Ray Dalio on US Dominance, China Economy, Inflation, Future of Bridgewater

I'm David Weston from Bloomberg and it is my distinct pleasure and privilege to welcome Ray dalio and he has a new title so I have to make sure I get it right he is founder CIO mentor and board member of Bridgewater is that right yeah great I got it uh newly minted uh so it's great to have you here it's really wonderful to get to talk to you I I have to say we have a little pressure on us because the governor's already said what he wants which is not to depress everybody so work on that okay you all know Ray is the Premier macro investor of our time uh and goodness knows we've got a lot of macro right now I mean from central banks around the world tightening their monetary policy to China on the rise to a ground war in Europe for the first time since World War II so the question I think for all of us today is where are we where are we going but Ray what you have taught me and I think others is in order to know where you're going you need to know where you've been and Ray has written a terrific book I really recommend the principles of dealing with the changing World Order where he goes back through 500 years but also at one point you go back farther than that you go back with China to like 500 as I recall uh to sort of say you know what we may not have been exactly here before but we've been someplace that looks like this so in order to address some of the issues today give us overall structure of what you found in going through history and the cycles that you identified that you think still apply it today okay I I will do that but I just want to also say that uh I had the opportunity of seeing Governor Lamont in action and I just want to tell you that I love Connecticut and it has had a difficult time and I've seen at a very nitty-gritty level how the various problems that you've dealt with in a moderate way and if there's one thing that I really think our country needs it's a strong middle that is basically able to bring things together in the interests of uh the country and I could go through the fact that kids didn't have computers in Memphis and he runs around and he does things so I just want to again uh thank you Ned for being doing what you do anyway to answer your question uh okay um in my in my years of doing this so something like over a little over 50 years what I found is that many times in my life things that surprised me were because of they never happened in my lifetime before but they happened many times in history so for example then studying these earlier times if they happen mechanistically I need to know how they work so I studied the Great Depression that's why we anticipated the 2008 financial crisis because the same things happen over and over again but sometimes not in our lifetimes and so there were three big things there are three big things that are happening uh to us that haven't happened in our lifetime I like to measure things so I can see them in numbers and charts and so on and those three big things are first the amount of debt and money creation how much debt we have the rate at which we are creating it and then where are we getting that money from the Federal Reserve and other central banks printing it so that has never happened to this degree except for the 1930 to 45 period which I studied before and I needed to go back and hit study that in history the second of those two things is the amount of internal conflict populism of the left and the right irreconcilable differences with the largest wealth gaps that have existed so the greatest political gaps the greatest amount of populism largest wealth gaps um since you have to go back to the 1930 to 45 period and actually it's larger than that and you have to go back to 1900 to see that by the way if you want to see it you'll see the charts in that so um we have a financial issue we have a internal conflict issue that has very big implications for how well our country is run but also what does it mean for taxes what does it mean for the value of assets I need to understand that and the third was um International conflict um so in my whole lifetime the United States was clearly a dominant power and we were in the American World Order 1945 the United States was the became the leading world power accounted for half-world GDP we had 80 percent of the world's money because gold was money then and we had a military Monopoly and so the reason that we were the world's power that's why the United Nations is in New York and IMF and World Banker Washington so dominant Pro but we could see this conflict this emerging competition and I didn't the last time that happened was the 1930 to 45 period And I need to study that and so I studied that pattern and these are the big things in our lives right now but we are not acquainted with it and I'm so I needed to study the rise and declines of currencies and other rise in declines of Empires and because these Cycles go on over a long per period of time I needed to see enough of those cases so I had to go back let's say the 500 years so I studied all of those now I'm not an act an academic I'm a practitioner so it's not like I'm writing history books it's for the purpose of making decisions today so what I learned there has been important in us our positioning in the markets right now so it's just that practical but those are the three big things I also studied saw in history that there were two other things that were very important um one was Acts of nature actually toppled more civilizations killed more people than the others that I just mentioned uh and though they are um uh droughts Bloods and pandemics but like a pandemic that's another one that comes along once in a lifetime and we don't see it and then of course the most important force over a long period of time is man's adaptability and inventiveness and now we have a greater ability so and that's the plus you know the others are challenging so that's it in a nutshell so Ray you talked about the fact that during our lifetime the United States has been dominant in the world uh it's not as dominant today as it was 20 30 years ago economically or militarily in compared to other people where are we right now in the cycle with respect to the United States are we at the peak are we coming down how fast are we going down um we're again when I say these things I use measures there are 18 measures of health and you could see them in the book and they're measures of things like what is your percentage well GDP what is your percentage of exports how are you reserve currency but also what is your education level level of Education what is your competitiveness 18 measures of that and we are in Decline we're declining on a relative basis but even also some measures in an absolute basis um so that's what the ark is and then uh China has been the leading competitor um I've been having uh for uh not since 1984 I've been going to China I watch it since I started going there per capita income has increased by 26 times and so if you use measures of comparability in military technology share of world GDP all of that uh you see that that's that is the only real power there are military Powers but history has shown if you're a military power and you're not an economic power while you may be a threat um you're not going to win the war so that's what that the picture looks like so if you go back and we could we could see it right we can see it in our various ways if you go back 500 years as you did you have the Dutch you have the British you have the U.S can a civilization Empire as you describe it change at least the slope of the curve and I'll give you a specific example right now your first thing was creating a lot of debt create a lot of money generating money the Federal Reserve right now is trying to reserve reverse that process could that slow down the decline well I'm going to take the second what the Federal Reserve is doing in a second and I'll deal with the uh the first it's all a matter of basics can't do you earn more than you spent okay do you have a good income statement and do you have a good balance sheet um do you have one or two parents who care for you and give you the guidance and the values can I go to a good Public School and and have food and health care and come out with uh an environment of equal opportunity that's all you need that's all you need because if you do those things you will have a civil population that will be productive and that you will be financially capable strong and um so you're going to do things better and better and you'll be strong so it comes down to those fundamentals when I look at one country or another and I'm thinking where do I want to invest it's like I'm looking at those things do they have a problem with internal conflict or is it orderly just those Basics now the question is can we do those basics okay so how are we doing on those Basics you have measures to judge that yes we can do it and I think the most important thing is how we are with each other like um uh do we have a democracy in which we can come together and have a like a very strong bipolar bipartisan middle okay and then work on dealing with those things like you know Governor Lamont Gabe touched on some of those Basics so it that becomes the big question I think but how are we doing and again come back to the FED for a second I was a Fed it sounds to me like the FED is trying to take a step in the what you would call the right direction yeah but what happens is like it's it's it's it's really simple you know um the way the system works is if you give a lot of money and credit and you make it cheap enough they will spend it okay but when you create debt um it's stimulative over the short run and depressing over the long run because when you have to pay it back then you have to um earn more than you spend to pay it back so what do you do with that debt okay if you make it tough to pay it back then what happens is you have a an economic downturn if you make it easy you print the money and those are that's the cycle so when we look at what the FED has done the fed and the government together gave an enormous amount of debt and credit and created a Lurch forward it a giant Lurch forward and created a bubble okay and now they're putting on the brakes okay so now we're going to create a giant Lurch backward I think because it's simple the amount of we talk about inflation inflation is a very simple thing it's the amount of money that's spent mounting and credit spared divided by the quantity sold is the price and so if you take that money away then you're then you you can't get rid of inflation the way you get rid of inflation is to get people to spend less and that is what an economic downturn so the cycle goes like that and then when you get to the point where let's say the economic pain is greater than the inflation pay then you see them do the opposite so we're going through that particular cycle so it's I think a delusion to believe that okay what they're going to do is deal with inflation and it'll all go away because they'll deal with inflation by doing that without realizing what that means in terms of that the the what the means of buying power think about the amount the supply demand of bonds just to give you we have to sell that um well the government is going to borrow Central government's going to borrow about five percent of GDP so they have to sell Bonds in that amount the Federal Reserve is going to sell or how have run off the balance sheet about five percent of GDB that's 10 percent of GDP okay who's going to buy the bonds who's going to buy that oh now they don't want to buy the Bots we've had you know Pension funds others they don't want to buy that bonds foreigners don't want to buy the bonds so then what the way that works is interest rates have got to go up to a level that constricts private credit demand and when that happens then there's less spending that's the mechanics so there's that trade-off and I think we're going to be in an environment in which they're trying to navigate these two difficult you don't want too much inflation and you don't want to weaken economy and so they're trying to navigate that which will be probably something like the 70s and that's all happening in the context of the political conflict which is very important and the international conflict because the international conflict has bearing on things like inflation supply lines and all of that you just sent the something briefly something like the 70s and my question is what are we in store for here and we had in some ways like seven years of feast and now we have seven years of famine is that what we're looking at right now in order to get inflation back in line because thus far the FED is being pretty convincing to a lot of people they really mean what they say yes and the consequences just everybody is do you understand what that means thank you that's great they mean what they say what they've done is they've produced this giant Lurch forward and now yes they will raise interest rates to the point that there's enough economic pain and financial Market pay to deal with that and it'll be real pain no question about it not least in the form of unemployment in all likelihood that we're going to have to have at the same point from your point of view your perspective on history despite the pain is it the right thing to do because in the long run even the people who make less are hurt by inflation more than anybody else is the key of course is to try to get the balance as as best as we can I I mean I call it a beautiful deleveraging you need a beautiful deleveraging um you how do in history uh debts decline relative to incomes so you could go back and see the mechanics of that and the way that happens is a mix of um some amount of restructuring debts and that is a deflationary force because um one man's debts are another man's assets and so what you so some amount of restructuring is a deflationary force you take buying power away from others and then some form of debt monetization and to get the stimulation and you try they tried to get the middle ground because of the size of the issues we're dealing with it's not something that we're used to in terms of its magnitude I think so and then if we take the internal conflict factor I think we have to look at all three because they play a role and so it it's traditionally those three things are the perfect storm right they all affect each other so if we if you have a bad economic situation as you said it affects one group of people and it hurts them then you have an internal political conflict right the left and the right the rich and the poor and so on and then that affects things and vice versa and then of course the external conflict the cost of the external conflict like for example um it's estimated that so far the cost of two to the Ukraine war of the Ukraine war to Nato is something like eight eight trillion dollars if you look at um to rebuild are we going to rebuild are they going to rebuild they ask the NATO countries like they asked the European countries uh are you going to put in well they're broke and they're going to put in then if you look at the cost of climate change climate change um is approximately 10 trillion dollars a year um if you look at the cost of building infrastructure if you look at the cost of all of those costs and you add up those costs those are it's not like we're going to stop the spending so you have to achieve that Financial balance in some kind of a way right now um governments governments are like people meaning when you spend you think the basic economics works the same the only difference is they get to print money so when you spend you think how much money do I have to spend and that wherefore what do I prioritize it on Governor Lou Mont has that challenge we all have that challenge not the federal government so what happens is the government says what do we need to spend money on and they then go spend the money and we don't have that balance so that issue is a big fundamental issue particularly when we have populism of both sides I want to turn to China which you mentioned but before that let me ask one question given where the United States is in the cycle one of the things you talk about in your book is reserve currencies and when you become dominant you get to have the reserve currency like the British pound before US dollar now given where we are why is the US dollar so strong is it too strong well so I think it's important for you and everybody to understand that if you're not you shouldn't look at the value of the dollar in relationship to other currencies as much I mean they're all bad currencies so we can get into why Europe is a bad currency and why the yen is a bad currency they're all bad currencies and they are all depreciating in buying power just like the 30s just like the 70s they all depreciate in relationship to what they can buy a currency is money um but when we look at them one in relationship to another we may not pay attention to that so that's our existing set of circumstances you know okay the answer is um the euro are you kidding me I mean we can go on about Europe's situation wow oh my God and then and then okay what are they doing in the end they're just printing the money whatever it is and so the question is what is a storehold of wealth you know money is a medium of exchange or a storehold of wealth and it's not a good storehold of wealth when the interest rate you're receiving is much less than the inflation rate so that's what you're seeing happen well before we get to China let me pick up on exactly that point given what you're saying about the world in terms of inflation and the the reduction in the value of the currencies around the world where is the right store for the world I mean is it gold is it Bitcoin what where do you go to defend yourself against inflation this is uh this is the question of our time we will over the next 10 years certainly I think be trying to find the answer of what is the storehold of wealth because usually it it's a money and then a debt instrument in holding that money but as that goes down then there is the question of what it is what is that currency and storehold of wealth so we're in that place it's always handy to be the thing that you is your buying power you're going to see it more in inflation hedge assets so like if you're thinking about a bond it's better to think about an inflation hedge Bond than to think about uh you know tips or inflation hedge assets along those lines and I think that you're going to see then uh the parts of the economy so like I think basically if I was saving what would I want to save it I'd like to save in the things I know that I'm going to need so I would like to save in like my residence my house I would like to save if I could pay forward my kids education pay forward the food or the health care that I can and so on I would want to save in those things to buy forward the things I need most fundamentally I think if we start to think that way not only in terms of the investment but what what are even the meat and potatoes type of businesses that are doing that and then also I think that you have to think geographically where is best in the world okay that and I'll I'll say that best in the world are countries in which they're earning more than their spending and their balance sheets are have more assets and liabilities on them that they're civil with each other and then they're not in conflict and they're they're not in risk of an international War it's basically those dementals and then I would say we are in an intellectual Revolution that our capacity to invent and think and use Technologies to help us think has never been greater than before and so those revolutionary type of Technologies when they're cutting edge I think that those are good Investments and I think then what you have to do is also diversify that because the the thing I learned is um um it's all returned in relation to risk everybody looks at how much return you make but it only takes one time to knock you out you know we didn't do it Richard has been doing this 47 years and we survived you have to survive first it only takes one time to knock you out of the game and so you should never lose more than x amount of money that you can't recover because you lose 50 percent it takes a hundred percent to get back so um diversification knowing how to do that well allows you to reduce your risk by up to 80 percent without reducing your return so I think that those would be the approaches that I would emphasize in this environment and I would not generally speak I don't think we're going to have a sustainable interest rate that is going to be a real adequate interest rate and so I would stay away from uh Dead Issue um that now the interest rates went from ridiculously stupid interest rates and their cup coming into an era an area that still I think is too low but it's not as ridiculous as it was before they have to get really so when you play with that game if you want me to just do it I'll just give you my thought real quick okay what would be the equilibrium interest rate for the equilibrium of inflation rate okay we're going to have probably I I would estimate we asked maybe between somewhere between a structural employment inflation rate maybe in the vicinity of uh between four and five percent in a highly on a certain environment you can't even be sure that but let's say that that means then what is the real bond yield okay so you have to go to that um we now have about a one and a half percent real bond yield um do you still have a one percent so you have to have the bond yield give you something I don't know what that is but that brings it above four and a half percent to some other number and you have to have relatively Tight money which means that you have a fairly flat yield curve so I don't know whether that's four and a half percent or the the economy could not take an interest rate much higher than that before it's going to be negative so those are the things that enter into my thinking in terms of what markets and what the portfolio would look like applying that analysis is China a good investment and more specifically is President XI a good investment because it looks like we're going to have at least five more years of President G okay I um let me uh I want to be clear in making um that from my getting to know the leaders and I don't know she but I know those around them that they are reasonable people and one and there's going to be a change in leadership that we're going to see on Sunday and you're going to in my opinion you're going to bring reasonable people into that there's a culture there's that and then there's but there's a lot of uncertainty and a lot of problems so let me rattle off the uncertainties and the problems that are temporary that could be temporary but they could be longer lasting the first is they have a debt crisis that in my opinion they've allowed to go too far into the bones of the economy so it's affecting local governments it's affecting financial institutions it starts with real estate real estate is 25 of their economy approximately and then the majority of savings so it has a wealth effect it has a negative and it's passing through the system so that's one second is that there's this question of are they still in favor of free enterprise and the market system and what is common prosperity mean and so on quite a lot of confusion regarding that from my uh operating there they uh they don't want to mess with that system very much um she doesn't um because when they did some things like shutting down some of the tech companies because they want to break up the Minard the uh these large companies they also did minority uh things anyway I'm so let me go number three covet okay number four is demographics okay demographics is particularly important in China because of the culture in China as well as the one child policy you know for um the family takes care of the family and so the tradition is that the children take care of the adults at in old age they don't have a well-developed pension system and so what happens is with the one child policy a husband and wife has four parents that they have to take care of system can't deal with that and so that's a main thing it relates to covet you know they have something like 350 million people over 65. so if they don't deal with so we have covet so you have a number of these problems you have a a climate problem and a water problem in China so China's got a lot of those problems to deal with but the real question and we we all can have problems the real question is where is that Beacon is that Beacon and we're going to learn more about that based on who's appointed to what jobs and also what statements are made is that Beacon continuing to do the things that raise productivity and inventiveness and so on so we're going to learn more but I think that as far as investing in China China is the if you take certain industries it's it's you know main competitor but it's neither should know in my opinion uh not you have to have a look you have to have a certain amount in China I think the longer term picture in China is still bright because I know the people and I know the culture and I think it's good but they have major issues now last subject Ray Bridgewater as I say you have a new title I'm curious about what's different and what's the same for you and for Bridgewater what do you expect will be the same what would be different well different is okay 47 years ago uh you know My two-bedroom apartment with a friend we started Bridgewater 47 years ago and then we built up this community meaningful work and meaningful relationships through radical truthfulness and radical transparency over that period of time and like a parent of a 47 year old what do you want more than anything I want more than anything them to be successful without me right that's the Ark in life Psalm 73 that's what I want and so um and it took a while I'm like I didn't know it's very difficult I would run the company I would do the investment part I would do the management part and so on and and it became too much and then the trial and error and I have very very high standards and so but and now we have a fabulous team we have a fabulous board and everything and I'm there so that's joyous as far as what that means it means pretty much that um like your kids they have control of their lives right and they're solid and they're and it's great and so I'm very happy about that and then I could do pretty much whatever I want with them or without them they want I want to be a mentor right I love the investment game so I'll keep playing it I'll keep doing it coming up with my ideas and so on and then I'll also help them be more successful by operating as the mentor and I could do that like uh without the um burden of the you know all the issues that one operates when you know the the responsibility is all with you so it's it you know it's a great joy you can't imagine how joyous it is just finally just to continue your analogy with your children you hope that you've sort of imbued them with certain character they'll make their own decisions which way different from your decisions but basically you'll be consistent are you confident that your DNA is in Bridgewater they'll get to the DNA even if they'll make different decisions than you would have made right that's a culture culture is Destiny and they have that culture and it's it's almost like the United States the Constitution what is America okay and then we grow up with that and that'll influence but it'll evolve the way it should evolve the way and you know and they'll probably make it better than I did and so on so yeah they've got the culture Ray dalio founder of Bridgewater thank you so much thank you okay thank you so much

Channel: Bloomberg Markets and Finance

Views: 605,328

Keywords: Bloomberg

Id: Y3LufB6DK4k

Length: 31min 52sec (1912 seconds)

Published: Tue Oct 11 2022