Author: Bridgewater Founder Ray Dalio

Translation and Compilation: BitpushNews

As a systematic global macro investor, as we approach the end of 2025, I naturally reflect on the underlying mechanisms of the events that have occurred, particularly in terms of market performance. This is the main theme of today's reflection.

While the facts and returns are indisputable, my perspective on issues differs from that of most people.

Although most believe that U.S. stocks, especially U.S. AI stocks, are the best investment of 2025 and the core story of the year, the undeniable fact is that the most substantial returns (and the real headline story) come from: 1) changes in currency value (most importantly the U.S. dollar, other fiat currencies, and gold); and 2) U.S. stocks significantly underperforming non-U.S. stock markets and gold (with gold being the best-performing major market). This is primarily driven by fiscal and monetary stimulus, productivity improvements, and a massive shift in asset allocation away from the U.S. market.

In these reflections, I want to take a step back and examine how last year's currency/debt/market/economic dynamics operated, and briefly touch on how the other four major drivers—politics, geopolitics, natural behavior, and technology—affect the global macro landscape within the evolving context of the "Big Cycle."

1. Changes in Currency Value

Regarding currency value: the U.S. dollar fell 0.3% against the yen, 4% against the yuan, 12% against the euro, 13% against the Swiss franc, and plummeted 39% against gold (gold is the second-largest reserve currency and the only major non-credit currency).

Thus, all fiat currencies are depreciating. The biggest story and market volatility of the year stem from the weakest fiat currencies experiencing the largest declines, while the strongest/hardest currencies see the largest gains. The most outstanding major investment last year was going long on gold (with a 65% return in dollars), which outperformed the S&P 500 index (with an 18% dollar return) by as much as 47 percentage points. In other words, measured in gold currency, the S&P index actually fell by 28%.

Let’s remember some key principles related to the current situation:

• When a country's currency depreciates, it makes things priced in that currency appear to be rising. In other words, viewing investment returns through the lens of a weak currency makes them seem stronger than they actually are. In this case, the S&P index returned 18% to dollar investors, 17% to yen investors, 13% to yuan investors, but only 4% to euro investors, 3% to Swiss franc investors, and a return of -28% to gold standard investors.
• Changes in currency are crucial for wealth transfer and economic direction. When a currency depreciates, it reduces a person's wealth and purchasing power, making their goods and services cheaper in others' currencies while making others' goods and services more expensive in their own currency. In this way, it affects inflation rates and trade relations, although this impact has a lag.
• Whether you have hedged against currency risk is very critical. If you haven't and don't want to express a view on currency, what should you do? You should always hedge into the currency combination that minimizes your risk and make tactical adjustments when you believe you can do well. I will explain how I operate later.

Regarding bonds (i.e., debt assets): because bonds are promises to deliver currency, when the value of currency declines, even if the nominal price rises, its real value decreases. Last year, the 10-year U.S. Treasury bond had a return of 9% in dollars (about half from yield and half from price), 9% in yen, 5% in yuan, but -4% in both euros and Swiss francs, and -34% in gold—while cash was an even worse investment.

You can understand why foreign investors dislike U.S. dollar bonds and cash (unless they are currency-hedged).

So far, the imbalance in bond supply and demand is not a serious issue, but there will be a large amount of debt (nearly $10 trillion) that needs to be rolled over in the future. Meanwhile, the Federal Reserve seems inclined to lower interest rates to suppress real rates. Therefore, debt assets lack attractiveness, especially on the long end of the curve, and a further steepening of the yield curve seems inevitable, but I doubt whether the Fed's easing will reach the levels currently reflected in pricing.

2. U.S. Stocks Significantly Underperforming Non-U.S. Stock Markets and Gold

As mentioned earlier, while U.S. stocks performed strongly in dollar terms, they lagged significantly in strong currencies and underperformed stocks from other countries. Clearly, investors prefer to hold non-U.S. stocks and non-U.S. bonds over U.S. assets.

Specifically, European stock markets outperformed U.S. stocks by 23%, Chinese stocks by 21%, British stocks by 19%, and Japanese stocks by 10%. Emerging market stocks performed even better overall, with a return of 34%, emerging market dollar bonds returning 14%, while emerging market local currency bonds (in dollar terms) had an overall return of 18%. In other words, there is a significant flow of wealth and value transfer from the U.S. to abroad, which may lead to more rebalancing and diversified allocations.

Regarding last year's U.S. stocks, the strong results were attributed to earnings growth and P/E (price-to-earnings) expansion.

Specifically, earnings grew by 12% in dollar terms, P/E expanded by about 5%, plus about 1% in dividends, resulting in a total return of approximately 18% for the S&P. The "Seven Giants of Technology," which account for about one-third of market capitalization, saw earnings growth of 22% in 2025, while the remaining 493 stocks also achieved earnings growth of 9%.

In earnings growth, 57% was attributed to sales growth (which grew by 7%), and 43% was attributed to margin improvement (which grew by 5.3%). A significant portion of margin improvement may be due to technological efficiency, but it is difficult to conclude definitively due to data limitations.

In any case, the improvement in earnings is primarily because the "economic pie" has grown, with capitalists capturing most of the gains while workers share relatively little. Monitoring margins in the future is crucial, as the market currently expects this growth to continue, while leftist political forces are attempting to reclaim a larger share.

3. Valuation and Future Expectations

While the past is easy to know and the future difficult to predict, if we understand the causal relationships, the current situation can help us anticipate the future. Currently, P/E is at a high level and credit spreads are extremely low, making valuations appear overly stretched. History shows that this foreshadows lower future stock market returns. Based on current yield and productivity levels, my long-term expected return on stocks is only 4.7% (at a historical low percentile), which is very low compared to a 4.9% bond yield, resulting in an extremely low equity risk premium.

This means that there is not much return left to squeeze out from risk premiums, credit spreads, and liquidity premiums. If currency depreciation leads to increased supply-demand pressure and thus rising interest rates, it will have a huge negative effect on credit and stock markets.

The Federal Reserve's policy and productivity growth are two major uncertainties. The new Federal Reserve Chair and committee seem inclined to suppress nominal and real interest rates, which will support prices and inflate bubbles. Productivity will improve in 2026, but how much of that can be converted into profits rather than used for tax increases or wage expenditures (a classic left-right issue) remains uncertain.

In 2025, the Federal Reserve's interest rate cuts and credit easing lowered discount rates, supporting assets like stocks and gold. Now these markets are no longer cheap. Notably, these re-inflation measures have not benefited illiquid markets such as venture capital (VC), private equity (PE), and real estate. If the debts of these entities are forced to be financed at higher interest rates, liquidity pressures will lead to significant declines in these assets relative to liquid assets.

4. Transformation of Political Order

In 2025, politics played a central role in driving markets:

• Domestic policies of the Trump administration: A leveraged bet on revitalizing American manufacturing and AI technology.
• Foreign policy: Scared off some foreign investors, with concerns over sanctions and conflicts supporting investment diversification and gold purchases.
• Wealth gap: The top 10% of capitalists own more stocks and have faster income growth; they do not see inflation as a problem, while the bottom 60% feel overwhelmed by it.

The "currency value/purchasing power issue" will become the number one political topic next year, which may lead to the Republicans losing the House and trigger chaos in 2027. On January 1, Zohran Mamdani, Bernie Sanders, and AOC united under the banner of "Democratic Socialism," signaling a battle over wealth and money.

5. Global Order and Technology

In 2025, the global order clearly shifted from multilateralism to unilateralism (might makes right). This led to increased military spending, expanded debt, intensified protectionism, and heightened de-globalization. Demand for gold strengthened, while demand for U.S. debt and dollar assets decreased.

In terms of technology, the AI wave is currently in the early stages of a bubble. I will soon release my bubble indicator report.

Conclusion

In summary, I believe that debt/currency/market/economic power, domestic political power, geopolitical power (military spending), natural forces (climate), and new technological power (AI) will continue to be the main driving forces reshaping the global landscape. These forces will generally follow the "Big Cycle" template I outlined in my book.

Regarding portfolio positioning, I do not want to be your investment advisor, but I hope to help you invest better. The most important thing is to have the ability to make independent decisions. You can infer the direction of my positions from my logic. If you want to learn how to do better, I recommend the "Dalio Market Principles" course offered by the Wealth Management Institute (WMI) in Singapore.

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