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Speaker 1: Each week we unpack a story that's crucial to the
Speaker 1: world's financial capitals. I'm from Saint Laqua and this week
Speaker 1: we speak to Ray Dalio. It's been a crazy week
Speaker 1: on the markets because of Trump's tariffs. Well, Ray Dalio
Speaker 1: warns that investors are way too focused on tariffs and
Speaker 1: just not paying enough attention to the breakdown in major monetary, political,
Speaker 1: and geopolitical orders. He says the US reliance on debt
Speaker 1: to finance success and creditor countries like China holding too
Speaker 1: much debt is a worry and that will lead to
Speaker 1: our correction of these imbalances and a change in the
Speaker 1: monetary order. Let's begin, Ray Dalio, thank you so much
Speaker 1: for joining us now. This week was a little bit
Speaker 1: rough on the markets. I know you've also the way
Speaker 1: you view the world is basically by identifying five major
Speaker 1: forces that drive the rise and fall of nations and
Speaker 1: shape the global economy. So we have debt, money, economic cycles.
Speaker 1: There's internal order and disorder, external geopolitical order and disorder,
Speaker 1: acts of nature and technology. Given all these competing forces,
Speaker 1: what do you think is the most worrying right now?
Speaker 2: Yeah, I think it's important to step back and see
Speaker 2: this big picture to understand where we are and what
Speaker 2: I What I mean is there are orders, which are systems,
Speaker 2: like a monetary order. We have a monetary order, and
Speaker 2: related to that monetary order, it has to do with
Speaker 2: a debt cycle. And when you get into too much debt,
Speaker 2: it's a problem. Too much debt one man's debts another
Speaker 2: man's money. And then it's related of course to the economy,
Speaker 2: and it's related to the imbalances such as we have
Speaker 2: a very large imbalance in trade, and we have a
Speaker 2: very large imbalance in capital, and there's a supplied demand
Speaker 2: problem with debt. The second influence through time is the
Speaker 2: domestic political order in other words, for example, democracy and
Speaker 2: so on, and we are changing in a form that's
Speaker 2: very similar to the thirties. All of this pattern is
Speaker 2: very similar to the thirties, in which there's an internal
Speaker 2: conflict you know in Europe, make the trains run on time.
Speaker 2: The inefficiency, the conflict of the wealth gaps, the opportunities gaps,
Speaker 2: the left and the right getting to the point where
Speaker 2: they have irreconcilable differences, and there's great internal conflict about that.
Speaker 3: The third force changes in the.
Speaker 2: World order, the world geopolitical order, you know, which began
Speaker 2: in nineteen forty five as a result of what happened
Speaker 2: in the thirties, which is then you have a new
Speaker 2: world order, an American world order. The winning country desides
Speaker 2: how things are going to go. And we had an
Speaker 2: American world order, which is why we have the United
Speaker 2: Nations and the IMF and the World NINK and so on.
Speaker 2: In the United States, and the United States was a
Speaker 2: dominant power, and now we're having a conflict. There's no rule,
Speaker 2: who rules, and there's a conflict. Those orders are changing
Speaker 2: because of excesses. In addition, through time, there's always been
Speaker 2: acts of nature. Droughts, floods, and pandemics have killed more
Speaker 2: people than wars.
Speaker 3: And then there's technology.
Speaker 2: So those forces and you could see them in a cycle.
Speaker 2: So right now we have imbalances. We have a lot
Speaker 2: of debt, we have and it'll be it. There's a
Speaker 2: supply demand problem. We have a lot of debt with
Speaker 2: more men's debts from another men's assets. That means that
Speaker 2: some people, some holders of these debts are concerned about
Speaker 2: those both because they have.
Speaker 3: A lot of it. Then they have to buy a
Speaker 3: lot more.
Speaker 2: When this treasury runs a large deficit, that means they
Speaker 2: have to sell bonds. And then in this environment it's
Speaker 2: not as desirable. There are countries that worry about actions
Speaker 2: and so on that with China and other countries worry
Speaker 2: about those things, and so there's a supply demand balance.
Speaker 3: These are the main drivers their problems.
Speaker 2: They have to reduce the debt issue, they have to
Speaker 2: reduce the imbalances, you know, the trade imbalance and the
Speaker 2: capital and balance, particularly at a time when there's conflict
Speaker 2: and there needs to be a sense of self sufficiency
Speaker 2: that you produce it at home. And then also there's
Speaker 2: the hollowing out of the loss of manufactory.
Speaker 3: So anyway, that's the framing of it.
Speaker 2: And now we're seeing the particular manifestations and actions pertaining.
Speaker 3: To that.
Speaker 1: Y what we've lived through in the last week with
Speaker 1: these traffs by Donald Trump that really sent the markets
Speaker 1: in disarray with possible distress. Was it good idea badly
Speaker 1: thought out or was it just a bad idea.
Speaker 2: Let's go to the problem, the problem, and then we
Speaker 2: deal with the solution. The problem is in a world
Speaker 2: that's in war, almost in conflict, and there's too much
Speaker 2: debt somehow, and the hollowing out of the middle class somehow,
Speaker 2: those imbalances, which means interdependencies have got to be reduced.
Speaker 2: Now the way that was handled rather than through negotiations,
Speaker 2: you know, I'm not the politician.
Speaker 3: I'm not the negotiator.
Speaker 2: I'm not the person to say whether that style of
Speaker 2: handling it was better or worse. I would say that
Speaker 2: it dramatically affected psychology and attitude about the United States' reliability,
Speaker 2: and also it exacerbated concerns, so I would say it
Speaker 2: could have been handled better. I would also say that
Speaker 2: it's very theoretical too to think that we are in
Speaker 2: the necessary timeframe to eliminate those imbalances, which have our
Speaker 2: capital balances as well as trade imbalances. That it's difficult
Speaker 2: to make manufacturing happen here in the same way because
Speaker 2: of the structural things. Do you have the labor force,
Speaker 2: what are the regulations. It's very difficult nowadays to produce here,
Speaker 2: that's part of the bureaucracy. How do you get to
Speaker 2: become efficient? How do you get that population which has
Speaker 2: been hollowed out? Sty percent of Americans have below a
Speaker 2: sixth grade reading level and are having a problem to
Speaker 2: be productive. So can you build the alternatives that can?
Speaker 2: You build ships? And with that, I use ships as
Speaker 2: an example.
Speaker 3: If you.
Speaker 2: If you're a shipbuilder, it's going to be very difficult
Speaker 2: to in a reasonable time frame to build be become
Speaker 2: an effective shipbuilder. And even as a shipbuilder or the
Speaker 2: analogous UH industry, you still have to you have instability.
Speaker 2: You don't know if the next administration is going to
Speaker 2: have that, and then all of a sudden you're competing
Speaker 2: with the Chinese or alternative shipbuilders around the world. So
Speaker 2: I think it could have been UH. I think it
Speaker 2: could have been handled better. I think it's you know,
Speaker 2: very very to And then when you have the retaliatory tariffs,
Speaker 2: you have a situation where basically production sort of grinds
Speaker 2: to a halt because there's these interdependencies.
Speaker 3: And that is very bad.
Speaker 2: It's almost like another COVID in that it raises costs,
Speaker 2: it lowers revenues for companies, and it worsens the capital markets.
Speaker 2: That the capital markets are very important for a lot
Speaker 2: of companies to be able to do things, particularly let's say,
Speaker 2: if you're developing technologies or whatever that you so that
Speaker 2: market is tightening up. So this, I would say was
Speaker 2: not done in the best way. And I'm pleased at
Speaker 2: least that that's been changed. I think that was a
Speaker 2: smart move to change it, and we have hopefully negotiations.
Speaker 2: But you still have these very big issues and the
Speaker 2: budget issues.
Speaker 3: You see right now we're.
Speaker 2: Paying attention to the tariff.
Speaker 1: And the budget issue. Yeah, and the budget issue is
Speaker 1: probably the one that will also focus on, which I
Speaker 1: know is a subject of your new book. But did
Speaker 1: you see the risk of a global financial crisis this
Speaker 1: week on a scale of what we saw after Lehman collapsed.
Speaker 3: Yeah.
Speaker 2: Well, as explained in my earlier book, The Changing World Order,
Speaker 2: and as explained in this other book, How Countries Go
Speaker 2: Broke the Big Cycle, these risks have been I think
Speaker 2: apparent for some time. They're measurable and so on. So yes,
Speaker 2: I think that I think now when I thought before,
Speaker 2: as expressed in the book when I do the pro
Speaker 2: form of financials for the supply of debt and who
Speaker 2: are the buyers of the debt, I'm deeply concerned it'll
Speaker 2: be about the deficit will be probably in the order
Speaker 2: of seven percent of GDP. And when I do the
Speaker 2: supply demand estimates, if the demand is probably going to
Speaker 2: be closer to three percent of GDP, so there needs
Speaker 2: to be a cut in that. And in my book
Speaker 2: I explain how that could be done as it was
Speaker 2: done between nineteen ninety two and nineteen ninety eight through
Speaker 2: a mix of policies. I'm not the political person to
Speaker 2: decide which it is, but I would say there's a
Speaker 2: mantra that I have. Everybody should take the three percent
Speaker 2: pledge in one way or another. They have to bring
Speaker 2: that deficit down to that or I do believe we're
Speaker 2: going to have a supplied demand problem. And if you
Speaker 2: have that together with the other problems, the tariff problem
Speaker 2: and the like, and you have that in an environment
Speaker 2: that is socially and politically very sensitive, imagine you know
Speaker 2: how much we'll be fighting with each other if you
Speaker 2: have that perfect storm, and you know those circumstances are
Speaker 2: all significant.
Speaker 1: Have players become too big to fail in the US
Speaker 1: was you know, the rescue effectively from President Trump about that.
Speaker 3: Of course, you know, of course, of course.
Speaker 2: And that's why, in one way or another, the government,
Speaker 2: either directly through the central government or indirectly through the
Speaker 2: Central bank, always needs to make those that are makes
Speaker 2: a choice which are those that are too big to fail?
Speaker 2: And then the way they do it always is the
Speaker 2: central government does its thing, which has provide supports in
Speaker 2: one way or another, and the central bank works with
Speaker 2: the central government to create the credit and the money
Speaker 2: that's necessary to do that. And so this is always
Speaker 2: the case, and it's so this is certainly the case.
Speaker 2: We've seen this many times before.
Speaker 3: Right.
Speaker 1: Do you think some investors would have basically blown up
Speaker 1: if the President hadn't reverse course on teriffs because of
Speaker 1: the market turmoil?
Speaker 2: Yes, some some certainly would, not only just because of
Speaker 2: the tariffs, but because of the capital markets implications. So
Speaker 2: there's a spiral that is reinforcing. When the capital markets
Speaker 2: tighten up for certain companies or certain people, and then
Speaker 2: there is the concern and that goes down there needs
Speaker 2: to be.
Speaker 3: An action, and that's you know, always the case.
Speaker 2: So, yes, we have these vulnerabilities, and then we have
Speaker 2: what governments do in the face of those vulnerabilities.
Speaker 3: This is this has always happened.
Speaker 1: But so given all of this, and given the market
Speaker 1: to themal that we saw, where should regulators be looking
Speaker 1: for risks?
Speaker 2: We went through the two thousand and eight financial crisis,
Speaker 2: a number of rules were put into place about how
Speaker 2: governments should and central banks should be handling things. So
Speaker 2: many rules that there was an absence of discretion and
Speaker 2: in other words, discretion was taken away for dealing with
Speaker 2: some of these issues. It's dependent on those rules working
Speaker 2: very well. Those who went through that time, Tim Geidner,
Speaker 2: Ben bernanke.
Speaker 3: Hank Paul Said, and so on.
Speaker 2: Spoke very clearly about the fact that you can have
Speaker 2: so many rules and in a crisis there needs to
Speaker 2: be a quick.
Speaker 3: Action.
Speaker 2: So my bigger worry is not that there would be
Speaker 2: it's a little bit that the rules themselves and the
Speaker 2: need to operate by the rules might could stand in
Speaker 2: the way of that. I'm not especially concerned about that,
Speaker 2: but I am concerned about that.
Speaker 3: What I am really mostly.
Speaker 2: Concerned about is the basic supplied demand of debt. It's
Speaker 2: together with these other factors because they work together. The
Speaker 2: debt combines with the politics, combines with the economy, combines
Speaker 2: with the geopolitical and so we talk about China, of course,
Speaker 2: but there are now dynamics at work Russia and Europe,
Speaker 2: the Middle East, there are, and there is not the
Speaker 2: same order in dealing with those. So it's that combination
Speaker 2: that I think is particularly dangerous. Any one of them,
Speaker 2: the supply demand would be dangerous, but these other things
Speaker 2: are dangerous.
Speaker 1: So we know ray that a lot of the banks
Speaker 1: are looking at their risk levels, and some have grown
Speaker 1: so much in prime brokerage, right, they've done this quite
Speaker 1: aggressively that they've had to give margin calls to some clients.
Speaker 1: Could they just terms under which they provide repo financing
Speaker 1: against treasuries? Is this a way to cool off the system?
Speaker 3: Yes, and they always do. And then.
Speaker 2: And I'm I'm not particularly concerned at that level because
Speaker 2: I think that those things can be handled. They'll be
Speaker 2: if you look at liquidity measures and ill liquidity measures
Speaker 2: and the tightness I've we have a liquidity gauge that
Speaker 2: you know has gone back actually you know, to nineteen
Speaker 2: thirty and so on a new you can measure these
Speaker 2: ill liquidity and this country, it has not reached and
Speaker 2: I think it would be unlikely to reach such extreme levels.
Speaker 3: And if it does, I think, except for.
Speaker 2: These regulatory hurdles, I think, you know, buy and large,
Speaker 2: they'll be handled. I think it's the greater watch the
Speaker 2: thirty year bond. Look at the market action of the
Speaker 2: thirty year bond relative to the ten year bond relative
Speaker 2: to cash, and that's reflecting the market action. Watch when
Speaker 2: the bond market goes down at the same time as
Speaker 2: the dollar goes down, at the same time as gold
Speaker 2: goes up, it is reflecting a shift in the capital market.
Speaker 3: So if the yield curve becomes more.
Speaker 2: Steep at the same time as the currency is going down,
Speaker 2: and you have that market action, it's reflecting the movement of.
Speaker 3: A supply demand in balance.
Speaker 2: So I would I'm concerned about that supply demand in balance,
Speaker 2: and I should say I don't want to just complain
Speaker 2: about things. In this book, I suggested what I call
Speaker 2: a three percent solution and three factor solution.
Speaker 3: Three percent of GDP which.
Speaker 2: Can be gotten, and three Let's keep in mind there
Speaker 2: are three factors they're spending. There's Texas, and there's interest rates,
Speaker 2: and interest rates are now more important than spending or taxes,
Speaker 2: even because of the size of that debt, so that
Speaker 2: we're dealing with a trillion dollars in interest rates and
Speaker 2: about nine trillion dollars more than that that has to
Speaker 2: be rolled over, which means has to be sold again.
Speaker 3: That's the issue. I think.
Speaker 1: There's also a number of papers right that talk about
Speaker 1: safety valve given really in the more immediate term what
Speaker 1: happened in the last week, and one of them said
Speaker 1: that the FED could consider, for example, setting up an
Speaker 1: emergency program that would close out highly leveraged hedge fund
Speaker 1: trades in the event of a crisis. Does that seem
Speaker 1: like something that you'd agree with? Does that seem like
Speaker 1: a good idea?
Speaker 3: I don't think that there's the understanding of that.
Speaker 2: I I'm all in favor of smart controls in a
Speaker 2: certain circumstance, but the amount of knowledge and the elements
Speaker 2: of whether it's a hedge fund or whether it's a bank,
Speaker 2: or whether it's some form of dealer, the actual knowledge
Speaker 2: to quickly make smart decisions is of concern to me
Speaker 2: that it's not adequate.
Speaker 1: Do you believe there's yea? Do you believe right there's
Speaker 1: permanent damage from the trade war. Right, despite Trump's turnaround,
Speaker 1: has damage been done to the global economy by this
Speaker 1: lingering sense of unpredictability in US policy?
Speaker 3: Yes, that all entities that I speak with.
Speaker 2: Here or around the world have an element of trauma
Speaker 2: or shock or fear and lack of confidence that there
Speaker 2: will be And I'm going to be careful not to
Speaker 2: say lack of confidence in general, but lack of certainty
Speaker 2: or the volatility is a scary thing together with the
Speaker 2: underlying circumstances. So the sense of stability has gone down
Speaker 2: a lot.
Speaker 3: The sense of the trust in.
Speaker 2: Policy being stable and the environment being stable has gone
Speaker 2: down a lot. The sense of being able to work
Speaker 2: things out has gone down a lot.
Speaker 1: How does the US regain that trust and what does
Speaker 1: that mean for treasuries, the US dollar as a reserve
Speaker 1: currency and actually US exceptionalism.
Speaker 2: Rust is the most important thing in all the capital markets,
Speaker 2: and I think that there's I think that that's a
Speaker 2: source of great of great concern. It takes a very
Speaker 2: long time to build a reputation that the capital markets
Speaker 2: are free, safe, that there's reasonableness, and that there's a
Speaker 2: way of working things out collectively that's not damaging. And
Speaker 2: you know, I don't know what the saying is, but
Speaker 2: you know how long it takes to build a reputation,
Speaker 2: and it only takes one or two times to lose
Speaker 2: that reputation, takes a long time to.
Speaker 3: Get it back. So I think.
Speaker 2: A lot will depend on the quality of all these
Speaker 2: decisions making the cooperation. And I'm not saying it won't happen,
Speaker 2: but it it better happened quickly, I think. And so
Speaker 2: in other words, how does it work? Negotiations and beyond negotiations,
Speaker 2: less volatility, just the sense that the capital markets now
Speaker 2: could lock up itself creates a change in the way
Speaker 2: that everyone, most importantly companies deal with their businesses and
Speaker 2: their capital capital raising and all of that.
Speaker 1: And so what's the right way of dealing with China
Speaker 1: given all of this, and given your specific worry that
Speaker 1: you've had for quite some time about US debt.
Speaker 2: Well, first, there has to be a recognition that we
Speaker 2: have a structural problem in that we have an interdependency
Speaker 2: that the United States can't either financially or geopolitically, because
Speaker 2: of the risks be in a position where it's dependent
Speaker 2: on getting stuff from China and Similarly, for the Chinese,
Speaker 2: they can't be feel safe about getting their capital returns.
Speaker 3: In that way.
Speaker 2: So in a global economy you can't have by definition
Speaker 2: large imbalances. So now the question is how to deal
Speaker 2: with that. That's an engineering exercise in my opinion. They
Speaker 2: can have a negotiated way in which.
Speaker 3: The currency is raised.
Speaker 2: They have to in one way or another to deal
Speaker 2: with this reduce that so the currency can be raised
Speaker 2: or mm B, which would happen by then starting to
Speaker 2: sell off reserves. The United States likes the fact that
Speaker 2: the currency would appreciate, and that the and probably the
Speaker 2: Chinese like the fact that they can get less in
Speaker 2: debt by selling off some of their holdings in that
Speaker 2: dynamic to support the currency, in which case then China
Speaker 2: has to not just be a manufacturer, but it has
Speaker 2: to be a consumer. And so right now about thirty
Speaker 2: three percent of all manufacturing in the world, which is
Speaker 2: more than the United States, Germany and Japan combined, is
Speaker 2: from China. So they manufacture. The United States does not manufacture,
Speaker 2: and so what the world needs now is the Chinese
Speaker 2: to be consumers. So if you would have that foreign
Speaker 2: exchange increase and you were to deal with trade together
Speaker 2: in a sensible way. I think ideally then you would
Speaker 2: also have naturally Chinese doing an increase in monetary and
Speaker 2: fiscal policies to raise demand, particularly consumption, because exports.
Speaker 3: Are going to go down. Manufacturing is going to be
Speaker 3: a problem.
Speaker 2: So that if they raise consumption and the United States
Speaker 2: becomes less consumption driven and more production driven, at least
Speaker 2: those are movements in the right right direction. Such negotiations, unfortunately,
Speaker 2: and such actual big changes are unlikely to take place
Speaker 2: quickly enough and well enough is my fear.
Speaker 3: Right.
Speaker 1: I mean, given that, and given this possible permanent scarring
Speaker 1: of US dollar and treasuries, is a US recession actually avoidable?
Speaker 2: I think it's likely that we're going to be in
Speaker 2: a recession. And the question really recession is you know,
Speaker 2: a line at zero you get and then you know
Speaker 2: sort of two quarters in that And I think right
Speaker 2: now it's you know, it's it's close call, and it's probable.
Speaker 3: But who cares about.
Speaker 2: Stat let's say two quarters of stagnation or a little
Speaker 2: bit of negative. I'm more worried about the greater dynamic
Speaker 2: of these conflicts. Uh they you know, I'm worried about
Speaker 2: more serious.
Speaker 3: Issues that are structural, financial.
Speaker 2: Political, the financial, the political and uh and the geo
Speaker 2: political because they feed on itself if you get a
Speaker 2: bad one, you know, yeah, this is not this is
Speaker 2: not a normal recession kind of situation. We are changing
Speaker 2: the monetary order in other words, when we start to
Speaker 2: think there's supply and the demand for debt and one
Speaker 2: man's debts or another man's assets, as I said, and
Speaker 2: then the question is money which is debt is supposed
Speaker 2: to be both the medium of exchange and a.
Speaker 3: Storehold of wealth.
Speaker 2: And there are times in history and this is one
Speaker 2: of those times in history that there's a question of
Speaker 2: whether bonds are an effective storehold of wealth because of
Speaker 2: this supply de man and so on, and then the
Speaker 2: need for you know, what does the central bank do?
Speaker 2: They try to push down the rates and provide liquidity,
Speaker 2: and that we.
Speaker 3: Cans the value.
Speaker 2: So the question is what is a good store hold
Speaker 2: of wealth? And of course you know that the treasury
Speaker 2: market is the backbone of all capital markets. You know,
Speaker 2: everything trades off of treasuries has spreads to treasuries. Equities
Speaker 2: in terms of expected returns relative to treasuries, and then
Speaker 2: credit spreads and everything. So I think a lot is
Speaker 2: going to depend on the prudent handling of the supply
Speaker 2: demand situation for treasuries, and then the political ability to
Speaker 2: carry this through without great internal disruption, and then the
Speaker 2: international world order and so cooperation and working towards stability,
Speaker 2: harmony is and dealing with these things as common problems
Speaker 2: would be the path to do that, and we'll there's
Speaker 2: reason to question that, right.
Speaker 1: Thank you so much for your time today. Thank you,
Speaker 1: thanks for listening, because this week's in the City from Bloomberg.
Speaker 1: This episode was hosted by me Francine Laquang, who was
Speaker 1: produced by Moses and dam Brandon. Francis Newnham is our
Speaker 1: executive producer. Special thanks to Ray Dalio. Please subscribe, rate,
Speaker 1: and review wherever you listen to podcasts.