Ray Dalio: The Great Cycle Schism, The Reshaping of Gold's Hegemony Amid the Dollar's Ebb

Original Author: Ray Dalio

Original Compilation: TechFlow

As a systematic global macro investor, as 2025 draws to a close, I can't help but reflect on how the markets operated this year. Today's reflection centers on this very topic.

While the facts and return data are indisputable, my perspective on the markets differs from that of most people. The majority believe that US stocks, particularly those related to artificial intelligence, were the best investment of 2025 and the year's biggest investment story.

However, it's undeniable that the largest returns (and thus the biggest story) of the year actually came from the following two aspects:

1) Changes in currency values (especially the US dollar, other fiat currencies, and gold);

2) The significant underperformance of US stocks compared to non-US equities and gold (gold being the best-performing major market).

This phenomenon was primarily driven by fiscal and monetary stimulus policies, productivity gains, and a substantial shift in asset allocation away from US markets.

In this review, I will analyze the dynamic relationships between currencies, debt, markets, and the economy over the past year from a broader macro perspective. I will also briefly explore how the four major forces—politics, geopolitics, natural events, and technology—are influencing the global macro landscape within the context of the evolving "Big Cycle."

First, let's talk about changes in currency values: In 2025, 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 39% against gold (as the second-largest reserve currency and the only major non-fiat currency).

In other words, all fiat currencies depreciated, and the year's biggest market story and volatility came from the weakest fiat currencies depreciating the most, while the strongest "hard assets" performed best. The best-performing major investment in 2025 was gold, with a USD-denominated return of 65%, 47 percentage points higher than the S&P 500's USD return (18%).

Put another way, from gold's perspective, the S&P 500 actually fell by 28%. Let's remember some important principles related to this:

1. When a domestic currency depreciates, asset prices measured in that currency appear to rise. In other words, investment returns look higher than they actually are from the perspective of a weakening currency.

In this case, the S&P 500's return was 18% for USD investors, 17% for yen investors, 13% for yuan investors, only 4% for euro investors, only 3% for Swiss franc investors, and -28% for gold investors.

2. Currency changes have an enormous impact on wealth transfer and economic operations.

When a domestic currency depreciates, it reduces domestic wealth and purchasing power, makes domestic goods and services cheaper in other currencies, and makes foreign goods and services more expensive in the domestic currency.

These changes affect inflation rates and who buys goods and services from whom, but this impact usually occurs with a lag.

3. Hedging currency risk is crucial.

What should you do if you have no foreign exchange position and don't want to bear currency risk?

You should always hedge to the currency basket with the least risk. If you believe you have the ability to make more accurate judgments, you can make tactical adjustments based on that.

However, I won't go into detail here about my specific approach.

4. As for bonds (i.e., debt assets), since bonds are essentially promises to deliver currency, their real value declines when the currency depreciates, even if their nominal price may rise.

In 2025, US 10-year Treasury bonds had a USD-denominated return of 9% (about half from yield, half from price appreciation), also 9% in yen terms, 5% in yuan terms, but -4% in euro and Swiss franc terms, and a staggering -34% in gold terms.

Cash performed even worse than bonds. This also explains why foreign investors are not keen on US dollar bonds and cash (unless currency-hedged).

Although the current supply-demand imbalance in the bond market is not yet a severe problem, nearly $10 trillion of debt will need to be refinanced in the future. Meanwhile, the Federal Reserve seems inclined to ease policy to lower real interest rates.

For these reasons, debt assets are less attractive, especially long-term bonds, and further steepening of the yield curve seems possible. However, I doubt whether the Fed's easing will be as substantial as currently priced in by the market.

Regarding the significant underperformance of US stocks compared to non-US stocks and gold (the best-performing major market in 2025), as mentioned, although US stocks performed strongly in USD terms, their performance was much weaker when measured in strong currencies and significantly lagged behind other countries' stock markets.

Clearly, investors preferred non-US stocks over US stocks; similarly, they also favored non-US bonds over US bonds or US dollar cash.

Specifically, European stocks outperformed US stocks by 23%, Chinese stocks by 21%, UK stocks by 19%, and Japanese stocks by 10%. Overall, emerging market equities performed even better, with a return of 34%, while emerging market USD debt returned 14%, and emerging market local currency debt overall returned 18% in USD terms.

In other words, capital flows, asset values, and wealth transfer shifted significantly from the US to non-US markets. This trend may lead to more asset rebalancing and diversification.

In 2025, the strong performance of US stocks was mainly driven by robust earnings growth and expansion of the price-to-earnings (P/E) ratio. Specifically, USD-denominated earnings growth reached 12%, the P/E ratio expanded by about 5%, and the dividend yield was about 1%, resulting in a total S&P 500 return of approximately 18%.

The "Magnificent 7" stocks in the S&P 500, accounting for one-third of the total market capitalization, achieved a 22% earnings growth rate in 2025. Contrary to popular belief, the other 493 stocks in the S&P 500 also delivered strong earnings growth of 9%, with the entire S&P 500's earnings growth rate at 12%.

This growth was primarily due to a 7% increase in sales and a 5.3% improvement in profit margins. Sales growth contributed 57% to earnings growth, while margin expansion contributed 43%. Part of the margin improvement appears related to gains in technological efficiency, though no data fully confirms this yet.

Regardless, the improvement in earnings is largely attributable to growth in economic output (sales) and the fact that corporations (and thus capitalists) captured most of the gains, while labor received relatively less.

It is crucial to monitor the distribution of margin growth in the future, as the market currently expects significant margin growth, while political left-wing forces are trying to secure a larger share of the economic "pie."

Although the past is easier to predict than the future, some current information can help us better foresee what's ahead if we understand the most important causal relationships.

For example, we know that current P/E multiples are high, credit spreads are low, and valuations appear stretched.

History suggests this typically foreshadows lower future stock returns. Based on my calculated expected returns from stocks and bonds, normal productivity growth, and the resulting profit growth, the long-term expected return for stocks is about 4.7% (below the historical 10th percentile). Compared to the current bond yield of about 4.9%, this level is low, indicating a low equity risk premium.

Furthermore, credit spreads narrowed to extremely low levels in 2025, which is positive for low-credit assets and equities, but also means these spreads are more likely to rise than fall further, which is negative for these assets.

Overall, there is little room left for returns from equity risk premiums, credit spreads, and liquidity premiums. In other words, if interest rates rise—which is possible due to increased supply-demand pressures from declining currency values (i.e., increased debt supply and deteriorating demand)—this would have a significantly negative impact on credit and equity markets, all else being equal.

Looking ahead, Federal Reserve policy and productivity growth are two key uncertainties. Currently, the new Fed Chair and the Federal Open Market Committee (FOMC) appear inclined to push down nominal and real interest rates, which would support asset prices and potentially fuel bubbles.

As for productivity growth, 2026 may see some improvement, but two questions remain uncertain: a) How much will productivity increase? b) How much of this increase will translate into corporate profits, stock prices, and capitalist gains, and how much will flow to labor and society through wage adjustments and taxes (a classic left-right political divide).

Consistent with the workings of the economic system, in 2025, the Federal Reserve lowered the discount rate by cutting interest rates and easing credit supply, thereby increasing the present value of future cash flows and reducing risk premiums. These changes collectively drove the aforementioned market performance. These policies supported asset prices, particularly longer-duration assets like stocks and gold, which perform well during economic reflation. Today, these markets are no longer cheap.

It's worth noting that these reflationary measures haven't helped illiquid markets like venture capital (VC), private equity (PE), and real estate much. These markets are facing some difficulties. If one believes the book valuations of VC and PE (though most don't), liquidity premiums are now very low; clearly, as debt borrowed by these entities needs refinancing at higher rates and liquidity pressures increase, liquidity premiums are likely to rise significantly, leading to declines in illiquid investments relative to liquid ones.

In short, due to massive fiscal and monetary reflation policies, the USD-denominated prices of almost all assets rose sharply, but these assets are now relatively expensive.

When observing market changes, one cannot ignore changes in the political order, especially in 2025. Markets and the economy influence politics, and politics, in turn, influences markets and the economy. Therefore, politics played a significant role in driving markets and the economy. Specifically for the US and globally:

a) The Trump administration's domestic economic policies were essentially a leveraged bet on capitalist forces, aimed at revitalizing US manufacturing and advancing US AI technology. These policies significantly influenced the aforementioned market trends;

b) Its foreign policy raised concerns and prompted retreat among some foreign investors. Fears of sanctions and conflict led investors to prefer portfolio diversification and gold purchases, which was also reflected in the markets;

c) Its policies exacerbated wealth and income inequality, as the "wealthy class" (i.e., the top 10% capitalists) own more stock wealth and have seen more significant income growth.

Due to the impact of c) above, the capitalist class in the top 10% does not see inflation as a problem, while the majority (i.e., the bottom 60%) feel overwhelmed by inflation. The issue of currency value (i.e., affordability) may become the top political issue next year, leading to Republican losses in the House in the midterm elections, setting the stage for chaos in 2027, and foreshadowing a contentious left-right political election in 2028.

Specifically, 2025 was the first year of Trump's four-year term, during which he controlled both the Senate and the House. Traditionally, this is the best time for a president to push through their policies.

Therefore, we saw the Trump administration's aggressive policies betting heavily on capitalism: including significantly stimulative fiscal policy, reduced regulation to increase the flow of money and capital, lowered barriers to production, increased tariffs to protect domestic producers and raise tax revenue, and proactive support for production in key industries.

Behind these moves is a shift, under Trump's leadership, from free-market capitalism to state-led capitalism. This policy shift reflects the government's attempt to reshape the economic landscape through more direct intervention.

Due to the workings of American democracy, President Trump had a relatively unimpeded two-year governing period in 2025, but this advantage could be significantly weakened in the 2026 midterm elections and even completely reversed in the 2028 presidential election. He may feel he doesn't have enough time to accomplish what he believes must be done.

Nowadays, it has become rare for a political party to remain in power for long periods, as parties struggle to deliver on their promises and meet voters' economic and social expectations. In fact, the feasibility of democratic decision-making is questionable when those in power cannot meet voters' expectations within limited terms. In developed countries, populist politicians from the left or right propose extreme policies attempting to achieve extreme improvements, often fail to deliver, and are eventually abandoned by voters. This frequent extreme volatility and power turnover leads to social instability, similar to what happened in less developed countries in the past.

Regardless, it is becoming increasingly clear that a large-scale confrontation between the far-right led by President Trump and the far-left is brewing.

On January 1st, Zohran Mamdani, Bernie Sanders, and Alexandria Ocasio-Cortez united at Mamdani's inauguration to support the "Democratic Socialist" movement against billionaires. This struggle over wealth and money is likely to have a profound impact on markets and the economy.

In 2025, the global order and geopolitical landscape underwent significant changes. The world shifted from multilateralism (operating by rules overseen by multilateral organizations) toward unilateralism (operating by power, with countries acting in their own self-interest).

This trend increased the threat of conflict and led most countries to increase military spending and borrowing to support it. Furthermore, this shift promoted the use of economic sanctions and threats, increased protectionism, accelerated deglobalization, and led to more investment and commercial transactions.

Simultaneously, the US attracted more foreign capital commitments for investment, but it also led to reduced foreign demand for US debt, the US dollar, and other assets, while further strengthening market demand for gold.

Regarding natural events, the process of climate change continued in 2025. However, the Trump administration politically chose to pivot, attempting to minimize the impact of climate issues by increasing spending and encouraging energy production.

In the technology sector, the rise of artificial intelligence (AI) undoubtedly had a huge impact on everything. The current AI boom is in the early stages of a bubble. I will soon share my analysis of bubble indicators, so I won't delve into it here.

When thinking about these complex issues, I find it invaluable to understand historical patterns and their underlying causal relationships, develop well-backtested and systematic strategic plans, and leverage AI and quality data. This is precisely how I make investment decisions and the experience I hope to impart.

Overall, I believe the dynamic forces of debt/currency/markets/economy, domestic political forces, geopolitical forces (like increased military spending and the borrowing to finance it), natural forces (climate change), and the forces of new technology (like the costs and benefits of AI) will continue to be the main drivers shaping the global landscape. These forces will largely follow the Big Cycle template I proposed in my book "How Countries Go Broke: The Big Cycle."

Due to the length of this piece, I won't delve deeper here. If you've read my book, you should know my views on the evolution of the Big Cycle. If you want to learn more but haven't read it, I suggest you do so soon. It will help you better understand future market and economic trends.

Regarding portfolio allocation, although I don't want to be your investment advisor (i.e., I don't want to directly tell you what positions to hold and have you copy my advice), I do hope to help you invest better. Although I believe you can infer the types of investments I tend to like or dislike, the most important thing for you is to have the ability to make independent investment decisions. Whether you judge for yourself which markets will perform better or worse, establish an excellent strategic asset allocation portfolio and stick to it, or select investment managers who can deliver good returns for you—these are the key capabilities you need to master.