Ray Dalio is the founder, co-chief investment officer and co-chairman of Bridgewater Associates, one of the largest hedge funds in the world, with assets under management of over USD $125 billion.
He is a genuine heavy hitter in the asset management industry, and when he talks the markets tend to listen.
The reason I’m sharing this is because just over two weeks ago, on the 18th July 2019, Dalio published a widely read and quoted article on LinkedIn titled “Paradigm Shifts”, as well as an even more detailed research piece on the same subject.
“Paradigm Shifts” looks at the changing economic, political and financial market environments that have occurred over the past 100 years, with Dalio starting his research piece by sharing one of his famous Investment Principles, in this case noting how important it is to; “Identify the paradigm you’re in, examine if and how it is unsustainable, and visualize how the paradigm shift will transpire when that which is unsustainable stops.”
This is highly relevant for existing or prospective rare coloured diamond investors today, because Dalio believes we are now entering a new Paradigm Shift, which could last for a decade or longer.
It’s being driven by a number of factors, including the incredible amounts of money that have been printed in the 10 years since the Global Financial Crisis officially ended, the boom in asset prices we’ve seen since, and the rise in wealth inequality and social and political fragmentation that has occurred alongside that.
Dalio believes the coming Paradigm Shift will have profound implications for investors.
In the years to come, amongst other things, he expects to see:
- Large fiscal deficits as governments spend ever more money
- Debt monetization, as central banks simply print money to fund the government
- Currency depreciations
Throughout this period, Dalio expects “holders of debt will receive very low or negative nominal and real returns in currencies that are weakening, which will de facto be a wealth tax.”
In this environment, Dalio believes; “storing one’s money in cash and bonds will no longer be safe. Bonds are a claim on money and governments are likely to continue printing money to pay their debts with devalued money.”
That point dovetails in with one of our key messages at Australian Diamond Portfolio, which is that investors have a better chance to protect, as well as grow wealth, using rare coloured diamonds in the years ahead, rather than keeping their money in the bank.
If you invest in the former, you are buying a rare finite asset with a history of +10% per annum price gains, the supply of which is about to be cut by 90%.
If you stay in the latter, you are basically guaranteed to lose purchasing power, as the dollars you hold in your bank account are created out of thin air.
Dalio also goes on to note that; “Most people now believe the best “risky investments” will continue to be equity and equity-like investments” even though these assets; “have low real and nominal expected returns”.
This point gels with another key message at Australian Diamond Portfolio, namely that now is the time to diversify a portfolio, and make sure your investments aren’t fully concentrated in traditional financial assets like shares and bonds, or property.
Those assets have all gone up together over the past few decades, benefitting from lower interest rates, excessive debt creation and a handful of other tailwinds, the vast majority of which have now run their course.
The fact that all those asset classes went up together means they can all go down together too. Astute investors want to protect against that eventuality, which is one of the tailwinds driving demand for finite assets like coloured diamonds, due to the unique role they can play in a portfolio today.
A final observation that Dalio made that we think is worth sharing is his view that in the years ahead, we are going to see large tax increases on holders of wealth. This for us is another tick in the box for rare coloured diamonds.
As tangible physical items, rare coloured diamonds are likely to benefit in the years ahead as investors look to park money in discrete assets, which can be stored outside the financial system.
The fact that the market for rare coloured diamonds itself is so much smaller than the equity, bond and real estate markets that make up over 95% of most peoples’ wealth, is an added bonus, making the asset class less likely to attract the attention of regulators.
We do hope you’ve enjoyed this weeks “In the Loupe”. If you would like to read the Paradigm Shift article from LinkedIn that we have referenced, you can access it at here.
In the meantime, if there is anything we can do to help you when it comes to investing in rare coloured diamonds, please don’t hesitate to get in touch.