Ray Dalio: Central banks will get so desperate they will give money away

who follow you know that you've developed models to explain how the economy works and anybody who's even remotely familiar with Bridgewater knows about the machine for example knows about the importance of the business cycle and furthermore the importance of the long term debt cycle what are those models telling you right now well let me just take a second and just review the model so everybody knows so I'm saying that over a period of time productivity matters the most what you earn is what you can get to spend but around that there were two cycles there's a short-term debt cycle that lets you spend more than you earn over a short period of time but when you pay back you've spend less and that there's that cycle the five to eight year cycle is the business cycle we're used to that everybody understands that and then there's a long term debt cycle that goes on 50 75 years and it goes through its limitations when you have too much debt relative to income so you can't service it anymore and when interest rates go to zero so there can't be stimulation we have run out of monetary policy number one and we have to go to monetary policy number two monetary policy number two was quantitative easing this happened in the Great Depression happened recently and that means the purchase of financial assets by the central bank and the sellers of those financial assets then by other financial assets and they caused those other financial assets to rise in price and have the effect of lowering returns those expected returns and when those other expected returns are low in relationship to cash that one is almost indifferent and so when you buy that bond when the Fed makes puts that money in the system that person is going to then go not it's it different and that that's called pushing on a string and pushing on a string began in 1935 and we're going into a situation which is generally worldwide somewhat analogous to that so there again we're approaching it so if I just take country by country now if I could give you got to her a little Tourette's do that quickly okay so Japan was there first for a couple of decades for a couple of decades pushing on a string because they hit interest rates at zero and some of the most aggressive quantitative easing program the world has ever seen and and they're trying to stimulate to get 2% inflation and they're going nowhere it's not working and it's not working so what Europe is there okay okay Europe if you look at the cross the curve we have interest rates at zero or slightly negative depending on where okay that so interest rates it's certainly not going to work and then the purchases of those financial assets are getting transmitted and currency movements and the like and the effect of raising those assets is not is very limited so we're there in Europe very close to being there in Europe in the United States we have a little bit more room we're very close to zero interest rates and then if you take the spreads the spreads are are relatively low so a little less than a two percent bond you know we think equities expected returns probably are around 4% so there's some spread there some ability the issue is if that creates asymmetric risks to the downside so the downside meaning it's tightening is always going to be effective it's easy you raise interest rates and things will slow down because everybody's got a lot of debt not a problem the situation is the risk on the downside because if you have a movement on the downside it's a risky situation so we're going to have to see and you'll see increased exploration of the movement to may to make other forms of stimulation which I'm calling monetary policy three monetary policy three will not be just through quantitative easing quantitative easing by as the financial assets from people who have it and it stays in the financial community we're going to have to move toward increasingly the making of purchases that put money directly in the hands of spenders because the linkage between having money in the financial assets and having spending is becoming weaker and weaker can I just pause for a moment or so what you're effectively saying to me is that monetary policy want interest rates has sort of run its course it's become ineffective monetary policy too quantitative easing if I take you correctly ineffective central banks are now going to have to print money and hand it to consumers in one fashion or in another they're going to have to go more directly to spenders how does that work well it can work in either a combination of fiscal and monetary policy some there's a continuum of how it's worked in history in some cases you can have the federal government run deficits which the central the central bank essentially monetized by lending the money and that that's one path some and then on there's a continuum and on that continuum the far side of that continuum is called helicopter money what helicopter money means is the process of essentially putting it directly in your hands the central bank has the capacity legally to essentially get money in your hands there's a legal in the Loess change from place to place to put it directly in your hands to have you spend it in other words to not bypass to bypass the financial markets to do that so if there's a range of ways that that can be done history is loaded with them we're just not acquainted with them because they haven't happened in our lifetimes before in other words these long-term debt cycles come once a lifetime and people are not sure even once a century even so they're rare and but but if you go back over history and you see them they've happened many times so let's look a little more short-term because that's going to take some time to play out I take it and it and examine what's going to happen in the next little while good you have been saying for some time that you anticipate the feds going to have to ease again and possibly even embark on a new round of quantitative easing that the next big move that they'll be minor moves like you may get another 25 basis point move but then not see Dean yeah you could up well you could you could see another 25 basis point rise in rates I'm not saying that couldn't see I just want to be clear yeah the next big move I believe will have to be toward quantitative easing rather than a big tightening you won't see a big the next move because we could be up could be down to the tick yeah you could get an uptick the next as early as a couple of weeks from now I don't think I think that they'd be a seer I've always said and I continue to say I think it would be a serious mistake I think that the Federal Reserve has come around to the notion that the we're living in a world economy and the circumstances that are now happening or surprising them have surprises because they're not paying enough attention to the long-term debt cycle in other words what is there's a reason that their attitudes have changed okay and then I think it's great that their attitudes have changed about that risk but if you look at their around the world our risk is not inflation and our risk is not overheating economies okay so you still feel the same way about the trajectory of the Federal Reserve and that's right area policy if the asymmetric if the the risks that we've talked about it they're asymmetrically to the downside for the global economy and for the effectiveness of monetary policy because of this compression of the spread between the return on fixed income you know at risk assets what does that mean for asset prices well it means that asset price is correct to a point where the risk premiums come back nothing a little bit of that that's right in other words the correction that's happened in the stock market let me be clear I'm not bearish on the stock market no no I'm not bearish on the stock market I'm saying that what we have is as you have those risk premiums mm-hmm but let's say I expect probably stocks out about a 4% return in other words long-term return 4% that's a problem for a lot of savers but nonetheless the choices aren't in funds like the university we're at right now yes in pension funds and a lot of savers it's a big problem that is like a slow growing cancer because it will not happen overnight but it'll mean that we won't have enough money to fund those things but nonetheless investors make a choice of assets and the choices are cash which as zero return a bond which has less than 2% return and equities as we calculate it says something like a 4% expected return so when you look at those assets what would happen is as they sell off it has the effect of making those assets more attractive and and then draws us in or draws others in the issue here that we're dealing with is the possibility of the negative feedback loop that comes from that and the ineffectiveness of monetary policy so when stocks go down it and it has a negative wealth effect that has a negative effect on the economy and when that has a negative effect on the economy and you don't have the ability to ease what I'm worried about is should the situation become weak enough in the economy like Japan situation the fort like you said two decades you will have a situation where then they have to do something else say I'm going to take this opportunity just to remind everybody that this is Ray Dalio of course the founder chairman Co CIO of Bridgewater associates and we're simulcasting live on Bloomberg radio welcoming everybody to the conversation let's go beyond stocks if the long-term average annual return for stocks is 4% and obviously it's less for government bonds and cash at the moment and for the time being is zero what makes sense is an investment strategy what do you buy would it you know what are you sure it effectively you know broadly speaking where what what's going to work well I think of what is working perhaps more appropriately today I think there are two ways that the average investor should think of investing one is are you going to create a good strategic asset allocation mix that is a balanced portfolio that means that you're not going to go to the betting table and bet against active investors like me look odd I'm scared of being wrong in the markets it is not easy to win in the market it is more difficult to win in the markets than to compete in the Olympics hang on a second hang on a second you guys have an extraordinary track record of winning yeah is it harder to compete in the markets today than it has been since you found at Bridgewater no I don't think so really not the way we do it and the reason I'm saying not the way we do it is we don't take systematic biases I think for a lot of people they're systematically long everything you know and so we have a world in which there when the world gets bad it's bad for them in 2008 it was great for us I don't know we had nearly 10 percent return in 2008 so we have the opportunity to go either way we just may be wrong ok if we're wrong so so I'm so scared about being wrong that it has helped reduce my chances of being wrong because I'm so scared I won't take debts that on you know that I don't feel good about and we diversify our portfolio and that's how we we we got the track record I was just commenting in terms of se let's say so um you asked me about investors so I'm trying to go back what an investor should do well absolutely and what you think is appropriate so here's what I'm trying you guys are doing well I want to just convey to investors I think in the average investor most everybody don't compete against pros like ourselves or other people don't making tactical asset allocation bets or moving around in the markets because you're probably going to lose it's difficult for what was really beautifully places points no you have to have a devout a balanced portfolio in other words think about how you how you're going to have a balanced portfolio what you know is that asset class as a whole over a period of time I'm going to outperform cash okay that's the most thing that you could be most comfortable with if they don't you have a depression the only times that hasn't happened but to know how to achieve a balanced portfolio and that's a whole other subject I don't know that you want to go through if you're talking about tactical bets in other words I can come on the show and I could say I think this is good but then what happens is if I come a month later and I then change my mind because something has happened then I'm going to leave some I'm going to mislead people so that the tactical bets I don't think are going to be helpful I would say that we're in an environment in which it's very important to have a well diversified and that'll include assets like to some extent maybe a little bit of gold in your portfolio in other words what could I tell investors try to achieve balance in various ways that's a whole subject about how to do it and also I think that you know a gold you know at five percent of your portfolio five or ten percent of your portfolio under the circumstances would also a prudent thing to do prudence is the important thing to do the reason I'm also referring to that is we have a situation where a debt is money in other words we have a Fiat monetary system too and so we're having problems as the central bank's operate and so that it's a think of it as another form of cash and when cash now has zero or zero percent interest rates or less think of it as one of those possibilities in terms of how do you how do you create diversification I respect the fact that the tactical view needs to change if you're going to be an effective investor but I would like to get your tactical view on two things if I may we'll see oil no I'm not going to give you one tactical China um okay I'll give you a little give you what my thoughts a little bit on China I think China is going through a situation which is very similar to what the United States and other countries have gone through a number of times which is that there's a debt problem debt is rising too fast just apply the template you can't have debt rise faster than your incomes for long ok so that's what's been having to run out of room and so you just apply the temp le to China so they have to have a slower rate of debt and they're going to have to restructure debts and they're in the process of doing that we've had three major debt crises in the United States and we've done that each time they have to restructure their economy they have to have a different kind of economy the old industries are out in the new industries have got to come in this has happened to us many times I remember one it was a steel industry and we were heartbroken because we would lose the steel industry so we went from manufacturing to services and now for services were going to digital technologies and South on they have to restructure their economy that's a difficult thing to do and they have a balance of payments challenge a balance of payments issue in other words flows we have had three balance of payments challenges and flows so we have a situation in China which is very much analogous to those cases and there are there are good ways to manage these things and there are bad ways to manage those things and the leadership matters so and I would that from my contacts I mean my contact that I've had over there that you have very capable very capable people in leadership the stock market handling was not capable don't mistake the COO stock market handling for the capability of restructuring their debts the processes that they're going through and and so the leader should you have confidence I have conf you have the way I've described at a long time it's like China is is having a heart transplant so if I said you're going to have a heart transplant here's what you probably are going to be fine in the long run it's probably going to weaken you okay and it has to be well executed and it you know it's somewhat of a it's a difficult situation that is going to weaken you and you will get through it and you will be better than you were before I think that that's what the situation in in China is I think people who have exaggerated it one way or another they're people who've looked at it as a boom or there's people who've looked at it as a disaster that's going to total collapse of the system I think they're missing actually what's going on do you feel you mentioned the stock market debacle that we witnessed in China last year and how that's not necessarily terrible but not reflective of how the leaders are handling the economy based on what you've seen do you feel better about their ability to handle their debt situation now than you did say six months ago um probably about the same the balance of payments issue is going to be a challenge let me if you want to get into the balance of payments I'll to explain it just a little bit but the balance of payments has to do the currency a lot of money leaving the country yes or right and there and they are draining the reserves very quickly that's right at will because money is leaving the country and also these cycles happen everyplace yeah but what happens is when the money's leading in the country and less money wants to go into the country creates a balance of payments issue in terms of that money leaving the country they have a lot of control over that nature that money because a lot of those are state-owned enterprises and other things for example they've just opened the bond market to foreign investment we estimate that probably in maybe 18 months or two years that'll be worth about probably in the vicinity of maybe 200 billion dollars of influence Oh in flows in other words you can have by opening the bond market and having foreign investors invest in the market it will also attract money in many of their companies are state-owned companies and multinational companies and they have greater controls over the then we might think for ourselves and and so on so while there's a balance of payments challenge there there are also ways to to deal with that I'm not saying it's not a challenging situation it is a challenging situation but on the tools to management and and I would say the capabilities of managing it are are excellent I will say that you know I I get to know different economic leaders around the world in different ways and I would say that their capabilities are equal to the best that exist anyway in terms of the things that need to be done with your monetary fiscal policy restructuring debts I mean all of those types of things and there is an advantage there look there are a lot of a disadvantages to a system like that but one of the greater advantages is that there's also greater controls over things do you think to fix this balance of payments issue you've described they'll have to devalue their currency I you know I don't know I guess the the thing that I would say is there's a balance of payments pressure I it's one of those things where that it's too close to call the to the tools that are there are are really great in many ways and then it's just one of those too close to call situations when we go back to what you were describing the failures of monetary policy one interest rates the failures of monetary policy to quantitative easing the possibility of monetary policy 3 where somehow governments get cash directly into the hands of consumers does that our ger we what does that our ger well or poorly for you know if you're thinking is an investor well uh well if you think there's the economy and there's the investor I was going to ask the answer the economy part of a first but you've asked from the perspective of the investor from the perspective of the investor I would use Japan as being more of what is most more likely unless there is a debt restructuring to deal with these things meaning we we have a we've raised the limits as as to debt relative to our incomes as a as a group something there's the private sector does the public sector but let's take us as a country then take us as a world so include Europe take China take the whole world the world has a limitation right now in terms of you can't raise much debt so it can't we can't borrow our ways to higher spending with the zero interest rates being down there that's where we are and then in terms of returns we're going to have a low return environment and that low return environment is the main issue that's that that becomes the main is when you liken it to Japan ray and I just want to remind everybody who's watching again Bloomberg television viewers and Bloomberg radio listeners worldwide does that mean that the United States and Europe the developed world broadly speaking of course Japan is part of that but is that the trajectory is that the road that we're headed down sucking loosely speaking I believe that that's the most likely scenario meaning slow growth very slow growth deflation ups and downs okay the increased difficulty in stimulating monetary policy that was manifest in deflation the movement toward increasingly other alternatives ways of having monetary policy that will produce stimulation more currency volatility but in other words I'm not expecting something like 2008 because 2008 was a debt crisis there were a lot of debts coming due and they they couldn't be paid and that was what 2008 was this is not like a crisis situation left that way it's not one of them you know I don't think we're going to probably see the big bang crisis type of it I think that what we're going to see is this kind of situation in which there's the dynamic of a relative stagnation low returns and also the you know not much picking up and low returns and zagnut and volatile markets choppier markets probably over a period of time so because like like what we've seen like a star you see any of this year yeah because as you as you have the zero interest rates and then you have the market sell-off then the market sell-off brings back risk premiums and there's a lot of liquidity and so from an investor point of view okay then you might move out from something like cash or a bond or something to an asset like equities and you might move out and so you have this movement up and down as those risk premia change but investors rents us have to decide that that those risk assets have repriced enough to create that attractive enough spread between that's that's right are we there yet well I you know as I no one knows exactly what that range is I think that becomes the nature of it and then we have to see what that whether there's that negative feedback loop I see okay because that part of the negative feedback loop is in other words stocks go down and that then means the wealth effect is lessened and as the dollar goes up and the wealth effect is and that makes us less competitive don't both the rise in the value of the dollar and the decline in the value of stocks is essentially a tightening of monetary policy and there's a tight globally there's a tightening of world economic activity and those negatives are how exactly they pass through to the economy is the asymmetric risks that I'm referring to I see ray while you're sitting here I want to touch on something that I know is important to you but it's attracted a little bit of attention lately shall we say which is Bridgewater's culture and the attention that it's attracted is due to this notion that there is some kind of a dispute if you will between you and your Co CIO Greg Jensen give me a sense of what's going on behind the scenes yeah I mean I don't know and the writ but culture is you know that's what people are asking question cake okay okay um the way that we succeed is by having thoughtful disagreement when I I'm so scared about being wrong and the key to my success and our success is to try to find people who disagree with us who are smart and try to understand their point of view so that we can have disagreement in order for us to have independent thinkers there's going to have to be disagreement and you have to do to be able to disagree well and you have to have those processes you also have to know what your strengths and weaknesses are you've got to bring all the weaknesses to the surface this is the essence of the of the culture and people may say it's all dirty played out of your principle that's right so you have to bring all weaknesses to the third you have to bring all of these things individual strains and we consider and you have to work yourself through and not in a thoughtful way that's how we succeed in the markets that's how we're succeeding and that's also builds our community in one sentence what we want is our goal is meaningful work and meaningful relationships the relationships part is just as important as the work part meaningful work and meaningful relationships through radical truth and radical transparency what I mean by radical truth means we can talk about whatever weaknesses are who's good and bad it wasn't and so on and bring all those things the problems of the surface and then radical transparency so everybody in the company can see all of this stuff going on so there's no spin behind it that's what's going on so as we're working our way through this Greg and I have been working together for 20 years it's also very exaggerated because you make it Greg and I there are some fantastic people you know David McCormick sure Aileen Murray Bob Prince has been with us for your do CIO the years we have a whole team of people there it's a company of 1,500 people okay so if you it's almost a character at your that they want you know okay there's one you know there's a character at your story which can be painted out in the media as being this thing that it's not right well this is precisely why I introduced you question is because I think it's important for you to clear the air thank you give me the chance but that's what's happening in other words you all care is this drama well no do Greg and I disagree on some things yes but and also how much of it there's David McCormack who might disagree on things and Eileen Eileen I'm but and and it will help we have a process for working ourselves through that when I started my transition out of management I'll always play the game because I love the game as long as I'm welcome at Bridgewater they'll only let me play the game up later yeah but as far as the management part in that transition we figured it's going to take a while to figure out how it works and that's what going through one last question for you Ray I'm curious to know because we talked a lot about the Machine we talked a lot about cycles and how the economy works what role does politics play in that American politics is attracting an enormous amount of attention two days ago we had Super Tuesday it seems as though mr. Trump is on his way to willing winning that Republican nomination things could change do you have to recalibrate your models to account for things like that I'm going to take the first part of the question rather than the recalibrate part of the question just to be answering you know if you go on the web YouTube I'll plug for there I took 30 minutes to say how the economic machine works and there's a photo and then so it's on YouTube that's 30 minutes and it will explain everything I know and basically what happens is there's a part in a cycle where there is tension and when when you get to this phase of the cycle there is tension between the haves and have-nots and also there's a frustration with government and what's happening in the United States is not very much different than what's happening in Spain with pidemo or what's happening in many countries that there is a frustration we have a situation in which emotionally charged individuals who may not be well informed in choosing leaders might select leaders who are not capable and our emotional themselves and if that happens in these countries which is gret more prone to happen in the in the circumstances whether these tensions then that means that you get a type of leadership which handles the situations worse than if you had more capable more moderate type of people who understand how the machine works and how should they they deal with it so whose hands it's in is important yes okay and what the and how fragmentation exists if we're one group fighting against another group it's going to be bad if there is in a sense a moderation and a bringing together of people in terms of a common mission and a thoughtful disagreement while we're talking about thoughts agreement if you could work your way through to get at the right answers then this is all manageable so that so politics does matter in answer to your question of how we deal with it we measure what their actions are and based on their actual actions then we make our responses ray I want to thank you very much on behalf of Bloomberg Television doers radio listeners worldwide it's been such a pleasure here at the University of Texas Ray Dalio is the chairman of found

Channel: ForexLive

Views: 464,046

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Keywords: analysis

Id: UBXjlNNNFus

Length: 29min 37sec (1777 seconds)

Published: Fri Mar 04 2016

Reddit Comments

[u/adamgalas]

I agree.

If Fed had given that $4.5 trillion it printed to every American in cash we'd have a much better economy.

Of course I would have invested my $17,509 into stocks.

But most people would have spent the money.

[u/lolstockslol]

So buy gold?