CIO Insights: The Changing World Order

Hi everyone
The question I get asked the most these days is when I think the current market turmoil will end. Nearly every day I see stocks registering double digit percentage moves. In the 30+ years I’ve been involved in equity markets it’s hard to recall seeing so much volatility continue for such a prolonged period of time, even if absolute volatility has been higher on particular occasions. The short answer I give people is “How can anyone really know?”
At our last in-person Sohn Hearts & Minds Conference in 2019, we were lucky enough to have Ray Dalio for a fireside conversation. For those of you who don’t know, Ray is the Founder and Co-Chief Investment Officer of Bridgewater Associates, the largest hedge fund in the world. I believe that he is one of the best macroeconomic investors of all time. I’ve been following him on LinkedIn and social media for years. You may have seen some of his most recent comments in the local financial press this week, where he was asked his thoughts on inflation. I love how Ray talks – he said that it’s “‘both naïve and inconsistent’ to think that the US central bank can just lift rates to control inflation and ‘everything will be good’. The hedge fund billionaire said ‘supposed experts’ assessing moves in financial markets ‘is like listening to nails scratch against a chalkboard because they are typically saying incorrect things in an erudite rather than common sense way.’”
Pretty interesting, especially as most of the macroeconomic commentary coming out of the US Federal Reserve is about how they need to 'tame rampant inflation”, by raising interest rates, despite the risk of recession. Ray believes that the consequence of raising rates aggressively will be stagflation, and not lower inflation.
So, what is actually going on in the market right now?
None of us have experienced this type of investment landscape in our lifetimes, which is perhaps key to why so many people are confused, scared, (insert appropriate word for yourself). The first stock market opened in 1612 in Amsterdam, and Ray has studied the last 500 years (yes, you read that correctly) to see if what is going on today has actually happened before.
And it has.
Many times, in fact.
If you’re interested in markets, and if you are reading this, I suspect you are, then I urge you to take some time on this. I promise that you’ll have a far better understanding of what is transpiring. 

Below are three ways to learn more; a short read, a video and a book recommendation.


5 minute read: Ray Dalio's LinkedIn post from 5 Jan 2022. I have included an excerpt from his post below.
According to Ray,

The world order is changing in important ways that have happened many times before in history, though not in our lifetimes. How the world order is changing has created the paradigm that we are in. By “paradigm,” I mean the environment that we are in. Paradigms typically last about 10 years, with occasional big corrections within them. They are driven by a persistent set of conditions that takes those conditions in a swing from one extreme to an opposite extreme. Because of this, each paradigm is more likely to be opposite than similar to the one before it. For example, the Roaring ’20s were followed by the depressionary 1930s, and the inflationary 1970s were followed by the disinflationary 1980s. The assets and liabilities that you would most like to have, and those that you would most like to avoid, change with the paradigm that exists at the time. For example, in the Roaring ’20s you’d want to own stocks and avoid bonds, while in the depressionary 1930s it would be the opposite; in the inflationary 1970s you’d want to own hard assets like gold and avoid bonds, while in the disinflationary 1980s you’d want to own financial assets and avoid hard assets.

For reasons explained in this report, I believe the current paradigm is a classic one that is characterized by the leading empire (the US) 1) spending a lot more money than it is earning and printing and taxing a lot, 2) having large wealth, values, and political gaps that are leading to significant internal conflict, and 3) being in decline relative to an emerging great power (China). The last time we saw this confluence of events was in the 1930-45 period, though the 1970-80 period was also analogous financially. In this piece, I will explain my reasoning and show charts that display these things happening.

What should one do in this new paradigm? This paradigm is leading to a big shift in wealth and power. Naturally, as a global macroeconomic investor, the economic and market behaviours in this paradigm are top of mind. I think one should consider minimizing one’s ownership of cash and bonds in dollars, euros, and yen (and/or borrow in these) and putting funds into a highly diversified portfolio of assets, including stocks and inflation-hedge assets, especially in countries with healthy finances and well-educated and civil populations that have internal order. These things are especially important in this paradigm. In brief, I think one’s assets and liabilities should be well-balanced with minimum exposures to dollar, euro, and yen currency and debt assets. During this time, I also think it will pay to be short cash (i.e., borrow cash). Of course, there will be corrections during the several years in the paradigm—for example, in central bank tightening’s. But I don’t see any sustained period in which the government will likely allow cash returns to be better than the returns of a well-diversified, non-cash portfolio (e.g., All Weather) geared to the level of risk you’re comfortable with because that would cause terrible problems. These circumstances also have big geopolitical implications.


43-minute video: watch here
I strongly recommend watching this video narrated by Ray, where he has simplified some quite complex concepts and explained 500 years of history in 43 minutes.


Book recommendation: Principles for Dealing with The Changing World Order (obviously written by Ray).


Like I said earlier, take the time to learn and understand markets, especially when the best in the business offer their wisdom for free.
Next week I get to do one of the best things in my job – see first-hand the difference our donations are making to our medical research beneficiaries. I can’t wait to head back to Westmead Hospital to see how the Paediatric Intensive Care Unit and the Cerebral Palsy Alliance Research Foundation are progressing with the projects HM1 is supporting.


Stay safe

Rory Lucas
Chief Investment Officer
Hearts and Minds Investments Limited

Reminder: these are simply my general views and should not be taken as investment advice


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DISCLAIMER: this communication has been prepared by Hearts and Minds Investments Limited (ABN 61 628 753 220) and may contain general information relating to HM1 securities. The general information should not be considered financial advice. HM1 is not licensed to provide financial product advice. The information does not consider the investment objectives, financial situation, or particular needs of any individual. The information is current as at the date of preparation and is subject to change. HM1 does not guarantee repayment of capital or any rate of return on HM1 securities. An investment may achieve a lower-than-expected return and investors risk losing some, or all, of their principal investment.  Past performance is not a reliable indicator of future performance. This document may not be reproduced or copies circulated without prior authority from Hearts and Minds Investments Limited.


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