Ray Dalio, Jamie Dimon, Ken Griffin: China, AI, and the global economy

The leaders of some of the world’s most prominent and successful financial firms: Bridgewater Associates’ Ray Dalio, Citadel’s Ken Griffin, and JPMorgan Chase’s Jamie Dimon, have each released their latest shareholder communiques.

Traversing broad territory, topics in Dalio's memo included the long-term appeal of China – and what he regards as “beautiful deleveraging".

Ken Griffin wrote about the more favourable global economy of 2024, despite high US public debt.

Jamie Dimon explained why AI innovation is comparable to the invention of the printing press, electricity, and the Internet. He also shared why he believes the chance of a soft landing for the US economy is far lower than the 70-80% markets are pricing in.

So you don't have to read the lengthy newsletters yourself, I’ve pulled out some of the most salient points in the following wire.

Ray Dalio: Why I Invest in China

Dalio’s latest article discusses his long history of investing in China, grouped across six short segments:

• Experience and Success
• Love for China
• Understanding the World
• Diversification
• Manageable Problems
• Good Investment Opportunities.

Dalio said China has been an overwhelming success for him – in all the ways he could have hoped. That’s partly due to the market suiting his investment style, with China showing investors “how they can do well in both bear and bull markets through smart portfolio diversification and overweighting those assets that are best for whatever the environment is like".

“Because of the way I invest, there is no such thing as a bad market; there is only bad decision-making. I find the markets in China good for my type of decision-making.”

He believes an understanding of China is key to a broad understanding of the world. With China and the US being the two dominant superpowers, “how these two nations are with each other will shape the world.”

China is also crucial to his investment diversification: "I can’t diversify as well as I’d like to without investing in China".

China’s “beautiful deleveraging”

While Dalio acknowledged the challenges China faces, he’s certain these are “manageable”. That is both in how he invests to perform across either bull and bear markets – and at the level of Chinese leadership.

“If they do their jobs well by being both smart and courageous, I think those who guide policy in China will eventually come around to dealing with the problems well,” he wrote.

“For example, I am seeing signs that Chinese economic leaders are preparing to do quantitative easing along with debt restructurings, to engineer a ‘beautiful deleveraging.’”

Coming back to this point, Dalio reminded investors of the adage that the time to buy is when there is blood in the streets, “when everyone hates the market and it’s cheap” – which is now the case in China.

And finally, he acknowledges the concerns many investors raise when avoiding China exposure, including:

• Controversy surrounding China being considered an enemy, “a communist dictatorship which we should be morally against"
• That such systems have a clear track record of failing,
• That a US-China war would be disastrous, especially for US investors in the region.

Dalio’s counterargument is that all markets have problems for potential investors to consider. For him, the positives outweigh the negatives.

“The key question isn’t whether or not I should invest in China, so much as how much I should invest,” he writes.

“My holy grail of investing is to have 15 or more good, uncorrelated, return streams. I see China as one of these, so that will be a core position”.

Ken Griffin, Citadel

In his market outlook, Griffin acknowledged the tumult of 2023. “The central bank fought against inflation, while investors navigated erratic data that alternated between signalling higher inflation, a potential soft landing, or a recession.”

For 2024, Griffin expects a “more favourable climate for fixed-income markets as inflation eases."

Economic growth is likely to be modest, staying below potential in the upcoming quarters, with the central bank persisting in its fight against inflationary pressures.

Consumers should benefit from an increase in real income due to declining inflation and continued wage growth.

US debt “irresponsible”

But Griffin remains concerned by surging US public debt.

“For example, the Congressional Budget Office estimates net interest spending will reach 3.1% of GDP in 2023 – a full percentage point higher than the average from 1974-2023," he wrote.

“It is irresponsible for the US government to incur a deficit of 6.4% when unemployment is hovering around 3.75%."

“We must stop borrowing at the expense of future generations. The Western world urgently needs a significant increase in productivity growth as the burden of rising government debt and entitlement spending strains almost every major economy.”

Jamie Dimon, JPMorgan Chase

Dimon’s annual shareholder letter landed on Monday in the US. The wide-ranging document covered international conflicts, climate change, and JPMorgan's plans to support diversity and inclusion initiatives.

“Extraordinary consequences” of AI

Dimon noted JPMorgan already uses AI in more than 4000 different ways.

"While we do not know the full effect or the precise rate at which AI will change our business—or how it will affect society at large—we are completely convinced the consequences will be extraordinary and possibly as transformational as some of the major technological inventions of the past several hundred years: Think the printing press, the steam engine, electricity, computing and the Internet, among others.”

What are the chances of a soft landing?

Likely considerably lower than the 70-80% probability that is being priced in by markets currently, Dimon says. He’s prepared JPMorgan for interest rate scenarios ranging from 2% to 8% - in both recession and economically strong environments.

Dimon also warned against emphasising monthly inflation data or slight changes to interest rates – which must be balanced against pressures such as high government spending and global trade restructuring.

Fix the post-GFC bank regulations

Dimon called for greater collaboration between banks and regulators to help overcome rules that are in some cases “duplicative, inconsistent, pro-cyclical, contradictory, extremely costly, and unnecessarily painful” for both parties.

Update on JPMorgan’s First Republic acquisition

One year on from JPMorgan’s acquisition of First Republic Bank, he believes the transaction “brought much-needed stability to the US banking system.”

He now projects First Republic will add about $2 billion to JPMorgan’s annual revenue, compared to initial estimates of $500 million.