EDITOR NOTE: The crux of the article here is that geopolitical risk on both sides of the world--east and west--is putting our financial assets at risk. Simple. Even if Ray Dalio’s prediction that China’s GDP will surpass ours in the US is correct, there’s no benefit in investing in dollar-based or yuan-based assets. Hence, the “big guns” are turning to the only asset that can stand aside from any geopolitically-driven economic folly. Gold.
Before continuing on the subject of Bridgewater founder Ray Dalio, I'd like to talk about his investment strategy in second quarter because the fund poured more than US$400 million (HK$3.12 billion) into gold, almost mirroring Warren Buffett's investment strategy.
Buffett's Berkshire Hathaway only bought Barrick Gold stock in season two, which was worth more than US$500 million at closing prices in the second quarter.
Those of you who have been following Dalio's essays on LinkedIn will know he's put out two chapters, but there is a final chapter that is yet to be published, so it would not be fair to come to any conclusion just by reading the first two.
When some people saw the last chart in the second chapter which showed that China's gross domestic product will overtake America's, they felt that Dalio was off the mark in saying the United States has lost its status as the biggest economy, and that the US dollar's hegemony has ended. Because, if this were so, why did Dalio boost his holdings of gold instead of yuan or related investments, and why did Buffett do the same?
Though the final chapter is yet to be published, the first two have tens of thousands of words and you should carefully read all the evidence he and his team have collated, because the key problems he mentioned are the current state of the global economy and financial markets.
Geopolitical tensions today are similar to the situation before the Second World War and Dalio and Buffett's investments in gold also seem to be because of increasing global risk.
Two weeks ago I spoke on how US President Franklin D Roosevelt launched a number of policies after taking office in 1933, which included a series of large government spending funded mostly by a big increase in taxes and the Fed balance sheet, thus providing a lot of liquidity.
At the same time, Roosevelt came up with an employment plan, unemployment insurance and a social security policy. Meanwhile, he dramatically raised the top marginal income tax rate on individuals from 25 percent in 1930 to 75 percent in 1935 in an initiative known as the "Soak the Rich" tax. He did this despite strong opposition, as the wealthy and businesses were the most affected by it.
Roosevelt's actions stimulated the US stock market which surged more than 200 percent between March 1933 and 1936 and at the same time, the economy grew at an average real rate of 9 percent. The stock market peaked at the end of 1936 and the economy fell into recession from 1937 to 1938 mainly because of the Federal Reserve's monetary tightening.
Dalio believes Roosevelt's actions during a time of severe economic hardship - when there was a huge inequality in wealth - was to make bond values fall and to redistribute assets through higher taxes on the rich and increased money supply.
Things may be a little different today, of course, because at least the tax on the rich hasn't happened yet. However, the stock market has risen significantly because of the actions by the Fed and US government.
While I won't talk about whether history's repeating itself in the United States until next week, I must point out that in the 1930's there was some reallocation of assets in Germany as well, but in a different way, through forced confiscation. Only when we understand why all this was being done at that time - from America and Germany - can we analyze the present situation more effectively.
Originally posted on The Standard