1 00:00:09,720 --> 00:00:12,920 Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene with 2 00:00:13,600 --> 00:00:16,520 Speaker 1: David Gura. Daily we bring you insight from the best 3 00:00:16,560 --> 00:00:22,279 Speaker 1: of economics, finance, investment, and international relations. Find Bloomberg Surveillance 4 00:00:22,320 --> 00:00:27,000 Speaker 1: on Apple Podcasts, SoundCloud, Bloomberg dot Com, and of course, 5 00:00:27,320 --> 00:00:33,080 Speaker 1: on the Bloomberg. He has made the sir, how many 6 00:00:33,080 --> 00:00:35,400 Speaker 1: book interviews have you done? I mean, are you up 7 00:00:35,440 --> 00:00:39,000 Speaker 1: to a hundred forty two yet? But I've done plenty. 8 00:00:39,159 --> 00:00:41,040 Speaker 1: The book has been out and he has done plenty 9 00:00:41,080 --> 00:00:43,680 Speaker 1: of uh interviews. It has launched to the top of 10 00:00:43,680 --> 00:00:47,080 Speaker 1: the New York Times bestseller list. Bill Gates helping that out, 11 00:00:47,800 --> 00:00:49,680 Speaker 1: saying that this provides guidance. I want to go to 12 00:00:49,760 --> 00:00:52,400 Speaker 1: Mr Gates here in a moment principles, Ray Dalio, of 13 00:00:52,400 --> 00:00:55,600 Speaker 1: course with Bridgewater, and yes we'll talk about the investment environment, 14 00:00:55,840 --> 00:00:59,520 Speaker 1: alternative assets and that in a moment. Congratulations are Ray 15 00:00:59,800 --> 00:01:01,640 Speaker 1: and what I want to know? And you finished strong 16 00:01:01,720 --> 00:01:04,720 Speaker 1: in your book with your final chapter, which is the 17 00:01:04,720 --> 00:01:08,600 Speaker 1: great mystery here and for heaven's sake, don't overlook governance. 18 00:01:08,920 --> 00:01:12,720 Speaker 1: Can you take the principles of an entrepreneurial guy like 19 00:01:12,920 --> 00:01:15,760 Speaker 1: you and can you bring them over to big corporations 20 00:01:15,800 --> 00:01:19,520 Speaker 1: like Microsoft. Any organization can determine how the people in 21 00:01:19,560 --> 00:01:21,640 Speaker 1: the organization we're going to deal with each other, right, 22 00:01:21,920 --> 00:01:24,200 Speaker 1: I mean, I think that that's the most important thing. 23 00:01:24,400 --> 00:01:28,640 Speaker 1: Right down your principles, which are basically the recipes for success, 24 00:01:29,160 --> 00:01:30,920 Speaker 1: and agree on them so that you can have an 25 00:01:30,920 --> 00:01:35,080 Speaker 1: idea meritocracy. What I'm arguing is that an idea meritocracy 26 00:01:35,280 --> 00:01:37,319 Speaker 1: is the best way to have an organization. And I 27 00:01:37,400 --> 00:01:39,920 Speaker 1: learned that in the markets, because in order to be 28 00:01:40,000 --> 00:01:42,280 Speaker 1: successful in the markets, I know that I don't have 29 00:01:42,360 --> 00:01:45,640 Speaker 1: all the answers, and I learned humility and that what 30 00:01:45,760 --> 00:01:49,240 Speaker 1: I wanted to do is to have the best independent thinkers, 31 00:01:49,240 --> 00:01:53,160 Speaker 1: people who will disagree with me and know how to 32 00:01:53,200 --> 00:01:55,280 Speaker 1: each agreement. So I need to have the rules of 33 00:01:55,320 --> 00:01:57,680 Speaker 1: the game clear so we could have that independent thing. 34 00:01:57,680 --> 00:02:00,840 Speaker 1: So you and Don Barton of mckensey go into a 35 00:02:00,880 --> 00:02:04,120 Speaker 1: given big blue chip company. Let's pick on Mr Diamond 36 00:02:04,120 --> 00:02:06,480 Speaker 1: and I guess he liked your book to Jamie Diamond 37 00:02:06,680 --> 00:02:10,040 Speaker 1: and JP Morgan, You guys go into JP Morgan. Are 38 00:02:10,040 --> 00:02:12,440 Speaker 1: you going to give everybody a JP Morgan and iPad 39 00:02:12,440 --> 00:02:14,760 Speaker 1: and have them judge each meeting? I mean, if I'm 40 00:02:14,760 --> 00:02:17,520 Speaker 1: with Michael Faroli David Gura. I'm gonna be like Faroli. 41 00:02:17,600 --> 00:02:20,200 Speaker 1: You were terrible there on potential GDP. I think the 42 00:02:20,240 --> 00:02:23,440 Speaker 1: basic question is whether you're gonna have an idea meritocracy. 43 00:02:23,480 --> 00:02:25,760 Speaker 1: Forget the iPad thing, forget any of the tools things. 44 00:02:26,040 --> 00:02:27,440 Speaker 1: The question is if you and I were going to 45 00:02:27,520 --> 00:02:29,480 Speaker 1: have a partnership, how we're gonna be with each other. 46 00:02:29,760 --> 00:02:32,040 Speaker 1: You better write down the rules. And I'm saying that 47 00:02:32,120 --> 00:02:33,520 Speaker 1: the better way to do it is to have an 48 00:02:33,520 --> 00:02:35,920 Speaker 1: idea of meritocracy. And what that means is how do 49 00:02:36,000 --> 00:02:37,840 Speaker 1: you know if there's a disagreement, how do you know 50 00:02:37,880 --> 00:02:39,440 Speaker 1: whether you're right or wrong? And how do you get 51 00:02:39,480 --> 00:02:42,320 Speaker 1: to the better answer? Then you could have individually right. 52 00:02:42,880 --> 00:02:47,280 Speaker 1: So that's a fundamental notion. And if you look, there 53 00:02:47,280 --> 00:02:49,640 Speaker 1: are two types of systems you ordinarily can have like 54 00:02:49,720 --> 00:02:52,880 Speaker 1: the uh the autocracy where the boss is always right 55 00:02:53,280 --> 00:02:55,520 Speaker 1: and then you're going to dictate it and everybody walks 56 00:02:55,560 --> 00:02:58,320 Speaker 1: around thinking whatever they think, or you're going to have 57 00:02:59,120 --> 00:03:01,920 Speaker 1: a democracy. Can't have it just second, you can't have 58 00:03:01,960 --> 00:03:05,000 Speaker 1: a democracy where one man, one vote is So how 59 00:03:05,040 --> 00:03:08,840 Speaker 1: do you get through disagreement? Intelligence? Okay, we've got radical 60 00:03:08,880 --> 00:03:11,400 Speaker 1: transparency here to David, your and I are not on 61 00:03:11,520 --> 00:03:15,280 Speaker 1: speaking right. You emphasize several times in the books the 62 00:03:15,360 --> 00:03:17,960 Speaker 1: need to to to write things down, to think about this, 63 00:03:18,040 --> 00:03:20,239 Speaker 1: to be self aware of one's own principles, and you 64 00:03:20,320 --> 00:03:22,280 Speaker 1: write about how you wish you could look back at 65 00:03:22,280 --> 00:03:25,200 Speaker 1: other leaders in business and and in economics and government 66 00:03:25,240 --> 00:03:27,359 Speaker 1: and get their sense of principles. How do you get 67 00:03:27,400 --> 00:03:29,359 Speaker 1: that kind of self awareness or how do you begin 68 00:03:29,400 --> 00:03:31,600 Speaker 1: to think about things in this sort of way? Well, 69 00:03:33,280 --> 00:03:35,240 Speaker 1: I could describe how I got it. I I wrote 70 00:03:35,240 --> 00:03:37,400 Speaker 1: down every time I made a decision, I wrote down 71 00:03:37,560 --> 00:03:39,760 Speaker 1: the reason I made the decision. I closed the trade, 72 00:03:40,160 --> 00:03:42,160 Speaker 1: and I reflected on it. And then I began to 73 00:03:42,200 --> 00:03:44,880 Speaker 1: see that if I could take those criteria, I could 74 00:03:44,880 --> 00:03:47,360 Speaker 1: test how they would have performed in the past. That 75 00:03:47,440 --> 00:03:50,800 Speaker 1: opened my eyes. Then I began to have a discussions 76 00:03:50,840 --> 00:03:54,119 Speaker 1: with other people about the people I work with, on 77 00:03:54,400 --> 00:03:57,320 Speaker 1: what are our criteria, not just what is our decision? 78 00:03:57,440 --> 00:03:59,320 Speaker 1: And then I when I found that we could agree 79 00:03:59,320 --> 00:04:01,480 Speaker 1: on the criteria, I found that we could put them 80 00:04:01,480 --> 00:04:05,000 Speaker 1: into algorithms, and we could take those algorithms and then 81 00:04:05,040 --> 00:04:08,440 Speaker 1: have the computer make decisions in parallel with us. And 82 00:04:08,520 --> 00:04:10,880 Speaker 1: that was mind blowing, right, So, If you don't know 83 00:04:10,960 --> 00:04:13,400 Speaker 1: your criteria for making decisions and you don't have it 84 00:04:13,440 --> 00:04:15,720 Speaker 1: written down and you have it clear, you're just gonna 85 00:04:15,760 --> 00:04:18,080 Speaker 1: walk into the snowstorm every day and you're going to 86 00:04:18,120 --> 00:04:20,080 Speaker 1: see this blizzard of stuff coming out you and you 87 00:04:20,120 --> 00:04:21,719 Speaker 1: won't know how to deal with it. If you have 88 00:04:21,760 --> 00:04:24,360 Speaker 1: a game plan and you start to realize that everything 89 00:04:24,400 --> 00:04:26,680 Speaker 1: that comes at you is another one of those in 90 00:04:26,720 --> 00:04:28,719 Speaker 1: other words, it happens over and over again, and what's 91 00:04:28,760 --> 00:04:31,919 Speaker 1: your game plan? Those are principles and that's powerful. Thew 92 00:04:32,000 --> 00:04:34,320 Speaker 1: did you come to to the awareness that these could 93 00:04:34,360 --> 00:04:36,320 Speaker 1: be things for self improvement, They could be things that 94 00:04:36,360 --> 00:04:39,080 Speaker 1: define how you live your life personally and in business, 95 00:04:39,680 --> 00:04:42,080 Speaker 1: and yet they could also be transferred to the company 96 00:04:42,120 --> 00:04:44,440 Speaker 1: that you're running, that they were more universally applicable than 97 00:04:44,480 --> 00:04:46,359 Speaker 1: you might have thought at the beginning. Be clear on 98 00:04:46,440 --> 00:04:50,600 Speaker 1: your criteria, right, be clear in your criteria. If you're 99 00:04:50,800 --> 00:04:54,320 Speaker 1: clear on your criteria, you write down your recipes not 100 00:04:54,440 --> 00:04:56,960 Speaker 1: only do you know them, and they can be converted 101 00:04:56,960 --> 00:05:00,800 Speaker 1: into algorithms, or you're clear with each other on how 102 00:05:00,839 --> 00:05:04,039 Speaker 1: to behave and when something comes along, your strategic and 103 00:05:04,080 --> 00:05:06,599 Speaker 1: you're not just in the blizzard. That is what I'm 104 00:05:06,640 --> 00:05:09,880 Speaker 1: passing along. In other words, whatever success I had in 105 00:05:09,920 --> 00:05:13,200 Speaker 1: life has not been due to me. Okay, it's been 106 00:05:13,240 --> 00:05:15,280 Speaker 1: due to the principles that are in that book. One 107 00:05:15,360 --> 00:05:17,320 Speaker 1: more question on principles and I want to move on. 108 00:05:17,800 --> 00:05:20,400 Speaker 1: I want to know what's in this for the kid 109 00:05:20,440 --> 00:05:25,120 Speaker 1: walking into Long Island University. He's seventeen, he's eighteen, he 110 00:05:25,160 --> 00:05:29,120 Speaker 1: grew up in Queens with a wonderfully gifted jazz musician father. 111 00:05:29,520 --> 00:05:32,080 Speaker 1: That kid walks in What is the seventeen or eighteen 112 00:05:32,160 --> 00:05:35,840 Speaker 1: year old get out of principles? For me, it was 113 00:05:36,760 --> 00:05:39,560 Speaker 1: I didn't have the approached the principles then, right, I 114 00:05:39,680 --> 00:05:43,039 Speaker 1: just dove into life and then I encountered things, and 115 00:05:43,080 --> 00:05:45,720 Speaker 1: then years later I discovered that I would write those 116 00:05:45,720 --> 00:05:48,520 Speaker 1: things down, and that's kind of the magic. And so 117 00:05:48,760 --> 00:05:51,279 Speaker 1: this is just a cookbook of the principles work for 118 00:05:51,320 --> 00:05:55,400 Speaker 1: me and forget about me. You I'm recommending to you, 119 00:05:55,520 --> 00:05:58,960 Speaker 1: and I'm asking other people I'm asking. I won't list 120 00:05:58,960 --> 00:06:03,520 Speaker 1: the people Bill get Jamie Diamonds, people like Mike Bloomberg. 121 00:06:03,960 --> 00:06:07,800 Speaker 1: If they wrote down their recipes for success of what 122 00:06:07,880 --> 00:06:10,360 Speaker 1: they did and people could look at them, it would 123 00:06:10,360 --> 00:06:12,440 Speaker 1: be tremendous for other people I'm gonna give you a 124 00:06:12,480 --> 00:06:15,600 Speaker 1: major marks for the individual nature of your book. This 125 00:06:15,680 --> 00:06:19,280 Speaker 1: is a naked book. Principles in the individual treatment of 126 00:06:19,320 --> 00:06:22,039 Speaker 1: it is first rate. I want to go now to 127 00:06:22,279 --> 00:06:25,160 Speaker 1: how you apply this over to investments. Once again, we're 128 00:06:25,160 --> 00:06:28,400 Speaker 1: in a period where your community, the hedgeman community used 129 00:06:28,400 --> 00:06:32,040 Speaker 1: to double digit and it returns to clients it ain't happening. 130 00:06:32,120 --> 00:06:35,040 Speaker 1: We're in a single digit with even some negative numbers 131 00:06:35,240 --> 00:06:38,280 Speaker 1: for hedge funds. How long can the community put up 132 00:06:38,279 --> 00:06:41,839 Speaker 1: with this under performance before the money starts walking out 133 00:06:41,839 --> 00:06:45,200 Speaker 1: the door? I think it's worth taking a second and saying, 134 00:06:45,200 --> 00:06:49,200 Speaker 1: what is the character of the environment? Great, totally agree? Okay, 135 00:06:49,279 --> 00:06:54,120 Speaker 1: And then that applies to things um uh so, First, 136 00:06:54,839 --> 00:07:02,440 Speaker 1: low volatility of inflation, low volatility of economic growth, low 137 00:07:02,560 --> 00:07:09,480 Speaker 1: volatility of interest rate changes means low volatility of market agreed. 138 00:07:09,520 --> 00:07:12,720 Speaker 1: And on a risk parity strategy, is you invented? It's tough? 139 00:07:13,520 --> 00:07:17,080 Speaker 1: Uh No, because our our returns for risparity this year 140 00:07:17,160 --> 00:07:21,000 Speaker 1: have been excellent in in other words, normal, and that's 141 00:07:21,040 --> 00:07:25,520 Speaker 1: because the expected return of equities, the actual return of equities, 142 00:07:25,720 --> 00:07:28,440 Speaker 1: and the actual return of bonds relative to the return 143 00:07:28,440 --> 00:07:31,600 Speaker 1: of cash and most asset classes. Uh continues to have 144 00:07:31,640 --> 00:07:35,760 Speaker 1: a premium the worst asset class you can have his cash, okay, 145 00:07:35,960 --> 00:07:39,560 Speaker 1: And as long as um and throughout history, the only 146 00:07:39,560 --> 00:07:42,400 Speaker 1: time that cash hasn't been the right has been the 147 00:07:42,440 --> 00:07:45,760 Speaker 1: better investment than a diverse, fied portfolio of other assets 148 00:07:45,920 --> 00:07:51,360 Speaker 1: has been during terrible economic conditions that result in reversals 149 00:07:51,400 --> 00:07:53,640 Speaker 1: like two thousand and eight. So but let me answer 150 00:07:53,680 --> 00:07:57,160 Speaker 1: your question in terms of the environment right by low 151 00:07:57,240 --> 00:08:01,120 Speaker 1: and volatility in terms of growth, and there's reasons for it. 152 00:08:01,520 --> 00:08:06,480 Speaker 1: Low volatility of inflation and low volatility of interest rates 153 00:08:06,600 --> 00:08:10,760 Speaker 1: short term interest rates. We're in a situation that generally speaking, 154 00:08:10,960 --> 00:08:13,600 Speaker 1: we have a low volatile environment and we have a 155 00:08:13,640 --> 00:08:17,000 Speaker 1: low return environment, and we have those things for structural reason. 156 00:08:17,000 --> 00:08:19,160 Speaker 1: And Rydal, you know, if I'm a Verizon walked in 157 00:08:19,200 --> 00:08:21,240 Speaker 1: the door years ago and put their faith behind you, 158 00:08:21,480 --> 00:08:24,600 Speaker 1: I got an SPX back twelve months up, nineteen point 159 00:08:24,680 --> 00:08:28,440 Speaker 1: eight percent, the dow up. That's the pressure the people 160 00:08:28,480 --> 00:08:32,480 Speaker 1: that admire you face. As I got straight equities, passive fund, 161 00:08:32,800 --> 00:08:36,480 Speaker 1: Vanguard killing it. How do you respond to that? First 162 00:08:36,520 --> 00:08:38,840 Speaker 1: of all, our clients love us because of the we 163 00:08:38,920 --> 00:08:43,600 Speaker 1: separate alpha and beta. The important Just explain that that's 164 00:08:43,600 --> 00:08:47,320 Speaker 1: important we have we have two types of funds. We 165 00:08:47,440 --> 00:08:50,800 Speaker 1: have a pure alpha fund in which the individual can 166 00:08:50,840 --> 00:08:54,160 Speaker 1: take that alpha and attach it to any asset class, 167 00:08:54,559 --> 00:08:57,440 Speaker 1: so they can set an equity benchmark and put the 168 00:08:57,480 --> 00:09:00,599 Speaker 1: alpha on top of that benchmark. In sixteen out of 169 00:09:00,679 --> 00:09:03,760 Speaker 1: lass sixteen years, we have had positive alpha. So if 170 00:09:03,800 --> 00:09:07,400 Speaker 1: they chose an equity benchmark and they put that alpha, 171 00:09:07,480 --> 00:09:10,400 Speaker 1: they would have had an alpha. Uh, that's positive whatever 172 00:09:10,440 --> 00:09:15,360 Speaker 1: you attach it to. And beta is the structure the 173 00:09:15,440 --> 00:09:19,040 Speaker 1: passive portfolio. What portfolio do you want? So we have 174 00:09:19,080 --> 00:09:22,199 Speaker 1: an all weather portfolio, which is our risk parody portfolio. 175 00:09:22,280 --> 00:09:26,720 Speaker 1: We describe okay, and that is our passive beta. So 176 00:09:26,840 --> 00:09:30,679 Speaker 1: one can choose what we think is the best beta portfolio. 177 00:09:31,000 --> 00:09:34,200 Speaker 1: Therefore there's no alpha. Alpha is the deviation from the 178 00:09:34,240 --> 00:09:37,080 Speaker 1: benchmark DA had more value or so you can have 179 00:09:37,160 --> 00:09:39,679 Speaker 1: the best beta portfolio or you can have the the 180 00:09:39,880 --> 00:09:42,600 Speaker 1: what we believe is the best alpha portfolio. So because 181 00:09:42,600 --> 00:09:46,679 Speaker 1: we've performed had positive expected alpha in sixteen out of 182 00:09:46,679 --> 00:09:50,080 Speaker 1: the last sixteen years, and we've done and had twenty 183 00:09:50,120 --> 00:09:52,800 Speaker 1: three out of less now it's less than it has been. 184 00:09:53,360 --> 00:09:56,920 Speaker 1: But if they don't compare it to equities at the time, right, 185 00:09:57,160 --> 00:10:00,439 Speaker 1: because In other words, it's it's above equities is the 186 00:10:00,480 --> 00:10:02,240 Speaker 1: way that they look at it. It's up to them 187 00:10:02,360 --> 00:10:04,440 Speaker 1: to choose whether they want the equity bench board. If 188 00:10:04,440 --> 00:10:06,400 Speaker 1: you're just joining us, Ray Dalio, with us, We've got 189 00:10:06,440 --> 00:10:09,160 Speaker 1: lots more to talk about well continually, Mr Dalio of Bridgewater. 190 00:10:09,240 --> 00:10:12,240 Speaker 1: The book is principles doing better than what have you sold? 191 00:10:12,240 --> 00:10:14,200 Speaker 1: The movie right here? Is there gonna be a movie? 192 00:10:14,200 --> 00:10:17,959 Speaker 1: Who's playing Ray Dalio? Come on? Who? No movie rights damp? 193 00:10:18,440 --> 00:10:32,920 Speaker 1: Ray Dalio with us, and we will continue. I'm Bloomberg Radio. 194 00:10:33,000 --> 00:10:36,040 Speaker 1: We welcome all of you on Bloomberg Television worldwide. If 195 00:10:36,040 --> 00:10:37,680 Speaker 1: I can get the tumb over. It's like the Old 196 00:10:37,720 --> 00:10:41,640 Speaker 1: and the New Testament Principles, Ray Dalio, and both David 197 00:10:41,679 --> 00:10:45,880 Speaker 1: Ger and I agree there's some huge individual initiative in 198 00:10:45,920 --> 00:10:49,760 Speaker 1: here to think better and do better over the career 199 00:10:49,760 --> 00:10:52,480 Speaker 1: of Mr Dalio. Of course at Bridgewater, Ray, I want 200 00:10:52,480 --> 00:10:54,480 Speaker 1: to ask one more financial question here that we've been 201 00:10:54,520 --> 00:10:56,440 Speaker 1: talking on, and I know David wants to go to. 202 00:10:56,880 --> 00:11:00,160 Speaker 1: So much of what the nation is looking at right now. 203 00:11:00,559 --> 00:11:03,320 Speaker 1: We see every day Cathy Burton and our team and 204 00:11:03,360 --> 00:11:08,560 Speaker 1: hedge funds, people returning money from hedge funds. What Have 205 00:11:08,640 --> 00:11:10,640 Speaker 1: you ever had to do that? Have you ever had 206 00:11:10,679 --> 00:11:14,160 Speaker 1: to return money to investors because things just don't feel 207 00:11:14,160 --> 00:11:17,880 Speaker 1: good right now? Anything like that. We have caps, and 208 00:11:17,920 --> 00:11:20,679 Speaker 1: we've always had caps. We've returned money over a long 209 00:11:20,720 --> 00:11:25,360 Speaker 1: period of time with within this is the recent underperformance 210 00:11:25,400 --> 00:11:28,160 Speaker 1: of hedge funds and the pressure to get back. What 211 00:11:28,240 --> 00:11:30,920 Speaker 1: do you do? Just wait? Do you take vacations waiting 212 00:11:31,240 --> 00:11:33,960 Speaker 1: to get back to the right non volatile excuse me, 213 00:11:34,040 --> 00:11:38,560 Speaker 1: the right volatile environment. I think I explained a little 214 00:11:38,559 --> 00:11:42,200 Speaker 1: bit about how it works right for us. We separate 215 00:11:42,280 --> 00:11:45,120 Speaker 1: alpha and beta. Right, So there's alpha, which is the 216 00:11:45,200 --> 00:11:47,719 Speaker 1: value added, and that's a pure alpha fund, and then 217 00:11:47,840 --> 00:11:50,480 Speaker 1: people can attach that to whatever beta they want. So 218 00:11:50,520 --> 00:11:53,400 Speaker 1: if they say I want equities at plus your your 219 00:11:53,400 --> 00:11:55,880 Speaker 1: alpha and your pure alpha fund, they get the alpha 220 00:11:55,880 --> 00:11:59,640 Speaker 1: plus whatever the beta is. If they have cash and 221 00:11:59,679 --> 00:12:02,720 Speaker 1: they can pair it with um an equity return, that's 222 00:12:02,760 --> 00:12:05,520 Speaker 1: not a smart thing to do. So we're institutional clients 223 00:12:06,000 --> 00:12:08,480 Speaker 1: compare it with the asset class that they put it against. 224 00:12:08,960 --> 00:12:12,240 Speaker 1: And so because we've added value in sixteen or less 225 00:12:12,240 --> 00:12:15,320 Speaker 1: sixteen years, and we're adding value less than we normally 226 00:12:15,360 --> 00:12:18,160 Speaker 1: do because volatility has been less, but still we're added 227 00:12:18,240 --> 00:12:22,240 Speaker 1: value net of fees UM, they're getting positive alpha, so 228 00:12:22,320 --> 00:12:25,440 Speaker 1: they have in our case, they give us. They tend 229 00:12:25,480 --> 00:12:27,600 Speaker 1: to give us money whenever there's an opportunity to give 230 00:12:27,679 --> 00:12:30,160 Speaker 1: us money. Now the question is what is a hedge fund? Right? 231 00:12:30,480 --> 00:12:33,040 Speaker 1: If a hedge fund is compared against the stock and 232 00:12:33,080 --> 00:12:36,040 Speaker 1: you're having a cash and you're producing that value added 233 00:12:36,160 --> 00:12:40,000 Speaker 1: and you're disappointed, then you're probably naive. If that entity 234 00:12:40,120 --> 00:12:43,640 Speaker 1: is meant to beat the the equity x markets or something, 235 00:12:43,960 --> 00:12:46,760 Speaker 1: then that's the passive. So you have to pick. The 236 00:12:46,800 --> 00:12:48,800 Speaker 1: investors got to pick one way or another because when 237 00:12:48,840 --> 00:12:51,000 Speaker 1: the bear market comes along, how do they deal with 238 00:12:51,040 --> 00:12:54,040 Speaker 1: the bear market? So it's becomes a strategic question. I 239 00:12:54,080 --> 00:12:58,440 Speaker 1: think the smart investor UM institutional investors are ours know 240 00:12:58,559 --> 00:13:00,920 Speaker 1: how to separate alpha and bay to make that I 241 00:13:01,000 --> 00:13:03,600 Speaker 1: gotta make news here this morning. Are you predicting amparer market? 242 00:13:03,640 --> 00:13:05,360 Speaker 1: It seems like every Friday all the doom and the 243 00:13:05,400 --> 00:13:08,600 Speaker 1: gloom comes out of higher interest rates, lower stock prices. 244 00:13:08,880 --> 00:13:12,760 Speaker 1: Can read predict negative eighteen percent in the equity markets. 245 00:13:12,840 --> 00:13:16,360 Speaker 1: Now we're um, we've been long ecomity markets and you know, 246 00:13:16,640 --> 00:13:19,839 Speaker 1: without getting too much into our positions, let's get into 247 00:13:19,880 --> 00:13:22,160 Speaker 1: you let's get into positions I can tell you because 248 00:13:22,200 --> 00:13:26,160 Speaker 1: we don't get into our positions. But anyway, I'm saying no, 249 00:13:26,280 --> 00:13:29,520 Speaker 1: the answer to your question. I mean, eventually it comes along, 250 00:13:29,720 --> 00:13:33,000 Speaker 1: but we're in a different environment. Now here's here's the difference. Okay, 251 00:13:33,040 --> 00:13:38,160 Speaker 1: and then David jumping from from Okay, from two thousand 252 00:13:38,240 --> 00:13:41,679 Speaker 1: and eight until two thousand and seventeen, we were in 253 00:13:41,720 --> 00:13:45,120 Speaker 1: a certain type of environment, and that environment it was 254 00:13:45,160 --> 00:13:47,760 Speaker 1: one in which there was the pushing of interest rates 255 00:13:47,760 --> 00:13:51,960 Speaker 1: down to the point of creating negative interest rates and 256 00:13:52,160 --> 00:13:56,400 Speaker 1: with a positive carry plot by doing quantitative easing to 257 00:13:56,480 --> 00:14:00,960 Speaker 1: push money into the system. Two thousand and seventeen is 258 00:14:01,000 --> 00:14:03,720 Speaker 1: the transition of an ending of all of that all 259 00:14:03,760 --> 00:14:06,559 Speaker 1: around the world, and we are entering a new era 260 00:14:06,920 --> 00:14:09,320 Speaker 1: in which there is going to be and there is 261 00:14:09,640 --> 00:14:13,720 Speaker 1: the raising of interest rates and the reducing of quantitative easy. 262 00:14:14,000 --> 00:14:18,280 Speaker 1: That action that they took in that produced significantly bad 263 00:14:18,360 --> 00:14:21,320 Speaker 1: real interest rates. I mean the real interest rates today 264 00:14:21,400 --> 00:14:25,640 Speaker 1: ten year on the tenure um real interest rates are 265 00:14:25,680 --> 00:14:28,680 Speaker 1: about a half a percent next to nothing, next to nothing, 266 00:14:29,080 --> 00:14:31,520 Speaker 1: and the break even inflation right for ten years is 267 00:14:31,520 --> 00:14:35,240 Speaker 1: about one eight percent. So that's those numbers are very 268 00:14:35,280 --> 00:14:38,600 Speaker 1: low because of let's call it repression, in order to 269 00:14:38,600 --> 00:14:40,960 Speaker 1: get the economy to do that. We are now in 270 00:14:40,960 --> 00:14:44,360 Speaker 1: a transition, a whole different environment. That's the equivalent of 271 00:14:44,560 --> 00:14:47,440 Speaker 1: entering the late stage of the cycle, and that's when 272 00:14:47,440 --> 00:14:51,680 Speaker 1: there is a tightening. Tightening has become progressively more concerning 273 00:14:51,720 --> 00:14:54,600 Speaker 1: because as you move along there are more and more 274 00:14:54,600 --> 00:14:58,400 Speaker 1: difficult to get perfect. So as we're progressing, we are 275 00:14:58,520 --> 00:15:01,320 Speaker 1: entering a period of greater risk and the nature of 276 00:15:01,320 --> 00:15:03,400 Speaker 1: the market. So when you look at the bond market 277 00:15:03,520 --> 00:15:06,200 Speaker 1: right now, there is risk in the bond rock. There's 278 00:15:06,240 --> 00:15:08,120 Speaker 1: looks to me as a significant amount of risk in 279 00:15:08,160 --> 00:15:10,840 Speaker 1: the bond market as that. So now let's go to 280 00:15:10,880 --> 00:15:13,240 Speaker 1: the policies that are behind well, let's bring in David. 281 00:15:13,320 --> 00:15:16,200 Speaker 1: Go to the policies. The good news is Ray Dalio 282 00:15:16,280 --> 00:15:18,200 Speaker 1: is not in the shortlist at the Fed. Well on 283 00:15:18,200 --> 00:15:20,680 Speaker 1: that note, Central Bank squarely and focus here. We just 284 00:15:20,720 --> 00:15:22,720 Speaker 1: heard from the e c B. We're waiting to hear 285 00:15:22,720 --> 00:15:24,280 Speaker 1: who the President is going to pick to lead the Fed. 286 00:15:24,360 --> 00:15:26,480 Speaker 1: Let me ask you a two part question, how much 287 00:15:26,520 --> 00:15:28,880 Speaker 1: does personality matter at the Federal Reserve? I look at 288 00:15:28,960 --> 00:15:31,360 Speaker 1: John Taylor and think maybe he's a Ray Dalio kind 289 00:15:31,360 --> 00:15:33,560 Speaker 1: of guy. He's Scott rules or principles of his own 290 00:15:33,600 --> 00:15:36,600 Speaker 1: that he's health throughout his his career. And on that note, 291 00:15:36,600 --> 00:15:38,160 Speaker 1: what would you say to the next chair the FED 292 00:15:38,320 --> 00:15:40,320 Speaker 1: to what he or she needs to focus on when 293 00:15:40,360 --> 00:15:42,800 Speaker 1: it comes to the health of the U S economy. 294 00:15:43,560 --> 00:15:47,840 Speaker 1: A bunch of questions in there, so uh, personality. Again, 295 00:15:47,920 --> 00:15:50,760 Speaker 1: I think the real question is principles. If you were 296 00:15:50,760 --> 00:15:53,200 Speaker 1: to write them down and articulate them and then discuss 297 00:15:53,280 --> 00:15:55,320 Speaker 1: them through history over period of time, I think that's 298 00:15:55,320 --> 00:15:58,640 Speaker 1: a good thing. They also have very different principles and 299 00:15:58,680 --> 00:16:01,840 Speaker 1: so such as it matters in terms of quantitative easing 300 00:16:02,120 --> 00:16:06,160 Speaker 1: and also whether it's too tightened too to loose. So 301 00:16:06,240 --> 00:16:08,800 Speaker 1: I do think it possible it can matter a lot 302 00:16:08,960 --> 00:16:12,280 Speaker 1: in terms of what the monetary policy is, particularly the 303 00:16:12,280 --> 00:16:15,240 Speaker 1: notion of about the quantitative easening and whether it's too 304 00:16:15,320 --> 00:16:18,520 Speaker 1: tight or too easy. It can matter a lot. Um 305 00:16:18,600 --> 00:16:22,840 Speaker 1: And then we have the pace at which from FED policy, 306 00:16:22,960 --> 00:16:25,520 Speaker 1: since we're talking about it, the pace at which there's 307 00:16:25,680 --> 00:16:28,120 Speaker 1: an unwinding of the balance sheet. You know, I look 308 00:16:28,160 --> 00:16:30,720 Speaker 1: at those numbers and um, I don't think they're going 309 00:16:30,800 --> 00:16:33,520 Speaker 1: to be able to continue to that pace because it's 310 00:16:33,520 --> 00:16:35,800 Speaker 1: equivalent of something like two and a half percent of GDP, 311 00:16:36,520 --> 00:16:38,680 Speaker 1: and if you have that happening at the same time 312 00:16:38,680 --> 00:16:41,680 Speaker 1: as there's increased budget deficits, we could have a budget 313 00:16:41,720 --> 00:16:44,480 Speaker 1: deficit increase of another one and alf percent of GDP. 314 00:16:45,040 --> 00:16:47,280 Speaker 1: That's a big number in the supply demand of bonds. 315 00:16:47,320 --> 00:16:49,440 Speaker 1: I mean, think about that. Okay, there's going to be 316 00:16:49,520 --> 00:16:52,880 Speaker 1: that amount of effective selling of credit by the Federal Reserve. 317 00:16:53,360 --> 00:16:56,080 Speaker 1: Big are you big numbering that? With the tax reform 318 00:16:56,200 --> 00:17:00,520 Speaker 1: proposed as Douglas holtz Ecan talks about, we're going to five, 319 00:17:00,640 --> 00:17:05,399 Speaker 1: six or seven of deficit to GDP, where we will 320 00:17:05,440 --> 00:17:10,479 Speaker 1: almost certainly have a significant move in that direction. So 321 00:17:10,640 --> 00:17:12,560 Speaker 1: you could even see it in the market action, in 322 00:17:12,560 --> 00:17:15,560 Speaker 1: other words, on days where it looks like they're making 323 00:17:15,560 --> 00:17:17,720 Speaker 1: more progress to the bond markets, more inclined to sell 324 00:17:17,760 --> 00:17:20,560 Speaker 1: off days that they're making less progress to bond market 325 00:17:20,640 --> 00:17:23,560 Speaker 1: because there's going to be probably a larger deficit and 326 00:17:23,640 --> 00:17:26,560 Speaker 1: that means more selling of bonds at the same time 327 00:17:26,600 --> 00:17:29,160 Speaker 1: as there's more selling of bonds by the Federal Reserve. 328 00:17:29,280 --> 00:17:31,720 Speaker 1: In terms of the balance you change now, I think 329 00:17:31,720 --> 00:17:34,000 Speaker 1: they'll be cautious in this, but when you're in this 330 00:17:34,040 --> 00:17:37,199 Speaker 1: part of the cycle, it's very delicate. And this is 331 00:17:37,240 --> 00:17:40,480 Speaker 1: not just the FED. This is what we're The movement 332 00:17:40,520 --> 00:17:42,800 Speaker 1: in the c B is going to be analogous to that. 333 00:17:42,960 --> 00:17:45,639 Speaker 1: So we're talking now today's meeting is what is the 334 00:17:45,680 --> 00:17:48,320 Speaker 1: pace of doing that? But we know the direction. And 335 00:17:48,359 --> 00:17:51,240 Speaker 1: if you move further along you know the direction. You 336 00:17:51,280 --> 00:17:55,120 Speaker 1: know the direction. And in Japan a little bit slower, 337 00:17:55,440 --> 00:17:57,480 Speaker 1: you know the direction. In China, as we have to 338 00:17:57,600 --> 00:17:59,920 Speaker 1: go from the Nine People's Congress and you go beyond it, 339 00:18:00,320 --> 00:18:02,520 Speaker 1: there's going to be more of a tightening of credit. 340 00:18:02,840 --> 00:18:05,919 Speaker 1: So the complexion of the world that we're in is 341 00:18:06,040 --> 00:18:09,879 Speaker 1: changing in a profound way. Every decade practically has uh 342 00:18:10,000 --> 00:18:13,359 Speaker 1: defining characteristics. You know, the sixties was a period of 343 00:18:13,840 --> 00:18:17,720 Speaker 1: strong growth, not much inflation. Seventies this is we're going 344 00:18:17,800 --> 00:18:20,120 Speaker 1: to have a period. We're gonna enter a new period 345 00:18:20,359 --> 00:18:22,119 Speaker 1: that's going to be quite different than the one that 346 00:18:22,119 --> 00:18:23,960 Speaker 1: we've been Eight ways to go here, We'll run out 347 00:18:24,000 --> 00:18:25,920 Speaker 1: of time because your answers are too long. I gotta 348 00:18:25,920 --> 00:18:27,760 Speaker 1: work on that. You gotta go to interview camp and 349 00:18:27,760 --> 00:18:31,959 Speaker 1: do shorter answers. I'm kidding, right. We just interviewed Richard Taylor, 350 00:18:32,240 --> 00:18:35,840 Speaker 1: the Nobel Prize winner in behavioral economics. In the back 351 00:18:35,880 --> 00:18:39,320 Speaker 1: of your book Principles, you have in your bibliography the 352 00:18:39,440 --> 00:18:44,040 Speaker 1: giant Mr Kanman of Princeton, Thinking fast, Thinking Slow. What 353 00:18:44,160 --> 00:18:48,359 Speaker 1: have you learned from the behavioral economists that you brought 354 00:18:48,480 --> 00:18:52,280 Speaker 1: over to your book Principles. I learned. I learned that 355 00:18:52,320 --> 00:18:55,480 Speaker 1: there are two us in everybody. Right. There's the upper 356 00:18:55,600 --> 00:19:00,639 Speaker 1: level thoughtful um you that's not emotionally carried away. And 357 00:19:00,680 --> 00:19:02,960 Speaker 1: there's the lower level you, which is a part of 358 00:19:02,960 --> 00:19:05,680 Speaker 1: the brain, the animal brain, that has that emotional uh 359 00:19:06,000 --> 00:19:08,560 Speaker 1: carried away. But also a lot of good things like 360 00:19:08,720 --> 00:19:13,040 Speaker 1: inspiration and um intuition come from that. And I've learned 361 00:19:13,200 --> 00:19:18,000 Speaker 1: how important it is to go slow and reconcile those 362 00:19:18,040 --> 00:19:20,679 Speaker 1: two things to to determine what you want. And that 363 00:19:20,880 --> 00:19:22,840 Speaker 1: is the exercise, in other words, when I'm in the 364 00:19:22,880 --> 00:19:25,959 Speaker 1: heat of the moment and I'm dealing with things, and 365 00:19:26,000 --> 00:19:28,240 Speaker 1: then I instead come out of that heat at the 366 00:19:28,280 --> 00:19:31,240 Speaker 1: moment and I've slowed down, and I write down my 367 00:19:31,440 --> 00:19:36,760 Speaker 1: criteria for making decisions, and I build a decision making system. 368 00:19:36,800 --> 00:19:39,479 Speaker 1: So it's like plane poker that I know if I 369 00:19:39,520 --> 00:19:42,160 Speaker 1: operated in this way, I could know what the results are. 370 00:19:42,560 --> 00:19:45,040 Speaker 1: I'm in a position that I can execute that like 371 00:19:45,119 --> 00:19:48,000 Speaker 1: creating a computer chess game. That's been great. We do 372 00:19:48,080 --> 00:19:50,680 Speaker 1: this for like six hours. I got too many questions ago, 373 00:19:50,720 --> 00:19:52,520 Speaker 1: I want to talk about Ed Thorpe and m T. 374 00:19:54,040 --> 00:19:56,160 Speaker 1: There'll be another book. When is the next book out? 375 00:19:56,960 --> 00:19:59,560 Speaker 1: Probably on economic investment principles for a year and a 376 00:19:59,600 --> 00:20:01,920 Speaker 1: half we wait for the movie. It'll be great principles. 377 00:20:02,000 --> 00:20:06,840 Speaker 1: Ray Dalio, thank you so much, really really interesting book 378 00:20:06,920 --> 00:20:10,159 Speaker 1: on the individual moving through life, with a lot of 379 00:20:10,240 --> 00:20:13,000 Speaker 1: lessons learned from Mr Dalio. He of course runs a 380 00:20:13,080 --> 00:20:17,440 Speaker 1: small investment shop up in Connecticut called Bridgewater as well. 381 00:20:26,800 --> 00:20:30,960 Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and 382 00:20:31,040 --> 00:20:36,400 Speaker 1: listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast 383 00:20:36,480 --> 00:20:40,000 Speaker 1: platform you prefer. I'm on Twitter at Tom Keene. David 384 00:20:40,040 --> 00:20:44,199 Speaker 1: Gura is at David Gura. Before the podcast, you can 385 00:20:44,240 --> 00:20:47,359 Speaker 1: always catch us worldwide. I'm Bloomberg Radio.