Ray Dalio warns the White House's latest plan to clamp down on Chinese investment could soon become a reality. Here's why he thinks 'all market participants need to worry.'
- Ray Dalio, the founder and cochief investment officer of Bridgewater Associates - the world's largest hedge fund - expresses his worry over the Trump administration's new plan to curb US investment in China.
- The hedge fund mogul likens this latest development to a period between 1935 and 1945 where a similar scenario resulted in the use of emergency powers and then, eventually, disaster.
- Dalio thinks that all market participants need to be concerned if today's advancements follow a similar path.
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The Trump administration's latest trade-war escalation involving China is focused on limiting US investors' capital flows into the emerging nation.
Possible courses of action include: the delisting of Chinese companies from US stock exchanges, restricting US investors exposure to Chinese investment through government pensions, and placing limits on Chinese companies included in indexes managed by the US.
This week, Ray Dalio - the founder and cochief investment officer of Bridgewater Associates - weighed in on the discussion by offering historical anecdotes, potential next steps, and reasons why this development shouldn't be taken lightly.
"Regarding the capital and currency wars, the ability of the US president to unilaterally cut off capital flows to China and also freeze payments on the debts owed to China and also use sanctions to inhibit non-American financial transactions with China must be considered as possibilities," Dalio stated in a recent LinkedIn post.
He continued: "That's why the proposed step of limiting American portfolio investments in China makes me both think about the implications of this step and wonder if it is an inching toward bigger moves."
To that end, Dalio thinks that President Trump may lean on the International Emergency Economic Powers Act in order further restrict the Chinese economy.
This act "empowers the president to unilaterally impose capital and FX controls, freeze assets and/or payments on assets (coupons), and force asset divestitures to 'deal with any unusual and extraordinary threat' from outside the US to 'the national security…economy of the United States,'" he said.
Parallels to the period from 1935 to 1945
To provide historical context for his argument, Dalio references a similar scenario that occurred in the late 1930's between the US and Japan. During this time period, the US froze Japanese assets and embargoed oil to Japan. The conflict eventually spiraled out of control.
Referencing this contested period from 1935 to 1945, Dalio thinks these most recent developments are akin to "the most logical steps in this classic dangerous journey."
A burgeoning gap between wealth and politics, a limited ability to stimulate by central banks, and a new world power that was on the rise were all present throughout the late 1930s and early 1940s.
Today, we're in that same spot. Income inequality and political extremes are present and growing, the Federal Reserve is running out of tools to stimulate the economy, and China is starting to challenge the US' status as the de facto world power.
Against that backdrop, it's easy to see why Dalio is worried about this latest development and how deepening escalations could potentially lead to a disaster.
"In any case, from not having to worry about such things in the past, now all market participants need to worry about them," he concluded.