Dalio's 2025 Ultimate Reflection: "Currency Purchasing Power" will become the top political issue in 2026, and AI is in the early stages of a bubble.

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Article by: Bridgewater Founder Ray Dalio

Compiled and organized by: BitpushNews

As a systematic global macro investor, as I bid farewell to 2025, I naturally reflect on the underlying mechanisms of the events that occurred, especially the market performance. That is the main focus of today’s reflection.

While facts and returns are indisputable, my perspective on issues differs from most.

Although most people believe that U.S. stocks, especially U.S. AI stocks, are the best investments for 2025 and the core story of the year, an undeniable fact is that the most substantial returns (and the real headline story) come from: 1) changes in the value of currencies (most importantly the dollar, other fiat currencies, and gold); and 2) U.S. stock performance significantly lagging behind non-U.S. stocks and gold (which was the best-performing major market). This is mainly due to fiscal and monetary stimulus, productivity improvements, and large-scale asset reallocation away from the U.S. market.

In these reflections, I want to step back and examine how last year’s currency/debt/market/economy dynamics operated, and briefly touch on how the other four major drivers—politics, geopolitics, natural behaviors, and technology—continue to influence the global macro landscape within the evolving “Big Cycle” context.

1. Changes in Currency Value

Regarding currency value: USD/JPY fell 0.3%, USD/CNY fell 4%, USD/EUR fell 12%, USD/CHF fell 13%, and gold plummeted 39% (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 currencies experiencing the largest declines, while the strongest/hardest currencies appreciated the most. The most outstanding major investment last year was going long gold (with a 65% return in USD), outperforming the S&P 500 index (18% return in USD) by 47 percentage points. In other words, measured in gold terms, the S&P index actually declined by 28% in real terms.

Let’s remember some key principles related to the current situation:

When a country’s currency depreciates, it makes things priced in that currency appear to rise. In other words, viewing investment returns through the lens of a weak currency makes them seem stronger than they actually are. In this scenario, the S&P 500 return of 18% in USD translates to 17% in JPY, 13% in CNY, but only 4% in EUR, 3% in CHF, and a -28% return in gold terms.

Currency fluctuations are crucial for wealth transfer and economic direction. When a currency depreciates, it reduces an individual’s wealth and purchasing power, making their goods and services cheaper in others’ currencies, while making others’ goods and services more expensive in their own currency. This impacts inflation and trade relationships, although with a lag.

Whether you hedge your currency exposure (Currency Hedged) is very important. If you haven’t, and don’t want to comment on currencies, what should you do? You should always hedge into the currency basket with the least risk, and tactically adjust when you believe you can do well. I will explain how I operate later.

Regarding bonds (debt assets): since bonds are promises to deliver currency, when currency value declines, their real value decreases even if nominal prices rise. Last year, the 10-year U.S. Treasury yield in USD returned 9% (roughly half from yield, half from price), in JPY 9%, in CNY 5%, but in EUR and CHF -4%, and in gold -34%—cash was a worse investment.

You can understand why foreign investors dislike dollar bonds and cash (unless they hedge currency risk).

So far, bond supply and demand imbalances are not severe, but in the future, a large amount of debt (~$10 trillion) will need refinancing. Meanwhile, the Fed seems inclined to cut rates to suppress real interest rates. As a result, debt assets lack appeal, especially on the long end of the curve, and a further steepening of the yield curve seems inevitable, but I doubt whether the Fed’s easing can be priced in as much as currently reflected.

2. U.S. Stocks Significantly Underperform Non-U.S. Markets and Gold

As mentioned earlier, while U.S. stocks performed strongly in USD terms, they lagged considerably in strong currencies and significantly underperformed stocks in other countries. Clearly, investors prefer holding non-U.S. stocks, non-U.S. bonds over U.S. assets.

Specifically, European stocks outperformed U.S. stocks by 23%, Chinese stocks by 21%, UK stocks by 19%, and Japanese stocks by 10%. Emerging markets stocks performed even better, with a 34% return, emerging market USD bonds returning 14%, and emerging market local currency bonds (USD-denominated) returning 18%. In other words, wealth is shifting significantly from the U.S. outward, which could lead to more rebalancing and diversification.

Regarding last year’s U.S. stocks, the strong results were driven by earnings growth and P/E expansion.

Specifically, earnings in USD grew 12%, P/E expanded about 5%, plus about 1% from dividends, giving the S&P a total return of approximately 18%. The “Big Seven” tech giants, accounting for about one-third of market cap, saw earnings grow 22 in 2025, while the other 493 stocks grew earnings by 9%.

Within earnings growth, 57% was due to sales growth (up 7%), and 43% due to margin expansion (up 5.3%). Much of the margin improvement may be attributed to technological efficiency, but data limitations prevent definitive conclusions.

In any case, profit improvement mainly reflects a larger “economic cake,” with capitalists capturing most of the gains and workers sharing less. Monitoring profit margins will be crucial going forward, as markets currently expect this growth to continue, while left-wing political forces are trying to regain a larger share.

3. Valuations and Future Expectations

While the past is knowable and the future uncertain, understanding causality helps us forecast. Currently, P/E ratios are high, and credit spreads are very low, indicating overextended valuations. History shows this often precedes lower future stock returns. Based on current yields and productivity levels, my long-term stock return expectation is only 4.7% (at a historic low), which is very low compared to the 4.9% yield on bonds, making the equity risk premium extremely low.

This means that little more can be extracted from risk premiums, credit spreads, and liquidity premiums. If rising supply-demand pressures from currency depreciation push interest rates higher, it will have a significant negative impact on credit and equity markets.

The two big uncertainties are Fed policy and productivity growth. The new Fed Chair and committee seem inclined to suppress nominal and real interest rates, which will support prices and inflate bubbles. Productivity will improve in 2026, but how much of that will translate into profits rather than being used for tax increases or wage hikes (classic left-right issues) remains uncertain.

In 2025, Fed rate cuts and credit easing lowered discount rates, supporting assets like stocks and gold. Now, these markets are no longer cheap. Notably, these reflation measures have not benefited illiquid markets like venture capital (VC), private equity (PE), and real estate. If their debt is forced to refinance at higher rates, liquidity pressures could cause these assets to fall sharply relative to liquid assets.

4. Political Order Changes

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

Trump administration domestic policies: a leveraged bet on revitalizing American manufacturing and AI technology.

Foreign policy: scared off some foreign investors, with concerns over sanctions and conflicts supporting diversification and gold purchases.

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

“Currency value / purchasing power” will become the top political issue next year, potentially leading to the Republicans losing the House and triggering chaos in 2027. On January 1, Zohran Mamdani, Bernie Sanders, and AOC united under the banner of “Democratic Socialism,” signaling a fierce battle over wealth and money.

5. Global Order and Technology

In 2025, the global order shifted clearly from multilateralism to unilateralism (power politics). This led to increased military spending, debt expansion, protectionism, and de-globalization. Gold demand strengthened, while demand for U.S. debt and dollar assets declined.

In technology, the AI wave is still in its early bubble phase. I will soon publish my bubble indicator report.

Summary

In conclusion, I believe that debt/money/market/economy forces, domestic politics, geopolitics (military spending), natural forces (climate), and new technological forces (AI) will continue to be the main drivers reshaping the global landscape. These forces will largely follow the “Big Cycle” template I outlined in my 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 independent decision-making ability. You can infer my position directions from my logic. If you want to learn how to do better, I recommend the “Dalio Market Principles” course offered by the Singapore Wealth Management Institute (WMI).