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Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.

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Speaker 1: Dear Lord, I have an extra special guest. His name

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Speaker 1: is Ray Dalio. I could have sat and chat with

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Speaker 1: Ray for hours and hours. His newest book is Principles

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Speaker 1: for Navigating Big Debt Crisis, and it is a masterful

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Speaker 1: three volume set on what the debt crises around the

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Speaker 1: world look like throughout history. He does detailed case stories

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Speaker 1: about three of the biggest ones, the Great Financial Crisis

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Speaker 1: of oid O nine, the Great Depression, and then what

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Speaker 1: took place in Germany. And then there are forty eight

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Speaker 1: case studies or forty six case studies about other debt crises.

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Speaker 1: He really provides an education for central banks going forward

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Speaker 1: as to what they need to do to avoid these

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Speaker 1: sorts of problems in the future, and when they happen,

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Speaker 1: how to make them less painful. It's a master work

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Speaker 1: and I expect it's gonna be on central bank bookshelves

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Speaker 1: for decades and decades to come. This is would also

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Speaker 1: be a good time to mention we have coming up

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Speaker 1: Masters in Business Live with Ray Dalio. Uh and keep

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Speaker 1: your ears open for that. We're gonna do a live

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Speaker 1: broadcast going over the book. You could get the PDF

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Speaker 1: of the book for free. The Kindle version is fifteen

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Speaker 1: dollars in this behemoth is about fifty bucks, So free pdf.

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Speaker 1: It's hard to argue with that. With no further ado,

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Speaker 1: my conversation with Ray Dalio. My extra special guest this

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Speaker 1: week is Ray Dalio, founder of Bridgewater Associates out of

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Speaker 1: his apartment over forty years ago. He is presently co

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Speaker 1: chairman and co c i O of the firm, which

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Speaker 1: manages a hundred and sixty billion dollars in assets. Bridgewater

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Speaker 1: perhaps has made more money for clients than any other

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Speaker 1: hedge fund in history. Rather than waste a lot of

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Speaker 1: time with the introduction, I just want to say, Ray Dalio,

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Speaker 1: welcome back to Bloomberg. Thanks for having me back. Before

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Speaker 1: we get to the new book. Last year, you were

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Speaker 1: here right after Principles came out, and knowing how you

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Speaker 1: look at the world as a giant experimental learning opportunity.

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Speaker 1: What did you learn on the tour to promote the book?

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Speaker 1: I was I was surprised at how curious and interactive

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Speaker 1: people were. Um, I went on social media and that's

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Speaker 1: a place that I thought I'd never go on. And

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Speaker 1: uh and I thought probably was a snarky place and

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Speaker 1: a little um hasn't been for me. You know, there

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Speaker 1: are a lot of curious people out there were eager

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Speaker 1: to learn, and I'm good people. I'm having great conversations

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Speaker 1: with them back and forth. Uh take a little bit

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Speaker 1: of time to do it. And uh so I was

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Speaker 1: most surprised about those things you embrace as part of

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Speaker 1: your process, both radical transparency and a pure meritocracy. If

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Speaker 1: someone has a good idea, it doesn't matter where it

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Speaker 1: comes from. Well, the markets teach you humility. You know,

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Speaker 1: you're never a dent, you're being right in any way.

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Speaker 1: And so that what that taught me is that I

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Speaker 1: love to have my views challenged and so to learn

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Speaker 1: the art of thoughtful disagreement. That's not a fight, it's

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Speaker 1: a curiosity experience. That's a great phrase, the art of

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Speaker 1: thoughtful disagreement. So now you write a second book, I

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Speaker 1: have to ask you go sixty years without ever writing

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Speaker 1: a book, and then you put out to really, this

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Speaker 1: is a really substantive book in three years. What what

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Speaker 1: is the hurry? What's the rush to get all this

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Speaker 1: writing done so quickly? Well, like my other book, a

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Speaker 1: lot of the principles that I had in this book

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Speaker 1: were written over a long period of time, a lot

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Speaker 1: of the research, and then I was asked by a

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Speaker 1: number of policy makers on others UH to write this

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Speaker 1: book on for the tenth anniversary of the financial crisis,

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Speaker 1: because um, they said that there's no book that you

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Speaker 1: can go to that really gives the lesson that happen

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Speaker 1: over and over again. Now other words, we're going to

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Speaker 1: focus a lot on the two thousand and eight financial crisis,

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Speaker 1: and that's good, but um, it's like looking at one

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Speaker 1: case of a disease. If you really want to understand

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Speaker 1: that how the disease transpires, you have to see pretty

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Speaker 1: much them all and then understand how they work on

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Speaker 1: average and how they deviate. And that was the purpose

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Speaker 1: of the book. So the timing was the big thing,

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Speaker 1: and then a shove from other people. You don't want

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Speaker 1: to get too lost in the weeds on any one

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Speaker 1: particular financial disaster. What we're trying to find is the

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Speaker 1: consistent thread, the best ways to respond to them, the

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Speaker 1: best ways to manage them, and even heaven forbid, possibly

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Speaker 1: avoiding them in the future. Statement. Yeah, well, let me

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Speaker 1: give you an example in this particular financial crisis, a

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Speaker 1: lot hinged on bank capital. No other words, how he

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Speaker 1: rectified bank capital, liquidity and how much well capital capital.

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Speaker 1: Liquidity is different from capital, but so in other words, basically,

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Speaker 1: capital is on your income statement, what your balance sheet

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Speaker 1: look like. Okay, are you out of money? Then you

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Speaker 1: get shut down. Liquidity is the money that comes in.

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Speaker 1: You can have no bank capital and plenty of liquidity

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Speaker 1: and be fine if they don't have marked the market accounting.

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Speaker 1: So like by going through the crisis, which by most

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Speaker 1: measures was of severe or comparable severity in terms of that,

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Speaker 1: one of the big differences was they didn't have marked

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Speaker 1: the market accounting. So because they didn't have marked the

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Speaker 1: market accounting, the solvency issue wasn't as big a deal

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Speaker 1: because they didn't account for it as being insolved where

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Speaker 1: the liquidity issue was. So my point is that when

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Speaker 1: you go from one to the other, you start to

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Speaker 1: understand what levers and what patches. So the whole notion

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Speaker 1: is look at the one on average, what's the typical one,

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Speaker 1: and then look at the deviations and see what causes them,

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Speaker 1: and then you understand how these things work. And that's

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Speaker 1: what the books about. So when we look at the

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Speaker 1: oh you don't crisis. We see most of the banks

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Speaker 1: had a lot of capital, but they also had a

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Speaker 1: ton of assets leveraged on top of the capital. How

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Speaker 1: significant is that leverage ratio of of capital to additional

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Speaker 1: leveraged assets. Well, it tells you how much of a

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Speaker 1: downward movement in the assets you can take. Right. If

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Speaker 1: it's if it's a bank is leverage ten to one

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Speaker 1: and the average assets go down ten percent, you're out

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Speaker 1: of money. Right, that's the counting. And and if you

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Speaker 1: don't account for that like that period of time, you

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Speaker 1: don't count for that exactly that way, you treat them differently,

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Speaker 1: then you're really dealing with a liquidity case. But these

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Speaker 1: things happen over and over again. The same basic structure

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Speaker 1: happens over and over again. And I thought it was

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Speaker 1: really really important to have a book that shows what

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Speaker 1: that classic diseases, like, how it works one thing leads

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Speaker 1: to another in a certain way, and then to show

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Speaker 1: all of the cases. So it shows all forty eight

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Speaker 1: cases of bad debt crisis is over the last hundred years,

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Speaker 1: and you can go into them see them one by one,

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Speaker 1: and then it takes you through three classic ones in

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Speaker 1: detail takes you through them pretty much almost day by day,

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Speaker 1: so you can viscerally feel what they were like, and

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Speaker 1: you could almost imagine what you would do on that day.

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Speaker 1: Um it starts with the it does it in the

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Speaker 1: sequential order. So in the nineteen twenties the inflationary depression

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Speaker 1: um of Germany's Weimar Republic. And the reason I put

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Speaker 1: that in is because depressions can be inflationary or deflationary,

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Speaker 1: and in order to understand what makes the difference, what

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Speaker 1: makes them inflationary versus deflationary, wanted to put that in.

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Speaker 1: But the sequence is similar. Then then we go that's

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Speaker 1: the end of World War One and the period in

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Speaker 1: between that's interesting, and then we go to the after

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Speaker 1: World More one. We had the twenties, and with that

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Speaker 1: we had the set up for the ninet thirties Great Depression.

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Speaker 1: I love the way you structured this three segments. One

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Speaker 1: is the archetypical debt cycle. The next is some detailed

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Speaker 1: case studies. And you look at the Great Depression, you

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Speaker 1: look at the Weinmar public, you look at a way

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Speaker 1: A nine, and then you come up with forty eight

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Speaker 1: additional case studies. Each of these are a different volume

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Speaker 1: in what effectively is a three volume set, tell us

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Speaker 1: the thinking about this, and and tell us about the

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Speaker 1: feedback you've gotten from people who had to manage the

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Speaker 1: oh eight or nine crisis. Well, I believe the same

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Speaker 1: things happened over and over again. And it's like a disease.

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Speaker 1: If you don't watch all the cases you want to

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Speaker 1: understand them. That's kind of like doctors in emergency room.

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Speaker 1: They do a twenty four hour shift just so they

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Speaker 1: can see the disease run its full course over and

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Speaker 1: over again, over and over again, right, and then you

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Speaker 1: make the connections. You know how these things work because

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Speaker 1: they're classic. They all happen basically in the same way.

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Speaker 1: So that's that's what I did. That's why I put

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Speaker 1: all of those case studies in there as a backdrop,

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Speaker 1: and then I put the template the templates. Just sixty pages.

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Speaker 1: You read it, you get the template. Um, yeah, no, no,

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Speaker 1: the people, Ben Bernankee said, Ray Dali's book is the

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Speaker 1: most read uh as I must read for anyone who

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Speaker 1: aspires to prevent or manage the next financial crisis. Larry

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Speaker 1: Summers said, a terrific piece of work by one of

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Speaker 1: the world's top investors who has devoted his life to

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Speaker 1: understanding the markets and demonstrating that understanding by navigating the

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Speaker 1: two thousand eight financial crisis. Um Tim Geitner said, it's

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Speaker 1: an outstanding history of the financial crisis, including the devastating

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Speaker 1: crisis of two thousand eight. That's an amazing list of

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Speaker 1: people who were actually actually there and and running this.

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Speaker 1: And Hank Poulson is another person who had some comments

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Speaker 1: in any way they I think it's um. I think

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Speaker 1: it's accur it. And the most important thing isn't the book.

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Speaker 1: The most important thing that I'm really trying to get

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Speaker 1: at is the mechanics of the disease has described here.

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Speaker 1: Because if we can just understand and agree on the

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Speaker 1: mechanics of these things, we make a giant leap forward.

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Speaker 1: A lot of the mechanics are not agreed to, and

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Speaker 1: they're not studied. They don't look at cases. For example,

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Speaker 1: at the time, there was a lot of argument that

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Speaker 1: printing money would bring back right, but which which showed

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Speaker 1: a fundamental misunderstanding of what showed a fundamental misunderstanding because

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Speaker 1: when when more money comes into the system at the

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Speaker 1: same time as credit is contracting, the actual amount of

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Speaker 1: purchasing power is not rising, and so what causes inflation

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Speaker 1: is when more money is spent than goods and services

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Speaker 1: are produced. Okay, And what's happening at these times is

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Speaker 1: that money creation is making up for the contraction and credit.

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Speaker 1: So you're you're jumping ahead to the beautiful deleveraging. Let's

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Speaker 1: go through the six steps as you outlined in the book,

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Speaker 1: and just a quick overview the early part of the cycle,

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Speaker 1: the bubble, the top, the depression, the beautiful deleveraging, the

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Speaker 1: pushing on a string, and then normalization is did I

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Speaker 1: get that more or less right? That's right and um,

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Speaker 1: And basically most cycles work the same way, but there's

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Speaker 1: when you hit a zero interest rate, then you have

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Speaker 1: the big one. Okay. So what happens is in the

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Speaker 1: early part of a cycle, uh, the amount of lending

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Speaker 1: that takes place produces a cash flow which is greater

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Speaker 1: than the debt service payments on that that's a virtuous

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Speaker 1: lending because credit gives buying power and depending on how

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Speaker 1: you're using that buying power for using it to create

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Speaker 1: income that's greater than the debt service payments. Is a

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Speaker 1: self reinforcing positive cycle that normally happens in the early

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Speaker 1: part of the cycle. Then it pushes asset prices up.

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Speaker 1: And what happens is that people start to extrapolate those

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Speaker 1: things going forward, so as the debts continue to rise,

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Speaker 1: and they believe this is going to go higher and higher.

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Speaker 1: In other words, the belief in um, the miracle of

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Speaker 1: the new thing, and maybe the miracle of the the

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Speaker 1: new Amazon or the new Tesla, or it's the nifty

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Speaker 1: fifty in other years, in other words, that of the world,

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Speaker 1: and that there's not careful calculation in terms of what

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Speaker 1: could be paid back. We start to get into the

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Speaker 1: bubble stage. The bubble stage is also um accompanied by

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Speaker 1: a shadow The development of shadow banking is that consistent

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Speaker 1: always always. We saw shadow banking very much in O eight,

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Speaker 1: o nine. I was not aware until I plowed through

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Speaker 1: this that there was a shadow banking system. Uh in

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Speaker 1: the Great Depression. There was a shadow banking system repeatedly

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Speaker 1: throughout history, repeatedly throughout history. The way it works is

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Speaker 1: the banks are regulated and they're controlled, and they're safe

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Speaker 1: and they're overseen. But there are innovations that come outside

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Speaker 1: of the banking system. For there's a shadow banking system.

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Speaker 1: Now you know, in other words, private lending that takes

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Speaker 1: place out of the side of the banking system in

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Speaker 1: various ways, and it's not regulated, and there's an incentive

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Speaker 1: to go outside the banking system because the banking system

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Speaker 1: being regulated and being controlled can't make as much money

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Speaker 1: as going outside the banking system. Safer but capped right,

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Speaker 1: watched over um. But you know, not necessarily totally say,

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Speaker 1: but you always have the going out to that, and

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Speaker 1: you always have the development of new vehicles, always new vehicles,

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Speaker 1: and they grow in a very fast way. Doesn't mean

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Speaker 1: they're not healthy, but they grow in a very fast way.

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Speaker 1: And you see a growth in that in lending that

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Speaker 1: becomes an unsustainable growth rate that feeds on itself because

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Speaker 1: the middlemen make money on making these kinds of loads. Um,

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Speaker 1: those who are buying them have them go up in value,

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Speaker 1: and everybody is happy at that point. What we always

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Speaker 1: try to do is do the pro form of financial statements,

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Speaker 1: in other words, how much cash is going to come

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Speaker 1: in and come and you don't have uh, you have

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Speaker 1: a problem. And there's the lending of seeds, the ability

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Speaker 1: to services that's right. And in addition, you come to

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Speaker 1: the late part of the cycle. You know, when there's

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Speaker 1: not much capacity to grow as fast, but the markets

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Speaker 1: continue to discount a fast growth rate. The funny thing

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Speaker 1: about markets is that they discount what they've experienced more

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Speaker 1: than what's likely. Like you would imagine when an economy

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Speaker 1: is really depressed that buying large that they would discount

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Speaker 1: that it would be pick up because it's at the

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Speaker 1: low part of the cycle, or when when you run

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Speaker 1: into the late part of the cycle, they would say

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Speaker 1: it can't sustain that particular growth rate. And they certainly

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Speaker 1: can't sustain that growth rate on a lot of debt,

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Speaker 1: But yet the their price to discount that, And so

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Speaker 1: the the irony is asset prices are higher. There's much

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Speaker 1: more leverage in the mark in the system. And so

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Speaker 1: why would asset prices be higher or credit spreads be

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Speaker 1: lower when there's a lot more leverage in the price

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Speaker 1: of everything is higher. Doesn't make sense, But that's where

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Speaker 1: the bubble is. These are the good times, these are

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Speaker 1: the great times, it seems right. So so then you

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Speaker 1: get the top and then bang, the next stop is depression. Well,

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Speaker 1: most typically then the top. The top usually comes through

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Speaker 1: a combination of a tightening of monetary policy because you're

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Speaker 1: later in the cycle. Are the central bankers historically always

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Speaker 1: late to the party. Is there anything they could do

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Speaker 1: to sort of slow it down in real time or

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Speaker 1: has history shown own they always are are at a

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Speaker 1: step History is shown that they're pretty much always allowing

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Speaker 1: the rate of growth to be rate faster than the

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Speaker 1: rate of capacity to produce. And so we see a

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Speaker 1: shrinking labor force. We excess labor, we see as shrinking

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Speaker 1: utilization of excess utilization of capacity. You see those types

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Speaker 1: of things that to put on the brakes enough ahead

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Speaker 1: of the capacity limitations. Um, you know, hardly ever takes place.

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Speaker 1: They can't, they don't get it right, and and that's

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Speaker 1: partially related to this economy, but it's also partially related

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Speaker 1: to the asset prices. The asset prices go first before

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Speaker 1: the economy goes, so private equity competes with public equity

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Speaker 1: and everything, and so you like in this cycle, you've

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Speaker 1: seen those asset prices go down and projected returns of

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Speaker 1: all those assets prices go lower. You see the duration

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Speaker 1: of the assets length and duration means also price sensitive.

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Speaker 1: A lacing um longer bo more sensitive than the product

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Speaker 1: to the movement of interest rates. So the interest rate UM,

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Speaker 1: so as it's become more sensitive, and then what happens

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Speaker 1: is classically you have enough of a tightening um to

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Speaker 1: create the crack that usually also happens when they cash

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Speaker 1: flow is not in um, not positioned because there's too

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Speaker 1: much debt relative to the cash flow, and it starts

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Speaker 1: in the periphery of the credit markets, and then it

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Speaker 1: works itself down through that. So sorry, you're suggesting it

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Speaker 1: starts in the shadow banking market and then works its

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Speaker 1: way into the mainstream, so you get colts. So what

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Speaker 1: we saw, no, you know, nine these non bank lenders,

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Speaker 1: the model was uh underwrite mortgages to sell to securitizers.

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Speaker 1: They started going belly up in pretty big numbers in

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Speaker 1: oh six, oh seven, long before you saw any problems

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Speaker 1: with with the big banks. That that's typical of all

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Speaker 1: these cycles because at the periphery there's more aggressive lending.

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Speaker 1: It's unregulated the leverage, right, I think about the investment

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Speaker 1: banks being more leveraged than the traditional banks. By way

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Speaker 1: of example, traditional banks are all part of the party.

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Speaker 1: I mean, it's it's the same thing now, every everybody

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Speaker 1: is in the same hot up together. All of these cycles,

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Speaker 1: the upward cycle is self reinforcing. So let's let's get

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Speaker 1: to the I want to jump to the beautiful deleveraging,

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Speaker 1: which is your phrase, which I've always found to be

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Speaker 1: somewhat of a romantic phrase about something that's a fairly

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Speaker 1: dry economic process. Tell us about the beautiful deleveraging post

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Speaker 1: O eight o nine And in previous cycles, well, um,

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Speaker 1: in a normal cycle, when you have the downward move

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Speaker 1: to get it reef moving on the positive side, they

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Speaker 1: get the good cycle going. You lower interest rates enough

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Speaker 1: so that the present value discount rate for asset prices

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Speaker 1: goes up. You may a um it cheaper to have

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Speaker 1: new borrow because the monthly payments are less because of

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Speaker 1: the interest rate is less. You and you make everybody richer.

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Speaker 1: That's how the cycle goes. And that seems to have

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Speaker 1: happened posted eight o nine. Yes, it happens in all

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Speaker 1: these cycles. That's the normal way to happen. But what's

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Speaker 1: different about the eight oh nine, which is the same

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Speaker 1: as the nine team to thirty two period, is interest rates.

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Speaker 1: It's zero. When interest rates it's zero, the game changes, okay,

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Speaker 1: because monetary policy cannot operate that way. And so two

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Speaker 1: times that century, that happened. And that's when century or

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Speaker 1: or century, that's the that's the time it happened. And

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Speaker 1: then what that means is the game changes. And the

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Speaker 1: game then has to be that you print money and

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Speaker 1: you buy financial asset central banks you got to do

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Speaker 1: that ZERP and KWI. Yeah, and that they do that

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Speaker 1: all over the world. And in that since then, they built, uh,

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Speaker 1: they brought about sixteen trillion dollars. Central banks have bought

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Speaker 1: about sixteen trillion dollars, put about sixteen trillion dollars of

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Speaker 1: liquidity out in the system in financial markets, and that

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Speaker 1: causes financial markets to go up and produces plenty of

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Speaker 1: liquidity in the um. In that crisis, they also guaranteed

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Speaker 1: about two thirds of all of the debt in the

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Speaker 1: United States. And that's that's just an astonishing figure. You've

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Speaker 1: been using nineteen thirty seven as the parallel for today.

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Speaker 1: Nineteen thirty seven was kind of a scary time in history.

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Speaker 1: It was before the rise of Nazism, was before World

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Speaker 1: War two. A lot of bad things were going on

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Speaker 1: in nineteen thirty seven. Why do you draw that that parallel, Well,

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Speaker 1: I think things happening. There's a list of things happening

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Speaker 1: in nineteen thirty two, nine nine, nineteen thirty two as

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Speaker 1: in two thousand and eight to two thousand nine UM,

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Speaker 1: there was a debt crisis and that UM where an

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Speaker 1: interest rates at zero and central banks had to print

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Speaker 1: a lot of money to buy a lot of financial assets,

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Speaker 1: which produced UM big rallies in the stock market and

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Speaker 1: a big pickup in economic activity. And in seven the

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Speaker 1: federal reserves started to tighten monetary policy of law, and

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Speaker 1: there was an interest rate sensitivity associated with that. Was

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Speaker 1: it premature UM, It's not so much premature as much

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Speaker 1: as highly impactful in my opinion, maybe a bit of both, UM.

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Speaker 1: But the point at that time is that in doing that,

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Speaker 1: that contributed to the wealth gap, because financial assets are

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Speaker 1: owned by people who have financials and poor people don't

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Speaker 1: have that, and to produced a wealth gap in which UM,

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Speaker 1: like now, the top intent of one percent of the

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Speaker 1: population's net woralth is equal to the bottom combined. So

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Speaker 1: so there was a there was a giant wealth gap.

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Speaker 1: And at that time there's tension between the left and

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Speaker 1: the right, and this is true in all countries around

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Speaker 1: the world, and so we have the emergence of populism

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Speaker 1: now four countries decided to go from democracies to dictatorships.

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Speaker 1: That happened in Italy, feet and then it happened in Germany,

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Speaker 1: it happened in Japan, it happened in Spain, and that

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Speaker 1: that tension produced tension inside the country and tension outside

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Speaker 1: the country, and it produced a certain type of leader,

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Speaker 1: which was a populist leader. So we have populism in

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Speaker 1: other words, of gap there that I think is very

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Speaker 1: important to understand. Politics now is more important than at

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Speaker 1: any time in my lifetime. And I've been doing this

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Speaker 1: for fifty years. So what are we seeing in today's

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Speaker 1: today's um worlds of politics between the rise of Trump

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Speaker 1: is m and what we've seen in the Philippines and

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Speaker 1: and Britain and Brexit. Are you saying, hey, your world

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Speaker 1: post crisis is now dealing with a very similar ninety

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Speaker 1: seven UH form of popularism and leading to dictatorship. Populism

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Speaker 1: is um when a strong individual is brought in by

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Speaker 1: a segment disenfranchised segment of the population, partially because of

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Speaker 1: the economics, partially because of a sense that their culture

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Speaker 1: is being threatened and that there are it's anti elites,

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Speaker 1: and it is nationalistic it is protectionistic and is military istic,

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Speaker 1: and the populist has a fighter mentality. So that's that's

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Speaker 1: what populace. That's every financial crisis, it's the same thing.

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Speaker 1: Well in the big ones. In the big ones, you

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Speaker 1: tend to get that polarity. So we have a situation

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Speaker 1: that's like that. I think everybody would agree that the

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Speaker 1: nature of the situation is like that. It's producing more

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Speaker 1: domestic conflict around that UM the the right becomes more

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Speaker 1: right and the left becomes more right left, and then

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Speaker 1: also more international conflict. Another key element here in the

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Speaker 1: thirties which were not used to is that you have

401
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Speaker 1: a rise of a country to of existing power, to

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Speaker 1: have challenged the exist the existing power rise of a

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Speaker 1: new country. That was that was Japan versus the Europeans,

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Speaker 1: or Japan versus the US, and the Japan versus the

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Speaker 1: European powers that had colonies in the Pacific area. A

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Speaker 1: lot of them had colonies that and the United States

407
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Speaker 1: UM had interest there where they were competing for natural resources.

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Speaker 1: And so when UM Japan, then UM had its economic

409
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Speaker 1: problems and wanted to grow. It needed resources to beyond

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Speaker 1: Japan because Japan has very limited resources, so it goes

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Speaker 1: into takes over man Choria, northern China. There is that competition.

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Speaker 1: So now we're worried about resources and we start to

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Speaker 1: put in you know, blockades and things. And then when

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Speaker 1: World War two begins to break out, really nine, so

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Speaker 1: we have the same phenomenon happening in Europe, where the

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Speaker 1: rising power was Germany. It was hobbled at the end

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Speaker 1: of World War One, hobbled and humiliated, and as a

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Speaker 1: result of that, it became stronger, and it became strong

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Speaker 1: relative to the existing powers, and that was particularly the

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Speaker 1: UK and France. And as a result, we had UM

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Speaker 1: that conflict, that that type of conflict, and over the

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Speaker 1: period of time, it first started economically, like in Japan,

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Speaker 1: they UM, we would put sanctions in place, and eventually

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Speaker 1: when it got um more serious, then Japan took advantage

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Speaker 1: of that because they couldn't those colonies couldn't defend themselves

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Speaker 1: in Asia, and so they invaded those areas and so

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Speaker 1: expanding to also get materials, rubbers and things like that.

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Speaker 1: And then UM we had then embargo their assets and

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Speaker 1: then eventually we embargo their oil and that led UM

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Speaker 1: to Pearl Harbor. So thirty nine was war in Europe

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Speaker 1: and forty one was um Pearl Harbor, and in the

432
00:26:36,359 --> 00:26:38,679
Speaker 1: beginning of that, I'm not saying we're going down that

433
00:26:38,760 --> 00:26:43,960
Speaker 1: path along those lines, but I'm saying, let's say key points. Okay, first,

434
00:26:44,119 --> 00:26:47,280
Speaker 1: you're you're later in a short term debt cycles. So

435
00:26:47,320 --> 00:26:49,919
Speaker 1: there are two debt cycles. I'm referring to. One is

436
00:26:49,920 --> 00:26:52,600
Speaker 1: the short term debt cycle. I think we're acquainted with that.

437
00:26:52,600 --> 00:26:56,760
Speaker 1: That's a business cycle. You have recessions, economy gross because

438
00:26:56,760 --> 00:26:59,960
Speaker 1: of stimulations, you run out of capacity, central bank titan

439
00:27:00,160 --> 00:27:04,520
Speaker 1: monetary policy, markets start to decline, then the economy declines,

440
00:27:04,560 --> 00:27:06,439
Speaker 1: and then you have a session and you do that

441
00:27:06,520 --> 00:27:09,000
Speaker 1: over and over again. Those things are usually you know,

442
00:27:09,080 --> 00:27:12,360
Speaker 1: maybe ten years in that facility, a little less. Then

443
00:27:12,400 --> 00:27:14,640
Speaker 1: you have a long term debt cycle. And the long

444
00:27:14,760 --> 00:27:18,840
Speaker 1: term debt cycle is um the accumulation of those short

445
00:27:18,960 --> 00:27:21,720
Speaker 1: term debt cycle, but it kind of reaches its end

446
00:27:22,840 --> 00:27:26,800
Speaker 1: when first interest rates at zero because you can't puff

447
00:27:26,920 --> 00:27:30,840
Speaker 1: things up with interest rate declines anymore. And then you

448
00:27:30,920 --> 00:27:34,679
Speaker 1: have QUI, which is then the purchase of those assets

449
00:27:35,040 --> 00:27:38,560
Speaker 1: to cause those prices to rise a lot. And with

450
00:27:38,640 --> 00:27:42,000
Speaker 1: those asset prices rising a lot, you can't From that

451
00:27:42,040 --> 00:27:46,960
Speaker 1: point have the same impact. I want to emphasize, UM,

452
00:27:47,000 --> 00:27:49,520
Speaker 1: that's the pushing on the string. That's the pushing that's

453
00:27:49,560 --> 00:27:52,199
Speaker 1: that's the pushing on a string phase, which is a

454
00:27:52,200 --> 00:27:55,760
Speaker 1: wonderful metaphor. You try and do something and nothing happens.

455
00:27:55,800 --> 00:27:59,280
Speaker 1: You push on it, it doesn't go into the system.

456
00:27:59,320 --> 00:28:05,800
Speaker 1: And so UM, just let's take a moment here and realize, UM,

457
00:28:05,840 --> 00:28:10,280
Speaker 1: that we have a system in which demand is produced

458
00:28:10,280 --> 00:28:17,479
Speaker 1: by credit and that UM most people are long in

459
00:28:17,480 --> 00:28:22,040
Speaker 1: other words, and their leverage law. UM. So the balance

460
00:28:22,119 --> 00:28:26,560
Speaker 1: that you're looking for a healthy economy to obtain is

461
00:28:26,920 --> 00:28:32,359
Speaker 1: sufficient credit consumption so that consumers are out buying, businesses

462
00:28:32,359 --> 00:28:37,240
Speaker 1: are expanding, but not such reckless issuance of credit that

463
00:28:37,359 --> 00:28:40,640
Speaker 1: things go haywire and you get the bubble and then

464
00:28:40,920 --> 00:28:44,560
Speaker 1: debt cycle that leads to a giant collapse. How do

465
00:28:44,600 --> 00:28:49,760
Speaker 1: you get that balance? Can? Um? Is debt rising faster

466
00:28:50,000 --> 00:28:53,640
Speaker 1: than the income to service it, that's a bad sign.

467
00:28:54,280 --> 00:28:56,520
Speaker 1: There maybe a lead lad but at the end of

468
00:28:56,560 --> 00:29:00,480
Speaker 1: the day, it has to rise there UM, So that

469
00:29:00,520 --> 00:29:05,520
Speaker 1: you have UM debt being that service payments growing faster

470
00:29:06,040 --> 00:29:11,240
Speaker 1: than the actual excuse me, the income growing faster than

471
00:29:11,280 --> 00:29:15,120
Speaker 1: the debt service payments. So you're gonna need that growing

472
00:29:15,160 --> 00:29:18,160
Speaker 1: faster than you could service stuff. That's that's good. That's

473
00:29:19,000 --> 00:29:21,400
Speaker 1: that's a good economy. That's the way the capital markets

474
00:29:21,400 --> 00:29:25,040
Speaker 1: should work. So when you have debt growing faster than

475
00:29:25,080 --> 00:29:29,040
Speaker 1: the debt service payments, that's unsustainable. And at some point

476
00:29:29,080 --> 00:29:32,280
Speaker 1: that stops and you lose that demand. So that's point one.

477
00:29:32,880 --> 00:29:36,600
Speaker 1: Point two is what is the power of the central

478
00:29:36,640 --> 00:29:40,280
Speaker 1: bank to keep that thing going to in other words,

479
00:29:40,520 --> 00:29:45,800
Speaker 1: repair that situation by lowering interest rates or buying assets

480
00:29:46,080 --> 00:29:49,280
Speaker 1: to produce liquidity in the system, to build it up,

481
00:29:49,320 --> 00:29:52,760
Speaker 1: because a debt is a promise to deliver cash, and

482
00:29:52,840 --> 00:29:56,000
Speaker 1: when they put money into the system, it makes it

483
00:29:56,080 --> 00:29:59,840
Speaker 1: easier to service that debt. It lowers interest rates, causes

484
00:30:00,080 --> 00:30:02,800
Speaker 1: set prices. So what is the capacity of the central

485
00:30:02,800 --> 00:30:07,280
Speaker 1: bank when we get into serious problems, really serious problems.

486
00:30:07,680 --> 00:30:10,880
Speaker 1: We have a situation in which we can't service that debt,

487
00:30:11,440 --> 00:30:17,480
Speaker 1: and we're in a situation where the central bank policies

488
00:30:17,960 --> 00:30:21,239
Speaker 1: aren't are not as powerful because either interest rates are

489
00:30:21,240 --> 00:30:26,040
Speaker 1: close to zero or the power of quantitative easing has

490
00:30:26,160 --> 00:30:30,480
Speaker 1: largely been used up because that balloon has been expanded,

491
00:30:30,680 --> 00:30:33,760
Speaker 1: and also what you can buy is limited. So that's

492
00:30:33,760 --> 00:30:35,960
Speaker 1: when you're at more at the end of the longer

493
00:30:36,080 --> 00:30:38,400
Speaker 1: term debt cycle, I wanna I want to ask you

494
00:30:38,440 --> 00:30:41,400
Speaker 1: about the current circumstances. Can you stick around a little bit.

495
00:30:41,440 --> 00:30:44,640
Speaker 1: We are tumbl questions we've been speaking with Ray Dalio.

496
00:30:44,760 --> 00:30:47,040
Speaker 1: If you enjoy this conversation, be sure and check out

497
00:30:47,080 --> 00:30:49,800
Speaker 1: the podcast extras, where we keep the tape rolling and

498
00:30:49,840 --> 00:30:53,840
Speaker 1: continue discussing all things debt crisis. You can find that

499
00:30:54,000 --> 00:30:58,760
Speaker 1: at Apple iTunes, Bloomberg dot com, Stitcher, overcast, wherever your

500
00:30:58,760 --> 00:31:01,840
Speaker 1: finer podcasts are sold. We love your comments, feedback and

501
00:31:01,960 --> 00:31:06,160
Speaker 1: suggestions right to us at m IB podcast at Bloomberg

502
00:31:06,240 --> 00:31:08,840
Speaker 1: dot net. Check out my daily column at Bloomberg dot

503
00:31:08,840 --> 00:31:11,280
Speaker 1: com slash Opinion. You could follow me on Twitter at

504
00:31:11,360 --> 00:31:14,800
Speaker 1: rit Holts. You could follow Ray on Twitter at Ray Dalio.

505
00:31:15,440 --> 00:31:18,520
Speaker 1: I'm Barry Ritolts. You're listening to Masters in Business on

506
00:31:18,640 --> 00:31:30,560
Speaker 1: Bloomberg Radio. Welcome to the podcast, Ray, Thank you so

507
00:31:30,640 --> 00:31:34,000
Speaker 1: much for doing this. I've been looking forward to following

508
00:31:34,240 --> 00:31:38,320
Speaker 1: up with you since our last conversation, and I have

509
00:31:38,440 --> 00:31:42,720
Speaker 1: so many questions we did not get to before we

510
00:31:42,800 --> 00:31:47,360
Speaker 1: move away from big debt crises. I just have to

511
00:31:47,400 --> 00:31:54,520
Speaker 1: ask you here it is. It's has anybody learned anything

512
00:31:54,720 --> 00:31:58,880
Speaker 1: about financial crisis? Do you think we're better prepared next time?

513
00:31:59,320 --> 00:32:01,120
Speaker 1: Or are we gonna get tenue to make the exact

514
00:32:01,200 --> 00:32:05,520
Speaker 1: same mistakes over and over again. We've learned some things,

515
00:32:05,560 --> 00:32:09,800
Speaker 1: but not enough things. I think that I think people

516
00:32:09,920 --> 00:32:15,080
Speaker 1: more cautious, cash is higher, the lending is different. Um,

517
00:32:15,240 --> 00:32:19,320
Speaker 1: I think the banks have more capital. Uh, those things

518
00:32:19,440 --> 00:32:25,200
Speaker 1: are good. I think we also, I think may put

519
00:32:25,280 --> 00:32:30,360
Speaker 1: some regulations in place that limit the policy makers flexibilities

520
00:32:30,440 --> 00:32:33,400
Speaker 1: to be able to deal with things. I think every

521
00:32:33,440 --> 00:32:35,920
Speaker 1: crisis is a bit different, and you can't write the

522
00:32:36,000 --> 00:32:39,240
Speaker 1: rules so precisely that you can deal with it anyway.

523
00:32:39,360 --> 00:32:44,400
Speaker 1: I don't think we've materially changed those things. If I'm

524
00:32:44,440 --> 00:32:48,120
Speaker 1: looking forward, I would say when we do our financial

525
00:32:48,200 --> 00:32:52,520
Speaker 1: numbers pro forma, generally speaking, there's much less of a

526
00:32:52,600 --> 00:32:55,160
Speaker 1: bubble around. Back in two thousand seven, when we did

527
00:32:55,200 --> 00:32:57,520
Speaker 1: those numbers, we could see that a lot of debt

528
00:32:58,240 --> 00:33:01,080
Speaker 1: problems and a debt crisis was going to come. So

529
00:33:01,160 --> 00:33:05,200
Speaker 1: how do you contextualize something like the student debt crisis

530
00:33:05,200 --> 00:33:08,000
Speaker 1: which is at all time highs or is that not

531
00:33:08,160 --> 00:33:11,560
Speaker 1: the sort of bubble that leads to a systemic issue. Well,

532
00:33:11,560 --> 00:33:13,400
Speaker 1: what we do is we look at each of the

533
00:33:13,440 --> 00:33:16,600
Speaker 1: different types. There are parts here that look like bubbles

534
00:33:16,640 --> 00:33:19,320
Speaker 1: to us, and the question is what is how big

535
00:33:19,360 --> 00:33:22,160
Speaker 1: are they and what are the contagious and so um

536
00:33:23,400 --> 00:33:27,560
Speaker 1: you're so methodical, you really you bring an engineer's approach

537
00:33:27,640 --> 00:33:32,280
Speaker 1: to this. It's the economic machine, which you've described previously.

538
00:33:32,840 --> 00:33:36,160
Speaker 1: But even when looking at a specific type of debt,

539
00:33:36,840 --> 00:33:40,440
Speaker 1: you want to know exactly how problematic it is and

540
00:33:40,840 --> 00:33:43,880
Speaker 1: is it something that's contained within its own silo or

541
00:33:43,920 --> 00:33:45,920
Speaker 1: does it have the ability to infect the whole system?

542
00:33:46,000 --> 00:33:47,840
Speaker 1: Where you need to do that and not just the

543
00:33:48,280 --> 00:33:50,200
Speaker 1: you know, you have to be granular as well as

544
00:33:50,240 --> 00:33:53,080
Speaker 1: a big picture. So yeah, that's what we do. And

545
00:33:53,400 --> 00:33:56,640
Speaker 1: so when we go that, I think the biggest risks

546
00:33:56,720 --> 00:34:02,080
Speaker 1: that we see are the corporate market has increased a lot.

547
00:34:02,400 --> 00:34:06,000
Speaker 1: There's been a lot of funding to um private equity

548
00:34:06,040 --> 00:34:08,879
Speaker 1: firms and so on. Um is that a good thing

549
00:34:08,920 --> 00:34:12,440
Speaker 1: or a bad thing? Well, funding is good. It depends

550
00:34:12,440 --> 00:34:15,719
Speaker 1: on whether that debt is producing the cash flows and

551
00:34:15,719 --> 00:34:19,600
Speaker 1: and and so on. If you have a decline in earnings,

552
00:34:19,680 --> 00:34:23,200
Speaker 1: which will come from the next recession, fair much fair

553
00:34:23,239 --> 00:34:27,719
Speaker 1: amount of that debt um will be stress tested and

554
00:34:27,800 --> 00:34:30,919
Speaker 1: they'll be issues pertaining to that. And then the other

555
00:34:31,280 --> 00:34:35,719
Speaker 1: UM particular imbalance that we see is the amount of

556
00:34:35,760 --> 00:34:38,000
Speaker 1: sales that the U. S. Treasury is going to have

557
00:34:38,080 --> 00:34:41,040
Speaker 1: to make. And so when we look about what those

558
00:34:41,120 --> 00:34:46,799
Speaker 1: numbers will be, particularly after the stimulus starts to taper off,

559
00:34:46,960 --> 00:34:49,560
Speaker 1: we have we've had a big one time stimulus, particularly

560
00:34:50,000 --> 00:34:53,759
Speaker 1: tax cuts and particularly the corporate tax cuts, and that

561
00:34:53,840 --> 00:34:56,680
Speaker 1: will have a fading impact at the same time as

562
00:34:56,719 --> 00:35:00,000
Speaker 1: the budget deficits. Hence the sales of bonds will increase

563
00:35:00,280 --> 00:35:02,759
Speaker 1: at the same time as the balance sheet is being contracted.

564
00:35:02,840 --> 00:35:07,200
Speaker 1: When I do the calculations of who are the buyers

565
00:35:07,280 --> 00:35:10,040
Speaker 1: of that and one of their quantities, I see an

566
00:35:10,040 --> 00:35:14,400
Speaker 1: imbalance in that. And so UM, that is a form

567
00:35:14,520 --> 00:35:17,960
Speaker 1: of problems that existing. So three types of debt. You

568
00:35:18,000 --> 00:35:24,440
Speaker 1: have household, You've corporate, you have government. Where's the biggest problem? Um? Government?

569
00:35:24,760 --> 00:35:30,960
Speaker 1: And UM, the government debt and the corporate debt are

570
00:35:31,000 --> 00:35:33,400
Speaker 1: the biggest problems. So let me push back on you

571
00:35:33,440 --> 00:35:37,880
Speaker 1: and that and UM please do But UM, and what

572
00:35:37,960 --> 00:35:43,319
Speaker 1: I'm saying is not in total, okay, but government by

573
00:35:43,360 --> 00:35:47,920
Speaker 1: and large in total. But UM, corporates, not in total,

574
00:35:48,440 --> 00:35:51,880
Speaker 1: but in existing in certain pockets. It's going to be

575
00:35:51,920 --> 00:35:55,160
Speaker 1: the pushback because there seems to be a whole lot

576
00:35:55,200 --> 00:35:58,239
Speaker 1: of corporate debt, some of which seems to be with

577
00:35:58,440 --> 00:36:01,960
Speaker 1: good companies with good care flows and a strong ability

578
00:36:02,000 --> 00:36:05,200
Speaker 1: to service that debt a rated and then I don't know,

579
00:36:05,280 --> 00:36:09,799
Speaker 1: it's call at the bottom who are issuing a lot

580
00:36:09,800 --> 00:36:13,360
Speaker 1: of debt that's a kind of junkie and of dubious

581
00:36:13,560 --> 00:36:16,160
Speaker 1: serviceability in the future, Or am I just being too

582
00:36:16,239 --> 00:36:18,560
Speaker 1: nat I think you're pretty you're pretty accurate on that.

583
00:36:18,840 --> 00:36:21,840
Speaker 1: In other words, if you did triple B or double

584
00:36:21,880 --> 00:36:27,880
Speaker 1: by debt, and if you looked at UM leverage loans

585
00:36:28,520 --> 00:36:31,200
Speaker 1: and which has become huge the past five years, that's right,

586
00:36:31,560 --> 00:36:35,920
Speaker 1: and UM to finance also acquisitions a lot of private

587
00:36:35,960 --> 00:36:39,480
Speaker 1: equity acquisitions and and so on, and you looked at

588
00:36:40,120 --> 00:36:44,840
Speaker 1: the collateralized loan obligation mark CLO market UM in terms

589
00:36:44,840 --> 00:36:48,000
Speaker 1: of those things, there are some there are vulnerabilities that

590
00:36:48,080 --> 00:36:51,360
Speaker 1: exist there in terms of if incomes go down and

591
00:36:51,400 --> 00:36:55,200
Speaker 1: they're fairly covenant like, they're they're very convenent lie UM

592
00:36:55,320 --> 00:36:58,960
Speaker 1: and so and the big growth in debt in this

593
00:36:59,560 --> 00:37:04,200
Speaker 1: psycho has been the corporate debt too, because when interest

594
00:37:04,280 --> 00:37:07,840
Speaker 1: rates were lowered to a level that was below the

595
00:37:07,920 --> 00:37:11,799
Speaker 1: return on equity it paid to have buy backs or

596
00:37:11,960 --> 00:37:15,879
Speaker 1: to make acquisitions or um, and to go out there

597
00:37:15,920 --> 00:37:19,120
Speaker 1: and have a private equity because I get a higher

598
00:37:19,160 --> 00:37:21,520
Speaker 1: return on the equity. So it's a great financial That's

599
00:37:21,520 --> 00:37:23,000
Speaker 1: what you do with free money. You take it and

600
00:37:23,040 --> 00:37:24,480
Speaker 1: you put it to where it's going to generate the

601
00:37:24,520 --> 00:37:28,200
Speaker 1: highest return. That's right, and so UM a lot of

602
00:37:28,239 --> 00:37:31,279
Speaker 1: that UM that's where the big growth is. Two things

603
00:37:31,320 --> 00:37:34,600
Speaker 1: about that is that can't continue. First of all at

604
00:37:34,600 --> 00:37:38,799
Speaker 1: that pace, okay, so um that that problem under the

605
00:37:38,840 --> 00:37:43,360
Speaker 1: market will be disappearing. And then because you get leveraged

606
00:37:43,440 --> 00:37:45,880
Speaker 1: up to a certain point, you can't extrapolate that. But

607
00:37:45,960 --> 00:37:50,279
Speaker 1: then in addition to that, you know through experiences that

608
00:37:50,320 --> 00:37:52,520
Speaker 1: there are some that you could see are going to

609
00:37:52,560 --> 00:37:55,440
Speaker 1: be problems when earnings get hurt. And then there are

610
00:37:55,560 --> 00:37:58,120
Speaker 1: some that you can't see because you haven't stress tested

611
00:37:58,480 --> 00:38:01,920
Speaker 1: whether that was done well with good asset liability matches.

612
00:38:02,280 --> 00:38:07,839
Speaker 1: You know, for example, number of multinational companies bought companies

613
00:38:07,960 --> 00:38:12,520
Speaker 1: in other countries and they financed that with dollar denominated debt,

614
00:38:13,200 --> 00:38:16,480
Speaker 1: and when the dollar goes up and the incomes that

615
00:38:16,520 --> 00:38:19,520
Speaker 1: they're receiving is in local currency, you have an asset

616
00:38:19,520 --> 00:38:22,920
Speaker 1: liability mismatch. So there are a lot of asset liability

617
00:38:22,960 --> 00:38:26,280
Speaker 1: mismatches that are out there that we sort of worry about.

618
00:38:26,880 --> 00:38:31,600
Speaker 1: Those are the particular spots I would say that look vulnerable,

619
00:38:31,719 --> 00:38:35,480
Speaker 1: not nothing like it looked to us in two thousand seven.

620
00:38:35,960 --> 00:38:38,480
Speaker 1: But then if you go a little bit longer and

621
00:38:38,560 --> 00:38:43,520
Speaker 1: you take the movement. Um, we also have nonfunded, non

622
00:38:43,600 --> 00:38:48,000
Speaker 1: debt liabilities in the form of pension liabilities and healthcare liabilities,

623
00:38:48,160 --> 00:38:51,719
Speaker 1: both of which widnded, that are going to come. I mean,

624
00:38:51,760 --> 00:38:54,440
Speaker 1: we're going to a lot of promises, promises either be

625
00:38:54,480 --> 00:38:57,000
Speaker 1: paid back in the form of debt or promises to

626
00:38:57,640 --> 00:39:01,360
Speaker 1: you have money to pay pensions and all and negati

627
00:39:01,440 --> 00:39:05,440
Speaker 1: here that that all becomes limited and not all that produces,

628
00:39:05,840 --> 00:39:09,320
Speaker 1: you know, a greater squeeze, So it doesn't look as big,

629
00:39:09,360 --> 00:39:13,120
Speaker 1: like a big bang type of thing. My concern has

630
00:39:13,160 --> 00:39:15,040
Speaker 1: to do with the fact that it is coming at

631
00:39:15,040 --> 00:39:20,319
Speaker 1: the same time as there's populism and the political because um,

632
00:39:20,440 --> 00:39:24,759
Speaker 1: we're really right now at each other's throats, the left,

633
00:39:24,800 --> 00:39:28,000
Speaker 1: the right, the UM. I want to I want to

634
00:39:28,040 --> 00:39:30,440
Speaker 1: push back on that also, But before I do that,

635
00:39:30,480 --> 00:39:32,399
Speaker 1: I just have to come back to the corporate debt.

636
00:39:33,080 --> 00:39:37,800
Speaker 1: What you're describing is sort of an echo boom following

637
00:39:37,840 --> 00:39:43,760
Speaker 1: the original bubble and crash. Is that echo boom historically consistent?

638
00:39:43,800 --> 00:39:47,840
Speaker 1: Does that always seem to happen after a debt crisis

639
00:39:47,920 --> 00:39:50,640
Speaker 1: and collapse? Do you always get hey, things start to

640
00:39:50,640 --> 00:39:53,319
Speaker 1: repair and here we go again, or is this kind

641
00:39:53,320 --> 00:39:55,719
Speaker 1: of unique to well? You always you always go through

642
00:39:55,719 --> 00:40:00,080
Speaker 1: the cycle. And so when you're uh, when we we

643
00:40:00,160 --> 00:40:02,839
Speaker 1: are in a position where we're nine years into the

644
00:40:02,880 --> 00:40:08,799
Speaker 1: expansion and central banks have brought fifteen sixteen trillion dollars

645
00:40:08,840 --> 00:40:13,520
Speaker 1: worth of assets and made that cheap, you then mechanistically

646
00:40:13,680 --> 00:40:15,920
Speaker 1: have what you're calling an echo boom. You have that

647
00:40:16,000 --> 00:40:20,759
Speaker 1: big boom that has taken place. Happens, and that that

648
00:40:20,840 --> 00:40:24,000
Speaker 1: always happens. That's why you always have cycles, you know,

649
00:40:24,120 --> 00:40:28,840
Speaker 1: And that's why you come back to seven between the politics,

650
00:40:29,400 --> 00:40:32,319
Speaker 1: it's ten years after that's twin years, almost ten years.

651
00:40:34,040 --> 00:40:37,480
Speaker 1: We're late in the short term cycle, relatively late, although

652
00:40:38,480 --> 00:40:41,480
Speaker 1: I would say we've got probably the seventh inning of

653
00:40:41,560 --> 00:40:45,000
Speaker 1: the short term cycle this business cycle. We're late in

654
00:40:45,040 --> 00:40:47,600
Speaker 1: the long we're late in the long term cycle. Meeting

655
00:40:47,880 --> 00:40:52,120
Speaker 1: the amount of ammunition is less. These are facts in

656
00:40:52,160 --> 00:40:56,320
Speaker 1: other words, the interest rate, the quei thing um. And

657
00:40:56,440 --> 00:41:01,360
Speaker 1: we do have um a lot of populism and uh

658
00:41:01,480 --> 00:41:05,480
Speaker 1: and clashes about wealth and culture and those things internally

659
00:41:05,600 --> 00:41:08,360
Speaker 1: much more than we did. And we're at the top

660
00:41:08,520 --> 00:41:10,759
Speaker 1: or right near the top of the cycle and the

661
00:41:10,800 --> 00:41:14,520
Speaker 1: markets and so on, so you can't imagine that things

662
00:41:14,560 --> 00:41:19,200
Speaker 1: would turn down. And when things turned down, UM, my

663
00:41:19,320 --> 00:41:27,160
Speaker 1: big worry about that following these cycles is that political conflict,

664
00:41:27,239 --> 00:41:32,560
Speaker 1: social conflict worsen's because at times get worse for everybody.

665
00:41:32,640 --> 00:41:34,640
Speaker 1: And that's and that's that's an issue. So how do

666
00:41:34,719 --> 00:41:37,719
Speaker 1: the politics play out? How how were we with each other?

667
00:41:38,160 --> 00:41:40,640
Speaker 1: Can we can we approach that together or not? And

668
00:41:40,680 --> 00:41:45,200
Speaker 1: then of course then there's the power of the central

669
00:41:45,200 --> 00:41:49,000
Speaker 1: bank to be helping us, which is less. So so

670
00:41:49,080 --> 00:41:52,759
Speaker 1: let me do the little bit of pushback. And you know,

671
00:41:52,840 --> 00:41:56,200
Speaker 1: we kind of all exist in a media world, in

672
00:41:56,239 --> 00:42:00,880
Speaker 1: a social network world. But when we see these studies

673
00:42:00,920 --> 00:42:05,680
Speaker 1: that talk to Americans about a lot of hot button issues,

674
00:42:06,840 --> 00:42:10,800
Speaker 1: once you get away from the crazy rhetoric and the divisiveness,

675
00:42:11,440 --> 00:42:14,360
Speaker 1: we kind of all more or less have you know,

676
00:42:14,440 --> 00:42:19,560
Speaker 1: six agreement on some big issues. We all agree that

677
00:42:19,640 --> 00:42:21,840
Speaker 1: there should be less abortions if there's a way to

678
00:42:21,880 --> 00:42:24,600
Speaker 1: make that happen. We could disagree about whether or not

679
00:42:24,680 --> 00:42:27,839
Speaker 1: it should be mandatory, but there's some agreement there. There's

680
00:42:27,880 --> 00:42:31,800
Speaker 1: some agreement about some pretty common sense gun control laws.

681
00:42:32,239 --> 00:42:36,480
Speaker 1: There's some agreement about pollution and climate change. There's a

682
00:42:36,520 --> 00:42:39,040
Speaker 1: small group of people who don't believe it's man made,

683
00:42:39,080 --> 00:42:41,040
Speaker 1: and there's a small group of people who don't believe

684
00:42:41,080 --> 00:42:44,960
Speaker 1: in small pox vaccination. But by and large, most of

685
00:42:45,040 --> 00:42:50,360
Speaker 1: America things it's a bad idea to spew chemical exhaust

686
00:42:50,400 --> 00:42:53,480
Speaker 1: into the into the atmosphere that we all have to

687
00:42:53,920 --> 00:42:58,200
Speaker 1: um breathe. So, taking what you've learned, when you've put

688
00:42:58,280 --> 00:43:02,839
Speaker 1: these principles of of dead crisis together, how can we

689
00:43:02,880 --> 00:43:07,680
Speaker 1: get people outside of Twitter and Facebook to focus on

690
00:43:07,920 --> 00:43:11,440
Speaker 1: what we have in common? Hey, we're all Americans. We

691
00:43:11,480 --> 00:43:15,080
Speaker 1: all share a certain common belief system. How come we

692
00:43:15,120 --> 00:43:17,600
Speaker 1: don't focus on what brings us together as opposed to

693
00:43:17,600 --> 00:43:20,799
Speaker 1: what divides us. Well, first of all, I would disagree

694
00:43:20,840 --> 00:43:23,720
Speaker 1: with us um. I think we have a higher level

695
00:43:24,000 --> 00:43:28,000
Speaker 1: of conflict that created a conflict gauge. The conflict gauge

696
00:43:28,120 --> 00:43:31,040
Speaker 1: consists of a lot of different measures of conflicts alone

697
00:43:31,200 --> 00:43:34,280
Speaker 1: go over that. I was kind of leaning in that direction. Okay,

698
00:43:34,320 --> 00:43:40,279
Speaker 1: but it would be UM. The polarity within the two

699
00:43:40,320 --> 00:43:46,160
Speaker 1: political systems, the percentage of UM those who are adamantly

700
00:43:46,320 --> 00:43:51,719
Speaker 1: in favor of their candidate versus adamantly opposed to the

701
00:43:51,760 --> 00:43:56,480
Speaker 1: other candidate. That it would be. There's a whole bunch

702
00:43:56,520 --> 00:44:01,040
Speaker 1: of political things like uh, compromises in the bills that

703
00:44:01,080 --> 00:44:03,839
Speaker 1: are there, UM, A whole bunch of those types of

704
00:44:03,840 --> 00:44:10,640
Speaker 1: political things. UM. There are social value measures UM. In

705
00:44:10,680 --> 00:44:15,120
Speaker 1: other words, UM lots of indicators of what the parties

706
00:44:15,160 --> 00:44:20,920
Speaker 1: think of the other side, which is um uh antagonistic

707
00:44:21,040 --> 00:44:24,759
Speaker 1: almost to the point of being violent in terms of

708
00:44:24,840 --> 00:44:28,720
Speaker 1: measuring what one side is listening to the other side.

709
00:44:29,320 --> 00:44:31,800
Speaker 1: Any if you if you use UM, if you google

710
00:44:31,880 --> 00:44:35,680
Speaker 1: the word google, count the word war as this thing

711
00:44:35,960 --> 00:44:40,359
Speaker 1: from the word peace or compromise, and so on, all

712
00:44:40,400 --> 00:44:43,800
Speaker 1: of those measures. I could rattle on a lot. Big

713
00:44:43,840 --> 00:44:48,040
Speaker 1: differences in beliefs, Okay, big difference Uh. One of the

714
00:44:48,080 --> 00:44:52,200
Speaker 1: things that used to bind us more together was UM

715
00:44:52,560 --> 00:44:59,440
Speaker 1: certain religious produced certain UM common beliefs of Judeo Christian,

716
00:45:00,040 --> 00:45:05,120
Speaker 1: of relief system, the appreciation for the immigrant UM. These

717
00:45:05,160 --> 00:45:08,239
Speaker 1: were things, in other words, where diversity was really the

718
00:45:08,280 --> 00:45:13,200
Speaker 1: main sort of thanks anyway I could rattle off those.

719
00:45:13,239 --> 00:45:17,080
Speaker 1: We so we created an index, and the Index of Conflict,

720
00:45:17,200 --> 00:45:20,719
Speaker 1: which is just these measures biled up UM shows that

721
00:45:20,760 --> 00:45:25,640
Speaker 1: the conflict gauge is both within the country and within

722
00:45:25,719 --> 00:45:29,400
Speaker 1: most countries, is greater than it was since the thirties,

723
00:45:29,760 --> 00:45:35,400
Speaker 1: and also between countries. So is it just the nature

724
00:45:35,440 --> 00:45:38,640
Speaker 1: of the debt cycle? Can we blame? Can you blame

725
00:45:39,680 --> 00:45:44,040
Speaker 1: I don't know, social media, Fox News, Nancy Pelosi, Donald Trump?

726
00:45:44,040 --> 00:45:46,759
Speaker 1: Who gets the blame for that? Or is this just

727
00:45:46,840 --> 00:45:50,160
Speaker 1: what happens when you have a big debt crisis. Um. Yeah,

728
00:45:50,200 --> 00:45:53,840
Speaker 1: I think it happens over and over again because of

729
00:45:53,880 --> 00:45:56,960
Speaker 1: that disenfranchise and also I don't think they have much contact.

730
00:45:57,160 --> 00:46:00,680
Speaker 1: I mean, it's totally understandable. I think in the sense

731
00:46:00,760 --> 00:46:05,600
Speaker 1: that UM, capitalism right now is not working for the

732
00:46:05,600 --> 00:46:09,360
Speaker 1: majority of Americans. And I'm a hardcore capitalist. I wish

733
00:46:09,600 --> 00:46:12,680
Speaker 1: I could. But if you take the bottom six I

734
00:46:12,719 --> 00:46:15,359
Speaker 1: did a study of carving out what is it like

735
00:46:15,440 --> 00:46:19,040
Speaker 1: the bottom I want to look at the majority. Those

736
00:46:19,040 --> 00:46:24,920
Speaker 1: conditions are are bad. Another hasn't been income growth theory

737
00:46:25,520 --> 00:46:29,680
Speaker 1: on a real basis. That's right, there's rising debt um Uh,

738
00:46:29,800 --> 00:46:33,839
Speaker 1: there's rising death rates to rid death rates from opiates

739
00:46:33,920 --> 00:46:37,520
Speaker 1: death rates, but from suicides and so on. In those

740
00:46:37,640 --> 00:46:41,360
Speaker 1: those conditions, less economic mobility, there's a whole ga. We

741
00:46:41,480 --> 00:46:43,920
Speaker 1: used to have a middle class that was on the

742
00:46:43,960 --> 00:46:47,040
Speaker 1: assembly line and it kind of worked. So we have

743
00:46:47,120 --> 00:46:51,319
Speaker 1: a greater economic polarity you have. UM, so there's a

744
00:46:51,400 --> 00:46:56,600
Speaker 1: disenfranchised group out there. That's important. UM, we're also we

745
00:46:56,640 --> 00:46:59,439
Speaker 1: don't have that same sort of contact with each other.

746
00:46:59,680 --> 00:47:02,880
Speaker 1: You know, I live in Greenwich, Connecticut, in Greenwich, so

747
00:47:02,960 --> 00:47:06,480
Speaker 1: I think so exemplifies this. And my um we live

748
00:47:06,520 --> 00:47:10,720
Speaker 1: in Fairfield County, Greenwich, Connecticut. Um, it's I think still

749
00:47:11,160 --> 00:47:15,080
Speaker 1: the wealthiest state in the United States anyway, right up there. Um,

750
00:47:15,160 --> 00:47:18,560
Speaker 1: in that state there is one county that's rich and

751
00:47:18,600 --> 00:47:21,000
Speaker 1: the rest of the count state pretty much as poor,

752
00:47:21,400 --> 00:47:24,759
Speaker 1: and it's going in terrible situation. My wife, she does

753
00:47:24,800 --> 00:47:27,920
Speaker 1: to work with the disengaged kids, the students who basically

754
00:47:28,600 --> 00:47:30,759
Speaker 1: they're just kind of coasting through school and not in

755
00:47:31,000 --> 00:47:35,120
Speaker 1: doing anything. Yeah, thank you for remembering. Yeah, it's um,

756
00:47:35,360 --> 00:47:39,600
Speaker 1: there's disengaged and there's disconnected. And the disengaged are the

757
00:47:39,680 --> 00:47:43,080
Speaker 1: kid who attends school but he doesn't study, doesn't take tests,

758
00:47:43,120 --> 00:47:44,759
Speaker 1: or he fails and that county is just so to

759
00:47:44,800 --> 00:47:48,480
Speaker 1: getting through, and then there's disconnected, which means they don't

760
00:47:48,520 --> 00:47:50,920
Speaker 1: know where they are. They're no longer coming to the

761
00:47:51,040 --> 00:47:55,320
Speaker 1: school district. Twenty two percent of the high school students

762
00:47:55,360 --> 00:47:57,759
Speaker 1: are one of those. Those kids are going to be

763
00:47:58,040 --> 00:48:01,040
Speaker 1: twenty Those kids are going to be on the street.

764
00:48:01,040 --> 00:48:04,120
Speaker 1: They're gonna be there's a uselessness. They have to share

765
00:48:04,280 --> 00:48:09,160
Speaker 1: books literally, I mean in some cases sharing pencils, they literally.

766
00:48:09,239 --> 00:48:14,280
Speaker 1: Can you do to change that? Sounds like a broken system,

767
00:48:14,400 --> 00:48:17,600
Speaker 1: both on the educational level and the family level. How

768
00:48:17,640 --> 00:48:21,839
Speaker 1: can you possibly fix that? Well, these are um I'm

769
00:48:21,840 --> 00:48:25,640
Speaker 1: still answering the last question on the division right and

770
00:48:25,719 --> 00:48:29,120
Speaker 1: that division and most people don't even have contact with it,

771
00:48:29,160 --> 00:48:31,640
Speaker 1: Like I wouldn't have contact if it wasn't for my

772
00:48:31,680 --> 00:48:34,799
Speaker 1: wife taking me there and they in their twenty five

773
00:48:34,920 --> 00:48:37,320
Speaker 1: miles up the road. You know, you're in Grant, Connectic

774
00:48:37,520 --> 00:48:39,640
Speaker 1: kit and then and there, and you go to Bridgeport

775
00:48:40,239 --> 00:48:42,319
Speaker 1: or you go to Hartford, and you look at what

776
00:48:42,400 --> 00:48:46,320
Speaker 1: the daily shootings are killings in this place. Hartford, Connecticut

777
00:48:46,400 --> 00:48:49,799
Speaker 1: used to be the yeah, and and uh, you know,

778
00:48:49,840 --> 00:48:52,279
Speaker 1: a very fine place to be. So there is this

779
00:48:52,440 --> 00:48:56,040
Speaker 1: polarity we're talking about the reasons for the polarity. There's

780
00:48:56,040 --> 00:48:58,400
Speaker 1: a lot of reasons. I think to answer your question,

781
00:48:58,880 --> 00:49:03,040
Speaker 1: what you need is to recognize that that that that's

782
00:49:03,080 --> 00:49:06,040
Speaker 1: a national emergency, in other words, that capitalism has got

783
00:49:06,040 --> 00:49:08,000
Speaker 1: to work for the majority of the people. First of all,

784
00:49:08,200 --> 00:49:12,160
Speaker 1: let's recognize that. Let's and let's establish what that polar

785
00:49:12,480 --> 00:49:15,759
Speaker 1: metrics around that. You you have always been such a

786
00:49:15,800 --> 00:49:19,000
Speaker 1: private individual most of your career. You're not a big

787
00:49:19,520 --> 00:49:21,440
Speaker 1: in the past. When the books came out, you started

788
00:49:21,440 --> 00:49:26,319
Speaker 1: doing a little more media. This sounds like politics. I

789
00:49:26,400 --> 00:49:30,360
Speaker 1: can't imagine any interest in running for for office or

790
00:49:30,520 --> 00:49:34,799
Speaker 1: you the I can't imagine it. Now, some guy who

791
00:49:34,840 --> 00:49:37,600
Speaker 1: sits about forty feet from where we're having a conversation

792
00:49:37,719 --> 00:49:42,960
Speaker 1: has been talking about running in Do you think the

793
00:49:43,160 --> 00:49:49,240
Speaker 1: sort of technocratic approach, the engineered approach that Bridgewater uses,

794
00:49:49,400 --> 00:49:53,000
Speaker 1: or Mike Bloomberg, who is the owner of Bloomberg LP

795
00:49:53,080 --> 00:49:55,440
Speaker 1: where we're sitting right now, do you think that approach

796
00:49:55,520 --> 00:49:59,040
Speaker 1: can help solve some of these issues. And I was

797
00:49:59,080 --> 00:50:02,200
Speaker 1: not planning on making a political commercial. I'm I'm sincerely

798
00:50:02,239 --> 00:50:06,400
Speaker 1: asking a question. These have been very, very challenging problems

799
00:50:06,440 --> 00:50:09,680
Speaker 1: for generations. Nobody seems to have figured out how to

800
00:50:09,719 --> 00:50:13,439
Speaker 1: fix that. Well, I think a big I think big

801
00:50:13,480 --> 00:50:19,680
Speaker 1: progress can be made. First, UM, let's acknowledge it, let's

802
00:50:19,760 --> 00:50:25,560
Speaker 1: measure it, put the statistics, let's use those measurements as metrics,

803
00:50:25,880 --> 00:50:28,960
Speaker 1: in other words, to own it, so that now you say,

804
00:50:29,000 --> 00:50:31,560
Speaker 1: if I change that number, I'm doing a good job,

805
00:50:31,719 --> 00:50:34,440
Speaker 1: or if I'm not changing that number. And then let's

806
00:50:34,520 --> 00:50:40,080
Speaker 1: bring about the various peoples and parties. UM various parties

807
00:50:40,560 --> 00:50:43,359
Speaker 1: people most importantly, who are experts who deal in those

808
00:50:43,360 --> 00:50:47,359
Speaker 1: communities and understand them and make changes. Because I think

809
00:50:47,360 --> 00:50:49,160
Speaker 1: there are a lot of things that can be done

810
00:50:49,719 --> 00:50:52,839
Speaker 1: in my philanthropic efforts, and I think probably in Mike's

811
00:50:52,840 --> 00:50:56,200
Speaker 1: philanthropic You guys just did something with the ocean X

812
00:50:56,800 --> 00:51:00,160
Speaker 1: two hundred million dollar investment to help uh folk us

813
00:51:00,200 --> 00:51:03,279
Speaker 1: on keeping the oceans cleaner and resolving submission. That's right,

814
00:51:03,400 --> 00:51:06,719
Speaker 1: And I think people, I think we're also dealing with

815
00:51:06,800 --> 00:51:12,000
Speaker 1: that population and a we see all the time great

816
00:51:12,120 --> 00:51:15,799
Speaker 1: return on investment type of things that could be done,

817
00:51:16,200 --> 00:51:18,880
Speaker 1: and you just cannot imagine how the payoff can't be

818
00:51:19,000 --> 00:51:21,399
Speaker 1: great on those types of things. I think you could

819
00:51:21,440 --> 00:51:25,359
Speaker 1: put together public private partnerships and that that could be

820
00:51:25,719 --> 00:51:30,680
Speaker 1: corporations or philanthropists together with the government to do high

821
00:51:30,719 --> 00:51:33,960
Speaker 1: return on investment. I could rattle off a bunch of

822
00:51:33,960 --> 00:51:36,239
Speaker 1: these types of things that would help to eliminate, in

823
00:51:36,280 --> 00:51:39,680
Speaker 1: other words, things that pay for themselves. And think about,

824
00:51:40,320 --> 00:51:42,879
Speaker 1: you know, the cost of getting not getting through high

825
00:51:42,920 --> 00:51:47,200
Speaker 1: school and getting not getting a job in an individual's lifetime.

826
00:51:47,440 --> 00:51:51,920
Speaker 1: It's gonna, it's gonna be forever. It's a it's about

827
00:51:51,920 --> 00:51:56,000
Speaker 1: a million dollars per per per person. The that means

828
00:51:56,040 --> 00:52:01,000
Speaker 1: everything from police to courts to jails and beyond incarceration

829
00:52:01,400 --> 00:52:05,880
Speaker 1: is between eighty thousand dollars a year is what happens.

830
00:52:05,880 --> 00:52:07,840
Speaker 1: And people if you don't have jobs and you're in

831
00:52:07,880 --> 00:52:12,400
Speaker 1: a community that way, and like I support micro finance,

832
00:52:12,880 --> 00:52:16,200
Speaker 1: and for every dollar that I give to micro finance,

833
00:52:16,760 --> 00:52:20,160
Speaker 1: twelve dollars is lent out to people in the first

834
00:52:20,160 --> 00:52:22,960
Speaker 1: five years and it keeps ongoing because they get paid

835
00:52:23,000 --> 00:52:26,799
Speaker 1: back and so on. If you look at um um

836
00:52:27,280 --> 00:52:29,880
Speaker 1: that I could go on and on and on a

837
00:52:30,000 --> 00:52:33,120
Speaker 1: listening and those things, but somebody's got to take it

838
00:52:33,320 --> 00:52:37,279
Speaker 1: on right in other words, and then the other thing

839
00:52:37,440 --> 00:52:41,560
Speaker 1: is um I think the important, the most important thing

840
00:52:42,080 --> 00:52:45,080
Speaker 1: is to believe that we're there's a country that we

841
00:52:45,160 --> 00:52:49,319
Speaker 1: are in it together, Okay, that we need to um,

842
00:52:49,400 --> 00:52:54,719
Speaker 1: not fight about things, but to debate, argue and then

843
00:52:54,840 --> 00:52:58,680
Speaker 1: move on to compromises and to run the country for

844
00:52:58,719 --> 00:53:02,080
Speaker 1: the whole. We need to have thoughtful disagreement and principles

845
00:53:02,080 --> 00:53:04,799
Speaker 1: for dealing with it. Yeah, so you got me on

846
00:53:04,840 --> 00:53:07,799
Speaker 1: a hot street, Ray, you got my vote. So I'll

847
00:53:07,840 --> 00:53:10,319
Speaker 1: tell you that much I wish. I know, I have to.

848
00:53:10,680 --> 00:53:12,960
Speaker 1: You have to head out. Promise me you'll come back.

849
00:53:12,960 --> 00:53:14,799
Speaker 1: I have a thousand more questions for you. I can

850
00:53:14,800 --> 00:53:17,319
Speaker 1: talk to you for hours and hours. Um, this has

851
00:53:17,360 --> 00:53:19,800
Speaker 1: been absolutely delightful. Thank you for being so generous with

852
00:53:19,840 --> 00:53:22,040
Speaker 1: your time. Thank you for having me. It's always a

853
00:53:22,120 --> 00:53:26,400
Speaker 1: delight Um. We have been speaking with Ray Dalio, co

854
00:53:26,560 --> 00:53:30,719
Speaker 1: founder of Bridgewater Associates. If you enjoy this conversation, well,

855
00:53:30,880 --> 00:53:32,560
Speaker 1: be sure to look up and entered down an inch

856
00:53:32,920 --> 00:53:38,600
Speaker 1: on Apple, iTunes, Overcast, Stitcher, uh, SoundCloud, Bloomberg dot com,

857
00:53:38,600 --> 00:53:42,200
Speaker 1: wherever your finer podcasts are sold. I would be remiss

858
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Speaker 1: if I did not thank the correct staff that puts

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Speaker 1: this together each week. Medina Patwana is my audio engineer

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Speaker 1: and producer extraordinaire h A Tico Valberon is our project manager.

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Speaker 1: Taylor Riggs is our booker, slash producer producer. Michael bat

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Speaker 1: Nick is my head of Reese Urch. I'm Barry Retolts.

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Speaker 1: You've been listening to Masters in Business on Bloomberg Radio

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Speaker 1: m