There is a deep tension in markets as cyclical conditions, which have converged towards reasonable equilibriums, continue to confront big, interrelated paradigm shifts in geopolitics, the macroeconomy and technology.
The transition from co-operative global trade towards more competitive trade protectionism – which we call ‘modern mercantilism’ – and the artificial intelligence revolution is entrenched and accelerating. For now, it has left cyclical equilibriums intact, which has been good for assets, and markets continue to extrapolate the same, particularly in the US.
In our view, this apparent market stability obscures a heightened potential for extreme outcomes. The escalation in US-China trade hostilities, the collapse of the Liberal Democratic Party-Komeito coalition in Japan, France’s fiscal crisis and changes in government, and a US government shutdown are simply the latest reflections of this underlying fragility.
Mercantilism is begetting more mercantilism every day, its impacts are beginning to flow through to cash flows and conditions and fiscal responses are contributing to a pull for capital outside the US and a surge in duration supply that markets must absorb.
The AI revolution has entered the resource-grab phase, with breakneck capital expenditure growth that is great for profits today but raises long-term concerns about whether these investments will produce the cash flows needed to meet high expectations. And the strong market returns this year reflect, in part, a ‘money illusion’, as the value of fiat money relative to other storeholds of wealth like gold has declined faster than assets have risen relative to fiat money.
There are many ways these forces could break. The interaction of simultaneous, interrelated paradigm shifts leaves us with an environment prone to non-linear outcomes, where conditions should not be forecast far into the future. Investing in this environment calls for diversification to protect against the many extreme unknowns and agility to be ready to adapt as the unknowns become known. Fortunately, across countries, assets and currencies, diversification is not only prudent but tactically attractive as well.
Near-term equilibrium has obscured complexity
Despite a chaotically and rapidly evolving background, cyclical equilibriums in markets and economies have largely remained in place (Figure 1). Growth has held up well in the US – AI-driven investment and support from the wealth effect and discounted easing have cushioned drags from trade uncertainty – and has accelerated in other major economies (for example, Europe and the UK).
Figure 1. Equilibrium despite uncertain background
Global equilibrium index
Source: Bridgewater Associates
Note: Data through Q3 2025. Equilibrium Index is based on Bridgewater analysis and represents an aggregation of the underlying pressures faced by an economy.
At the same time, strong productivity growth and the deflationary impulse of tariffs outside the US have allowed for the continued moderation of inflation in most developed economies. That said, it’s important to realise that even in normal times cyclical equilibriums often don’t last long before something disturbs them.
The money illusion is at work
Balanced conditions typically produce roughly average excess returns of assets relative to local cash. In fact, asset returns this year have been favourable relative to local cash – i.e. relative to fiat money. Viewed from this perspective, US markets are up substantially this year – stocks look roughly in line with most developed-world peers and bonds are the top performer (Figure 2).
Figure 2. US markets are up substantially
Local currency terms, %
Source: Bridgewater Associates
Note: Data through Q3 2025. Past performance is not indicative of future results.
But returns in local currency mask an already unfolding consequence of mercantilism, which is that the value of money itself has declined as trust has declined. This has particularly been the case for the dollar as its stability has been brought into question, capital inflows have slowed and investors have taken some initial steps to hedge exposures. When viewed in global currency terms, US stocks are actually the worst-performing of the major equity markets – a big shift from the prevailing outcomes of the past decade and a half (Figure 3).
Figure 3. US stocks worst-performing in major equity markets
Global FX terms, %
Source: Bridgewater Associates
Note: Data through Q3 2025. Past performance is not indicative of future results.
More broadly, the perceived confidence in fiat money has clearly fallen this year in relation to gold, which is the only asset or currency that is not someone else’s liability (Figure 4). The reasons for this shift are confirmed by our examination of the flows. While fiat asset returns suggest that the stream of future cash flows has become more attractive, gold returns suggest that the true storehold value of those cash flows has fallen.
Figure 4. Confidence in fiat money has fallen in relation to gold
Gold terms, %
Source: Bridgewater Associates
Note: Data through Q3 2025. Past performance is not indicative of future results.
Asset returns measured in gold have been deeply negative, reflecting a cost in terms of efficiency and trust from the global and chaotic shift towards modern mercantilism. That’s the money illusion – nominal returns still appear good relative to money, but this reflects money devaluing relative to real storeholds of wealth. While gold is the most extreme reflection of this, you see the same effects in varying degrees with respect to other storeholds of wealth.
This is an environment where much can change quickly. The opportunities we see today are of less value than the process and ethos that underlies them – which is to approach these markets with diversification, agility and a healthy sense of paranoia.
Bob Prince, Greg Jensen and Karen Karniol-Tambour are Co-Chief Investment Officers at Bridgewater Associates.
This article featured in ‘Redefining resilience in reserve management,’ the first report from OMFIF’s Global Public Investor Working Group, which Bridgewater Associates was a member of.
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