Transcription
Thank you so much for being here. I want to start with these five forces that you see right now that are affecting markets that are important to understand in order to understand where we work, where we are. Could you just talk a little bit about what those forces are?
Sure. Through history and now there are five big forces that are interrelated and generally transpire in cycles, as I described. And we know they exist because everything that we are going to talk about will fall into one of those categories. That is the debt money economy cycle, meaning credit is buying power. You give buying power to entities like it's like the circulatory system. You give credit. And if that credit produces, it'll produce debt. But if it produces an income that is good enough to pay the debt. It's a healthy system. But when it produces more debt and more debt service payments, that squeezes out the spending. And that produces a problem. And then there's a supply demand problem that has to and then there are economic problems. Okay. That's one cycle.
The second cycle related to that, because money and wealth have political and social effects, is that there becomes big differences in wealth and values. And so when there are big differences in wealth and values and the people feel that the system isn't working for them, you see greater political polarity between the left and the right becomes more of the hard left and the hard right, and those become irreconcilable differences that are not easily solved through the usual means of operating that way in such as democracies. During the thirties, for example, four major democracies chose to be autocracies during those periods.
The third is the international geopolitical cycle. In other words, of a rising power challenging existing powers and the same dominance of the dominant power fades relative to other powers. And also the order then gets challenged. And we're certainly going through that.
The fourth factor throughout history has been acts of nature. Droughts, floods and pandemics have actually killed more people than wars and actually led to more ends of the previously mentioned cycles than anything else. So nature and certainly nature, climate change and the like is a big force.
And then fifth through history are man's learnings of particularly developments of new technologies. The development of new technologies is what has raised living standards over time, which you can see in terms of life expectancies and per capita GDP. And of course, the development of new technologies now is a very important influence. So those five factors have gone above those of main five factors. Anything we'll talk about will be under one of those. And of course, the interrelationships within with between them as are important.
It seems like we're at the cross-section of a pretty transformative moment then, because it's the cross section of all of these things, whether it's the AI aspect, the technological overlay, the monetary debt aspect of it. With respect to the debt and deficit, can you put into perspective the fact that this has been building up over time? Where do the tariffs and some of the trade disputes of today fit into that? Do they help sort of alleviate some of these imbalances? Do they exacerbate them? Are they a symptom of them? How do you understand sort of that aspect of policy right now?
Well. First of all, there are great imbalances that have to be rectified given this set of circumstances. So three major types which relate to trade, but they also relate to capital. The the first is that the dynamic by which Chinese export to the United States, items that are cost effective and Americans buy them and then they sell send the money back and the Chinese earn the money and take that money and invest in bonds has created a unsustainable dynamic because as we're living in this environment related to the next two items where those two countries can be in conflict, military conflict, there necessarily has to be insecurities on both parties and the Chinese having an insecurity of whether they're actually going to be able to turn their credit into goods and services. In other words, there's no purpose of holding a bond or an asset unless you can then sell it and get money and buy things. And when that dynamic works the other way, it's quite painful for the debtor to have to pay back in real stuff. And then in a geopolitical conflict, that's a problem. And then, of course, so and then in this environment of conflict, that's that's also the problem of it's worsened because in wars and prior times or even with Russia, then there were freezing of assets and there could always be that kind of issue. So that's a consideration.
And then, of course, there's the loss of manufacturing and the loss of manufacturing in the United States, you know, has two problems which are that it's connected to self-sustaining. You have to be able to be in a risky world. You have to be able to produce what you need. So you need to be capable of manufacturing certain items. And then also the wealth loss of the middle class has a lot to do with the loss of manufacturing. So for those reasons, that imbalance that let's call it trade and capital account imbalance, it's both a trade issue and a capital issue. And raising tariffs is a way of dealing with that through history. Tariffs really have been more of a tax than other forms of taxes going way back, and they bring in tax revenue. So, you know, they'll probably bring in somewhere between 300 million and 500 million a year or something like that. And so that's a consideration. So that's the mechanics about what's happening.
I just wonder if you think that that goes toward alleviating concerns about debt and sustainability, certainly in the United States, given that there will be those revenues.
Yeah, it is right. It is a source of revenue and it will diminish that. However, the economics, it's small by comparison to the gap. So as I said, the mechanics of the debt situation are really have a few components. The first is that when debt service payments add up, they squeeze out other spending. And so that can create the equivalent of an economic heart attack. The second is there is a supply demand issue. In other words, a deficit. It requires debt sale. And so there we have a lot of debt sales. And we and that's and there's a lessening demand for that. So and then there are the central bank playing a role. So what we have now is think of it as a big company or an individual, except the main difference between a company, a country and an individual or a company and a government is that the government can print money. So that's the basics. But figure it this way, the United States here are the numbers. The United States spends well this year, spend about $7 trillion, and it'll take in about $5 trillion. So that means it's spending 40% more than it is taking in because it has run deficits and sold a lot of debt. The total debt is about six times the total amount of money coming in. And we're seeing those debt service payments squeeze that out. So and as a result of what the projections are, it's likely that. Those deficits will then produce lots of bond sales, which will compound it. When you get into the point in the cycle where debt is needed to pay debt and compounds, it becomes a problem. It becomes a problem also for the central banks, because the central banks, by the way, this is not just an American problem. This is a world problem. The central banks of themselves owned, owned the debt. And so they lose money on the debt. And so when they're losing money on the debt and they have asset liability problems, then they also not only have to monetize essentially the other the government's debt, but they also have to monetize theirs. And those are the characteristics that produce a deterioration in a monetary order. And that's you know, that's why what you're seeing, you're seeing a dynamic of why countries, for example, are letting their reserves or their assets in bonds and so on go down. And they're acquiring and have been acquiring gold, for example. So gold is a currency. You know, we think of currencies as being fiat, the major fiat currency. But gold is a currency. It's the second largest reserve currency. And so you're seeing changes in the monetary order that or reflecting those things somewhat like happened in the early seventies.
Ken Griffin yesterday of Citadel said that he sees gold as more of a safe haven right now than the dollar. Do you agree?
Oh, certainly. I mean, you know, I think. I tell you a story. I've been trading market since I was a kid, and between my college year and going to graduate school in the summer of August 1971, I was clerking on the floor of the New York Stock Exchange, and I. I followed markets. And on Sunday night, Paul Volcker and then President Nixon, really, who was President Nixon delivered the message that you're not going to get your money. Gold was money then. So we viewed things differently, you know, like money, fiat money, as we think about it today, was like checks in a checkbook so that you could go get your gold. And we looked at things through a gold lens. And it it I walked on the floor of the stock exchange. I thought, this is a big crisis because you're not going to get your money. People are not. And the stock market, I thought, was going to go down a lot. Stock market went up a lot. And I went and I studied history. That's, by the way, why I study history. So I studied history and I found out the exact same thing happened in March 1933 with Roosevelt getting on the radio and doing the exact same thing. In other words, devaluing money. Okay. In other words, So when we're looking at the world now, we look at it through our currency lens. You know, we think things go up or down in buy when we're measuring it in our currency, but in reality, the currency goes up and down. And so as we start to think about that. Okay. Think about what's happening. Yes, it's a currency. It's an alternative currency. It's not a fiat currency.
So do you think that it actually makes perfect sense that the stock market is hitting record high after record high at the same time that gold is hitting record high after record high?
Yes. Yes. It's very much like the early seventies. And then the question, because what do you put your money in? Okay. Of course, the stock market has. We can't speak about the stock market as a whole, of course, because the stock market is so bifurcated, you know, and the world stock markets are so bifurcated. But but, yes, that is the dynamic. It depreciates the value of money. And then, of course, because everyone it's all about a store hold of wealth. What is your store hold of wealth? What's it going to be? A currency should be a medium of exchange and a store hold of wealth. But when you have so much debt, you know, debt is money and money's debt. I mean, debt is money. Meaning when you hold debt, you are holding a promise to receive money. And when I say money is dead, when you're holding money, you're putting it in a debt instrument. And so for those reasons, when you have such a supply of debt and debt instruments and it's not an effective store home of wealth, it's natural to go to an alternative store or hold of wealth, which is why we're going to harder currencies, you know. And of course, gold is the most fundamental of those, not only because of the many years, but even there it's, you know, as they say, it's the only asset that somebody can hold. That doesn't mean that you don't have to depend on somebody else to pay you money for it at a time of incredible uncertainty, but also potentially incredible opportunity.
You're talking about the technological advancements. Can you give a sense of how you're thinking about allocations with gold versus bonds versus U.S. versus international versus some sort of leveraging to the story of technological development?
Well, I think, first of all, in an asset allocation mix, the first thing you have to do is create your neutral portfolio. What's your balance, What's your data mix to your strategic asset allocation? If you don't have a view of the markets to make tactical moves and then you have to think, how do you make tactical moves? Who's going to make those? Because tactical moves are a zero sum game, you have to beat the other person who's who's doing it on the strategic asset allocation mix. Before I get into the tactical, though, I've expressed my views on the tactical of gold relative to bonds. I think you have to create a very good balanced portfolio. How you do that can take a long session, but I think you have to think of that and not in nominal terms, but in real terms. So in other words, when you're thinking you're doing your asset allocation, what is going to protect your real after tax returns? So you do you create that optimal mix. Gold is a very excellent diversifier of the portfolio. So if you were to look at just from the strategic asset allocation mix perspective, you would probably have something like as the optimal mix, something like 15% of your portfolio in gold because of the fact that if you didn't even have a tactical, because it is the one asset that does very well when the typical parts of your portfolio go down, because the typical parts of your portfolio are also so credit dependent. So anyway, I think all of this means that there should be some peace in that gold. If I'm making tactical bets, I don't like debt assets per say and I would say I don't like debt assets per se, not just government debt assets, but also if you're looking, let's say a credit or private credit and you look at where the credit spreads are, credit spreads are very, very low. And so for those various reasons, my tilts would be away from those things and toward gold. But again, yes, so more than that would be a normal asset allocation mix. But I think you have to also say, you know, start with what is a real dollar. If you're a dollar investor, a real return asset that you're going to hold as part of that portfolio, that the most of the system is dependent on credit. Equities and everything is dependent on credit. You change credit and, you know, then all sorts of things happen. And so it's an effective diversifier as well as probably the timing seems good.
Going to the five tenets that you were talking about, given the imbalances in the deficit and the debt load and the amount that people are going to have to sell. Governments are going to have to sell. Do you think it's appropriate for the Fed to be cutting rates right now?
I think I think the picture on cutting rates. It's slightly mixed. So and it has to do with the split in the economy and it has to do with split in capital markets, which means you're trying to look at the economy as a whole. But what you have is in certain sections of the economy, you have an enormous amount of liquidity, an enormous amount of wealth. Things like if you're in the top 1% of anything you know, or which is the top 1% of the income earners, the one top 1% of the stocks and a high and so on, so forth. Wow. There's a tremendous amount of liquidity. And fantastic. And so you would say, if anything, you'd worry more about the bubble and how you start to pull the, you know, the punchbowl, that kind of thing. And but we have a very diverse economy. So if you're looking at, let's say, the bottom 60% of the population and the conditions of the bottom 6% of the population and labor markets and so on, then you have a very, very different issue. I don't think monetary policy at all is going to be able to do that. I think that there's a strong situation where, you know, the natural instinct is if if things aren't exactly like I would like and I'd like to make them better, actually use monetary policy. Okay. So, I mean, that's now we've learned that, right? Because every time you do that and then things go up and people are happy and and so on. But there's a cost of doing that, right? The cost in doing that is that there's, you know, one man's debt or another man's assets. And so when you artificially lower the interest rate so that it is not attractive in a sense to hold as an asset and it's very attractive to borrow and buy things, that creates an imbalance. So I think that and I think that discipline is not something that anybody seems to want, and yet I think it's needed. So when I think about the monetary policy and so on, I think not much if any, but I also think it's not really dealing with the whole so well because of the disparity in the part.
Going back to the video that you showed first. You're talking about these 250 year cycles and then 10 to 20 year periods where there's a transition of a power from one to another nation. And I just wonder if you see things the same way this time, because it seems like globally they're the same issues everywhere in terms of these imbalances and in terms of the deficit, in terms of nobody really wanting to take the punchbowl away at a time of increasing distress in certain pockets. Do you think it's different?
I think and just to be clear, that's the whole cycle of the great cycle in there. There are breakdowns of of orders, right? So 1944, we had the breakdown of the monetary order. We had another breakdown in 1971. All right. So 1945, we had the breakdown of the most countries political orders and most countries general and geopolitical order. Right. So we're really we have those those cycles which are part of then, you know, the overall greater cycle are worth keeping in mind. So they look a lot alike to me. So when I look at it and I look at the thirties, I think there's a lot to be learned about that, that particular dynamic. I think one shouldn't just believe a cycle is going to follow. I think it's like almost like a life cycle. You know, each person's life cycle is somewhat different and it's caused by symptoms and conditions that could be measured. So you can look at the economy. You can look at the numbers themselves and see the health indicators. And that's what I did in the books, the books I wrote and so on. So you could look at them directly. You can see how much like a doctor taking, you know, CAT scan or bone circulatory system. You could see how it's squeezing out. You can see the supply demand. You can see this dynamic happening. You can see it politically. You can see it go globally. So you could see those breakdowns. Okay. You have to then put them in the context, I think, of what the process is. What does a country do when it doesn't have enough money? Okay. There are a limited number of things in order to see that you can go back in history and get some understanding and also see what's going on now. So I think it's very, very similar to that. Just to me, these all look like watching the same movie over and over again, except there's people use different technologies and they have different clothes and so on and there are different people, but they look so much alike. So I think that this is pretty much looking like the typical process.
So everyone's asking, how does it end? Right? Everyone wants to know how the book is going to end, how the movie's going to end. One thing that you've been talking about is how China has been taking over in a significant way, that the economy there has been growing tremendously. I just wonder whether some of the rebalancing and the rejiggering of the trade flows in the world are stymieing that progress or whether there are a speedbump or how that you see that fitting into the trajectory that you've been witnessing over the past ten years?
Well, China has a number of problems that it has to deal with, which I'll touch on. However, since I started go to China, which is 1984, and I went first for Curiosity and then because it was so interesting and I like the relationship, per capita incomes increased by 28 times, life expectancies increased by ten years and so on. It's done a remarkable, but it now has very significant problems. There were quickly take you through four or five of those on its debt problems. Its debts are all denominated in its own currencies and among Chinese, mostly speaking, but it needs a giant debt restructuring. The difficult one is the local governments, because the local governments in China account for more of the economy and they're broke the model and they were selling off land, earning money from land sales and borrowing money to produce, to produce high production. And and so not only do they have a debt, but they have a model for those that local governments that is not an economic model. In other words, what do you do with businesses that don't work, that don't have a profit? And related to this is the rationing system, that they don't have a profit system. They've gone really mostly after quantity. So by and the quantity, you know, how do I help maximize the quantity of production, forgetting about the profitability of that. So when you have that, they then you have the dynamic that they're now describing, which is now called involution, which is the fact of overproduction and doing harm to the economy, that's going to require a big restructuring like these big restructurings go similar to what they did in the nineties. Zhu Rongji was the vice premier and premier at the time who did this. But these the way they go is you have to pick which country, which company is going to stay and which go on the auction block and which get restructured and so on. Otherwise they're going to have the problem similar to China. Okay, because China excuse me, Japan, Japan had the same thing up too much debt, but it was a surplus country. And the debt was in its currency and they had locals. But you have to do that restructuring. So there's that. And then there's a number of things that we won't have. But certainly the world markets are the change. The China produces manufactured goods is dominant. 32% of the world's manufactured goods come from China. That's more than the United States, Japan and Germany combined. And now their markets are being closed to them and so on. So they have to go to the Third World. There are a number of these types of issues having to do with the pension system and income tax system and so on, that if they don't deal with well and they're very difficult to deal with, well, that'll be a burden on on China. While at the same time it's of course doing amazing innovations in a number of ways that are government directed. So I don't want to just say that it has those burdens because it has a lot of really powerful thinking and quantity of engineers. And what can be done is quite something. They're more advanced in the use of A.I. for applications than the United States is, for example, actually using A.I. and so on. Anyway, that's too long of an answer.
Would you rather invest in China than the US?
No, I'm not. I think when I think about it, I think, how much do I allocate to each market? Right? And I think of that first as a strategic asset allocation. I look at things like, what's the size of the market capitalization? How is it easy for me to get my money in and out of the country? What is how attractive are they? And so on. So there's a greater amount that I'm investing in the United States than is. And then I'm investing in China, I think. And both have their their challenges and, you know, and their benefits in the United States, if we're it depends what market we're talking about. But if we're talking about a lot of the market, it's quite expensive. And the nature of the flows are concerning and the nature of a number of circumstances are concerning. If I'm looking at China, it's a different thing. It's relatively inexpensive, some of those assets, but at the same time, capital flows and other issues also make it a problem. So I think, you know, I have my allocations to each much greater in the United States than is in China, and then I move tactically within those. That's how I work.
You've mentioned really tight credit spreads. You've mentioned some of the flows concerning. There have been a lot of discussions around bubblicious conditions in the air space in particular in that slice of the market. Do you see that there is some sort of excess building? When you look at history and how this has always played out, whether it's a dot com bubble or whether it's the tulips over in Amsterdam, I mean, is this something that feels frothy to you?
Yes, there's something that feels frothy to me.
How do you how do you look at it?
That's a straight answer that it's fantastic. I think that was brilliant.
I wonder how do you see it evolving? I mean, because there is this great promise, right? It's sort of the idea that the Internet did come to fruition and change the world and might change the world, but it certainly will. But you're asking history on at each of the times, the greatest technological revolutions were taking place during those times. In other words, the late twenties, for example, was there were more patents, more inventions in the world and so on. And if you, you know, you could take 2000 or those types of period, a lot of them are dependent. There was an interdependency between the capital markets and these in terms of funding and those types of things. So we have to look at valuations too, right? I would say in terms of, let's say, a high valuations. And so I think it's more in the areas of applications than than, let's say, the super scholars themselves. I'm not I don't wouldn't want to short the super scholars. But if I'm thinking about what what's going it's going to be in the users, either the users of those technologies becoming more effective and so their profits will be better and so on, or those who will provide the platforms for the effective use of those. I think that that's an area of greater opportunity.
You mentioned something about China that I think is a subject of huge debate in the United States, which is the way that they've sponsored certain industries and certain development of technologies in the air space and beyond. And I wonder if, by the way, we're doing that, too. That's what I wanted to go to. The idea that the United States is now taking a stake in lithium companies and Intel and a whole host of others and sort of cobble together sovereign wealth fund that we're learning about in real time. And I just want. Do you think that is the right approach for our country to take at this moment?
At this moment? I again want to compare it with the 1930s, because you have to look at the times and what it's like, Right. So this is a period of great conflict. And if you take such periods of great conflict, the country often needs a direction. You know, it can't be just consumer goods, rich people then buying expensive things like handbags or something, you know. So it needs a direction. If you're looking at things like data centres and what does it mean for A.I. and what does it mean? In many ways, in order to be combat competitive, there needs to be much more guidance because it just is not going to be adequate by itself. So yes, I think under these types of circumstances there needs to be that. The question is whether that is done wastefully or productively. Right. The problem with governments, generally speaking, is it's done wastefully. So you have state owned enterprises or state controlled in that. And people in Washington are not usually really good at this type of that to stop resource allocation. The question is how the balance exists. But yes, I think at these types of times there needs to be more of that and you hope that that's done well.
You've mentioned 1930 several times and that this is a time of conflict and we know how that movie ended. Is that kind of the parallel that you see this war right now?
I think it could. And there's a certain dynamic. That makes it get worse and worse. You know, so there's the debt dynamic that we're talking about. But there's also, let's say, the internal political dynamic. Do we see people coming, both sides being able to work together for results and that there's going to be votes that people believe and they believe the system is going to be fair for them so that if they lose, they accept losing because they believe the system is fair and so on. You know, history shows that that's not likely and that things can worsen because people then, you know, in you know, in history, it can get bad. I don't know, one side shoots and other side who knows where it is. You know, one would hope that there would be sort of a strong middle that would bring for most people and that you can get back to a system that's fair. But I think that that's that's a difficult thing to do. I think the world order, the changing world order. We've gone from a multilateral world order. In other words, it was the American model that there's a United Nations, a world court, a World Health Organization, a World Trade organization, an IMF, a World Bank, and all of those world so that there is sort of an attempt to bring rules and systems into place that are multilateral. I think that's over. That's largely over. I don't think we're not likely to go back to those types of things. So I don't think I think we have to instead worry about not having such a bad fight with each other, that debt or a financial crisis that we that we've make things worse than they are. But it's I'm I'm you're asking me as a man who actually has to bet on this and has to be as accurate as I can. I mean, like hope is not a strategy. So when you ask me, I say I really hope that that's not the case. But if you look at history and you look at the dynamics, there is more the movement toward these things being resolved in the form of conflicts that we've seen in the past.
On that uplifting note, we're out of time. Ray Dalio It has been absolutely my pleasure to speak with you. Thank you so much for being here.