Ray Dalio, CIO Mentor, and Member, Operating Board, Bridgewater Associates In conversation with: Alan Murray, FORTUNE
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00:00 (upbeat music)
00:02 - Hey. - Hey, Alan.
00:05 - Thank you so much for doing this.
00:08 - Oh, thank you so much for having me.
00:09 - You spend a lot of time in Abu Dhabi these days.
00:12 - Yeah. - How come?
00:13 - Abu Dhabi's a Renaissance state.
00:18 I started to come about 35 years ago,
00:21 so I developed great relationships,
00:23 work and personal relationships.
00:27 And I got to know the culture and so on.
00:29 But in the world today, there are bright spots.
00:34 There are the places where they're earning more
00:40 than they're spending,
00:41 they have good income statements and balance sheets,
00:44 they have a culture in which there's excellent education
00:49 for most people, there's civility,
00:54 and then-- - Good weather.
00:55 - Productivity.
00:57 The weather is an issue.
00:58 But it's like Miami or someplace.
01:01 But I mean, it's, so in this world,
01:04 changing world order, which we're going to talk about,
01:07 the GCC states have to be paid attention to.
01:13 They are the Renaissance states,
01:15 as well as Singapore, for example,
01:18 what Singapore represents for the same reason
01:20 in the Far East.
01:22 Singapore is a hub for that region, which is a hot region.
01:26 So the world is changing,
01:27 and this is one of the places here, Saudi--
01:31 - And you open an office here.
01:32 - Yeah, family office.
01:34 - Family office, do you have those in multiple locations?
01:37 Or is this-- - Here in Singapore,
01:39 and then, of course, the states.
01:41 - Interesting.
01:41 So your analysis of economic historical events
01:46 is based on five forces.
01:48 And I'd really like to start this conversation
01:50 by getting you to just quickly summarize those five forces.
01:53 - Okay.
01:55 Just to give you a little bit of background,
01:58 I'm a global macro investor,
02:00 and what I learned through my experiences
02:03 is some of the times that I was surprised
02:05 is because things didn't happen in my lifetime,
02:07 but I found out they happened in the past in history.
02:10 So the three big forces that really drew me attention
02:14 to studying the rises and declines of reserve currencies
02:19 and empires were, first, the amount of debt creation
02:22 and the amount of money creation,
02:25 and the whole impact of debt and money on the economy.
02:29 The magnitudes are unprecedented,
02:32 except you have to go back to the '30 to '45 period,
02:35 and happened many times in history.
02:37 The second is the amount of internal conflict,
02:41 particularly the development of populism on both extreme,
02:46 due to the largest wealth and values gaps that we have.
02:49 And a populist is an individual
02:51 who will fight and win at all costs,
02:54 including the system.
02:55 So I never saw that before, and I needed to go back.
02:58 I knew it existed in the '30 to '45 period,
03:01 needed to go back and study it.
03:03 The third force, of course,
03:04 is the great power conflict internationally.
03:08 You know, we had our world order began in 1945
03:13 at the end of World War II.
03:14 Then there's a new way of doing things.
03:16 The United States was the dominant world power,
03:19 had 50% of world GDP, 80% of the world's money,
03:24 gold was money then, and had a monopoly.
03:27 So they determined how things would go, pretty much.
03:31 And then, of course, now we have
03:32 the great power conflict, and so on.
03:35 So those three things, last time they happened,
03:37 1940, '30 to '45 period,
03:40 I wanted to go study them in the past.
03:42 In doing that study over the last 500 years,
03:44 I have a fabulous research team that can do this,
03:48 and doing it over the 500 years,
03:50 I saw that two other things popped.
03:53 Maybe more important, or comparably important,
03:59 was acts of nature, droughts, floods, and pandemics.
04:03 So climate became a big issue, and of course,
04:07 climate is a big force of our time,
04:10 because no matter what is done or not done,
04:13 it's gonna be very costly,
04:14 so it's certainly an economic issue.
04:16 And then number five was technology,
04:19 the changes in technology.
04:21 So those five forces I saw,
04:25 and I realized how they interrelate with each other
04:29 to create this big arc,
04:32 and so it's like watching the movie happen
04:34 over the same time over and over again.
04:36 - And it's a great framework for looking at history.
04:38 I wanna try and hit all five of them here
04:40 in this conversation, because we've been talking
04:42 about all five of them in various forms
04:44 over the last two days.
04:46 But let's start with the money debt economic cycle.
04:49 We had this extended period of what you've called
04:52 insanely low interest rates,
04:55 followed by a massive wealth transfer
04:57 that happened during the pandemic.
04:59 Where does that leave us?
05:00 When you look at the economy over the next couple of years,
05:03 with the buildup in debt,
05:04 with interest rates returning to normal,
05:06 what does the economy look like?
05:08 - Yes, I like to explain,
05:11 when I answer questions like that,
05:12 I like to explain the mechanics of how it works,
05:15 so that we understand that.
05:17 - As long as we can do it within the time, yeah.
05:18 - And I'll try to be as quick as I can.
05:20 One man's debts are another man's assets.
05:24 That means interest rates have gotta be high enough
05:31 that they're a good return for the creditor,
05:34 without being so high that they're bad for the debtor.
05:38 And so you see these swings and cycles
05:41 in which it's great for one time for the debtor
05:44 and vice versa.
05:45 So we went into an insanely free money environment
05:50 in which interest rates were nil
05:54 and real interest rates, bond yields,
05:56 went to minus 1.7%.
05:59 Okay, so which side is it good for?
06:02 Okay, okay.
06:03 And then we go through this other swing,
06:05 and an insane swing.
06:07 All through this, we've increased our debt to GDP.
06:12 What we did is we particularly transferred,
06:15 the government got into a lot of debt,
06:17 and the government then wrote,
06:18 so that they could write a lot of checks
06:20 for a lot of things, okay?
06:22 So what happens is, as debts rise relative to incomes
06:27 that are supposed to support the debt,
06:30 it becomes a more and more difficult balance.
06:32 So we've reached the point, we are reaching the point,
06:35 in a classic debt cycle,
06:37 you reach the point that you have to borrow
06:41 to service your debt.
06:43 You know, like the different countries,
06:46 Singapore is a good example,
06:47 20% of their expenditures,
06:51 for government expenditures,
06:52 come from what they earn in the financial part
06:55 of their balance sheet.
06:56 Well, there's the other side of that,
06:57 of what you pay. - If you haven't paid debt.
06:59 - Okay, and then there's that acceleration.
07:01 So we're very close to that acceleration
07:05 in which it becomes compounded.
07:07 And there's a, I won't spend too much time,
07:09 but the classic signs are when the central banks
07:13 lose a lot of money.
07:14 So what happened is, they bought all the bonds,
07:18 'cause there was a supply-demand imbalance.
07:20 In other words, there were not enough buyers.
07:23 So they came in and bought on.
07:24 So they messed up the market,
07:26 the free market to keep rates there.
07:29 And now they're owning all the bonds,
07:31 banks bought all the bonds,
07:32 Japanese bought bonds, everybody bought bonds,
07:35 they have a lot of bonds,
07:36 they're losing money on the bonds,
07:38 everybody's, okay, go ahead.
07:39 - So you've watched this cycle over 500 years,
07:42 what does that mean for the next year or two?
07:44 - Well, what it means,
07:48 what it means is that all markets
07:54 are driven off of the treasury market.
07:56 All credit markets, all equity markets,
08:03 everything is priced off of that curve.
08:05 So the real, now we'll go back to basics of that.
08:09 What is the inflation rate going to be estimated,
08:13 inflation rate, and people have their different guesses,
08:16 probably between three and 4%, okay.
08:20 Somewhere in the, let's call it three, 3 1/2,
08:22 whatever the number is.
08:24 You're gonna need a real interest rate
08:26 that's going to be in the vicinity of 1 1/2 or 2%.
08:30 You can't go back to the other, otherwise--
08:32 - So now you're talking 5 1/2.
08:34 - So you're talking in that order of neighborhood,
08:37 five, 5 1/2, there's nothing precise about that.
08:40 And so now you have an interest rate
08:42 that is in that vicinity,
08:45 if you have a normal supply-demand issue.
08:48 We may have a supply-demand imbalance,
08:52 we're going to be dealing with that,
08:54 because there'll be a lot, still, big deficits,
08:57 big, the world needs big spending,
09:00 there's gonna be big spending,
09:01 and that means you have to sell bonds.
09:05 And the world is overloaded in bonds,
09:08 and so we have that dynamic.
09:09 So I don't believe that you're going to see
09:12 any material interest rate decline.
09:14 A lot is being made of the blip down.
09:18 Interest rates went from, the bond yield,
09:22 went from 1.7% to five,
09:25 and has then come down to 4 1/2-ish, and so on.
09:29 But so that is where the bond,
09:31 now when you're looking at, let's say, equity markets,
09:35 and they could be private or public equity markets,
09:38 and you're looking at the premium
09:40 that they usually should have above that,
09:43 you don't have much premium above that.
09:46 At the same time, you're having this technological changes
09:51 that are big technological changes.
09:53 And so the question has to do with
09:56 what their impact is on earnings and so on.
09:57 - So it's sort of, do the negative economic effects
10:00 outweigh the positive technology effects?
10:02 - Yeah, you have to look at company by company
10:06 and industry by industry, and also geography by geography,
10:11 because there's such a bias
10:12 to talk about the American markets, okay?
10:15 - I'm gonna come back to technology,
10:18 but let's do politics quickly.
10:19 We have an election next year in the US
10:21 that you've said is the most important election
10:23 in our lifetime.
10:25 You see populists on both sides of the debate.
10:29 How do you, what's the end result there?
10:32 - Well, I think we can all see
10:34 that we have irreconcilable differences by sides
10:38 that will, if that's what I mean by populism,
10:41 irreconcilable difference by sides
10:44 that will not accept losing.
10:45 And so you're seeing an emergence,
10:47 even an emergence of should the Supreme Court matter
10:52 and do you put people in jail
10:54 and all of this kind of extremism.
10:57 So one side can't beat the other,
10:59 and no good government, no good society exists
11:02 with this kind of fighting,
11:05 and this is not good governance.
11:06 This has big implications.
11:08 It has big economic and tax implications
11:11 and money implications.
11:13 Who do you get the money for?
11:14 So this is something that people will fight over
11:17 in their various ways if it's not resolved.
11:20 What we need is a very strong middle--
11:25 - You see any chance of that?
11:28 - Well, here's the, there are two scenarios that I have.
11:32 I pray that we do not have another Trump-Biden election,
11:38 okay, because that'll produce a lot of problems.
11:43 Now the question is whether on the Republican side
11:48 there's going to be an alternative candidate,
11:51 and the game plan is for that alternative candidate,
11:55 the Republican game plan,
11:56 is to have whoever's the number one contender
12:00 be the only contender so others will drop out.
12:03 They're gonna be first the Iowa caucuses,
12:05 New Hampshire, and then there's gonna be--
12:07 - So there's a little bubble of Nikki Haley--
12:09 - So Nikki Haley is the leading candidate,
12:12 and from my point of view,
12:16 is she smart, can she work across parting lines,
12:20 does she have quality of character,
12:23 and all of those elements.
12:25 She's, in my opinion, she's good for the system.
12:29 I want both sides to have--
12:31 - Yeah, what happens on the other side?
12:32 - Well, the other side, there are,
12:36 the question is whether Biden runs,
12:42 his combination of his age issue,
12:45 his popularity, and so on are a problem,
12:48 so that if Nikki Haley should get the nomination,
12:52 she would be the probable winner in a presidential election,
12:56 almost everybody would say that,
12:58 and that would put added pressure on the Democrats
13:00 because also everybody's thinking about
13:03 who is the successor, and Pamela Harris is not popular.
13:06 - So if Nikki Haley gets it,
13:07 then they'll have to think about a different candidate.
13:10 - So we're now entering a different dynamic,
13:12 and the question is do we change,
13:14 and beneath the surface, there are people
13:17 who are very effective working, moderate people,
13:20 practical people, 'cause we're also going to need reforms.
13:24 Okay, we have to reform the system in a lot of ways
13:27 to make sure it's great for most people,
13:29 and that's a whole other--
13:30 - Yeah, I'd love to have that conversation
13:32 with you sometime because it's absolutely critical,
13:34 but it sounds like you think there's at least a chance
13:36 that we don't end up with a Trump-Biden election.
13:38 - Yeah, the interesting election, the interesting race
13:42 is going to begin really probably around South Carolina
13:46 after that, right around that time
13:47 between the alternative and Trump.
13:50 - Yeah, something to watch.
13:51 Geopolitics, we've got a war in Europe,
13:55 we have a war here in the Middle East,
13:57 we've got tension in China.
13:58 I saw you said recently that you think
14:00 the chances of war in Asia have gone down.
14:04 - Yeah, I've been going to China since 1984,
14:08 and they didn't have money, and I didn't go for money.
14:13 I went for these curiosity at first,
14:15 and then the relationships, and I've been involved
14:18 all the way through that, and when I went there last March,
14:23 we were really on the brink of war,
14:25 irreconcilable differences, and certain things
14:29 have happened since then that the fear of that,
14:33 the devastation that that could be
14:34 if you had a bad economic war,
14:37 sanctions getting past a certain point and the like,
14:41 would be devastating on the world economy,
14:43 that became real, and then the issue of military war became,
14:46 so they couldn't even talk, and that lent itself
14:51 to a stepping back, and so it was in preparation
14:56 for the AIPAC agreement that a lot of work was done,
14:59 and things were done, so there's a stepping back
15:01 from that kind of war.
15:02 - There was more like a Chinese war,
15:06 the nonviolent war that is the war behind,
15:09 like the Art of War, the book of the Art of War
15:11 describes it well, but it's through their history.
15:13 They basically believe that if you go to a military war,
15:18 you weren't smart enough to win
15:20 without going to a military war,
15:23 and so it's a more, the conflict is more like
15:26 an intense competition, a no rules
15:31 kind of intense competition.
15:32 - So one thing that's emerged in recent days
15:35 is that the US government is telling investors,
15:39 maybe you, certainly some sovereign wealth funds,
15:41 that when it comes to investing in high-end technology,
15:45 you gotta choose, you can do the US,
15:47 or you can do the West, you can do China,
15:49 you can't do both, what do you think about that?
15:52 - That's real, okay.
15:53 - You feel it?
15:54 - It's a fact.
15:55 - It's a fact, is that a good policy
15:58 in global power dynamics?
16:00 - It's part of the policy of this new type of competition.
16:04 The United States is exerting its various powers
16:09 in that sort of way, and this, by the way,
16:13 was very similar to prior to World War II.
16:17 We embargoed oil, we prevented oil
16:20 from going to Japan before, and we froze their assets.
16:25 In the United States, as they're thinking,
16:28 ships are like oil, so as there's that competition,
16:32 that's certainly the case, it's a reality,
16:34 it's that kind of struggle, and then there was a worry,
16:37 would you get sanctions on the bonds
16:40 that they own and so on.
16:42 So it's that kind of war that--
16:43 - Not going away.
16:45 - No, the technology war isn't going away,
16:47 and how far it passes will be constant tension
16:51 in terms of the negotiation, but I think
16:54 that there's been an important stepping back
16:56 from the worst kind of war.
16:58 - I wanna jump to force number five, technology,
17:01 because we've spent a lot of time over the last two days
17:03 in this room talking about really some pretty remarkable
17:06 effects that AI in particular is having
17:09 on how companies are thinking about their path forward.
17:13 As an investor, how significant,
17:17 and as an economic historian,
17:20 how significant is this technology revolution?
17:23 - Oh, I think it's hugely significant,
17:26 and I'm not just starting on it.
17:29 I found, like 25 years ago, I started writing down
17:34 my principles in words, and then they became encoded
17:38 in algorithms, we built systems, decision-making,
17:42 computerized decision-making systems,
17:45 and there was a great power, and I've watched
17:47 the whole arc of this, and I know the power.
17:51 It is stupid, it is archaic for people to think
17:56 that decision-making just in their heads
17:59 is going to be good.
18:00 There has to be a partnership between what's in your heads
18:04 and what the computer does, because it's so much powerful
18:07 in so many other ways, so I think it's part
18:10 of the whole evolutionary process.
18:12 You know, it wasn't that long ago in a historical sense
18:15 that we were in the agricultural area,
18:17 and people were like oxen.
18:19 That was their whole purpose, they would dig,
18:21 and then our physical was replaced.
18:24 We had the Industrial Revolution.
18:26 Well, basically, higher and higher,
18:28 and our intellects are being, now it's gonna take
18:31 a partnership between those two things, in my opinion,
18:34 to create this great leap forward.
18:36 Then in terms of investing, you think,
18:38 okay, where do you invest?
18:39 There's a temptation to invest in those companies
18:43 that are making the technologies, which is understandable,
18:46 but the biggest effect are going to be
18:48 on those who use it well, all right?
18:51 They're the ones who are going to create
18:54 the transformations, probably, that many,
18:56 almost, I would assume, almost all of the people
18:58 here in the room are knowing about or getting exposure.
19:02 - And so if you look at the economy
19:03 over the next two, three years,
19:05 and you look at the positive effects of technology,
19:07 the negative effects of the debt buildup,
19:09 which is gonna win out?
19:10 Are you optimistic, pessimistic?
19:12 - The whole thing of all of these together
19:15 is all dependent on how we are with each other.
19:18 Are we going to create rules?
19:21 Are we going to fight over the money?
19:24 Are we going to fight over the values?
19:26 - You're saying leadership.
19:28 - And the people.
19:30 The people select who we choose.
19:34 That's why I come back to this basic notion
19:37 that you need to be in it together, you need to be civil.
19:41 Then if we look at the places,
19:42 you started with the question of Abu Dhabi,
19:44 and I refer to Singapore.
19:46 And so when I look back at this global setting,
19:50 I'm looking at, okay, what are the places
19:52 that are financially sound and work well together,
19:56 raise their kids to be civil, and all of that?
20:00 It will, again, don't use too much a US-based focus.
20:05 Sometimes Americans can make the mistake
20:08 of thinking about the we is the United States
20:12 rather than realizing that we
20:13 is very different we's around the world.
20:15 - Ray, we're out of time,
20:17 and my production team is going to kill me for this.
20:18 They're waiting in the wings to throttle me,
20:20 but I have to ask you about this new book
20:22 that's out by the New York Times reporter Rob Copeland
20:25 that's pretty critical of the way you ran Bridgewater.
20:29 - It's so interesting to me because you see
20:32 these books come along, everybody's seen them.
20:35 Okay, so meaning the salacious kind of book,
20:38 the gossip gotcha kind of book come along.
20:41 So this is my first going through it.
20:44 What the tragedy of it is as an observer of this one
20:49 is that it is fiction created as fact.
20:53 There's a problem.
20:54 - It's a New York Times reporter you're talking about.
20:57 - That's right.
20:57 In other words, okay, I'll give you facts.
21:00 Here's the facts.
21:01 I don't know, 10, 12 years ago or so,
21:06 he came to ask for a job at Bridgewater.
21:10 We rejected him.
21:11 So he didn't get a job at Bridgewater.
21:13 Then he went to the Wall Street Journal
21:16 and he became a writer.
21:18 And he would make up stuff.
21:19 He would exaggerate.
21:20 He would speak to old employees
21:22 who were typically dismissed or something
21:26 and he would get threads of things
21:27 and then he would make it up.
21:30 So it's interesting for me to observe how the system works.
21:35 So I don't know whether you know,
21:37 but I guess you do know,
21:39 that in the name of journalistic freedom,
21:43 reporters can actually make up things
21:46 and lie intentionally, proving intentional,
21:50 in the United States.
21:51 It's a different rule than in Canada or the UK.
21:54 Let me just finish this point.
21:55 So the fact checker went through it
21:58 and there were 400, over 400 cases
22:02 in which it was made up.
22:05 And then in the book,
22:07 he puts explanations in the ends of the book.
22:12 He puts little notes that,
22:13 let's say he would make up a conversation
22:15 between two people and there are only two people in the room
22:19 and both of them said the conversation never happened.
22:21 He would make it up and he would make up the dialogue.
22:24 Now what's interesting, forget about my case.
22:27 My case is trivial.
22:29 It goes, people know me, they don't know me.
22:32 It's not important.
22:33 What is interesting is the system.
22:36 When truth gets mixed with fiction by journalists,
22:42 the country has a problem.
22:43 So put aside my case and talk about the problem of truth.
22:48 - That is a conversation I would love to engage you in,
22:52 but not today.
22:55 Ray, thank you for giving us that tour of the world.
22:58 Really appreciate it.
22:59 Thank you.
23:00 - Thank you.
23:01 - Thanks a lot.
23:02 (silence)
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