Ray Dalio: Reflections on the Trump Presidency, One Week after the ElectionVW Staff
Before and immediately after it was clear that Donald Trump had been elected, the markets (especially the stock market) had negative votes on the man (thinking he might be irresponsible), while after he got elected, the markets reacted to the man’s policies—so the correlations reversed. That shift was due to the changing complexion of market participants—those who drove the markets after his election were largely those who kept their powder dry until they saw the outcome and chose to process (and bet on) the policies themselves. As for us, we chose not to bet on whether or not he would be elected and/or whether or not he would be prudent because we didn’t have an edge in predicting these things. We try to improve our odds of being right by knowing when not to bet, which was the case.
Having said that, we want to be clear that we think that the man’s policies will have a big impact on the world. Over the last few days, we have seen very early indications of what a Trump presidency might be like via his progress with appointments and initiatives, as well as other feedback that we are getting from various sources, but clearly it is too early to be confident about any assessments. What follows are simply our preliminary impressions from these. We want to make clear that we are distinguishing between a) the sensibility of the ideology (e.g., one leader’s policies might be “conservative/right” while another’s might be “liberal/left”) and b) the capabilities of the people driving these policies. To clarify the distinction, one could have capable people driving conservative/right policies or one can have incapable people driving them, and the same is true for liberal/left policies. To understand where we are likely to be headed, we need to assess both. To be clear, we are more non-ideological and practical/mechanical because to us economies and markets work like machines and our job is simply to understand how the levers will be moved and what outcome the moving of them is likely to produce.
The Shift in Ideologies
As far as the ideology part of that assessment goes, we believe that we will have a profound president-led ideological shift that is of a magnitude, and in more ways than one, analogous to Ronald Reagan’s shift to the right. Of course, all analogies are also different, so I should be clearer. Donald Trump is moving forcefully to policies that put the stimulation of traditional domestic manufacturing above all else, that are far more pro-business, that are much more protectionist, etc. We won’t go down the litany of particulars about the directions, as they’re well known, discussed in my last Observations, and well conveyed in the recent big market moves. As a result, whereas the previous period was characterized by 1) increasing globalization, free trade, and global connectedness, 2) relatively innocuous fiscal policies, and 3) sluggish domestic growth, low inflation, and falling bond yields, the new period is more likely to be characterized by 1) decreasing globalization, free trade, and global connectedness, 2) aggressively stimulative fiscal policies, and 3) increased US growth, higher inflation, and rising bond yields. Of course, there will be other big shifts as well, such as pertaining to business profitability, environmental protection, foreign policies/alliances, etc. Once again, we won’t go into the whole litany of them, as they’re well known. However, the main point we’re trying to convey is that there is a good chance that we are at one of those major reversals that last a decade (like the 1970-71 shift from the 1960s period of non-inflationary growth to the 1970s decade of stagflation, or the 1980s shift to disinflationary strong growth). To be clear, we are not saying that the future will be like any of these mentioned prior periods; we are just saying that there’s a good chance that the economy/market will shift from what we have gotten used to and what we will experience over the next many years will be very different from that.
To give you a sense of this, the table below shows that a) these economic environments tend to go on for about a decade or so before reversing, b) market moves reflect these environments, and c) extended periods of movements in one direction (which lead to confidence and complacency) tend to lead to big moves in the opposite direction.