Hedge Fund Legend Ray Dalio On The Economy

Ray Dalio is the founder and chief investment officer of Bridgewater the world's largest and most successful hedge fund and he is a best-selling author coming off the launch of principles which we'll talk about in a minute but ray welcome I say you've written one of the largest and I have no doubt most comprehensive analyses of debt crises that I have ever seen you say this pattern repeats itself again and again why write a book about this well I'm at a stage of my life that I want to pass along the principles that helped me this was really research that was done before the 2008 financial crisis and it lays out a template of how these things happen over and over again in other words I believe that same things happen over and over again and if you study the patterns of them you understand the cause-effect relationships and then can write down principles for dealing with them well we dealt with them very well in that financial crisis and in other debt crisis is and I wanted to pass that template along it's actually only in the first 60 pages of the book so it's not a big read if people want to and you're giving it away for free which is great so where are we in the current debt cycle you often hear lots of talk about debt obviously we're now ten years as you note past the financial crisis but debt still comes up the deficit is ballooning in the United States where are we in the cycle I think that there are six stages to the cycle I'm going to touch on them briefly there's the early part of the cycle where debt is being used to create productivity incomes and then it can be serviced well asset prices go up everything is great and then you come to the bubble phase of the cycle and in that bubble phase you're in a position where everybody extrapolates the past because asset goes up they think it's assets are going to continue to rise and you put you borrow money and they leverage and when you are in that phase you do it when we do the calculations well you could start to see that maybe you won't be able to sustain that level of debt growth then you come into the third phase of the cycle which is the top that's typically the part of the cycle when central banks start to put on the brakes tighten monetary policy and then you come into the down leg and when interest rates hit 0% you come into a depression part of that cycle because monetary policy doesn't work normally when interest rates hit zero then you have to have quantitative easing and you begin that expansion and then you carry that along and you begin the cycle carry that so I think the period that we're in is very similar to the period that we were in in the 1930s if I may oh absolutely explain it okay there are only two times in the history of this century where we had debt crisis in which interest rates hit zero and in both of those times the central bank had to print money and go to a different type of monetary policy which we call quantitative easing and to buy financial assets and that drives up in both of those cases the value of those financial assets and produces a recovery but it drives interest rates down to zero or near zero and where they are around the world and that buying in this case fifteen trillion dollars of financial assets has put up pushed up financial assets and drove driven the interest rates down to zero so it's caused asset prices to rise it's also caused populism more populism because that process creates a gap between the rich and the poor those who have more financial assets now see those asset prices go up and for various other reasons a wealth gap has developed if you look at right now the top the 10% of 1% of the populations net worth is equal about to the bottom 90% combined that's very similar to the late 30s when we had that stimulation and so on so we in a situation where we're in the part of the cycle later part of the cycle where quantitative easing has been used most of its energy asset prices are up interest rates are low and we're beginning a tightening of monetary policy very much like we began in nineteen 37 and we have a political situation in terms of having more of a conflict between the rich and the poor which is bringing out a populism populism around the world is the selection of strong-minded leaders who are sort of take charge but tend to be more nationalistic and so we're in that type of position and you've written extensively and articulately about what happened after 1937 which is we went through a real surge of populism and nationalism and got to World War two and all the horrible things that happen there what do you think happens now given where we are I think the cause-effect relationships are analogous meaning that if you have a wealth gap and you have a downturn in the economy where you're sharing the pie how do you divide a budget sharing the budget there's a risk that the both sides are at odds with each other there's also a greater international risk in tensions economic tensions produce global tensions for various reasons so I think that in this expansion we're about in the seventh inning of a nine inning game let's say we're in the later part of the cycle the part of the cycle in which monetary policy is tightening and there's not much capacity to squeeze out of the economy and that as interest rates tend to rise if they rise faster than is discounted in the curve it can hurt asset prices and asset prices are fairly fully priced at this level of interest rates at some point we're going to have a downturn because that's why we have recessions nobody ever gets it perfectly and my concern is what that downturn would be I think that that's not immediate we don't have the same pressures but I think it's maybe in - maybe it's in two years I can't say but I think that that what concerns me is that it concerns me also internationally because the situation internationally is quite similar to the late 30s in that in the these periods of time these geopolitical cycles there is an established power and an emerging power that then have a rivalry at first it's an economic rivalry and then it can become quite antagonistic so back then the United States and England War One World War one and we had the peace but then as there was a rising Germany and a rising Japan there became that kind of economic rivalry that became more antagonistic I think that we have a situation where there is a rising China and the United States is an existing economic power and there is a rivalry about that and there can be an antagonism about that so what when I look at it I think the parallels are quite similar does it mean that the same outcomes have to happen okay but does mean that I think we have to be alerted to the fact that going forward in a downturn monetary policy will not be able to be as effective as it was last time so we have to be cautious about a downturn I would say err on the side of having a little bit more leeway and be and then we have to be concerned about the wealth gap and the consequences geopolitically and if we don't want to repeat what happened in the late 30s and 40s what do we have to do what is the having studied history the right way to handle this and head that off well I think one of the things is to make sure the capitalism works for the majority of people to look at the bottom 60% of the population and use that as metrics to say is that improving or not and how do you approach that wealth gap and it's not just a wealth gap I think it's more important than the wealth gap is an opportunity gap that people need to be made useful by being able to have jobs and so on so I think that there should be that should be considered you know an imperative I think that we have to be thinking about our balance of payments situation and the amount of debt that we're producing we're in a very privileged position of having a reserve currency one of the things that distinguishes countries that really have problems from those who are able to manage their debt problems is whether the currencies denominated the debt is denominated in one's own currency that requires us in order to do that to continue to maintain sound basic finance I think we're going to have though a squeeze that will be not just related to debt but even more importantly related to pensions and healthcare obligations that will happen so I think these will be difficult times not not immediately but I think in maybe a few years and I think it will be very dependent on how we are with each other so let me ask you about both of those first how do we make capitalism work for everybody it seems like part of the problem is that as you pointed out the rise and asset values are not accruing to 60 to 80 percent of the population anytime you suggest that companies pay people more the financial class well Sal that's outrageous that should be free markets we can't have minimum wage and it should be hey Iran was right you want to raise you've got a bargain for it so how in that you you obviously care about the economy how do we make capitalism work for everybody without wrecking I think I think the first thing that you need to do is realize that it's a the issue as a national emergency I would like the president to declare it as a national emergency and then use metrics to judge that in other words take the population the bottom 60% 60% and take those numbers and make the metrics and then bring together a commission of people a bipartisan Commission to be dealing with this I think there are a lot of things that could be done I see it to some extent philanthropic last thing at an education for example in education we're in a situation where in many cases terrible terrible conditions in education literally in schools that I know children are having to share pencils they'll break a pencil and half and sharpen it at both ends or they'll pass it back and forth they don't have adequate books there were certain day those children in Connecticut where the state that I'm from which is either the richest or what certainly one of the top three richest country states in the country we have 22% of the popular popular that is either disconnected or disengaged and and so I'll tell you what that means a disengaged student is one that attends high school but doesn't participate they don't study they don't really make progress a disconnected student is one that they don't even know where they are 22% of the population in Connecticut is one of those and high school students is one of those those those are students that are not going to be able to be productive they're going to be on the streets if you look at the cost of incarceration cost of incarceration is between 85 and $125,000 typically a year in terms of that so there were certain things I think I think you could create public-private partnerships so that these some programs do well I'm support I support for example microfinance microfinance in being able to bring about there are many things forget the things that I'm supporting I'm saying if we take an initiative and you say a national emergency and you bring together others and you establish metrics like good management of that I think that you are you will be making progress toward dealing with that in in public part private partnership and I don't know what'll happen I don't think that's going to happen I have no prospect of that that's why I'm a little bit concerned that what will the next downturn will be like does it require our raising taxes because the other problem as you point out is the debt and the debt growth is accelerated with the recent tax changes any time you mentioned the idea of more money to education or more money to other social services lots of people freaked out and say we can't afford it so are you suggesting that we do need to have an increase in the tax base I think that most probably we do but the real issue is mostly productivity right in other words to unleash productivity there was a time that we're in part of the world for workforce and when they entered the workforce it it caused the great productivity boom I think if we make it a mission that that group becomes much more productive and has the opportunity I mean I think the country you know is what are we about I think it should be the land of opportunity and we bring that together and produce those opportunities because that produces productivity candidate Trump going back to debt campaigned on how awful the administer administration was doing the debt was growing now President Trump has a big new tax plan that has radically accelerated the growth of debt given your concern and expertise in dead cycles are you concerned about what's happening at this stage of the cycle in terms of the increasing debt the private sector debt for the most part I don't have much in the way of concerns for when we do our pro form of financial numbers and we look at we see pockets that will probably have problems servicing their debt there's a lot of cash around I am concerned in about a two-year period about the amount of dollar denominated debt that we're going to have to sell abroad because we're going to have to fund the deficits and then in addition we'll have our balance sheets the Federal Reserve's balance sheet go down and that'll involve a significant amount of selling of dollar-denominated debt when I look at the portfolio's of different entities that are holding different amounts I think it'll be more difficult to sell that amount of debt I think that will cause upward pressure on interest rates but the way that works is that pressure will sort of be negative for the economy let's say two years from now but it will also probably be at that point more negative for the dollar right now we're in a short squeeze $4 because there's a lot of dollar-denominated debt a debt is a short dollar position because it's a promise to delivery doubt dollars you don't own and when you have a lot of countries that borrowed in dollars and have their cash flows in local currency such as we see it in Argentina and Turkey and Brazil in other countries they're in a debt squeeze that causes the debt to the dollar to rise and that deck squeeze will be passed in two years at the same time as we're going to have to sell a lot more dollar-denominated debt and I think that that probably would be bearish for the dollar at you know at that point so there are parts not the same sectors as last time but different parts so you've had one of the most successful careers in history and investing huge sums of money as you look at where we are in the cycle what do you think normal investors should do you say where it's not an immediate issue but a couple of years out we may have a downturn how do you invest in a retirement portfolio in light of that I think that there are two key parts of investing there is what is your strategic asset allocation and then there's moving around there's tactical bets and alpha and I think the average man should not try to make tactical bets to try to produce alpha because he's going to get it wrong alpha is better than average in other words to say now's the time to buy now is the time to sell this market timing don't do that the history of it is clear I remember learning this when Peter Lynch ran the Magellan fund and there was the best stock performing fund in all the stock market when the stock market was best and the average investor lost money in it and how was that possible and the reason it's possible is one that was very hot and the advertisements were there people bought and when it was had a period of bad performance they got out and they got scared and so market timing is a very difficult thing it's a very difficult thing for we who puts hundreds and millions of dollars each year right we have sixteen hundred people at Bridgewater it's a difficult game and so I would say that they should not try to play that game that they should understand the how to achieve balance and diversification in and operating now how to do that is a conversation that's a you know a longer conversation Tony Robbins injured interviewed me about it and he made a very simple book as part of investing its described in there but the you there's ways of achieving balance that doesn't cost you return and significantly reduces your your risk so I would recommend that they come to a a balanced portfolio what we call an all-weather portfolio but something that means that they're not exposed to any particular type of environment and it's the same portfolio in inning seven of the debt cycle that's right if you're going to play the cycle then realize that the time to buy is when there's blood in the streets is the same okay and then you you sell when everything is great and everybody's extrapolating the past and you're near the end of the cycle because as you come in as your unemployment rate gets low and asset prices are high and debts are being built up and everyone's extrapolating the past the past will not perform up to expectations and that is the time to sell but it's very difficult for people to step away from the crowd and to do that and and what do you watch to know that everyone is now excited and everyone's extrapolating into the future and I'll give you an example which is that two years ago we talked lots of concerns then about the stock market and valuation and you said Henery relax we're in the middle of the cycle now you say we're in the seventh inning what do I as a normal person look at to tell me okay it's one out in the ninth time to start transferring and getting ready for disaster okay first of all you look at how much slack is left in the cycle okay where's the unemployment rate where's the capacity what is the central bank doing is a tightening monetary policy or is it easy monetary policy that's one so how much slack second you look at how much debt has been used to finance those purchases okay third you look at the amount of sentiment the you know the the euphoria and forth I would say you can see the pricing of how much debt is how much growth is built into the pricing in other words by comparing the yield on stocks and the yield on bonds and you look at the price at you look at credit spreads and things like that they paint the picture of the future that's the discounted future and if you look at that picture of the discounted future and that picture is an extrapolation of what happened in the past to something that's unlikely to happen going forward then you would know that prices are are too high and then you have to think about timing great let's talk about something else which is that you recently wrote a book called principles it's New York Times bestseller it's read by people way beyond the financial industry part of what you talk about is the culture that you developed at Bridgewater which you say yourself is not right for everybody it's tough it's like the seal team of corporate environments only certain people can handle it and in the book you lay out your principles that have helped you be successful what have you learned from feedback from the outside world as people have have digested the book and and does it make you change any of those principles my main thing it didn't and meaning its it's very simple in one sentence what I want is meaningful work and meaningful relationships through radical truthfulness and radical transparency because they reinforce each other and that's what's worked for me if you're on a mission to do wonderful things understand the world and try to do great jobs together and you're tough with each other but also develop those meaningful relationships so you feel like you're sharing each other's lives and you're committed to that mission that's very powerful but the radical truthfulness so that you don't not biessing it at each other and you know really what's going on and your could be totally straightforward in terms of even looking at people's weaknesses and their mistakes so that you can learn from those and so that radical truthfulness and that radical transparency so people can see things themselves to me is a has been a miracle formula and on and I'm so pleased because I get literally I don't know I don't know if it's tens of thousands or hundreds of a lot of people who thanked me for that changing their lives however having said that I don't think my principles are important you could pick whatever principles that you want what I learned when I was going along is that every time I would make decisions they're paid particularly after mistakes it paid to write down what my principles were for dealing with that the next time I'm going around and I think the important thing is individuals picking their principles for themselves so one of the things that's excited me about it is also people doing it for themselves they have I don't want them to follow my principles I want them to think hard about what works and then think about being clear on their own principles to realize that the same things happen over and over again so every time you have an experience particularly if you have a bad experience a painful experience that there are lessons to be learned and ways to change and principles to develop so that you can do it better next time and I and one of the key principles is to know that you don't know what's best necessarily to separate yourself from your individual opinion to have a fear of being wrong I have a tremendous fear of being wrong cuz in the market you learn that and if you don't learn that that gives you then the open-mindedness to take in from other people what you've learned those types of things I'm excited that people are learning so I'm excited this is a this will go on for just a short period of time and then I'm gonna go quiet because what I've done is to you know what I will have done is passed these principles along like this these debt principles I think that they could help and is there another one coming after that we have life principles principles the one that I meant to write before this I wrote this debt one was economic and investment principles because I think there were two things that I learned about through experiences of my 43 years of running Bridgewater and overseeing in various ways and that is how to run a company with a neat unique culture and how to be involved in the investment and economic area and so I wanted to pass those along so that'll be coming but I don't know 6 or 12 months [Music] you

Channel: Business Insider

Views: 1,749,408

Rating: 4.8609471 out of 5

Keywords: Business Insider, Business News, ray dalio, bridgewater associates, financial crisis, economy, debt crisis, economy crisis

Id: 5C43i3yclec

Length: 24min 56sec (1496 seconds)

Published: Wed Sep 19 2018

Reddit Comments

[u/EffectiveWait]

I just saw his videos on macro economy yesterday for the first time... Blew my mind! His understanding and way of explaining is profound