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  • Writer's pictureMarion Macleod

Learning the lessons of history - the 'Big Cycle' of human behaviour

The Financial Review’s James Thomson, (Chanticleer) on 2nd Nov. 2022 profiled the hedge fund veteran, turned amateur historian, Ray Dalio’s views on the current financial and political horizon. Dalio sees military conflict on the horizon, but his broader message for the market is one of instability and volatility.

Dalio profiles a ‘Big Cycle’ roadmap, evidenced from history. Dalio’s “Big Cycle” is based on his study of historic market cycles, primarily focused on the last couple of centuries but also looking back across a longer sweep of history.

  1. stage one follows a big war, when a new world order is formed, new leadership consolidates power, debts are forgiven or restructured and wealth gaps are closed.

  2. stage two is the consolidation of this new order

  3. stage three is peace and prosperity. .. but then the trouble starts ...

  4. stage four sees an excess in spending and a build up of debt that leads to wealth gaps widening, while ...

  5. stage five sees economic crises create internal political divisions and crises between countries - this all leads to ...

  6. stage six when there are wars – this is the point we are entering according to Dalio – and whilst he doesn’t believe war is invevitable - he considers the highest risk point being in 2025-26 - at which point the cycle will start again.

Dalio’s Big Cycle includes three smaller cycles ....

  • The first cycle is “the long term debt-money-economic cycle”. Trouble starts here when “debt assets and debt liabilities have both risen to such high levels that the interest rates that are high enough to incentivise creditors to hold them are intolerably high for debtors to meet their debt payment obligations”, This is where Dalio thinks we are heading right now.

  • The second cycle is around internal politics, and the shift to populism that is clearly underway around the world. “Populists are people who will fight to win at all costs”, Dalio says.

  • The third cycle within the big cycle is disorder between countries, - clearly on display now in Ukraine, North Korea and between the US and China.

Dalio says economic conflicts typically come before military ones, Where this leads is anyone’s guess. However, there is evidence that the world has resolved similar periods of tension without major war.

We all should prepare for volatility and think about how we prepare for the rough seas ahead.

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