Dalio's ultimate reflection in 2025: "Purchasing power of money" will become the number one political issue in 2026, and AI is in the early stages of a bubble.

Written by: Ray Dalio, Founder of Bridgewater Associates

Compiled and edited by: BitpushNews

As a systematic global macro investor, it's natural for me to reflect on the underlying mechanisms of events, particularly market performance, as we bid farewell to 2025. This is the main theme of today's reflection.

While the facts and returns are undeniable, my perspective differs from most people's.

While most consider U.S. stocks, especially U.S. AI stocks, to be the best investment of 2025 and the central story of the year, the undeniable fact is that the most substantial returns (and the real headlines) come from: 1) changes in currency value (primarily the U.S. dollar, other fiat currencies, and gold); and 2) the significant underperformance of U.S. stocks compared to non-U.S. stocks and gold (gold being the best-performing major market). This is primarily driven by fiscal and monetary stimulus, productivity gains, and a massive shift of asset allocation away from the U.S. market.

In these reflections, I want to take a step back and examine how these monetary/debt/market/economic dynamics operated last year, and briefly touch upon how the other four major drivers—politics, geopolitics, natural behavior, and technology—influence the global macroeconomic landscape within the context of an evolving “Big Cycle.”

1. Changes in the value of money

Regarding currency values: The US dollar fell 0.3% against the Japanese yen, 4% against the Chinese yuan, 12% against the euro, 13% against the Swiss franc, and plummeted 39% against gold (gold is the second largest reserve currency and the only major non-credit currency).

Therefore, all fiat currencies depreciated. The biggest story and market volatility of the year stemmed from the weakest fiat currencies experiencing the largest declines, while the strongest/toughest currencies saw the largest gains. The most outstanding major investment of the year was going long on gold (65% return in USD), which outperformed the S&P 500 (18% return in USD) by a whopping 47 percentage points. Or in other words, the S&P 500 actually fell by 28% when measured in gold.

Let us remember some key principles relevant to the current situation:

When a domestic currency depreciates, things priced in that currency appear to appreciate. In other words, investment returns viewed through the lens of a weak currency appear stronger than they actually are. In this scenario, the S&P 500 returned 18% to dollar investors, 17% to yen investors, and 13% to yuan investors, but only 4% to euro investors, 3% to Swiss franc investors, and -28% to gold standard investors.

Currency fluctuations are crucial to wealth transfer and economic trends. When a currency depreciates, it reduces an individual's wealth and purchasing power, making their goods and services cheaper in other people's currencies and more expensive in their own. In this way, it affects inflation rates and trade relations, although these effects are often delayed.

Whether you've hedged your currencies is crucial. What if you haven't, and don't want to, express an opinion on currencies? You should always hedge to your least risky currency portfolio, making tactical adjustments as needed when you feel you're capable of doing well. I'll explain how I do this later.

Regarding bonds (i.e., debt assets): Because bonds represent a promise to deliver money, their real value decreases when the value of that money declines, even if the nominal price rises. Last year, the 10-year US Treasury yielded 9% in US dollars (roughly half from yield and half from price), 9% in Japanese yen, and 5% in Chinese yuan, but -4% in euros and Swiss francs, and -34% in gold—and cash was an even worse investment.

You can understand why foreign investors don't like dollar bonds and cash (unless they have hedged their currencies).

So far, the bond supply-demand imbalance is not a serious problem, but a large amount of debt (nearly $10 trillion) will need to be rolled over in the future. Meanwhile, the Federal Reserve seems inclined to cut interest rates to suppress real interest rates. Therefore, debt assets are unattractive, especially the long end of the yield curve, and a further steepening of the yield curve seems inevitable, but I doubt whether the Fed's easing will reach as much as currently priced in.

2. US stocks significantly underperformed non-US stock markets and gold.

As mentioned earlier, while US stocks have performed strongly when denominated in US dollars, they have underperformed significantly against strong currencies and have also lagged behind stocks in other countries. Clearly, investors prefer to hold non-US stocks and bonds rather than US assets.

Specifically, European equities outperformed US equities by 23%, Chinese equities by 21%, UK equities by 19%, and Japanese equities by 10%. Emerging market equities performed even better overall, with a return of 34%, emerging market dollar bonds by 14%, and emerging market local currency bonds (denominated in US dollars) by 18%. In other words, there is a significant outflow and value transfer of wealth from the US, which may lead to more rebalancing and diversification.

Last year's strong results for US stocks were attributed to earnings growth and an expansion of the price-to-earnings ratio (P/E).

Specifically, earnings grew by 12% in dollar terms, the P/E ratio expanded by about 5%, and with a dividend of about 1%, the S&P 500's total return was about 18%. The "Big Seven" tech giants, which account for about one-third of the market capitalization, saw earnings growth of 22% in 2025, while the remaining 493 stocks also saw earnings growth of 9%.

Of the profit growth, 57% was attributed to sales growth (7%) and 43% to improved profit margins (5.3%). A large portion of the improved profit margins may be attributable to technological efficiency, but this is difficult to conclude due to data limitations.

In any case, the improved profitability is mainly due to the larger "economic pie," with capitalists reaping the lion's share and workers receiving relatively less. Monitoring profit margins in the future is crucial, as the market currently expects this growth to continue, while left-wing political forces are attempting to reclaim a larger share.

3. Valuation and Future Expectations

While the past is easily known and the future difficult to predict, understanding cause and effect can help us anticipate the future. Currently, P/E ratios are high and credit spreads are extremely low, indicating overvaluation. History has shown that this foreshadows low future stock market returns. Based on current yields and productivity levels, my long-term expected equity return is only 4.7% (a historically low percentile), very low compared to the 4.9% bond yield, thus indicating an extremely low equity risk premium.

This means that little return can be squeezed out from risk premiums, credit spreads, and liquidity premiums. If currency devaluation leads to increased supply and demand pressures, which in turn causes interest rates to rise, it will have a huge negative impact on the credit and stock markets.

Federal Reserve policy and productivity growth are two major uncertainties. The new Fed chairman and committee appear inclined to keep nominal and real interest rates low, which would support prices and inflate bubbles. Productivity will increase in 2026, but how much of that will translate into profits rather than being used for tax increases or wage spending (the classic left-right dilemma) remains uncertain.

In 2025, the Federal Reserve's interest rate cuts and credit easing lowered the discount rate, supporting assets such as stocks and gold. These markets are no longer cheap. It's worth noting that these reflationary measures have not benefited less liquid markets such as venture capital (VC), private equity (PE), and real estate. If these entities are forced to finance their debt at higher interest rates, liquidity pressures will cause these assets to fall sharply relative to liquid assets.

4. Changes in the political order

In 2025, politics played a central role in driving markets:

The Trump administration's domestic policy was a leveraged bet on revitalizing American manufacturing and AI technology through capitalism.

Foreign policy: It scared away some foreign investors, while concerns about sanctions and conflict supported investment diversification and gold purchases.

Wealth disparity: The top 10% of capitalists own more stocks and have faster income growth; they do not see inflation as a problem, while the bottom 60% of the population feel overwhelmed by it.

The "currency value/purchasing power issue" will be the top political topic next year , potentially leading to the Republicans losing the House and triggering chaos in 2027. On January 1st, Zohran Mamdani, Bernie Sanders, and AOC joined forces under the banner of "democratic socialism," foreshadowing a battle for wealth and money.

5. Global Order and Technology

By 2025, the global order has clearly shifted from multilateralism to unilateralism (meritocracy). This has led to increased military spending, expanding debt, and intensified protectionism and deglobalization. Demand for gold will strengthen, while demand for US debt and dollar assets will decrease.

In terms of technology, the AI wave is currently in the early stages of a bubble. I will be releasing my bubble indicator report soon.

Summarize

In conclusion, I believe that debt/currency/market/economic power, domestic political power, geopolitical power (military spending), natural forces (climate), and new technological power (AI) will continue to be the main drivers of reshaping the global landscape. These forces will largely follow the "megacycle" template I outlined in the book.

Regarding portfolio positioning, I don't want to be your investment advisor, but I hope to help you invest better. The most important thing is to have the ability to make independent decisions. You can infer my position direction from my logic. If you want to learn how to do it better, I recommend the "Dalio Market Principles" course offered by the Wealth Management Institute of Singapore (WMI).