Ray Dalio Is Now Ranking Economies by Their Strengths and Weaknesses

Ray Dalio, who built the world’s largest hedge fund firm with an eye toward global macroeconomics, is now in the business of ranking nations. He has concocted an annual tabulation grading the top 24 economic powers determined by economic size, according to their present strengths and weaknesses, plus their prospects.

At the top of the Country Power Score Index is the U.S., yet its position is precarious. No. 2 China is gaining on it fast. The eurozone is in third, although in decline.

The index’s commentary says the U.S. owes its leading status to its high level of education, military strength and technology capability. But the nation is on the downslope for the future because of economic inequality and internal political strife.

According to the Dalio analysis, China is on the upswing, as the result of its expanding economy and international trade, quick infrastructure improvements, investment, innovation and technology. The Dalio study ended in January and thus doesn’t take into account China’s pandemic lockdowns, which is hindering its economic growth, however temporarily.

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In the view of the Dalio index, the eurozone is in relative decline due to low productivity gains and inefficient allocation of labor and capital.

Dalio’s gauge weighs 18 different qualities that it describes collectively as a “good leading indicator of future conditions” and “a guide for policymakers to produce improved outcomes.” The factors the list uses include education, innovation and technology development, civility of people, economic output, incomes and balance sheets, reserve currency status and military power.

In a tweet on Wednesday, Dalio pointed to his half-century career as a worldwide investor who “likes to quantitatively measure” investments to understand them better. That same approach is what he takes to the countries in his roster.

The investor’s themes are well-known. His latest book is 2021’s “Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail.” In this treatise, he speaks glowingly of China’s cohesion and resolve, and some critics have faulted the book for overlooking its authoritarian ways that could well threaten the very innovation vital for world economic dominance in the long term.

Regardless, the new index offers an interesting, if familiar, take on geopolitics and its handmaiden, economics.

For several months now, bond prices have fallen in unison with stocks, reversing the customary see-saw relationship between the two asset classes. Rising inflation and interest rates were the agreed-upon culprits for spooking bond investors. But around two weeks ago, bond prices began rallying, parting company with stocks.

This bond rebound happened around the time that the benchmark 10-year Treasury bond nudged past 3%. Suddenly, the positive correlation between the 10-year and the S&P 500 flipped. Stocks continued to slide.

If 3% is a psychological threshold, how come? Perhaps, writes Guneet Dhingra, Morgan Stanley’s head of U.S. interest rate strategy, investors believe that 3% “is the magic number—in which financial conditions have tightened enough to slow down growth,” which would give the Federal Reserve “what it is looking for.” For sure, he adds, worries about growth have begun to overshadow inflation anxieties.

“The bottom line is that growth concerns dominate market thinking,” Dhingra says in a research note. “Ten-year yields could range-trade around 3% until we have a resolution of the growth picture.”

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Projections of 2022 gross domestic product growth have been pulled down by many economists in recent months. The Conference Board recently lowered its estimate to 2.1% for the full year, down from its 3.5% call issued in January. This year’s first quarter posted a negative 1.4%.

Dhingra argues that the picture is too mixed to tell whether the economy really is on the wane for the balance of the year. Last week, the stock market freaked out at weak earnings at Walmart, Target and Amazon. Sales at these companies are still good, he reasons, but the problem is that profit margins are tighter, likely due to inflation. At the same time, he goes on, airlines are reporting stellar earnings as Americans travel more.

A new dynamic is at work here, Dhingra says: People are moving back toward services and away from their rampant buying of goods.

Over the past two weeks, the 10-year’s yield had dropped back about a third of a percentage point, as the bond’s price has climbed; the two move in opposite directions.

Due to the shift back to services, “We think the growth concerns, while something to keep an eye on, could be overstated,” he writes. Alas, the same can’t be said for inflation. It could stay stuck around the 8% annual level for “at least the next three months,” he contends.