Ray Dalio on How He’s Seeing the World Right Now

[Music] welcome back to squawk box we're joined now by a very special guest right here at the salt conference in new york city bridgewater associates founder ray dalio is with us great to see you in person i think for the first time in a very long time we're coming out right we're coming out um we've all been trying to make sense this morning as we do every morning of where we are in this economy and where we are in the markets and i haven't had an opportunity to to hear from you and ask ask you where you think things stand right about now i know you always think about things sort of in this the in the machine the economic machine so help us understand what what's going on inside ray dallas mind right now well i think it depends on the time frame i think the relevant time frame is the next few years um and i think you have to put things into context so there are three big forces that have been at work and i think you have to understand those first is the debt money thing how much debt right money and what are the repercussions how does that pass through the economy what does that mean for markets inflation and so on that we're in a different era now zero interest rates produce a lot of debt and monetize it second influence the conflict internal conflict over wealth left right conflict that conflict and then the third is the rising of a great power in the form of china challenging and existing great power and challenging the existing world order those three things are coming together at the same time as then we have a pandemic so i think each one of those is a cycle they uh what's happening now has not happened before in our lifetimes but has happened in the 1930-45 period i went back and studied it over 500 years and so it's that context so i think if we're talking about anything we should look at that within that okay let's let's break it down then and let's start with the the the debt situation that we have in this country uh the rema and the and the zero interest rates give given you're a student of history what happens next um we have there's not enough money to go around right we're we're spending a lot more than we're earning and we have to do that partially because of this social redistribution that necessity and they can't take it from all from taxes and what that means is the printing of money so it's the mechanics of that so what you do is you get more money and so that devalues the value of money in other words cash it's trash you came you came on our air i think in davos since it cash is trash you still believe it of course you don't look you're not this is guaranteed you are not going to have an interest rate that's going to compensate you anywhere for inflation so you have to look at the cost of the money right and so the court that interest rate whether it's the bond rate or whether it's the cash rate certainly you're not going to get that and so you we have this wonderful sugar high which is distribute the the checks and so on but that means everything else goes up in relationship to cash because it's better to borrow cash that's just mechanics so we have that dynamic underway so we produce inflation but what you do know is that interest rates must be below inflation rates and must be below the nominal growth rate in order to deal with all of that debt in order to finance it and that depreciates the value of cash and money so you have to invest it elsewhere that's the dynamic right so that's just to be two things somewhat bullish therefore on the markets i would think on that's right on the margin so if we look at the expected return of equities let's say u.s equities and so on and you do the projections of the present value of discounted cash flows type of thing you probably can have somewhere in the vicinity of three and a half or four percent return and you probably can get so return relative to the return of cash it's a better deal but those as equity prices go up those excess returns go down that's what produces more of a bubble in other words the lower returns there and as that shrinks and then if you should have rates to rise that cushion narrows and as that cushion narrows you come into more and more danger zones so that's what we're seeing after you believe we're an inflationary environment and and i say that because that seems to be the prevailing view right now however we talked to kathy wood on on monday she said you know what actually next five years deflationary because of technology well there's uh uh there's the those are the pros and cons right um so we're in an era where there's much greater inventiveness and that's going to produce productivity if it's managed well in this politically challenging environment but if it is converted into productivity does that look that is a deflationary enforce but we're simultaneously in this world in which nobody is really going to get paid for those assets right okay so you have to have the debt monetization there's nothing that you can increase in supply quicker than money and money and credit so let's look at it this way there's a big increase in the value of financial assets so think about yourself each individual and say how much of your net worth is in financial assets versus actual things your house your other things your your equity and a lot of that money will there's too much of that money in financial assets that will never be able to get paid because if you calculate how much is it in financial assets and a financial asset is only a claim right to buy goods and services otherwise it's worthless there's an enormous amount of that how is that going to be dealt with it has to be dealt with with the printing of money so you have those two forces i think the greater force is the force of what those financial assets that the world in together will never be able to convert into goods and services because they're just too much of it so what do you do does that mean you want to be owning as much real estate as possible levering yourself does that say to yourself the crypto crypto and bitcoin uh is more valuable than i mean this goes back to the cash is trash where do you put the cash okay first no cash is trash so don't keep it in cash right second the most important thing i think that an individual investor or any investor could do is know how to diversify well because all those asset classes will outperform cash and so if you uh but but also risk uh when you can diversify well and what i mean diversify diversify acro countries right currencies asset classes and so on so that you have that balance then you take your prac your tactical moves from there but the most important thing i think is to divert know how to diversify well i think most people are not doing that i think most people think okay it's the stock market and and the stock market i think is relatively attractive in relationship to the alternatives but that dynamic is going to start to change as monetary policy gets tighter and so on and so forth so diversify well in those various areas the country the currency the asset class i i mentioned briefly the idea of crypto and i know you've had different views of this a lot of people think of that as a a new investment class that has had enormous run thus far but also as a way to mitigate if you will against the idea of what the value of cash becomes well i think it's worth considering all the uh the alternatives to cash and all the alternatives to some of the financial assets uh and so bitcoin has um has that is a possibility is that america i have a certain amount of money in bitcoin it's a small percentage of that which i have in gold which is a relatively small percentage of what i have in my other asset classes and so on and i think that that has the merit it's it's an it's an amazing accomplishment to have brought it from where that programming occurred to where it is and take the test of time on the other hand it's if if it's successful it's going to not be the governments don't want to have it successful you don't want to have it we're starting to see governments like el salvador i know that's not exactly uh going to be the leading government on this but there are there are governments that may take this on but no no no no no um the you have el salvador taking on and you have indian china getting rid of it and you have the united states talking about how to regulate it and it could still be controlled so that's right what it looks like if you're el salvador and you talk about your alternative monies you know it's a different thing do you believe that regulation ultimately will make something like bitcoin and other cryptocurrencies have a future or do you think regulation will kill it well i think regulation i think at the end of the day if it's really successful they'll kill it and they'll try to kill that and i think they will kill it because they have ways of killing it but that doesn't mean it doesn't have um you know a place of value and so on but it's one of those things right now it doesn't have intrinsic value if you look if you put crypto currencies or let's say bitcoin in the historical perspective right right there are so many things in a historical perspective that were given intrinsic that didn't have intrinsic value and were have perceived value and then became hot and then they become clo cold and so it could be either way you just have to know what it is right yep i mean like you know it could be a tulips in um in holland you know and that intrinsic value so what is the value and then there are technological changes i don't i'm no expert on that i'm just trying to say that you asked me what my opinion is take it for what it's worth i'm no expert on it i think it i think diversification values it matters i suspect the real question that investors should be asking themselves is how much stuff like that do they have do how much stuff do they have do they have gold okay should we be talking about how much you have in gold versus how much you have in bitcoin and do you have a diversification in those kinds of things that we might call intrinsic value money because we have a fiat monetary system okay with a fiat monetary system where is your hard money that's the question and i however you go after it i think that's the question to be answered okay there's two other pillars to the to the conversation we're having here when you spelled out three three different pieces of machinery i think actually maybe five in total but let's focus on the three the political environment right now you have long talked about taxes and inequality and what's happening here overlay that on top of what you just said well we have a we have large wealth and opportunity gaps you know a couple years ago i wrote a piece which was called why and how capitalism needs to be reformed because besides not being fair it is not achieving the goal of being able to have broad-based opportunity because capitalism intrigue intrinsically uh creates prosperity but it creates it in a different way for different people right and that self tends to be self-perpetuating because those who earn the money then take care of their kids and they have better education and so on and if you look at the bigger cycle when you get up and rich and then you get into some problems you have wealth gaps and the whole thing gets challenged and that's the cycle that we're in and so the question is the how do you make productivity continue to increase rather than just redistribution and so that's where we are politically we have that conflict we see the left-right conflict we see it play out now in the tax bills and so on we're going to see it in the 2022 elections you're going to see it in the tooth and that conflict itself is the ingredients of some form of civil war conflict it doesn't lend itself to what we're really talking about you've talked a lot about you've used the phrase civil war before do you think that we really are ahead of that well i think the the question is what's a war you know a war it doesn't have to be killing each other okay well i don't need it that way i mean but it but sometimes when it gets out of control it it does lead to that it's a good thing that we read history and see how it is left in the past how moderation has gone to extremism it's something we should be aware of but it is uh we certainly have um kind of a war developing between uh um the various factions the states it's right and so on and how that'll be resolved like in the 2022 elections there's still the question there's talk of um systematically challenging those elections right and if and if there's a systematic challenge that's a challenge to democracy because if you don't know who gets to sit in the seat to make the votes how do you resolve that kind of thing if the system isn't there it depends how extreme we get so i'm not talking about the fact that we will go there i'm just saying you have to be aware of it and then and the more we're aware of it maybe the more cautious we're going to be not to be that way but if we don't pull together as a country okay if we keep fighting with each other and have this together with the bad finances and together with a rising power challenging the existing power that's not going to be putting forward our best as an investor though how how do you assess the tail risk to the extent that's a tail risk of of the situation you just even described in 2022. well you always have to take the tail the first thing you have to do is deal with the tail risk eliminate the tail risk in one way or another and then go from there you can eliminate tail risks with a very small percentage of your portfolio right it can be done and that's a structural question what not only what assets you hold but also what options you might how old or whatever you might do to eliminate that tail risk right because the market is not really taking that tail risk and pricing it in so eliminate it right okay and they're so in market positions and so on you can do that um let's talk about china because you have a view that that china will eventually i think overtake the great american empire no well i mean if you just take lines on charts and you get basically see what's going on in terms of basic fundamentals there are four times more than four times uh as many chinese and so if they had an average per capita income that was half the average american they will be twice as large as the united states and if you take their growth rate and so on it is likely that china and today china is comparable in many ways they're a larger percentage of world trade uh they're comparable in gdp production depending on whether you're doing it ppp adjusted or not and so on so it is a reality today that they're roughly comparable and that they are increasing get their strength at a faster rate than we are that's a reality given though the regulatory crackdown in china right now a lot of people say you know what you shouldn't be investing in china you have a different view yeah first of all i think people have not a lot of people have not spent a lot of time there i've been going there since 1984 and i've been very lucky to know many people from the most common people to the most uh senior leadership and so on so forth and i think you have to understand what's going on and i'll just try to say it in a nutshell okay um everybody follows the approach that they believe is best for their own country i can't tell you whether their approach our approach my job isn't to do that but they have a top-down approach rather than a bottom-up approach very much like a strict parent so the question the riddle that you have to event asked yourself answered before is how does a communist party that talks about marxist leninism and at the same time has such the second largest capital markets and the development of capital markets coexist and the answer to that is that they believe that capitalism is a way of increasing the wealth and power of the country that's been key key at the same time as there's an important to redistribute it if you look at the policies of uh that are being dealt with now and i can rattle off the four elements of those policies they're not going to disrupt they're not going back to what you would call the old communism that you're you're it's they're very practical people and so the issue is really um the issue is um more control like they will tell your kids how many video games they could watch where you wouldn't it's like a strict parent and they're and they will redistribute the wealth but if you take the measurements of capitalism right now i have a continuum of a lot of measures i won't get into but um of capitalism the united states and china are the most capitalist countries right and and if you were to say will they go as far to the left as europe has gone it's unlikely that they will go as far to the left as europe has gone on those measures whether those are tax redistribution the effect of capital markets and the like and you can't get in and out of a place on the basis of that in addition you need diversification right okay so if you have two great powers two developments of technologies and so on and and so forth and you're looking what percentage of your portfolio do you have here and what percentage of your portfolio there diversification is a key element so when i look at it i think that there are risks in the united states there are risks there we can talk about those diversification is important and i think the fundamentals are basically sound i want to thank you this morning ray for a great discussion thank you andrew thank you it's a pleasure you better you

Channel: Bridgewater Associates

Views: 327,238

Rating: 4.8140326 out of 5

Keywords: Ray Dalio, Bridgewater Associates, Andrew Ross Sorkin

Id: KLdYfEIX8e0

Length: 18min 31sec (1111 seconds)

Published: Wed Sep 29 2021

Reddit Comments

[u/ProfessionalChapter0]

I am tired of Billionaires having a voice in this convo. Never trust these MFs even if they occasionally agree with you.