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Speaker 1: Here we are with Ray Dalio, the one and only.

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Speaker 1: Hi David, Hi, it's great to have you Gray. Thanks,

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Speaker 1: great to be here. I always enjoy speaking with you.

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Speaker 1: So we all know Ray Daluo I is the founder

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Speaker 1: of Bridgewater and is an esteemed author of books as

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Speaker 1: well as LinkedIn posts that we all wait for. But

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Speaker 1: he also now is starting something actually with Masterclass as

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Speaker 1: the leading the number one luminary investor. So congratulations, that's

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Speaker 1: how they pitch it. Well, I think we'd all agree

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Speaker 1: with that. So we have read your material and we

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Speaker 1: have some sense of how you structure a particularly in

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Speaker 1: your most recent book, You've got five basic forces that

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Speaker 1: explain a lot of economic history. You go back several

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Speaker 1: hundred years and look at it.

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Speaker 2: And I thought we.

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Speaker 1: Might take some of those and apply them to the

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Speaker 1: present day. And as I recall them and you'll correct me,

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Speaker 1: the first one has to do with money, credit, debt,

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Speaker 1: the economy, right, and then internal conflicts within a country

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Speaker 1: external and then forces of nature, which would be climate

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Speaker 1: change by today, and then technology. Start with the first one,

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Speaker 1: the one that involves debt, credit, money, the economy, and

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Speaker 1: apply to the here and now. One of the big

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Speaker 1: raging questions, is are long term interest rates? And for

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Speaker 1: this purpose, I guess I mean really real interest rates.

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Speaker 1: Are they going to remain elevated? We're done a negative,

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Speaker 1: We're now up above one. Are they going to remain

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Speaker 1: elevated in the out years as you see it? Or

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Speaker 1: do you think they'll come back down? There are camps

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Speaker 1: in both directions at this point, and you look at

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Speaker 1: the long term, long term where we headed.

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Speaker 3: Well, it's most important to me to not just answer

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Speaker 3: questions like higher, lower, or whatever, but to try to

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Speaker 3: explain the mechanics, the cause effect relationships that.

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Speaker 2: Are going on.

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Speaker 3: Right And the reason I did this study, which then

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Speaker 3: turned into a book and I'm just a practical markets

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Speaker 3: decision maker, is that three big things happened in my

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Speaker 3: are happening in our lifetimes that never happened before that.

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Speaker 3: Let me say that again. Three things that surprise us

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Speaker 3: that haven't happened in our lifetimes but happened many times

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Speaker 3: through history are the creation of an enormous amount of

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Speaker 3: debt and debt monetization. This second is the internal conflict,

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Speaker 3: the large wealth gaps, and the internal conflict that makes

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Speaker 3: the politics of populism and so on, and the third

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Speaker 3: is the great power conflict, comparable powers of the United

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Speaker 3: States and China, and the possibilities of war.

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Speaker 2: But back to your question.

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Speaker 3: In terms of the mechanics, there are very basic simple

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Speaker 3: things that there is a debt cycle.

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Speaker 2: There are short debt cycles. We're used to those.

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Speaker 3: They last on average about seven years, give or take

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Speaker 3: about three. And you know, you have recession and interest

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Speaker 3: rates are low, inflation is low, and the Federal Reserve

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Speaker 3: becomes stimulative, and then you have growth, you have non

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Speaker 3: inflationary growth, and you have inflationary growth, and they type

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Speaker 3: monetary policy, and then you have a slow up or

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Speaker 3: the recession that follows until the cycle participates. It happens

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Speaker 3: that way. We've had twelve of those, where in the

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Speaker 3: thirteenth we're about halfway through that cycle. We're at the

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Speaker 3: point where interest rates have to rise. Okay, so the

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Speaker 3: level of interest rates, it's you have to satisfy a

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Speaker 3: debtor and a creditor, and so that means interest rates

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Speaker 3: have to be high enough that the creditor gets a

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Speaker 3: real return higher than their money. So and if you

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Speaker 3: don't do that, you create the cycle that we have before,

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Speaker 3: where money is essentially free. Interest rates are nil or

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Speaker 3: in some case negative, and you have a situation where

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Speaker 3: you don't have to pay principle, so money was essentially free.

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Speaker 3: Then that imbalance is enormous, and it's made more enormous

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Speaker 3: because even then the supply demand is not adequate. There's

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Speaker 3: not enough demand to buy those bonds, and so the

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Speaker 3: Federal Reserve's got to come in there and print money

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Speaker 3: and buy those bonds and redistribute wealth. So you have

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Speaker 3: that difference. So now you're moving. We have moved to

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Speaker 3: a level of real interest rates. Think about inflation. That

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Speaker 3: is depending on how you calculate. If you look at

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Speaker 3: tips or if you look at short term interest rates.

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Speaker 2: They need a one to one and a half percent

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Speaker 2: real rate.

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Speaker 3: Those days that we have seen in the past are

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Speaker 3: over and there's big adjustment in that. So the headline

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Speaker 3: for that is so who have been the losers? Who

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Speaker 3: have been the winners, and who have been the losers.

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Speaker 3: This is a different kind of debt problem in that

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Speaker 3: what happened is, in order to create this big transfer

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Speaker 3: of wealth that there needed to be in various ways,

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Speaker 3: the government borrowed a lot of money because they spent

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Speaker 3: a lot more than they earned, and they sell a

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Speaker 3: lot of bonds, and then the federers ave buys bonds

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Speaker 3: and it subsidizes those bonds. And so the big losers

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Speaker 3: of this cycle has not been the individual balance sheets,

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Speaker 3: because the individual balance sheets have been improved. It is

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Speaker 3: the fact that those who are holding government debt are

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Speaker 3: the ones that are having the losses.

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Speaker 2: So the central banks have all lost a lot of money.

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Speaker 3: The commercial banks bought a lot of these debts. So

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Speaker 3: when we look at the commercial banking problem, it is

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Speaker 3: largely a government debt problem because there was the financing

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Speaker 3: of holding bonds with short term interest rates, and so

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Speaker 3: that was the squeeze. So you have that particular dynamic

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Speaker 3: as we move forward. The higher you raise the debt

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Speaker 3: to income ratio, the more difficult that balancing act becomes.

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Speaker 3: And so we're seeing a trade off now that interest

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Speaker 3: rates have got to be high enough for the creditor

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Speaker 3: but not too high for the debtor, and so you're

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Speaker 3: seeing now this adjustment in which you're having sort of

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Speaker 3: a one percent growth rate. Not the household sector having

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Speaker 3: a problem, but those are holding the bonds and so

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Speaker 3: on they're having the problems. And so you're seeing growth

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Speaker 3: come down with still an inflation issue. The inflation issue

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Speaker 3: comes from two parts really. First of all, if you

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Speaker 3: spend a lot more than you earn, and you give

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Speaker 3: a lot of money and credit, you're going to have

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Speaker 3: an inflation. But it also comes from the supply demand

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Speaker 3: bond of bonds. So if you look at who's benefiting

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Speaker 3: in this the household sector, the workers are benefiting. This

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Speaker 3: isn't a classic recession in which the unemployment rate goes

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Speaker 3: up because the unemployment rate is remaining relatively good because

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Speaker 3: this wealth transfer you have, and they are also having

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Speaker 3: higher wage gages. And then you have the inefficiency of

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Speaker 3: the global supply chains, which has happens there. So what

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Speaker 3: that means, I think, is that you have this stubbornly

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Speaker 3: high inflation. We're not going to go down to our

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Speaker 3: targets for a number of the reasons. And then there

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Speaker 3: has to be the real interest rates remaining high in

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Speaker 3: that and that creates a sort of stagflation kind of environment.

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Speaker 1: So let's talk about that stubbornly high inflation. There are

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Speaker 1: some who think that there are larger forces that may

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Speaker 1: drive it back down. Demographics in particular, too much savings

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Speaker 1: actually globally, as the population ages at the same time

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Speaker 1: reduction and productivity less demand coming online. Some people argue,

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Speaker 1: in fact that we will have the inflation come back

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Speaker 1: down on its own, and therefore the nominal rates, if

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Speaker 1: you add your one to one and a half percent

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Speaker 1: on top of it for the real esship, they will

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Speaker 1: come down. Do you disagree with that?

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Speaker 3: Yes, In the it's a matter of the amount of

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Speaker 3: money and credit created, and it's also a matter of productivity.

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Speaker 3: And so when we look at the amount of money

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Speaker 3: and credit, we will spend a lot more than we

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Speaker 3: will learn. We know the budgets, we know the projections,

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Speaker 3: we know individuals. That's going the big risk there is

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Speaker 3: a supply demand risk. So we are going to sell

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Speaker 3: a lot of bonds, and then the question is does

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Speaker 3: a federal reserve come in and then start to print

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Speaker 3: and make that So I think from the demand, including

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Speaker 3: employment and the amount of money creation, we have that power.

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Speaker 3: And then we're also living in a different world, particularly

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Speaker 3: as supply chains change. The only big question is the

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Speaker 3: technology impact. Like if we take a five year you

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Speaker 3: were talking about a longer term horizon, we'll have to

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Speaker 3: talk about technology and the impact that that'll have on

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Speaker 3: that in terms of productivity, but the demographics is not

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Speaker 3: a favorable thing because what we're going to have to

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Speaker 3: do is draw down savings and there's going to be

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Speaker 3: lesser number of population. So in terms of the labor component,

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Speaker 3: I don't see that as a net positive.

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Speaker 1: You mentioned that going out, it looks like we're going

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Speaker 1: to be borrowing more than we're earning. Does that mean

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Speaker 1: we are in or headed for a debt crisis? You

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Speaker 1: wrote a book on that as well, studying debt crisis

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Speaker 1: since nineteen forty five. Are we in a debt crisis

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Speaker 1: or are we headed for one?

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Speaker 3: We are, in my opinion, we are at the beginning

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Speaker 3: of a very classic late cycle, late big cycle debt crisis,

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Speaker 3: when the supply demand gap, when you're producing too much

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Speaker 3: debt and you have also a shortage of buyers. What's

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Speaker 3: happening now is we have to sell all this debt?

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Speaker 3: Is we do you have enough buyers? There were changes

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Speaker 3: now in terms of the quantities in the world that

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Speaker 3: are being held by large investors around the world that

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Speaker 3: have lost money in these treasury bonds and so on.

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Speaker 3: And then there are geopolitical changes which are having an

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Speaker 3: effect some cases. Some countries are worried about sanctions, and

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Speaker 3: then there's this geopolitical shift. So when I look at

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Speaker 3: the supplied demand issue, there's a supplied demand issue for

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Speaker 3: that debt. There's a lot of debt. It has to

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Speaker 3: be bought, has to have a high enough interest rate.

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Speaker 3: So a crisis that's you know, if we continue down

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Speaker 3: this path in terms of what's likely over the next

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Speaker 3: you know, five and ten years, then what you reach

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Speaker 3: the point that that balancing act becomes very difficult.

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Speaker 1: How will we know and is it really a function

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Speaker 1: of not having enough buyers for the federal debt? Is

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Speaker 1: there any evidence of that?

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Speaker 3: So far, we were right at the brink of starting

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Speaker 3: to find out that the amount of selling of government

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Speaker 3: debt collapsed, right, we didn't issue government debt, and now

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Speaker 3: we're going to issue a lot of government debt. And

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Speaker 3: so when one looks at when we look at the buyers,

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Speaker 3: there appears to be a shortage, a significant shortage of

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Speaker 3: the buyers for that government debt. But we're now at

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Speaker 3: the brink of being able to see what that supplied

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Speaker 3: manat picture looks like as we go over the next

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Speaker 3: year and two.

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Speaker 1: Given the challenges that we face, fiscal challenges that you

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Speaker 1: describe we need a political process that will help us

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Speaker 1: get out of it.

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Speaker 2: Do we have that?

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Speaker 1: As goes to the second issue that you always deal with,

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Speaker 1: which is internal conflict.

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Speaker 3: Well, the things that you see happen on over again

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Speaker 3: when you look at history is when you have a

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Speaker 3: financial not good situation at the same time as you

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Speaker 3: have large wealth gaps, you start to see the emergence

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Speaker 3: of populism. And we see extremism in both of the

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Speaker 3: political parties. Okay, we see that split a populace as

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Speaker 3: an individual or a leader of a political person who

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Speaker 3: will win at all cost that the rules of the

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Speaker 3: game known as much matter, and so we're in the

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Speaker 3: January sixth type of incident and so on.

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Speaker 2: Is very interesting.

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Speaker 3: The political system, in terms of primaries and the parties,

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Speaker 3: tends to create that sort of polarity. I think that

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Speaker 3: I think it's very clear that there is only one

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Speaker 3: good outcome if we can, and that's a strong bipartisan

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Speaker 3: middle because either of the extremes is not going to

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Speaker 3: be able to be dominant, the small right or even

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Speaker 3: the small left. And as a result, we're seeing a

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Speaker 3: fragmentation geographically. You're seeing people move to different areas, not

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Speaker 3: just because of taxes, but of differences in values and

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Speaker 3: so on, and so you're seeing this separation. I think

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Speaker 3: over the next two years, the real question is can

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Speaker 3: we maintain can we have a strong bipartisan middle or

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Speaker 3: are we going to have that.

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Speaker 2: Kind of fragmentation.

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Speaker 3: We have three things aligning that are concerning on this

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Speaker 3: short term debt cycle, I call it, you know, the

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Speaker 3: seven year cycle.

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Speaker 2: We're about halfway through.

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Speaker 3: In other words, interest rates are now at a level

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Speaker 3: that they're probably going to stay at, but they're probably

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Speaker 3: not going to rise much from here, and there's tightness,

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Speaker 3: and the consequences of that are going to be a

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Speaker 3: weaker economy going forward.

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Speaker 2: It doesn't have to be a big, big.

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Speaker 3: Downturn because of the household sector, but it is a

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Speaker 3: balance sheet kind of recession, and I think you're going

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Speaker 3: to that's things are going to get worse in the economy.

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Speaker 3: There's a financial issue at the same time as you

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Speaker 3: have this internal conflict. So I think that that's going

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Speaker 3: to make for a risky situation, particularly then when we

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Speaker 3: deal with the third major influence, which is this conflict,

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Speaker 3: this geopolitical conflict in the world, particularly related to China,

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Speaker 3: Russia and the implications that that has on supply chains, production.

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Speaker 2: And the life.

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Speaker 1: Well, let's go exactly there, because you know China very well.

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Speaker 1: You spent a lot of time there, You've invested there

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Speaker 1: over the years. What do you make of the situation

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Speaker 1: with US and China? You said some things that we

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Speaker 1: think we're heading in a bad direction right now.

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Speaker 2: Right now, there.

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Speaker 3: Are irreconcilable differences on a number of topics Taiwan, Russia,

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Speaker 3: revers Ifius, chips and so on. They're kind of at

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Speaker 3: the edge and that there's an inability to talk. So

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Speaker 3: there's quite a bit of brinksmanship. And we are also

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Speaker 3: heading into a political year here in which there's going

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Speaker 3: to be more pressuring pressure. Both sides are very worried

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Speaker 3: about this. So I think you're going to see restraint.

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Speaker 3: I don't think it's going to lead to a terrible

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Speaker 3: situation in terms of but it is leading. You're going

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Speaker 3: to see restraint in a period of time where you're

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Speaker 3: going to see more tangents. There's the Mike Allagher's Commission

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Speaker 3: and so on, more pressure with chips and so on

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Speaker 3: and so forth. I don't think that that's going to

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Speaker 3: cross the line, but it is going to raise tensions.

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Speaker 3: You will see also more attempts Tony Blincoln's going over,

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Speaker 3: You'll see more attempts to try to smooth things out

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Speaker 3: because both sides are afraid of where we are. In

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Speaker 3: any case, while it'll be that kind of bringsmanship, most

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Speaker 3: likely there is a building of self sufficiency. In other words,

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Speaker 3: efficiency was the game before everything was global.

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Speaker 2: You produce it in wherever.

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Speaker 3: The cheapest place was most cost effective, and we became

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Speaker 3: very intertwined with each other. Now in this global world,

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Speaker 3: there's the worry about being cut off, cut off in

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Speaker 3: all sorts of things, and so you're having that dynamic play,

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Speaker 3: you know, a negative role in economics and inflation.

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Speaker 1: In thinking about the US relationship with China, which I

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Speaker 1: think is probably the most important geopolitical economic relationship for

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Speaker 1: the next generation, I would I would venture to say

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Speaker 1: many people have made much of the fact that China

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Speaker 1: is going to overtake the United States in terms of

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Speaker 1: the size of its economy, the strength of this economy.

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Speaker 1: There are some questions about that. Now where are you

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Speaker 1: on that question? And if in fact China is not

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Speaker 1: as strong as we have thought it is economically I'm

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Speaker 1: talking about now, how does that affect the relationship.

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Speaker 3: I think it's almost like splitting hairs. There are two

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Speaker 3: great powers, and you know the difference of overtake. If

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Speaker 3: you take purchasing power parody the size of GDP, they

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Speaker 3: have slightly overtaken us. If you take the other, who

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Speaker 3: knows they're gonna The main thing is they're comparable powers

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Speaker 3: in many ways, having strains in the they can do

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Speaker 3: a lot of They have a lot of dependency with

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Speaker 3: each other, and they can do a lot of harm.

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Speaker 3: So the most important thing I think is how we

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Speaker 3: take care of ourselves.

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Speaker 2: Can we get strong? Can we raise productivity?

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Speaker 3: Can we be politically and economically cohesive so that we

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Speaker 3: can be effecient, effective and strong, Because you know, you

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Speaker 3: can't rule out China since I started to go to China,

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Speaker 3: you know, nineteen eighty four per capita income increased by

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Speaker 3: twenty eight times. It's a power and it's a smart power.

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Speaker 3: So it's going to be it's going to be like that. No,

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Speaker 3: there's not a winner or a loser. There were only

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Speaker 3: either you're gonna have both winners or you're gonna have

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Speaker 3: both losers.

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Speaker 1: What is the route for the United States to come

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Speaker 1: to a functioning relationship economically with China, because it seems

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Speaker 1: to be what people are asping for. I mean, you

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Speaker 1: could say, going back to two thousand and the WTO

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Speaker 1: that was part of the theory that China would become

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Speaker 1: more like the United States, more like the West. That

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Speaker 1: didn't quite work out that way, and now I think

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Speaker 1: we're not quite sure how to deal them. What is

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Speaker 1: the way to have a relationship there. We're gonna have

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Speaker 1: different systems, We're not going to agree on everything but

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Speaker 1: any means, but we can really work with each other

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Speaker 1: in a constructive way.

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Speaker 3: For the globe fear, I have a saying, if you worry,

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Speaker 3: you don't have to worry, and if you don't worry,

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Speaker 3: you need to worry, because if you worry, you will

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Speaker 3: make sure that the thing you're worrying about doesn't happen.

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Speaker 3: And right now they're at the brink. And so the

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Speaker 3: understanding of where the red lines are, and just like

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Speaker 3: the Soviet Union, mutually assured destruction was the means by

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Speaker 3: which we got through that. That notion of pushing each

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Speaker 3: other will be the you know, just do not cross

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Speaker 3: certain red lines.

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Speaker 2: You know, chips are oil.

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Speaker 3: In World War Two, the United States shut off embargoed

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Speaker 3: Chinese Japanese oil and they froze their assets, sanctions their bonds.

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Speaker 3: It could be very analogous with chips and with with

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Speaker 3: bonds they're worried about sanctions, those kinds of there's a

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Speaker 3: there's a there's a limit to being strong, and then

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Speaker 3: there's that issue. So I think restraint on both parties

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Speaker 3: is going to be of paramount importance.

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Speaker 1: One of the things that people of hope for, I

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Speaker 1: would say, is some cooperation, fundamental cooperation between China United

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Speaker 1: States when it comes to climate, to try to deal

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Speaker 1: with climate issues. Your fourth element, as I recall, was

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Speaker 1: acts of nature and climate? What can we do with China?

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Speaker 1: And by the way, going back to your point that

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Speaker 1: first way to start with our being strong, what we

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Speaker 1: should be doing on our own about climate.

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Speaker 3: They'll be probably I would expect some superficial, cosmetic attempts

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Speaker 3: at cooperation on climate. The other more contentious issues will

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Speaker 3: remain simultaneously. And yes, the climate issue was very interesting.

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Speaker 3: When I did this study, motivated by the first three

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Speaker 3: of the last five hundred years, I saw that acts

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Speaker 3: of nature, droughts, flunds, and pandemics toppled more civilizations caused

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Speaker 3: more deaths than any of the things I mentioned before,

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Speaker 3: and so climate is certainly an issue, and we're going

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Speaker 3: to see It's not like we're going to have great surprises,

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Speaker 3: though great technologies are coming, but the worst is still

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Speaker 3: ahead of us. And I think you know enough about

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Speaker 3: that to say that this is not an easy or

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Speaker 3: inexpensive problem to handle. Fortunately, there have been great advances

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Speaker 3: in many sorts of technology, but it's a long and

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Speaker 3: expensive way to go.

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Speaker 1: It would not be easy or inexpensive if we all

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Speaker 1: agreed on how to handle it. To some extent. It

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Speaker 1: gives me back to your second issue, which is internal conflict,

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Speaker 1: because right now we see, for example, how many seventeen

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Speaker 1: states something like that, or adopting legislation to restrict their

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Speaker 1: pension plans for making investments based on ESG. Can we

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Speaker 1: address climate as a nation, put aside China the rest

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Speaker 1: of the world. Can we address as a nation? We

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Speaker 1: have that kind of division, political division over even addressing the.

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Speaker 2: Question of climate, right.

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Speaker 3: I'm not optim not optimistic, particularly because it's also very expensive,

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Speaker 3: and so what do you do when there's so many expenses.

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Speaker 3: There's the climate issue, there's the social issues, education, poverty

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Speaker 3: in school districts. My wife works in some of the telpatns,

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Speaker 3: some of the worst school districts.

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Speaker 2: I'll give you an example.

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Speaker 3: In Connecticut, which is always one two or three richest

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Speaker 3: country states in the country, twenty two percent of the

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Speaker 3: high school students are either dropped out of high school

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Speaker 3: or are have absentee rates of greater than twenty five

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Speaker 3: percent and are failing classes. And there's poverty in all

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Speaker 3: these So we have so many necessities, expenditures and problems

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Speaker 3: that we cannot agree on how to handle those problems.

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Speaker 3: So it's there's a climate component to it, but there's

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Speaker 3: you know, bigger mouth fund a component, which is why

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Speaker 3: I mean, I'm curious and I hope that we will

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Speaker 3: see a strong bipartisan middle beat the extremes in the

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Speaker 3: political situation because it is difficult.

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Speaker 1: Let's try to end a hopeful note here and get

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Speaker 1: to your fifth issue, which is technology or invention.

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Speaker 2: You mentioned it earlier.

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Speaker 1: I mean, you founded Bridgewater, and for everything I've read

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Speaker 1: about Bridgewater, I mean you put a great emphasis on

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Speaker 1: the systems involved, the mechanics involved, the engine, it seems

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Speaker 1: to me without knowing about it. Having done this for

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Speaker 1: twenty five years or so that AI might apply to

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Speaker 1: that fairly easily. Is that your sense? Where are we

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Speaker 1: going with artificials?

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Speaker 3: Yeah, I'm so excited because, as you say, for twenty

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Speaker 3: five years, I would always write down my investment principles,

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Speaker 3: all my principles, and then I would convert them to algorithms,

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Speaker 3: which became decision rules, which became systems, and everything would

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Speaker 3: run and they would like setting up a computer chess game.

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Speaker 2: It would play.

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Speaker 3: I would play next to it, and we would then

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Speaker 3: reconcile differences and we would learn together. Now what's happening

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Speaker 3: with generative AI is that I can one can take

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Speaker 3: all of that knowledge and have it there, and then

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Speaker 3: go beyond that to have it as a partner, a

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Speaker 3: thought partner, because the intelligence has capacities that the human

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Speaker 3: mind doesn't have. We don't, you know, the ability to

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Speaker 3: process so much and everything at the same time. So

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Speaker 3: I'm extremely excited. I think that this is a the

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Speaker 3: greatest revolution, bigger than the Internet revolution. But like technology,

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Speaker 3: it really depends. The problem isn't with the technology. The

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Speaker 3: problem is with the people who use the technology. Will

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Speaker 3: that technology be used to raise humanity's living standards or

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Speaker 3: will that be used for war in a sense, for

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Speaker 3: hurting each other and so but any way, we're gonna

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Speaker 3: cut it. If you take those five we're going to

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Speaker 3: go through a time warp. If if we take the

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Speaker 3: next five to ten years, in the next five to

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Speaker 3: ten years, it's not going to go through a time warp.

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Speaker 3: We're gonna come out the other side and you're going

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Speaker 3: to see a very completely different world.

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Speaker 1: I'm gonna take that as hopeful. Okay, ray Dallia, thank

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Speaker 1: you so much. He's a luminary investor, but also he's

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Speaker 1: the founder of Bridgewater tank Ye.

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Speaker 2: Thanks a lot.