A Conversation with Ray Dalio and Michael Milken

good morning and we have a lot of topics to cover you have the book here on principles and my book which I looks like I might all hear it as has a few little marks in it and I encourage each of you to use little post-its while you're reading the book from that standpoint I thought rate we'd start with a little bit why did why did you go into finance I carried in the 1960s when I was 12 I carried it at a golf course and everybody was talking about the stock market then it was it was the stock market gone up for a long long time and if you ever do get a haircut or anything you would always be talking about stocks and so I took my catting money when I learned six dollars a bag and I and so with get twelve dollars around and I would mike adding money and i put it in the stock market i mean i was curious and the first I remember the first stock I bought was a company by the name of northeast Airlines and the only reason I bought it is because it was selling for less than five dollars this year and I figured I could buy more shares so I'd make more money if it went up that was my brilliant theory of course it was dumb but I it was a company that was about to go bankrupt somebody acquired it it tripled and I was hooked so I got hooked on the markets at that time high I was trading in the debt of Northeast Airlines at that time and really really how cool and we were debating shorting the stock as our long position the debt was selling at a substantial discount and I think the time that Ray's talking about if you ever want to check an archive there was a book published happiness as the stock that doubles in a year and this was a a period of time where if you couldn't make 50 or 100 percent of your money really weren't doing a good job and it looked at the American Stock Exchange and all the stocks that doubled during this period of time in a year and it basically concluded you should be focused on very low priced stocks so that book symbolized that issue let's talk a little bit about your family and how your life growing up potentially influenced you later well my dad was a jazz musician and my mom was a stay-at-home mom my dad played late at night and you know he's a good man but I didn't have a lot of contact with him until he was until later and I was just a normal kid we played you know touch football on the streets and my mom loved me a lot I was lucky to have a really good family with a lot of love you know there was a lot of work done on education looking back in the 60s and 70s and one of the conclusions was the most important thing in education was having two parents that loved you enough and Express confidence and good teachers yes there was my circumstances and you were exactly right and when I contrast it with some of the circumstances of others like I was ultra rich in being able to have two parents who loved me and to be able to go to a school in which I was well educated and to have then an environment which was also inspirational in that it was an aspirational environment it was the time when you know John Kennedy was going to go to the moon and we're going to eliminate poverty and the United States was the richest country in the world with accounting for 40% of world GDP and that whole aspirational opportunity you know the idea of the equal opportunity and a great abundance of it and the far parents well you would do better than your parents it was a different kind of environment then and so what Ray's talking a little bit about are the baby boomers now ray is much younger than I but he's still in that baby boomer group today and this group that was born 1946 to 1964 and much different generation than our parents our parents success was really highly depended on the government whether it was World War two whether it was the depression and our parents told those baby boomers you could be anything one person can change the world and in 1964 the first year the baby boomers went to college from that standpoint if we step back and think about that period of time rayon I was at Berkeley and taking these courses and quantum economics etc was the only person that enjoyed it in a class and I think and every I was excited because it was like a chapter a story in every class we got new algebraic formulas on how the world worked that we could write put in and our computers our 360 was about as big as this room at that time and I'm when I think about the book and many of the principles you put forth I think about the advancements in technology computing power today versus us writing those little algorithms every class to try to define what was happening in the world and in many ways your effort to create a meritocracy is based someone on those little formulas that we had written down in that class at Berkeley take us through that kind well I mean yeah you remember it well like you say and we had those little punch cards right and you would drop them in and then I learned what regression analysis was right well and that was the key to discovering everything you know you just put the data in and you got the two independent variables and then explained it and then then you understood it and but at the time yeah I mean literally I would have colored pens and rulers to plot my graphs and literally operating that way but and then I remember when I started my business you know which was in 1975 I had an HP 67 calculator so you put the little thing in and you typed in and you got the regressions and that's where it started right but yeah for you and for me I guess I can you speak for you I then began to understand that we could put things in equations and we could put our thinking in equations and algorithms they were called equations then there are algorithms now there's basically the same things and you and then you could have the computer start to think in parallel with you and that's when it began so well so I would say it the opposite way though it wasn't that that thinking led me to have an idea meritocracy it was that I wanted to have an idea meritocracy for other reasons I'll explain that then made me use the algorithms to help me do that in particular look in order to be successful in the markets you have to be an independent thinker who bents against the consensus because the consensus is in the price so and also nobody's good enough to know themselves that they can all the answers so you know I learned by having you know the kicked out of me a fair amount of time I learned a certain amount of humility and then I knew that I didn't have enough of the right answers so I wanted a bunch of independent thinkers and so when you get it and think independent thinkers then how do you get past that and you you know you're gonna want to have an idea meritocratic process and then what I found is that algorithms allowed me to do that because rather than think about what decision we were going to make at any point in time we would think about what the criteria for making the decisions would be you know and then if you write down those criteria and make them clear and then put them in the form of an algorithm then you could test how they would have worked over history and that allowed idea meritocratic thinking and we also had some ways of getting past that I'm sure we'll get into those I don't want to hijack that by explaining that in those ways but that led us to make use algorithms to have an idea meritocracy to make better decisions than any individuals could and that's been really the key to the success it's one of the it's in the work principles here and it's that one of those things that I really want to emphasize because I think we're now in an era in which when we talk about open source and such things we're now in an area an era where idea meritocratic thinking can be then systemized to produce better results than it any individual can produce so let's talk just a better specific that'll go back in time I'm home watching the election in November results come out and as the results come out things are changing and it appears at the moment that President Trump is about to be elected and the stock market in Asia the futures are down 1,700 points I call one of the individuals in this room and I called a number of others I told them we should be buying everything okay not nothing based on fundamental analysis that I had spend my life on but basically then when people woke up in the morning the election would be over no one would be suing the next day and would just be over and after a year and a half or two years every day these issues you'd be a sense of relief and in my opinion the most important element is that we the government would believe in the private enterprise system and regulatory would be backed off nothing else so that was my view of what was about to occur it was a macro not a micro view what occurred at your firm after the election deal well what we did is we wanted to go into the election neutral to the event because we honestly we don't want to have anyone big bets particularly political debts and so we try to have his balance the position regarding to that that it would be a concentrated bet as far as the reaction of at that time the real question as we were going into that was the question of how it would be received in terms of capital flows and it was very clear that it was good for capitalism it was good for capital flows and lower taxation would be good now the issue of protectionism and those other issues were also you know issues and so we tried not to bet on politics but and we should probably get into the discussion of the markets and what the particular zuv the policies are in terms of their implications but we wanted basically to bit largely going neutral and then there was the the issue of certainly it's great that we're going into a capitalist environment certainly it's great that we're going to making money is a good thing it's certainly great for taxes stocks are going to be worth more because of the fact that your taxation is lower it's it's great in those regards and then there were the issues of what does that mean for the fragmentation of we're in a populist environment what does that mean for conflict what is that going to also mean in terms of protectionism so as we got down to the nitty-gritty it was very much a company by company situation you know if you were a multinational company operating in certain kind of environments it was a bad thing in one respect so anyway we tried to go in pretty much neutral to it so let's go back for me the Watts Riots happen I go back to Berkeley I write down this formula it's 1965 and basically I concluded that if we're going to have prosperity jobs whatever it might be we needed to create financial technology they would serve as a multiplier on the world's largest asset human capital world's second largest asset social capital and then real assets and so I'm thinking about these things and Gary Becker wrote a paper in 1966 called why irrational behavior could be rational so I was thinking about people that were participating in these insurrections in the United States that would wake up in the morning didn't have a job at cetera but I was so focused on this element of bringing financial leverage financial technology to people that had ability and thinking about how to deploy them and so at the time in 1972 I went to Singapore and my objective was to sit down with Lee Kuan Yew and talk about a country that was about to be built on human capital attracting the best and brightest from around the world to come number one and number two to provide stability he had to educate his own population so they wouldn't be second-class citizens to xmax to me in many ways his ideas for a country reflected in some ways of your ideas for a company am i right am I wrong there are a lot of similarities in that the man was a very strong man and he was in a position as he describes if you don't know Lee Kuan Yew is a remarkable man because he took basically of Miskito invested back water in which he's in the middle of the heroin drug trade triangle and he created a vision and built out that vision in which it would be the place in Asia that companies wanted to be in that families could be raised and from people from around the world and in order to do that he had to have about what I would vision in which there was a firmness of the type of behavior that was necessary so that there was a strictness in terms of a definition of what a good citizen was and he built out that good citizenship and at the same time he did that in a way which respected all the different cultures so and there and the divergent the differences in people so people from all over Asia could be educated and continue to speak their language and be educated in their language as well as English and so I respect the his diversity I respect his idea meritocratic way among those decision-makers and I respect the the the notion of good citizenship at the same time as there's you know that sort of discipline at the same time as that there's this egalitarian way of operating to bring people up so yeah I mean ought to be compared with Lee Kuan Yew is a tremendous honor because to me I he's been a hero from I think he's probably the greatest leader of the last you know fifty or a hundred years he's certainly one of them and so I guess the fact that I admire him and and we've I've gotten I got to know him I've had him you know dinner in my house and talking about such things which was a great honor not talking about but gathering information from him in terms of his perspective and I would say we have a lot of common about values yes there's a lot of common and about values and how to then run an organization that way so when I when I look at Singapore and Lee Kuan Yew as we've discussed with a number of you over the years it was mirroring what I was focused on in finance we would finance and focused on can we provide capital people with ability and let them create jobs etc so if you go back and look at as we looked at many times Singapore versus Jamaica both of them were separating from the UK at the same time they both have the same GDP in 1960 there was no difference Lee Kuan Yew actually went to Jamaica to talk to the leader to discuss what his strategy was the strategy of Jamaica was tourism and natural resources the strategy of Singapore was human capital and this essentially was our concept and idea of Gary Becker eventually won a Nobel Prize for this in 1992 and so if you look at them today no one would compare today Jamaica and Singapore and so this is an example how it worked at for a country but raise give us a little more ideas of how it worked for a company called Bridgewater and this meritocracy that was created but based on the ability of individuals which was the world's largest I want to take us back to the mid-1970s and a number of you over the years have heard me talk about the 1974 period by far the most important in my opinion post the depression if you're going to go into finance analyze what happened but definitely the most important period since World War two and so the stock market went down 50% interest rates doubled you had credit controls banks weren't even allowed to loan money to new customers unemployment rate doubled all financial markets were shut down the Businessweek brand stories no one will ever buy a stock again but one of the keys that I want you to talk about was the nifty 50 so all of you who are responsible for managing money for your pension funds endowments etc today this was a period of time where you could just buy stock and hold them forever the nifty 50 these 50 stocks and they sold at an average p/e multiple in 1972 at the height of 66 times that was the average p/e multiple at the time and if you gave your money to a trust bank JP Morgan or whoever this is what they bought for you well this was a difficult there were some great companies Eli Lilly Walmart etc Disney but there was some more difficult companies obviously Polaroid and others in this group and adjusted for inflation you lost 46 percent of your money and so this was kind of the end if putting your money out safe results in you only losing 46 percent of your money the the explosion and growth of the money management business eventually hedge fund business began how did nineteen seventy-four factored into your thinking at that time well still you know there's that there was the nifty 15 and then there's the and then the bubble 74 so I'm in the basta 74 so let me comment in them separately the nifty 50 is a phenom was a phenomenon that has repeated over and over and over again because it's the nature of the markets so it would be the dot-com bubble of 1999-2000 and it in a can to some extent be the lesson that might be relevant today and that is the the notion that there's a group of great stocks and everybody sort of agrees that these are wonderful companies and like today a number of companies if you look at the composition of the leadership of the bull market and the companies that are leading that bull market those are wonderful innovative companies and like in 2000 and so but what the nature of the markets of course is that prices reflect the demand and so when you get into a situation where people say that's a great company and they do well and then there's the self-reinforcing notion of they do well because people look bought a lot of them are buying a lot of them that makes for expensive stocks because the nature of our business the nature of the beast is something that if there's a lot of demand it makes it expensive and when you get into the demand that people are no longer thinking about is it too expensive even though they're great companies you have that phenomenon and so that was the nifty 50 and there are lessons and you know the reason I wrote this thing print principles is the same things happen over and over again the same things happen over and over again and you have to know those so that was what that phenomenon looks like and you know to know that something that made you a lot of money might be more expensive and you know that's when the the naive money comes in and they buy it because it's good without thinking about how it's expensive that was a nifty 50 1974 was also a good example of a time when you know it it was such a good example that taking my caddying time and I'm tick 1966 was the real dollar the peak of the stock market and 1974 was the bottom and in nineteen and you were describing it cite 1966 that time of catting everybody believed that the stock market was going to go up it was you know just dollar cost averaging and so on and then of course it went down 1974 as you point out was exactly the opposite everybody believed that it was going to go down the last thing in the world that you can that you should go is buy a stock and that was the exact bottom so the lessons are that the future is probably going to be a very different version of the present and don't think that the past is going to be representative of the future and that's you know sort of a timeless lesson I think so this gets at the concept of regression analysis that the future is like the past and this 74 period an example would have been singer sewing machine paid dividends for more than a hundred years obviously a safe thing it was rated investment grade in January and the bonds were issued Goldman Sachs sold bonds and the big argument in January should I buy it at an 8 18 should I buy it in an 8 22 what is the right yield to buy the debt interest rates were higher than today people at the end of the year we're selling this security between 30 40 cents on the dollar they weren't asking about four basis points give or take a thousand what's the bit and so something happened and it was just kind of maybe the discovery that maybe women in the emancipation of the 1970s wouldn't be all at home sewing and so this conventional wisdom let's take us to today and before we go back in history Rea conventional wisdom let see if you knew that the president of Brazil was going to be impeached if you knew that they were going to indict the previous president if you knew that the largest company in Brazil Petrobras was going to have all these issues and you knew there was a Zika epidemic inflation Runnings unbelievably high unemployment doubling and increasing and you could say to yourself weaken these things are happening in Brazil in 2016 would you short the market if you knew the future or would you buy it or would you not invest in Brazil and so obviously Brazil in retrospect was the currency and the market one of the best performing markets in the world right can you tell us how to look at something like yeah sure sure you know if you took two years before that three years before that it would have been they everybody was loving Brazil you know and it was very very expensive right if it's loved it's probably expensive right if it's hated is a good chance it's cheap right there's a saying as the time to buy is when there's blood in the streets right so to know that something that is good may may be very overpriced and something that is bad may be very cheap you have to know how to do calculate value and also expect change let's look at even something a little more current it's 19 its 2015 and you were reading the newspaper in 2017 President Trump has been elected you've been able to look two years in the future he's now in a verbal war with the leader of North Korea okay every day they're doing things now North Korea is creating video games showing how they're bombing US aircraft carriers etc and having the students worked on how to do this in school a lot of volatility in the world people concerned should you be investing in South Korea at this period of time since you knew the future well generally you'd be thinking well I'm not going to invest who knows they're pretty close and half the population of the country lives in Seoul so they have difficulties well if we look at how South Korea financial markets are doing this year you'll see that their currency has moved up versus the US currency their stock markets moved up substantially take us to 2017 and South Korea well politics is also something to be fading wars are something to fade I mean a histep if you look at the history you could take Kennedy's assassination you could take most of the wars that we've gone into and so on including the bombing of Pearl Harbor and various Wars and I think people exaggerate the implications of the wars in other words they there's a tendency to think that politics or global affairs can destroy something and then we're talking about the same phenomenon when it's perceived as something that's not discounting the economics so if we take Korea if there's not a catastrophic event you have a situation economically and that's going on in in that region economically that's fantastic for companies and very strong for the currency so I think it's a right now it's knowledgeable that the politics is not something that is an overarching issue unless there is you know the catastrophic event but there tends not to be the catastrophic events so it's interesting the North Korean issue gets more media press in the United States in South Korea today if you want to compare just the amount of headlines that's one and two I want to make sure one understands ray is not saying war is good okay so what he was commenting here was really the realism of what's occurred I think we're I think what we're doing now is is the exercise that I would encourage everybody to do everything is another one of those so that if you looked at war go back in time and look at the times that we had war look at the break look at pearl hammer harbor and what happened in terms of that look at the European Wars in other words the worst ones and then say how did they happen how did they occur in the past in order to gain a perspective because what you're bringing to the table right now is the notion of the same things happening over and over again and the lessons from history and that's the exercise everything is another one of those that happens over and over again so just whenever you're thinking about one of those if you just go back and say what happened it'll help to give some sort of perspex oh I just want a paraphrase they could for the saying right the lesson that Ray is giving us on this subject is study history look at what's occurred and try to figure out how it reflects today and what I found if I go back to 65 so I check out this book I had to have it sent to me called long-term corporate bond experience and I discover an unbelievable thing that Heckman head of the Cleveland Reserve had done he had tracked the history of every single bond issued from 1900 to 1944 and what happened to him so this data was available to everybody and what do you learn you learned that everything that people are saying about credit is wrong everything the worst credit is sovereign debt yet everybody said it was best and every country was rated triple-a even Venezuela second you learn that the second weakest credit was individuals they default and then the best credit was small and medium companies and and large companies and that the spreads were too wide even during the Depression now this fact was available to everybody no computers unbelievable job to have to keep track of everything for 44 years then it's updated from 44 into the 1960s by someone else and I think one of the things you're seeing in Rey and his firm is this understanding at least that you understand history and what occurred and why others they reflect the future I think I think then you ask yourself what is the most analogous period in history and I would say 1937 is the most analogous period in history to where we are today just take a moment if you do want to take a moment on that so analogous in the following sense in 1929 to 1932 we had a debt crisis was which was similar to the debt crisis that we had in 2008-2009 then you get to hit zero interest rates and so when you hit zero interest rates the Federal Reserve can't any longer ease monetary policy by lowering interest rates so it had to expand its balance sheet from the other words essentially print money and buy financial assets to put those financial assets up and put more liquidity in the system so as a result 1932 to 1937 was very similar to 2009 to the present period of time and during that period of time there was a big rise also in the wealth gap right now the top one-tenth of one percent of the populations net worth is equal to the bottom 90% combined and if you look at that income gap you would have to go back to 1935 to 1940 so we had a situation which was somewhat analogous and then in 1937 as in now the Federal Reserve began to tighten monetary policy I'm not saying by the way the same thing is going to happen I hope that there's a lesson to be no no learn by that but there was a symmetric risk and so what we have is some of the audience that doesn't remember vividly what happened to financial markets and the 37 period why don't you just reviewing with it for a moment well this the stock market stock market went down 50 percent and we had what was then the first time we call a recession which was like a read depression and that's that's the in a sense that and what had happened was and we had the beginning of populism around the world so that was populism that was not a term that we're used to using here it's a relatively modern term but it was a popular it was a term that existed back over then and because that if we had strong leaders who were also nationalistic leaders who were more confrontational by nature and we also then had that wealth gap so one could imagine that if we had a downturn now well we don't want a downturn but if we were to have a downturn and I don't think we'll have one but if we were to have a downturn I think that that would cause a lot of social and political conflict in other words as a wealth conflict there's that kind of environment so we had that kind of an environment come or an environment of greater conflict so I think it's an it's interesting that it's analogous I would say if you look at populism when we started to see populism populism it's I'm not just referring I'm referring to the phenomenon not just the people the phenomenon grows in a certain way and to study it I there's something I put on LinkedIn if people are interested it's a case study of 14 different populism what is populism how does it grow how does it behave 14 cases and then what is its archetypical but if you're looking at it it lies beneath the surface in Europe it lies beneath the surface elsewhere and it's one of those things that we have to be careful of and so economically I think as we talk about the issues of our time we have the wealth and opportunity gap which is a phenomenon that we that is analogous that we have to have some of those pay some of those pay attention to that I'm only bringing this up because you were referring to the same things happening over and over again and then looking at a particular period and I think that begs the question okay so what is the analogous period to today so I think the Institute in many ways was created with the idea okay we have a problem how are we going to solve it and if you look back at the late 1970s and I know the Shree is here today we saw that sovereign debt that people willing to buy sovereign debt at 25 basis points more than IBM it's dead so we try to discourage anyone from investing in that and I ran in the 1970s you got 25 basis points more than US Treasury bills that was here alternatively then they had a change of management and Iran and the new management didn't recognize the liabilities of the old management from that standpoint but this buildup that we saw there was no way its for it to continue but it was essentially financed by the banks and an outgrowth of this Petro dollars of the mid-1970s that were deposited and if you looked at history of sovereign debt and he had a couple different elements occurring at this time I want to take him back to Ray in 1990 1982 you had that a head of the Federal Reserve Paul Volcker who believed no country ever defaulted well that might be true in Jupiter but not in the United States he had a disciple Walter Wriston who wrote a book which I'd suggest you called risk and other four-letter words but he believed in it also and essentially almost brought down the entire banking system who the world eventually lost a trillion dollars in sovereign debt and so it was until the mid 83 that we started we would then went out and hired everyone early mid 80s who issued all this debt to now refinance it and at that time so we were focused on okay what are we going to do about Max how are we going to refinance Mexico and our conclusion Rey was that a 99 year lease on Baja to develop Baja was worth than more than all the debt of Mexico and Mexican and the Nationals had more money deposit in the United States than in Mexico so we were preparing to offer to pay off the debt of Mexico you had predicted the same thing occurring late 70s early AIDS take us back to that point in time what are the lessons learned well yeah I was it was my biggest lesson at the time so yeah I went through the calculations and it was very controversial point of view that these countries would not be able to pay their debts and events started to transpire and Mexico defaulted on in August of 1982 and because I had anticipated that and I got a lot of attention I was you know a young guy and I was asked to speak to Congress and explained to them what was going on and I was on Wall Street week and if you want to see ray you can go to a youtube video from a TED talk that's you could see him testifying yeah go to the TED talk it's you'll see that moment and that moment I'm testifying to Congress on wall in wall street week and I figure we're going to have a hell of a debt crisis and the economy's going to down and that was the exact bottom in the stock market I couldn't have been more wrong I I was so wrong I had to I had a small company then I had I think it was bomb Leland I'm 7/8 people or so these were close people I had to let them go I was so broke that I had to borrow $4,000 from my dad to help to pay for my family bills this was one of the most painful experience how much money were you managing at that time oh I mean nothing that you know I can't I can't remember but not much and you know and I scrapped myself up to that point and and it was the most painful and probably the best most valuable experience I ever had in my life because it changed my approach to decision making you know I went from thinking I'm right to thinking how do I know I'm right it gave me the humility that I needed to balance with my audacity it made me start to think it made me want to find out the smartest people who disagreed with me and to understand their reasoning you know have thoughtful disagreement it led to me it was the reason we wanted to make this idea of meritocracy it was the main reason like give me the smartest people I can have around me and let's have those arguments and how do we get past those and it led to the idea meritocratic and it was really from that point forward that that took knowing how to balance risk like you we talked about going into the Trump election trying to make sure imbalance risk but also it taught me about looking at history that the surprises that I had were things that happened in in history but never happened in my lifetime before like in I was clerking on the floor of the New York Stock Exchange in 1971 when the dollar was floated and so I walked on the floor of the stock exchange and people wouldn't accept dollars and the money and I figured okay went major crisis and and the stock market went up and I thought it was going to go down a lot you know this is when I was in college and and I realized that when I went back that there were two valuations that happened not in my lifetime before but happened before so it was to know that everything happens over and over again this these were the lessons lessons are the ability to have thoughtful disagreement so to raise the probabilities of being right to find the smartest people who disagree with you and understand their reasoning to know how to balance the bets well so that there's no one bet that's becomes an important thing and you become dominated and or anything else and also to to go to history that if you if things happened in the past or in some other country and you don't understand them then you're gonna be in trouble so you need to have timeless rules and universal rules so we have a criteria that everything all of our decision rules have got to be timeless and universal so those are the lessons that I talked took out of that very painful experiences and that's really what has served me and Bridgewater well since then so one there's a lesson to be learned if you're gonna make mistakes make him early in your life it was interesting I actually saw Ray on television it was broadcast his appearance oh you did at the time and what this did is it formed us and myself to feel okay this is reinforcing our views and this is going to be a great opportunity because the banks had been lending money keeping it going even though Mexico defaulted if you wanted to trade sovereign debt in the 1900 a 1980s you had to pretend it was worth a hundred cents on the dollar because they didn't have to mark it down and so if you wanted to if you believed you wanted to swap Honduras for Nicaragua you had it create like a chef's salad a combination of different securities because they all pretended they were par and it really wasn't until a little later in the 80s but this told us ok this is an opportunity for us to use our skills not only to refinance or rebuild companies but to rebuild countries and change their capital structure let them exchange their debt for ownership and their businesses like Chile and others did at the time and I want to go back and really reinforce something Ray is saying here's and that is dealing with this issue of conventional wisdom in history so to me if you look back to the 20th century one of the fundamental things that changed the 20th century for every single person was Sputnik going up and I was in elementary school here in California and I know when I was debating a number of years ago Putin akan whether Russian capitalism or Western capitalism was better on Russian TV he would corrected me to let me know it was Sputnik not Sputnik but that was the day the Soviet Union thought this was their finest hour they overcame everything they were scientifically superior it was the middle of the Cold War bomb shelters etc but that would mark the day the end the end of the Soviet Union because it woke the United States up NASA was formed DARPA was formed DARPA was formed so the United States would never be behind in science again and the US economy relative was like the u.s. versus New Jersey so ultimately Russia ultimately could not compete and it was finished with Reagan and Star Wars we says okay we're gonna go spend a trillion dollars well that was not an opportunity for the Soviet Union so it really woke him up and so I think one of the points that Rey is made here I just want to reinforce when you read this book and look at it is to learn from things and conventional wisdom as raised pointed out makes it very hard in the early 1970s there was everything the market was perfect etc in academic circles ray let's talk about one of the challenges I want to just jump off here we just had our Asian summit in Singapore and for many of the reasons you cited the Milken Institute decided we would put our headquarters in Asia and Singapore not in China and not in Japan not in India etc but we had out of our group which today that group of people that have their own money I have between twenty and thirty trillion in assets and about fifteen trillion was represented many of these institutions today ray are not putting on a million they're putting out a billion or they're putting out ten billion or twenty and in the case of piff and we'll be launching the Milken Institute Middle East summit in February and we were visiting with them they put out forty five billion into just one fund and twenty billion into just another fun you're one of the world's largest money managers the world's largest hedge fund how much do you believe your meritocracy the way operate how much in assets do you believe you could deploy today let me break to answer questions alpha in this beta okay and then we're dealing with the the general question of liquidity alphas a zero-sum game and I'm gonna take a couple of minutes and and just sort of explain it alpha everybody has to start with a strategic asset allocation mix and how do they come up with that strategic asset allocation mix that they then tactically deviate from so when you create that asset allocation mix we create a balanced portfolio we call an all-weather portfolio and we have some capacity in that area because it's a passive portfolio that is just holding an asset allocation mix that is not active in that we have capacity in alpha you have transactions and you don't want to have we're closed in alpha we don't want to take more money we've decided we've been closed for most of the last ten years so the answer is we don't have capacity because if you manage too much money than your transaction cost ain't gonna eat you up so I think the for any manager the amount that they have is a function really of almost how much they transact I think we have the most capacity because we deal in all liquid markets in the world I mean not only stocks bonds currencies commodities everything that's liquid and we tend to move very slowly in those we take positions in those and we're moving them around and we're at our own I would say is our maximum and we don't want to take more money so active management is limited in other words I know the the boundaries of it and the limitation for active management is limited the ability the real issue is how to create a really well-balanced strategic asset allocation mix now all that money has come around largely because central banks have put fifteen trillion dollars of their balance sheet into buying financial assets right so that's put a lot of liquidity in the market and because of that liquidity and all of that demand then there's the purchase of all asset classes because they all compete with each other so it's there's the competition of you know you have a zero interest rate you have a two and a quarter percent bond yield and then you have an equity and private equity and everything has an abundance of demand because there's all that money chasing all that that that number of investments so as a result of that there's going to be low returns coming forward and that's going to have important implications as well as we're moving so the answer is that there's not enough for active management then you have to deal with the strategic asset allocation risk strategic asset allocation issue to try to create that balanced portfolio and then when you take that you're going to have that in an environment where there's generally going to be low returns because all of that money has bid up the prices of those assets to have relatively low returns and the real thing that those institutions need to do is to know how to engineer for that all right now I just can't stress you know the challenge to our society and importance today ray talked about really an important issue before income inequality in my own opinion partly today we're in it with a knowledge society that is built into it from that standpoint but if we look at the actual assumptions in Japan today the largest fund in the world a Japanese pension fund has about one point eight five that's their goal for all of Japan today it's a little over two and a quarter if he wanted to buy an annuity in Japan today you get 25 basis points so you could double your money in two hundred and eighty years if you'd come to Canada it's in the forest for two four and a half percent and if you come to the United States today it still weighted average somewhere between seven and eight percent of the expectations if you look at swapping in two dollars today it's about 160 180 basis points so if you tack that on and in Yan you're at about four or four and a half similar to Canada yet what we see of these dramatic unfunded pension funds the challenge is to meet them the promises made a company like GE dramatic change here with sixty billion dollar unfunded pension at a seven or seven plus percent actuarial assumption that they are dealing with and imagining what that unfunded pension fund would be so how to generate these rates of return right since this is going to affect society so significantly particularly in the United States and Western Europe and other places what advice do you have for us on this side well first of all those returns could not be generated they will not be generated because there's only beta and alpha and if you look at the what is priced into beta in other words there's cash yields the bond yields and then you carry that forward in terms expect the returns of equities or if you look at private equity what their returns are and so on ain't nothing that is going to have that kind of return from a beta point of view and then alpha zero-sum so we're not going to have that those returns for all those people those entities so and if so what we know I even if I give my money to Bridgewater all my answers I'm not going to you will not achieve that yeah certainly if I acted if I was to say I don't I'll answer your question literally from an engineering point of view if you have an asset a balanced portfolio of assets and the return of those assets let's say is a five percent return or a three year four percent return depending it very much depends on what the return of cash is to think about whether that leveraged return would produce a return that's higher than that it's certainly the case that engineering for that is an exercise that is the only path out and and and there may not be a path out the issue from most of those returns though is that those returns won't be met and to get back to your question it also that won't be met in terms of health care obligations so that if you take the total amount of obligations for our society that is in the form of debt pension obligations and healthcare obligations it is certainly the case that those obligations can't be met and that doesn't mean that we're going to have a debt crisis like in when 2008 we anticipated the debt crisis we'd went through the proform of financials it was not it was clear that the there was going to be not enough money to pay off those debts in this case when we do through the calculations we don't have a debt crisis but we have an emerging squeeze and so those are the promises that means that they'll be compromises in pension what's delivered they'll be compromises in those things and when that happens in an economy where we have essentially two economies and you look at the bottom 60% of the economy that's a I believe a social pressure that's going to be an important social and pressure that it's a pressure of our time so that's why I believe that that that the combination of those obligations not being able to be met is a social pressure and I think then there's the exercise of what does it realistic how do they engineer for that it becomes a cash flow issue not just a theoretical issue when there's enough money around to top up the pension fund fine when you have a situation when you're actually having to sell off assets in order to make the funding and the portfolio of your assets shrinks those actuary will return numbers that you need or rise so because of that phenomenon we're about to enter that period where the cash flow needs are going to have to come out I mean it's going to be such a burden and too much of a burden or the pension obligations are not going to be met or you're going to have the cashflow problem that I'm talking about in terms of the need for the actuarial assumptions to rise so it's an engineering problem that's particularly true because the obligations are large and because the expected return of asset classes is going to be low so yeah it's gonna be a social and political issue as well as a market issue for our time for the next generation I believe so just to comment here one we're speaking on a very macro basis if you go to many of the pension funds for example in Canada they have net inflows for the next 15 to 20 years so they don't they don't have to generate any rates of return on a cash flow basis at this time with more money coming in and going out and what array is common and there's a number of others where the outflows exceed the inflows and if you look back at the mid 1970s and late seventies when interest rates were very high people thought they were getting big rates returned by big coupons on debt but it was the reinvestment rate that got to them and if that's why equitable life insurance is no longer an independent company because they had written a number of new --'tis but the reinvestment rate on their cash floo changed ray you just touched on something I think that's extremely important and the theme at the Milken Institute this year is building meaningful lives and when you talk about populism or other challenges it's do people feel they have meaningful lives and many of us when we are in high school or college studied Maslow's hierarchy of needs and as triangle and looking at this area we are first focused on basic needs it then goes to safety for your family and you can just start thinking about people that lost their net worth or you're reading about they're going to lose their job to technology and as but as you move up that hierarchy you get to loving and belonging and meaningful relationships self-esteem and eventually self-actualization Rea I remember reading and in the book and maybe pull up the slide on Bridgewater's radical transparency and your efforts of creating this within a firm and here was a note you got on feedback to a meeting from you and the other leaders at Bridgewater could you kind of take us back to that and talk about relationships among people and I remember it and might we didn't allow people on the trading floor generally between 6:00 in the morning and - it was a distraction and one day we had one of the world's larger money managers come on the floor for a reason I don't know how he got there and later when I took him to dinner he said he didn't realize how people disliked each other so much at the department because they were screaming at each other I told them that we don't have a long time to go sit down quietly in a room and discuss in a nest on pillows why that was a terrible decision ok we only have a few seconds and we express it quickly and we're on to the next thing and it wasn't anything to do with personal relationships just how you express yourself how could you possibly by that secure that point had to be made quickly so my point how does it work the firm is so unique in this sense and when we talk about things to many of the world's leaders and finance whether they're money managers etc they are not used to certain terms such as baseball cards dot and other areas how does it work ok so I'm gonna give you one sentence it's a long sentence but it's it comes from the fact that I need the smartest independent thinkers to bang around idea as well and get past those ideas right so Bridgewater is an idea meritocracy that's what I mean idea meritocracy in which the goals are to have meaningful work and meaningful relationships they're equally important meaningful work and meaningful relationships it supports each other they support each other it's like tough love ok you can care about a person and you could be tougher with them if you care about them and it's like the Navy SEALs you want you know so that sentence is an idea meritocracy in which the goals are to have meaningful work and meaningful relationships through radical truthfulness and radical transparency in other words that anybody can say anything and challenge anybody so if you put that slide back up that was the one that you were asking right can I go back up yeah so here's Jim Haskell and we have this radical transparency and he said ray you deserve a d-minus for your performance today in the meeting you did not prepare at all because there was no way you could have been that disorganized without preparing ok isn't that great isn't that great right it's great because if first of all I needed that feedback because he was right so that was good I got the feedback and secondly if he couldn't speak that way then he would bottle that thing up he'd have to carry that around them and I wouldn't and I wouldn't be good for our relationship right so being able to speak and radically truthfully to each other to get past it but and then you talk about our baseball cars and so on you have to know what people are like people are good and bad at different things everybody's got weaknesses so the idea is can you find ways to really know what people like and can they embrace their weaknesses and do you do that in an idea meritocratic way like if I if if you know if I came in and just said to somebody you know you're not very good at this thing we don't know if you're very good at this thing just because I say it so does it mean itself so how do we get at that and how do we do with that and collectively how do we acquire evidence so if you go to that TED talk the TED talk will really sort of convey how we sort of collect that evidence and then everybody knows whether they're genuinely good and bad at different things once you get there then you know each person knows how to improve in a better way or they know what which is even more valuable who to pair up with somebody else because somebody may be let's say somebody's very creative and not reliable somebody else is very reliable and not creative you put those two together you have an effective team or somebody's big picture and not detailed somebody else is detailed and not big picture they make a great team well first of all if you don't know what they're good at you're not gonna put them in the right jobs and they're not going to improve and so the whole idea is to how do you Mary idea meritocratic Lee evidence-based through a lot of dots and evidence get to the notion of what people are good at and bad to in order to have that idea meritocracy and that's been our secret sauce for success right if you can do that because if you also have an idea meritocratic Darcy that people believe in then they think it's fair and it gets you past disagreements you know there was a disagreement that I had with the magician the CEO about different things and but we have a process that gets us through those disagreements because everybody believes that the decision-making process is fair so that's how you put together a team of great independent thinkers so that you can go to great collect of decision-making rather than just individual decision-making because nobody's good enough so you can get a chance in the book to read about dot collector's baseball cards paint button issue log dispute resolution and when I when I think about it and how this today has been capturing a computer with the data to analyze you know I was very focused on hiring people that had a meaningful relationship outside the office so that somebody loved him therefore they would be better employees they wouldn't be looking necessarily for love and acceptance and they would take different opinions and convinced then Commission next ray I noticed this system I mentioned to you we generally told employees you could not tell me or someone else to get bent for one week okay after one week it was a free open discussion I noticed you have a lot of first-year second-year employees that participate third I think it was very important and when I think back this concept that Ray just put forth and I want to comment it we very focused on and hiring the person that graduated first in the class who was the brightest best in mathematics etc but we concluded after a number of years that we had a couple them with a person that had common sense okay and so they might not have even gone to college but that team and I think what Ray said and reflecting in sports very quickly I grew up in Los Angeles and watch the Lakers lose every year to the Celtics very disappointing even though the Lakers at the time had maybe better players but Boston was a better team I then went to graduate school in Philadelphia watching Philadelphia that had better players Wilt Chamberlain lose to Boston and I think what ray is telling you as they found a very successful formula to build a team and at the end team generally wins over an individual right I want to switch to two more areas today as we think about the jobs of the future in technology you've operated in a financial industry where when I went to Wall Street in 68 9 fix Commission's if you bought a million dollars worth of stock you got to pay a 1 percent commission so transaction costs were high ten thousand dollars if you bought a thousand if you buy a thousand shares they of say Amazon if you can't negotiate a better deal fidelity will do it for you for three dollars and fifty cents or Schwab I've commented to both of them this was the competition between AT&T and MCI in the 1980s and I went to the MCA board meeting and said why don't you just go to zero if everything you offered is worthless and it's only price when we just go to zero but we can imagine what's happened to two transaction costs today 60% of the assets now indexed or based on some kind of technology that's assembled together what's the future for people in the financial service industry well I think it's not just the financial futures industry it's every industry because you take blockchain and you look at how that exists and you take algorithms and so we're in a world where that you are either going to be writing code and writing algorithms or you're gonna be displaced and lose your job to those algorithms you know something like over the next 20 years something like 40% of all jobs are likely to be lost or certainly threatened and so that's just the reality and so I think the education of speaking knowing how to write code is like knowing how to read and write so we're in a situation where you know it's fantastic and it's terrible depending on your where you are right it's the fantastic leverage so I would say for all of you as it has been for me if you put somebody who knows how to write code and next to you and then you think whenever you're making a decision what am i criteria for making that decision and you slow yourself down and you write them down that's why I wrote these principles and then there's economic you could convert those principles which are in words into equations so that the data can come in and make and operate in parallel with you and that is a that you must do that is a phenomenon that in order to be competitive is is necessary so I think that's what the future looks like I think that's where we're heading and it's in many ways terrific but behind it of course is the disparity that it produces an income and opportunity and that produces a lot of people who are then left behind and we have to deal with that issue that issue - yeah it I'm not berating the way it works is our investment processes which are our thinking expressed in algorithms work in parallel with my individual decision making so it's like operating with the computer chess game in other words I have a computer chess or maybe think of it as like a GPS this GPS is giving the instruction and I'm making my decisions in parallel and then because that's a great partnership I can then say if there's a difference in our decision why does that difference exists between what the computers telling me to do and what I would tell - and then I go back and reconcile it so I could say is the community algorithm missing something or am I missing something most of the time I'm missing something because what the computer can do is it can process a lot more information you could do it a lot faster and a lot less emotionally but there may be times where I'm seeing something that isn't properly in there and I can take that and then convert that to a modification in that to improve the computer decision-making so the parallel and you're you're in a world in which that parallel is the future and a lot of things also don't even need to have that parallel thinking if depending on on the nature of the decision because it could be done make it mechanistically that is the emerging today and that is what the future is so right when I went to Wall Street one of the first shocks I got was that what one would think was the utility curve of the owner and the management didn't necessarily overlap and so I was constantly focused for those companies where the manager would think of himself as an owner and many many companies the owner was divorced let's call it the stockholder that the manager was focused first on the managers utility curve on what was best for them and then second maybe the company today private equity has changed dramatically and our financing of this beginning in the 70s and so we have dropped almost 50% of the stocks that were listed for small and medium companies there's less today than there was 20 years ago private equity today has significant social responsibilities and that it controls far more companies than are listed today they are deploying leverage and other forms of capital structure to generate rates of return higher from that standpoint but what the idea that private equity controls more companies that are listed on the New York Stock Exchange or Nasdaq today how does this affect your thinking and management of money so if they're gonna raise five to six hundred billion a year and they're gonna leverage at least two to one if not three to one you're talking about these new funds that are going to be taking one-and-a-half to two trillion a year out of potentially public markets and equity returning part of it in debt markets but how does this reflect on your thinking today at Bridgewater well first of all from a money raising point of view nowadays because it you know you there's plenty of money to do whatever you want in the private market so you don't have to be public and it's a lot generally a lot better to not be in a public security than me a private security because you can operate in a way that's more effective and so that's a natural pressure as you were referring to before you have those institutions are eager to make investments and so that's that becomes the nature of the beast and so it'll change where the liquidity is of course it's it's having that effect that you're describing in terms of the issues in in terms of let's say the leverage question I think that that's equally applicable whether it's in a security or outside of obscurity in other words if I look through that company and I decide well if I want to them whether it's a public company or not private company one can decide what amount of leverage one wants and engineer that so one can take a company and say is it does it have the right amount of leverage to be in it right now what's happening is as you're pointing out is that there's a lot more financial leverage that's going on because of the fact that the cost of funding is because it's significantly less than the return on equity so if you're thinking I can buy you know if my return on equity is 7% or something and I have a funding cost that I can match in terms of the term structure of that then I can have an engineered return that's an attractive return and so the real question is how that's engineered to be balanced if it is balanced so the cash flows are balanced and that those returns are maintained on that that's a good investment and so that's why you're seeing a lot of of course mergers and buybacks and and and that kind of engineering that which is totally fine that will also change in to the extent that the Federal Reserve tightens money and store to change the calculations of that if we look at a lot of the support of the stock market and who was being sported it's mostly supported by those that kind of buying the public is that selling of stocks the public sectors net selling of stocks and so that financial engineering is a you know an important positive influence for the stock market that's also why the Federal Reserve should be very cautious about tightening too quickly because it's not just an effect on the economy its effect on the financial markets in regarding the amount of leverage the the sensitivity of the financial markets is partially affected by the amount of leverage it's also affected by the fact that the duration of the assets is lengthened as interest rates come down because as you know very well as you lower interest rates you lengthen the effective duration and increase the price sensitivity of those types of things so anyway um you know probably seeing more about the leverage and I don't know if I'm answering I think I think the issue really is is more and more of let's call equities are owned privately it potentially reduces you know those that are only operating on the public markets unless you're participating in the other parts of the capital structure from that standpoint in closing ray I wanted to ask an issue and there's a vibrant market now that's private in other words you can you know you can practically trade private things more it's becoming more liquid so once we have private companies that buy and sell stock for companies that are valued more than 50 billion it's questionable what is public and what is private today rain closing and then we're going to take a couple questions from the group here I wanted to ask about your own family so as I reflect over the last 50 years there was only one out of over 3000 companies I financed where the CEO told me he was in it for the money and wealth was really a byproduct of what they built and their passion for what they built and we all know that it's very difficult for second and third generations and fourth generations we're a first generation has been very successful particularly financially like yourself you have four sons what are you thinking about for those four sons and your three grandchildren I think at the moment and if you're thinking I always think about okay what's your legacy what's happening with your children what's happening with your grandchildren and I know so many and I'm sure you do successful people were all they've had is service with their children or grandchildren as a byproduct of their own success and the way they led their life how do you view that well I was very lucky and my family I guess was lucky and that we you know so we didn't have anything and then as we accumulated this they like me experienced at each one of the stages of going from essentially nothing to more and they so they know actually know what the differences that we didn't come in with this and by experiencing that so they your grandchildren might not have had oh my I'm saying it's an it could be a it certainly could be an issue for the grandchildren but by experiencing that I mean and also knowing well you know what you value somehow gets carried along to them in terms of like what you value I remember when we renovated a kitchen and the kitchen had be closed down and we had to go into this little room there with a hot plate and everybody we reminisce about how the dinners were great in that hot plate and so on so you you can know what you went to Mass those loss and you can know as you go up there what matters you know you got a if you got a bed and sleep in and you got good food and got good relationships okay safety belonging community that's been you touched on it community is the greatest source of happiness this isn't me saying this is as numerous studies and there's not much correlation there's no correlation past a certain basic level of income amount of money and happiness so we know those things we experience those things and I'm lucky in a sense the my kids have done that and then the thing I want to give my kids more than anything and those grandkids is self-sufficiency another word you could have it any life you want to choose but you've got to be self-sufficient in the end you being strong and I've provided them I don't know with a lot of tough love and they they understand the concept of tough love so that's been but it's definitely an issue right yep the problem of having too much money we've talked about this the the problem of having too much money in many cases is much more than the problem of having too little money depends where you are right community relationships and its greatest reward a greater sue I think source of happiness and so knowing that but people can become addicted to these things and and you have to be very careful about that my you know we still you know fly commercially almost generally speaking my wife is like this we get in the habit of these things because and the kids are like that so I think it's yeah it's a big issue and it's important to experience that and that like grandkids but I think I'm lucky in that my kids themselves get this and like I'm they they're more in many cases more austere than I am I won't get into all that but it's an important issue yeah so let's open it a couple of questions yes we were buying it yes no I don't I don't believe in let me be clear I think the data mining a single with multiple I won't allow even regression analysis to be done just to be clear an algorithm what I'm referring I'm sorry for the interruption let me then let me make this clear an algorithm the way I see it is an expression of your thing the question is how it's determined if you go to data mine to try to determine your algorithm like a regression analysis I think you're going to be in trouble particularly in the markets because you're not going to understand you could take a two independent variable regression analysis and you can't explain why the coefficient if it says point two five times whatever that is and you say why should it be that if that thing changes by 0.25 you can't explain it so I'm not that I'm talking about algorithms which are in a sense the decision rules that you are expressing however you choose to come by that I just wanted to clarify that sorry for the interruption which tail risk no out standard deviations no I think that again I think that you're not a I'm not conveying to you adequately what I'm saying I would ask you how do you take in consideration of tail risk however you do I'm I have my way you have your way that the algorithm can capture that it's not a mathematical thing I think you're thinking of you have you're approaching that with a certain preconception of what I'm doing that's not correct right so I'm saying we all deal with the question of tail risk then I would if we had a conversation and say what's the best way to deal with cat tail risk then we would derive that we put that in words and then we would convert that into an algorithm for dealing with tail risk that's what I'm using that as an example right so the question is does it represent represent your good thinking don't you're having a preconception essentially that it thinks I'm putting a lot of numbers in the machine and then I'm trying to deal with that and I we can go down that path but I just want to explain that it's not it's a real I believe it has to be a reflection of your thinking I believe that the biggest issue of we're dealing with particularly in the markets regarding algorithms is algorithms are going to blow up if these two things to consideration do you understand the algorithm and does the cause-effect relationship make sense to you a lot of algorithmic and machine learning means that the person cannot explain the logic of the cause-effect relationship and that's the first sign of danger the second sign of danger or risk is that the future is different from the past if you have both of those things we're in the markets the future is both likely to be different from the past and most importantly that whatever is discovered becomes put into the price right in other words if you discover something right and the algorithm discovers it and other people discover the same algorithm then what's going to happen is the worst the reverse because everybody finding that but using that algorithm will bid up the price let's say and not understand why and it's therefore more logical to go the opposite way of the algorithm than to follow the algorithm you gotta short it right and history has shown us that that's the case long term capital I mean many many many cases merger arbitrage any particular style of investing has when it's gone through that process where the person doesn't know the logic find it it's very dangerous so I just want to be clear I don't think by the way that's just an investment problem I think it's a it's it's an issue of our time because as we get into more algorithmic decision-making I think that it's totally ok if the future is the same as the past and you don't understand it playing chess for example or even doctors doing surgeries if the same moves are made over and over again cutting and making those decisions and so on so that there's no reason to believe that the future is different from the past you can get algorithms to do mimicking and that will be effective and we're going to see a lot of that but we're going to push the limits of this thing because some people in terms of competition are not going to be able to tell the difference and as a result I think algorithms in our society zone can be quite dangerous because there's not an understanding and there's the future being different from the past and that's a formula for danger so I'm sorry so I'm a very short eager interruption I did say that in that period of time you were buying securities at 1 cent on the dollar to 50 60 cents in an hour today spreads have tightened you have non-investment grade death sold it two and three quarters and euros three and three quarters in the US and so I think one of the areas that Ray touched on in this environment the definition of a quote junk security making up 99 percent of all companies or high-yield was that the security traded more on the underlying credit of the company than it did on where governments were interest rates which spreads contracting so much the risk is that these securities will be trading more on the where the in level of interest rates are than the underlying what's going on in the company and so you've brought this element of risk into the marketplace today which is not reflected and that is that you don't have this cushion you don't have 800 basis points 7,000 basis points when the naira 20 have these spreads narrowing so much and so therefore the real risk of the 1970s was interest rate risk and early eighties so you had US government bonds trading at 50 cents on the dollar not because of credit but because of interest rates so well next question yes sir I want to distinguish Bitcoin from the technology such as blockchain and those kinds of because when we talk about Bitcoin one might be referring to either of those things and I just want to create the distinction between those things well why don't why don't you I think why don't you talk about bokor uh okay um a currency cryptocurrency there are two purposes of a currency a medium of exchange and a store hold of wealth I can have a bond or and so on and then there's the question of which one is if Bitcoin aetherium is it going to be another technology question okay so all of those things are on the table right now it's it's not an effective medium of exchange you know you I definitely it's somebody I don't want to go spend it's gone you can't use it as effective medium of exchange other than in a very limited number of cases which can also be threatened in terms of what the secrecy of those transactions are and things that are being done by governments to get beyond that sequencing so it's not an effective medium exchange as of now and it's not an effective store hold of wealth and that's because the speculation on it is such and the participant in it is something that I would say is a classic bubble kind of situation meaning if you look at the nature of the participant in it and you say what is the level of sophistication in their understanding the ability is do we have a sophisticated investor who is then actually thinking in terms of expected value terms of what where that's going to be and so on or do we have an investor who was inclined to then flip it and trading in and out and what's that component you can by the way have a wonderful investment that's a long-term investment and still have a bubble in that investment so so I'm not saying this is a forever thing but the nature of the participants in that investment and what they're doing has made it a bubble of you knowing when I doesn't mean it's a worthless investment it just means that when you look at the characteristics of what constitutes a bubble the purchase for resale by a naive group of people who are attractive because it's moving up and has those bubble characteristics okay and then and then so and then there's the question of what is the version of it so if I take Bitcoin and then there's a theory M and then there's the I don't know each one of those that might come and how will they operate I would say that as distinct from the blockchain notion of the and the whole concept of cryptocurrency which has a lot of merit to it so but as a currency you can't have the volatility driven by speculation on it make it a store hold of wealth so it that's that's an its characteristics right now we're standing in the way of its potential it may be engineered differently to some extent there you know maybe if you created at a different engineer if I was trying to make it effective as a currency I would engineer how I do that differently I won't digress into how I would engineer it to do it differently so I think it has a lot of potential as as a as a concept and blockchain but at the same time it has these issues I'm referring to so we all remember when the US and other currencies we talked about how what percent was backed by gold so when you talked about what is the storehouse of value and then the separation of the currency from gold and I think we see you just have to look on social media a number of people that have the most number of hits on Twitter are now thinking about creating their own security okay in their own currencies so if you're gonna come if I have a hundred million people following me on the web maybe I should have my own currency too so they can put money behind me from that standpoint next question that's taken care of yes sir you wanna take it first now okay I'll separate the philanthropy part from the China thing I'm very bullish on China John China has four big economic challenges but if you're really looking at the nature of this fundamentals and the getting past those challenges so here it is the four challenge is that then it has is it has a it has to do a debt restructuring it has to do an economic restructuring it has to develop its capital markets and it has to manage its balance of payments those are the four major challenges every country in the world has had those in the United States had three major debt crises we've had balance of payments challenges and all of those types of things the real question is is it denominated in your own currencies the debt primarily denominated in your own currency and do you know how to manage these things well so what we're seeing in China is we're seeing effective move toward the debt restructure debt restructurings you're seeing and will after we pass the nineteenth People's Congress and so on you're gonna see more of that that kind of move there's a very impressive economic restructuring going on the dealing there's the old industries the state-owned enterprises in those old industries and there's the development the fast development of wonderful new industries cutting-edge that are period that are fantastic you know when I went to China originally in start in 1984 I would bring a ten dollar calculator to them and they thought that was like a miracle and now I'm watching in terms of where they are in artificial intelligence and all of those things and it's comparable to where we are and I've for very good reasons so we're having an economic restructuring that's very effective in terms of the capital markets development Wow I mean and you know blink Hong Kong and the development of securities over the last few years the ability really to develop the the liquidity the depth of those markets the openness of those markets extremely effective and in terms of dealing with its balance of payments its dealing with this balance of payments effectively and the reason it is is because they have capable leaders I know the economic leaders the people who are there I know you know how well what are their skill sets and and how are they managing that and they have you know an advantage in some respects in terms of the ability to control some of those things so so I'm very very impressed if you take a look at them they're their underlying fundamentals the education of their kids the this this move to reform in other words reform means in other words becoming a much more market oriented economy to be and also rule of law of rule of law eliminating corruption or reducing corruption look at the incredibly impressive accomplishments there I'm confident I feel good about the leadership of China the capabilities not only at the highest level but also particularly on the economy and then and I'm looking at that so those are issues that you know they create little bumps along the way I think people misunderstand China because these problems existing does a lot of people thought were problems that are going to mean be terrible for the China but they don't understand essentially the engineering and you have to look back and say that it's been an impressive track record consistently really since Deng Xiaoping came to power right and it was very similar Deng Xiaoping was quite similar to let's say a capitalist okay if you say who who's had the quote it's glorious to be rich that was deng xiaoping as they brought it to china and that's that's continued in terms of creating that type of and then the political risks are not too high political risks so they have to build rule of law anyway I'm answering the question too long but I'm I'm bullish on China and its capabilities they will have to change the economy is no longer going to be the cheap cheaply produced things but that's okay because they'll have the capacity to do that anyway over you most people are too busy doing than to sit down and write a book and I think all of us Rea are envious that you took the time to write a book to capture not only your personal experience but the principles you've sat down and we look forward in potentially this third chapter in your life as a fellow member of The Giving Pledge with you and your family as to what you're going to accomplish and how you might change that world thank you for joining us today thank you for having me we have partnership in that third phase of our life well thank you

Channel: Milken Institute

Views: 283,506

Keywords: Ray Dalio, Milken Institute, Finance, Michael Milken, Mike Milken, principles

Id: oCSDfpeTkcU

Length: 97min 57sec (5877 seconds)

Published: Thu Oct 12 2017