving itself to be a steadfast capitalist environment that respects investment tools as a means of wealth storage, still possessing the rule of law, an entrepreneurial and innovative culture, and relatively free speech, all of which constitute the "American exceptionalism." Maintaining capital inflows into the US and creating mutually beneficial investment deals can greatly improve this situation. Everything depends on how this aspect is managed.

2) On the domestic wealth and value gap forces that determine the political order.

These have led to irreconcilable differences, with almost no willingness to compromise, manifested in the rise of populism, the emergence of populist leaders, and the classic rise of more authoritarian leadership, the weakening of democracy, and the erosion of the rule of law as more populist and authoritarian leaders struggle against opposition to achieve the changes they deem necessary. The relative power of the president against the judiciary and legislative branches, as well as the American democracy as we know it, may be tested. Additionally, the issues facing the bottom 60% of the population remain unresolved, and the inevitable political and media opposition will almost certainly escalate soon.

3) On the international order/chaos forces that determine the world order.

The lack of a single dominant world power—combined with more countries having strong-willed populist leaders facing the aforementioned issues, who tend to fight for their own interests and are more inclined towards victory than harmony—has led to more unilateral rather than multilateral decision-making and greater conflict. During this period, the risks of trade, technology, geopolitical, and military wars are greater, leading countries to behave more aggressively and defensively. This has prompted the need to ensure secure sources for domestic production and other necessary goods. Multilateralism is waning, while bilateralism (bilateral deals) is on the rise, with the US and China each responding in their own ways. The country that offers the best deals to other nations will achieve greater and better outcomes. How this is handled will be crucial to changes in the world order.

4) On natural disasters (droughts, floods, and pandemics).

The situation is clearly worsening, which will cause significant economic losses and equally significant actual losses. How countries and peoples adapt will be key.

5) On the power of human invention and creativity, especially new technologies.

This will greatly enhance human thinking capabilities in most areas and is likely to be used to produce both tremendous improvements and significant harms.

In short, the overall situation presented by numerous objective indicators is that the existing monetary, domestic political, and international geopolitical orders are deteriorating and declining, accompanied by an increasing threat of natural disasters and significant advancements in technology. Meanwhile, most of these factors are being recognized and addressed by a unique right-wing/capitalist American president and his administration.

What measures are we taking to address these issues?

• Reaching deals, including: a) tariffs aimed at increasing tax revenues and providing better business for domestic producers and US exporters; b) attracting large amounts of foreign capital into the US; c) promoting better global investment.

• Reducing government regulation to enhance productivity.

• Reducing government waste and improving the management of government assets.

• Reducing budget deficits and addressing government debt issues, although it is currently unclear how this will be achieved.

• Using power to challenge established laws and regulatory systems to achieve the goals of the president and his hard-right voters while not losing the necessary swing voters.

How to respond to these situations and forces? This is the biggest question.

Will these situations and forces be handled properly or improperly? In other words, when dealing with these situations, is it rational or out of control? Does Donald Trump's extreme stance on deals and his friend-enemy negotiation style indicate that he and his administration can handle our issues properly? Is his announcement of a comprehensive 145% tariff on China on "Liberation Day" merely an effective pretext that ultimately led to two days of productive talks and a very wise short-term agreement, followed by serious negotiations? What has happened so far supports the view that Donald Trump is handling those important and long-ignored issues in a relatively unstable but productive manner. But frankly, it is too early to draw conclusions now.

A few suggestions: Imminent Crisis

Remember, news should be valued and viewed in the context of the big forces that collectively determine the direction of major cyclical changes, most importantly the monetary order, domestic political order, world geopolitical order, climate change, and technological change (i.e., the five major forces).

Remember, we are on the brink of significant changes in monetary, domestic political, and international orders, and everything depends on whether these matters are handled in a smart, cooperative manner.

Remember, in investing, it is important to: 1) Develop a well-thought-out investment plan that includes smart diversification and stick to it; 2) Do not react to news and market fluctuations after the fact without careful consideration.

Finally, the views expressed here are solely my own and do not necessarily represent the views of Bridgewater Associates.

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