Ray Dalio's Lessons From The Financial Crisis

joining us right now is Ray Dalio Bridgewater associates founder co-chair co-chief investment officer Ray has a new book out it's getting endorsements by all sorts of luminaries it's called the template for understanding big debt crises it's out now and we should tell you this is one of the best kind of books it's available for free you can actually go online and download it from free as a PDF you can also get it on your Kindle and you get a hard copy in October but it's really a look at crises over centuries really and what policies created the crisis and what policies helped rescue the world from them so good morning to you thank you for morning thank you for being here okay we're spending the whole week really looking back at the 2008 crisis but and by the way during the midst of the crisis we should say a lot big pieces of this book he was writing these memos every single day that people like Tim Geithner and Ben Bernanke were reading that ultimately got crafted inside this book but when you look back and think about the crisis what is the biggest single lesson I know there's so many lessons in the book and we want to get to them but the biggest single lesson for you of all of them there's the debt growth that finances the bubbles that happen before it that create the busts you know there's basically six stages to it there's the normal debt growth that finances growth that pays for itself and then you get into the bubble stage when everybody's extrapolating what happened in the past so asset prices are going up and everybody's borrowing a lot of money to extrapolate what's happened and that bubble stage central banks don't pay much attention to because it doesn't affect inflation and growth and so I think at that stage is when the central bank should be looking at are those debts going to be able to be paid back from the financial that would be the biggest right now and what stage therefore are we in today we had a segment on at around 6:30 with Brian Sullivan who talked about actually how debt in this country has actually increased since 2008 yeah debt is debt is increased but debt relative to the debt service debt service payments relative to incomes have not risen like they've had in 2007 and NH his point was looking at corporate debt and for debt of course is livid but if you look at the corporate cash and you look at the maturity of the debt when we run the proform of financial calculations it's nothing like 2007 what looked like to 2008 there's a squeeze that that'll be emerging but generally speaking we're in I would say the seventh inning of this cycle I think that we're at the stage in the cycle where what interest rates are being raised right we're in the later stage probably maybe we have two more years I would say into the cycle something like that what and then the issues and the issues of this desk crisis a very different thing out than the last desk crisis each one's a little bit unique this one looks very much more like the nineteen thirty five to thirty six thirty nineteen thirty five to forty period I mean that situation you called it a crisis we're not at a crisis yet are we are are we there now no but oh you mean the debt situation could I describe the parallels yes I think the parallel is a really important understanding okay nineteen twenty nine to thirty two at nine and 2008 to 2009 we have a debt crisis and interest rates hit zero both of those cases interest rates at zero only two times the century it there's only one thing to do next and that is to print money and buy financial assets so in both of those cases that's what the central bank did and they pushed asset prices up as a result we had an expansion we had the markets rising and we particularly had an increase in the wealth gap because if you known financial assets you got richer and if you didn't you didn't and so what today we have is the wealth gap that's the largest since that period the top one-tenth of one percent of the populations that worth is equal to the bottom ninety percent combined you have to go back to nineteen thirty five to forty as a result we have populism okay populism is the disenchanted capitalism not working for the majority of people then we so we have that particular gap so we have a political gap the a social gap in terms of the economics and we're coming into the phase where we're beginning the the tightening cycle 1937 we begin a tightening cycle we begin a tightening cycle at this point no tightening cycle ever works out perfectly that's what we have recessions we get can't get it perfectly so as we're going into this particular cycle we have we have to start to think well what will the next downturn are you like we're nine years into this as you have a downturn I believe that there's a political and social implications to that related to populism and less effective monetary policy there's less effective monetary policy because they're so far there are two types of monetary policy used lowering interest rates we can't lower interest rates and the second is quantitative easing and it's maximized its effect so I think that the next downturn is going to be a different type of downturn I think pension problems so healthcare problems in terms of obligations that are not funded that's not death or severe next time I think it'll be more severe in terms of the social political problems and I think it'll be more difficult to handle like the it won't be lot of the same in terms of the big bang debt crisis it'll be a slower growing more constricting sort of debt crisis that I think he'll have bigger social implications and a bigger international implications but there's a sense in this book that there's an avid ability to these crises and so one of the questions is from a policy perspective if we're in the seventh inning is there anything that policymakers can do today not afterwards but today to avoid this crisis you're talking about I I think first of all to be able to think about how to handle it because you're right they're inevitable they're inevitable because there's never the perfect balance between lending and borrowing right and so they're inevitable I would say the things that they should do that maybe you're missing are first of all to have the freedom of action we have a lot of regulations and they're usually written or what the last desk rice was was like and ours are but there are less freedoms of action today we have a safer banking system and we've done a lot of things to make it safer but each one is a little bit different it classically there's the development of the shadow banking system and there and and we will have a new type of shadow banking system so less freedom I think we have to think about what is the monetary policy 3 as I call it that is not going that when we have quantitative easing not because that's what I mean I mean is the and then the would the prescription for that though maybe to raise rates now and try and unwind arrays if you raise rates now all the rate structures affected and carries through all markets right because we're all discount it's a discount rate for the present value of all asset classes no no I think you have to start to think of what monetary policy 3 is which is particularly in Japan you're going to need it not the type of thing where there's it's not just the purchase of financial assets it gets individuals to make their purchases right well what if I said what if what we're seeing now is is not really transient in terms of the the business conditions and and we continue to see this new corporate structure actually helped in terms of capital formation for corporations the 2.9% wage gains that we saw continues and does the populace worries and concerns that you have for income inequality could that ease if we went into a protracted period of good economic growth I looked at the bottom 60% of the population so to take out of the averages and for various reasons having to do with technology and other things like the capacity perch are you gonna tell me we're screwed either way or I think that I think that there should be a national initiative to look at the parts of the population that are not benefiting from the cycle and I think that then you know education in many ways is just terrible oh you're not talking about pure redistribution you're not talking about universal basic income you're not talking about any anything's like that no I want to keep things going in terms I privates I think the most important thing is the ways to create opportunity and productivity in that group yeah we all want to do that and because product everybody needs to be it'd be better to do that in a growth period do you have more money to try to do that with if the overall this is the I think this at the time I think imagine it if you have a downturn what will it be like I mean it's a basic principle that if you have a big difference in wealth and you share a pie you divide the budget in one way or another and you have an economic downturn that that people are at each other's throat but if you're growing at 3% for three or four years if that were possible which is 50 percent even more faster than we were growing previously that throws off more money for education and for social programs to ameliorate what you're talking about doesn't it certainly certainly wound up but it doesn't solve the problem doesn't solve the problem but you're in a I mean I choose one or the other you'd want you'd want growth oh I want growth that's why well I would I would say the risks are so much harder to solve the income and quality problem when you're not growing I'm sorry much harder to deal with the income inequality problem when you're growing one all it soars and that's what I saw and that's why I'm saying one the downturn comes yep and you doubt that the downturn will come I don't want to I when you say that it's inevitable we have another debt crisis it makes me sad oh I didn't ask whether you're sad I ask what it's disturbing and sister I'm not sure how you'd it almost is like you're saying human nature almost mandates it happens we over we we we get late in the cycle we never get any that was overly right we did the same things over and over again yeah that's that's what the book is about though if the one thing I'm the reason I wrote the book is not so much to talk about this one and so on it's the show that they all happen in the same way there's all the mechanics of the same way there are six stages to it we won't have the time to go through the six stages but then I'm saying that same thing happens over there if you take in this first 60 pages of it and it's free to read the first 60 pages of that book this new issue of too big to fail can i download that for free or is that loaded on kindle you can buy it but is it like Ray's book I'm not even sorry I'll sign your book not yours is a free like Ray's book or do I have to I'm a capitalist way here's a policy question for you one of the things you've we've all heard from from Hank Paulson Ben Bernanke and Tim Geithner is that they wish they could have articulated and communicated their their policy responses better and that there's a view that maybe if they did somehow the popular populism that we have today might be different do you think that's true well I think the majority of population is not watching your television show or understands the communication I think that they understand their experiences and with those experiences that produces by the way you look at the policy responses people you know have talked about would we be better off there was principal reduction for homeowners directly remember a lot of the resentment in the public came because there was a feeling that the money was going to the banks rather than directly to the homeowners who were who were in trouble or some of these other steps you've looked at these different crises in and sort of how people feel about them afterwards I think the over and over again it's emotions and it's not logic and when there's the polarity sometimes it even gets you know it even gets violent you know so I think it's emotions when you say violence we had a conversation you talked about Pearl Harbor well what I was referring to is that the conflicts that we have internally between the left and the right and those who have in those who have not we also get elected populous and then we also have international tensions and so when we had the smoot-hawley tariff and we had Japan rising as a power Germany rising as a power in much same ways China's rising as a power we had a situation where there were economic rivalries out in Asia and and so 1931 was when the Japanese invaded Manchuria and that they started to compete with resources and that took 10 years but 1941 was the bombing of Pearl Harbor I'm saying that you're in a situation where also we have rising powers China's a rising power competing with the United States and those tensions get carried forward there and those are economic tensions of paramount importance those economics tensions produce conflicts in various ways and that everybody should be cautious about it yes dr. market do in 36 to 39 not too bad not too good palliative that way 50% what's your current market commentary for I don't I don't think it's I don't think it has anything like that I think I think overall in general how you feeling right now right now we have just gotten to the point in my judgment that it's more than the risk return is more negative that now we've got we've we used to have a lot of we talked that comfortable you said stay in there there was a lot of cash on the sidelines a lot more of that cash has been deployed and we had the benefit of the corporate tax cuts behind us yeah and if we look at what's being discounted what's being discounted is about right in other words if you look at the projected returns of equities relative to cash and bonds the projective returns right but you really outside the upside the upside is a little bit is limited relative to the other meaning you would pull money out of the market or you just win dollars right now whatever is more defensive I would then be in a more defensive posture whatever your strategic asset allocation issue is that you know what your strategic mix is I would be less aggressive rather than more aggressive you remember what he told us in Davos because I remember you remember - that's good you don't give that many interviews I think so you know exactly what you said that that is accurate - I was gonna mention that yeah you weren't I wouldn't call you rampantly Bush but you said this is good then things are gonna get better but you had concerns even then but the the societal concerns over a two-year time arises if I was to take now and think over the next two years that's where my concerns are I'm not what could we divide it where we are into it could we consolidate for two years and stay here of these levels I think more than likely we'll be in these general vicinities for a while okay but as time progresses the risks increase okay what do you think the Fed should do right now I think the Fed should make sure that it doesn't raise rates faster than its discounted in the curve right because there's an interest rate curve that we that calculates how fast our rates are gonna rise that great curve is priced into all asset classes and to bonds stocks everything else and so they should make sure that they're like the you know I'm not quite as fast as the curve or equal to the curb because asset prices are very sensitive I think that was something you said as well I was gonna ask you about China I consider you a bit of a China file someone who spends a lot of time there and knows the people there what you think is going on in their economy there seems to be a lot of debate and discussion what you mean about what about the debt restructuring about the tariffs about was all of the trade I think that the actual size of the tariffs and trade on the Chinese economy is not that big a deal and that you know there's the 500 billion that they export there's the size of that they've got a giant economy and they can handle those types of things so I don't think it's that big of a deal for them I think the big deal is what the nature of the relationship is is this going to be a relationship in which they're sort of the give and take or is this going to be an antagonistic relationship I think that that's much you know almost a warlike relationship I don't like they I don't think they like the term trade war as the thing from trade negotiation or you think it's more like I think that that it is an exchange of painful acts and an intimidation kind of thing rather than a negotiation of you know what do you need how can I help you how can you help me so I think it's gotten on a footing that I think is discomforting to the Chinese but there were people here who would say it's gotten uncomfortable because in this relationship negotiation that we've had to this point Americans have fared less well at least that's the perception in a lot of places you think that's accurate and is there a way to be a tougher negotiator without maybe ruffling the feathers oh yeah I think tough negotiations nobody is against tough negotiations every country understands that it needs to on the track it needs to do what's best in their country but the question is I think the real issue of China a leader in China described it as follows he said in the United States that unit that matters the most is the individual you are a country of individual lists you protect individual property rights in a certain way and if you understand our mentality we are a family in other words the word country in China in characters is state family and he says when we run the country we think about how think about how you a head of a family would run the family so it's very much more from the top down it's very much more hierarchical so the notion of China Inc in other words of course there's almost a pyramid and they think at the head of the family at the head of the government they think on what is best for China and my Chinese companies and so that approach very much different from our approach which is this bottom-up and it redefines so many things how we handle data how we handle each other and so on that's a very structural important difference it works for them and so their notion will you have these state-owned enterprises being helped by the government what stage of that will you compete in what state are they in in terms of the six stages the most important the most important thing about that is whether the debts denominated in your currency or a foreign currency if it's in your currency you can manage it just like we managed it you spread it out and you move it around and you monetize some of it in their case the debt is denominated in their currency most of those currencies so they're going to be able to manage that I think well and their corporate debt levels are high they're going through the restructuring but generally speaking their debt levels are not as high as ours and they're one of the great things is that they're doing it before a crisis we do it in a very reactive way and in their particular case they know that they've got a debt situation and they're in the process of managing it I think that they'll manage it just fine I think they'll manage their economy just fine I don't think we're gonna have a any big there'll be bumps along the way there were sessions slower growth a little bit of that mm-hmm but I think China would be I think the big issue is our relationship with China over a period of time I hope it doesn't follow a path that is very similar to the US Japanese path where the economic tensions the competing for trade routes the competing for influence in different countries and all that leads to an antagonism leads to embargoes and dishonor to final quick questions one on policy which is 21 trillion dollars in debt in our country do you think that we we can ultimately manage that that that's one of you know people talk about too big to fail now they that was in the concepts of banks now people talk about in the context of the country or municipalities cities yeah I I think that's exactly right if you if you well we don't have an immediate debt rollover or like in the next year or two we have a giant squeeze that's happening and it's it's not only because of the debts but even more important the unfunded pension liabilities when it the and the health care costs and so we have a squeeze that's emerging we will in two years have have the fiscal stimulation that we have pass and we are going to be selling bonds a lot more bonds to the rest of the world we are a reserve currency and because we're a reserve currency we're in the very privileged position of having other countries want to save our currency and buy our bonds but that is going to be risked by the quantity of debt that we request to deal with given that you've seen how policymakers have responded to crises how would you grade Hank Paulson Tim Geithner and Ben Bernanke I'm gonna see them tomorrow at the Brookings Institute when you look at given the gift of populism and all the issues that you've raised about where we are today hey you're a plus I'd give a mayor a plus I mean like I really do think one could theoretically say you could have anticipated we revel anticipate it by doing these pro forma financial numbers and so on but actually who did and I'm raise your hand if you did hardly anybody did so what once that point happened and they were operating in that political environment the actions that they took the speed at which they dealt with all of that led to the results that we now have so yeah I think they did a great there any income inequality problem in China you see but there's a look at the bottom six that are we as our bottom 60% better than their bottom better off than our bottom say they're there they're there income problem income gap problems work is very similar to ours it's essentially almost the same as ours and it's it's an issue it's part of the development of the western provinces and those types of things but on the other hand they don't have the same sort of political and social problems that I'm dealing with it you know yeah they might deal with it a little differently the legendary leader of Bridgewater author of the new book you can go out and download it right this minute a template for understanding big debt crisis we thank you for joining us this morning thank you

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Id: 7WXidoI9ppw

Length: 23min 57sec (1437 seconds)

Published: Tue Sep 11 2018

Reddit Comments

[u/bollebob5]

He wrote a book about the debt crisis and you can download it for free here: https://www.principles.com/

Sorry if i've broken a rule, but you can get free knowledge from a professional which is always great!

[u/CoffeWithoutCream]

He has a free new book on Amazon about debt crisis