Interviewer / Host (2:30)

Ray Dalio, thank you so much for joining us. Now this week was a little bit rough on the markets. I know you've also the way you view the world is basically by identifying five major forces that drive the rise and fall of nations and shape the global economy. So we have debt, money, economic cycles, there's internal order and disorder, external geopolitical order and disorder, acts of nature and technology. Given all these competing forces, what do you think is the most worrying right.

GSK Advertiser (3:00)

Now.

Ray Dalio (3:04)

Yeah, I think. I think it's important to step back and see this big picture, to understand where we are and when I. What I mean is there are orders which are systems like a monetary order. We have a monetary order. And related to that monetary order, it has to do with a debt cycle. And when you get into too much debt, it's a problem. Too much debt, one man's debts, another man's money. And then it's related, of course, to the economy and it's related to the imbalances. So such as we have a very large imbalance in trade and we have a very large imbalance in capital. And there's a supply demand problem with debt. The second influence through time is the domestic political order, in other words, for example, democracy and so on. And we are changing in a form that's very similar to the 30s. All of this pattern is very similar to the 30s, in which there's an internal conflict. You know, in Europe, make the trains run on time. The inefficiency, the conflict of the wealth gaps, the opportunities gaps, the left and the right getting to the point where they have irreconcilable differences. And there's great internal conflict about that. The third force is changes in the world order, the world geopolitical order, which began in 1945 as a result of what happened in the 30s, which is then you have a new world order, an American world order. The winning country decides how things are going to go. And we had an American world order, which is why we have the United nations and the IMF and the World bank and so on in the United States. And the United States was a dominant power. And now we're having a conflict. There's no rule who rules. And there's a conflict. Those orders are changing because of excesses. In addition, through time, there's always been acts of nature. Droughts, floods and pandemics have killed more people than wars. And then there's technology. So those forces, and you could see them in a cycle. So right now we have imbalances. We have a lot of debt. We have. And it'll be. There's a supply demand problem. We have a lot of debt with one man's debts are another man's assets. That means that some people, some holders of these debts are concerned about those both because they have a lot of it, then they have to buy a lot more. When this treasury runs a large deficit, that means they have to sell bonds. And then in this environment, it's not as desirable. There are countries that worry about sanctions and so on that with China and other countries worry about those things. And so there's a supply, demand, balance. These are the main drivers, their problems. They have to reduce the debt issue, they have to reduce the imbalances, you know, the trade imbalance and the capital imbalance, particularly at a time when there's conflict and there needs to be a sense of self sufficiency, that you produce it at home. And then also there's the hollowing out of the loss of manufacturing. So anyway, that's the framing of it and now we're seeing the particular manifestations and actions pertaining to that.

Interviewer / Host (7:02)

But Ray, what we've lived through in the last week with these tariffs by Donald Trump, that really sent the markets in disarray with possible distress. Was it a good idea, badly thought out, or was it just a bad idea?

Ray Dalio (7:21)

Let's go to the problem, the problem, and then we deal with the solution. The problem is in a world that's in war, almost in conflict, and there's too much debt somehow and the hollowing out of the middle class somehow, those imbalances, which means interdependencies, have got to be reduced. Now, the way that was handled rather than through negotiations, you know, I'm not the politician, I'm not the negotiator, I'm not the person to say whether that style of handling it would was better or worse. I would say that it dramatically affected psychology and attitude about the United States reliability and also it exacerbated concerns. So I would say it could have been handled better. I would also say that it's very theoretical too to think that we are in the necessary time frame to eliminate those imbalances, which are capital imbalances as well as trade imbalances, that it's difficult to make manufacturing happen here in the same way because of the structural things. Do you have the labor force, what are the regulations? It's very difficult nowadays to produce here. That's part of the bureaucracy. How do you get to become efficient? How do you get that population which has been hollowed out? You know, 60% of Americans have below a sixth grade reading level and are having a problem being productive. So can you build the alternatives that can you build ships? And with that, I use ships as an example. If you, if you're a shipbuilder, it's going to be very difficult to, in a reasonable time frame to build, become an effective shipbuilder. And even as a shipbuilder or the analogous industry, you still have to, you have instability. You don't know if the next administration is going to have that. And then all of a sudden you're competing with the Chinese or alternative shipbuilders around the world. So I think it could have been. I think it could have been handled better. I think it's, you know, very, very disruptive. And then when you have the retaliatory tariffs, you have a situation where basically production sort of grinds to a halt because there's these interdependencies. And that is very bad. It's almost like another Covid in that it raises costs, it lowers revenues for companies and it worsens the capital markets. That the capital markets are very important for a lot of companies to be able to do things, particularly, let's say, if you're developing technologies or whatever, that you. And so that market is tightening up. So this, I would say, was not done in the best way. And I'm pleased at least that that's been changed. I think that was a smart move to change it. And we have hopefully negotiations. But you still have these very big issues. And the budget issue right now we're paying attention to, to the tariff.

Interviewer / Host (11:31)

And the budget issue. Yeah, and the budget issue is probably the one that we'll also focus on, which I know is the subject of your new book. But did you see the risk of a global financial crisis this week on a scale of what we saw after Lehman collapsed?

Ray Dalio (11:46)

Yeah, well, as explained in my earlier book, the The Changing World Order, and as explained in this other book, How Countries Go Broke, the Big Cycle, these risks have been, I think, apparent for some time. They're measurable and so on. So, yes, I think that, I think now, and I thought before, as expressed in the, in the book, when I do the pro forma financials for the supply of debt and who are the buyers of the debt, I'm deeply concerned it'll be about the deficit will be probably in the order of 7% of GDP. And when I do the supply demand estimates, if the demand is probably going to be closer to 3% of GDP. So there needs to be a cut in that. And in my, in my book, I explain how that could be done as it was done between 1992 and 1998 through a mix of policies. I'm not the political person to decide which it is, but I would say there's a mantra that I have. Everybody should take the 3% pledge in one way or another. They have to bring that deficit down to that. Or I do believe we're going to have a supply demand problem. And if you have that together with the other problems, the tariff problem and the like, and you have that in an environment that is socially and politically very sensitive, imagine, you know, how much we'll be fighting with each other if you have that perfect storm. And, you know, those circumstances are all significant.

Interviewer / Host (13:51)

Have players become too big to fail in the US Was, you know, the rescue, effectively from President Trump about that?

Ray Dalio (14:02)

Of course, you know. Of course, of course. And that's why in one way or another, the government, either directly through the central government or indirectly through the central bank, always needs to make those that are. Makes a choice, which are those that are too big to fail. And then the way they do it always is the central government does its thing, which is provide supports in one way or another, and the central bank works with the central government to create the credit and the money that's necessary to do that. And so this is always the case. And it's. So this is certainly the case. We've seen this many times before.

Hiscox Insurance / Amazon Business Advertiser (15:02)

Right.

Interviewer / Host (15:03)

Do you think some investors would have basically blown up if the president hadn't reversed course on tariffs because of the market turmoil?

Ray Dalio (15:15)

Yes, some. Some certainly would, not only just because of the tariffs, but because of the capital markets implications. So there's a spiral that is reinforcing when the capital markets tighten up for certain companies or certain people. And then there is the concern, and that goes down. There needs to be an action, and that's, you know, always the case. So, yes, we have these vulnerabilities, and then we have what governments do in the face of those vulnerabilities. This is. This has always happened.

Interviewer / Host (15:59)

But so given all of this and given the market turmoil that we saw, where should regulators be looking for risks?

Ray Dalio (16:12)

When we went through the 2008 financial crisis, a number of rules were put into place about how governments and central banks should be handling things. So many rules that there was an absence of discretion. And in other words, discretion was taken away for dealing with some of these issues. It's dependent on those rules working very well. Those who went through that time, Tim Geithner, Ben Bernanke, Hank Paulson and so on, spoke very clearly about the fact that you can have so many rules and in a crisis, there needs to be a quick action that. So my bigger worry is not that there would be. It's a little bit that the rules themselves and the need to operate by the rules might. Could stand in the way of that. I'm not especially concerned about that, but I am concerned about that. What I am really mostly concerned about is the basic supply demand of debt together with these other factors because they work together. The debt combines with the politics, combines with the economy, combines with the geopolitical. And so we, we talk about China, of course, but there are now dynamics at work. Russia and Europe, the Middle east, there are. And there is not the same order in dealing with those. So it's that combination that I think is particularly dangerous. Any one of them, the supply demand would be dangerous, but these other things too are dangerous.

Interviewer / Host (18:28)

So we know, right, that a lot of the banks are looking at the risk levels and some have grown so much in prime brokerage, right. They've done this quite aggressively that they've had to give margin calls to some clients. Could they adjust terms under which they provide repo financing against Treasuries? Is this a way to cool off the system?

Ray Dalio (18:51)

Yes, and they always do. And then, and I'm, I'm not particularly concerned at that level because I think that those things can be handled. They'll be. If you look at liquidity measures and illiquidity measures and the tightness I've, we have a liquidity gauge that you know, has gone back actually, you know, to 1930 and so on. And you can measure these illiquidity and this crunch, it has not reached. And I think it would be unlikely to reach such extreme levels. And if it does, I think except for these regulatory hurdles, I think, you know, by and large they'll be handled. I think it's the Greater watch the 30 year bond. Look at the market action of the 30 year bond relative to the 10 year bond relative to cash. And that's reflecting the market action. Watch when the bond market goes down at the same time as the dollar goes down at the same time as gold goes up, it is reflecting a shift in the capital market. So if the yield curve becomes more steep at the same time as the currency is going down and you have that market action, it's reflecting the movement of a supply demand imbalance. So I would, I'm more concerned about that supply demand imbalance. And I should say I don't want to just complain about things in this book suggested what I call a 3% solution and three factor solution. 3% of GDP which can be gotten. And three, let's keep in mind there are three factors there. Spending, there's taxes and there's interest rates. And interest rates are now more important than spending or taxes even because of the size of that debt. So we're dealing with $1 trillion in interest rates and about $9 trillion more than that. That has to be rolled over, which means has to be sold again. That's the issue, I think.

Interviewer / Host (21:32)

But there's also a number of papers, right, that talk about safety valve given really, in the more immediate term what happened in the last week. And one of them said that the Fed could consider, for example, setting up an emergency program that would close out highly leveraged hedge fund trades in the event of a crisis. Does that seem like something that you'd agree with? Does that seem like a good idea?

Ray Dalio (21:56)

I don't think that there's the understanding of that. I, I'm all in favor of smart controls in a certain circumstance, but the amount of knowledge and the elements of whether it's a hedge fund or whether it's a bank or whether it's some form of dealer, the actual knowledge to quickly make smart decisions is of concern to me that it's not adequate.

Interviewer / Host (22:38)

Do you believe there's. Yeah. Do you believe there's permanent damage from the trade war? Right. Despite Trump's turnaround, has damage been done to the global economy by this lingering sense of unpredictability in US Policy?

Ray Dalio (22:56)

Yes, that entities that I speak with here or around the world have an element of trauma or shock or fear and lack of confidence that there will be. And I don't want to be careful not to say lack of confidence in general, but lack of certainty or the volatility is a scary thing, together with the underlying circumstances. So the sense of stability has gone down a lot. The sense of the trust in policy being stable and the environment being stable has gone down a lot. The sense of being able to work things out has gone down a lot.

Interviewer / Host (24:09)

How does the US Regain that trust, and what does that mean for Treasuries, the US Dollar as a reserve currency? And actually US Exceptionalism?

Ray Dalio (24:24)

Trust is the most important thing in all the capital markets. And I think that there's. I think that that's a source of great concern. It takes a very long time to build a reputation, that the capital markets are free, safe, that there's reasonableness and that there's a way of working things out collectively that's not damaging. You know, I don't know what the saying is, but you know how long it takes to build a reputation, and it only takes one or two times to lose that reputation takes a long time to get it back. So I think a lot will depend on the quality of all these decision making, the, the cooperation. And I'm not saying it won't happen, but it, it better happen quickly. I think. And so in other words, how does it work? Negotiations and beyond negotiations, less volatility, just the sense that the capital markets now could lock up itself creates a change in the way that everyone, most importantly companies, deal with their businesses and their capital, capital raising and all of that.

Interviewer / Host (26:12)

And so what's the right way of dealing with China, given all of this and given your specific worry that you've had for quite some time about U.S. debt?

Ray Dalio (26:24)

Well, first there has to be a recognition that the. We have a structural problem in that we have an interdependency that the United States can't either financially or geopolitically because of the risks, be in a position where it's dependent on getting stuff from China. And similarly for the Chinese, they can't be feel safe about getting their capital returns in that way. So in a global economy, you can't have by definition large imbalances. So now the question is how to deal with that. That's an engineering exercise, in my opinion. They can have a negotiated way in which the currency is, is raised. They have to in one way or another deal with this, reduce that so the currency can be raised, the renminbi, which would happen by then starting to sell off reserves. The United States likes the fact that the currency would appreciate and that the, and probably the Chinese like the fact that they can get less in debt by selling off some of their holdings in that dynamic to sue to support the currency, in which case then China has to not just be a manufacturer, but it has to be a consumer. And so right now about 33% of all manufacturing in the world, which is more than the United States, Germany and Japan combined, is from China. So they manufacture. The United States does not manufacture. And so what the world needs now is the Chinese to be consumers. So if you were to have that foreign exchange increase and you were to deal with trade together in a sensible way, I think ideally then you would also have naturally Chinese doing an increase in monetary and fiscal policies to raise demand, particularly consumption, because exports are going to go down, manufacturing is, is going to be a problem. So, so that if they raise consumption and the United States becomes less consumption driven and more production driven, at least those are movements in the right direction. Such negotiations, unfortunately, and such actual big changes are unlikely to take place quickly enough and well enough is my fear.

Interviewer / Host (29:44)

But. Right. I mean, given that, and given this, this possible permanent scarring of US Dollar and Treasuries, is the US Recession actually avoidable?

Ray Dalio (29:59)

I think, I think it's likely that we're going to be in a recession. And the question really recession is, you know, a line at zero, you get and, you know, sort of two quarters in that. And I think right now it's, you know, it's close call and it's probable, but who cares about stat, let's say 2/4 of stagnation or a little bit of negative. I'm more worried about the greater dynamic of these conflicts. The, you know, I'm worried about more serious issues.

Interviewer / Host (30:45)

That are structural, financial, hard.

Ray Dalio (30:47)

The political, the financial, the political and, and the geopolitical because they feed on itself. If you get a bad one, you know.

Interviewer / Host (31:00)

Yeah. Ray, thank you so much for your.

Ray Dalio (31:02)

Time today, but this is not, this is not a normal recession kind of situation. We are changing the monetary order. In other words, when we start to think there's supply and demand for debt and one man's debts are another man's assets, as I said. And then the question is, money, which is debt, is supposed to be both a medium of exchange and a storehold of wealth. And there are times in history, and this is one of those times in history, that there's a question of whether bonds are an effective storehold of wealth because of the supply, demand and so on. And then the need for, you know, what does the central bank do? They try to push down the rates and provide liquidity and, and that weakens the value. So the question is, what is a good sorrow? The wealth. And of course, you know that the treasury market is the backbone of all capital markets. You know, everything trades off of Treasuries as spreads to Treasuries equities in terms of expected returns relative to Treasuries and then credit spreads and everything. So I think a lot is going to depend on the prudent handling of the supply demand situation for Treasuries and, and then the political ability to carry this through without great internal disruption. And then the international world order and so cooperation and working towards stability, harmony, and dealing with these things as common problems would be the path to do that. And there's reason to question that.

Interviewer / Host (33:05)

Ray, thank you so much for your time today.

Ray Dalio (33:07)

Thank you.

Francine Lacqua (33:10)

Thanks for listening to this week's in the City from Bloomberg. This episode was hosted by me, Francine Lacroix. It was produced by Moses Andam. Brandon Francis Munham is our executive producer. Special thanks to Ray Dalio. Please subscribe, rate and review wherever you listen to podcasts.

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