Ray Dalio, founder of Bridgewater Associates, the world’s largest hedge fund firm, believes that generative artificial intelligence could be the “greatest invention in history” and will revolutionise the world, but the progress it unleashes may come down to “how we are with each other”.
Technological change is the biggest determinant of economic cycles, according to Mr Dalio, who frames global macro developments in five big drivers. As a global macro investor for 50 years, he studies history to understand developments in a cyclical way.
In an interview with The National during Abu Dhabi Finance Week, Mr Dalio explained: “I studied the 1930s and the Great Depression and that allowed me to anticipate the 2008 financial crisis and do well, when others had some trouble”.
Those five big drivers include the level of debt in an economy, the forces of internal order and disorder in a country, as well as great power conflicts when one country competes with another, especially as now the US is “no longer the dominant power”. He lists the fourth big driver as the costs of climate change.
However, Mr Dalio sees that “through all history, the biggest force, most powerful force is the evolution in man's learning, particularly of technologies, the invention of new technologies and ways of operating. Certainly that's the case now with AI and other technology developments that are going to change how we're operating”.
Mr Dalio keeps a close eye on US debt and with the incoming administration of Donald Trump, interest rates will be a big point of discussion. Mr Trump has been critical of the Federal Reserve, especially its chairman Jerome Powell, who he accused of not cutting interest rates fast enough. Mr Dalio agrees.
He acknowledged that “when there's a lot of debt relative to GDP (gross domestic product), it's a difficult balancing act for central banks because they have to be careful to keep interest rates high enough that they're good for the creditor without being so high that they're bad for the debtor. And that balancing act becomes progressively difficult”.
“I don't think the Fed handled it in the right way … they were too stimulative”, he said, especially in having “two big stimulations” during the pandemic and at the start of the Joe Biden administration, which led to “the inflation we’ve experienced”.
Trump policies
Mr Dalio expects that “the Trump administration is going to follow a policy very similar to the policy that existed in the right-of-centre governments in the 1930s. They're going to become protectionist. They're going to raise tariffs a lot. And that tariff will be taxes, essentially”. The anticipated Trump policies will inject income into the US economy. Mr Dalio adds “that protectionism is to try to build up the American industry, not just for an economic reason, but because there's a sense of self-sufficiency is needed in case we get into a war”. Special attention will be given to microchips and electricity.
With these changes, Mr Dalio believes that capitalism in the US will change. “Not capitalism as we ordinarily think of it. We think of capitalism as a free market. This is much more top down and directed”, including with additional military spending. That means part of “the changing of the world order where the US is no longer taking care of the world order as it designed it, but it is instead taking care of itself, America”.
Mr Dalio has been quoted several times as being conservative when it comes to cryptocurrencies, and yet with Bitcoin reaching $100,000 recently, there is increasing interest in it. Responding to a question on cryptocurrencies, Mr Dalio stressed “my view on cryptos remain pretty much the same”, while acknowledging he owns some cryptocurrencies, including Bitcoin.
He stressed that investors should ideally have both “the old man's gold and then the younger man's crypto”, but cautioned that no one should be “so fanatical that you're just having one and not the other”. However, he clearly prefers gold to crypto, explaining “that gold is the only asset you can own that's not somebody else's liability, meaning you have to depend on somebody else”, in addition to being the third-largest reserve currency globally.
Mr Dalio is known for his insights for future developments and one of the main future trends he is visibly excited about is AI. He has used AI in investment decision-making over the past 25 years.
“I've been involved in different ways of AI for decision-making for a very, very long time, and I view this as the greatest progression of that”. However, that decision-making around AI is rooted in principles that Mr Dalio “converted into algorithms to make decision-making in the computer … it’s been key to my success".
He says that Generative AI “is the greatest invention in all history … it's going to be a tremendously advantageous tool”. His advice is to understand AI in its many dimensions. “In the next three years to five years you're going to encounter a new reality, so you must understand it.”
However, he is aware of the challenges of the evolving technology. “AI, first of all, will replace a lot of people” and this is an issue that needs tackling, he says.
“It's going to be a societal issue and then, in addition to that, it's a vehicle for war and we are at war”.
He warned that there have to be efforts to consider “how that's going to be managed - it could be used as a weapon, or it could be used to raise living standards”.
Wealth gaps
As for the dynamic of internal conflicts that effect national and global economic cycles, wealth gaps are particularly startling. In the US, according to St Louis Fed’s Institute for Economic Equity data, as of the second quarter of 2024, the top 10 per cent of households held 67 per cent of total household wealth in the country. The bottom 50 per cent of households held only 2.5 per cent of total US household wealth.
Mr Dalio recognises this as an issue, but he says “the wealth and values gaps” are creating a “toxic combination, particularly if you have a debt problem”.
In the US, that is reflected in the “Maga versus Woke values gaps … you're seeing both the wealth gaps and the values gaps … compromise is not possible”. Tackling that toxic combination requires “elements of making a good place”, which Mr Dalio says includes “if you earn more than you spend and you stay out of the war and you're good with each other, you create that environment, you have a paradise”.
Mr Dalio, who has been travelling to the UAE for over 30 years sees this dynamic in the UAE which he said “is a renaissance state in history … it’s a modern-day Switzerland”.
He unpacks these descriptions by saying it “has that element of neutrality, it’s a more vibrant Switzerland”. A key component is being a country “creating an environment where you have good education, civility, productivity, and all of that, and it's a crossroads for the world … [The UAE] is an alternative place to be in a world of chaos”.
The Emirates seeks to remain competitive at a time of great change and Mr Dalio sees the secret to that remains in “how to strike a balance”. He said the UAE Founding Father Sheikh Zayed bin Sultan Al Nahyan “always brought wisdom, and what his next generation brings is the wisdom, of how to strike balance. There's no extremism here, there's balance”.
