Dalio Flags US-China ‘Economic Warfare’ Among Top Global Risks

(Bloomberg) -- Ray Dalio said internal conflicts will be the “highlight of this year,” particularly on the issue of whether the US election result will be accepted by both parties.

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The policies from an administration run by Donald Trump would be very different from a Democratic one, Dalio said during a video speech at the Greenwich Economic Forum in Hong Kong Wednesday. However, on anti-China policies, there’s broad agreement between the two parties.

“There’s a great risk of economic sanctions that would be really terrible for the world,” said the billionaire investor and founder of Bridgewater Associates.

Dalio was building the case that the world is entering a period of greater risks, on the back of enormous debt creation, internal conflicts unprecedented in developed countries and great power clashes. Adding to those are natural disasters that would cost 8% of annual global gross domestic product to curb, pandemics and the greatest industrial revolution propelled by artificial intelligence. The uncertainties call for effective diversification in investments, across countries, currencies and asset classes.

“The power of diversification is greater than the power of even good decision-making,” he said.

Looking back in history, “economic warfare precedes military warfare,” he said. While most likely there will be no imminent form of military conflict, on the issue of Taiwan, the one-China policy “will not go on forever.” That’s triggered questions from international investors who are gauging whether they will suffer from actions taken by their own government.

“American investors investing in China could experience negative consequences from their governments,” said Dalio. “And there’s worry that from the Chinese side they could make it challenging.”

Those concerns are reflected in the falling stock market in Hong Kong and on the mainland earlier this year, Dalio said. Now Chinese assets are very attractively priced, he said, adding that Bridgewater has done very well operating there in the last five years, highlighting there are effective ways to invest in China.

While he will stay invested in the US and China — who he says are the only big players in revolutionary new technology — he called attention to neutral states such as those in Southeast Asia, India and even the Middle East. In a war, neutral countries often do better than even the winner. The key is to pay attention to “quantity” in diversification.

Dalio prefers equity assets over debt, as he worried about the latter asset class not being able to provide adequate returns. Central banks own a lot of those debts and are sitting on losses, he said, adding that they may have to monetize those losses, a classic late-cycle inflationary consequence. Gold should be in investors’ portfolio, as it is the third-largest reserve currency, just behind the greenback and the euro.

(Updates with comments on neutral states, debt assets from penultimate paragraph)

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