Surveillance Special: A Conversation With Bridgewater's Ray Dalio

of uh interviews. It has launched to the top of the New York Times bestseller list. Bill Gates helping that out, saying that this provides guidance. I want to go to Mr Gates here in a moment principles, Ray Dalio, of course with Bridgewater, and yes we'll talk about the investment environment, alternative assets and that in a moment. Congratulations are Ray

and what I want to know? And you finished strong in your book with your final chapter, which is the great mystery here and for heaven's sake, don't overlook governance. Can you take the principles of an entrepreneurial guy like you and can you bring them over to big corporations like Microsoft. Any organization can determine how the people in the organization we're going to deal with each other, right, I mean, I think that that's the most important thing.

Right down your principles, which are basically the recipes for success, and agree on them so that you can have an idea meritocracy. What I'm arguing is that an idea meritocracy is the best way to have an organization. And I learned that in the markets, because in order to be successful in the markets, I know that I don't have all the answers, and I learned humility and that what I wanted to do is to have the best independent thinkers, people who will disagree with me and know how to

each agreement. So I need to have the rules of the game clear so we could have that independent thing. So you and Don Barton of mckensey go into a given big blue chip company. Let's pick on Mr Diamond and I guess he liked your book to Jamie Diamond and JP Morgan, You guys go into JP Morgan. Are you going to give everybody a JP Morgan and iPad and have them judge each meeting? I mean, if I'm with Michael Faroli David Gura. I'm gonna be like Faroli.

You were terrible there on potential GDP. I think the basic question is whether you're gonna have an idea meritocracy. Forget the iPad thing, forget any of the tools things. The question is if you and I were going to have a partnership, how we're gonna be with each other. You better write down the rules. And I'm saying that the better way to do it is to have an idea of meritocracy. And what that means is how do you know if there's a disagreement, how do you know

whether you're right or wrong? And how do you get to the better answer? Then you could have individually right. So that's a fundamental notion. And if you look, there are two types of systems you ordinarily can have like the uh the autocracy where the boss is always right and then you're going to dictate it and everybody walks around thinking whatever they think, or you're going to have a democracy. Can't have it just second, you can't have a democracy where one man, one vote is So how

do you get through disagreement? Intelligence? Okay, we've got radical transparency here to David, your and I are not on speaking right. You emphasize several times in the books the need to to to write things down, to think about this, to be self aware of one's own principles, and you write about how you wish you could look back at other leaders in business and and in economics and government and get their sense of principles. How do you get that kind of self awareness or how do you begin

to think about things in this sort of way? Well, I could describe how I got it. I I wrote down every time I made a decision, I wrote down the reason I made the decision. I closed the trade, and I reflected on it. And then I began to see that if I could take those criteria, I could test how they would have performed in the past. That opened my eyes. Then I began to have a discussions with other people about the people I work with, on what are our criteria, not just what is our decision?

And then I when I found that we could agree on the criteria, I found that we could put them into algorithms, and we could take those algorithms and then have the computer make decisions in parallel with us. And that was mind blowing, right, So, If you don't know your criteria for making decisions and you don't have it written down and you have it clear, you're just gonna walk into the snowstorm every day and you're going to see this blizzard of stuff coming out you and you

won't know how to deal with it. If you have a game plan and you start to realize that everything that comes at you is another one of those in other words, it happens over and over again, and what's

your game plan? Those are principles and that's powerful. Thew did you come to to the awareness that these could be things for self improvement, They could be things that define how you live your life personally and in business, and yet they could also be transferred to the company that you're running, that they were more universally applicable than you might have thought at the beginning. Be clear on

your criteria, right, be clear in your criteria. If you're clear on your criteria, you write down your recipes not only do you know them, and they can be converted into algorithms, or you're clear with each other on how to behave and when something comes along, your strategic and you're not just in the blizzard. That is what I'm passing along. In other words, whatever success I had in life has not been due to me. Okay, it's been

due to the principles that are in that book. One more question on principles and I want to move on. I want to know what's in this for the kid walking into Long Island University. He's seventeen, he's eighteen, he grew up in Queens with a wonderfully gifted jazz musician father. That kid walks in What is the seventeen or eighteen

year old get out of principles? For me, it was I didn't have the approached the principles then, right, I just dove into life and then I encountered things, and then years later I discovered that I would write those things down, and that's kind of the magic. And so this is just a cookbook of the principles work for me and forget about me. You I'm recommending to you, and I'm asking other people I'm asking. I won't list the people Bill get Jamie Diamonds, people like Mike Bloomberg.

If they wrote down their recipes for success of what they did and people could look at them, it would be tremendous for other people I'm gonna give you a major marks for the individual nature of your book. This is a naked book. Principles in the individual treatment of it is first rate. I want to go now to how you apply this over to investments. Once again, we're in a period where your community, the hedgeman community used to double digit and it returns to clients it ain't happening.

We're in a single digit with even some negative numbers for hedge funds. How long can the community put up with this under performance before the money starts walking out the door? I think it's worth taking a second and saying, what is the character of the environment? Great, totally agree? Okay, And then that applies to things um uh so, First, low volatility of inflation, low volatility of economic growth, low volatility of interest rate changes means low volatility of market agreed.

And on a risk parity strategy, is you invented? It's tough? Uh No, because our our returns for risparity this year have been excellent in in other words, normal, and that's because the expected return of equities, the actual return of equities, and the actual return of bonds relative to the return

of cash and most asset classes. Uh continues to have a premium the worst asset class you can have his cash, okay, And as long as um and throughout history, the only time that cash hasn't been the right has been the better investment than a diverse, fied portfolio of other assets has been during terrible economic conditions that result in reversals

like two thousand and eight. So but let me answer your question in terms of the environment right by low and volatility in terms of growth, and there's reasons for it. Low volatility of inflation and low volatility of interest rates short term interest rates. We're in a situation that generally speaking, we have a low volatile environment and we have a low return environment, and we have those things for structural reason.

And Rydal, you know, if I'm a Verizon walked in the door years ago and put their faith behind you, I got an SPX back twelve months up, nineteen point eight percent, the dow up. That's the pressure the people that admire you face. As I got straight equities, passive fund, Vanguard killing it. How do you respond to that? First of all, our clients love us because of the we separate alpha and beta. The important Just explain that that's

important we have we have two types of funds. We have a pure alpha fund in which the individual can take that alpha and attach it to any asset class, so they can set an equity benchmark and put the alpha on top of that benchmark. In sixteen out of lass sixteen years, we have had positive alpha. So if they chose an equity benchmark and they put that alpha, they would have had an alpha. Uh, that's positive whatever you attach it to. And beta is the structure the

passive portfolio. What portfolio do you want? So we have an all weather portfolio, which is our risk parody portfolio. We describe okay, and that is our passive beta. So one can choose what we think is the best beta portfolio. Therefore there's no alpha. Alpha is the deviation from the benchmark DA had more value or so you can have the best beta portfolio or you can have the the

what we believe is the best alpha portfolio. So because we've performed had positive expected alpha in sixteen out of the last sixteen years, and we've done and had twenty three out of less now it's less than it has been. But if they don't compare it to equities at the time, right, because In other words, it's it's above equities is the way that they look at it. It's up to them

to choose whether they want the equity bench board. If you're just joining us, Ray Dalio, with us, We've got lots more to talk about well continually, Mr Dalio of Bridgewater. The book is principles doing better than what have you sold? The movie right here? Is there gonna be a movie? Who's playing Ray Dalio? Come on? Who? No movie rights damp? Ray Dalio with us, and we will continue. I'm Bloomberg Radio. We welcome all of you on Bloomberg Television worldwide. If

I can get the tumb over. It's like the Old and the New Testament Principles, Ray Dalio, and both David Ger and I agree there's some huge individual initiative in here to think better and do better over the career of Mr Dalio. Of course at Bridgewater, Ray, I want to ask one more financial question here that we've been talking on, and I know David wants to go to. So much of what the nation is looking at right now. We see every day Cathy Burton and our team and

hedge funds, people returning money from hedge funds. What Have you ever had to do that? Have you ever had to return money to investors because things just don't feel good right now? Anything like that. We have caps, and we've always had caps. We've returned money over a long period of time with within this is the recent underperformance of hedge funds and the pressure to get back. What do you do? Just wait? Do you take vacations waiting to get back to the right non volatile excuse me,

the right volatile environment. I think I explained a little bit about how it works right for us. We separate alpha and beta. Right, So there's alpha, which is the value added, and that's a pure alpha fund, and then people can attach that to whatever beta they want. So if they say I want equities at plus your your alpha and your pure alpha fund, they get the alpha plus whatever the beta is. If they have cash and they can pair it with um an equity return, that's

not a smart thing to do. So we're institutional clients compare it with the asset class that they put it against. And so because we've added value in sixteen or less sixteen years, and we're adding value less than we normally do because volatility has been less, but still we're added value net of fees UM, they're getting positive alpha, so they have in our case, they give us. They tend to give us money whenever there's an opportunity to give

us money. Now the question is what is a hedge fund? Right? If a hedge fund is compared against the stock and you're having a cash and you're producing that value added and you're disappointed, then you're probably naive. If that entity is meant to beat the the equity x markets or something, then that's the passive. So you have to pick. The investors got to pick one way or another because when the bear market comes along, how do they deal with

the bear market? So it's becomes a strategic question. I think the smart investor UM institutional investors are ours know how to separate alpha and bay to make that I gotta make news here this morning. Are you predicting amparer market? It seems like every Friday all the doom and the gloom comes out of higher interest rates, lower stock prices. Can read predict negative eighteen percent in the equity markets.

Now we're um, we've been long ecomity markets and you know, without getting too much into our positions, let's get into you let's get into positions I can tell you because we don't get into our positions. But anyway, I'm saying no, the answer to your question. I mean, eventually it comes along,

but we're in a different environment. Now here's here's the difference. Okay, and then David jumping from from Okay, from two thousand and eight until two thousand and seventeen, we were in a certain type of environment, and that environment it was one in which there was the pushing of interest rates down to the point of creating negative interest rates and with a positive carry plot by doing quantitative easing to

push money into the system. Two thousand and seventeen is the transition of an ending of all of that all around the world, and we are entering a new era in which there is going to be and there is the raising of interest rates and the reducing of quantitative easy. That action that they took in that produced significantly bad

real interest rates. I mean the real interest rates today ten year on the tenure um real interest rates are about a half a percent next to nothing, next to nothing, and the break even inflation right for ten years is about one eight percent. So that's those numbers are very low because of let's call it repression, in order to get the economy to do that. We are now in a transition, a whole different environment. That's the equivalent of entering the late stage of the cycle, and that's when

there is a tightening. Tightening has become progressively more concerning because as you move along there are more and more difficult to get perfect. So as we're progressing, we are entering a period of greater risk and the nature of the market. So when you look at the bond market right now, there is risk in the bond rock. There's looks to me as a significant amount of risk in the bond market as that. So now let's go to the policies that are behind well, let's bring in David.

Go to the policies. The good news is Ray Dalio is not in the shortlist at the Fed. Well on that note, Central Bank squarely and focus here. We just heard from the e c B. We're waiting to hear who the President is going to pick to lead the Fed. Let me ask you a two part question, how much does personality matter at the Federal Reserve? I look at John Taylor and think maybe he's a Ray Dalio kind of guy. He's Scott rules or principles of his own

that he's health throughout his his career. And on that note, what would you say to the next chair the FED to what he or she needs to focus on when it comes to the health of the U S economy. A bunch of questions in there, so uh, personality. Again, I think the real question is principles. If you were to write them down and articulate them and then discuss them through history over period of time, I think that's

a good thing. They also have very different principles and so such as it matters in terms of quantitative easing and also whether it's too tightened too to loose. So I do think it possible it can matter a lot in terms of what the monetary policy is, particularly the notion of about the quantitative easening and whether it's too tight or too easy. It can matter a lot. Um And then we have the pace at which from FED policy, since we're talking about it, the pace at which there's

an unwinding of the balance sheet. You know, I look at those numbers and um, I don't think they're going to be able to continue to that pace because it's equivalent of something like two and a half percent of GDP, and if you have that happening at the same time as there's increased budget deficits, we could have a budget deficit increase of another one and alf percent of GDP. That's a big number in the supply demand of bonds.

I mean, think about that. Okay, there's going to be that amount of effective selling of credit by the Federal Reserve. Big are you big numbering that? With the tax reform proposed as Douglas holtz Ecan talks about, we're going to five, six or seven of deficit to GDP, where we will

almost certainly have a significant move in that direction. So you could even see it in the market action, in other words, on days where it looks like they're making more progress to the bond markets, more inclined to sell off days that they're making less progress to bond market because there's going to be probably a larger deficit and that means more selling of bonds at the same time as there's more selling of bonds by the Federal Reserve.

In terms of the balance you change now, I think they'll be cautious in this, but when you're in this part of the cycle, it's very delicate. And this is not just the FED. This is what we're The movement in the c B is going to be analogous to that. So we're talking now today's meeting is what is the pace of doing that? But we know the direction. And if you move further along you know the direction. You know the direction. And in Japan a little bit slower,

you know the direction. In China, as we have to go from the Nine People's Congress and you go beyond it, there's going to be more of a tightening of credit. So the complexion of the world that we're in is changing in a profound way. Every decade practically has uh defining characteristics. You know, the sixties was a period of strong growth, not much inflation. Seventies this is we're going

to have a period. We're gonna enter a new period that's going to be quite different than the one that we've been Eight ways to go here, We'll run out of time because your answers are too long. I gotta work on that. You gotta go to interview camp and do shorter answers. I'm kidding, right. We just interviewed Richard Taylor, the Nobel Prize winner in behavioral economics. In the back of your book Principles, you have in your bibliography the

giant Mr Kanman of Princeton, Thinking fast, Thinking Slow. What have you learned from the behavioral economists that you brought over to your book Principles. I learned. I learned that there are two us in everybody. Right. There's the upper level thoughtful um you that's not emotionally carried away. And there's the lower level you, which is a part of the brain, the animal brain, that has that emotional uh carried away. But also a lot of good things like

inspiration and um intuition come from that. And I've learned how important it is to go slow and reconcile those two things to to determine what you want. And that is the exercise, in other words, when I'm in the heat of the moment and I'm dealing with things, and then I instead come out of that heat at the moment and I've slowed down, and I write down my criteria for making decisions, and I build a decision making system.

So it's like plane poker that I know if I operated in this way, I could know what the results are. I'm in a position that I can execute that like creating a computer chess game. That's been great. We do this for like six hours. I got too many questions ago, I want to talk about Ed Thorpe and m T. There'll be another book. When is the next book out? Probably on economic investment principles for a year and a half we wait for the movie. It'll be great principles.

Ray Dalio, thank you so much, really really interesting book on the individual moving through life, with a lot of lessons learned from Mr Dalio. He of course runs a small investment shop up in Connecticut called Bridgewater as well. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene. David Gura is at David Gura. Before the podcast, you can

always catch us worldwide. I'm Bloomberg Radio.