In a recent interview with MarketWatch, Ray Dalio, the billionaire founder of Bridgewater Associates, covered a wide range of topics. These include his thoughts on capitalism, China, the US dollar as the world reserve currency, and much more.
Dalio says the US is facing three distinct problems and is losing ground to China in many ways.
“There are three problems that are coming together,” said Dalio. “So it’s important to understand them individually and how they collectively make a bigger problem,” said Dalio.
“There is a money and credit cycle problem, a wealth and values gap problem, and an emerging great power challenging the existing dominant power problem. What’s going on is an economic downturn together with a large wealth gap and the rising power of China challenging the existing power of the United States.”
“It’s a fact that there has been a weakening of the competitive advantages of the United States over the last couple of decades. For example, the United States lost a lot of the education advantage relative to other countries, our share of world GDP is reduced, the wealth gap has increased which has contributed to our political and social polarization.”
Challenges the U.S. Face
To illustrate the challenges that the US faces as it attempts to stay ahead of China and remain a world power, Dalio says we need to look at Britain and how they eventually lost their position as the world’s reserve currency.
“If you look at British history, the development of rival countries led them to lose their competitive advantages. Their finances were bad because they had accumulated a lot of debt. So, after World War II those trends went against them. Then they had the Suez Canal incident and they were no longer a world power and the British pound is no longer a reserve currency. These diseases almost always play out the same way.”
“The United States’ relative position in the world, which was dominant in almost all these categories at the beginning of this world order in 1945, has declined and is exhibiting real signs that should raise worries. There’s a lot of baggage. The U.S. has a lot of debt, which is adding to the hurdles that typically drag an economy down, so in order to succeed, you have to do a pretty big debt restructuring. History shows what kind of a challenge that is.”
“The United States is a 75-year-old empire and it is exhibiting signs of decline. If you want to extend your life, there are clear things you can do, but it means doing things that you don’t want to do.”
Capitalism Needs Improvements
Dalio is a capitalist (he didn’t become a billionaire through handouts). However, he does acknowledge that the system needs to be improved so that everyone has a chance at financial freedom.
“What has been shown is that capitalism is a fabulous way of creating incentives and innovation and of allocating resources to create productivity. All successful countries have uses for it. For example, communist China has chosen capitalism, which has been essential to its growth.
“But capitalism also produces large wealth gaps that produce opportunity gaps, which threaten the system in the ways we are seeing now.
“We have to be in this together. The system needs to be reengineered to do this. But if we don’t do this engineering well, we’re going to spend in an unlimited way and deal with that by creating debt that won’t ever be paid back, and we will risk losing the reserve currency status of the dollar. If we get into that position — and we’re very close — things will get much worse because we are living on borrowed money that’s financing our consumption.”
On Dollar as the World Reserve Currency
Dalio says we could see the US lose reserve currency status as soon as the next five years.
“Within the next five years you could see a situation in which foreigners who have been lending money to the United States won’t want to, and the dollar would not be as readily accepted for making purchases in the world as it is now.”
“The United States doesn’t have a good income statement and balance sheet in dealing with the rest of the world. It is running a deficit to the rest of the world that is financed by borrowing money so that we are producing liabilities.”
There is uncertainty in the markets ahead of the November election. With this, Dalio says there are two steps investors can take to protect their wealth.
“First, worry as much about the value of your money as you worry about the value of your investments. The printing of money and the debt should make you aware of that. That’s why financial asset prices have gone up — stocks, gold — because of the debt and money creation. You don’t want to own the thing you think is safest — cash.”
“Second, know how to diversify well. That includes diversification of countries, currencies and assets, because wealth is not so much destroyed as it shifts. When something goes down, something else is going up so you have to look at all things on a relative basis. Diversify well and worry about the value of cash.”
Dollar Will Plunge 35%, Lose Status As World Reserve Currency
The US dollar is on the verge of a 35% collapse. It could also lose its status as the world’s reserve currency. This is according to Stephen Roach, a senior fellow at Yale University and the former chairman of Morgan Stanley Asia.
The reason, according to Roach, is the slow decoupling of the US from its trade partners. Along with this, another reason is the rise of China. He says China’s structural reform goes away from a manufacturing economy. Instead, it comes into a more service-oriented economy with a stronger consumer base. This could mean the days of the US dollar being the world’s reserve currency are numbered.
Merely suggesting that the US losing its reserve currency status is enough to bring out the critics. In an opinion piece he wrote for Bloomberg, Roach addresses those critics.
“Scorn has long been heaped on those daring to question the supremacy of the U.S. dollar,” he starts. “As the world’s dominant reserve currency…the counter-arguments were strong and highly political, basically boiling down to the so-called TINA defense – that when it comes to the dollar, ‘there is no alternative.'”
The Role of The Dollar
Roach says that even those that believe there is no alternative to the US dollar when it comes to international trade. The same goes for when the financial markets are being shortsighted.
“Alas, the TINA argument doesn’t stop there. The counter to my case for dollar weakness also rests on the reserve status of the U.S. currency as the linchpin of world financial markets. All trading nations, goes the argument, have to hold the dollar as the price for doing business in an increasingly integrated dollar-based world economy.
“Even so, the dollar’s share of official foreign-exchange reserves has declined from a little over 70% in 2000 to a little less than 60% today, according to the Bank for International Settlements. That downtrend could gather momentum in the years ahead, especially with the U.S. currently leading the charge in de-globalization and decoupling. With America’s share of reserves well in excess of its share in world GDP and trade, such a correction might well be inevitable in an increasingly fragmented, multi-polar world.”
The natural instinct for a weak dollar is to buy hard assets like gold. However, Roach says those markets are simply too small. They will not be able to absorb the tsunami of dollars looking for a new home.
“And although cryptocurrencies and gold should benefit from dollar weakness, these markets are too small to absorb major adjustments in world foreign-exchange markets where daily turnover runs around $6.6 trillion.”
Gold and cryptocurrencies are too small to benefit. Although, Roach says he does expect two currencies to strengthen as the dollar weakens: the Chinese renminbi and the euro.
Can It Be Replaced?
“On this basis, a forecast of a weaker dollar requires some combination of a strengthening in China’s renminbi and the euro…
“The China call is very contentious. From the trade war to the coronavirus war to the distinct possibility of a new Cold War, the negative case for China has never been stronger in the U.S. than it is today.”
“The call on the euro is also counterintuitive, especially for a broad consensus of congenital euro-skeptics like me… I now have to concede that reports of the euro’s imminent death have been greatly exaggerated. Time and again, especially over the past 10 years, Europe has risen to the occasion and avoided a catastrophic collapse of its seemingly dysfunctional currency union. From Mario Draghi’s 2012 promise to do “whatever it takes” to save the euro from a sovereign debt crisis to the recent Angela Merkel-Emmanuel Macron commitment to a Next Generation European Union Fund of 750 billion euros ($855 billion) to address the coronavirus crisis, the great European experiment has endured extraordinary adversity… there is unmistakable upside for the most unloved currency in the world.”
Roach ends his article by pointing out that no country has ever devalued its currency and enjoyed prolonged prosperity.
“If TINA is the dollar’s only hope, look out below… Yes, a weaker dollar would boost U.S. competitiveness, but only for a while. Notwithstanding the hubris of American exceptionalism, no leading nation has ever devalued its way to sustained prosperity.”
Three reasons Europe is struggling
Chase’s Chief Economist Anthony Chan says about the three reasons why he thinks Europe is struggling. 1.This environment is and has been the result of the flawed currency union that is acting a lot like a gold standard handcuffing Europe’s economies.2.The Euro remains an inherently flawed currency system that has no efficient rebalancing mechanism.3.Only measure that can efficiently resolve this is a form of fiscal transfers that turns Europe into a single currency system with a national treasury.
How to Invest in Currencies: Full Guide Part 1
• United States: National Futures Association (NFA) and Commodity Futures Trading Commission (CFTC)
• United Kingdom: Financial Services Authority (FSA)
• Australia: Australian Securities and Investment Commission (ASIC)
• Switzerland: Swiss Federal Banking Commission (SFBC)
• Germany: Bundesanstalt für Finanzdienstleistungsaufsicht (BaFIN)
• France: Autorité des Marchés Financiers (AMF)
Individual investors can decide to go it alone or seek the professional guidance of a broker as there are a lot of actively managed funds and indexed offerings in this sector. If you (or your broker) are willing to search hard enough there’s a good chance you’ll find an index which mimics what you may have wanted to do in an individual trade. Many investors like this aspect of risk management available due to the sheer size of the foreign exchange markets.
If you do indeed decide to invest in currencies on their own, you must be comfortable making informed decisions about the fundamentals of a particular national economy, currency strengths and weaknesses. If this sounds appetizing, then foreign-currency certificates of deposits or a forex trading account are both good options. Generally speaking, currencies rise in value when countries raise their interest rates and weaken when rates fall, but you’re going to need a lot more than that to be successful. Remember, with trades in the foreign exchange markets placed so frequently and at such high speeds, prices can fluctuate wildly. Here are some of the things you will either need to know or at least have a good idea of before placing a trade:
• You will need to be able to make reasonably accurate predictions about either, a given economy or the interplay between two or more economies. If you think the Eurozone will continue to weaken economically, then you’ll want to sell euros in exchange for a currency from a country with a robust economy. With that said, the Eurozone has preferred trading partners. If the European economy suffers, who else might suffer? Who might prosper? These are the sorts of questions you’ll constantly need to be asking yourself (and answering) in order to gain an edge.
• You will need to consider a country’s trading position. Do they have an abundance of goods in demand? What are their export numbers? Can they export enough of these goods to make enough money to support a trade advantage that strengthens the economy? And finally will these factors contribute to a rise in the value of the currency? Infrastructure and supply chains are a huge factor in answering some of these questions. Many less developed countries have far less stable currencies for this exact reason, there simply isn’t enough information available and no way for investors to make educated guesses without rampantly speculating.
• Politics. Even though politics, in general, have become more of an investment factor, nowhere is this more evident than in currency markets. Who wins an election, what their regulatory policies are, how those will affect economic growth, create or dissolve conflicts, change relationships with other countries and trade unions. These are just some of the political factors involved and the less transparent the economy, the more important the political factors.
• Get familiar with economic reports. Can you read and interpret reports on a country’s GDP, unemployment numbers, rates of inflation? All these and more have a direct impact on the value of a currency. You will also want to know about a country’s private sector. Sometimes a thriving private sector from an investor’s perspective may not signal great news for the currency. Mexican equities, for instance, saw huge gains in recent years while the national economy floundered.
• You’ll need to be able to calculate profits. Even if you decide on professional help, you should know what pip means. A pip measures the change in value between two currencies. One pip is equivalent to approximately 0.0001 of a change in value. If a GBP/USD trade moves from 1.685 to 1.687, your value has gone up by 10 pips. You can then multiply the number of pips across your account by the exchange rate to determine how much you have lost or gained.
One of the first things many individual investors do before entering the forex market is choose a broker. If you are opening an online forex brokerage account you can choose a personal or managed account with which you can either execute your own trades, or rely on your broker. If you decide to go this route there are a number of things for you to consider:
• Experience. It should go without saying but if a brokerage hasn’t been around for a decade or more you will most likely sacrifice a level of client care that other brokerages with more experience offer. On the flip side, more established firms will pay more attention to more established clients. If your account has $1,000 in it, you cannot expect it to get the same treatment that an account with $1,000,000 in it will receive. Try to find a balance.
• Low spreads. Spreads are measured by pips. Most forex brokers do not charge commission, instead they make their money with pips. Bottom line for brokers: lower spreads save you money.
• Credibility and legitimacy. Your broker should be a registered Futures Commission Merchant and brokerage should be regulated by a major oversight body. This means that your brokerage is open to government oversight and your broker will be more honest and transparent. With any market that has an OTC element, you definitely want to see as much licensing and documentation as possible from your broker. Some of the major financial oversight bodies include:
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