Transcription
We're in a trade war. We are in a technology war. We are in a capital war. We are in a geopolitical influence war. And that, of course, is very relevant to the whole picture. Welcome. I'm Manita Huja, editor at large at Forbes and founder of Iconic Glass. And we're here at the NASDAQ market site. We're joined by none other than legendary investor Ray Dalio, founder of Bridgewater Associates, the world's largest hedge fund with over 150 billion in assets under management. Ray has been one of the world's leading macroeconomic investors for over 50 years. Bridgewater famously banked profits off of the 1987 market crash and 2008 financial crisis. He's the author of several books, including the number one New York Times bestseller, Principles. His latest book, Why Countries Go Broke: The Big Cycle, recently came out this spring. Extremely prescient timing, Ray, considering our current geopolitical and macroeconomic environment. Ray, thank you so much for joining us.
Thank you. It's good to be here again with you. I know it's good to be here with you. And so, Ray, we've known each other for over 15 years, and I can say with great confidence that you're a practical guy, and I would love it if you would help us understand. You're somebody who bets on the future, the foundational aspects that you explain in the book as to where we are right now in our current situation.
Well, the book is intended to convey the mechanics of the process, right? Why do countries go broke? Where are we? You can look at the numbers. It's like a doctor looking at, uh, test results of a patient. We can see it. Okay. So, um, I just want to maybe take a minute and describe it, please. And then I also want to explain that it's one of about five factors that work together to have a big impact. So, okay. Um, think of it this way: that the credit system, the capital market system, is like the circulatory system that brings credit to the various parts of the body, and those are buying power that are like nutrients. Um, but it also produces debt. Now, if it produces income that is better than the debt, bigger than the debt, so it can service it, it's a healthy process. But what happens is that the, uh, if you raise debt and debt service payments relative to incomes, it squeezes out like plaque in the circulatory system squeezes out other spending because you have to spend so much money on the debt service, right? Okay. Uh, and so you can see that developing, and if that continues for a while, then you have a debt heart attack, essentially. Okay. Also, that there's a certain supply of debt that has to be sold, and there's a certain demand for that debt, right? So, and one man's debts are another man's assets. So, they have to provide a high enough return to keep the, uh, creditor happy. Mhm.
Now, what happens, uh, is not only as that debt squeeze happens, which we are seeing clearly in the government, we're seeing that, um, we'll go over that in a second, but you, you're seeing that squeeze happening. We're also seeing an enormous amount of supply. So, what's happening now, just to put it in perspective, is the government is spending about $7 trillion a year, and it's taking in about $5 trillion a year. So, there's a $2 trillion discrepancy. Yeah. Right. Deficit. So, it's spending, think of it like a family, right? Okay. Or a business. It's spending 40% more than it is taking in. And it's been doing that for many years. And as a result, it has a debt that is six times, 600% of its, uh, income. So, that is, um, a squeeze that's developing. And so, um, as we, there's a lot of other things behind that, but you can see that mechanics. And this is a situation, really, that you're at the point where both the government, federal, will have that deficit to fund, and then the central bank comes in and buys. So, we see a lot of pressure on the, on the central bank to ease monetary policy, to bring those interest rates down, and so on. And that has, um, can have a problem if it makes the bonds no longer attractive.
I know that, you know, we've spoken about this economic heart attack, and you've raised the alarm about America's $37 trillion debt could cause this heart attack. What forms do you believe reforms do you believe are effective and politically realistic to avoid this outcome?
The two may be mutually exclusive and politically, uh, realistic. So, um, I've spent time with leaders of both parties in Washington, and most people, and I think they all agree on what I've just said about the debt problems. Um, and I think we're at a point, looking at the numbers like a doctor, um, we're at the point where what could happen theoretically, what could happen is what I call the three percent, three-part solution, which means bring the deficit down to 3% of GDP. And you have to do it in three parts because there are three things that affect the deficit, right? That is spending, spending that is, um, uh, taxes, tax revenue, and tax revenue, and also interest rates. And if you cut, you have to do it by a bit of all. And so, if you cut about 4% in spending and you raise taxes the equivalent of about 4%, Mhm. Um, that would improve the supply and the demand picture, and it would allow interest rates to naturally, to, to decline, and that would get you to about a stable situation, stabilizing where it is now. If you don't do that, then next year, we're going to accumulate a lot more because we're going to accumulate another two trillion. Over the next 10 years, we'll accumulate about 25 trillion. Okay. So, debt service payments will go through the roof, and that'll mean that we need to actually borrow money. The government needs to borrow money, central bank needs to borrow money in order to pay the debt. And as that, you get that compounded effect, that's near the end of the debt cycle where bad things happen.
And correct me if I'm wrong, but you've warned that there's about a three-year period that if we don't try to right the ship within that time frame, we're headed towards serious trouble. Is that correct?
That's right. And, uh, and I might say that, then the reason I say politics is the problem is because when I went down there, I sort of say, you know, um, take the 3% pledge one way or another. Stop arguing about exactly how you're going to do it, right? But, um, just even if you had to do it proportionately across everything, but, but get there. And what I'm told, really, is, uh, well, we can't because we have to make a pledge. And that pledge is one of two pledges, which is pledge number one is, uh, I pledge to you voter, I won't raise your taxes, or pledge, I promise you voter, that I won't cut your benefits. So, because if not, that's not politically acceptable, right? And so, for that reason, the politics, even though there's a problem, uh, uh, is a problem. So, it's like being on a boat that, um, everybody on the boat sort of agrees that we're headed to the rocks, and then the question is, uh, do you turn left or do you turn right? But they can't agree on turning left or right, and so we now have that political problem standing in the way of this.
That's a great analogy because what you're, if, and correct me if I'm wrong, but what you're saying is that both sides recognize the situation and that they're aligned, and I think I've heard you say that they're aligned that we need to get to that 3% level. Is that correct?
Yes. And it's just that politically we're at odds. Yes.
Is there a workaround when they say this to you? Is there a workaround that you can think of to suggest that helps them politically speaking, uh, make it more digestible?
No, I think, um, I think we're going down another path. And, um, that path, um, is, um, an aggressive path by the administration in which, um, a number of things will be done. Um, and I think the administration, uh, believes that those things are good things. Um, so, for example, uh, tariffs will bring in a significant amount of revenue. You know, it might bring in up to two trillion or more. Uh, I think per year, probably maybe in the vicinity of 5 trillion, given, I mean, five hundred billion in ter, 500 billion, excuse me. But then if you take that over 10 years, then you get to your five trillion. Then, okay, that, that, that could be a significant, very significant number. And also then to be stimulative in order to raise income, um, and so on. And, uh, the way I work those numbers, I think that's a very risky, not, um, not the path that I would go. Um, but, uh, that's, uh, that's the path. And then to try to attract, uh, capital into the United States, which has been, um, uh, effective and so on. And then to build up manufacturing and so on.
Are you concerned though about America's position on the world stage because of all the actions we're taking due to the tariffs?
Well, as I said, there were five major forces. And maybe I'll just take a minute to try to explain those. Okay. Throughout history, there are these big cycles. Debt rises relative to incomes that you can't until it can't anymore and so on. And then you have the adjustments. Well, in addition to that, um, there's, in addition to the debt money thing that we're talking about, there is the internal order and disorder cycle that has to do with the left-right conflicts that happen. Um, and so we are now in a period of time where there's been, um, I would say a deterioration in our country in a lot of different ways, and that there are strong views about from either side, and there's a conflict. You know, that, well, who will you need a more autocratic approach in order to take charge of that? And so we're now having, uh, the system, the democracy in a different way than we've said. We have a conflict between the left and the right because even people believe that everything's politicized. They look at the Supreme Court and they say, "Can I get an honest judgment?" But it is politicized. And for those reasons, as we've seen in the past, very similar to the '30s, we're seeing this very similar to the '30s. We have that internal conflict. Okay.
In addition, we have a geopolitical conflict. We see this, the rise of a great power challenging, um, a, a great power that is more declining. We have been, in a sense, by a lot of measures, certainly on a relative basis, declining. And that great power conflict, we see, as we've seen just recently, so such a good example of the parade in Beijing with President, right, um, uh, Putin and Modi, and plus a number of other leaders. So, we have this geopolitical conflict, which is a costly, uh, endeavor, just if we take the economics, the cost of military, and then the cost of trade wars and other things are very costly economically, but they need to be, um, dealt with. So, that's the third force. The fourth force, um, is throughout history, acts of nature, droughts, floods, and pandemics have killed more people than wars and have toppled more orders than anything else. And of course, number five force is man's inventiveness, particularly of new technologies, right? So, we're seeing the interaction. So, you're touching on that when you're asking the question. Uh, definitely, um, there have been great disruptions, and there's great questions of what the new world order will look like. And there is, like there was in the '30s, axis powers and allied powers, there is a polarization that we're seeing, and, you know, approaching, uh, greater amounts of conflict.
So, geopolitically, we are in, we're in a trade war. We are in a technology war. We are in a capital war. We are in a geopolitical influence war. And that, of course, is very relevant to the whole picture. That will make less efficiencies. But it needs to also create self-sufficiencies because one, in this warlike environment, cannot depend on getting things from others. Right. Right.
100%. And you touch on this in the book, and we've kind of, you know, uh, laid out the framework here, and you've been this macroeconomic investor for 50 years, but a student of history as well. So, it sounds like you're saying we're most akin to the 1930s period. That was the last time in these cycles. These cycles go on, these types of cycles. They're not all identical, but they're all similar. And so, the 1930s, if you understand the 1930s, the economic and debt problems that existed, the internal conflicts between the left and the right, the geopolitical conflicts, including acts of nature, and then, of course, technology.
So, how should investors be thinking about reallocating their portfolio amidst all of these five factors at play and the current geopolitical macroeconomic?
Well, I think, um, the most important thing they have to understand is how to diversify their wealth. Mhm. Well, okay, because, um, uh, um, markets, if you have a bad market, if you have a bad economy, uh, bonds go up and stocks go down and so on. So, you can create a balanced portfolio. I don't want to digress into that too much because that would take too much time. But I also have them, uh, encourage them to think about the nature of the problem that we have and a question of, um, how their portfolios diversified for the value of money. We're in a situation now where, um, money is debt, and debt is money. What I mean by that is, if you have money, you're storing it in the form of a debt instrument. And a debt instrument is a promise from somebody to give you money. And when we have too much debt and supply and, and the supply-demand that we're talking about, there's a high likelihood of the devaluation of money. And that's not just an American money, that is most money because countries are in similar positions, and they don't want to get uncompetitive by having competitive exchange rates. So, such periods of that, such as the '70s, the 1970s, or the 1930s, are periods in which one has to worry about the value of money. That's why gold is going up so much. Right. Right. Okay. Because, and reserve, and that's why you give your grandchildren gold every year. Gold coins. Yeah. Gold coins every year. And you have them take a look and measure it against the value of their toys, right?
Well, yeah. I, um, what I give them a gold coin every year, uh, for their birthday, and then for Christmas. Um, and then, um, so they then, over a period of time, they get to see that everything else disappears and the gold coin remains. But that gold coin can't be spent until in some time in their life when there's an emergency need for that. Okay. So, gold is an effective storehold of wealth, and it also is an effective diversifier to a portfolio. A normal efficient portfolio should have somewhere in the vicinity between 10 and 10 to 15% in it to as an effective diversifier for that value of money. Um, most portfolios don't. I'm not, um, I'm not here to provide investment advice, of course, but I'm, um, I do want to say that diversification and thinking about the value of money. What is a storehold of money? This is going to be a very important theme as we think, what is money? What is money as a medium of exchange, but it has to be a storehold of wealth, and we have a problem regarding that. And, um, so as we have Bitcoin coming and other things, right?
I was going to follow up with Bitcoin. You suggested at a smaller level, there should be potentially a little bit of exposure to that.
Well, um, yeah, I do, you know, we, there's pros and cons, uh, about, you know, what you think about Bitcoin and what you think about gold. Um, it's not going to be a central bank, I believe, a central bank, uh, asset, whereas gold is now the third largest reserve currency, dollar, euro, then gold, and it's being accumulated. Also, it's a, a currency that, uh, is easy to track and can be controlled, and there are other issues. Bitcoin is, I mean, so, um, I prefer gold for. But the question still is, in the future, what will be money and the storehold of wealth? And that's something to be considered when thinking about how to diversify a portfolio because you want your portfolio always to have real returns. In other words, don't look at nominal returns, what just what the return is, but what it is relative to inflation.
So, we're almost, uh, wrapping up, and I want to make sure that we get to what the show is called, which is Iconoclast, and you by definition are an iconoclast. So, I want to get some of your leadership perspectives, if that's okay. Um, you know, you've built one of the world's most successful financial institutions. You are an iconoclast, and in a world where there is, you know, by and large pretty consistent access to data, talent, there's abundance of resource, it's all inputs are fairly equal. What were some of your leadership tactics or guidance or principles that you think really helped you build Bridgewater into the success and in your investment career as one of the world's most successful investors?
Uh, I think most importantly, uh, is having meaningful work and meaningful relationships together, where you're on a passion, a mission to create something great, excellent, and you have meaningful relationships that they're in it together. You're almost sharing each other's lives. That this is more than, it's a mission more than just an accomplishment. And then you have to, um, everything is people and culture. You have to get the people right, and the people right means you have to get people of great character and great capabilities, and you have to enable them. It's like orchestrating an orchestra. You know, you're the conductor, but it really, who your community is and how they work together is everything. And I believe that that has to be done like, uh, running a, a great team. Uh, Bill Belichick, when he read my book, Principles, and said, your work, Principles, he gave me a call and he said, I want to, uh, meet and talk about the Principles because yours are the same as mine. Oh, that was very interesting. And that means that you have to find the stars, you have to nurture them. And then you also have to select them and, and, and keep stars. As Steve Jobs said, if, uh, you know, if you don't keep all A players, the A players will have the B players, pretty soon you'll have the C players, and the A players won't want to be there. So, I believe that you have to have radical truthfulness in dealing with these issues. I remember I hired some friends, they were great, but they couldn't do the job as well. How do you work yourself through that? So that, and I think it has to be an idea meritocracy. So, um, what's helped me was, um, you know, uh, radical truthfulness. You can talk about anything, you become evidence-based and so on. I also systematized all decision-making. In other words, what I did found this invaluable, and now it can be done by everyone, is that every time I was making a decision, I would think of the criteria I was using to make that decision. I would write them down as principles. Principle, I mean, when the next thing comes along that's like that, what do you do? And so, uh, and then I was able to backtest those principles to see how they would have performed in the past to have a game plan, and I was able to computerize them. We are, in other words, that was a previous version of AI called expert systems. Now we can do that. So, what we're in a position of doing, what I recommend is that you have that complementary, um, AI working with you as an AI partner, but, um, but it really has to do your thinking. What I found when I built, um, it was like building a computer chess game that would play chess along next to me. So, as we were making the, uh, moves, things would come at us, and, um, the chess would make a move, and I'd make a move. Now, the chess had chess system that, in a sense, the system I built had a greater ability to make decisions because it could weigh many complex things much quicker than I could, and take emotion out of, emotion out, right? And, um, and, and so, and that's, and then I knew also, I'm executing a game plan. So, it led me to execute that game plan. But what I could bring was the inspiration, the intuition, and so on, to work with that. So, these are the things that I would suggest, you know, meaningful work, meaningful relationship, the right people, right culture, um, and on a mission together, and to do it, um, where we're, you're tough on each other to raise the highest standard of living, and definitely automating, thinking more about how to automate what you're doing.
So, it sounds like with that rise in technology, that is a silver lining that could be a tool that could be used for people who are trying to emulate careers like yourself in combination with principles and, and your other, you know, frameworks that you've so generously shared.
What I'm super excited about is I'm going to enable everybody. Okay. So, the way that I want to do that is, um, to create a platform that anybody can use to be able to do this automation. I think we're in an era now, um, and we have been for, uh, you know, a long time, that what it is, is find and talented people and enable them. That's more important, more powerful than money can buy, but if you watch who's succeeding and where has wealth gone, it has gone to those talented people who have been enabled. Now, where did Nvidia come from? Where did all these other? They came from those talented people. So, to identify and enable those talented people with an AI type of platform in which they can be super effective would be a joy to me, and that's one of the things I'd like to do.
Because at this phase, you're currently working on that.
Yeah, I'm currently working on that. Okay.
So, when is that supposed to come out?
We'll see. But, um, anyway, I, I think that that's the type of era we're in, and those are the suggestions that I would have for anybody who's in the investment business or wants to be, uh, invest an investor and an entrepreneurial investor.
So, final question, you've inspired and motivated millions of people around the world by sharing your work over, you know, your entire investment career. Who's one person or one individual that has had left their mark on you or inspired you on your journey to becoming Ray Dalio?
Well, I think there were, you know, there just, uh, so many people that I, I think about in in various dimensions. Um, I think about like, uh, those that I've read the books. Um, um, my pals in, uh, the investment world. Uh, I would worry that I would offend some, but I would say people like, um, Paul Jones and Dan Ducka Miller and, um, a number of them have been, um, great. And I would say that, uh, in understanding the geopolitical world, I was very fortunate to, uh, know well and discuss things with Henry Kissinger. Mhm. Uh, Paul Volcker was Paul Volcker. Oh, yeah. He was not only a hero, he was a good friend. He's a good friend. Oh, yeah. I'm glad. I remember speaking to him about you for my book, of which you were featured in, uh, a long time. Yeah. What a, what a man of character and capability. Uh, fantastic. He was definitely a mentor of mine, in a sense. Um, those are the ones that occurred to me.
Well, Ray Dalio, thank you so much for joining us at the NASDAQ market site on Iconoclast and congratulations on your first episode.
Thank you so much.