Ray Dalio's Year-End In-Depth Review: The Logic Behind Dollar Depreciation and the Rise of Gold
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Ray Dalio's Year-End In-Depth Review: The Logic Behind Dollar Depreciation and the Rise of Gold
U.S. stocks have significantly underperformed compared to non-U.S. equities and gold, with gold being the top-performing major market.
Navigating Web3 tides with focused insightsAuthor: Ray Dalio
Compiled by: TechFlow
As a systematic global macro investor, as 2025 draws to a close, I cannot help but reflect on how the markets operated this year. Today's reflection centers on this very topic.
While the facts and return data are indisputable, my perspective on the markets differs from that of most people. Most believe that U.S. stocks, particularly U.S. AI-related stocks, were the best investment of 2025 and the biggest investment story of the year.
However, it is undeniable that the largest returns (and thus the biggest story) this year actually came from the following two aspects:
1) Changes in currency values (especially the U.S. dollar, other fiat currencies, and gold);
2) The significant underperformance of U.S. stocks relative to non-U.S. stocks and gold (gold was the best-performing major market).
This phenomenon was primarily due to fiscal and monetary stimulus, productivity gains, and a significant shift in asset allocation away from U.S. markets.
In this review, I will analyze the dynamics between currencies, debt, markets, and the economy over the past year from a broader perspective and briefly explore how the four major forces—politics, geopolitics, natural events, and technology—are shaping the global macro landscape against the backdrop of the evolving "Big Cycle."
First, let's talk about changes in currency values: In 2025, the U.S. dollar fell 0.3% against the Japanese yen, 4% against the Chinese yuan, 12% against the euro, 13% against the Swiss franc, and 39% against gold (the second-largest reserve currency and the only major non-fiat currency).
In other words, all fiat currencies depreciated, and the biggest market story and volatility of the year came from the weakest fiat currencies depreciating the most, while the strongest "hard currencies" performed best. The best-performing major investment in 2025 was gold, with a U.S. dollar-denominated return of 65%, 47% higher than the S&P 500's U.S. dollar return (18%).
Put differently, from gold's perspective, the S&P 500 actually fell by 28%. Let's remember some important principles related to this:
- When a domestic currency depreciates, asset prices measured in that currency appear to rise. In other words, from the perspective of a weak currency, investment returns appear higher than they actually are.
In this case, the S&P 500's return was 18% for U.S. dollar investors, 17% for yen investors, 13% for yuan investors, only 4% for euro investors, only 3% for Swiss franc investors, and -28% for gold investors.
- Currency changes have an enormous impact on wealth transfers and economic operations.
When a domestic currency depreciates, it reduces domestic wealth and purchasing power, making domestic goods and services cheaper in foreign currencies while making foreign goods and services more expensive in the domestic currency.
These changes affect inflation rates and who buys goods and services from whom, but this impact typically occurs with a lag.
- Whether to hedge currency risk is crucial.
What should you do if you have no foreign exchange positions and do not want to bear currency risk?
You should always hedge to the currency mix with the least risk. If you believe you can make more accurate judgments, you can make tactical adjustments based on that.
However, I won't explain my specific approach in detail here.
- As for bonds (i.e., debt assets), since bonds are essentially promises to deliver currency, their real value declines when the currency depreciates, even if their nominal prices may rise.
In 2025, U.S. 10-year Treasury bonds had a U.S. dollar-denominated return of 9% (roughly half from yield, half from price appreciation), 9% in yen terms, 5% in yuan terms, but -4% in euro and Swiss franc terms, and a staggering -34% in gold terms.
Cash performed even worse than bonds. This also explains why foreign investors are not keen on U.S. dollar bonds and cash (unless currency-hedged).
Although the supply-demand imbalance in the bond market has not yet become a severe problem, nearly $10 trillion in debt will need to be refinanced in the future. Meanwhile, the Federal Reserve appears inclined to ease policy to lower real rates.
For these reasons, debt assets are less attractive, particularly long-term bonds, and further steepening of the yield curve seems possible. However, I doubt whether the Fed's easing will be as substantial as currently priced in by the market.
Regarding the significant underperformance of U.S. stocks relative to non-U.S. stocks and gold (the best-performing major market in 2025), as mentioned earlier, although U.S. stocks performed strongly in U.S. dollar terms, their performance was much weaker when measured in strong currencies and significantly lagged behind other countries' stock markets.
Clearly, investors preferred non-U.S. stocks over U.S. stocks; similarly, they also favored non-U.S. bonds over U.S. bonds or U.S. dollar cash.
Specifically, European stocks outperformed U.S. stocks by 23%, Chinese stocks by 21%, UK stocks by 19%, and Japanese stocks by 10%. Overall, emerging market stocks performed even better, with a return of 34%, while emerging market U.S. dollar debt returned 14%, and emerging market local currency debt overall returned 18% in U.S. dollar terms.
In other words, capital flows, asset values, and wealth transfers shifted significantly from the U.S. to non-U.S. markets. This trend may lead to more asset rebalancing and diversification.
In 2025, the strong performance of U.S. stocks was primarily driven by robust earnings growth and price-to-earnings (P/E) ratio expansion. Specifically, U.S. dollar-denominated earnings growth reached 12%, the P/E ratio expanded by about 5%, and the dividend yield was approximately 1%, resulting in a total S&P 500 return of about 18%.
The "Magnificent 7" stocks, accounting for one-third of the S&P 500's total market capitalization, achieved a 22% earnings growth rate in 2025. Contrary to popular belief, the other 493 stocks in the S&P 500 also delivered strong earnings growth of 9%, with the entire S&P 500's earnings growth rate at 12%.
This growth was primarily due to a 7% increase in sales and a 5.3% improvement in profit margins. Sales growth contributed 57% to earnings growth, while margin improvement contributed 43%. Some of the margin improvement appears related to gains in technological efficiency, though data cannot fully confirm this yet.
Regardless, the improvement in earnings is largely attributed to growth in economic output (sales) and the fact that corporations (and thus capitalists) captured most of the gains, with workers receiving relatively less.
It is crucial to monitor the distribution of margin growth in the future, as the market currently expects significant margin growth, while left-wing political forces are attempting to secure a larger share of the economic "pie."
Although the past is easier to predict than the future, some current information can help us better foresee the future if we understand the most important causal relationships.
For example, we know that current P/E multiples are high, credit spreads are low, and valuations appear stretched.
History suggests this typically portends lower future stock returns. Based on my calculated expected returns derived from stock and bond yields, normal productivity growth, and resulting profit growth, the long-term expected return for stocks is about 4.7% (below the 10th historical percentile), which appears low compared to the current bond return of about 4.9%, resulting in a low equity risk premium.
Furthermore, credit spreads narrowed to extremely low levels in 2025, which was positive for low-credit assets and equities but also means these spreads are more likely to rise than fall further, which is negative for these assets.
Overall, there is little room left for returns from equity risk premiums, credit spreads, and liquidity premiums. In other words, if interest rates rise—which is possible due to increased supply-demand pressures from declining currency values (i.e., increased debt supply and deteriorating demand)—this would, all else equal, have a significantly negative impact on credit and stock markets.
Looking ahead, Fed policy and productivity growth are two key uncertainties. Currently, the new Fed Chair and the Federal Open Market Committee (FOMC) appear inclined to push down nominal and real rates, which would support asset prices and potentially fuel bubbles.
As for productivity growth, 2026 may see improvement, but two questions remain uncertain: a) How much will productivity increase? b) How much of this increase will translate into corporate profits, stock prices, and capitalist gains, and how much will flow to workers and society through wage adjustments and taxes (a classic left-right political divide issue).
Consistent with the workings of the economic system, in 2025, the Fed lowered discount rates through rate cuts and eased credit supply, thereby increasing the present value of future cash flows and reducing risk premiums. These changes collectively drove the aforementioned market performance. These policies supported asset prices that perform well during economic reflation, particularly longer-duration assets like stocks and gold. Today, these markets are no longer cheap.
It is worth noting that these reflationary measures have not been as helpful for illiquid markets like venture capital (VC), private equity (PE), and real estate. These markets are facing some difficulties. If one believes the book valuations of VC and PE (though most do not), liquidity premiums are now very low; clearly, as debt borrowed by these entities needs to be refinanced at higher rates and liquidity pressures increase, liquidity premiums are likely to rise significantly, leading to declines in illiquid investments relative to liquid ones.
In short, due to massive fiscal and monetary reflationary policies, the U.S. dollar-denominated prices of almost all assets rose significantly, but these assets are now relatively expensive.
When observing market changes, one cannot ignore changes in the political order, especially in 2025. Markets and the economy influence politics, and politics, in turn, influences markets and the economy. Therefore, politics played a significant role in driving markets and the economy. Specifically for the U.S. and globally:
a) The Trump administration's domestic economic policies were essentially a leveraged bet on capitalist forces, aiming to revitalize U.S. manufacturing and advance U.S. AI technology. These policies significantly influenced the aforementioned market trends;
b) Its foreign policy triggered concerns and retreat among some foreign investors. Fears of sanctions and conflicts led investors to prefer portfolio diversification and gold purchases, which was also reflected in the markets;
c) Its policies exacerbated wealth and income inequality, as the "wealthy class" (i.e., the top 10% capitalists) own more stock wealth and have seen more significant income growth.
Due to the impact of c) above, the capitalist class in the top 10% does not see inflation as a problem, while the majority (i.e., the bottom 60%) feel overwhelmed by inflation. The issue of currency value (i.e., affordability) may become the top political issue next year, leading to Republican losses in the House in the midterm elections, setting the stage for chaos in 2027 and foreshadowing a contentious left-right political election in 2028.
Specifically, 2025 was the first year of Trump's four-year term, during which he controlled both the Senate and the House. Traditionally, this is usually the best time for a president to push through their policies.
Therefore, we saw the Trump administration's aggressive policies fully betting on capitalism: including significantly stimulative fiscal policies, reduced regulation to increase liquidity of funds and capital, lowered production barriers, increased tariffs to protect domestic producers and raise tax revenue, and proactive support for production in key industries.
Behind these measures is a shift, under Trump's leadership, from free-market capitalism to state-led capitalism. This policy shift reflects the government's intent to reshape the economic landscape through more direct intervention.
Due to the workings of the U.S. democratic system, President Trump had two years of relatively unimpeded governance in 2025, but this advantage could be significantly weakened in the 2026 midterm elections and potentially completely reversed in the 2028 presidential election. He may feel he does not have enough time to accomplish what he believes must be done.
Nowadays, prolonged rule by a single party has become rare because parties struggle to deliver on their promises and meet voters' economic and social expectations. In fact, when those in power cannot fulfill voter expectations within limited terms, the feasibility of democratic decision-making is also questionable. In developed countries, populist political figures from the left or right propose extreme policies, attempting to achieve extreme improvements, but often fail to deliver on promises and are eventually abandoned by voters. This frequent extreme volatility and power shifts lead to social instability, similar to what was seen in less developed countries in the past.
Regardless, it is becoming increasingly clear that a large-scale confrontation between the far-right led by President Trump and the far-left is brewing.
On January 1st, Zohran Mamdani, Bernie Sanders, and Alexandria Ocasio-Cortez united at Mamdani's inauguration to support the "democratic socialist" movement against billionaires. This struggle over wealth and money is likely to have profound effects on markets and the economy.
In 2025, the global order and geopolitical landscape underwent significant changes. The world shifted from multilateralism (operating by rules overseen by multilateral organizations) toward unilateralism (power-dominated, with countries operating based on their own interests).
This trend increased the threat of conflict and led most countries to increase military spending and borrowing to support it. Furthermore, this shift promoted the use of economic sanctions and threats, increased protectionism, accelerated deglobalization, and led to more investment and business transactions.
Simultaneously, the U.S. attracted more foreign capital commitments for investment but also led to reduced foreign demand for U.S. debt, the U.S. dollar, and other assets, while further strengthening market demand for gold.
Regarding natural events, the process of climate change continued in 2025. However, the Trump administration politically chose to pivot, attempting to minimize the impact of climate issues by increasing spending and encouraging energy production.
In the technology sector, the rise of artificial intelligence (AI) undoubtedly had a massive impact on everything. The current AI boom is in the early stages of a bubble. I will soon share my analysis of bubble indicators, so I won't delve deeper here.
When contemplating these complex issues, I find it invaluable to understand historical patterns and their underlying causal relationships, develop well-backtested and systematic strategic plans, and leverage AI and quality data. This is how I make investment decisions and the experience I hope to impart.
Overall, I believe the dynamic forces of debt/currency/markets/economy, domestic political forces, geopolitical forces (such as increased military spending and borrowing to finance it), natural forces (climate change), and the forces of new technology (like the costs and benefits of AI) will continue to be the main drivers shaping the global landscape. These forces will largely follow the Big Cycle template I proposed in my book "How Countries Go Broke: The Big Cycle."
As this is already quite lengthy, I will not delve deeper here. If you have read my book, you should know my views on the evolution of the Big Cycle. If you wish to learn more but haven't read it, I suggest you do so soon. It will help you better understand future market and economic trends.
Regarding portfolio allocation, although I do not wish to be your investment advisor (i.e., I do not want to directly tell you which positions to hold and have you copy my advice), I genuinely hope to help you invest better. Although I believe you can infer the types of investments I tend to like or dislike, the most important thing for you is to have the ability to make independent investment decisions. Whether you judge for yourself which markets will perform better or worse, establish an excellent strategic asset allocation portfolio and stick to it, or select investment managers who can deliver good returns for you—these are the key capabilities you need to master.
If you wish to receive advice on how to do these things well to help you succeed in investing, I recommend you take the Dalio Market Principles course offered by the Wealth Management Institute of Singapore.
*Note: As Q4 financial reports have not yet been released, related data are estimates.
**Note: When these factors decline, they exert upward pressure on stock prices.
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