Speaker 1: Bloomberg Audio Studios, podcasts, radio news. I'm Danny Berger, and
Speaker 1: I'm so pleased I'm here at the Forbes event sitting
Speaker 1: alongside Ray Dalio, founder of of Course Bridgewater and of
Speaker 1: the Dalio Family Office. Ray, thank you so much for joining.
Speaker 2: It's a treat.
Speaker 1: And look, you've been doing a lot of work. You've
Speaker 1: been busy with these five forces that have been shaping
Speaker 1: the global economy. Just to quickly go through the money
Speaker 1: and debt, internal order and disout order, power, conflict, active nature,
Speaker 1: and technology. I want to start on that first one though,
Speaker 1: because it's a point that you've made globally. But here
Speaker 1: in the US seven trillion dollars in spending but only
Speaker 1: five trillion dollars in revenue, Ray, are we already past
Speaker 1: the point of no return? That the fact we have
Speaker 1: this dynamic means that some sort of crisis is inevitable.
Speaker 3: Yes, we're past the point of no return. Meaning when
Speaker 3: debt service payments squeeze out spending, like plaque in the
Speaker 3: circulatory squeezes out the flow of money, the flow of blood.
Speaker 3: It's the same kind of thing could be measured. So
Speaker 3: we're seeing that happen. And then there's a supply and
Speaker 3: a demand issue. The supply of one budget deficit means
Speaker 3: that debt has to be sold, and you have a
Speaker 3: supply demand issue. And we could see it happening in
Speaker 3: the bond market, and we could see that bonds have
Speaker 3: been a bad investment and that there's pressure and interest
Speaker 3: rates and there's borrowing, and that's one of the five factors,
Speaker 3: as you're saying, But that dynamic is happening. People are
Speaker 3: treating it like if it hasn't happened before. They don't
Speaker 3: understand that, like plaque in the arteries, that it builds
Speaker 3: up and they have that exposure. So I think when
Speaker 3: you're looking, I think a particularly vulnerable period is after
Speaker 3: the midterm elections and before for the presidential election, because
Speaker 3: as we connect these forces, we have that issue, the
Speaker 3: dead issue, and we also are going to have a
Speaker 3: great deal of political conflict. That has implications for taxes,
Speaker 3: It has implications for all sorts of things.
Speaker 1: So what does history tell us that this looks like
Speaker 1: when we get closer to that point, Is it yields
Speaker 1: reaching a certain level, is it failed auctions? What would
Speaker 1: you look for to say the time is here? The
Speaker 1: bond temper chantrum is finally occurring.
Speaker 3: Well, it could be seen, excuse me, in either of
Speaker 3: the bond market the market action, it's by long rates rising.
Speaker 2: Relative to short rates.
Speaker 3: In other words, they're trying to hold the short rates
Speaker 3: down and the long rates are rising, and we're seeing
Speaker 3: some of that, and then you're seeing the weakening then
Speaker 3: of the dollar, and then you're seeing movements such as
Speaker 3: in gold and other assets. And when you see that
Speaker 3: rise in rates, then that starts to affect the stock
Speaker 3: market because what's happened now is that with bonds going
Speaker 3: down and stocks going up, the perspective returns now of
Speaker 3: stocks are now down low relative to the perspective returns
Speaker 3: of bonds, and so that upward pressure then starts to
Speaker 3: translate into a stock market pressure. That is the classic
Speaker 3: dynamic and something that the feder Reserve than or any
Speaker 3: central bank is in a position of not easily being
Speaker 3: able to manage because it becomes more of a stagflationary environment.
Speaker 3: So the stagflation that we're seeing right now, the Fed
Speaker 3: wrestles with the question if it's tightening or if it's easing.
Speaker 3: That also has in a economy where there is such
Speaker 3: a wealth disparity but also think about the implication of
Speaker 3: whether you own stocks or whether you don't own stocks,
Speaker 3: and that difference, that impact is very different, that has
Speaker 3: huge political implications.
Speaker 2: Say give you that's where that period, because this.
Speaker 1: Is an administration that has been very explicit in its
Speaker 1: desire for cuts. And this is part of the reason
Speaker 1: that Kevin Worsh is now our FED chair, who, of
Speaker 1: course is said I am independent.
Speaker 2: Do you think throughout.
Speaker 1: History there's often been bond markets that test a Federal
Speaker 1: Reserve chair. Is Kevin Worsh about to get a big test?
Speaker 3: Of course, one man's debts or another man's assets, Okay,
Speaker 3: And if there's not a high enough real return, then
Speaker 3: those bonds are not appreciated.
Speaker 2: Okay.
Speaker 3: So what are you holding the bond for? You're holding
Speaker 3: it for a real return. So the markets, ultimately, the
Speaker 3: marketplace can ultimately decide whether it owns.
Speaker 2: It or not. Right.
Speaker 1: Do you think we head to the nineteen thirties again,
Speaker 1: where it's a treasury that works with the Fed. That's
Speaker 1: some of that independence has kind of chipped away out
Speaker 1: of a necessity to keep debt servicing costs low.
Speaker 3: For example, that's I think it's exactly headed to that
Speaker 3: kind of thing, which we also saw a number of
Speaker 3: times through quantitative easing.
Speaker 2: It's called financial repression, and.
Speaker 3: The idea is that you drive the bond yields down
Speaker 3: with buying of assets and so on. Sometimes it includes
Speaker 3: even foreign exchange controls to try to prevent money from
Speaker 3: going outside the country and so on, but to have
Speaker 3: that forced low real rates, and then that's usually accompanied
Speaker 3: by high taxation and a higher level of inflation to
Speaker 3: bring in revenue. And because money wants to go to
Speaker 3: other things, that's when gold has been illegalized. That's when
Speaker 3: foreign exchange controls come in, and so and so forth.
Speaker 3: I'm not saying we're going that far, but I do
Speaker 3: think the real is, yes, that the bond market either
Speaker 3: is fundamentally good by providing a high enough real return
Speaker 3: to compensate people, or it's going to be manipulated in
Speaker 3: a sense this way that will make it unattractive. In
Speaker 3: either case, it's relatively unattractive, and so money goes elsewhere,
Speaker 3: and that's just the way it works.
Speaker 1: You've also been very forward and very early saying that
Speaker 1: the Strait of hor Moose is an issue for the US,
Speaker 1: and people followed on and said that and now it
Speaker 1: feels like we're ignoring it. I know you've compared this
Speaker 1: to the suice crisis in nineteen fifty six. Are we
Speaker 1: heading toward similar environment where we become Britain where if
Speaker 1: we can't control the strait of hormoose, that is something
Speaker 1: that could also cause a crisis of confidence in the
Speaker 1: US and US financial markets.
Speaker 3: Ultimately, what we're seeing now indisputably. And I travel around
Speaker 3: the world and I speak with world leader. I was
Speaker 3: just a month in Asia and ten days in China
Speaker 3: and someone and what we're seeing around the world is
Speaker 3: the question of will the United States? Can the United
Speaker 3: States fight a war in defense or an offsetting set
Speaker 3: of pressures of other powers, particularly China and in Asia.
Speaker 3: Right now, all the leaders I spoke with would say,
Speaker 3: it's clear that the United States cannot fight a war
Speaker 3: because the population doesn't want the cost of living impact that,
Speaker 3: they don't want people to die, they don't want they
Speaker 3: want it to be over fast. Okay. And also the
Speaker 3: country can't be over extended. How can it fight a
Speaker 3: war in the Middle East and fight a war there?
Speaker 3: It's getting over extended now, that fact that realization is
Speaker 3: having very big geo political implications for those who expect
Speaker 3: because there was a policy of containment for China. Okay,
Speaker 3: there's Taiwan issue, and then around the Taiwan issue, our
Speaker 3: questions of borders and so on, there was a process
Speaker 3: of Containment's that's over pretty much, and so as a
Speaker 3: result of that, there's a dynamic Taiwan and Taiwan's very
Speaker 3: serious case because it's not just political, it's chips and
Speaker 3: for example, it's entirely within the power of the Chinese
Speaker 3: government to basically say, let's take it, let's put a
Speaker 3: block eight or and let's have a week of no
Speaker 3: chips out coming out. Let's just imagine that that signal
Speaker 3: was given to the market. All the texts, all the socks,
Speaker 3: Ai stocks and everything would crash.
Speaker 2: The stock market would crash.
Speaker 1: Yes, And considering how high we're coming from, I would
Speaker 1: kind of love to combine these ideas because on one hand,
Speaker 1: you have the spending we're already doing. War has been
Speaker 1: incredibly expensive, that's more spending from the US. And then
Speaker 1: there's AI and the desire for AI sovereignty. Debt markets
Speaker 1: are being flooded with AI alphabet raising their equity offering
Speaker 1: to eighty five billion dollars. Are you concerned that there's
Speaker 1: a crowding out happening in this market? Can we handle that.
Speaker 2: Amount that's coming. All great technology changes.
Speaker 3: Produce bubbles, and the reason they produce bubbles is because
Speaker 3: nobody can get.
Speaker 2: It exactly right.
Speaker 3: Okay, you have to either spend a ton of money
Speaker 3: to capture your market share and so on, and don't
Speaker 3: worry about whether it's too much or not, or you
Speaker 3: don't spend enough money and you lose your market share.
Speaker 3: And it's very imprecise with a lot of competition.
Speaker 2: Okay. And then when people bet.
Speaker 3: On the technology, which I'll bet on the technology, but
Speaker 3: they think that buying the stocks is betting on the technologies,
Speaker 3: which is a different thing because the stocks can be
Speaker 3: expensive and so on.
Speaker 2: That's that's a problem.
Speaker 3: And what happens is when wealth grows a lot relative
Speaker 3: to incomes. I want to distinguish wealth from incomes. Okay,
Speaker 3: wealth is you can create wealth very easily in the
Speaker 3: following way. You say, I'm going to have a raise
Speaker 3: fifty billion dollars fifty million dollars on a billion dollar valuation. Okay,
Speaker 3: that's counted as a billion dollars of money, and now
Speaker 3: you're a billionaire, but you only put up fifty million, okay,
Speaker 3: and so wealth you cannot spend wealth. Wealth is you
Speaker 3: have to sell wealth to get money because you can
Speaker 3: only spend money. So when there's a lot of wealth
Speaker 3: relative to the amount of money there is there is
Speaker 3: a vulnerability in bubbles burst when money, when wealth needs
Speaker 3: to be converted into money. What is Often that's because
Speaker 3: of debt, but it could be for anything.
Speaker 2: It could be for wealth taxes.
Speaker 3: For example, supposing you put in wealth taxes, then those
Speaker 3: people who have wealth are going to have to sell
Speaker 3: some of that wealth to pay taxes. That dynamic that
Speaker 3: I'm talking about a companies the miracle technologies that over
Speaker 3: a period of time have wonderful implications for productivity. So
Speaker 3: I don't think it has a problem with productivity. I
Speaker 3: do think, but productivity, it has a big wealth gap implication.
Speaker 3: A very small percentage of the population is going to
Speaker 3: do unbelievably and a lot of people won't.
Speaker 2: So what do we do?
Speaker 3: Can we work together politically to deal with those issues?
Speaker 2: And how do you do? I do not believe. I'm
Speaker 2: not optimistic on us working together to solve So what's
Speaker 2: the end is it a bubble.
Speaker 3: That person actually so I think it is, yes, And
Speaker 3: then that moment there's always the issue of a bubble,
Speaker 3: and we can measure a bubble. I have indicators, and
Speaker 3: there's how many people are over owned, what's the sentiment?
Speaker 2: A lot of indicators for bubble.
Speaker 3: And we are right now rising close to closer to
Speaker 3: not at the same level in two thousand and same
Speaker 3: level in nineteen twenty nine.
Speaker 1: Specific level where you say, oh no, here's the one
Speaker 1: that we really need to wear.
Speaker 3: The thing about it is there's two parts to it.
Speaker 3: There is a quote a bubble, and then there's the
Speaker 3: pricking of the bubble. And the pricking of the bubble
Speaker 3: happens when there's a need for wealth to be sold
Speaker 3: to get the money, like normally in a dynamic of.
Speaker 2: A debt problem.
Speaker 3: Okay, if you take Japanese a bubble, take the twenty
Speaker 3: nine bubble, take the two thousand bubble, all of them
Speaker 3: have an element of tightening money to because it can't
Speaker 3: go on forever.
Speaker 2: It'll find its bubble.
Speaker 3: The question is how long you let the bubble go
Speaker 3: before there's the pricking. So in order to do the
Speaker 3: market timing, to know how to market time. It requires
Speaker 3: both the understanding of the bubble and the looking for
Speaker 3: the pricking. And the pricking is the converting of wealth
Speaker 3: into money because I need money in order, but I
Speaker 3: have wealth, but so I have to sell some of
Speaker 3: the wealth in order to get the money.
Speaker 2: That's how it works.
Speaker 3: That dynamic is following that kind of path, even though
Speaker 3: it's a wonderful technology that'll have great.
Speaker 1: Ray, we could talk about this all day, and I'm
Speaker 1: so upset out of time because I know you're using
Speaker 1: it specifically in your family office. We're going to talk again,
Speaker 1: specifically about that, because I'm really interested to hear more
Speaker 1: about that too. Ray, thank you so much for sitting
Speaker 1: down with me. Really appreciate your time. That, of course,
Speaker 1: is Ray Dalio here at the Forbes Aconoclast event