Ray Dalio says markets 'prefer capitalists' as potential 'extremist' clash looms

By William Watts

The U.S. is left with 'pretty disturbing domestic picture' after Biden's dismal debate, says billionaire investor

'As a result of all this, we are in the part of the cycle in which the choice is likely to be between extremists, so you will have to pick a side and fight for it, keep your head down, or flee. 'Ray Dalio, founder, Bridgewater Associates

Billionaire investor Ray Dalio, who has been warning of the potential for U.S. political polarization to devolve into a civil war, offered a pretty downbeat assessment of the setup for the November presidential election following President Biden's shaky performance in last week's debate with Donald Trump.

In an email to contacts late Friday, Dalio, founder of hedge fund Bridgewater Associates, said that following the debate, Democrats "will either lose the election or replace Biden as their candidate and, in the process of replacing Biden, will make clear whether the Democratic side will be of the soft or hard left."

Read: Gathered at Camp David, Biden's family urges him to stay in race, keep fighting

Dalio laid out the potential clash in what he acknowledged were "stark" terms: "While it is now clear that the Red Team/Republican side will consist of players from the hard right (i.e., dictatorial capitalists like fascists), we will soon find out if the Blue Team/Democrats will be from the soft left (socialists with liberal values) or hard left (closer to communists)."

Dalio said readers might "justifiably react" to "controversially stark words like 'fascists,' 'socialists,' and 'communists' to describe the alternatives," but argued that they were "relatively small exaggerations of what's happening and seeing things through this stark lens is better than seeing it in a more nuanced and blurred way."

Stocks saw a choppy session on Friday following the debate, but strategists and investors have noted a positive correlation between Trump's perceived prospects for victory and market gains.

See: Don't mix politics and portfolios: stock market reacts to presidential debate

The S&P 500 SPX rallied more than 14% over the first half of 2024, with gains fueled largely by megacap tech stocks that have proven the beneficiaries of enthusiasm over artificial intelligence. The Dow Jones Industrial Average DJIA has lagged, up less than 4% this year.

The relationship between markets and politics, meanwhile, is straightforward, Dalio wrote.

Markets "prefer capitalists - i.e. markets are all valued on the basis of the present value of their expected after-tax future cash flows, so whichever side supports these cash flows will support the markets," he said. "At this time, investors from all over the world are asking themselves 1) where can they be most confident that these cash flows will be best and 2) where are these capitalist values most strongly held and protected. This assessment will increasingly drive markets."

Dalio said the potential clash between hard right and hard left means, unfortunately, that those in the "bipartisan middle," who "respect civil rules of engagement and cooperate to create bipartisan leadership" are "pretty much out of the picture."

In the end, the U.S. is left "with a pretty disturbing domestic picture in a world in which the other four big forces (debt/money/economics, international great power conflict, acts of nature/climate, and new technologies) will likely also be disruptive to the existing world order," he said.

Check out: As jobs get harder to find, stocks could be in trouble after best first half to an election year in half-century

-William Watts

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07-01-24 0756ET

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