WEBVTT - Ray Dalio Discusses Major Financial Crises (Podcast) 0:00:02.240 --> 0:00:06.800 This is Masters in Business with Barry Ridholts on Bloomberg Radio. 0:00:07.320 --> 0:00:09.640 Dear Lord, I have an extra special guest. His name 0:00:09.680 --> 0:00:13.040 is Ray Dalio. I could have sat and chat with 0:00:13.119 --> 0:00:16.760 Ray for hours and hours. His newest book is Principles 0:00:16.800 --> 0:00:21.640 for Navigating Big Debt Crisis, and it is a masterful 0:00:21.880 --> 0:00:26.079 three volume set on what the debt crises around the 0:00:26.120 --> 0:00:29.840 world look like throughout history. He does detailed case stories 0:00:29.880 --> 0:00:33.000 about three of the biggest ones, the Great Financial Crisis 0:00:33.000 --> 0:00:35.640 of oid O nine, the Great Depression, and then what 0:00:35.720 --> 0:00:40.000 took place in Germany. And then there are forty eight 0:00:40.400 --> 0:00:44.520 case studies or forty six case studies about other debt crises. 0:00:44.960 --> 0:00:49.199 He really provides an education for central banks going forward 0:00:49.640 --> 0:00:52.199 as to what they need to do to avoid these 0:00:52.200 --> 0:00:55.440 sorts of problems in the future, and when they happen, 0:00:56.040 --> 0:00:58.960 how to make them less painful. It's a master work 0:00:59.000 --> 0:01:03.480 and I expect it's gonna be on central bank bookshelves 0:01:03.600 --> 0:01:06.720 for decades and decades to come. This is would also 0:01:06.760 --> 0:01:09.240 be a good time to mention we have coming up 0:01:09.520 --> 0:01:13.240 Masters in Business Live with Ray Dalio. Uh and keep 0:01:13.280 --> 0:01:15.119 your ears open for that. We're gonna do a live 0:01:15.200 --> 0:01:18.479 broadcast going over the book. You could get the PDF 0:01:18.560 --> 0:01:21.800 of the book for free. The Kindle version is fifteen 0:01:21.840 --> 0:01:27.440 dollars in this behemoth is about fifty bucks, So free pdf. 0:01:27.480 --> 0:01:30.160 It's hard to argue with that. With no further ado, 0:01:30.400 --> 0:01:36.920 my conversation with Ray Dalio. My extra special guest this 0:01:36.959 --> 0:01:42.360 week is Ray Dalio, founder of Bridgewater Associates out of 0:01:42.400 --> 0:01:45.360 his apartment over forty years ago. He is presently co 0:01:45.520 --> 0:01:48.520 chairman and co c i O of the firm, which 0:01:48.560 --> 0:01:52.840 manages a hundred and sixty billion dollars in assets. Bridgewater 0:01:53.120 --> 0:01:57.400 perhaps has made more money for clients than any other 0:01:57.480 --> 0:02:01.080 hedge fund in history. Rather than waste a lot of 0:02:01.160 --> 0:02:04.080 time with the introduction, I just want to say, Ray Dalio, 0:02:04.200 --> 0:02:06.919 welcome back to Bloomberg. Thanks for having me back. Before 0:02:06.920 --> 0:02:09.320 we get to the new book. Last year, you were 0:02:09.360 --> 0:02:13.919 here right after Principles came out, and knowing how you 0:02:14.680 --> 0:02:18.799 look at the world as a giant experimental learning opportunity. 0:02:18.960 --> 0:02:22.280 What did you learn on the tour to promote the book? 0:02:23.160 --> 0:02:26.560 I was I was surprised at how curious and interactive 0:02:26.600 --> 0:02:30.280 people were. Um, I went on social media and that's 0:02:30.280 --> 0:02:32.720 a place that I thought I'd never go on. And 0:02:32.240 --> 0:02:35.560 uh and I thought probably was a snarky place and 0:02:35.840 --> 0:02:38.960 a little um hasn't been for me. You know, there 0:02:38.960 --> 0:02:41.360 are a lot of curious people out there were eager 0:02:41.400 --> 0:02:44.560 to learn, and I'm good people. I'm having great conversations 0:02:44.600 --> 0:02:47.000 with them back and forth. Uh take a little bit 0:02:47.000 --> 0:02:49.400 of time to do it. And uh so I was 0:02:49.600 --> 0:02:52.880 most surprised about those things you embrace as part of 0:02:52.919 --> 0:02:58.200 your process, both radical transparency and a pure meritocracy. If 0:02:58.200 --> 0:03:00.240 someone has a good idea, it doesn't matter where it 0:03:00.240 --> 0:03:02.840 comes from. Well, the markets teach you humility. You know, 0:03:03.080 --> 0:03:06.280 you're never a dent, you're being right in any way. 0:03:06.480 --> 0:03:09.200 And so that what that taught me is that I 0:03:09.320 --> 0:03:12.360 love to have my views challenged and so to learn 0:03:12.440 --> 0:03:15.440 the art of thoughtful disagreement. That's not a fight, it's 0:03:15.480 --> 0:03:19.080 a curiosity experience. That's a great phrase, the art of 0:03:19.120 --> 0:03:23.080 thoughtful disagreement. So now you write a second book, I 0:03:23.160 --> 0:03:25.720 have to ask you go sixty years without ever writing 0:03:25.760 --> 0:03:28.880 a book, and then you put out to really, this 0:03:28.960 --> 0:03:32.520 is a really substantive book in three years. What what 0:03:32.680 --> 0:03:34.880 is the hurry? What's the rush to get all this 0:03:34.960 --> 0:03:38.600 writing done so quickly? Well, like my other book, a 0:03:38.640 --> 0:03:41.400 lot of the principles that I had in this book 0:03:41.400 --> 0:03:43.480 were written over a long period of time, a lot 0:03:43.480 --> 0:03:47.240 of the research, and then I was asked by a 0:03:47.320 --> 0:03:51.040 number of policy makers on others UH to write this 0:03:51.120 --> 0:03:54.320 book on for the tenth anniversary of the financial crisis, 0:03:54.400 --> 0:03:57.520 because um, they said that there's no book that you 0:03:57.600 --> 0:04:01.040 can go to that really gives the lesson that happen 0:04:01.200 --> 0:04:03.200 over and over again. Now other words, we're going to 0:04:03.320 --> 0:04:06.520 focus a lot on the two thousand and eight financial crisis, 0:04:06.520 --> 0:04:09.760 and that's good, but um, it's like looking at one 0:04:09.800 --> 0:04:12.480 case of a disease. If you really want to understand 0:04:12.520 --> 0:04:15.680 that how the disease transpires, you have to see pretty 0:04:15.720 --> 0:04:18.440 much them all and then understand how they work on 0:04:18.520 --> 0:04:21.240 average and how they deviate. And that was the purpose 0:04:21.279 --> 0:04:23.480 of the book. So the timing was the big thing, 0:04:23.520 --> 0:04:26.040 and then a shove from other people. You don't want 0:04:26.080 --> 0:04:28.360 to get too lost in the weeds on any one 0:04:28.440 --> 0:04:31.919 particular financial disaster. What we're trying to find is the 0:04:31.960 --> 0:04:35.320 consistent thread, the best ways to respond to them, the 0:04:35.360 --> 0:04:39.080 best ways to manage them, and even heaven forbid, possibly 0:04:39.120 --> 0:04:41.880 avoiding them in the future. Statement. Yeah, well, let me 0:04:41.920 --> 0:04:45.159 give you an example in this particular financial crisis, a 0:04:45.240 --> 0:04:48.120 lot hinged on bank capital. No other words, how he 0:04:48.200 --> 0:04:52.120 rectified bank capital, liquidity and how much well capital capital. 0:04:52.360 --> 0:04:56.719 Liquidity is different from capital, but so in other words, basically, 0:04:57.279 --> 0:05:00.800 capital is on your income statement, what your balance sheet 0:05:00.880 --> 0:05:03.599 look like. Okay, are you out of money? Then you 0:05:03.640 --> 0:05:06.760 get shut down. Liquidity is the money that comes in. 0:05:06.920 --> 0:05:10.880 You can have no bank capital and plenty of liquidity 0:05:10.920 --> 0:05:14.160 and be fine if they don't have marked the market accounting. 0:05:14.640 --> 0:05:19.159 So like by going through the crisis, which by most 0:05:19.160 --> 0:05:22.840 measures was of severe or comparable severity in terms of that, 0:05:23.320 --> 0:05:26.000 one of the big differences was they didn't have marked 0:05:26.040 --> 0:05:28.720 the market accounting. So because they didn't have marked the 0:05:28.800 --> 0:05:31.960 market accounting, the solvency issue wasn't as big a deal 0:05:32.080 --> 0:05:35.719 because they didn't account for it as being insolved where 0:05:36.200 --> 0:05:39.680 the liquidity issue was. So my point is that when 0:05:39.720 --> 0:05:42.240 you go from one to the other, you start to 0:05:42.320 --> 0:05:46.400 understand what levers and what patches. So the whole notion 0:05:46.600 --> 0:05:49.920 is look at the one on average, what's the typical one, 0:05:50.440 --> 0:05:53.400 and then look at the deviations and see what causes them, 0:05:53.720 --> 0:05:56.640 and then you understand how these things work. And that's 0:05:56.640 --> 0:05:59.320 what the books about. So when we look at the 0:05:59.360 --> 0:06:02.320 oh you don't crisis. We see most of the banks 0:06:02.360 --> 0:06:05.760 had a lot of capital, but they also had a 0:06:05.760 --> 0:06:08.880 ton of assets leveraged on top of the capital. How 0:06:08.920 --> 0:06:13.680 significant is that leverage ratio of of capital to additional 0:06:13.800 --> 0:06:18.000 leveraged assets. Well, it tells you how much of a 0:06:18.120 --> 0:06:21.160 downward movement in the assets you can take. Right. If 0:06:21.200 --> 0:06:23.400 it's if it's a bank is leverage ten to one 0:06:23.920 --> 0:06:28.520 and the average assets go down ten percent, you're out 0:06:28.520 --> 0:06:32.680 of money. Right, that's the counting. And and if you 0:06:32.800 --> 0:06:36.120 don't account for that like that period of time, you 0:06:36.160 --> 0:06:39.160 don't count for that exactly that way, you treat them differently, 0:06:39.720 --> 0:06:42.640 then you're really dealing with a liquidity case. But these 0:06:42.640 --> 0:06:46.479 things happen over and over again. The same basic structure 0:06:46.560 --> 0:06:49.080 happens over and over again. And I thought it was 0:06:49.200 --> 0:06:54.120 really really important to have a book that shows what 0:06:54.200 --> 0:06:58.520 that classic diseases, like, how it works one thing leads 0:06:58.560 --> 0:07:01.799 to another in a certain way, and then to show 0:07:01.839 --> 0:07:05.479 all of the cases. So it shows all forty eight 0:07:05.600 --> 0:07:09.120 cases of bad debt crisis is over the last hundred years, 0:07:09.520 --> 0:07:11.760 and you can go into them see them one by one, 0:07:12.280 --> 0:07:15.320 and then it takes you through three classic ones in 0:07:15.400 --> 0:07:18.920 detail takes you through them pretty much almost day by day, 0:07:19.000 --> 0:07:22.000 so you can viscerally feel what they were like, and 0:07:22.040 --> 0:07:25.480 you could almost imagine what you would do on that day. 0:07:25.600 --> 0:07:28.680 Um it starts with the it does it in the 0:07:28.720 --> 0:07:33.680 sequential order. So in the nineteen twenties the inflationary depression 0:07:34.000 --> 0:07:37.480 um of Germany's Weimar Republic. And the reason I put 0:07:37.520 --> 0:07:43.040 that in is because depressions can be inflationary or deflationary, 0:07:43.120 --> 0:07:45.840 and in order to understand what makes the difference, what 0:07:45.960 --> 0:07:49.560 makes them inflationary versus deflationary, wanted to put that in. 0:07:49.920 --> 0:07:52.760 But the sequence is similar. Then then we go that's 0:07:52.800 --> 0:07:55.160 the end of World War One and the period in 0:07:55.200 --> 0:07:59.640 between that's interesting, and then we go to the after 0:07:59.680 --> 0:08:02.920 World More one. We had the twenties, and with that 0:08:03.040 --> 0:08:06.600 we had the set up for the ninet thirties Great Depression. 0:08:06.760 --> 0:08:10.600 I love the way you structured this three segments. One 0:08:10.720 --> 0:08:14.840 is the archetypical debt cycle. The next is some detailed 0:08:15.280 --> 0:08:17.320 case studies. And you look at the Great Depression, you 0:08:17.320 --> 0:08:18.840 look at the Weinmar public, you look at a way 0:08:18.920 --> 0:08:21.040 A nine, and then you come up with forty eight 0:08:21.080 --> 0:08:25.240 additional case studies. Each of these are a different volume 0:08:25.320 --> 0:08:28.880 in what effectively is a three volume set, tell us 0:08:28.880 --> 0:08:31.560 the thinking about this, and and tell us about the 0:08:31.640 --> 0:08:36.599 feedback you've gotten from people who had to manage the 0:08:36.679 --> 0:08:40.160 oh eight or nine crisis. Well, I believe the same 0:08:40.200 --> 0:08:42.640 things happened over and over again. And it's like a disease. 0:08:42.720 --> 0:08:44.920 If you don't watch all the cases you want to 0:08:44.960 --> 0:08:48.000 understand them. That's kind of like doctors in emergency room. 0:08:48.000 --> 0:08:50.839 They do a twenty four hour shift just so they 0:08:50.840 --> 0:08:53.040 can see the disease run its full course over and 0:08:53.080 --> 0:08:55.000 over again, over and over again, right, and then you 0:08:55.040 --> 0:08:57.680 make the connections. You know how these things work because 0:08:57.720 --> 0:09:00.840 they're classic. They all happen basically in the same way. 0:09:00.920 --> 0:09:03.320 So that's that's what I did. That's why I put 0:09:03.360 --> 0:09:05.840 all of those case studies in there as a backdrop, 0:09:05.880 --> 0:09:08.920 and then I put the template the templates. Just sixty pages. 0:09:08.960 --> 0:09:12.040 You read it, you get the template. Um, yeah, no, no, 0:09:12.280 --> 0:09:15.840 the people, Ben Bernankee said, Ray Dali's book is the 0:09:15.840 --> 0:09:18.600 most read uh as I must read for anyone who 0:09:18.640 --> 0:09:23.680 aspires to prevent or manage the next financial crisis. Larry 0:09:23.679 --> 0:09:26.320 Summers said, a terrific piece of work by one of 0:09:26.320 --> 0:09:28.959 the world's top investors who has devoted his life to 0:09:29.000 --> 0:09:32.880 understanding the markets and demonstrating that understanding by navigating the 0:09:32.920 --> 0:09:38.280 two thousand eight financial crisis. Um Tim Geitner said, it's 0:09:38.280 --> 0:09:42.360 an outstanding history of the financial crisis, including the devastating 0:09:42.400 --> 0:09:45.880 crisis of two thousand eight. That's an amazing list of 0:09:45.960 --> 0:09:50.360 people who were actually actually there and and running this. 0:09:50.960 --> 0:09:54.360 And Hank Poulson is another person who had some comments 0:09:54.640 --> 0:09:59.240 in any way they I think it's um. I think 0:09:59.240 --> 0:10:02.679 it's accur it. And the most important thing isn't the book. 0:10:03.360 --> 0:10:05.920 The most important thing that I'm really trying to get 0:10:05.960 --> 0:10:10.840 at is the mechanics of the disease has described here. 0:10:11.200 --> 0:10:15.040 Because if we can just understand and agree on the 0:10:15.080 --> 0:10:18.600 mechanics of these things, we make a giant leap forward. 0:10:19.280 --> 0:10:22.520 A lot of the mechanics are not agreed to, and 0:10:22.559 --> 0:10:26.040 they're not studied. They don't look at cases. For example, 0:10:26.280 --> 0:10:28.640 at the time, there was a lot of argument that 0:10:28.760 --> 0:10:35.080 printing money would bring back right, but which which showed 0:10:35.080 --> 0:10:39.520 a fundamental misunderstanding of what showed a fundamental misunderstanding because 0:10:40.280 --> 0:10:44.520 when when more money comes into the system at the 0:10:44.559 --> 0:10:49.280 same time as credit is contracting, the actual amount of 0:10:49.640 --> 0:10:55.319 purchasing power is not rising, and so what causes inflation 0:10:55.920 --> 0:10:59.200 is when more money is spent than goods and services 0:10:59.240 --> 0:11:03.520 are produced. Okay, And what's happening at these times is 0:11:03.559 --> 0:11:08.000 that money creation is making up for the contraction and credit. 0:11:08.240 --> 0:11:11.400 So you're you're jumping ahead to the beautiful deleveraging. Let's 0:11:11.440 --> 0:11:14.240 go through the six steps as you outlined in the book, 0:11:14.720 --> 0:11:18.600 and just a quick overview the early part of the cycle, 0:11:19.120 --> 0:11:24.440 the bubble, the top, the depression, the beautiful deleveraging, the 0:11:24.520 --> 0:11:27.400 pushing on a string, and then normalization is did I 0:11:27.440 --> 0:11:31.080 get that more or less right? That's right and um, 0:11:31.200 --> 0:11:35.280 And basically most cycles work the same way, but there's 0:11:36.000 --> 0:11:39.520 when you hit a zero interest rate, then you have 0:11:39.679 --> 0:11:43.120 the big one. Okay. So what happens is in the 0:11:43.120 --> 0:11:47.400 early part of a cycle, uh, the amount of lending 0:11:47.720 --> 0:11:51.600 that takes place produces a cash flow which is greater 0:11:51.720 --> 0:11:55.119 than the debt service payments on that that's a virtuous 0:11:55.200 --> 0:11:58.800 lending because credit gives buying power and depending on how 0:11:58.800 --> 0:12:01.640 you're using that buying power for using it to create 0:12:01.800 --> 0:12:04.800 income that's greater than the debt service payments. Is a 0:12:04.880 --> 0:12:08.400 self reinforcing positive cycle that normally happens in the early 0:12:08.440 --> 0:12:12.240 part of the cycle. Then it pushes asset prices up. 0:12:12.760 --> 0:12:17.640 And what happens is that people start to extrapolate those 0:12:17.679 --> 0:12:21.040 things going forward, so as the debts continue to rise, 0:12:21.280 --> 0:12:24.040 and they believe this is going to go higher and higher. 0:12:24.400 --> 0:12:28.480 In other words, the belief in um, the miracle of 0:12:28.600 --> 0:12:32.240 the new thing, and maybe the miracle of the the 0:12:32.240 --> 0:12:36.240 new Amazon or the new Tesla, or it's the nifty 0:12:36.320 --> 0:12:38.880 fifty in other years, in other words, that of the world, 0:12:39.440 --> 0:12:43.480 and that there's not careful calculation in terms of what 0:12:43.559 --> 0:12:46.160 could be paid back. We start to get into the 0:12:46.200 --> 0:12:51.400 bubble stage. The bubble stage is also um accompanied by 0:12:51.960 --> 0:12:55.560 a shadow The development of shadow banking is that consistent 0:12:55.600 --> 0:12:59.120 always always. We saw shadow banking very much in O eight, 0:12:59.160 --> 0:13:03.120 o nine. I was not aware until I plowed through 0:13:03.160 --> 0:13:06.680 this that there was a shadow banking system. Uh in 0:13:06.720 --> 0:13:10.120 the Great Depression. There was a shadow banking system repeatedly 0:13:10.120 --> 0:13:13.640 throughout history, repeatedly throughout history. The way it works is 0:13:13.679 --> 0:13:17.960 the banks are regulated and they're controlled, and they're safe 0:13:18.000 --> 0:13:21.360 and they're overseen. But there are innovations that come outside 0:13:21.400 --> 0:13:25.200 of the banking system. For there's a shadow banking system. 0:13:25.240 --> 0:13:28.959 Now you know, in other words, private lending that takes 0:13:28.960 --> 0:13:30.680 place out of the side of the banking system in 0:13:30.720 --> 0:13:34.040 various ways, and it's not regulated, and there's an incentive 0:13:34.080 --> 0:13:37.200 to go outside the banking system because the banking system 0:13:37.240 --> 0:13:40.800 being regulated and being controlled can't make as much money 0:13:41.160 --> 0:13:47.480 as going outside the banking system. Safer but capped right, 0:13:47.880 --> 0:13:51.920 watched over um. But you know, not necessarily totally say, 0:13:51.960 --> 0:13:54.360 but you always have the going out to that, and 0:13:54.440 --> 0:13:58.280 you always have the development of new vehicles, always new vehicles, 0:13:58.360 --> 0:14:00.760 and they grow in a very fast way. Doesn't mean 0:14:00.800 --> 0:14:03.320 they're not healthy, but they grow in a very fast way. 0:14:03.520 --> 0:14:06.720 And you see a growth in that in lending that 0:14:06.840 --> 0:14:11.560 becomes an unsustainable growth rate that feeds on itself because 0:14:11.600 --> 0:14:15.120 the middlemen make money on making these kinds of loads. Um, 0:14:15.200 --> 0:14:18.120 those who are buying them have them go up in value, 0:14:18.520 --> 0:14:22.920 and everybody is happy at that point. What we always 0:14:22.960 --> 0:14:26.000 try to do is do the pro form of financial statements, 0:14:26.000 --> 0:14:28.000 in other words, how much cash is going to come 0:14:28.040 --> 0:14:30.280 in and come and you don't have uh, you have 0:14:30.320 --> 0:14:33.080 a problem. And there's the lending of seeds, the ability 0:14:33.120 --> 0:14:35.880 to services that's right. And in addition, you come to 0:14:35.960 --> 0:14:38.880 the late part of the cycle. You know, when there's 0:14:38.920 --> 0:14:42.120 not much capacity to grow as fast, but the markets 0:14:42.160 --> 0:14:46.080 continue to discount a fast growth rate. The funny thing 0:14:46.120 --> 0:14:49.600 about markets is that they discount what they've experienced more 0:14:49.640 --> 0:14:52.800 than what's likely. Like you would imagine when an economy 0:14:52.840 --> 0:14:56.119 is really depressed that buying large that they would discount 0:14:56.200 --> 0:14:58.000 that it would be pick up because it's at the 0:14:58.000 --> 0:15:00.120 low part of the cycle, or when when you run 0:15:00.000 --> 0:15:02.600 into the late part of the cycle, they would say 0:15:02.720 --> 0:15:05.440 it can't sustain that particular growth rate. And they certainly 0:15:05.440 --> 0:15:07.960 can't sustain that growth rate on a lot of debt, 0:15:08.280 --> 0:15:11.600 But yet the their price to discount that, And so 0:15:11.840 --> 0:15:15.520 the the irony is asset prices are higher. There's much 0:15:15.560 --> 0:15:18.480 more leverage in the mark in the system. And so 0:15:18.600 --> 0:15:22.400 why would asset prices be higher or credit spreads be 0:15:22.560 --> 0:15:25.040 lower when there's a lot more leverage in the price 0:15:25.080 --> 0:15:28.240 of everything is higher. Doesn't make sense, But that's where 0:15:28.280 --> 0:15:31.880 the bubble is. These are the good times, these are 0:15:31.920 --> 0:15:34.480 the great times, it seems right. So so then you 0:15:34.560 --> 0:15:39.240 get the top and then bang, the next stop is depression. Well, 0:15:39.320 --> 0:15:44.080 most typically then the top. The top usually comes through 0:15:44.120 --> 0:15:48.760 a combination of a tightening of monetary policy because you're 0:15:48.840 --> 0:15:53.320 later in the cycle. Are the central bankers historically always 0:15:53.360 --> 0:15:55.600 late to the party. Is there anything they could do 0:15:56.240 --> 0:15:58.720 to sort of slow it down in real time or 0:15:59.120 --> 0:16:02.600 has history shown own they always are are at a 0:16:02.640 --> 0:16:06.960 step History is shown that they're pretty much always allowing 0:16:07.000 --> 0:16:10.320 the rate of growth to be rate faster than the 0:16:10.440 --> 0:16:14.200 rate of capacity to produce. And so we see a 0:16:14.280 --> 0:16:18.600 shrinking labor force. We excess labor, we see as shrinking 0:16:19.080 --> 0:16:24.280 utilization of excess utilization of capacity. You see those types 0:16:24.320 --> 0:16:28.040 of things that to put on the brakes enough ahead 0:16:28.120 --> 0:16:32.520 of the capacity limitations. Um, you know, hardly ever takes place. 0:16:32.800 --> 0:16:35.080 They can't, they don't get it right, and and that's 0:16:35.120 --> 0:16:38.960 partially related to this economy, but it's also partially related 0:16:39.240 --> 0:16:42.760 to the asset prices. The asset prices go first before 0:16:42.800 --> 0:16:46.560 the economy goes, so private equity competes with public equity 0:16:46.600 --> 0:16:49.240 and everything, and so you like in this cycle, you've 0:16:49.280 --> 0:16:52.800 seen those asset prices go down and projected returns of 0:16:52.800 --> 0:16:56.360 all those assets prices go lower. You see the duration 0:16:56.440 --> 0:16:59.920 of the assets length and duration means also price sensitive. 0:17:00.000 --> 0:17:04.119 A lacing um longer bo more sensitive than the product 0:17:04.160 --> 0:17:08.160 to the movement of interest rates. So the interest rate UM, 0:17:08.359 --> 0:17:12.080 so as it's become more sensitive, and then what happens 0:17:12.320 --> 0:17:15.800 is classically you have enough of a tightening um to 0:17:16.080 --> 0:17:19.840 create the crack that usually also happens when they cash 0:17:19.880 --> 0:17:23.760 flow is not in um, not positioned because there's too 0:17:23.840 --> 0:17:26.359 much debt relative to the cash flow, and it starts 0:17:26.359 --> 0:17:29.000 in the periphery of the credit markets, and then it 0:17:29.040 --> 0:17:32.639 works itself down through that. So sorry, you're suggesting it 0:17:32.720 --> 0:17:35.160 starts in the shadow banking market and then works its 0:17:35.200 --> 0:17:39.359 way into the mainstream, so you get colts. So what 0:17:39.440 --> 0:17:42.320 we saw, no, you know, nine these non bank lenders, 0:17:42.359 --> 0:17:47.640 the model was uh underwrite mortgages to sell to securitizers. 0:17:48.160 --> 0:17:51.000 They started going belly up in pretty big numbers in 0:17:51.119 --> 0:17:54.800 oh six, oh seven, long before you saw any problems 0:17:54.840 --> 0:17:57.160 with with the big banks. That that's typical of all 0:17:57.200 --> 0:18:01.919 these cycles because at the periphery there's more aggressive lending. 0:18:02.440 --> 0:18:05.720 It's unregulated the leverage, right, I think about the investment 0:18:05.720 --> 0:18:09.360 banks being more leveraged than the traditional banks. By way 0:18:09.400 --> 0:18:12.439 of example, traditional banks are all part of the party. 0:18:12.520 --> 0:18:16.120 I mean, it's it's the same thing now, every everybody 0:18:16.200 --> 0:18:19.480 is in the same hot up together. All of these cycles, 0:18:19.520 --> 0:18:23.040 the upward cycle is self reinforcing. So let's let's get 0:18:23.040 --> 0:18:25.720 to the I want to jump to the beautiful deleveraging, 0:18:25.760 --> 0:18:28.720 which is your phrase, which I've always found to be 0:18:28.920 --> 0:18:32.640 somewhat of a romantic phrase about something that's a fairly 0:18:32.800 --> 0:18:37.879 dry economic process. Tell us about the beautiful deleveraging post 0:18:37.920 --> 0:18:42.479 O eight o nine And in previous cycles, well, um, 0:18:42.520 --> 0:18:45.800 in a normal cycle, when you have the downward move 0:18:46.000 --> 0:18:49.720 to get it reef moving on the positive side, they 0:18:49.800 --> 0:18:53.680 get the good cycle going. You lower interest rates enough 0:18:54.280 --> 0:18:58.560 so that the present value discount rate for asset prices 0:18:58.600 --> 0:19:02.639 goes up. You may a um it cheaper to have 0:19:02.800 --> 0:19:05.600 new borrow because the monthly payments are less because of 0:19:05.640 --> 0:19:09.800 the interest rate is less. You and you make everybody richer. 0:19:09.960 --> 0:19:12.560 That's how the cycle goes. And that seems to have 0:19:12.600 --> 0:19:15.760 happened posted eight o nine. Yes, it happens in all 0:19:15.800 --> 0:19:18.640 these cycles. That's the normal way to happen. But what's 0:19:18.720 --> 0:19:22.399 different about the eight oh nine, which is the same 0:19:22.440 --> 0:19:27.080 as the nine team to thirty two period, is interest rates. 0:19:27.160 --> 0:19:33.720 It's zero. When interest rates it's zero, the game changes, okay, 0:19:33.800 --> 0:19:37.720 because monetary policy cannot operate that way. And so two 0:19:37.800 --> 0:19:43.240 times that century, that happened. And that's when century or 0:19:43.400 --> 0:19:47.360 or century, that's the that's the time it happened. And 0:19:47.400 --> 0:19:51.840 then what that means is the game changes. And the 0:19:51.920 --> 0:19:55.120 game then has to be that you print money and 0:19:55.400 --> 0:19:57.879 you buy financial asset central banks you got to do 0:19:57.920 --> 0:20:02.159 that ZERP and KWI. Yeah, and that they do that 0:20:02.240 --> 0:20:05.480 all over the world. And in that since then, they built, uh, 0:20:05.520 --> 0:20:08.880 they brought about sixteen trillion dollars. Central banks have bought 0:20:08.880 --> 0:20:12.760 about sixteen trillion dollars, put about sixteen trillion dollars of 0:20:12.800 --> 0:20:16.280 liquidity out in the system in financial markets, and that 0:20:16.440 --> 0:20:19.879 causes financial markets to go up and produces plenty of 0:20:19.920 --> 0:20:24.680 liquidity in the um. In that crisis, they also guaranteed 0:20:24.920 --> 0:20:27.520 about two thirds of all of the debt in the 0:20:27.560 --> 0:20:31.240 United States. And that's that's just an astonishing figure. You've 0:20:31.240 --> 0:20:35.560 been using nineteen thirty seven as the parallel for today. 0:20:36.240 --> 0:20:39.600 Nineteen thirty seven was kind of a scary time in history. 0:20:40.119 --> 0:20:43.560 It was before the rise of Nazism, was before World 0:20:43.600 --> 0:20:45.879 War two. A lot of bad things were going on 0:20:45.920 --> 0:20:49.640 in nineteen thirty seven. Why do you draw that that parallel, Well, 0:20:49.760 --> 0:20:52.640 I think things happening. There's a list of things happening 0:20:53.200 --> 0:20:57.800 in nineteen thirty two, nine nine, nineteen thirty two as 0:20:57.840 --> 0:21:02.240 in two thousand and eight to two thousand nine UM, 0:21:02.359 --> 0:21:06.040 there was a debt crisis and that UM where an 0:21:06.040 --> 0:21:10.320 interest rates at zero and central banks had to print 0:21:10.359 --> 0:21:13.040 a lot of money to buy a lot of financial assets, 0:21:13.119 --> 0:21:17.880 which produced UM big rallies in the stock market and 0:21:18.119 --> 0:21:22.840 a big pickup in economic activity. And in seven the 0:21:22.880 --> 0:21:26.840 federal reserves started to tighten monetary policy of law, and 0:21:27.240 --> 0:21:30.159 there was an interest rate sensitivity associated with that. Was 0:21:30.200 --> 0:21:35.160 it premature UM, It's not so much premature as much 0:21:35.200 --> 0:21:39.640 as highly impactful in my opinion, maybe a bit of both, UM. 0:21:39.920 --> 0:21:43.560 But the point at that time is that in doing that, 0:21:44.440 --> 0:21:48.200 that contributed to the wealth gap, because financial assets are 0:21:48.240 --> 0:21:53.440 owned by people who have financials and poor people don't 0:21:53.480 --> 0:21:57.679 have that, and to produced a wealth gap in which UM, 0:21:57.920 --> 0:22:01.280 like now, the top intent of one percent of the 0:22:01.320 --> 0:22:07.720 population's net woralth is equal to the bottom combined. So 0:22:07.720 --> 0:22:10.080 so there was a there was a giant wealth gap. 0:22:10.600 --> 0:22:14.720 And at that time there's tension between the left and 0:22:14.760 --> 0:22:17.160 the right, and this is true in all countries around 0:22:17.160 --> 0:22:21.800 the world, and so we have the emergence of populism 0:22:21.840 --> 0:22:26.440 now four countries decided to go from democracies to dictatorships. 0:22:26.520 --> 0:22:30.359 That happened in Italy, feet and then it happened in Germany, 0:22:30.680 --> 0:22:34.439 it happened in Japan, it happened in Spain, and that 0:22:34.440 --> 0:22:39.240 that tension produced tension inside the country and tension outside 0:22:39.280 --> 0:22:42.040 the country, and it produced a certain type of leader, 0:22:42.080 --> 0:22:45.359 which was a populist leader. So we have populism in 0:22:45.400 --> 0:22:47.840 other words, of gap there that I think is very 0:22:47.880 --> 0:22:51.320 important to understand. Politics now is more important than at 0:22:51.359 --> 0:22:53.359 any time in my lifetime. And I've been doing this 0:22:53.400 --> 0:22:56.480 for fifty years. So what are we seeing in today's 0:22:57.440 --> 0:23:01.919 today's um worlds of politics between the rise of Trump 0:23:02.000 --> 0:23:04.359 is m and what we've seen in the Philippines and 0:23:04.359 --> 0:23:07.960 and Britain and Brexit. Are you saying, hey, your world 0:23:08.119 --> 0:23:12.480 post crisis is now dealing with a very similar ninety 0:23:12.560 --> 0:23:20.720 seven UH form of popularism and leading to dictatorship. Populism 0:23:21.080 --> 0:23:24.760 is um when a strong individual is brought in by 0:23:24.800 --> 0:23:29.639 a segment disenfranchised segment of the population, partially because of 0:23:29.680 --> 0:23:32.920 the economics, partially because of a sense that their culture 0:23:32.960 --> 0:23:36.879 is being threatened and that there are it's anti elites, 0:23:37.119 --> 0:23:42.560 and it is nationalistic it is protectionistic and is military istic, 0:23:42.840 --> 0:23:47.720 and the populist has a fighter mentality. So that's that's 0:23:47.760 --> 0:23:51.880 what populace. That's every financial crisis, it's the same thing. 0:23:52.119 --> 0:23:54.520 Well in the big ones. In the big ones, you 0:23:54.600 --> 0:23:57.680 tend to get that polarity. So we have a situation 0:23:58.000 --> 0:24:00.280 that's like that. I think everybody would agree that the 0:24:00.400 --> 0:24:03.640 nature of the situation is like that. It's producing more 0:24:04.520 --> 0:24:09.479 domestic conflict around that UM the the right becomes more 0:24:09.560 --> 0:24:12.280 right and the left becomes more right left, and then 0:24:12.440 --> 0:24:16.359 also more international conflict. Another key element here in the 0:24:16.440 --> 0:24:19.960 thirties which were not used to is that you have 0:24:20.040 --> 0:24:23.600