A Tale of Two Countries

Charles Dickens expressed it well in his novel, A Tale of Two Cities. He describes a period of time that contained both positive and negative experiences. The dichotomy of the human condition in which there is good and evil, prosperity and poverty.

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness... it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair.”

Obviously, there can be parallels drawn from the themes Dickens penned many years ago to today. In a blog posted today by Ray Dalio, the founder of Bridgewater Associates, the world’s largest hedge fund took those themes to yet another level when he began his post by saying, “There are returns, and there are risks.”

In this post, Dalio speaks to the fact that the current geopolitical environment contains increasing and inherent risks. He specifically talks about the ongoing tensions between North Korea and the United States. He views this current crisis in terms of risk and volatility, framing it with the financial environment that preceded it.

“As a rule, periods of lower risk/volatility tend to lead to periods of greater risk/volatility.” He goes on to say, “That appears to be the case now—i.e., prospective risks are now rising and do not appear appropriately priced in because of a) a backward looking at risk and b) corporate leveraging up has been high because interest rates are low.”

His financial advice to that current dilemma is that he “will aim to stay liquid, stay diversified and not be overly exposed to any particular economic outcome.”

During the last part of today’s blog, he offers an analysis of this highly complex geopolitical scenario by saying, "Two confrontational, nationalistic, and militaristic leaders playing chicken with each other, while the world is watching to see which one will be caught bluffing, or if there will be a hellacious war."

In regards to the current tension with North Korea, he adds that if things go awry, “It would seem that gold (more than other safe haven assets like the dollar, yen, and treasuries) would benefit, so if you don’t have 5-10% of your assets in gold as a hedge, we’d suggest that you relook at this.”

His closing remarks elaborate on the importance of having some of your assets in gold as a hedge and warns that “one should not let traditional biases, rather than an excellent analysis, stand in the way of you doing this.”

This author is in total agreement.

Wishing you as always, good trading,