Paradigm Shifts

Yesterday, Ray Dalio posted a piece on paradigm shifts and the evolving nature of market forces and human psychology. His opinions were interesting.

According to Dalio, most paradigms last roughly 10 years before they become overinflated and result in a psychological shifts to a new paradigm. As we have passed the decade mark of our current bull market, the tide looks to be changing.

Dalio argues that investors are dealing with diminishing returns because they have held stocks and other assets with equity-like returns. He believes the next paradigm shift will favor assets that are uncorrelated to the market and perform well when the value of money depreciates (Bitcoin?).

Dalio believes that many of the foundations of today’s bull market such as the growth of stock buybacks, M&A, and the rise of private equity and venture capital are a result of the cheap money and the historically-low borrowing levels we have experienced for the duration of the current cycle. While all of these factors have driven the market to record highs, it has hampered future returns and made cash less and less valuable.

Adding to this, the low borrowing levels have driven up corporate and government debt and pending liabilities such Medicare and Social Security payouts loom.

In Dalio’s eyes, it is not a question of when the market will correct, because that is imminent now. Rather it is a question of how will it recover once this happens. QE provided a parachute for the economy in 2008, but as central banks have exhausted every stimulant and fiscal policy takes ages to implement, even Dalio questions what measures will be taken to stop the bleeding.

I will not pretend to act like I can predict if we are at a critical point relating to paradigm shifts. For most of my adult life, the economy has done well, and I have never experienced a serious correction since being in the market. Once a correction does come, it immediately becomes a question of where to put my cash to work because as Dalio noted, holding cash is the same as losing money.

One of the attractive properties about Bitcoin to me is the fact that it is not correlated to the rest of the market. If Dalio’s predictions come true, it will be interesting to see how cash is reallocated and how much of it is transferred to buy Bitcoin as a safe haven.