Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene with
Speaker 1: David Gura. Daily we bring you insight from the best
Speaker 1: of economics, finance, investment, and international relations. Find Bloomberg Surveillance
Speaker 1: on Apple Podcasts, SoundCloud, Bloomberg dot Com, and of course,
Speaker 1: on the Bloomberg. He has made the sir, how many
Speaker 1: book interviews have you done? I mean, are you up
Speaker 1: to a hundred forty two yet? But I've done plenty.
Speaker 1: The book has been out and he has done plenty
Speaker 1: of uh interviews. It has launched to the top of
Speaker 1: the New York Times bestseller list. Bill Gates helping that out,
Speaker 1: saying that this provides guidance. I want to go to
Speaker 1: Mr Gates here in a moment principles, Ray Dalio, of
Speaker 1: course with Bridgewater, and yes we'll talk about the investment environment,
Speaker 1: alternative assets and that in a moment. Congratulations are Ray
Speaker 1: and what I want to know? And you finished strong
Speaker 1: in your book with your final chapter, which is the
Speaker 1: great mystery here and for heaven's sake, don't overlook governance.
Speaker 1: Can you take the principles of an entrepreneurial guy like
Speaker 1: you and can you bring them over to big corporations
Speaker 1: like Microsoft. Any organization can determine how the people in
Speaker 1: the organization we're going to deal with each other, right,
Speaker 1: I mean, I think that that's the most important thing.
Speaker 1: Right down your principles, which are basically the recipes for success,
Speaker 1: and agree on them so that you can have an
Speaker 1: idea meritocracy. What I'm arguing is that an idea meritocracy
Speaker 1: is the best way to have an organization. And I
Speaker 1: learned that in the markets, because in order to be
Speaker 1: successful in the markets, I know that I don't have
Speaker 1: all the answers, and I learned humility and that what
Speaker 1: I wanted to do is to have the best independent thinkers,
Speaker 1: people who will disagree with me and know how to
Speaker 1: each agreement. So I need to have the rules of
Speaker 1: the game clear so we could have that independent thing.
Speaker 1: So you and Don Barton of mckensey go into a
Speaker 1: given big blue chip company. Let's pick on Mr Diamond
Speaker 1: and I guess he liked your book to Jamie Diamond
Speaker 1: and JP Morgan, You guys go into JP Morgan. Are
Speaker 1: you going to give everybody a JP Morgan and iPad
Speaker 1: and have them judge each meeting? I mean, if I'm
Speaker 1: with Michael Faroli David Gura. I'm gonna be like Faroli.
Speaker 1: You were terrible there on potential GDP. I think the
Speaker 1: basic question is whether you're gonna have an idea meritocracy.
Speaker 1: Forget the iPad thing, forget any of the tools things.
Speaker 1: The question is if you and I were going to
Speaker 1: have a partnership, how we're gonna be with each other.
Speaker 1: You better write down the rules. And I'm saying that
Speaker 1: the better way to do it is to have an
Speaker 1: idea of meritocracy. And what that means is how do
Speaker 1: you know if there's a disagreement, how do you know
Speaker 1: whether you're right or wrong? And how do you get
Speaker 1: to the better answer? Then you could have individually right.
Speaker 1: So that's a fundamental notion. And if you look, there
Speaker 1: are two types of systems you ordinarily can have like
Speaker 1: the uh the autocracy where the boss is always right
Speaker 1: and then you're going to dictate it and everybody walks
Speaker 1: around thinking whatever they think, or you're going to have
Speaker 1: a democracy. Can't have it just second, you can't have
Speaker 1: a democracy where one man, one vote is So how
Speaker 1: do you get through disagreement? Intelligence? Okay, we've got radical
Speaker 1: transparency here to David, your and I are not on
Speaker 1: speaking right. You emphasize several times in the books the
Speaker 1: need to to to write things down, to think about this,
Speaker 1: to be self aware of one's own principles, and you
Speaker 1: write about how you wish you could look back at
Speaker 1: other leaders in business and and in economics and government
Speaker 1: and get their sense of principles. How do you get
Speaker 1: that kind of self awareness or how do you begin
Speaker 1: to think about things in this sort of way? Well,
Speaker 1: I could describe how I got it. I I wrote
Speaker 1: down every time I made a decision, I wrote down
Speaker 1: the reason I made the decision. I closed the trade,
Speaker 1: and I reflected on it. And then I began to
Speaker 1: see that if I could take those criteria, I could
Speaker 1: test how they would have performed in the past. That
Speaker 1: opened my eyes. Then I began to have a discussions
Speaker 1: with other people about the people I work with, on
Speaker 1: what are our criteria, not just what is our decision?
Speaker 1: And then I when I found that we could agree
Speaker 1: on the criteria, I found that we could put them
Speaker 1: into algorithms, and we could take those algorithms and then
Speaker 1: have the computer make decisions in parallel with us. And
Speaker 1: that was mind blowing, right, So, If you don't know
Speaker 1: your criteria for making decisions and you don't have it
Speaker 1: written down and you have it clear, you're just gonna
Speaker 1: walk into the snowstorm every day and you're going to
Speaker 1: see this blizzard of stuff coming out you and you
Speaker 1: won't know how to deal with it. If you have
Speaker 1: a game plan and you start to realize that everything
Speaker 1: that comes at you is another one of those in
Speaker 1: other words, it happens over and over again, and what's
Speaker 1: your game plan? Those are principles and that's powerful. Thew
Speaker 1: did you come to to the awareness that these could
Speaker 1: be things for self improvement, They could be things that
Speaker 1: define how you live your life personally and in business,
Speaker 1: and yet they could also be transferred to the company
Speaker 1: that you're running, that they were more universally applicable than
Speaker 1: you might have thought at the beginning. Be clear on
Speaker 1: your criteria, right, be clear in your criteria. If you're
Speaker 1: clear on your criteria, you write down your recipes not
Speaker 1: only do you know them, and they can be converted
Speaker 1: into algorithms, or you're clear with each other on how
Speaker 1: to behave and when something comes along, your strategic and
Speaker 1: you're not just in the blizzard. That is what I'm
Speaker 1: passing along. In other words, whatever success I had in
Speaker 1: life has not been due to me. Okay, it's been
Speaker 1: due to the principles that are in that book. One
Speaker 1: more question on principles and I want to move on.
Speaker 1: I want to know what's in this for the kid
Speaker 1: walking into Long Island University. He's seventeen, he's eighteen, he
Speaker 1: grew up in Queens with a wonderfully gifted jazz musician father.
Speaker 1: That kid walks in What is the seventeen or eighteen
Speaker 1: year old get out of principles? For me, it was
Speaker 1: I didn't have the approached the principles then, right, I
Speaker 1: just dove into life and then I encountered things, and
Speaker 1: then years later I discovered that I would write those
Speaker 1: things down, and that's kind of the magic. And so
Speaker 1: this is just a cookbook of the principles work for
Speaker 1: me and forget about me. You I'm recommending to you,
Speaker 1: and I'm asking other people I'm asking. I won't list
Speaker 1: the people Bill get Jamie Diamonds, people like Mike Bloomberg.
Speaker 1: If they wrote down their recipes for success of what
Speaker 1: they did and people could look at them, it would
Speaker 1: be tremendous for other people I'm gonna give you a
Speaker 1: major marks for the individual nature of your book. This
Speaker 1: is a naked book. Principles in the individual treatment of
Speaker 1: it is first rate. I want to go now to
Speaker 1: how you apply this over to investments. Once again, we're
Speaker 1: in a period where your community, the hedgeman community used
Speaker 1: to double digit and it returns to clients it ain't happening.
Speaker 1: We're in a single digit with even some negative numbers
Speaker 1: for hedge funds. How long can the community put up
Speaker 1: with this under performance before the money starts walking out
Speaker 1: the door? I think it's worth taking a second and saying,
Speaker 1: what is the character of the environment? Great, totally agree? Okay,
Speaker 1: And then that applies to things um uh so, First,
Speaker 1: low volatility of inflation, low volatility of economic growth, low
Speaker 1: volatility of interest rate changes means low volatility of market agreed.
Speaker 1: And on a risk parity strategy, is you invented? It's tough?
Speaker 1: Uh No, because our our returns for risparity this year
Speaker 1: have been excellent in in other words, normal, and that's
Speaker 1: because the expected return of equities, the actual return of equities,
Speaker 1: and the actual return of bonds relative to the return
Speaker 1: of cash and most asset classes. Uh continues to have
Speaker 1: a premium the worst asset class you can have his cash, okay,
Speaker 1: And as long as um and throughout history, the only
Speaker 1: time that cash hasn't been the right has been the
Speaker 1: better investment than a diverse, fied portfolio of other assets
Speaker 1: has been during terrible economic conditions that result in reversals
Speaker 1: like two thousand and eight. So but let me answer
Speaker 1: your question in terms of the environment right by low
Speaker 1: and volatility in terms of growth, and there's reasons for it.
Speaker 1: Low volatility of inflation and low volatility of interest rates
Speaker 1: short term interest rates. We're in a situation that generally speaking,
Speaker 1: we have a low volatile environment and we have a
Speaker 1: low return environment, and we have those things for structural reason.
Speaker 1: And Rydal, you know, if I'm a Verizon walked in
Speaker 1: the door years ago and put their faith behind you,
Speaker 1: I got an SPX back twelve months up, nineteen point
Speaker 1: eight percent, the dow up. That's the pressure the people
Speaker 1: that admire you face. As I got straight equities, passive fund,
Speaker 1: Vanguard killing it. How do you respond to that? First
Speaker 1: of all, our clients love us because of the we
Speaker 1: separate alpha and beta. The important Just explain that that's
Speaker 1: important we have we have two types of funds. We
Speaker 1: have a pure alpha fund in which the individual can
Speaker 1: take that alpha and attach it to any asset class,
Speaker 1: so they can set an equity benchmark and put the
Speaker 1: alpha on top of that benchmark. In sixteen out of
Speaker 1: lass sixteen years, we have had positive alpha. So if
Speaker 1: they chose an equity benchmark and they put that alpha,
Speaker 1: they would have had an alpha. Uh, that's positive whatever
Speaker 1: you attach it to. And beta is the structure the
Speaker 1: passive portfolio. What portfolio do you want? So we have
Speaker 1: an all weather portfolio, which is our risk parody portfolio.
Speaker 1: We describe okay, and that is our passive beta. So
Speaker 1: one can choose what we think is the best beta portfolio.
Speaker 1: Therefore there's no alpha. Alpha is the deviation from the
Speaker 1: benchmark DA had more value or so you can have
Speaker 1: the best beta portfolio or you can have the the
Speaker 1: what we believe is the best alpha portfolio. So because
Speaker 1: we've performed had positive expected alpha in sixteen out of
Speaker 1: the last sixteen years, and we've done and had twenty
Speaker 1: three out of less now it's less than it has been.
Speaker 1: But if they don't compare it to equities at the time, right,
Speaker 1: because In other words, it's it's above equities is the
Speaker 1: way that they look at it. It's up to them
Speaker 1: to choose whether they want the equity bench board. If
Speaker 1: you're just joining us, Ray Dalio, with us, We've got
Speaker 1: lots more to talk about well continually, Mr Dalio of Bridgewater.
Speaker 1: The book is principles doing better than what have you sold?
Speaker 1: The movie right here? Is there gonna be a movie?
Speaker 1: Who's playing Ray Dalio? Come on? Who? No movie rights damp?
Speaker 1: Ray Dalio with us, and we will continue. I'm Bloomberg Radio.
Speaker 1: We welcome all of you on Bloomberg Television worldwide. If
Speaker 1: I can get the tumb over. It's like the Old
Speaker 1: and the New Testament Principles, Ray Dalio, and both David
Speaker 1: Ger and I agree there's some huge individual initiative in
Speaker 1: here to think better and do better over the career
Speaker 1: of Mr Dalio. Of course at Bridgewater, Ray, I want
Speaker 1: to ask one more financial question here that we've been
Speaker 1: talking on, and I know David wants to go to.
Speaker 1: So much of what the nation is looking at right now.
Speaker 1: We see every day Cathy Burton and our team and
Speaker 1: hedge funds, people returning money from hedge funds. What Have
Speaker 1: you ever had to do that? Have you ever had
Speaker 1: to return money to investors because things just don't feel
Speaker 1: good right now? Anything like that. We have caps, and
Speaker 1: we've always had caps. We've returned money over a long
Speaker 1: period of time with within this is the recent underperformance
Speaker 1: of hedge funds and the pressure to get back. What
Speaker 1: do you do? Just wait? Do you take vacations waiting
Speaker 1: to get back to the right non volatile excuse me,
Speaker 1: the right volatile environment. I think I explained a little
Speaker 1: bit about how it works right for us. We separate
Speaker 1: alpha and beta. Right, So there's alpha, which is the
Speaker 1: value added, and that's a pure alpha fund, and then
Speaker 1: people can attach that to whatever beta they want. So
Speaker 1: if they say I want equities at plus your your
Speaker 1: alpha and your pure alpha fund, they get the alpha
Speaker 1: plus whatever the beta is. If they have cash and
Speaker 1: they can pair it with um an equity return, that's
Speaker 1: not a smart thing to do. So we're institutional clients
Speaker 1: compare it with the asset class that they put it against.
Speaker 1: And so because we've added value in sixteen or less
Speaker 1: sixteen years, and we're adding value less than we normally
Speaker 1: do because volatility has been less, but still we're added
Speaker 1: value net of fees UM, they're getting positive alpha, so
Speaker 1: they have in our case, they give us. They tend
Speaker 1: to give us money whenever there's an opportunity to give
Speaker 1: us money. Now the question is what is a hedge fund? Right?
Speaker 1: If a hedge fund is compared against the stock and
Speaker 1: you're having a cash and you're producing that value added
Speaker 1: and you're disappointed, then you're probably naive. If that entity
Speaker 1: is meant to beat the the equity x markets or something,
Speaker 1: then that's the passive. So you have to pick. The
Speaker 1: investors got to pick one way or another because when
Speaker 1: the bear market comes along, how do they deal with
Speaker 1: the bear market? So it's becomes a strategic question. I
Speaker 1: think the smart investor UM institutional investors are ours know
Speaker 1: how to separate alpha and bay to make that I
Speaker 1: gotta make news here this morning. Are you predicting amparer market?
Speaker 1: It seems like every Friday all the doom and the
Speaker 1: gloom comes out of higher interest rates, lower stock prices.
Speaker 1: Can read predict negative eighteen percent in the equity markets.
Speaker 1: Now we're um, we've been long ecomity markets and you know,
Speaker 1: without getting too much into our positions, let's get into
Speaker 1: you let's get into positions I can tell you because
Speaker 1: we don't get into our positions. But anyway, I'm saying no,
Speaker 1: the answer to your question. I mean, eventually it comes along,
Speaker 1: but we're in a different environment. Now here's here's the difference. Okay,
Speaker 1: and then David jumping from from Okay, from two thousand
Speaker 1: and eight until two thousand and seventeen, we were in
Speaker 1: a certain type of environment, and that environment it was
Speaker 1: one in which there was the pushing of interest rates
Speaker 1: down to the point of creating negative interest rates and
Speaker 1: with a positive carry plot by doing quantitative easing to
Speaker 1: push money into the system. Two thousand and seventeen is
Speaker 1: the transition of an ending of all of that all
Speaker 1: around the world, and we are entering a new era
Speaker 1: in which there is going to be and there is
Speaker 1: the raising of interest rates and the reducing of quantitative easy.
Speaker 1: That action that they took in that produced significantly bad
Speaker 1: real interest rates. I mean the real interest rates today
Speaker 1: ten year on the tenure um real interest rates are
Speaker 1: about a half a percent next to nothing, next to nothing,
Speaker 1: and the break even inflation right for ten years is
Speaker 1: about one eight percent. So that's those numbers are very
Speaker 1: low because of let's call it repression, in order to
Speaker 1: get the economy to do that. We are now in
Speaker 1: a transition, a whole different environment. That's the equivalent of
Speaker 1: entering the late stage of the cycle, and that's when
Speaker 1: there is a tightening. Tightening has become progressively more concerning
Speaker 1: because as you move along there are more and more
Speaker 1: difficult to get perfect. So as we're progressing, we are
Speaker 1: entering a period of greater risk and the nature of
Speaker 1: the market. So when you look at the bond market
Speaker 1: right now, there is risk in the bond rock. There's
Speaker 1: looks to me as a significant amount of risk in
Speaker 1: the bond market as that. So now let's go to
Speaker 1: the policies that are behind well, let's bring in David.
Speaker 1: Go to the policies. The good news is Ray Dalio
Speaker 1: is not in the shortlist at the Fed. Well on
Speaker 1: that note, Central Bank squarely and focus here. We just
Speaker 1: heard from the e c B. We're waiting to hear
Speaker 1: who the President is going to pick to lead the Fed.
Speaker 1: Let me ask you a two part question, how much
Speaker 1: does personality matter at the Federal Reserve? I look at
Speaker 1: John Taylor and think maybe he's a Ray Dalio kind
Speaker 1: of guy. He's Scott rules or principles of his own
Speaker 1: that he's health throughout his his career. And on that note,
Speaker 1: what would you say to the next chair the FED
Speaker 1: to what he or she needs to focus on when
Speaker 1: it comes to the health of the U S economy.
Speaker 1: A bunch of questions in there, so uh, personality. Again,
Speaker 1: I think the real question is principles. If you were
Speaker 1: to write them down and articulate them and then discuss
Speaker 1: them through history over period of time, I think that's
Speaker 1: a good thing. They also have very different principles and
Speaker 1: so such as it matters in terms of quantitative easing
Speaker 1: and also whether it's too tightened too to loose. So
Speaker 1: I do think it possible it can matter a lot
Speaker 1: in terms of what the monetary policy is, particularly the
Speaker 1: notion of about the quantitative easening and whether it's too
Speaker 1: tight or too easy. It can matter a lot. Um
Speaker 1: And then we have the pace at which from FED policy,
Speaker 1: since we're talking about it, the pace at which there's
Speaker 1: an unwinding of the balance sheet. You know, I look
Speaker 1: at those numbers and um, I don't think they're going
Speaker 1: to be able to continue to that pace because it's
Speaker 1: equivalent of something like two and a half percent of GDP,
Speaker 1: and if you have that happening at the same time
Speaker 1: as there's increased budget deficits, we could have a budget
Speaker 1: deficit increase of another one and alf percent of GDP.
Speaker 1: That's a big number in the supply demand of bonds.
Speaker 1: I mean, think about that. Okay, there's going to be
Speaker 1: that amount of effective selling of credit by the Federal Reserve.
Speaker 1: Big are you big numbering that? With the tax reform
Speaker 1: proposed as Douglas holtz Ecan talks about, we're going to five,
Speaker 1: six or seven of deficit to GDP, where we will
Speaker 1: almost certainly have a significant move in that direction. So
Speaker 1: you could even see it in the market action, in
Speaker 1: other words, on days where it looks like they're making
Speaker 1: more progress to the bond markets, more inclined to sell
Speaker 1: off days that they're making less progress to bond market
Speaker 1: because there's going to be probably a larger deficit and
Speaker 1: that means more selling of bonds at the same time
Speaker 1: as there's more selling of bonds by the Federal Reserve.
Speaker 1: In terms of the balance you change now, I think
Speaker 1: they'll be cautious in this, but when you're in this
Speaker 1: part of the cycle, it's very delicate. And this is
Speaker 1: not just the FED. This is what we're The movement
Speaker 1: in the c B is going to be analogous to that.
Speaker 1: So we're talking now today's meeting is what is the
Speaker 1: pace of doing that? But we know the direction. And
Speaker 1: if you move further along you know the direction. You
Speaker 1: know the direction. And in Japan a little bit slower,
Speaker 1: you know the direction. In China, as we have to
Speaker 1: go from the Nine People's Congress and you go beyond it,
Speaker 1: there's going to be more of a tightening of credit.
Speaker 1: So the complexion of the world that we're in is
Speaker 1: changing in a profound way. Every decade practically has uh
Speaker 1: defining characteristics. You know, the sixties was a period of
Speaker 1: strong growth, not much inflation. Seventies this is we're going
Speaker 1: to have a period. We're gonna enter a new period
Speaker 1: that's going to be quite different than the one that
Speaker 1: we've been Eight ways to go here, We'll run out
Speaker 1: of time because your answers are too long. I gotta
Speaker 1: work on that. You gotta go to interview camp and
Speaker 1: do shorter answers. I'm kidding, right. We just interviewed Richard Taylor,
Speaker 1: the Nobel Prize winner in behavioral economics. In the back
Speaker 1: of your book Principles, you have in your bibliography the
Speaker 1: giant Mr Kanman of Princeton, Thinking fast, Thinking Slow. What
Speaker 1: have you learned from the behavioral economists that you brought
Speaker 1: over to your book Principles. I learned. I learned that
Speaker 1: there are two us in everybody. Right. There's the upper
Speaker 1: level thoughtful um you that's not emotionally carried away. And
Speaker 1: there's the lower level you, which is a part of
Speaker 1: the brain, the animal brain, that has that emotional uh
Speaker 1: carried away. But also a lot of good things like
Speaker 1: inspiration and um intuition come from that. And I've learned
Speaker 1: how important it is to go slow and reconcile those
Speaker 1: two things to to determine what you want. And that
Speaker 1: is the exercise, in other words, when I'm in the
Speaker 1: heat of the moment and I'm dealing with things, and
Speaker 1: then I instead come out of that heat at the
Speaker 1: moment and I've slowed down, and I write down my
Speaker 1: criteria for making decisions, and I build a decision making system.
Speaker 1: So it's like plane poker that I know if I
Speaker 1: operated in this way, I could know what the results are.
Speaker 1: I'm in a position that I can execute that like
Speaker 1: creating a computer chess game. That's been great. We do
Speaker 1: this for like six hours. I got too many questions ago,
Speaker 1: I want to talk about Ed Thorpe and m T.
Speaker 1: There'll be another book. When is the next book out?
Speaker 1: Probably on economic investment principles for a year and a
Speaker 1: half we wait for the movie. It'll be great principles.
Speaker 1: Ray Dalio, thank you so much, really really interesting book
Speaker 1: on the individual moving through life, with a lot of
Speaker 1: lessons learned from Mr Dalio. He of course runs a
Speaker 1: small investment shop up in Connecticut called Bridgewater as well.
Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and
Speaker 1: listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast
Speaker 1: platform you prefer. I'm on Twitter at Tom Keene. David
Speaker 1: Gura is at David Gura. Before the podcast, you can
Speaker 1: always catch us worldwide. I'm Bloomberg Radio.