Billionaire Ray Dalio Says '50% Chance Of World War' - How To Invest?

Summary

Billionaire Ray Dalio believes the odds of a global hot war involving major powers have risen from 35% to 50% in the past two years.

The economic implications of World War III would be catastrophic, with estimates of a 5-10% contraction in the US economy, a likely collapse of China's economy, and a global depression.

We share our picks for how investors can prepare their portfolios to survive and thrive regardless a major global war breaks out or not.

I am Samuel Smith, Vice President of Leonberg Capital. I lead the investing group High Yield Investor where we do our best to find the right balance between safety, growth, yield, and value.

Billionaire Hedge Fund tycoon Ray Dalio - in a recent LinkedIn post titled "Another Step Toward International War" - offered some sobering takeaways from the escalating geopolitical conflicts involving Israel and Hamas and Russia and Ukraine. Dalio underscored that these are not isolated conflicts but are entwined with the larger, global power struggles shaping the new world order that he has repeatedly spoken of. Most alarmingly, in his post, he stated:

it appears to me that the odds of transitioning from the contained conflicts to a more uncontained hot world war that includes the major powers have risen from about 35% to about 50% over the last two years.

In this article, we will look further at his reasoning behind this stark assertion, evaluate the potential damage that such a conflict would cause to the global economy, and share how we are preparing our portfolio for an environment where major geopolitical conflict plunges us into a deep recession or even a depression.

Why Ray Dalio Thinks World War Is Likely

Mr. Dalio's thesis draws on parallels between the current geopolitical climate and the periods preceding the two World Wars in the 20th century. He emphasizes that the Israel-Hamas and Russia-Ukraine conflicts have transitioned from pre-hot-war conflicts to uncontained hot wars, which will likely be brutal and protracted until one side decisively triumphs over the other. Furthermore, Dalio warns that these conflicts have the potential to spread and escalate, involving more countries and potentially leading to a world war if major powers like the US and China are drawn into direct conflict with each other.

He believes that the conflicts involving Israel, Hamas, Ukraine, and Russia are - just like in the periods preceding the past two world wars - symptomatic of larger great power conflicts that will significantly impact countries allied with these nations. He suggests that the US is already indirectly engaged in these conflicts, fighting proxy wars in Europe and the Middle East while also preparing for potential conflict in East Asia. The spreading of these wars will not only be costly but will also risk drawing non-combatant nations into the fray, thereby expanding the scope and scale of the conflicts.

In terms of solutions, Dalio's idealistic "pipe dream" would be for world leaders to recognize the catastrophic potential of hot wars and collaboratively establish pathways and processes to minimize the chances of such conflicts developing. Apart from that increasingly unlikely solution materializing, however, it appears to be only a matter of time before hot conflict between the world's major military and economic powers breaks out.

Economic & Stock Market Implications Of World War

For stock market investors, the implications of a global war would likely be devastating. The escalation of geopolitical conflicts and the potential for them to spiral into a larger, more widespread war could introduce significant volatility and risk into global markets.

While the death and destruction that such a global conflict would cause are reason enough to shudder at the idea that they are growing increasingly likely, the economic fallout would be catastrophic as well given how interconnected the global economy has become. A war pitting China against the United States (and undoubtedly involving Taiwan as well) is anticipated to unleash severe repercussions on the global economy and some estimates put the damage at a 5% contraction of the $23 trillion US economy, marking the worst decline since the Great Depression. The stock markets in the U.S. and around the world would undoubtedly crash, likely surpassing even the 50% drop in the S&P 500 (SPY)(VOO) and Nasdaq (QQQ) witnessed during the 2007-2009 Great Financial Crisis and recession. If the market capitalization of the S&P 500 were to be halved, it would wipe out around $18 trillion in wealth, which is equivalent to roughly two-thirds of the United States' current GDP. Some estimates even put a 10% GDP decline as probable in this scenario, which equates to a ~$2.5 trillion hit to annual economic output, triggering mass layoffs and plummeting consumption rates.

Of course, a significant casualty in this conflict that would drive much of the global economic chaos in its wake would be the semiconductor industry given that Taiwan is a critical player in global semiconductor production (TSM). A major disruption of Taiwan's semiconductor exports to the world's major economies is estimated to potentially eliminate $1.6 trillion in corporate annual revenue. Moreover, the supply chain restructuring required in response to a potential conflict like this would easily surpass the adjustments witnessed during the COVID-19 pandemic, with major companies like Apple (AAPL), Caterpillar (CAT), GM (GM), Ford (F), Tesla (TSLA), and Starbucks (SBUX), among others, deriving substantial revenues from China.

On the other hand, the economic effects would be even more severe for China and its companies like Alibaba (BABA) and Nio (NIO) due to disrupted trade which would dramatically reduce its exports, cut off access to advanced Western technology and investment capital, and potentially lead to a crisis level shortage of key commodities such as energy, copper, food, and iron ore, exacerbating internal political instability.

Overall, the conflict would likely trigger a global depression owing to the intertwined nature of the US and Chinese economies with the rest of the world's economies. Companies, regardless of their national origin, would suffer from supply chain disruptions, impacting consumer and business investments globally.

Investor Takeaway: How To Invest?

With such scary scenarios becoming increasingly likely, how are investors supposed to position themselves? It may be prudent for some to take advantage of elevated interest rates and hunker down completely in safe havens like investment grade bonds (BND)(IGHG), treasuries (SGOV), land (FPI)(LAND), gold (GLD)(IAU), and perhaps for the bold, even Bitcoin (BTC-USD). Maybe even a small short position (SH)(SDS)(SPXU) on the S&P 500 might make sense given how overvalued the market is right now according to many leading models.

However, as an investor who is able to take on a bit more risk in pursuit of higher long-term total returns, yet still wants my portfolio to not suffer a complete wipeout in the event of World War 3 breaking out this decade, I am investing increasingly in the following types of securities:

Gold is a well-established safe haven that would likely soar higher in the event of a global conflict given its proven history as a store of wealth and its zero counterparty risk. Meanwhile, even if World War 3 doesn't break out, there are many other reasons to be bullish about gold's near and long-term outlook.

Virtu Financial (VIRT) is a market-maker that profits off of the bid-ask spread in some stock, bond, ETF, option, and even crypto transactions. Its profits are derived from trading and investment activity, not economic activity, and it tends to be most profitable when market volatility is high. As a result, its profits soared during the 2008 and 2020 stock market crashes, making it a likely lucrative investment in the event that a major global conflict was to break out. VIRT also has a strong balance sheet, pays a very attractive and well-covered dividend, and is buying back shares hand-over-fist, so even if no market crash comes for many years, I am confident that VIRT will still likely deliver attractive risk-adjusted returns.

Triple Net Lease REITs (O)(NNN) are likely to outperform the broader stock market and hold up reasonably well during a severe recession or even a depression. They have long-term leases, well-diversified portfolios, and strong investment grade balance sheets, and have performed exceptionally well during the recent economic crises of 2008 and 2020. While they would undoubtedly suffer from some counterparty bankruptcies and lease cancellations in the event of a severe recession or depression, their portfolios should hold up fairly well based on their past track record during periods of economic stress. Moreover, their tenants are mostly domestically focused, essential goods and services providers that are less intertwined with global trade. Additionally, interest rates would likely plunge in such a scenario, which would reduce their cost of capital and make their bond-like cash flow profile appear more attractive by comparison. Moreover, these REITs now offer dividend yields of 6-7% along with low to mid-single-digit annualized cash flow and dividend per share growth potential, combining with their low-risk business models to offer attractive risk-adjusted total return potential regardless of what transpires on the global geopolitical stage.

By investing in these assets today, I believe that I am positioning my portfolio to deliver attractive current income and risk-adjusted total returns regardless if World War 3 ends up materializing in the near future or not.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

source: https://seekingalpha.com/article/4640936-billionaire-ray-dalio-says-50-percent-chance-of-world-war-how-to-invest?mailingid=33044974&messageid=must_reads&serial=33044974.2674129&utm_campaign=Must%2BReads%2Brecurring%2B2023-10-16&utm_content=seeking_alpha&utm_medium=email&utm_source=seeking_alpha&utm_term=must_reads