Ray Dalio's Annual Review: The depreciation of the US dollar and other fiat currencies, and the high returns of US stocks are merely "valuation illusions," while gold outperforms everything

Key Takeaways:

Gold is the true value anchor: In 2025, the U.S. stock market is expected to deliver strong returns in U.S. dollars (18%), but this is actually a "pricing illusion" caused by the significant depreciation of the dollar and fiat currencies. The dollar has fallen 39% against gold, while the return on long positions in gold (priced in dollars) has reached as high as 65%. When priced in gold, the S&P 500 index has actually declined by 28%.

Funds shifting to non-U.S. markets: From a strong currency perspective, U.S. stocks significantly underperform compared to markets in Europe, China, Japan, and emerging markets (overall return of 34%). The return on 10-year U.S. Treasuries priced in gold is -34%, and cash performs even worse, with foreign investors losing interest in dollar-denominated assets.

U.S. stock valuations peak: Earnings growth is driven by sales and technological efficiency (AI), but most profits flow to capitalists rather than workers. The expected long-term return on equities (4.7%) is now lower than the return on bonds (4.9%), with equity risk premiums extremely low and valuations highly stretched.

Political and systemic transformation: The "affordability" crisis caused by inflation is triggering dissatisfaction among the bottom 60% of the population, with expectations of severe conflict between extreme left and extreme right forces in the U.S. in 2027-2028. The global shift from multilateralism to unilateral interest-driven policies has led to soaring military expenditures and frequent sanctions, further diminishing the attractiveness of dollar-denominated assets.

Ray Dalio, founder of Bridgewater Associates, pointed out in his annual review released on the 5th that the biggest investment story in 2025 is not the strong performance of U.S. stocks, but the dramatic changes in currency values and the global shift in asset allocation. He believes that the high returns in the U.S. stock market are largely a "pricing illusion" brought about by the depreciation of fiat currencies, with gold being the true winner.

Fiat currencies collectively weaken: Gold establishes its position as a major reserve asset

In Dalio's framework, the most important change in 2025 is the reshaping of currency values. The dollar has fallen 13% against the Swiss franc, 12% against the euro, and 4% against the Chinese yuan. He points out that when a local currency depreciates, assets priced in that currency create an illusion of appreciation. For investors benchmarked against the Swiss franc or gold, the performance of U.S. stocks last year was actually disastrous.

Gold, as the only "major non-fiat currency," takes on the role of the second-largest reserve currency in 2025. Dalio emphasizes that currency trends have a decisive impact on wealth transfer. Depreciation reduces individual purchasing power, and while it can enhance export competitiveness in the short term, its lagging effects on inflation and erosion of personal wealth cannot be ignored. For investors who have not hedged against currency risks, holding cash and bonds in U.S. dollars is becoming increasingly unattractive.

Structural contradictions behind U.S. stock performance: Imbalance in profit growth and distribution

Although the S&P 500 index recorded a total return of 18% in U.S. dollars, Dalio analyzes that this is primarily driven by profit growth and P/E ratio expansion. Among them, the "seven giants" saw profit growth of 22%, while the remaining 493 constituents experienced profit growth of 9% Sales expansion contributed 57% to profit growth, while the improvement in profit margins accounted for the remaining portion.

Ray Dalio pointed out that the improvement in profit margins is largely due to increased technological efficiency, but this distribution of benefits is extremely uneven. Capitalists have captured most of the gains, while the working class has benefited less. He warned investors that this imbalance is drawing the attention of leftist political forces, and the struggle for profit distribution will become a key variable affecting profit margins in the future. The currently high price-to-earnings ratios and extremely low credit spreads indicate that the room for obtaining additional returns from risk premiums has disappeared.

Illiquid Markets Under Pressure: Liquidity Premium Faces Significant Increase

Unlike the re-inflation boom in the public markets, illiquid markets such as venture capital, private equity, and real estate are expected to perform poorly in 2025. Dalio believes that these sectors are facing severe debt extension pressures. With the increasing demand for financing at higher interest rates and the accumulation of cash-out pressures, the currently extremely low liquidity premium is likely to rise significantly.

This will lead to a decline in the value of illiquid assets relative to liquid assets. Dalio warned that if investors still believe in the book valuations of assets like private equity, they may overlook the impending liquidity traps.

Politics and Geopolitics: The Dangerous Shift from Multilateralism to Unilateralism

Dalio also discussed the impact of the Trump administration on the markets. He believes that current policies are a radical leveraging bet on capitalist forces. However, unilateral foreign policies and the risks of sanctions are prompting foreign investors to diversify their portfolios, reducing demand for U.S. debt and turning to gold.

On the political front, affordability issues (i.e., currency value issues) have become a core contradiction. Since the top 10% "wealthy class" holds a significant amount of stock assets, they have not felt the pressure of inflation, while the bottom 60% are feeling overwhelmed. Dalio predicts that this widening wealth gap will lead to turmoil in the 2026 midterm elections and trigger a "great showdown" between the left and right over wealth distribution, and this uncertainty will continue to have a profound impact on the markets.

Below is the full text of Dalio's 2025 annual review, with some content omitted:

As a systematic global macro investor, as we bid farewell to 2025, I naturally reflect on the underlying mechanisms of the events that have occurred, especially regarding the market situation. This is the theme of today's reflection.

Although the facts and returns are indisputable, my perspective on the issues differs from that of most people. While most believe that U.S. stocks, particularly U.S. AI stocks, are the best investment targets, thus constituting the biggest investment story of 2025, the undeniable fact is that the largest returns (and thus the biggest story) came from: 1) changes in currency value (most importantly the U.S. dollar, other fiat currencies, and gold); 2) U.S. stocks significantly underperforming non-U.S. stock markets and gold (with gold being the best-performing major market), primarily due to fiscal and monetary stimulus, productivity improvements, and a significant shift in asset allocation away from the U.S. market. In these reflections, I take a step back to examine how this currency/debt/market/economic dynamic mechanism operated last year, and briefly discuss how the other four major forces—politics, geopolitics, natural phenomena, and technology—impact the global macro landscape in the context of evolving long-term cycles

Regarding 1) Changes in Currency Value: The US dollar has fallen 0.3% against the Japanese yen, 4% against the Chinese yuan, 12% against the euro, 13% against the Swiss franc, and 39% against gold (gold is the second largest reserve currency and the only major non-fiat currency). Therefore, all fiat currencies have depreciated, and the biggest story of the year and the largest market volatility stem from: the weakest fiat currencies have depreciated the most, while the strongest/hardest currencies have appreciated the most. This year's best major investment target is to go long on gold (with a return of 65% in USD), outperforming the S&P 500 index (with a return of 18% in USD) by 47 percentage points. In other words, the S&P 500 index has fallen 28% when priced in gold. Let’s remember some key principles relevant to the current situation:

1. When a local currency depreciates, it makes things priced in that currency appear to appreciate. In other words, viewing investment returns through the lens of a weak currency makes them seem stronger than they actually are. In this case, the return on the S&P 500 index for USD-based investors is 18%, for JPY-based investors is 17%, for CNY-based investors is 13%, for EUR-based investors is only 4%, for CHF-based investors is only 3%, while for gold-based investors, the return is -28%.
2. The movement of currency has a significant impact on wealth transfer and economic operation. When a local currency depreciates, it reduces personal wealth and purchasing power, making domestic goods and services cheaper when priced in foreign currencies, while making foreign goods and services more expensive when priced in the local currency. In these ways, it affects inflation rates and who buys what from whom, although there is a lag effect. Whether to hedge currency is crucial. If you have no view on currency and do not want to hold currency positions, what should you do? You should always hedge to the lowest risk currency combination, and if you believe you can do well, then make tactical adjustments from there. I won’t detail how I operate now, but I will discuss it later.
3. As for bonds—i.e., debt assets—because they are promises to deliver currency, when the value of currency declines, even if their nominal prices rise, their real value decreases. Last year, the 10-year US Treasury bond had a return of 9% in USD (about half from yield and half from price), 9% in JPY, 5% in CNY, -4% in EUR, -4% in CHF, and -34% in gold—while cash is an even worse investment. It is understandable why foreign investors do not favor USD bonds and cash (unless they have hedged currency). So far, the imbalance in bond supply and demand has not become a serious issue, but in the future, a massive debt of nearly $10 trillion will need to be rolled over. Meanwhile, the Federal Reserve seems to be leaning towards easing policies to suppress real interest rates. For these reasons, debt assets appear unattractive, especially at the long end, and a further steepening of the yield curve seems likely, although I am skeptical about whether the extent of the Fed's easing will reach the levels reflected in current pricing

Regarding 2) U.S. stocks significantly underperforming non-U.S. stocks and gold (with gold being the best-performing major market), as mentioned earlier, while U.S. stocks have performed strongly in U.S. dollars, they have performed much weaker when priced in strong currencies and have significantly underperformed stocks from other countries. Clearly, investors prefer to hold non-U.S. stocks over U.S. stocks, just as they prefer to hold non-U.S. bonds over U.S. bonds and U.S. dollar cash. More specifically, European stocks outperformed U.S. stocks by 23 percentage points, Chinese stocks by 21 percentage points, British stocks by 19 percentage points, and Japanese stocks by 10 percentage points. Emerging market stocks performed better overall, with a return of 34%, while emerging market U.S. dollar bonds had a return of 14%, and emerging market local currency bonds had an overall return of 18% when measured in U.S. dollars. In other words, there has been a massive shift of funds, valuations, and wealth away from the U.S., and the ongoing situation may lead to further rebalancing and diversification.

As for the performance of U.S. stocks last year, the strong results stemmed from robust earnings growth and P/E ratio expansion. More specifically, earnings grew by 12% in U.S. dollars, the P/E ratio increased by about 5%, and the dividend yield was around 1%, resulting in an approximate total return of 18% for the S&P index in U.S. dollars. The "seven giants" in the S&P 500 index account for about one-third of its market capitalization, with earnings growth of 22% expected in 2025. Contrary to popular belief, the earnings growth of the remaining 493 stocks in the S&P index was also strong, reaching 9%, leading to an overall earnings growth of 12% for the entire S&P 500 index. This was achieved with sales growth of 7% and a profit margin increase of 5.3%, with sales contributing 57% to earnings growth and margin improvement contributing 43%. It seems that a significant portion of the margin improvement is attributed to enhanced technological efficiency, but I do not see exact data to confirm this. Regardless, the earnings improvement is primarily due to the expanding economic pie (i.e., sales), with corporations (and thus the capitalists who own them) capturing most of the improvement, while workers receive relatively little. Monitoring the flow of profits and margin growth closely in the future will be crucial, as the market currently expects these growths to be substantial, while leftist political forces are attempting to capture a larger share of the pie.

While understanding the past is easier than predicting the future, we do have insights into the present, and if we understand the most important causal relationships, it can help us better foresee the future. For example, we know that high P/E multiples and low credit spreads indicate that valuations seem stretched. If history serves as a guide, this suggests lower future stock returns. When I calculate expected returns based on stock and bond yields, using normal productivity growth and the resulting profit growth, my long-term expected return for stocks is about 4.7% (in the bottom 10th percentile), which is very low compared to the existing bond return of about 4.9%, indicating a low equity risk premium. Additionally, credit spreads are expected to narrow to very low levels by 2025, which benefits lower-grade credit and equity assets, but makes it less likely that these spreads will decline further and more likely that they will widen, which is unfavorable for these assets. All of this means that there is no more return to be squeezed from equity risk premiums, credit spreads, and liquidity premiums **This also means that if interest rates rise—which is possible due to increasing supply-demand driven pressures (i.e., supply increases while demand prospects worsen) caused by the decline in currency value—there will be a significant negative impact on the credit and stock markets, all else being equal.

Of course, there are significant questions regarding Federal Reserve policy and future productivity growth. The most likely scenario is that the newly appointed Federal Reserve Chair and the Federal Open Market Committee will tend to suppress nominal and real interest rates, which will support prices and create bubbles. As for productivity growth, there may be some improvement by 2026, but a) how much improvement there will be, and b) how much of the productivity gains will flow to corporate profits and stock prices, benefiting capitalist owners, versus how much will flow to workers in the form of wage changes and taxes, remains uncertain.

Consistent with how this mechanism operates, the Federal Reserve's interest rate cuts and relaxation of credit availability in 2025 reduced the discount rate, which determines the present value of future cash flows and lowers the risk premium. These factors collectively contributed to the outcomes described above. These changes supported asset prices that perform well in a re-inflation environment, especially those with longer durations, such as stocks and gold, thus these markets are no longer cheap. Additionally, it is worth noting that these re-inflation measures have not provided much help to venture capital, private equity, and real estate—i.e., illiquid markets. These markets are facing challenges. If one believes the book valuations of venture capital and private equity (which most do not), the liquidity premium is currently very low; it seems evident that as these entities incur debt that must be financed at higher interest rates, and as the pressure to improve liquidity continues to accumulate, the liquidity premium is likely to rise significantly, leading to a decline in illiquid investments relative to liquid investments.

In summary, due to massive fiscal and monetary re-inflation policies, almost all assets have risen significantly in dollar terms and are currently relatively in an expansionary state.

When observing market changes, one cannot ignore the changes in the political order, especially in 2025. As markets and economies influence politics, and politics also influences markets and economies, politics plays a significant role in driving markets and economies. More specifically, regarding the U.S. and globally:

1.) The domestic economic policies of the Trump administration have historically been, and continue to be, a leveraged bet on the forces of capitalism, aiming to revitalize U.S. manufacturing and promote the development of U.S. artificial intelligence technology, which has contributed to the market volatility I described above;
2.) Its foreign policy has deterred and disappointed some foreign investors, with concerns over sanctions and conflicts supporting the portfolio diversification and gold purchases we have seen;
3.) Its policies have widened the wealth and income gap, as the "wealthy class" (the top 10% income group) are capitalists who hold more stock wealth and have experienced greater income growth.

As a result of c), those capitalists in the top 10% of income now do not see inflation as a problem, while the majority (the bottom 60% income group) feel overwhelmed. The issue of currency value, also known as the affordability issue, is likely to become the number one political topic next year, which will lead to the Republican Party losing the House of Representatives, resulting in significant chaos in 2027, and ushering in a very interesting 2028 election At that time, the conflict between the two factions will evolve into a major confrontation.

More specifically, 2025 is the first year of Trump's four-year term, during which he controls both the House and Senate, which is typically the best year for a president to implement their policies. Therefore, we see his administration making a radical bet on capitalism—namely, aggressive stimulative fiscal policies, deregulation to make funds and capital more abundant, streamlining production processes for most products, raising tariffs and increasing taxes, and providing proactive support for production in key industries. Behind these initiatives is a shift from free-market capitalism to government-led capitalism, spearheaded by Trump.

Due to the way our democratic system operates, President Trump has two years of unimpeded governance, a power that may be significantly weakened in the 2026 midterm elections and overturned in the 2028 elections. He surely feels that this does not give him enough time to accomplish what he believes needs to be done. Nowadays, it is rare for a political party to govern for a long time, as they struggle to fulfill promises to meet the financial and social expectations of voters. In fact, when those in power cannot govern long enough to meet voter expectations, the viability of democratic decision-making comes into question. In developed countries, it has become commonplace to see populist politicians from the left or right advocating extreme policies for extreme improvements, only to fail to deliver and be ousted. These frequent shifts from one extreme to another are causing instability, reminiscent of past situations in underdeveloped countries. In any case, it is becoming increasingly clear that a major battle is brewing between the far-right led by President Trump and the far-left. On January 1, we saw the opposition unite, with Zolan Mamdani, Bernie Sanders, and Alexandria Ocasio-Cortez coming together behind Mamdani's inauguration in the anti-billionaire "democratic socialism" movement. This will be a struggle over wealth and money, likely impacting the markets and the economy.

Regarding how the world order and geopolitics are changing, 2025 has seen a clear shift from multilateralism (the desire to operate under rules supervised by multilateral organizations) to unilateralism (power supremacy, with countries acting according to their own interests). This raises and will continue to raise the threat of conflict, leading most countries to increase military spending and finance it through debt. It also encourages the increased use of economic threats and sanctions, protectionism, and de-globalization, more investments and business transactions, more commitments from foreign capital to invest in the U.S., heightened demand for gold, and reduced foreign demand for U.S. debt, the dollar, and other assets.

Regarding natural phenomena, climate change continues to evolve, while under political leadership, Trump turns to spending funds and encouraging energy production, attempting to downplay the issue.

Regarding technology, it is clear that the current AI boom, which is evidently in the early stages of a bubble, has a significant impact on everything. I will soon issue an explanation regarding my bubble indicators, so I won't delve into this topic now.

This requires a lot of thought, and we have not yet touched on much of what is happening outside the United States. I find it extremely valuable to understand historical patterns and the causal relationships driving them, to have a well-backtested and systematic game plan, and to utilize artificial intelligence and high-quality data This is how I invest, and it's what I want to convey to you.

In summary, this approach leads me to believe that debt/currency/market/economic forces, domestic political forces, geopolitical forces (such as increased military spending and debt financing), natural forces (climate), and new technological forces (such as the costs and benefits of artificial intelligence) will continue to be the main driving forces shaping the overall landscape, and these forces will generally follow the long-cycle template I outlined in my book. Since this is already lengthy, I won't delve into all these topics now. If you've read my book "How Countries Go Bankrupt: The Long Cycle," you know my views on how cycles evolve; if you want to learn more and haven't read it yet, I recommend you do so.

As for portfolio allocation, while I don't want to be your investment advisor (meaning I don't want to tell you what positions you should hold and have you simply follow my advice), I do want to help you invest better. Although I believe you can infer the types of positions I like and dislike, what's most important for you is to be able to make your own investment decisions, whether it's betting on which markets will perform well or poorly, building an excellent strategic asset allocation portfolio that you adhere to, or choosing fund managers who can make good investments for you