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- [00:00]
Indiana University Announcer
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- [00:18]
Interviewer
Bloomberg Audio Studios Podcasts Radio News. Thank you so much for being here. I want to start with these five forces that you see right now that are affecting markets that are important to understand. In order to understand where we were, where we are. Could you just talk a little bit about what those forces are?
- [00:36]
Ray Dalio
Sure. Through history and now there are five big forces that are interrelated and generally transpire in cycles as I described. And we know they exist because everything that we are going to talk about will fall into one of those categories. That is the debt, money, economy cycle, meaning credit is buying power. You give buying power to entities like. It's like the circulatory system. You give credit. And if that credit produces, it'll produce debt. But if it produces an income that is good enough to pay the debt, it's a healthy system. But when it produces more debt and more debt service payments, that squeezes out the spending and that produces a problem. And then there's a supply demand problem that has to. And then there are economic problems. Okay, that's one cycle. The second cycle related to that because money and wealth have political and social effects, is that there becomes big differences in wealth and values. And so when there are big differences in wealth and values and people feel that the system isn't working for them, you see greater political polarity between the left and the right. It becomes more the hard left and the hard right, and those become irreconcilable differences that are not easily solved through the usual means of operating that way, such as democracies. During the 30s, for example, four major democracies chose to be autocracies during those periods. The third is the international geopolitical cycle, in other words, of a rising power challenging existing powers. The same dominance of the dominant power fades relative to other powers, and also the order then gets challenged. And we're certainly going through that. The fourth factor throughout history has been acts of nature. Droughts, floods and pandemics have actually killed more people than wars and actually led to more ends of the previously mentioned cycles than anything else. So nature, and certainly nature, climate change and the like is a big force. And then fifth, third through history are man's learnings of particularly developments of new technologies. The developments of new technologies is what has raised living standards over time, which you can see in terms of life expectancies and per capita gdp. And of course, the development of new technologies now is a very important influence. So those five factors have gone evolved. Those are the main five factors. Anything we'll talk about will be under one of those. And of course, the interrelationships within with between them is important.
- [03:46]
Interviewer
It seems like we're at the cross section of a pretty transformative moment then, because it's this cross section of all of these things, whether it's the AI aspect, the technological overlay, the monetary debt aspect of it. With respect to the debt and deficit, can you put into perspective the fact that this has been building up over time? Where do the tariffs and, and some of the trade disputes of today fit into that? Do they help sort of alleviate some of these imbalances? Do they exacerbate them? Are they a symptom of them? How do you understand sort of that aspect of policy right now?
- [04:21]
Ray Dalio
Well, first of all, there are great imbalances that have to be rectified given this set of circumstances. So three major types which relate to trade, but they also relate to capital. The first is that the dynamic by which Chinese export to the United States items that are cost effective and Americans buy them and then they send the money back and the Chinese earn the money and take that money and invest in bonds has created a unsustainable dynamic. Because as we're living in this environment related to the next two items where those two countries can be in conflict, military conflict, there necessarily has to be insecurities on both parties. The Chinese having an insecurity of whether they're actually going to be able to turn their credit into goods and services. In other words, there's no purpose of holding a bond or an asset unless you can then sell it and get money and buy things. And when that dynamic works the other way, it's quite painful for the debtor to have to pay back in real stuff. And then in a geopolitical conflict, that's a problem. And then of course, so. And then in this environment of conflict, that's, that's also the problem of worsened because in wars in prior times or even with Russia, then there were freezing of assets and there could always be that kind of issue. So that's a consideration. And then of course, there's the loss of manufacturing and the loss of manufacturing in the United States, you know, has two problems which are that it's connected to some. You have to be able to be in a risky world. You have to be able to produce what you need. So you need to be capable of manufacturing, certain items and then also the wealth, the loss of the middle class has a lot to do with the loss of manufacturing. So for those reasons, that imbalance, that let's call it trade and capital count imbalance, it's both the trade issue and, and a capital issue. And raising tariffs is a way of dealing with that. Through history, tariffs really have been more of a tax than other forms of taxes going way back. And they bring in tax revenue. So you know, they'll probably bring in somewhere between $300 million and $500 million a year, something like that. And so that's a consideration. So that's the mechanics about what's happening.
- [07:19]
Interviewer
I just wonder if you think that that goes toward alleviating concerns about debt and sustainability certainly in the United States, given that there will be those revenues.
- [07:29]
Ray Dalio
Yeah, it is right. It is a source of revenue and it will diminish that. However, the economics, it's small by comparison to the gap. So as I said, the mechanics of the debt situation are really have a few components. The first is that when debt service payments add up, they squeeze out other spending. And so that can create the equivalent of an economic heart attack. The second is there's a supply demand issue. In other words, a deficit requires debt sale. And so we have a lot of debt sales and we, and that's, and there's lessing demand for that. So, and then there are the central bank playing a role. So what we have now is think of it as a big company or an individual. Except the main difference between a company, a country and an individual or a company and a government is that the government can print money. So that's the basics. But figure it this way. The United States. Here are the numbers. The United States spends, will this year spend about $7 trillion and it'll take in about $5 trillion. So that means it's spending 40% more than it is taking in because it has run deficits and sold a lot of debt. The total debt is about six times the total amount of money coming in. And we're seeing those debt service payments squeeze that out. So, and as a result of what the projections are, it's likely that those deficits will then produce lots of bond sales, which will compound it. When you get into the point in the cycle where debt is needed to pay debt and, and compounds it becomes a problem. It becomes a problem also for the central banks, because the central banks, by the way, this is not just an American problem, this is a world problem. The central banks themselves own, own the debt and so. And they lose money on the debt. And so when they're losing money on the debt and they have asset liability problems, then they also not only have to monetize, essentially the other, the government's debt, but they also have to monetize theirs. And those are the characteristics that produce a deterioration in the monetary order. And you know, that's why what you're seeing, you're seeing a dynamic of why countries, for example, are letting their reserves or their assets in bonds and so on go down. And they're acquiring, and have been acquiring gold, for example. So gold is a currency. You know, we think of currencies as being the major fiat currency, but gold is a currency, it's the second largest reserve currency. And so you're seeing changes in the monetary order that are reflecting those things somewhat like happened in the early 70s.
- [10:52]
Indiana University Announcer
Indiana University is shaping the future of healthcare. Advancing discoveries that become treatments for Alzheimer's, obesity, cancer and other rare and complex diseases. And training the next generation of providers, doctors and nurses trusted to address health challenges with skill, compassion and purpose. From the lab to the clinic, from research teams to patient care, IU talent is driving medical innovation, improving health outcomes and and strengthening communities. See how IU solves. What's next iu. Edu Impact.
- [11:25]
Interviewer
Ken Griffin yesterday of Citadel said that he sees gold as more of a safe haven right now than the dollar. Do you agree?
- [11:32]
Ray Dalio
Oh, certainly. I mean, you know, I think tell you a story. I've been trading markets since I was a kid. And between my college year and going to graduate school in the summer of August 1971, I was clerking on the floor of the New York Stock Exchange and I filed markets. And on Sunday night, Paul Volcker and then President Nixon, really it was President Nixon delivered the message that you're not going to get your money. Gold was money then. So we viewed things differently, you know, like money. Fiat money, as we think about it today, was like checks in a checkbook so that you can go get your gold. And we looked at things through a gold lens. And I walked on the floor of the stock exchange, I thought, this is a big crisis because you're not going to get your money. People are not. And the stock market, I thought was going to go down a lot. Stock market went up a lot. And I went. And I studied history. That's by the way, why I study history. So I studied history and I found out the exact same thing happened in March 1933 with Roosevelt getting on the radio and doing the exact same thing in other Words devaluing money. Okay. In other words, so when we're looking at the world now, we look at it through our currency lens. You know, we think things go up or down when we're measuring it in our currency, but in reality, the currency goes up and down. And so as we start to think about that. Okay, think about what's happening. Yes, it's a currency, it's an alternative currency. It's not a fiat currency.
- [13:32]
Interviewer
So do you think that it actually makes perfect sense that the stock market is hitting record high after record high at the same time that gold is hitting record high after record high?
- [13:39]
Ray Dalio
Yes, yes. It's very much like the early 70s. And then the question because what do you put your money in? Okay, of course the stock market has. We can't speak about the stock market as a whole, of course, because the stock market is so bifurcated, you know, and the world stock markets are so, so bifurcated. But, but yes, that is the dynamic. It depreciates the value of money and then it costs because everybody, it's all about a storehold of wealth. What is your storehold of wealth? What's it going to be? A currency should be a medium of exchange and a storehold of wealth. But when you have so much debt, you know, debt is money and money's debt. I mean debt, debt is money, meaning when you hold debt, you holding a promise to receive money. And when I say money is debt, when you're holding money, you're putting it in a debt instrument. And so for those reasons, when you have such a supply of debt and debt instruments and it's not an effective store hold of wealth, it's natural to go to an alternative storehold of wealth, which is why we're going to harder currencies. And of course, gold is the most fundamental of those. Not only because of the many years, but even there it's, you know, as they say, it's the only asset that somebody can hold. That doesn't mean that you don't have to depend on somebody else to paying you money for it.
- [15:09]
Interviewer
At a time of incredible uncertainty, but also potentially incredible opportunity. You're talking about the technological advancements. Can you give a sense of how you're thinking about allocation allocations with gold versus bonds versus us versus international versus some sort of leveraging to this story of technological development?
- [15:29]
Ray Dalio
Well, I think first of all, in an asset allocation mix, the first thing you have to do is create your neutral portfolio. What's your balance, you know, what's your beta mix? Your Strategic asset allocation. If you, you don't have a view of the markets to make tactical moves and then you have to think how do you make tactical moves? Who's going to make those? Because tactical moves are a zero sum game. You have to beat the other person who's doing it. On the strategic asset allocation mix. Before I get into the tactical though, I've expressed my views on the tactical of gold relative to bonds. I think you have to create a very good balanced portfolio. How you do that can take a long session, but I think you have to think of that and not in nominal terms, but in real terms. So in other words, when you're thinking you're doing your asset allocation, what is going to protect your real after tax returns? So you do you create that optimal mix. Gold is a, a very excellent diversifier of the portfolio. So if you would look at just from the strategic asset allocation mix perspective, you would probably have something like, as the optimal mix, something like 15% of your portfolio in gold because of the fact that if you didn't even have a tactical, because it is the one asset that does very well when the typical parts of your portfolio go down because the typical parts of your portfolio are also so credit dependent. So anyway, I think all of this means that there should be some peace in that of gold. If I'm making tactical bets. I don't like debt assets per se and I would say I don't like debt assets per se, not just government debt assets, but also. So if you're looking, let's say a credit or private credit and look at where the credit spreads are. Credit spreads are very, very low. And so for those various reasons, my tilts would be away from those things and toward gold. But again, yes. So more than would be a normal asset allocation mix. But I think you have to also say, you know, start with what is a real dollar dollar if you're a dollar investor, a real return asset that you're going to hold as part of that portfolio. Most of the system is dependent on credit equities and everything is dependent on credit. You change credit and you know, then all sorts of things happen. And so it's an effective diversifier as well as probably the timing seems good.
- [18:15]
Interviewer
Going to the five tenants that you're talking about. Given the imbalances in the deficit in the debt load and the amount that people are going to have to sell, governments are going to have to sell. Do you think it's appropriate for the Fed to be cutting rates right now?
- [18:28]
Ray Dalio
I think, I think the picture on cutting rates is slightly mixed. So. And it has to do with the split in the economy and it has to do with split in capital markets, which means you're trying to look at the economy as a whole. But what you have is in certain sections of the economy, you have an enormous amount of liquidity, enormous amount of wealth. Things are like if you're in the top 1% of anything, you know, or which is the top 1% of the income earners, the one top 1% of the stocks, NAI and so on, so forth. Wow. There's a tremendous amount, amount of liquidity and fantastic. And so you would say, if anything you'd worry more about the bubble and how you start to pull the, you know, the punch bowl, that kind of thing. But we have a very diverse economy. So if you're looking at, let's say the bottom 60% of the population and the conditions of the bottom 60% of the bottom population and labor markets and so on, then you, you have a very, very different issue. I don't think monetary policy at all is going to be able to do that. I think that there's a strong situation where, you know, the natural instinct is if things aren't exactly like I would like and I'd like to make them better, I should use monetary policy. Okay, so I mean that's. Now we've learned that, right? Because every time you do that and then things go up and people are happy and so on. But there's a cost of doing that, right? The cost in doing that is that there's one man's debts are another man's assets. And so when you artificially lower the interest rate so that it is not attractive in a sense to hold as an asset and it's very attractive to borrow and buy things, that creates an imbalance. So I think that, I think that discipline is not something that anybody seems to want and yet I think it's needed. So when I think about the monetary policy and so on, I think not much if any. But I also think it's not really dealing with the whole so well, because of the disparity in the parts going.
- [20:48]
Interviewer
Back to the video that you showed first, you're Talking about these 250 year cycles and then 10 to 20, 20 year periods where there's a transition of a power from one to another nation. And I just wonder if you see things the same way this time because it seems like globally there are the same issues everywhere in terms of these imbalances and in terms of the deficit, in terms of nobody really wanting to take the punch bowl away at a time of increasing distress in certain pockets. Do you think it's different?
- [21:16]
Ray Dalio
I think and just to be clear, that's the whole cycle of the great cycle in there. There are breakdowns of orders, right? So 1944 we had the breakdown of the monetary order. We had another breakdown in 1971. So 1945 we had the breakdown of the most countries, political orders and most countries and geopolitical order, right. So we're really, we have those cycles which are part of then, you know, the overall greater cycle are worth keeping in mind. So they look a lot alike to me. So when I look at it and I look at the 30s, I think there's a lot to be learned about that, that particular dynamic. I think one shouldn't just believe a cycle's going to follow. I think it's like almost like a life cycle. You know, each person's life cycle is somewhat different and it's caused by symptoms and conditions that could be measured. So you can look at the economy, you can look at the numbers themselves and see the health indicators. That's what I did in the books, the books I wrote and so on. So you can look at them directly. You can see how much like a doctor taking, you know, CAT scan of circulatory system, you could see how it's squeezing out. You can see the supply, demand, you can see this dynamic happening. You can see it politically, you can see it geo globally. So you could see those breakdowns. Okay, you have to then put them in the context, I think of what the process is. What does a country do when it doesn't have enough money? Okay, There are a limited number of things in order to see that you can go back in history and get some understanding and also see what's going on now. So I think it's very, very similar to that. Just to me these all look like watching the same movie over and over again, except there's people use different technologies and they have different clothes and so on and there are different people, but they look so much alike. So I think that this is pretty much looking like the typical process.
- [23:36]
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- [24:36]
Interviewer
Asking how does it end?
- [24:37]
Ray Dalio
Right?
- [24:37]
Interviewer
Everyone wants to know how the book is going to end, how the movie is going to end. One thing that you've been talking about is how China has been taking over in a significant way, that the economy there has been growing tremendously. I just wonder whether some of the rebalancing and the rejiggering of the trade flows in the world are stymieing that progress or whether they're a speed bumper or how that you see that fitting into the trajectory that you've been witnessing over the past 10 years.
- [25:06]
Ray Dalio
Well, China has a number of problems that he has to deal with, which I'll touch on. However, since I started to go to China, which is 1984, and I went first for curiosity and then because it was so interesting and I like the relationship, per capita incomes increased by 28 times, life expectancies increased by 10 years, and so on. It's done remarkable, but it now has very significant problems. There were I'll quickly take you through four or five of those on its debt problems. Its debts are all denominated in its own currencies and among Chinese mostly speaking. But it needs a giant debt restructuring. The difficult one is, is the local governments, because the local governments in China account for more of the economy and they're broke the model. They were selling off land, earning money from land sales and borrowing money to produce high production. And so not only did they have a debt, but they have a model for those local governments that is not an economic model. In other words, what do you do with businesses that don't work, that don't have a profit and related to this is the rationing system that they don't have a profit system. They've gone really mostly after quantity and the quantity, you know, how do I maximize the quantity of production, forgetting about the profitability of that. So when you have that, then you have the dynamic that they're now describing, which is now called involution, which is the fact of overproduction doing harm to the economy. That's going to require a big restructuring. Like these big restructurings go similar to what they did in the 90s. Zhu Rongji was the vice premier and premier at the time, who did this. But these, the way they go is you have to pick which country, which companies are going to stay and which go on the auction block and which get restructured and so on. Otherwise they're going to have the problem similar to China. Okay, Because China, excuse me, Japan, Japan had the same thing. Too much debt, but it was a surplus country and the debt was in its currency and they had locals. But you have have to do that restructuring. So there's that and then there's a number of things that we won't have. But certainly the world markets are the change. China produces manufactured goods, is dominant. 32% of the world's manufactured goods come from China. That's more than the United States, Japan and Germany combined. And now their markets are being closed to them and so on. So they have to go to the third world. There are a number of these types of issues having to do with a pension system and income tax system and so on that if they don't deal with well, and they're very difficult to deal with, well, that'll be a burden on China, while at the same time it's of course doing amazing innovations in a number of ways that are government directed. So I don't want to just say that it has those burdens and has a lot of really powerful thinking and quantity of engineers. And what can be done is quite something. They're more advanced in the use of AI for applications than the United States is, for example, actually using AI and so on. Anyway, that's too long of an answer, probably.
- [28:44]
Interviewer
Would you rather invest in China than.
- [28:46]
Ray Dalio
The U.S. no, I'm not. I think when I think about it, I, I think how much do I allocate to each market? Right. And I think of that first as a strategic asset allocation. I look at things like what's the size of the market, capitalization, how is it easy for me to get my money in and out of the country, what is, how attractive are they? And so on. So there's a greater amount that I'm investing, investing in the United States than is that I'm investing in China, I think. And both have their, their challenges and, you know, and their benefits in the United States. If we're, it depends what market we're talking about. But if we're talking about a lot of the market, it's quite expensive and the nature of the flows are concerning. And the nature of a number of circumstances are concerning. If I'm looking at China, it's a different thing. It's relatively inexpensive, some of those assets, but at the same time, capital flows and other issues also make it a problem. So I think, you know, I have my allocations to each much greater in the United States than is in China. And then I move tactically within those. That's how I work.
- [30:06]
Interviewer
You've mentioned really tight credit spreads. You've mentioned some of the flows concerning. There have been a lot of discussions around bubblicious conditions in the air space, in particular in that slice of the market. Do you see that there is some sort of excess building when you look at history and how this has always played out, whether it's a dot com bubble or whether it's the tulips over in Amsterdam? I mean, is this something that feels frothy to you?
- [30:31]
Ray Dalio
Yes, there's something that feels frothy to me.
- [30:35]
Interviewer
How do you, how do you, how do you see.
- [30:39]
Ray Dalio
It's a straight answer.
- [30:40]
Interviewer
That is fantastic. I think that was brilliant. I wonder how do you see it evolving? I mean, because there is this great promise, right? It's sort of the idea that the Internet did come to fruition and change the world. AI might change the world, but certainly will.
- [30:54]
Ray Dalio
But you're asking history on. At each of the times. The greatest technological revolutions were taking place during those times, in other words, the late twenties, for example, was there were more patents, more inventions in the world and so on. And if you, you know, you could take 2000 or those types of period, a lot of them are dependent. There was an interdependency between the capital markets and these in terms of funding and those types of things. So. So we have to look at valuations too, right? I would say in terms of, let's say, AI valuations and so on. I think it's more in the areas of applications than let's say, the superscalers themselves. I'm not, I wouldn't want to be short the superscalers. I just. But if I'm thinking about what, what's going, it's going to be in the users, either the users of those technologies becoming more effective and so their profits will be better and so on, or those who will provide the platforms for the effective use of those. I think that that's an area of greater opportunity.
- [32:06]
Interviewer
You mentioned something about China, that I think is a subject of huge debate in the United States, which is the way that they've sponsored certain industries and certain development of technologies in the AI space and beyond. And I wonder if, by the way.
- [32:19]
Ray Dalio
We'Re doing that too.
- [32:20]
Interviewer
That's what I wanted to go to. The idea that the United States is now taking a stake in lithium companies and intel and a whole host of others and sort of cobbled together sovereign wealth fund that we're learning about in real time. And I just wonder, do you think that is the right approach for a country to take at this moment?
- [32:35]
Ray Dalio
At this moment, I again want to compare it with the 1930s because you have to look at the times and what it's like. Like, right, so this is a period of great conflict. And if you take such periods of great conflict, the country often needs a direction. You know, it can't be just consumer goods, rich people then buying expensive things like handbags or something, you know, so it needs a direction. If you're looking at things like data centers and what does it mean for AI and what does it mean in, in many ways in order to be competitive there needs to be much more guidance because it just is not going to be adequate by itself. So yes, I think under these types of circumstances there needs to be that. The question is whether that is done wastefully or productively. Right. The problem with governments, generally speaking is it's done wastefully. So you have state owned enterprises or state controlled and that. And people in Washington are not usually really good at this type of stuff, resource allocation. The question is how the balance exists. But yes, I think at these types of times there needs to be more of that. And you hope that that's done.
- [33:49]
Interviewer
Well, you've mentioned 1930 several times and that this is a time of conflict and we know how that movie ended. Is that kind of the parallel that you see this right now?
- [33:59]
Ray Dalio
I think it could. There's a certain dynamic that makes it get worse and worse. You know, so there's the debt dynamic that we're talking about, but there's also, let's say, the internal political dynamic. Do we see people coming, both sides being able to work together for results and that there's going to be votes that people believe and they believe the system is going to be fair for them so that if they lose, they accept losing because they believe the system is fair and so on. You know, history shows that that's not likely and that things can worsen because people then, you know, you know, in history it can get Bad. I don't know. One side shoots another side, and who knows where it is? You know, one would hope that there would be sort of a strong middle that would bring for most people and that you can get back to a system that's fair. But I think that that's. That's a difficult thing to do. I think the world order, the changing world order, we've gone from a multilateral world order. In other words, it was the American model that there's a United Nations, a World Court, a World Health Organization, a World Trade Organization, an imf, a World bank, and all of those world. So that there is sort of an attempt to bring rules and systems into place that are multilateral. I think that's over. That's largely over. I don't think. I think we're not likely to go back to those types of things. So I don't think. I think we have to instead worry about not having such a bad fight with each other that that's. Or a financial crisis, that we. That we make things worse than they are. But it's. You're asking me as a man who actually has to bet on this and has to be as accurate as I can. I mean, like, hope is not a strategy. So when you ask me, I say I really hope that that's not the case. But if you look at history and you look at the dynamics, there's more. The movement toward these things being resolved in the form of conflicts that we've seen in the past.
- [36:25]
Interviewer
On that uplifting note, we're out of time. Ray Dalio, it has been absolutely my pleasure to speak with you. Thank you so much for being here. Hiscox Small Business Insurance knows there is no business like your business. Across America, over 600,000 small businesses, from accountants and architects to photographers and yoga instructors, look to Hiscox Insurance for protection. Find flexible coverage that adapts to the needs of your small business with a fast, easy online quote@hiscox.com that's hiscox.com there's no business like small business. Hiscox Small Business Insurance.