Bridgewater chiefs warn US assets are in danger — as founder Ray Dalio says the trade imbalance with China must end

• Bridgewater's investing chiefs say a changing world is threatening markets and portfolios.
• The hedge fund trio sees "exceptional risks" to US assets and a rising chance of recession.
• Founder Ray Dalio said an "unsustainable imbalance" in the US-China relationship must be resolved.

The world's biggest hedge fund has sounded the alarm on a seismic global shift, warning investors they're dangerously exposed and must adapt to the new reality.

Bridgewater Associates' three co-chief investors — Bob Prince, Greg Jensen, and Karen Karniol-Tambour — issued the dramatic caution in their latest letter to clients and included an excerpt in a company newsletter this week.

The trio said the transition to a "new macroeconomic and geopolitical paradigm" is roiling markets, reshaping capital flows, and threatening the status quo.

The world is moving from the post-war era of globalization and free trade to one of "modern mercantilism," they said. The Trump administration's efforts to disrupt multinationals and upturn trade and security agreements as part of its "America First" agenda are accelerating the change, they continued.

Prince, Jensen, and Karniol-Tambour predicted governments would increasingly intervene in their economies, using trade, foreign, and industrial policy to support companies and sectors that fit their strategic mission to "increase wealth, strength, and self-sufficiency."

The shift poses an "urgent threat" to markets and investors' portfolios, they said. "Today's mix of global assets reflects the winners from the past paradigm, which were largely assets like US equities that benefited from rising growth, a proactive Fed, and US outperformance."

The three investment gurus cautioned that many portfolios appear vulnerable to weaker growth, reduced central bank flexibility, stocks underperforming, and US assets trailing foreign rivals.

"We expect a policy-induced slowdown, with rising probability of a recession," they said, suggesting the Federal Reserve won't be able to cut interest rates as freely as some other central banks given the risk of resurgent inflation. They also flagged that the stock market is still pricing in strong earnings for companies even though they're "under threat."

"We see exceptional risks to US assets, which are dependent on foreign inflows," they said, nodding to the vast amount of overseas money invested in American stocks and bonds.

Bridgewater's bosses pointed to AI as another driver of global change, but they said it's "too soon to say who the winners will be and if they will hold on to their winnings."

They drew a parallel to the early stages of the dot-com boom. While the early promises of the internet were eventually realized, US stocks underperformed Treasurys, gold, and emerging market equities in the 15 years after 1998, they said. They added that most of the dominant tech stocks of that period trailed the broader market, too.

"Beautiful rebalancing"

Ray Dalio, Bridgewater's billionaire founder and the official mentor to its three investment heads, has been heralding a change in the world order for some time.

In a LinkedIn post on Thursday, Dalio said he dreamed of US-China trade negotiations leading to a "beautiful rebalancing."

He diagnosed the problem as the US being overdependent on cheap manufactured goods from countries including China, which had eroded its manufacturing base and hurt a large segment of its population. China, meanwhile, had become too reliant on selling to and investing in the US and other countries.

"This is an unsustainable imbalance that one way or another — i.e., in a coordinated, well-managed way or in a crash — must come to an end," Dalio said.

The US needed to cut the deficit, boost manufacturing, reduce consumption, and lower its debt burden to rectify the imbalance — and he hoped it could work with China to do so.