← Tom Bilyeu's Impact Theory
Tom Bilyeu's Impact Theory
Economic Crisis: Ray Dalio's Warning For The Banking Collapse, US Dollar & Upcoming Recession
01:55:17
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- [00:00]
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Tom Bilyeu
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- [01:00]
Tom Bilyeu
Hey guys, I'm really excited for today's episode. This is another extremely topical one around finance, and right now, if you're not paying attention to what's going on in finance, you've got a rough road ahead of you. And I got to sit down today with Ray Dalio for another episode. He is one of the most important thinkers on the topic of macroeconomics. What is going on in the world, how it relates to you, and and what you should be thinking about as you plan out your financial future. Now is one of those incredibly volatile times. If you pay attention and you move in an intelligent fashion, you can make wise decisions. But if you stick your head in the sand and aren't thinking about how these grand world changes do apply directly to you, you are going to make suboptimal decisions. And when that comes to your finances, nobody is in the mood for suboptimal decisions. So guys, I hope that you get out a notepad, take notes, listen to the things that Ray and I talk about in this episode. He's got just unbelievably useful insights. As somebody who's built the largest hedge fund in the world, this is a guy that routinely bets on the market and has come up right more than virtually anybody else ever. He has a very sober way of thinking through these problems. So I hope that you guys will enjoy this episode of the There is a lot of amazing ground that we cover if you enjoy listening to this episode as much as I did recording it. And I think you will, because it is so insightful. Please rate, review and tell other people about this podcast. It's exactly how we get this out to more people just like you and help them become legendary. I'm Tom Bilyeu and welcome to Impact Theory. Talk to me about the three forces that you see that are influencing this moment. We've got banks collapsing, US Dollars under attack, looming recession. What is going on? How do we step back and think about this moment?
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Ray Dalio
I look at three major forces that are happening now, haven't happened in our lifetimes, but have happened many times in history. And those three major forces are the creation of a lot of debt and the printing of a lot of money to buy that debt because. Particularly because the government is running large deficits and so they don't have enough money, so that government has to print that money. So that creation of all of that, that debt and its financial implications and its economic implications is one force. The second force is the internal conflict, the amount of conflict that's internally largely due to the largest wealth gaps that we've had since the 30s, and that produces populism of the left and the right, particularly when there are financial difficulties. The third force is the rising power, the challenging, the existing power, largely in the form of China and to some extent Russia. So let's call it the great power conflict, because in 1945, you know, there's. There's the cycle. You have a war and after a war you have winners, and the winners determine the rules of the game. And then there's this evolution of others becoming more competitive. And then you have a conflict again for who's in control. So we have that dynamic taking place. So those three influences, the financial, the internal conflict, external conflict, influences on having a dominant influence. I learned before that when I was surprised, often it was because of things that hadn't happened in my lifetime before, but happened in history. Because of that reason. I went back and studied history the last 500 years on these cycles. There are big cycles that last about 75 years, give or take about 50 years, and of rises and declines. And I put that out because I think it's so important people understand that. I put it out in a book called the Changing World Order and in a free video calling the Changing World Order. So when we look at each one of those, they're important. I also learned in studying history that there were two other influences that were very big and you could see them. The first was acts of nature, such as droughts, floods and pandemics. The changes over time in the evolution over time of people's learning and the technologies they make. So I'd say there are the really five big influences that drive everything, and they are the money and debt, economic influence, the internal conflict, the external conflict, the nature influence, and the, let's call it the technology influence. So as we go now into this, it's important again, I put it out as a free video on YouTube so that people could see it easily. And when we get into whatever we're going to talk about, it'll be certainly in the context of those things. And since they each affect each other, it produces what I call the big cycle.
- [06:54]
Tom Bilyeu
The animation that you put out in conjunction with your book, Principles for Dealing with a Changing World Order have influenced my thinking around this moment more than anyone or anything else. It makes it seem so predictable from a historical perspective when you look at that big cycle and you see how it repeats. And so as you went through the last 500 years, one thing that you make very clear in the book is that the, the rise and fall of empires, the rise and fall of a reserve currency, they go in this six cycle trend. And the, the part that I always find unnerving is phase six is basically war and collapse. And so you have that previously dominant power loses its position, loses its status as a reserve currency, and it loses it for pretty predictable reasons in the three forces that you were talking about in the beginning. Discounting the fourth force, which I don't think in every cycle you always had, and correct me if I'm wrong, but you didn't always have a pandemic or anything like that. But the fact that we're living in a moment right now where we have all of them. And so we've got, not only is it a moment of massive technological disruption right now, good and bad, but we've got the money printing. The meme on the Internet is money printer go brrr. So we've got printing because of COVID we've got printing coming off of printing because of the 2008 collapse. And now we're again seeing this cycle repeat itself. So I've heard you say that, that we're in somewhere in phase five, which is as the empire begins to decline, as you have a rising superpower, as the debt bubble is getting out of control, with that perspective, was what happened with the SVB bank collapse, was that something that you knew, okay, something like that is coming, or was that a surprise to you?
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Ray Dalio
No, it's. It was, it was obvious. Look, if just let's. I want to Talk about the mechanics. Really, I'm so eager to pass along an understanding of the mechanics so people themselves can do the analysis. So one man's debts or another man's assets. Okay, so what happened? The government had to sell a lot of debt. And when it sold a lot of debt, there were a lot of entities that bought a lot of bonds, government bonds. And money was very easy, which meant that short term interest rates were very low and money was almost being, it was actually being given away because they had interest only loans and interest rates were less than 1% and you didn't have to pay back principal so you could go get money. And so that created a lot of debt and it created a lot of buying of government bonds. So what happened to Silicon Valley bank is what happened to many, many entities all around the world, not just banks. They. What does a bank do? A bank takes in deposits typically or debt in some way, and then it buys debt. It can do that in the form of making a loan, or it could do that in the form of buying a government bond, buying debt. And then when interest rates went up, the value of that debt went down. The money they had to give to depositors became more and more expensive. And also depositors, wanting them to be competitive, looked at money market rates or other rates and withdrew money from the bank to, because they had better uses. Okay, so what that, that leaves them with. It's a banking problem that has happened literally for thousands of years. That, that what they do is the depositors, you know, want their money back and they're holding assets that are in this case have gone down in value, so they're broke.
- [11:37]
Tom Bilyeu
Let, let me, let me put a fine point on that. Sorry, before you move on, I, I don't know that people really understand this. Is, is this a, it seems to be a necessary result of fractional reserve banking, meaning that if you deposit $10 to me, I only need to keep, and I think this is actually accurate, I only need to keep a dollar. And so the other $9 I can actually put to work in terms of loans to other people or investments. And that puts us in a position where, okay, you gave, technically you are giving the bank a loan. A deposit isn't just, oh, my money is in a vault somewhere. I've given the bank a loan, the bank is going to go do things with that of varying degrees of risk. In the case of svb, they thought, I'm doing the least risky thing, which is I'm buying government debt, the government is going to back it. The Government, especially the US Government, can actually print money if they had to, to cover that, which they did in this case.
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Ray Dalio
But.
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Tom Bilyeu
But if a lot of people go to the bank at the same time, known as a bank run, and say, I want all of my money, the bank goes, whoa, whoa, whoa, I don't have that money. And so I have all these assets. And as long as those assets remain liquid and I can liquidate them in a timely fashion, then sure. As long as the requests for people's deposits back are coming at a reasonable rate, all is well. But when you get a lot of people coming at once and you have the, the investments that they've made have gone down in value now, you get a perfect storm.
- [13:07]
Ray Dalio
Exactly. I think you said it very well. You're allowed to be in the business. Let's call it 1/10. It's actually less than one tenth is your money. Whoa. But let's call it one tenth. You, you have a certain amount of money up, they give you the deposits, you invest the money within these general guidelines. So, for example, government bonds are safe from default. So you buy the government bonds, you think you're making a spread, and then what happens is the government bonds go down in value at the same time as the people say, hey, I want to go take my money and put it someplace else. So you don't have enough money. And central banking works like that, except the government can print the money. So the risk and when it's the government is not that you won't get the money back unless, like in this particular case for a bank, it goes down in value. So you ain't going to get that back. You're going to sell it. But anyway, you described it very well. What happens for the economy as a whole is then they print the money because they don't want defaults. There's a tolerable amount of defaults. And then you get past a tolerable amount of defaults and it just crushes everything. And so they print the money. Okay? And so this thing with the bank is not a Silicon Valley bank alone issue. It's not a banking issue. It is a global issue in terms of all around the world, all sorts of entities, pension funds, insurance companies, all around the world, there was a lot of the buying of these government bonds which have gone down in value. And if you then take it and you say, what's the value of those? Those have gone down and the cost of money is high. And so the world is leverage. Long. Okay? Long. Meaning they own stuff and they borrowed Money to own it and it's going down in value.
- [15:27]
Tom Bilyeu
How nightmarish does that scenario become? So you've got your money locked up in something for a long time, but it's declining in value. Is this like a classic moment where we can look at this big cycle and, and go, oh, we know where this goes? Like the, the music has stopped everybody or. No, it, it's a bit harder to judge than that.
- [15:46]
Ray Dalio
I think it's pretty easy to judge on a, you know, an intermediate or longer term basis because there, there's a choice. Right? The, the predominant, the big issue is, you know, okay, the government can come in and print the money and give money to anybody they want to give money to, but when they do that, that typically devalues the money. So if, think about it, if you're holding a bond, you know, you got a claim on money, but the claims are too much. So, so one way or another, you're either not going to get back that money in full or you're going to get back money that's worth less because they print the money.
- [16:45]
Tom Bilyeu
Ray, I've never heard anybody say it like that. So let me just make sure that I understood that. The government has effectively issued too many bonds. So people have their holding a lot
- [16:55]
Ray Dalio
of companies and a lot of other things too.
- [16:58]
Tom Bilyeu
Okay, very good point. So we're not just buying the bonds from the government, we're buying corporate bonds, municipal bonds, like anybody that wants to put some debt out into the market. Government, of course. In fact, I'm actually curious, what's the ratio roughly, if you know this, between corporate debt and government debt?
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Ray Dalio
Well, right now I couldn't give you the, you know, number or exact number off top of my head, but there's household debt, corporate debt and government debt.
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Tom Bilyeu
Yeah, that, that's terrifying. So even if you took every dollar that our entire country makes, I think it's true globally. If you took every dollar that we made globally and tried to pay off the debt, you wouldn't be able to do it.
- [17:52]
Ray Dalio
Well, that's right, but it's not expected to pay it off in a year. I want to go back to my main point to make this clear. If you're holding that debt, you are holding something that will money will come back. Let's say if the, and the government can print the money. But if the money's hard, if that's going to be good money that's coming back, it's going to be hard for those entities to pay back because it's a lot relative to Their income and cash flows to pay it. And that means that the default risk rises. However, because you're holding that, it means that the debt will be bad one way or another. It's either bad because they don't pay it, it needs a haircut for them to pay it, or because they do pay it with money that is going to be printed to come back. So when you look at that, and that problem occurs when there's a lot of debt assets and a lot of debt liabilities. So think of it this way. Just want to make this clear. When there was the position that interest rates got a lot below the inflation rate, you are losing buying power. There's no good reason to own that. And there's a change in psychology because before there was I own bonds, the bonds go up in value as interest rates go down. So I'm getting a price appreciation even though I'm getting, you know, let's say a low interest rate. But inflation isn't a problem until it's a problem. Then when it's a problem because they print so much money and they put it out, then inflation goes up and a light bulb goes off. That light bulb used to be, okay, how much am I earning? Okay, I'm not earning much, but it's okay. The price of the bond or whatever's gone up and, but anyway, I'm holding it and it's safe. And then people realize it's not safe because I'm losing money to inflation. So now you have the central bank wanting to rectify that imbalance by real interest rates were minus 1.7%.
- [21:05]
Tom Bilyeu
Meaning that inflation was chipping away at your buying power.
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Ray Dalio
Yes. If I look at inflation index bonds as an indicator or other indicators, I'm losing percentage points to inflation by holding that bond. And then when they, and people realize that, well, you don't want to do that. And then the other side of it was you want to buy, buy and borrow and buy stuff because you know, money's free. So companies borrow and buy stuff and individuals borrow and buy houses because interest only loans on the houses. I mean, like, okay, I can buy a house, I can buy an apartment. And so, but that creates the imbalance where it's terrible to be a lender and a creditor and it's good to be a borrower and do that. So that imbalance takes place, it produces inflation. And then when it produces inflation and so on, and then you say, I don't want to own these things anymore. And also the Federal Reserve says, I better fight inflation they change things. And so by raising interest rates to levels in which it goes from minus 1.7% in inflation index bonds to plus 1.7% and it makes it, and it raises the short term interest rates, you know, real interest rates much higher. Then lo and behold, all the people who did all those things get hurt. Okay, they borrowed, they bought, bought the bonds, they bought all of those things and all of those debt instruments. And also companies, look at the companies that are affected because yields got so low. Tech companies and others, those who have a dream, I'm going, they don't have to necessarily make profits. They're selling a dream and the money's got to be invested. And so you see all of that change radically when those, that tightening of monetary policy. So now you sit there and have a lows. So when you're looking at the big picture, you look at, you've got think of it as all like banking. You're holding all these financial assets. What is the value of a financial asset? It has no intrinsic value. Its only value is what it can buy. But there are many, many more financial assets out there. The most financial assets out there that there's ever been relative to the value of stuff to buy. There's too many claims out there. It's, it's like musical chairs. Okay? If everybody says, oh, wait a second, let get, let me get my stuff, let me convert my debt assets, you know, and I want to, I want to get my stuff, I want to get real stuff. That's, that's a real problem. And so that's the global picture on the first of those five influences, right. The fact that it's happening with the other influences is very important because they affect each other. So this financial picture, by the way, is the same as in the 1930-45 period and the same as they were throughout history.
- [25:06]
Tom Bilyeu
Yeah, for people that don't know, that's World War II.
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Ray Dalio
Just, it started with a financial crisis that then caused internal conflict. What do we do about the financial crisis? The populism of the left and populism of the right in this internal fighting. And four countries that were democracies chose not to be democracies because of the conflicts that were existing. And those countries were Germany, Italy, Spain and Japan. Because there's a lot of internal conflict over wealth. And when you have that, and so that creates a lot of internal disorder, a lot of fighting. Okay. In some ways almost civil war forms everywhere, some form of civil war. Who wins the internal war. And of course that happens also at the same time as there's the external conflict. First of all, everybody's fighting over resources. You have populists come to power, and the populists are not compromisers the way democracies work.
- [26:28]
Tom Bilyeu
Yeah, let's fight. I'm going to fight for you. This. Don't worry, I'm not in the middle. I'm not going to compromise.
- [26:32]
Ray Dalio
And you've got to pick a side. And so the moderates. There's no place for moderates. You've got to pick a side. And the sides are, let's say, internally in the country, the left and the right. And externally, you know, I don't know, the Americans and the Chinese or the Americans. Okay. And you got to pick a side and fight. And so that becomes the dynamic that is these periods of time. And these periods of time have typically lasted about 10 to 15 years. And you. And they have various symptoms to it. So in the book I. I write out, yeah, there's like a disease, like a cancer. You see stage 1, 2, 3, 4. If you have these things, you could look at it and you could diagnose, and you see it moving from stage one to two, to three, to four to five and to six, you could see that taking place. And each time you come closer to a bad set of circumstances, bad financial circumstances and bad fighting over things.
- [27:52]
Tom Bilyeu
Yeah. So this is where this gets really breathtaking. So you've talked a lot about this idea that there are things you even mentioned at the beginning of this episode. There are things that have not happened in our lifetime, but they happen over and over and over. And so it is very easy for me, as somebody born in the 70s, to think, oh, war isn't the thing that happens in the U.S. that's something that happens elsewhere. Populism isn't something that happens in the U.S. it's something that happens elsewhere. But it does happen. We're seeing it ratchet up right now because of that. I heard you once say, and I think this is really important for people to understand about the internal conflict. In fact, you and I bumped into each other in Dubai, and I was saying, you know, Ray, as given everything that's going on, how do I think. How do I think about where to live, whatever. And you said, tom, the only thing that matters is how people are with each other. And for whatever reason, it really hit me that time what you meant by that. And I understood the importance of this conflict. And what I heard you say previously is that in the French Revolution, it was the moderates that got the guillotine. It's like you are forced. Because I consider myself very centrist in nature and you find yourself as things escalate, being forced to take a side which the French Revolution one gave me pause. I was like, not how I would want to end up as a moderate really fast. Going back to that. This is a global moment. It's a predictable part of the process that stage five, the debt is too much. Interest rates are now going up to keep inflation from running away. We printed money like crazy. You've got the rise in conflict. Is, is the. When we printed money, when the Fed printed money to backstop the. What looked like it was going to be a potential contagion from svb. Obviously I think there were five banks that ended up failing. Is this now contained or is. Is what the Fed did just going to forestall something that's inevitable?
- [29:59]
Ray Dalio
The dominoes are beginning to fall. I mean, okay, you know, you know what the next dominoes are. And you can imagine the dynamos. So for example, they're not going to buy the debt. A lot of them are not. Those who are, who bought the debt and have too much debt and have debt losses on government debt are not going to buy that buy more of that debt, for example. And therefore when the government sells more of the debt, there's not going to be an adequate number of buyers for that debt. You know that those who are hurting because they have those losses won't make loans. And a lot of those loan loans went to real estate, particularly commercial real estate. And you know that for various reasons in commercial real estate that you're. We don't use it the same way and so on. So you're going to have problems in commercial real estate. You know that this kind of money was also financing venture capital and private equity entities that also have cash flow problems, challenges. And so you know that that funding is not going to be there in the same way, you know, as a result of these things that a number of entities will cut costs and in their various ways. And so depending on the, on that the job market is changing. And you, you know, you see it for example in tech jobs and, and other, you know, if you're in some of those areas that are getting squeezed and you see the same thing by and large, you know, happening internationally. So you can see also that if you said what is the value of those assets that are being held, that that value has gone down a lot. And because it was bought on leverage, as you described, because it has bought on leverage, there are bad losses in different places. And then the question is, what are you going to do with those losses? In most cases, quite often they're, you know, don't mark them to the market, meaning don't account for them and recognize those losses, which is kind of, let's say, hiding those losses and hoping in time that they'll just, over time, you know, it'll be fine, but that'll produce a squeeze, that'll produce a problem. So I think we know those things. We know those things. And, and that's happening at the same time as we have an internal conflict taking place, such as the presidential election. So we're going to come into the presidential and, and it's not just presidential election, of course, it's a number of senators, congressmen and so on, and who are at each other's throats about this and who are going to fight with each other. Okay. And, and fight to win. Not probably respect the rules as much, but fight to win for their side. And that's happening at the same time as we have the situation with China, most importantly China and Russia in terms of the issues, in terms of their things to fight over. You know, for example, even there's going to be an election in Taiwan that also have a big bearing on this whole thing. So there's, you know, there we know, I think pretty much that we're going to have financial problems at, and economic problems at the same time as we have this internal fighting and, and this external risky situation.
- [34:44]
Tom Bilyeu
You're at a stage in your life where you really want to help people understand the mechanisms, how to think through this stuff from a framework perspective so that we can apply it, you know, God forbid, in the post Ray Dalio era. Let me run you through how I'm thinking about this moment, the questions that I'm asking myself. And then if you don't mind, help me correct the, the approach that I'm taking to this. So I, Whenever we get in a moment where there's really, we're at the. What I see is the end of stage five. I don't know if you would agree with that. So this is where, just again, to reiterate, so we've gotten over our skis on debt. The Fed is going to try to print their way out of this. All that does is create inflation. They try to break the back of inflation with high interest rates. But so many people got themselves into debt in the good times on variable interest rates or that they bought a, they bought long on something like a bond where it devalues based on what happens with the interest rate? So as the interest rates go up, either people just can't make their interest rates payments or the debt that they were holding goes down in value. Okay, so you've got this moment where a lot of people are about to lose money and a lot of people are going to be very uneasy. And you've got the political divide that's continuing to escalate. Escalate. We saw the last election cycle here in the US where people stormed the Capitol. It was a very sort of unnerving moment. And now it's like, well, things weren't nearly as bad then as they are coming into the 2024 election. So I start thinking, okay, what is the safe move? And if I'm honest, Ray, I start looking at where do I live? So is there a move to be made within the US and so I start looking at places that feel more secure for the way that I think about the world. Or I start thinking, do I become a more globally mobile citizen? Is there something that I should be thinking about there? I've got a lot of my money in cash. And then one thing that we didn't talk about, which we probably should, you. You mentioned the word hard money. And so hard money, I'll give my layperson's definition, and then if any of this is inaccurate, please let me know. But hard money being something that has intrinsic value. So gold, precious metals become something that I start thinking more seriously about. Now I'm what I'll call a digital native. So I think about Bitcoin is something on my radar. I know that you're maybe not a fan, but anyway, that's how I'm thinking about the world. I'm trying to be in cash. I'm not trying to be in anything long. I'm. I have Ray Dalio. I have zero leverage. I don't play with leverage. Even when the money was free, I was basically. I didn't take on any leverage because that's the one thing that scares me. So safety. Safety. Safety is how I'm thinking about things now. I don't exactly know how to diversify well, but that becomes another part of. Of how I look at this. And you've got the all weather strategy that I know you've tried to articulate for people. So safety first. If I had to sum up my stance.
- [38:09]
Ray Dalio
Everything you said is beautiful and very similar to the way I think. And I'll add a couple of things to it. But when we think about safety, we have to think about that as purchasing power. Because a lot of people think if I put my money into a Treasury bill, I get safety. Well, look at whether that's giving you a return that's compensating for inflation. So I just wanted to tweak what you said.
- [38:38]
Tom Bilyeu
That's very important, tweak. And now you're getting into where I feel under educated. So how do we then think through that?
- [38:48]
Ray Dalio
Before I go there, I want to say, and also take. Here's the other advice, and maybe we're all wrong. Maybe there's nothing to worry about. Okay, so how do I deal with that? Like, what this guy Dalio's saying is very crazy. And who knows whether he's right or wrong and he's been wrong in the past and who knows if it's right? And I. Okay, and simultaneously. So, okay, that's the. Exactly what you said is the way pretty much I look at it that you said, and if I was to paint the world, I painted the world the way I did. Okay? And I have those questions. And then beyond that, I say you as an individual should think about the total safety, including maybe that terrible scenario doesn't happen. Okay, that's what I'd like you to do. That's what I'd like you to do. And if you do that, you will come to a better balanced, better balanced position. I want you to get balance, okay? I want you to do certain things. I want you to have enough savings, whatever, you know that, okay? Tab security to build the first level of, I think, investing and investing, which is the same as savings, comes in tiers. Tier 1, Tier 2, Tier 2, 3 on risk. And the first tier is, if everything goes wrong, I'm okay. And everything could be inflation, depression, anything. Whatever it is, I lose my job, whatever it is, I got that thing covered. Then your next level is, okay, what am I going to get the highest returns? What is my best bet? But start at that level level. And then you said the other thing, TR too, that it's, it's not just the investment. It's where am I, Am I in the middle of a fight? Like, I don't want to be in the middle of a fight. Okay, what's it going to be like? So it, it does have geographic implications, you know, I don't know, maybe it's the state or the, the state you go to or the city you go to or the country you go to or whatever it is, you know, like, and there are certain things you can do to say, this one's going to be better than that. One, let me give you an example of that. There are three things you could do on. Based on these three influences. Are you going to be in a place and around people and circumstances that are financially strong? In other words, they income better. Is the. Are they earning more than they're spending? And they have a good balance sheet because that means stability. If you can go through that and you have stability, places that are like that are better off. Number two, do they have internal conflict, country place, and is, you know, and is it a hospitable environment? For me. Okay, that's the second. And then third, are they in the risk of an international war? Like, I don't want to be where the fighting is. I really don't, you know, and I want to be safe and stable and so on. So this is a time for looking for such things.
- [43:02]
Tom Bilyeu
Yeah. Okay. While deeply unnerving, I think incredibly important to think through that. Let's talk about diversification. Doing that. Well, you talk about uncorrelated assets and I don't know how much you talk about this publicly, but I'd love to understand. It seemed like the.
- [43:21]
Ray Dalio
For.
- [43:21]
Tom Bilyeu
For people that, that don't know your background, you have a meteoric rise. You're in your 30s, on top of the world, unbelievable success. You make a huge bet on something. To your point earlier about have the humility to know that you may be wrong. You made a huge bet on a collapse and it didn't play out. And it ended up that the market went up and you lost a lot of money. Almost lose. Bridgewater managed to keep it together. You come up with a new strategy that I believe is known as pure alpha. It ends up getting tested multiple times in the market. And you guys crush when other people struggle, which leads you to be, for people that don't know, the largest hedge
- [44:02]
Ray Dalio
fund we made money in 28 of the last 32 years. We never had a really bad year. You know, it made. I think it was during my time there running it, 11.8% a year with. No, with the worst year being, I think it was down, I don't know, 10 or 12% sort of thing. And, and that. And the next worth, you're being like down 1%. And. And we did that by simultaneously looking for opportunities and looking for good returning assets that were not correlated. Diversification of good, you know, and just as you point out, what happened was. And by the way, those returns are not correlated with the stock market or whatever. So they were fantastic. Stock market, bond market, they're uncorrelated. So they were fact effective diversifiers in portfolios which almost all go up and down together. This would diversification. And so it was loved by investors, institutional investors and so on. And the thing, and as you point out, what I learned from, you know, basically this punch in the face mistake, okay, this painful mistake is I learned how to make good money without having big loss. I knew, I learned how to improve my return relative to my risk. And I learned that the holy grail of investing is 10 or 15 good uncorrelated return streams. Like, okay, you get that and you will, I don't know, have a similar path to the path I've been fortunate enough to have. And so that's what I want to pass along to people. You know, like, you go into the COVID year, the one year that I, that we lost, I don't know, it's 10 to 13% or something was 20, 22 because Covid came along. I didn't have covet in our system. We had other things that. So that was it. And, and so there's, you know, something comes along all the time for anything. Everything has its time. And so you put your money in any one thing. You know, you could think, okay, movie theaters are good and then you get Covid or cruise lines are good and then you get Covid and you know, whatever it is is good. Well, it's good sometimes, but there's always something that always is going to mess up the one things. So you don't want like in my opinion, you don't want more than 10% of your money and anything. And you want, you know, probably you don't want more than seven and a half percent of your money in anything. And they want to be good, different things. And that's the message I'm trying to convey.
- [47:15]
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- [48:15]
Tom Bilyeu
Right now, one of the things that has me the most unnerved is the attack on the dollar. So you've got the BRICs, nations for people that haven't heard that acronym before. Brazil, Russia, India, China and South Africa are getting together. And I know this has been going on for quite some time, so I don't know if I should be overly paranoid about that in this moment or not. But again, going back to those indicators that point to a transition from phase five to phase six, do you think there's anything that we can prepare for as we look at the big cycle, as we see this particular moment with the assault on the dollar? Is, is there anything in the big cycle that can educate us on how to deal with this moment?
- [49:00]
Ray Dalio
Just all happens over and over. The decline of the British pound as a reserve currency, and before that, the decline of the Dutch gilder as. As reserve currency all happened for the same reasons, which is, you know, two things are going on. First of all, they're holding all of this dollars, and the stuff that we talked about is going on. And then also there's the weaponization through sanctions of the dollar. In other words, the United States's greatest weapon to use as distinct from its military weapon is sanctions. And so sanctions means you freeze other assets, you freeze assets. Those assets are the bonds. And so that happened with Russia, and there are threats of it with other countries, China and so on. And there's kind of the thinking, well, if I hold the bonds, can I be. Can that happen to me? And. And then why am I transacting in this? Are the third currency rather than transacting directly? So, for example, the United States share of world trade has declined and China's share of world trade has increased to become greater. And so if two countries are trading, let's say Saudi Arabia is trading with China, why do they buy? Why do they go to the dollars in order to do that? You know, no good reason to go to the dollars. And you know, they don't, then they're worried about holding the dollars because they might get sanctioned. And so you see more of those transactions taking place in other currencies. And then the usefulness of the dollar as a storehold of wealth changes. It's like, think about it in the most fundamental way. Everybody wants a medium of exchange and a storehold of wealth. So in other words, if everybody's using the dollar in world trade, then you want to save in dollars. Because you say, okay, now that's the thing. I spend it and I, and I save in the dollars. But over time, as the share of world trade goes down, why aren't they denominating in who, like China has a larger share of world trade? Traditionally, the countries that have the world's reserve currency have the largest share of world trade and the largest share of world capital flows. And because the United States has declined, and also there's a worry about that holding it because of sanctions. I mean, just imagine how the Chinese must feel about having a lot of money in treasury bonds. You know, like, I would be worried that I would, like, be treated like Russia would be treated. It's not something I would want to hold as, you know, a safe asset. And other countries, like, who might feel that they can get sanctioned, and for all those reasons, they're less inclined to hold. And when we, when we call the dollars, what we're really calling is dollar debt, because you don't hold, you hold dollar debt. And that's a, what is a debt? It's a promise to rel. Receive currency. So, okay, so now getting out of those things and transacting in other currencies seems to be the safer thing to do for those countries. And so that's the dynamic that's taking place. So it's, it's, it's not an attack on the dollar. It's like, I don't want to hold those things. And so very similar to, on the British pound. You know, what happened is the British had the war, and they were the most powerful empire ever in the world. And they had World War II, and they came out of World War II financially in debt, a lot of debt. And who hold, who held the debt? All these countries held the debt because that was the residual from that. But they had a problem. They had a debt problem. And so they needed to print more money because it was too much of a squeeze. And then you had, so it deteriorated. And then they, you know, they sort of said, please hold my debt, please hold my debt. They went to Commonwealth countries, the part of those that were in the former British Empire. And then you had the Suez Canal incident where there's sort of a, a war. And everybody realizes, well, hey, wait a second, that British Empire ain't the British Empire. And they're heavily in debt. And then they say, I don't want to own that debt. And there went the British pound. So that's just how the mechanics work.
- [55:01]
Tom Bilyeu
Okay, so looking at the US and I don't want to be cheeky and say, speaking directly to the, you know, the U.S. government, but if I were to be so bold. So if, if this is that predictable moment where, okay, there are actions that we can take as a country that will either help us keep the world reserve currency status and there are actions that we can take that will cause us to lose that status more quickly. It seems like, okay, you've got the brics nations, they are moving away from the dollar. It seems like that has already, that card has already been played. I don't know if you think there's anything that we can do to make that easier, but certainly speaking to printing. So one thing that I've heard recently, and this is a really fascinating concept, that when you have other nations that are holding your currency, holding debt, as you said, they're not like hoarding cash, but they're holding a lot of debt. If we print money, what we're essentially doing is externalizing inflation. So we are causing a devaluation of that debt for all the countries that hold us. Now we're in a moment with rising interest rates that's causing us to need to print, but creating this really weird, difficult moment where as we print then we have a need to raise interest rates. But the reason we're having to print is because we're raising interest rates. So it's a very difficult moment. But if we could, going back to your idea, it's how we are with each other. If we could get people to come together in the middle with would one of the things we would want to convince the US government to do is to be very cautious about devaluing the dollar. Is, is that an important idea?
- [56:56]
Ray Dalio
It's more basic than that and it's more simple, but it's also more difficult. What the reason cycles exist is that the next stage has been determined by what has already happened in the prior stage. So we are in debt a lot. You can't change that. We got a lot of debt. And if you say, what could you do? I mean, two things come to mind. What you could do is you could be financially strong and you can not use financial sanctions as a weapon to scare the holders of those bonds. But to be financially strong requires you to not spend more than you earn. That means you either have to cut your spending or raise your earnings. Okay, that's okay. That ain't easy. Okay, okay, so are we going to cut our spending? Okay, now you look at it. What are you going to infrastructure programs, I don't know, poverty transfers, defense spending. Okay, what, what are we going to cut the world Governments have the same basic economics as people, except for the fact that they can take money from one person and give it to another and they can print money. That's it. And so when you look at this, okay, you have that gap, you can eliminate the gap by taking money from some and eliminating another and not spending much. Okay, okay. That's not easy. Right? Okay. Okay. What are you going to that most governments now don't think, how much money do I have to spend? And then how do I prioritize that? They think I need to spend on this, I need to spend on that, and I need to spend on that, and they spend on it. And then they either produce it, they produce a deficit, and then you either have to pay it back with hard money or printed money. And that situation. So when you say, what could we do? Well, you've got to get financially strong in a politically fragmented environment in which everybody wants more and you, and you have to, you know, like, be a higher percentage of world trade so that everybody wants to use your currency and be. And not threaten the holders of, of that bonds with freezing their assets.
- [60:17]
Tom Bilyeu
It is, it's a tall order. In this moment, I, it has become so clear to me in the last month since you and I saw each other how important, the reason that you keep coming back to it all comes down to how people treat each other. So in this moment, I don't want to be a Debbie Downer, but it does feel like the die is cast a little bit. I don't see how we pull ourselves back from the precipice because to your point about being fiscally responsible, like, we'd have to get into a position where we're making more than we spend. I want to circle around to something. As you were talking, you mentioned infrastructure. And it got me thinking about, okay, what are things that we would need to go? Right. So I think everybody is aware, and I've heard you say, that there are changes that are going to need to be made to capitalism in order to bring back a thriving middle class and the importance of the thriving middle class. And you've defined the things. Again, staying to the theme of principles here. Of the three things that we need to do to be strong as a country or for any country to be strong, and you said two parents in the home, great public education, and then equal opportunity. Where do you see us on those? Are we moving in the right direction? Moving in the wrong direction.
- [61:40]
Ray Dalio
Well, again, maybe I aspire too much to two parents in the home. It's certainly better if you have two loving parents raising a family that's good, but maybe that's too much to ask for. But in other words, good parental guidance. Okay, you're raised well, you're educated well. You can go to a public school that educates you well, and you have good guidance. So you're well raised in a healthy environment. And not only do you learn, you know, skills and, and all that, but you learn how to behave well to. With each other. So you learn civility and, and so you come out capable and civil to a land of opportunity in which you can, you know, work and, and, and have a good environment. And really that's all you need if a society does that. Right. And I think, you know, where we, you know, the things that are going on, you know, education in a lot of public education is a. Is deteriorating. It's a real problem. My wife works to help the poorest school districts, the poorest people in the state of Connecticut. And the state of Connecticut is usually, it's always one, two or three in terms of the highest per capita income. And in the state of Connecticut, as Of last survey, 22% of the high school students have either dropped out of high school.
- [63:33]
Tom Bilyeu
Whoa.
- [63:34]
Ray Dalio
Or have absentee rates which are greater than 25% in our failing classes. So at their living in. They're living in areas that don't have the things I'm talking about, about parents, nutrition and so on, and there's not adequate resources for them. For example, during COVID we. We found that 60,000 students didn't have computers or connectivities to take classes, and the government wasn't going to provide it. So philanthropically we, we bought 60,000 computers and give to the kids, but we can't, you know, we can't do that, you know, so our society is. When you look at this, you see drugs, drug problems. You see that, how the cities are changing, you know, the cleanliness of the cities, the education levels of the cities, mental illness, crimes and so on. You're not seeing, you know, you're seeing people fighting with each other a lot, not all the time. There are wonderful places in the United States, you know, education, some of the best universities, their pockets, some of the best, you know, their neighborhoods. But there is this encroaching. So you see infrastructure breaking down, school shootings, you know, you know, like, okay, so you decide how we doing?
- [65:36]
Tom Bilyeu
I think we're doing pretty badly. It. I I don't know. Look, it's not going to be a popular thing, but I think going back to what you were saying about the parents and maybe asking for two people is too much. Look, I get it. I think everybody's doing their best and. And God knows, for any single parents out there, you have my love and respect that. It just seems. Seems like a hard job when there's two of you, let alone one. So I'm not, I'm not throwing shade, but in terms of cultural momentum, when I look at people not. Not getting married before they have kids, incentives that end up leading people to where it's actually more economically advantageous to have a child when you're single does not strike me as a great idea. And trying to reverse that trend, I think is going to be really important. Really putting a ton of time and energy into making sure that we're. We are looking at ourselves on a global stage from an educational standpoint and understanding that we are competing against. I mean, just to really make it stark, we're competing against China. Now, I have employees that grew up in China. I actually have some contractors that are in China currently. And when I see the discrepancy of what demands the educational system places on them when they're young versus the demands that we place on our students when they're young, it creates a ripple effect as they get into the workforce in terms of just the expectations that they have of themselves, the drive, the desire to excel. So these strike me as really, really problematic things. I'd love to talk to you about Singapore. So as we're talking, and I haven't studied Singapore very closely, but when I think about how they've created something that seems really amazing very recently and sort of born up out of nothing. Is it those three principles? Two parents in the home, quality education, equal opportunity. I mean, is that it? Or is there something else?
- [67:36]
Ray Dalio
Earn more than you know, earn more than you spend. Be well educated to help you earn more that you've said, be civil with each other, be productive. You know, when you come out, equal opportunity. And, and it's not just like in Singapore, but it's true in other countries. There's a level below, below which nobody should go. Certainly children should not go. Right. How can you have an environment that children. There's. So there should be basics of housing, health care, certain basics, because otherwise you build a cycle. You know, I mean, when they become. When the children become adults, you might say, oh, it's up to them to do it. But if you mess up the children early, they become the adults who can't do it. And so you have this cycle, you know, in which you have to take care of people. You know, you walk around and look at it, you can see the gaps, the opportunity gaps, you can see the mental illness gaps. You know, walk down the street and, you know, downtown Manhattan or lots of places and see the gaps, okay? And some, that adult who is screaming, you know, and homeless and whatever came from a place, a reason, you know, that was, that made him that way. And you know, so it's like the, you know, why isn't the computer given to the kid who doesn't have a computer so he can have learning? Think about how difficult it is for the, for the kid who doesn't have learning. And they have one parent and that parent might have in a poverty and might have drug problems and all that. I mean, the kid can't make it. So the kid's going to come up to be an adult. Okay. What kind of an adult is. It's going to be a problem.
- [70:02]
Tom Bilyeu
So I know that a lot of people are going to say, okay, well, raise taxes. We'll have money for all of that. That doesn't seem to be how things work, but I'm open to being wrong about that. There's a book coming out I'm very interested to read called Taxes have Consequences, which I don't think people think a lot about, but it is entirely possible that I'm wrong. So if we look at someone like Singapore, do they just have really high tax rates and they distribute it in a way that makes sense.
- [70:30]
Ray Dalio
What they did was they required savings.
- [70:37]
Tom Bilyeu
They require it.
- [70:39]
Ray Dalio
Require savings. An employee, I think an. I think it works like this employee gives 12% of their incomes. An employer gives 22%, 10% of their income. So, so they saved something like 22% of their income is in savings. Okay. They do other things too. They have a tax balance, but they have a savings. And as a society, they earn more than they spend, okay? So, and then on housing, for example, they have a public housing that is subsidized that the person can take their savings with to use to buy that public housing. That is a saving through that saving. So everybody has good housing, good public housing, and they own it. So if it goes up in value, they can sell it. And, and so they have that. So the housing creates a good environment. They put a lot of money into education, equal education. It's not. People there don't have to go to a private school to get good education. They so they have good education and they so. And then they have the people who work hard and are civil with each other and that's how it works. And it forget about Singapore. If you look through history, these are, these are basic fundamental things. So and so wherever they've happened in history, they've worked. And you can go back through all history if you, you know these basics earn more than you, than you spend. You know, be well educated, be civil, be productive, you know, those types of things that those fundamentals work.
- [73:17]
Tom Bilyeu
What is it about the human personality that makes it so common that people don't deploy those things?
- [73:25]
Ray Dalio
It's so interesting to me because I found that when people get richer, the societies get richer, they typically get in more debt, which seems backwards. Like so for example, I, I watched the first time it happened when the United States started borrowing money from j. From China. The United States had income that was 40 per capita income, 40 times those from China. And they're borrowing money from China. So I wonder like how does that really happen? And there's when you don't have much money and you're at a stage of life where you know, you value money, you want to save. So there's a psychological thing, you don't have much money, you get some money and you want to save it and to save it means you have to lend it to somebody. Then what happens is ironically when everybody earns more money and it's easy to borrow, people will get in, in debt or society will get in debt or the government will get in debt. And also then there become very big wealth gaps and people basically are interested in taking care of their, themselves. And so you don't have, you have a fight over taxes or something. And so you have a society that borrows. Just even think the political system cycle, people pay. If you're a new politician and you run a state or you run, let's say a state and it's before an election, it's in your interest to borrow and spend because nobody pays any attention to the borrowing, where the money comes from. They pay attention to the spending. So give them stuff, you know, go spend, give them stuff, have a party. It's like having a party on debt. And there's the short sightedness, it's like the, you know, raising kids. They call it the marshmallow test, you know, you know, you ask a kid in early, early, early age, I can give you one marshmallow now or I can give you two marshmallows in 15 minutes. Which would you prefer? And okay, the smart one says, I can defer my gratification for 15 minutes and get two marshmallows. We have a lot of society who wants the it now. So is it enjoyable to take your money and spend it on better infrastructure or. Let's take the education system. The education system, according to the Constitution, is a state decision. So it's not federal, not mostly federal money. Then you come down to the state, and it's mostly a tax district. If you're in this neighborhood through property taxes and so on, you will get the money to educate your children in that tax district. So naturally, richer tax districts will have better money. And so, like, I'm in in Greenwich, Connecticut, and last numbers I looked, I'm sure they're higher than this now, but it was not that long ago is in Greenwich, Connecticut, it was $24,000 per student. In Bridgeport, Connecticut, which is like 10 minutes up the road, it's $14,000 per student. Whoa. And they need more money because they're poor. So if you just take. It's not just education. How do you clothe the kid? How do you feed the kid? How do you give them the computer that doesn't come through the school and all that? They need more, not less, budget. So those are the mechanics of it. First, you have to go to bipartisanship. Like, if I was president, I would have a bipartisan cabinet. And then if I was dealing with the economic problems, I'd get smart people from the right and smart people from the left who want to make this thing work, and I'd put them into like a Manhattan Project kind of thing. In other words, put them into six months in which they have to agree on a system that's going to work, tie them together and force them to agree and come out with that and have them gain control over the extremists who are going to fight. Like, I don't really care exactly how it works, just as long as, you know, like, if smart people from both sides can get together and make it work. And then you come back to these basics. You know, okay, how do you spend more, earn more money than you spend? How do you educate your children? Well, whether or not you know, and deal with those project problems that way to in a together way, you'll get the best outcome. If you don't do that, you won't get the best outcome.
- [79:42]
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- [80:39]
Tom Bilyeu
Yeah, I think this is really brilliant. And for people that haven't heard me talk about our company culture before, it's very much in line with this. And these are things that I learned from reading your book Principles. So when I read Principles, it was really life changing for me. It was before you and I had ever done an interview. Because what I liked about the book is exactly what you're talking about right now. This idea of a bipartisan cabinet. So in my own company, I'm not looking for people to agree with me. I'm looking for people that will challenge my ideas. I'm looking for disconfirming evidence. I want to get the smartest people that I can possibly attract to what we're doing and saying, okay, we need to disagree with each other well, so that we can identify the right answer to your earlier point. You're going to be wrong so often that if you go into something thinking I'm infallible, I'm going to have all the right answers. You're just headed towards disaster. So my question is, how do we set up a situation where people can disagree? Well, what is that structure?
- [81:41]
Ray Dalio
I think it starts with worry. I have a principle. If you worry, you don't have to worry. And if you don't worry, you need to worry about. Because if you worry, you'll take care of the things that you're worrying about to the best possible way. If you don't worry and you just go headlong into these things, you're going to have a real problem. So I think that you have to have people first realize what does that picture, picture look like if we don't do these things, if we don't, if we don't have bipartisan, if we don't solve these problems together, if we fight, you know, you have to see the clarity of those two paths and have people choose the good path. You know, okay. We will figure this out intelligently to make the best possible thing to. Intelligently and together. Okay. It starts there. It's not a structure. Where does the structure come from? It comes from people. Okay. And it comes from people having a need to create a structure and a way of being.
- [82:59]
Tom Bilyeu
So how do we get people to worry?
- [83:01]
Ray Dalio
Well, maybe what we're doing, I mean, I think they have to worry at two levels. First, enough of us worry that
- [83:11]
Tom Bilyeu
we
- [83:12]
Ray Dalio
vote for it, or, you know, we use our voting and our others to say, let's vote on together and compromise and smart people doing these kinds of things. Or. And that that's worrying about the society as a whole. And then there's worrying of, as an individual, if they don't do those things, how do I take care of myself? Those are the two types of worries or two types of impacts you can have. Right. So I think they need to think of both of those.
- [83:50]
Tom Bilyeu
For people that aren't familiar with Lincoln, how much have you looked into him? His idea of a team of rivals sounds like very similar to what you're saying about having a bipartisan cabinet. Is he somebody that you've looked at or.
- [84:06]
Ray Dalio
I know that. I know a bit about Lincoln. I wouldn't call myself an expert, and I know that about him. And. Yeah. And I think that's really, really great. Yeah.
- [84:17]
Tom Bilyeu
So when, whether it's at Bridgewater or elsewhere, how do you facilitate people disagreeing? Well, because let's say that you have an intern going against your chief investment officer. Like, how would you. Do you take that person seriously? They have little to no experience. How do you set that up so that you don't waste time, but at the same time, you get the best ideas.
- [84:42]
Ray Dalio
First of all, you explain to people and you understand yourself how important thoughtful disagreement is. So you remove it. You minimize it from being something that people view as a fight and get upset about. You have to change the attitude about disagreement so that, you know, if you're in disagreement, then one of you is probably wrong. How do you know the wrong person isn't you? And then also you still have to resolve the disagreement in some way. And so you have to have in place, first of all, you know, an understanding and an intellectualization of that so you don't get emotionally carried away and thinking, because I disagree, that's equivalent to a fight. Okay. So you have to change that psychology. And then once you do that, then you have to have protocols in place for doing that. Now, you know, in. In my book, you know, principles, life and work, and the work part of principles, I've outlined those things, those techniques that can be done repeatedly. So you have to have a system for that. And you know, and so let, let me make it very simple examples of that. If you and I are disagreeing and we sort of want to try to get at the truth, things that you can do is to mutually agree on a mediator. So, okay, you, you could step out of your argument and say, okay, this isn't working. How should we do this disagreement? And maybe like let's mutually agree on a mediator. Like we both agree that that person, you know, something, somebody we can trust and to through. Okay, that's a good step. Then as you're doing that, carrying that through, you can also say, are you taking in the other person's thinking and replying to that or are you just blocking? And there are techniques that you can do to do to demonstrate you've taken it in. Okay, like repeat the other's point and so on and then reply to the other's point and then do certain things like not interrupt. In other words, I have a rule, I call it the two minute rule. Somebody says, okay, can you give me the two minute rule? That means for the next two minutes I can speak uninterruptedly. So there are techniques that you can use to first understand that it's not a big fight, that there's protocols. Okay, then how do you do that in a hierarchy? Okay, there are different ways you can do that in a hierarchy anyway. There are many of them and you know, we're not going to have the time to go through them, but they're outlined in, you know, my book Principles Life and Work there in the work principles part of it.
- [88:19]
Tom Bilyeu
Yeah, that's something that we found really effective here is rules of engagement is how we refer to it. So whether it's the two minute rule or something else, but ultimately getting people to understand. I'm saying this in, in the context of somebody who's trying to figure out how we get. We know that the, the big cycle has a high degree of predictability. And I'm willing to accept that maybe the US can't remain the, the reserve currency forever. Maybe we're not going to be the dominant world superpower forever, but that I want to handle that transition out as well as possible. And usually phase five to six ends with literal bloodshed. And things have to get so painful before people can correct course. And so trying to give people a framework, I know you're saying that maybe I'm looking At the structure too much, but I think in framework. So what's that rubric by which people can go into, whether it's the 2024 election, whether. I think right now we're still in gridlock with the budget or the debt ceiling or whatever it is, giving people ways to navigate through this. Well, and so my thing is everything begins with the goal. So what's your goal? And even just getting any group to agree on what the goal is. Now, once we know what the goal is, then we can start saying, okay, what people or ideas are most likely to get us there. How do you stress test an idea? How do you know?
- [89:45]
Ray Dalio
I just want to emphasize though, as you're doing that the people have got to agree how they want to be with each other first before there's a structure. I mean, I can, we can have structure. I can create ST structure. And we could do all sorts of things. We can have a bipartisan cabinet, we can have the, the going off for six months and doing the project. And we can do all. There's lots of things we can do. But you first have to change the mindset of going from a I want to win at all cost to wanting that. So all I'm saying is when you say I want the structure, and I'm a structured guy, I want the structure, and I'm a structured guy too. But it takes people wanting something. And so what is the goal? Like you say the goal. You start with the goal, okay, that we are not going to fight with each other in a dysfunctional way, okay? That we will work together to overcome our differences, that we will be good with each other, okay? If you put those things there and then judge those things and you sort of then say, how are we going to do that? Okay, Then you do to buy founders and structure or whatever, you know, bipartisan cabinet, blah, blah, blah, blah, all that other stuff, then you can come around to it. But you have to. If you're in a I will fight at all cost mode, nothing, the structure of the Constitution is not going to work.
- [91:30]
Tom Bilyeu
I'll give you my hypothesis on the only way to pull that off. And let me know if you see another option. Lord knows, I hope there is one. I've thought a lot about how you sway people into doing something that is more advantageous. I'm usually thinking about it for them. So just what's more advantageous for them? And it all ultimately comes down to you have a leader or a group of people for whom you're trying to earn the respect of and by earning their respect. You do the right things. So I'll sum it up at. At the national level, we would need a leader that can actually bring. Bring the two sides together. Somebody who has a very clear vision. You've. You've grimaced for anybody that's just listening to this, Ray, Dalia just grimaced hard. All right, so explain the grimace. Right.
- [92:21]
Ray Dalio
It's like wishing for the tooth fairy or something. I mean, it's like not going to the root cause of why you don't have that leader. Okay, If. If you look at history, this is one of the great challenges of a democracy. And when it gets into everybody fighting for their own cause with p. Populism, they, you know, and so, you know, Mussolini comes to power to make the trains run on time because it's badly managed and so on. So somebody says, give me the dictator, give me the dict. Dictator, and then I will. And. And I want that dictator. So that's what we're. Okay, so how do you get that leader? Okay. Increasingly, I'm just dealing with the mechanics. So I'm. So how do you get the leader and what do you do with the opposition? Okay, it's almost like, well, you. You have this fighting of the various types, and do you accept losing and then does the opposition remain and undermine everything you're trying to. So it's almost like it gets to mob rule. That's why the dictators come to power. Okay. And so that's just history. And that's all understandable, if not desirable. It's still understandable that that's the mechanics. So to wish and say, okay, we need a strong leader who will get control and make everything go all right, sounds a little bit like wishing for the tooth fairy, that that is how
- [94:30]
Tom Bilyeu
dictators come to power. That is very much the scenario I would want to categorically avoid. So do you see that? Just as that is an inevitability, because right now, right to your own point, we are not being good with each other. From what I can see there. There is certainly a broadcast signal, and maybe this is a distortion of social media, but I don't think so, certainly not given the elections of recent. There is a broadcast of a signal of massive division. In a moment of massive division, you get people fighting. In a moment where people fighting, there is a winner take all scenario. That's the path to dictatorship. So while my path may be wishing for the tooth fairy to want somebody who's inspiring, that can unite people, I'll ask it pointedly, do you just see it as an inevitability that we head towards dictatorship.
- [95:25]
Ray Dalio
When you say have a leader that way, you're not dealing with the mechanistic determinants to say, how do you get a society that is splitting apart and operating in the way that I describe, to have a leader that leads and people follow properly. Okay, you're skipping over that. You can't skip over that.
- [95:50]
Tom Bilyeu
Do you see a path, though, other than. Because the natural way that this plays
- [95:53]
Ray Dalio
out, the only path I can see is the one that I'm referring to. If you worry about the alternative. Okay, okay. If you worry. Look at that. What is it? You must not have it. If the more people worry about that, then the more likelihood you won't have that. In other words, if you want to tilt the odds in all the different ways, I don't know, take out the ads, have conversations like this, do whatever it is and say, I worry of what's going to happen. So we must not have that. And we really must have this other alternative. I really want to buy into that other alternative. And you have somebody arguing for that other alternative, like, will you follow? And I'll tell you. I'll tell you the prime Mario Draghi in Italy. Let me just tell you the story very quickly of Mario Draghi in Italy. Mario Draghi used to be the head of the European Central bank, which was like being head of the Federal Reserve for a number of years. And he and I got to know each other in that. He completed that. And he's highly, highly respected. He's Italian. And Italian has. Italy has crazy anarchy. Like they've had an average of one prime minister a year. And so chaotic and so bad that all the political parties got together and said, we will be united under Mario Draghi. We will let him lead. We will turn it over to him. And he said, I will do that only as long as all the political parties remain united, because if they don't remain united, we're going to get into this dysfunctional fighting. And I know it's not going to work. So for a period of 18 months, he was prime minister of Italy and. And very loved people loved him. And then one of the political parties dropped out because they disagreed on his approach for, I think it was handling Ukraine. And he said, okay, now I'm resigning, even though everybody wanted him to stay overwhelmingly. But he said, I can't govern under that kind of a fragmented environment. And, you know, in other words, he knew where it was going to go. So he resigned. And in the period between him resigning and actually Turning it over to the new prime minister. We had lunch and we were talking about these things and what he was describing and what exists is the issue that we're talking about the inability of a leader to be able to lead when there's so much fragmentation. And if you look at the history of democracies and you go back to Plato, back Plato's Republic, he wrote the Plato. You know, a lot of people think Americans invented democracy. It existed way back, you know, in the Roman and Greek times and all that. And so he looked at the cycles, and what he said was, there's the cycle of these different systems. One leads to another in this way where what happens is the greatest risk of democracy is an anarchy, because the fragments, it becomes uncontrolled. They all have their interests, they fight and they tear the thing apart. And then, so what happens after that is then you get the dictator and you get, ideally, the benevolent dictator. In other words, the one who really knows how to make good things happen. And he cares about the country, he doesn't care about his personal wealth and those kinds of things and that. And they create that. And okay, to create order, that comes about that. And then in that cycle, after a period of time, you inevitably get the incompetent or selfish dictator, and then you have a revolution, and then you go to a democracy and so on. And these things go in cycles. And so when you're asking the question, you know, of the leader, you know, you're saying, okay, let's create a leader and, and, and have them go lead, you can't ignore the fragmentation and the inability to lead in that set of circumstances.
- [101:26]
Tom Bilyeu
I agree with that. But if you, even in your own example, what you had in Mario is somebody that is able to garner the respect of all the different factions. Now, I understand that it ultimately broke apart, but he is the tooth fairy that I'm talking about. You need somebody that people can unite.
- [101:45]
Ray Dalio
But it didn't work because of the power. People behave with each other and it won't work. Okay.
- [101:53]
Tom Bilyeu
Yeah. Okay, so if, if we know that people aren't going to stay united for long, what you're saying is the duration that people can stay united is the duration that you can have that sort of peace, prosperity. And the second that you.
- [102:09]
Ray Dalio
How long is that duration here? I mean, let's. Let's look at the situation. I mean, it doesn't exist, let alone have a duration to it.
- [102:17]
Tom Bilyeu
Yeah. Ray, you say very troubling things in a very calm manner, which I think is probably the only way to say them all right? So as I then step back and I say, okay, the cycles are what the cycles are. You said something earlier which I think is really important that I want to reemphasize. What's happening now is a determination from something that happened earlier. And so to some extent you're in a better position to deal well with the way things are. The reality, I've heard you talk a lot about that. The reality is what? The reality is you need to be awake, you need to be paying attention to that reality. And then you need to base your plan of action based on the truth of that circumstance. To do that though, one thing I think is incredibly important is people have to be able to strip their emotions out of this. I know you're a huge proponent of meditation. Our how do people get good at removing emotion from the equation so that they can see reality accurately?
- [103:16]
Ray Dalio
Well, meditation is a huge benefit for that. So I really, it, it, it gives one both a calmness and a clarity. It gives one an ability almost to go above everything and look down on it and say, okay, here's how things work and an acceptance of reality. It's like this serenity prayer. God, give me the serenity to accept that which I can't control. Give me the power to control that which I can and give me the wisdom to tell the difference and you know, just to be able to approach things in an open minded way like we talk about. You asked the question about disagreement. How can I approach disagreement? Do I emotionally get into a fight about it or do I handle it? Well, meditation and those types of things, calming yourself down, viewing everything more like it's, you know, it's. Think of a reality as being like a game, like a chess game. Okay, calmly, okay, this thing happens and what's your next move and how does it work?
- [104:41]
Tom Bilyeu
Okay, very fascinating. So if you take a chess grandmaster, anybody that's really proficient at chess, and you put a chess board in front of them, they, they look at the board and they don't have to analyze each individual piece. They know that pattern on the board very well, they know where you are in the game. And so that, that's a chunk of information. It feels like a very similar approach to the way that you're looking at financial markets, global movements, the big cycle. In that, oh, I can drop you into a scenario. You'd look at a few key pieces of information. You'd know where we are in the cycle. So I mean, starting with the three forces that we talked about at the very beginning hey, tell me where those three forces are. You expanded it to five, but tell me where we are with those five forces. That's the chunk on the chessboard that I need. Boom. Now I know how to take that next move.
- [105:29]
Ray Dalio
That's what I want to try to give to people, okay? That's why I have the animated video on YouTube. That's why I have the book. Because it's like watching the same movie happen over and over again. You can see it and you understand the cause, effect relations. So you can understand. So when you ask questions like, you know, how do you get better? And then we go, dealt with the mechanics of that, like, okay, how do you get financially better off? And how do you be good with each other and not be threatened? I mean, it's just if you look at it that way and you understand the mechanics, it is what it is. That's how reality works. And then how do you deal with it?
- [106:20]
Tom Bilyeu
Makes a lot of sense. Okay, so in terms of chunking, in terms of understanding where we are in the cycle, one thing that I'm thinking a lot about is as we go into the 2024 election, I've heard credible people say that they think China is going to make a move on Taiwan in the sort of chaos of the division that we have here in the current global superpower. Do you see that as a logical move on the chessboard for China? Is that something that seems plausible to you?
- [106:59]
Ray Dalio
I have very good contact, so I have close contacts of, on both sides. And, and, and so I'm just wanting to say it rather than just throwing out an opinion. I, My opinion is that there's a political situation in the United States that, that it's really the issue of how much the United States pushes the issue in Taiwan that makes it risky because there's a, a move for, of let's say, hawks or some, to defend Taiwan or. So let me just give you the facts. If there is a. I'm going to give you a little history, okay? Please. Taiwan was part of China, And around 1840, foreign powers came into China and they wanted to trade and do things with, with China and China didn't want to do that. And so around that time they had the Opium wars, you may have heard that in history, in which the, the Chinese at the time said, I don't want to trade. You don't have anything that I want. And then they brought in our opium that the Chinese wanted so that they would have this trade and whatever, and then militarily won and took over large Parts of China took control of that. And in 1895 it was many foreign powers. And in 1895, Japan takes Taiwan. Okay, fast forward. You go into World War II, and after World War II, the winners of the war get to divide up the world and said, who, who gets what? And Taiwan was given back to China. That's 1945. Then they have a civil war. Oh, as usual, the left and the right, they fight each other. And so the capitalists get kicked out by the communists and they go to Taiwan and they control Taiwan. Okay, so everybody agrees that China is part of Taiwan, is part of China. But they argue who, who controls China. The ones in Taiwan say, oh, we control China, China. And the ones in Beijing say we control China. But everybody agrees with that 50 years ago. So it's a, that's a big issue in their mind because it's part of China and it's been told to them that it's part of China, Taiwan's part of China. And but it, but they, the capitalists, which, it's called the guamindang, they are living in Taiwan and, and they're not controlling it. So Henry Kissinger first makes the, gets together, goes to China and deals with reunification. And then Nixon follows and, and there's this argument and they reiterate that Taiwan is part of China. Everybody agrees on that and that there should be peaceful unification of China. And that goes on 50 years now and brings it up, up to where we are today. Okay, so a red line for China is if the United States or Taiwan says Taiwan should be an independent country, that would produce a war. And everybody knows that. All those in government would know that would produce a war. This is a big thing for them, you know, in other words, they call that period of time a hundred years of humiliation. It was taken, it's promised back and, and whatever it's, it's in, in their mind, an indisputable reality. Now we're in a situation in which the United States and particularly some congressmen who are more hawkish, say good chance they will say we will militarily defend Taiwan and then go on and sell them more military equipment. So it's very, very close to saying I will. It's a separate state. So we're very, very close to that particular issue. So what will come. I don't believe China is going to initiate a move to, to take control of China, of Taiwan unless the United States crosses that line, pushes that line now. So the way that it is understood and just by different part parties is it's understood by the Chinese to be the way I describe it. Look, it's been promised. It's here, you know, I mean, don't. No, that's an uncompromisable thing. And Americans, I think, think about this communist dictatorial bully that is trying to take a free country, a free people, and in a, You know, aggressive way, take over them and that we need to defend liberty and protect them from that. Okay. I just want to emphasize it's more complicated than that in the way that I said. And also it's like, from the Chinese point of view, it's part of the American containment strategy, which means, you know, China has grown and it's become a higher percentage of world economy and so on, and it's expanding and it's like Taiwan is the lid on this boiling pot. So that's my best description of what the situation is. So I wouldn't expect. I would say, if you want to know what really happens, watch it. The way I describe it, in other words, is it unprovoked or is. Or is it provoked in the way I just described it? Now, again, I'm a very realistic person. I'm not an ideological person. I'm not trying to. Okay. I'm just like, how does the. How does reality work? And what's the move? What's the next move? And I'm just trying to describe that reality. I'm not taking a side. And it's just like two sides in a chessboard. And I'm just looking down at the chessboard.
- [115:42]
Tom Bilyeu
Ray, what are the things that you think people need to understand about the world to navigate it? Well, and I'm asking this now, at this moment, because hearing even how you answer the question of China, if I had to guess what you're going to say to my question, I would say it would be, people need to understand human nature. People need to understand finance. People need to understand.
- [116:11]
Ray Dalio
I think you're making it too complicated.
- [116:13]
Tom Bilyeu
Oh, give it to me.
- [116:20]
Ray Dalio
I think people. Need to understand the basics, the fundamentals and the story that repeats over and over for and why it occurs.
- [116:34]
Tom Bilyeu
History.
- [116:36]
Ray Dalio
Oh, okay. Yeah. And understanding the cause, effect, relationships in it. Right. Nobody. You can't expect somebody to understand all the things in finance. And you don't need to. You don't have to. All the things in human nature and psychology, you don't need to. Okay. It just comes down to kind of pretty much simple, basic stuff that repeats in a cycle for. For the certain reasons. That's why I tried to make it in these simple entertaining videos, right? I, I put three videos together. How the economic machine works in 30 minutes, principles for success in 30 minutes and the changing world order and it's in 40 minutes. And these are just basics if you understand that like, you know, what makes a healthy society, you know, we boiled it down, you don't need to know a lot of complexity in order to understand, you know, like how do you raise your kids? Do you hear more than you spend? You know, it all kind of comes down to those kinds of basics and so you need to understand those.
- [117:49]
Tom Bilyeu
I think we'll link to those three videos in the show notes. But where can people follow along with you and what you're doing?
- [117:57]
Ray Dalio
I'm on LinkedIn but I also post on all the major and sometimes if it's more in Depth, it's on LinkedIn
- [118:07]
Tom Bilyeu
Guys, if you haven't already, be sure to subscribe and until next time, my friends, be legendary.
- [118:11]
Ray Dalio
Take care.
- [118:11]
Tom Bilyeu
Peace.