Today’s market and political conditions mirror those of the late 1930s when World War II was beginning, according to Bridgewater founder Ray Dalio.
In his latest LinkedIn missive, Dalio laid out the similarities between today and the period ahead of World War II while weighing in on what he thinks President Donald Trump may do next when it comes to the China trade war.
According to Dalio, “three big forces” are now converging that haven’t since the late 1930s: rising wealth and political inequality, central banks’ limited ability to stimulate the economy, and a rising power – China – challenging the United States.
The wealth gap between the wealthy and the poor, and the political gap between populists on the right and on the left, are at their largest since the 1930s, according to Dalio. This has created an environment where increasing conflict has reduced the “respect for both law and the art of compromise by our political leaders,” and has increased the use of emergency powers by leaders like the U.S. president.
At the same time, central banks have a limited ability to shore up the economy in the event of a downturn. According to Dalio, the government could either substantially increase taxes on corporations and the wealthy, or the central bank could print money and buy debts that come from deficits.
This typically results in investor flight, followed by capital controls, according to Dalio. But if capital flows to China are restricted, it’s unclear what could happen next, he wrote.
This is all occurring as China and the United States are engaged in a trade war that, as Dalio noted, brings to mind the Smoot-Hawley Tariffs of 1930. Those tariffs, which were designed to protect American businesses and farmers during the Great Depression, backfired.
China’s growth has been exponential, yet quiet, Dalio notes. “Countries are increasingly having to choose whether they are aligned with the United States or China,” he wrote. “When presented with this choice, they typically answer it based on both economic and military calculations.”
According to Dalio, when pressed, folks generally choose China when they’re concerned about economic issues, and the United States when they’re dealing with military issues.
To cope with these market conditions, Dalio said the president could tap into his emergency powers to unilaterally cut off capital flows to China, freeze payments on debts owed to China, or inhibit non-American financial transactions with China through sanctions, among other things.
“Just the realization that these moves can be used has important implications for capital flows,” Dalio wrote.
[II Deep Dive: Bruce Zimmerman Named CIO of Ray Dalio’s Family Office]
As for what’s next, in Dalio’s eyes? Once the 2020 elections take place, “the real picture will emerge,” he wrote.
“Time is on China’s side as it is improving at a faster rate than the United States,” Dalio observed, adding that the big question is whether a war will break out, or if the world will peacefully evolve toward two spheres of influence,” with China in the east and United States in the west.
