Ray Dalio's introspective look at financial world order, inequality and capitalism: Full interview

ray dalio is one of the most influential investors in the world today he started his company bridgewater out of his two-bedroom apartment in new york city in 1975 and has grown it into the world's largest hedge fund dalio is the author of the new york times number one bestseller principles life and work in which he shares a blueprint for success personal and professional dalio is an active philanthropist and conservationist with a special interest in ocean exploration and conservation i'm pleased to bring in our next guest ray dalio the founder of bridgewater associates the world's largest and most profitable hedge fund firm ray is also a well-known philanthropist and an author of multiple books ray it's great to have you with us so nice to be here i mentioned at the top that you're an author of multiple books and i know that you're writing one now called the changing world order and you've been talking about three forces at play that we're here pre-pandemic would love for you to share your world view with our viewers and listeners um yeah i do i do research um and so i this is a study that i've been doing and then i decided to share it with people because i think it's so important um yeah um a number of years ago first with 2008 we got into a monetary situation of course where we're printing money creating a lot of debt and monetizing it and then populism emerged around the world and um president trump who was more of a populist emerged and it affected tax policy it affected markets in a lot of different ways and that uh led me to realize that there are three big things that are going on in the world um that are dominant and then ko kovid came along those three forces are first the long-term debt and monetary cycle which i mean um the creating a lot of debt monetizing it and the implications of that which reverberate through the system in terms of all the markets and everything the second um is uh this conflict this polarization this wealth gap and how we're at each other's throats and i looked at the wealth gap and i looked at a lot of measures of conflict going back in time and i found that if they were in the 1930-45 period the printing of money as i described in debt monetization was also in the 1930-45 period and the third big influence is the rise of china so the rise of a great power challenging an existing great power the united states and that has enormous implications as investor i think what are the relative appeals of the markets but it it has a lot of implications it's not just a trade war so the markets and everything we're reverberating the trade war the technology war the geopolitical war in taiwan and the south china seas and um and then also the capital war we're seeing that emerge so those three factors required me to then go back in history and i i wanted to study the rises and declines of reserve currency empires so i needed to go back far enough that i would have a few so i had to go back 500 years so i could see the rise and decline of the dutch empire and its reserve currency the rise and decline of the british empire and its reserve currency the rise and beginning of decline for the united states and its reserve currency and china and that's so those are the forces and that's what i did which you're referring to and that by the way that's available for anybody to read on linkedin so so to recap is the high levels of debt extremely low interest rates um the large wealth gaps in political divisions and uh the rising world power which was china um versus this kind of overextended power being the us and i just heard you say ray um in that thesis there that you said this was the most analogous to the 1930-1945 time period of course if we go back in history we understand what happened then that that sounds really concerning well it it it is really concerning and when it's even more concerning when i went back to find the 500 years and the times that repeated over and over again and what i found was um there's a cycle there's a big cycle you know you start a new world order in 1945 we began a world order after the war they decided how the world would be divided they created the dollar as the world's reserve currency and so on and then um because there's so much fighting and there's and then you've established a power that is a dominant power you have a period of peace and prosperity and then that gets extrapolated and it leads to more debt fear of bad times diminishes opportunities of borrowing and getting in debt particularly if you have a reserve currency because the world wants to save in that reserve currency and that gets the country deeper and deeper in debt and so you have those debt increases and you have bubbles but you have prosperity and bubbles are really fun they're really enjoyable they're great but then you get to the point that there is a limitation to that and those limitations start become apparent when the central bank can't easily produce money and credit that starts when you hit zero interest rates because then you can't do it the same okay then you go to what that's monetary policy one is interest rate monetary policy when that doesn't work anymore you go to the next type of monetary policy which is printing money and buying financial assets but that financial purchases of financial assets and other things widen the wealth gap because those who have financial assets do better than those who don't have financial assets and you have a wider and wider wealth gap and when you have that wider wealth gap and then you have another downturn in an economy that's a formula for a lot of conflict and so that's what we see so what does a central bank then do it if if it taxes it takes money out of the economy to it's that's not good it's a problem and if it cuts expenses that's worth that's a problem so the central bank always through history this goes back literally thousands of years the central bank um or the entity that controls money then prints more money because think of it we got all those checks in the mail and we needed to get all those checks in the mail but um you can't take it away from anybody so where does it come from and what are the implications so that happens for lot logical reasons and it often happens at the same time as there's a rising power externally as a competitor which is um a challenge in that environment so yes it's a um it's it's it's it's one of those times and i think people are not aware of it because um i learned uh from my experiences that many things that happened in my lifetime that surprised me never happened in my lifetime before but they happened many times before and in history and that if i would go back in history i could see that the first time that happened was in 1971 i was clerking on the floor of the new york stock exchange and richard nixon gets in front of the camera and um says we're not going to give you the gold and the value is the dollar and and and i walked on the floor of the stock exchange i figured there was a big crisis and i walked on the floor of the stock exchange and the stock market was up four percent which was the most in couple of decades and i said wow that's surprising and then i found out that roosevelt did the exact same thing on march 5th 1933 and what was done in those two times is the same thing that was done on april 9th of this year when the federal government and the federal reserve decided to produce a lot more money and credit so yes you need these perspectives and i want to pass that along which is why i'm passing along that research on the linkedin piece yeah and it's always interesting especially when you mention a mistake that uh 1971 on the floor of the stock exchange what you thought was happening or going to happen and it didn't so you looked back in history and did this deep study uh a couple things i'd like to kind of double click on here ray um monetary policy you were just talking about monetary policy one monetary policy two and you know when you think about what's happened first you had the low low interest rates you couldn't you couldn't go any lower so then you had to purchase the financial assets you mentioned it benefits the wealthier um the wealthier because they own the stocks so i guess are we exacerbating wealth inequality here and do we need a rethink of monetary policy that's more targeted that actually can help stimulate those who really need it well that's what monetary policy three is so monetary policy one is uh interest rate based monetary policy two is the classic quantitative easing federal reserve buys or central banks by financial assets monetary policy three which is now what we are seeing and what is needed is um the production of that debt through government borrowing and the government direction of those checks to those who need it most that's what we just saw and that being then monetized by the central banks and so we're in a new era okay of monetary policy three as i call it monetary policy three will mean that the free market will play a much less role in determining those capital market flows that the government as we come into the future will be thinking how do i get that money to those who need it the most so it'll be a highly political decision much more political than it was in the past and that the central bank then will monetize those political decisions so monetary policy three means there's that type of cooperation so so those are the two dimensions of the big big change environment you're going to see um much more government influences and direction of where money goes which will have a big impact on not only the economy but of markets you have to watch what they're going to spend their money on and they have to watch where they're going to get their money from what taxes and so on means the government will play a bigger bigger role and it also means that there'll be much more debt that is monetized and that has implications for the value of financial assets it has input implications for the value of the currencies and so on let's unpack that further the monetization of the debt and what the implications could be i mean you're talking about you know of course when we think about the us we have the world's reserve currency that sounds like that status is very much uh i guess is it under threat here is that what you're essentially saying yes um if you look at those arcs there are many characteristics of those but um when you get to the end of the arc um if money is hard when it was connected to gold or it was gold they always broke that link um and they owe it and if it was soft they would always print more money and you can't raise living standards by raise by printing more money you can redistribute it certainly the money that is being received by those in the form of checks and they go out and spend it helps their living standards but it what it does is it diminishes the value of that cash and it diminishes the value of bonds because bonds are a promise to receive a lot of currency and it shifts wealth to financial assets it always sends stocks higher like my 1971 level lesson it always sends gold higher and it also always shifts uh the impact of currency so when we're looking at this we're going to also see i think the rise of the the increased importance of china's remnb as a currency it's got a long way to go before it's going to be a reserve currency but i think that one of the important things to see is that you're going to see favorable capital flows for china and you're and if you do a comparison of their markets what where their interest rates are where their capital markets who's doing ipos you know nearly half of the ipos depending we'll find out but something like 45 of the ipos there will be done in china's markets shanghai and hong kong this year new offerings that'll drive cap and more and more you're going to see the internationalization of the remnb you're going to see capital flows move in those directions and those kind of analogous movements have repeated through history and then i guess tying it back to you know the investors who are watching a lot of retail investors and a lot of folks who are my generation as well how should they be thinking about this it sounds like you know the kind of i guess the out performance that we've seen in the u.s stock market for so long they need to kind of think beyond the us is that what i'm also hearing well i think first the most important thing um is to realize first uh cash is a risky asset um i think so many people think if i go to cash i'm going to be safe because it's much less volatile but please realize in this environment of producing a lot more cash the real returns go down it's a seductive um risk risky asset because let's say relative to inflation you might get taxed 2 percent a year and as you're taxed two percent a year that's a huge amount of money over time but it's a subtle tax so first watch that think about okay currency issue or the value of money issue then in terms of that yes you will want to diversify to storeholds of wealth and what the number one the second big thing is diversify well diversify well um into diverse five asset classes but diversify of countries diversify currencies so think about diversification if you diversify well you lower your risk without lowering your expected returns if you know how to do that well but i would say you know uh what are the three main things i don't know diversify diversify diversify i would say um so i would say those would be kind of the main headlines um that i'd like to pass and of course you know we're heading into an election and in just a matter of days and you have to wonder some of the themes that we've talked about here whether it's the wealth gaps the political gaps the the the um populist on the left and the right how do you think about the election and i guess the scenarios the probabilities and how that might play into some of these bigger themes that we have talked about earlier um well first of all i think like what is the most important thing for the united states um and i think um the the most important thing of the united states uh is to do the fundamental things right we'll talk about that in a second and also to come together i'm i'm most concerned about one side trying to beat the other side um and doing damage because history has shown that when you get those gaps uh those uh wealth gaps and the values gaps and anger you do get demonstrations you get you get violence and you can move to the point that the respect for the system uh is not good i have a you know principle which is when the causes that people are behind are more important to them than the system the system is in jeopardy so the the bringing it bring it together and making sure that we can do that i think is impairment importance then what are the fundamentals the fundamentals there's so many important fundamentals but let me go through the important ones um are you going to earn more than you spend so that you're going to build to we as a country are we going to earn more than we spend so that we build our balance sheets um that's important for every individual for every company for every organization and for every government uh you can judge the health by the financial health by those things then you have to go to the fundamentals that produce those things and they start with educating your children well broad-based i think good broad-based good public education and civility when i say education i don't just mean uh do you know how to read and write and all of those things that's very important of course but also to behave civilly with each other because societies that row in the same direction with a common mission like an american dream uh work better and so i believe uh it starts with education and and you know the basics basically not what i was looking at i went to a public school i had parents who cared for me and took love me into taught me some values and so much those things are the most important fundamentals save more than you know those things if we can do that that will be the most important thing because wherever we are in relation to china or any place is going to be dependent on how we are with ourselves to do those fundamental things correctly you wrote the book principles and and uh it's a fascinating read you're talking about radical transparency thoughtful disagreement all these different principles and we're just having this conversation about you know how we are with each other and civility bringing back civility are you optimistic that we can get there um i'm not optimistic that we can get there but i do know that we can get there if people are fearful of the consequences of not getting there um i believe that if you study history and you see what civil wars can be like and you realize that you could have a civil war don't take it for granted that you don't and you see that when people put winning and getting their way above all else so that they will distort truth um that they will uh cheat rules and that they will be violent with each other because by because that winning is of paramount importance that the whole suffers greatly and it affects everybody adversely so um but um i do think we're in a mindset in which everybody not everybody but i'll i think the greatest problem of our time is people are passionately attached to their opinions um and are not able as well to go through the thoughtful disagreement of how to get past those agreement disagreements and do things well together i want to talk about uh capitalism as well and i know ray you've done a deep dive on this he did a study on this not too long ago and it also ties back to education which i know you and your wife are intimately involved in in the state of connecticut which if you look at that state has a wealth gap as well how would you diagnose uh the current state of capitalism is it broken yeah the piece you're referring to which is available on linkedin if everybody wants it is um why and how capitalism needs to be reformed um it you know it's kind of simple um what are your goals and is the system achieving the goals um and um i don't know that we could agree on our goals but i'd say i would say the american dream as i grew up and really believed in and benefited from was the idea of equal opportunity and to in doing that you would draw upon the greatest percentage of the population so that you would find out where the talents lie everywhere and also the people would believe the system is fair and so i believe when i look at that i don't i think the system is broken um i believe in capitalism but the nature of capitalism in various ways can produce these disparities that has to be dealt with so education is a good example as you point out my wife and i am particularly my wife um sees um kids can't have the most basic educational um needs pervasively okay let me give you the picture in connecticut connecticut is the richest state in the country and um it has the largest wealth gap and um wealth is concentrated in small percentage of the population relative to the whole 22 percent of the high school students in connecticut are either disengaged or disconnected disengaged means that they have an absentee rate which is greater than 25 percent and they're failing their classes or disconnected means they don't they don't come to school they're out of school they don't know where they are 22 percent of high school students those where those high school students going to be like what kind of citizens are they going to be are they going to be net contributors or are they not going to be in that deficit and is that fair okay um education we were in a situation where uh kovid makes clear that they didn't have computers so we had to um and the state didn't have the money for buying the computers so we so we had to buy 60 000 computers for kids who didn't have computers and they don't have connectivity okay but there are so many there's poverty there's food as an issue in that kind of environment so it's not an environment of equal opportunity now why does that again exist and there are not bad people who are producing it but the profit system is not good enough to be able to allocate resources that way in other words not everything's going to be able to be achieved by profit for example profit pursuit is logically and for the efficiency of the whole system going to replace people and jobs and so it contributes to the wealth gap it's smart for a company to have a technology that's going to replace people in jobs but you get to a smaller and smaller percentage of the population that makes that technology and benefits it and it produces that wa wider wealth gap so that wider wealth gap also isn't an unjust system um what i found is that the top 40 percent because i broke it into quinn tiles top 20 each 20. and top 40 percent of the population on average spends five times as much money on their children's education than those in the bottom 60 in other words the majority of people has this um the elites spending five times as much money on their kids education the elites and and the and the kid people below are want to take good care of their kids they're not doing a bad thing but that perpetuates an opportunity gap so those structural reasons not a bad guys but those structural reasons are leading to a result that i don't think a that is is either fair or that we want because we're not um tapping that talent and it could lead to a civil war or you know some kind of revolution of sorts so it has to be dealt with you have to wonder too how the states are faring through the pandemic too and you're thinking about just the the public education system and funding those things how do you think that kind of exacerbates the problem and what should be done do we need more government to step in here do we need the private sector to step up do we need more philanthropists to adopt local public schools what do you think needs to change um before i get to the what i think to change i want to build on your point of what is and what is is um in a lot of places and it's ironic in the richest states um they have the most debt and they have the largest wealth gaps so this is true not only in connecticut new york new jersey illinois you know and a number of places and that produces a dynamic that has been everybody sees it's true over time you can't raise taxes because people will leave and have too much of a burden and you can't lower spending because it's inhumane for those other people um and when you have a large debt and you have a large wealth gap and you have a downturn you have a conflict you've got a real problem the united states as a whole has that issue but the federal reserve buys bridges the gap by buying the money but printing the money and buying that gap buying that debt i think at the end of the day the question will have to arise will they have to do it how will that question be dealt with because it um at you know at the state level or the local level because it exemplifies what happens when the debt can't be purchased or and then so i think we're in an era of a lot of monetization unfortunately these all reach a point where it's an intolerable crisis and then extraordinary measures come and so i think that the path will look something like that so what does that mean for my generation i'm a millennial um you know my generation i guess we're becoming the parents of today and younger generations we're going to be the ones that have to really deal with the consequences here what do you think the world looks like that we ultimately inherit well again i think you have to be savvy of what that whole cycle is like that's one of the reasons i wrote that linkedin piece so the changing world order and linkedin if you see it because otherwise you'll be surprised by it i think uh but i would say um when you're looking at that um it comes back to the same fundamentals educate your children well um teach them self-discipline character civility those things to be strong teach them them to be open-minded to go to read history or to hear from other people um teach them to be strong those are the things that you can give and and yeah don't be naive don't be blind to uh think that just the experiences that you've had are all you need the future will be very different than your past because of the way these things go in cycles the the funny thing i think most everybody expects the future to be a modified version of the present and or what they've recently experienced and more often than not it's it's more the opposite than uh similar if in fact if you take every decade the 1920s the 30s were the opposite 1930s the 40s were the opposite more opposite that's similar and you take every decade and it's more opposites and similar so open the mind to that strong character well educated those are the things at the end of the day that will serve you well you know i just want to read something that you wrote because it really it stayed with me you said quote we're like ants preoccupied with our jobs of carrying crumbs in our miniscule lifetimes instead of having broader perspectives of big picture patterns and cycles the important and inter in the important interrelated things driving them and where we are within the cycles and what's likely to transpire and of course i think later in the piece you even said that you're even just beginning to put together the crumbs the picture here and you don't have all the answers of course and no one really does but i guess kind of to round it out here uh what do you say uh i guess you were kind of outlining what our world might look like but if you could narrow it down to one thing what would be the biggest issue that we need to tackle first well of course the biggest issue goes back to one's approach to life it depends on what level you want me to answer the question but um the biggest issue uh is um be radically open-minded you have to make your own decisions and you have to make them well by taking in well not by being close-minded and um and having the character to do it and then going back and understanding histories and and how that the patterns of histories and then take in from the people around you the smartest people you know the information and triangulate with them well to make that decision that is i would say overarching at any time the most important things anybody could do as for now i would say um to realize um that these changes take a global view take um um make comparisons um of countries put things in perspective and then if i narrowed down to inver investing so i'm getting more specific and ask answering your question it would be first to realize that cash is not a safe investment it's a very risky investment and know how to diversify well and what i mean diversify well i mean diversify uh globally in countries in markets and in currencies how about um do you have a take on digital currencies this is something a lot of young people talk about any uh view on that there are um digital currencies let me break them out down into two types um there's the type in which it's like a bitcoin type of currency that'll be an alternative currency um in terms of its supply demand and an alternative storehold of wealth and then there's digital currencies that means there'll be other types of currencies let's say the dollar or the euro or the chinese remnb that is digitalized okay i think we're going to see a lot more of that second type but i think that there are three main problems of the first type the bitcoin type of of that um uh theoretically it's good but the three basic things are um uh a currency has to be an effective medium of exchange store hold of wealth and the governments want to control it so um i today can't take my bitcoin yet and go buy things easily with it and as a storehold of wealth um it it it's so volatile um that its volatility based on speculation is so much greater that it's not an effective storehold of wealth and which is also one of the reasons it's a problem to be a transaction vehicle because if a vendor says i'm going to get paid in bitcoin and they don't know what that means in terms of their other liabilities that's a problem and then thirdly um you know governments won't and when if it becomes material governments won't allow it i mean they'll outlaw it and they'll use whatever teeth they have to enforce that they would say okay you can't have you can't transact the bitcoin you can't have a bitcoin so then you have to sort of be almost like um is it a felony and i'm gonna have to be a felon in order to transact they outlawed gold um you know um what's what's wrong with gold uh but gold was a storehold of wealth and so if i was to say what would i prefer bitcoin to gold uh no i wouldn't prefer bitcoin to gold gold is uh um it will be the vehicle there's either that central banks and countries jews as an alternative to the regular cash um because each central bank can print cash but through transaction through time when countries dealt with each other they used gold because they didn't have to worry about being devalued by some country that's going to print the gold and so it still is our third largest reserves if you take central bank reserves the largest is the dollar the second largest is uh euros and the third largest is gold so um but um so if i'm dealing with classic currencies i'm really sort of getting into the storeholder wealth domain that also includes stocks in this that store all the wealth but i don't think digital currencies uh will succeed and in the way um people hope they would uh for those reasons really interesting insights and of course you know i recommend folks read uh the changing world order by you ray and if you have any book recommendations feel free to pass those along as well thank you so much for your time thank you julie

Channel: Yahoo Finance

Views: 1,175,313

Rating: 4.8031502 out of 5

Keywords: Yahoo Finance, Personal Finance, Money, Investing, Business, Savings, Investment, Stocks, Bonds, FX, Currencies, NYSE, Equities, News, Politics, Market, Markets, Yahoo FInance Premium, Stock market, Ray Dalio, Wealth Gap, Billionaire, 2020 election

Id: BnNCVfo3G-o

Length: 36min 30sec (2190 seconds)

Published: Sat Nov 07 2020

Reddit Comments

[u/Kappanion]

"When you get to the end of the arc [the current economic cycle], if money is hard, like connected to gold, they always broke that link, and it was soft, they always printed more money. And you can't raise living standards by printing more money, you can redistribute it. Certainly the money, that is being received by those in the form of checks and they go out and spend it helps their living standards. But what it does is it diminishes the value of that cash and it diminishes the value of bonds [...] and it shift wealth to financial assets. It always send stocks higher, it always sends gold higher, and it always shifts the impact of currency. So what we're looking at, we;re going to also see I think the increased importance of China currency"

[u/Bitcoin_is_plan_A]

i like Ray