Ray Dalio on the Decline of Real Interest Rates (Podcast)

of Bridgewater Associates. Ray is a fascinating guy. We've had him on the show a couple of times, one for Principles, the second for Big Debt Crises, both of the books he's written previously as well as Ray did the initial Master's Business Live, which we would be doing but for the pandemic and lockdown, we would have continued that into

this year. This is really quite an intriguing conversation. Ray has done a deep dive into the history of the rise and fall of currencies, of great powers of debt. He really brings an analytical approach, not just a global macro and investing, but how to think about the world, how to think about the variables that we deal with.

I am completely tickled by the idea of Ray at home in Connecticut with the ability to pretty much get whoever he wants on the phone and basically having a podcast of just him and somebody else because he's interested in a particular subject matter, such as currencies or pandemics or monetary history. And when you're Raid Dali or you could pick up the phone and get whoever you want on the other hand to basically give you a crash

course in that area. And he's endlessly um curious. He's one of these people whose intellect is always hungry for figuring out what happens. I'm fascinated by the way he views the world and the economy as this big mechanical contraption that you can understand if only you take the time and effort to dive into it. And pretty much that's what he's done. And I find him to be just a really fascinating guy to talk to. I think

you'll find this to be an intriguing conversation. So, with no further ado, my interview with Bridgewater Associates Ray Dahio. This is Masters in Business with Barry Ridholts on Bloomberg Radio. My extra special guest this week is Ray Dalio. He is the founder of the world's largest hedge fund, Bridgewater. Bridgewater has generated the most amount of profits for its

clients of any hedge fund in history. He is the author of several books including principles life and work, big debt crises, and the upcoming the changing world order, Why nations succeed and fail. That will be out January, Ray Dalio, welcome back to Masters in Business. Thank you Berry, glad to be here. Well, I'm glad to have this opportunity to have a conversation with you. I know that you're a student of history and market cycles, and you're a big macro guy looking at the world from a thirty

thousand foot perspective. I wanted to talk to you about really what is going on in in what can only be described as a fairly unique moment in history. Well, uh, it isn't it isn't. You know. The one thing that I learned about early on, particularly when the dollar in one was broken from gold, is that many things that surprised me had never happened in my lifetime before, but

they happened many times in history before. And the three things that are happening now that are the big backdrop situation. Before we had the covid um our first, the debt cycle, monetary creation of debt, and monetizing debt. The last time that happened was in nine thirty three when interest rates is zero, and central banks printed a lot of money and so on, and that's a big factor because we're dealing with the question of the value of money and

how that happens. So that's number one. The second is the large um wealth and political and social gaps that are causing us to be at each other's throats and also giving very different choices in terms of the left and the right and capitalism and socialism. And the third is the rise of a great power to challenge the existing great power UM, the rise of China to challenge the United States in many areas UM. And we're seeing that, and one has to go back to the period to

look at it. And then when I felt that I needed to understand it better, I went back five years because I needed You know, these cycles, they go on like a hundred years, and in order to follow a world order arise in a decline of empires and all of those things, one has to go back a number of cycles. So that's what I did. So we have those as the backdrop. And then we had COVID, and COVID is the stress test, and the world had COVID and the stress test, and that's the moment we're in.

So when we look at today, we have to see it in that um in that light because when we think about where do we get money from the creation of debt and the printing of money, and where do we get to support when we're talking about the next bill that might or might not past next stimulative it has big implications to the economy, to the markets, and so on. And so that's the dating, all right. So working within those three big frameworks, let's start out talking

about monetizing debt. So normally Congress can't agree on renaming a library. But back at the end of the first quarter, in the midst of the panic, they passed a three trillion trillion with a t three trillion dollar Cares Act, a giant stimulus plan. Was that the right call back then? And what was its impact on the national economy? It was it was the necessary call. But it's a reflection of where we are in the cycle, and so it

has consequences. It's the necessary call because if you don't give money to those that they gave money to money and credit, we would have had an implosion and we would have probably had a great deal of social problems. UM. But it's not real money in the sense that the real money would have required taxation or it would have required cutting spending. And so the easiest way to give

money throughout history, we've seen this. The easiest way is to create government debt and have the central bank purchased that government debt and and and provide other loans because it's not taking money away from anybody and it's not cutting spending, both of which are intolerable. And that move

is very much analogous what happened on April nine. That was the announcement to the same thing that happened on March five three, except then we had an exchange rate which was tied to the dollar, but they are tied to gold. But they needed to sever that tie in order to do the same type of policies. And if you look at throughout history, that's what happens. And then that's what makes the market go up. Okay, the value of money, because all investments compete with each other, and

so that brought down nominal and real interest rates. We can talk about multiples, stock multiples and bond multiples, I think might help to convey the concept. But the decline in real interest rates and the decline in nominal interest rates pushes asset prices higher in and of itself, and the putting of money into our loans for companies and so on. They drew the line at investment grade, and those that were the fallen angels just past that and

they would buy those things. Those guarantees or even knowing that those purchases would take place created the financial support. So we saw an expansion in multiples. When we think of multiples, you know, we we think of multiples that stocks and bonds compete with each other. But when we look at stocks, we think of multiples multiples times earnings, and we look at bonds we think of yields, and

they're just the inverse of each other. So one could say, you know, what is the multiple on a bond and the multiple on a bond now, with interest rates being close to zero uh low in the United States and below zero in Europe and Japan, is a very high multiple, almost in you know, an infinite multiple, more than a

hundred times. And because stocks and bonds compete on yield basis, that also drove up the yield and so you're seeing the movement of money out of cash and bonds and moving to asset class, and that has been the main driver, and it's been a world phenomena because the Europeans have done an analogous version of that the Japanese have because there is a void. The void is for every individual or a company or country, there's a certain amount of revenue that comes in a certain amount of expenses and

a certain balance sheet. And if your income is less than your expenses and you don't have a good balance sheet and you look all a lot of money, you're going to have a bankruptcy. You're gonna have a problem unless you get that. And so it was necessary, and but it changes the value of money. So let's talk a little bit about the value of money. Let's discuss a little bit about America's exorbitant privilege. We own the

reserve currency of the world. What does all this continuing debt monetization mean to the US maintaining that reserve currency status? And uh, what might it look like if the U s would lose that reserve currency status. Well, as you point out, that is the greatest power because the United States as a whole, which is just the aggregate of the individuals, is buying more from the rest of the world. Spending more than it is selling to the rest of

the world. We just had another large trade deficit number, and it is doing that by selling credit, by selling our bonds. And so when we look at that dynamic, there's a certain amount of UM bonds out there UM. And the world always wants to hold a reserve currency because that's what you save in. If you want to save in something UM, you know you're not going to save UM, You're gonna save in the world's reserve currency.

And that has been the exorb of and privilege. However, what we're two things are happening that are threatening that a bond is a currency or a currency is a bond. What I mean by that is when you own a bond, that is a promise to receive currency, and that when you have a central bank that can print currency without a boundary, that means you have to sell a lot

of bonds. So when we run large deficits, and we will in the future, no matter who the president is, we will run large deficits, we will have to sell bonds to the rest of the world. And if you look at the owners of those bonds UM, and most importantly I would say it's a combination of central banks, UH, sovereign wealth funds, and of course some other investors. But um, they are overweight in bonds and they're gonna have to

buy more US bonds than they have to buy. And that's coming at a time when the rewards of those bonds are bad. In other words, there's now a negative real interest rate of about one percent and no nominal interest rate. And it's coming at the time when there is a large production of debt and large monetization. So we are testing the limits of how we can how far we can go in a fiat monetary system, and nobody knows exactly over the short run, let's say, over the next year or two and so on. We know

that everybody wants buying power and dollars. There's something that's received all around the world, and you create a squeeze in those and there's also a lot of dollar denominated debt that has to be paid, and that's a supporting because they need dollars to pay those debts. That's a support. But those supports are are are failing, will will diminish with and so we're testing the limits. Now you ask what would happen, what would happen would be if you

don't own bonds, um. And that's not only Americans, but foreigners, because they might say pension funds might say pen h bonds don't do me very much good. And and if you started to see their interest rates rise at all, then you see bond prices go down and you see stock prices go down, which would be intolerable. So if you have that movement, that would require the Federal Reserve to then buy more to fill in that gap, which

would be monetization, and that could create a spiral. But the answer to your question of what would happen is that you would have to then um pay um. You're you have to cut your buying two exceed um your earning. Um. You'd have to go to surpluses to pay down your debt or you at least have to go to balances that would require That would be tough, and it would also mean that you would have a depreciation in the in the value of the dollar, which is changes America's

purchasing power in the world. So when you look at history, you've seen throughout history, Um, I've gone back a number of years. And by the way, if everybody wants I wrote this up on LinkedIn um changing World Order. You can see seven cases of different currencies and the value in currencies and what what triggers them. But all currencies at one time or another have been devalued or destroyed. And uh and so that's that is a risk that one has to watch very closely. So, Ray, let me

refer back to something you said earlier. You mentioned in the government did a lot of fiscal stimulus. They basically issued a lot of bonds of which the Federal Reserve ended up um using as a basis for lending. Basically, the Fed was funding the government. That that sounds an awful lot like modern monetary theory is MMT not all that modern, that's right, that's right. Uh. Mm T is

a version of what I call monetary policy. Three. So what I mean is monetary policy one is interest rate policy, cost of funds when interest rates at zero, and you can't use that policy anymore, you go to monetary policy. To monetary policy too means the central bank essentially prints money and buys financial ass it. That causes financial asset prices to go up, but it doesn't trickle down very much. It widens the wealth gap, and it doesn't get it into the hands of those who need it, it gets

it into those who have financial assets. Monetary policy three is when there's a need to get it into specific hands, and the federal government, the central government, is the only one who can direct where it goes. So a lot of the spending that we've seen in terms of its direction required the Federal Reserve to require the government to borrow the money. That's Federal Reserve lent it the money, and that as a result, got it to go into the hands of those who needed it the most. Um.

And that's monetary policy three. So I would say, um, I think you should focus on on monetary policy three rather than the more narrow definition of modern monetary theory because it's the but it's it's basically that we are

now in a government controlled capital markets. So the government will allocate resources through fiscal policy that will be monetized, and so it's going to be a much more government controlled fiscal and monetary coordinated monetary policy, and that will affect all the markets, it will affect us in many many ways. Let's talk a little bit about what's going

on with wealth and income inequality. A number of people have made the case that the mostly monetary response to the Great Financial Crisis without a whole lot of accompanying fiscal response lead to a lot of widening income and wealth inequality. What your view on that, Ray, Well, it's it's certainly true. Although the ingredients of the widening wealthcap we're a you know, a number of ingredients, um, and

I we should talk about the widening wealthcap. But yes, the purchases of financial assets helps those who have financial assets more than it helps those who don't have financial assets. And what we saw, of course is those purchases caused financial asset prices to rise up um and didn't trickle down in the same way to others, and so it widened it other Fay, let me interrupt you there for a second, Ray, And I want to just put some

meat on the bone. So about half of Americans don't own any stocks, and of the Americans that do own stocks, about half of those equities are owned by the top ten of m of the country economics. So when you say stimulus of financial assets doesn't trickle down, I'm assuming that's more or less what you're referring to. Yes, you've said it very well and for a variety of reasons.

It's a self perpetuating cycle because as you have more assets, like right now in terms of wealth, the top one tenth of one of the population has slightly more than the bottom combined in wealth. And when wealth is those assets, those financial assets that the central bank buys, that perpetuates the cycle. And there are other things that relate to that.

For example, I did a breakdown of the economy and the financial positions by Quinto, and I really wanted to look at the bottom and relationship to the top to see these different economies. And um, what I saw, for example is that on education, those in the top forty on average spend about five times as much money on the children's education than those in the bottom six. And

it's a natural cycle that um. You you know when you we all want to take care of our kids and we want to educate them well and so on. But we see it. I see it here in Connecticut,

which has a large wealth gap. We can get into that, but I mean, um, a total absence of resources, and it becomes self perpetuating because it then becomes better educated people then earn more money and so on, and that's becoming more and more true also as technology is playing a greater role, because as technology is replacing people, including now more and more elements of thinking, you are getting into an environment of those who are designers of the

technology and so on doing better and better. Because it is the process of capitalism to do things most efficiently in pursuit of the profit. That then leads to those changes which means rely less on people, rely more on machines. So there's a monetary component to that, There is a technology component to that widening yellow of gap. And then of course there's also globalization. It's more efficient for the whole to have globalization to produce things in where they're

most efficient, of course. And but what you see is within countries you have a widening wealth gap. Between countries you have a narrowing wealth gap. In other words, those who are less lower income, they learn more and they rose. And so if you happen to be in the country that's rising less quickly and you happen to be on the bottom end of that, that globalization hurt you in

incomes too. And so those three things have produced the disparity that we see, and at the same time that is what has led to the political consequences that we're experiencing. In other words, the rise in populism across the world, but of course it would come in the United States, particularly because of the disparity. So let's get into that a little bit. You've written about the hollowing out of

cities and regions and indeed society as a whole. How is that manifesting itself and what can we as a nation do about it? Well, again, I'm describing the mechanics of this. I'm not ideological, I'm just mechanical. There's a formula, simple formula. If you've got a lot of debt and you have a big well gap, and you have an economic downturn, you have a fight over how to divide

the pie. That can be dealt with either through printing money or you have to deal with it with If you don't print the money to finance the deficits the way we're talking about, then you have to either raise taxes or cut spending. Now, in states, they don't get to print money. I mean, the main difference between the federal government and the state governments has to do with

this printing of money and monetizing debt thing. So if you're in a state like Connecticut, New Jersey, Illinois and so on that has large debts, a large wealth gap, and you know, experiences a downturn. Then you create a dynamic where either raising taxes or cutting spending makes a place more difficult to be in. Those with income don't want to experience the tax increases, and when you cut expenses, those expenses are for the people who are really the poor.

People in those states are intolerable and so and they also reduce services, and so it makes it a less hospitable place to be. So you've seen that hollowing out dynamic like Captain in places like Detroit or the rust Bell places and so on, where those moved, they move from one place to another place that's more hospitable for them. And when they move, those who move and have the

higher income, they bring their taxation. Their tax money is with them, and it begins a self perpetuating cycle because then services go down. It becomes a more antagonistic kind of environment, which creates a motivation. So I think that when we're looking at add this is gonna be there's gonna be a big issue after the election, um, how those states are going to be dealt with and those deficits quite interesting. I know a number of people have

proposed various cures for this. One concept is baby bonds. Everybody gets a small set of bonds at birth, or theoretically a small account which could compound over time. I know you've studied universal basic income. I was kind of surprised to see what you learned. Tell us a little bit about that. Well, first of all, I think that the basic necessities of educating children well must be done.

It's inexcusable. It's the greatest cost to our country, and it's the most unfair not to educate children in some analogous way. I think the basics what is needed, um, also basic healthcare, basics, certain basics. UM. I was lucky to have, you know, two parents who care for me. I went to a public school, and I came out to a world of equal opportunity, and that's all that anybody needs. But they need those things, and then the

question is how to best give that. They also have to be productive, because you can't just give income income money has no intrinsic value. And so if you keep giving income and money to people and you don't make them be productive, that's not gonna work. What you eat and what you consume is going to be based on what you produce, so you have to make people productive and so on. So now you deal with the question of how would you bring that about, how would you

engineer for that? And what is the role of university basic income? Which has pros and cons But let's say, um, you can't just you can't do every thing. So if you go to universal basic income, which can be very expensive, it has the benefits of being efficient. If apparent handles that money well and has the greatest notion of how to best use that money. Well, uh, you know, that could be very good. You don't have a bureaucracy to

administer it and so on, and that that's the problem. However, um, the usage may very you know, you put money in the hands of some people, um, and and that money may not go to the best uses for their children and and beyond. And so when you think about does it go at the expense of let's say, certain education programs. I'll give you an example in Connecticut, where the wealth gap is large and we're intimately involved, twenty two of the high school students want five. In other words, are

disengaged or disconnected. Disengaged means when they're attending school, they have an absentee rate or more and they're failing classes. That's disengaged. Disconnected means they don't come to school anymore and they don't know where they are one in five And if you look at the finances of that and how you could change that, they end up in uh, detriments to the society because they're they're in at the cost of incarceration. All these things are terrible. So there

has to be that usage and money. I would say, through our philanthropics um efforts, we get windows into some of these things, and they're so cost effective to use the money right in programs. So the question is do you want to find do you want to give checks or do you want to give programs because you can't do both, And so that's the real question. I think.

I don't think there's a question of the need to do take care of children well and educate them well and those types of things even there, you know, so anyway, it's a priority question. So we're going to talk more about your philanthropy a little later, but I just have to ask a very basic question about the role of government. What should Americans expect from their state and local and federal governments? What level of service is reasonable in a

modern somewhat civilized society. Well, there are two ways I could answer that question. What a modern civilized society should provide and what you can expect given the structure. There are two different things I think everybody should expect. That the basics and that I dealt with before, that I experienced when I was growing up. I was born in and I went to and there was the American dream and we're all in it together, and I wow, that

was great. I got went to a public high school, public school all through my life, and parents who took care of me, and that and and if they have health care, basic health care and so on, that's pretty much. And then you come out have an equal opportunity. Everything has shown that that is that should be expected, that it is. If you don't do that, it's not fair and it's not productive because you cut a large percentage

of the populations of people who could be productive. As you narrow that group that has opportunities, you exclude those who might be the most creative and capable people, and so you suffer in both of those ways. So I would think that basic civility and basicness essity would require those things. Then when you ask what can you expect, somebody can't just demand something. We have to understand how

the system works, and the system works mechanistically. So you know, let's say you're in a state, and so you're going to get money from taxation, where's the money come from. You're gonna have taxation, and you don't have enough money, literally, and so you can't just say I'm in the state and I'm expecting it. You have almost a constitutional challenge to provide that money, because let's say it's education money.

For example. By the constitution, education is a state issue, like in the state of Connecticut, about eight percent of the money comes from the federal government and the rest comes from within the state. And so if if taxpayers move and states operate that way, you can sit there all you want and say I need these basics, and you won't get those. And one of the big things is that people actually really don't have much contact or knowledge of what it's like to be in each other's shoes.

I live in Greenwich, Connecticut, and um and up the road. UM, you know, it could be fifteen twenty minutes away is another world. And I wouldn't have the exposure to this if it wasn't from my wife kind of living in that world to be helping helping this and so on.

And I can understand it as as I walked down Greenwich Avenue and and so on, where you know, these are normal people who want to take care of their families, and they have that and the awareness and the um and the acting on that awareness, you know, is a structural is a structural problem because at the end of the day, you know, everybody's trying to do the best they can, and so it's a problem. So those things, what are you gonna do. You're gonna say, we expect it.

But it's sure that health case to me that you need to provide those based six makes sense to me. Let's talk a little bit about some of your recent writings about China. You have discussed the confluence of longstanding economic trends and big shifts in the political environment. How much of a collision course is China and the United States on? Well, there are five main areas of conflict, five or six, and they're a manifestation of history repeating itself.

So just to take a second on that. We began the existing world order in ninety world War two ended, we began a new monetary system, Brenton Wood's monetary system in forty four, and we set the rules, and the United States then accounted half of the world economy. It had of the world's gold stocks and gold stock and

the words gold and that and gold was money. And we built a dollar denominated system and an American world order, which is why the United Nations, the I M f M, the World Bank a roll in the United States, and that that happened, and then as a psycho happens. If you look at history, China over the last two thousand years, but has always been like one number one or two,

one of the most powerful countries. And then starting from eighteen forty until Ninette had a collapse and then it began to emerge in and then in nineteen seventy eight dankshall Ping came to power and they he tapped into capitalism, state capitalism. He created state capitalism and since then till now, the average real income has in reached by twenty two times. It's been very productive and it's becoming very capitalist. In um. It's uh, there are billionaires being formed, their ideas, their

um um I p o s um. There's creativity and there's that competition. And so when you get a rising power challenging and existing power, there are different ways of doing that. And so there are five types of we call them wars conflicts, and they are the trade war, the technology war, the geopolitical war, the capital war, and you could have a military war. The trade war we know very we know a lot about and that's the most minor of those. Um it's really the overall conflict

that matters. The technology war, you see it um anything from Huawei, TikTok and so on, and who going to produce what technologies in this world. That's something we can talk about if you want to. The geopolitical war is a very important thing, but I want everybody agrees has been agreed that Taiwan is part of China and there should be peaceful unification. And there's a region around there and that includes Hong Kong, and they have historical meanings

because they used to be part of China. Then in the wars they were taken away from China and then they've been promised back and they are big issues. And then there's influence in the world as they've become competitor, and so there's that gel political world war capital war

is a very important thing. History is shown that when you get into wars, this is very interesting even before their awars, that they foreign powers cut off to the other They cut them off for capital, and they cut them off for needed items like in World War two Japan Um when we when there was the rise of Japan in there, Um they were cut off from oil, they would cut off from rubber, um, and they were

men cut off from capital. We could we did say that we wouldn't pay their debt, and the United States today could do that with the bonds they owned. China owns about a trillion dollars worth of bonds, and the president unilaterally can say, um, you know, we're not going to pay those bonds or cut off capital in different ways, and so you see the development of capital markets and so on. And then of course, um, there's the military question because at the end of the day, it's a

test of power. So if you look at the geopolitical part of this in the region, militarily, China has developed what military experts tell me is a military actual superior priority, and about two thousand MILEAR eight and I don't know anyway would be very bad. That includes the Taiwan area

and so on. And because the world doesn't have a World Court to plead your case, it is always a testing of each other's limits and boundaries, and that would have big implications for the United States stature in the world. So those issues are all wrapped up together. In other words, there's a lot to argue about. At the end of the day, though, the most important determinant of power is

how we are with ourselves. I should say, you know, we've got these conflicts with China, and those conflicts also mean that we're having separation. Um we can get into that. I don't want to ramble too long, but the decoupling is a necessity and would be part of our environment head now when we talk about decoupling. Over the past years, it feels like we've become much more integrated with China's economy,

their manufacturing prowess. I hate the phrase frenemies, but we certainly have aligned our interests together in a lot of ways. Our entire supply chain comes very much runs through China. How easily can these two nations decouple. It seems like we're both fairly dependent on the other, of course, because we lived in an environment when you have globalization and you took it as an assumption, particularly the Chinese took it as an assumption that they could build on the

American technologies and they'll be there. Chinese are more vulnerable than Americans are to a technology war at the moment. They know that, and as a result they're initiating ways um semiconductor chips and many other ways so that they can become self to efficient because you know, classically in a conflict, you're cut off, you're cut off from capital, you're cut off from what you need, and it is devastating.

And because it has to exist as a possibility that you can have war, I mean history is shown when there's a rising power challenging existing power. That's happened sixteen times in the last five years. Twelve of them are actually shooting wars. That possibility certainly exists, which means there must be decoupling there, or said another way, there must be self sufficiency so that one cannot be cut off

from what one needs. And that means that there's a process over the next five years you're going to see a lot of decoupling. It creates inefficiency for the world as a whole. However, you know it's not going to change the world. That those efficiencies are almost luxury by comparison to the necessity of surviving. And so you will see that kind of decoupling. And the real question is, um you know what it will look like. Two systems, how do they operate in parallel? Can we have harmony

or are we going to get something else? But it'll it's happening, and it's a pressing thing on both countries to make it happen fast. So you mentioned there was sixteen examples of a rising power challenging the existing order. Give us a few dates and places. Where else have we seen situation similar to the rise of China challenging the United States? What's parallel? Well, I think the I think the period is the most analogous period I touched on.

You know, that was the when interest rates at zero, when there was a lot of printing of money and changes and so on and so forth, when the wealth gap was the same as it is now and so on. Well, during that period, there was a depression and there was the rise of Germany, and there was the rise of Japan to challenge the existing world powers and sort of out of necessity. And there was a lot of conflict, internal conflict in those cases because during such times people

become more extreme. The right becomes more right, the left becomes more left, and they fight with each other more and when they fight, um it becomes more disorderly. You know, in that period there were four countries that were democracies that chose to have autocratic systems. You know, that was Germany, Italy, Japan, and Spain in terms of trying to have autocratic system

to bring order to disorder. And so that period was very analogous, and if you go down to the particular alers of Japan, it's analogous in many ways, even because the geography of the place is in many ways similar. You know, to get oil, you know, you have to go through the Straits of Malacca, and you've got to you know, you bring resources from there, and you have

bonds and and you know, all of those things. In many cases, the evolution that led up to Pearl Harbor when they were cut off of resources, and the idea of that been if they cut off of resources, they respond those things seem very much analogous. I think, though the difference this time is that we are dealing with a more powerful country and Germany or Japan relative to

the United States. To put that in perspective, China has a population that's four times the size a little bit more than four times the size of the United States. That means if it's capital income is half the United States, then its size will be twice that of the United States. And so it's an economic power, and it gained economic power by following a lot of capitalist policies to create the inventiveness and allocate resources. So it's a anyway, it's analogous,

but bigger. So we have an election coming up November three. The president gets elected, the new president, or I should say, whatever new administration comes in, and that particular president picks up the phone and says, Ray, you're a China expert, and you're an economic expert, I'm concerned that the United States is slipping in terms of our world leadership. What sort of advice would you give him? Well, there's internal

and there's external. The most important thing internally, as measured by leading indicators of well being are things by what is the education level of the population. What is the financial condition? Are you producing more than you are consuming? And do you have a balance sheet in which you have more assets relative to liabilities. You've got to go. So you've got to get productivity going, You've got to

get education going, and so on. So you have to have internally You've got to become internally also more aligned. You have to have the population rowing in the same direction rather than fighting with each other, and so um I would say, you know the ways of achieving those things. How do you achieve a bipartisan American dream and rowing in the same direction? How would you achieve that? And then make clear about productivity and how how you would

achieve that. It's a big it's a big order. But if you're going to get strong, those are the things you have to do into eternally to get strong and protect your financial system externally. There are there's the realization that we have these issues and there has to be a plan, a strategic plan. And I think that both parties, I would say internal people who fight with each other, and I wish they can visualize what civil wars have been like, what fighting with each other can be like?

This This could be nothing by comparison with what we good experience. We can't take this for granted, so if we it's the issue is most importantly how we are with each other, both internally and externally. Externally, I know um that the Chinese leadership and I believe the American leadership realize that if you slip into one of those unacceptable um wars, that the ways that we've invented for hurting each other are, you know, greater than ever before.

World War two cost more lives than any other war before it, and World War Three in its various ways is so horrible. So one hopes that there's a fear with that, and so that each would have to find the way of defending the others. There's a concept called the prisoners dilemma, and basically what it means is if there are two people or two countries and each could kill the other or they could cooperate, what should each do.

And the answer to that is kill the other a stasis that they can because if there's some risk and you don't know what they're gonna do, it's an existential risk. So you just get rid of the other. And so the only way that you're going to be able to deal with that is to go to the higher level and say, how can you protect each other. The more that it's done with a tip for tat and you know, an exchange range of hurts um, the more problem is, and that problem is gonna worsen over time for the

United States position because time is on China side. It's growing faster. A lot of things will mean it will be more independent five years from now than it is today, and so on. So there has to be the thinking through both domestically and internationally of how you have win win relationships. And that's a lot to ask for people

who want to fight with each other. Fascinating stuff. Ray Over the three topics we've been discussing, there there's one overarching theme and it's something I know you've written about extensively and I find obvious and yet so widely ignored by so many people. You have written the most important thing for an investor to do is to confront reality how it is, as opposed to wishing it is something else.

Explain why that even has to be discussed. Isn't it just a given that we all have to deal with the world as it is and not how we wanted to be well neurologically, I mean, we um one would think that logically, but there are you know, a couple of impediments. There are subliminal emotional things that enter into our decision making. You know, like when an investment goes up,

one falls in love with it. Investors had to fall in love with it rather than and think, wow, that was a great investment, rather than thinking that's more expensive. And so there are those kinds of things. And then there's also that many of the things that have happened over time have not happened in our lifetime before, even though they repeat, So those lessons from history, we each

learned them differently. I remember my dad, Um, you know, he went through depression and then war and then you know in the nineteen fifties, you know, he wanted to save, he wanted to secure that, he didn't want to go into the stock market and so on and that. But there was another part of that cycle when you know, booms come after depressions and wars because people don't want

to fight with each other and they work together. And he missed out on the stock market, and then you have through the full cycle that it's common knowledge you know to borrow and to buy stocks, and so one of these things have cycles to them, so they're understandable. Also, the nature of the mechanics of markets lends itself to that. It's a funny thing. Let's say the concept of long term security produces short term volatility. What I mean is

the concept of duration. So let's say I give the absolutely certain return for the next twenty five years, like a bond or inflation index bond or whatever. That will produce greater near term volatility because the duration of that asset produces a volatility as the discount rate for that changes. So all those things drive people to those I think bad behaviors are referring to. So let's stick with the

concept of bad behaviors. Very low rates have sense investors scrambling, and as we saw in the mid two thousands, there's a tendency for them to chase yields and assume a lot more risks than perhaps they should. What sort of advice would you give investors who are looking for more yield without having to embrace an exorbitant amount of risk. Right now, yield difference is to start with interest rates, but we could also deal with things like earnings yield

are very small in relation to the volatility. So if you look at a bond, you get very little interest, right less than one percent. What depends what bonds you're getting, but basically, if you have a secure bond, secure of default, you have no hardly any interest rate, even almost a negative interest rate. And because all assets compete with each other, that's true in inflation and exponse, it's true in all asset classes. Some of them don't let you know what

the exact yield are. But because there's so much liquidity chasing them and they compete, they all in the future have low meal. And so those who are looking for yield have to realize that price changes are more important than yield. Okay, one day's price change is greater than one year's yield, and so you have to go away from looking for the field. And and any time there's something yields more than something else, people are not just

giving away free money, free yield. There's always an element of a risk, of the fault risk or something otherwise the world would arbitrage that. And you know, you make a ton of money by buying the one and selling the other, and all the people try to do that, it's a problem. So be careful about yield in terms of those things. And that's why you have to think of price changes. And then when you think of price changes, I think it's important to think about the value of money.

We started to talk about that, and so um, with interest rates being where they are and um there think of that as risky. You know, most investors think the safest investment is in cash because cash doesn't have as much volatil city to it. But cash is going to be the worst investment, particularly in this environment, because it's it's attacks, it doesn't have the volatility to it. But what it does is like now it's like a negative two percent a year, So um, it's this non volatile

hidden tax. At two percent a year. You look at the compounded effect of one or two or three percent per year on your life and your and so on, and it is enormous. So cash, you can't you cash no in this environment, and bonds in this environment, in my opinion, are not sort of good asset classes. And so get away from yield and you have to start to think of what are the other store holds of wealth.

Give us some example. I'm I'm gonna assume you're gonna talk about gold or you're gonna talk about preferreds or dividend yielding stocks, all of which have different degrees of volatility. So if you don't want to sit in cash, if cash is trash, and if bonds aren't yielding much of anything, where should a prudent investor put their money. Well, two things, I'd say. First of all, stocks has always been a beneficiary. So I want to be as a store hold of wealth.

Because if back to that March three evaluation, or we've had one in August one and so on, Yes you saw a gold, but you saw stocks, and so in other words, things real things, income streams, and so they don't have to be those the most stable. They can have growth to them. I just want to be clear. Multiples go up and so on. And then there are the assets that you refer to. But balance is the

most important thing. So you don't want cash, I think, I don't think you want bonds, and I do think that you want alternative storels of wealth, but diversified well, so, and when I say diversification, I mean diversification not just of stocks and stock sectors. But yes, I want some stocks. Um so diversification of asset classes, diversification of currencies, and

diversification of countries in order to achieve balance. If you balance well, you don't give up any return in order to reduce your risk, because all assets compete with each other and so on. So I think that my own view would be I don't want cash, I don't want much in the way of bonds. I want a diversified portfolio of assets that tend to diverse each other, first by each other. Those are the ones we mentioned, and I want them in other countries. And do pay attention

to the currency, because there is a currency risk. We have gotten used to looking at everything through the lens of our currency. So when we say the dollar, you know, how how are you doing, and you say, well, the stock market, I'm doing great. The market is you know, my portfolio is increased by ten percent this year because you're measuring it in a currency, and those currencies that depreciate the most often have than not that price rise. But you can lose money in buying power because you're

not you're viewing it through that lens. It's a little bit like being in in a boat in the water that's going up and down. And you look at land and you think land is volatile, the asset classes that you're looking at through that lens is something. So you need currency diversification too. Well, let's stick with that concept, because, um, the old weather portfolio, which which has a pretty successful track record, has a lot of exposure to fix thing.

Come if you were creating that from scratch in how might that look different than it has historically? Well, it's fixed income exposure has declined a lot as interest rates approach zero because of the mechanics of what zero interest

rates means. So maybe it's worth touching on that. When you get interest rates low enough, not only don't they provided a return, but they don't provide a diversification benefit because there's a limitation of how much interest rates can go down, which means a limitation of how much those assets can rise in price. And so the way that's a problem for the central banks too. I mentioned that

there's monetary policy one, two, and three. Monetary policy one, you can't cut the interest rates, and so historically then what you get is the printing of money, buying of financial assets, buying of government assets, and so on. The reflationary type of policies that we have here, and so if you're seeking diversification when interest rates are close to zero, bond yields are close to zero, you won't get it

in bonds. The diversification and the way monetary policy works to produce an easing is to have reflation assets, such as that which happened on April ninth when they did fiscal and monetary policy moves. So let's talk a little bit about gold, which has seen a pretty good run over the past decade, although certainly not as strong as as stocks have seen. What are your thoughts about heart assets like gold and how important is it to either

all whether or risk parity approaches to asset allocation. Think of gold as an alternative cash next to a dollar and the euro and twice as much as the Japanese yend is gold in central bank reserves, and it used to be the world's money, and it is viewed as money, which and there are reasons it is. It's there's a limited supply of it, it's storable, it's transferable, and it's universally accepted as a medium of exchange and a storehold

of wealth pretty much. But like cash, it's not a good returning asset it normally over time, very different in debt cycles. In the early part of a debt cycle, when there's not much debt and you get a higher interest rate by holding cash or cash deposits, it pays to own cash instead of gold. But what happens in the debt cycle is that basically debts rise relative to

the amount of money there is. Money used to be gold up until and then there's the claim, and so late in a debt cycle you get to have hardly any interest rate, so you don't get much of an interest rate benefit of opening cash relative to gold. They both the yields are are not much, and you're getting the production of the other kind of money relative to that, and that's why you see the movement in that direction.

You also see as real interest rates decline, which central banks have to do by increasing the supply of money. That causes the real interest rate, causes the goal to go up because gold think of gold as being something that's steady, and so if if you're taking the present value of money now in the future, and the discount rate for that, the interest rate that you're discounting goes down,

the real interest rate it goes up. In value. So gold historically has been an effect of diversifier at certain times in history when there's kind of that breakdown of the monetary system, um, when you have you know, the excessive printing of money and so on. So it is a think of it that way, and it is, and it's an effect of diversifier. UM. So I would say instructuring a portfolio, there's it's important to have a piece

into gold that doesn't have a big, big piece. But you know, I think almost everybody is pretty much underweighted to that. Whether that's ten or fift or something I don't I don't know, but so that's part of it. But there are other storeholds of wealth. Again, I would want to sort of break them into you know, are they liquid, can you transact? Can you move them? As distinct from some other assets, Let's say like real estate, which is very much situational and and and not very liquid.

You know, you could change the picture of you have I don't know, commercial or residential real estate in a location New York, San Francisco and or X y Z London, and the circumstances can change. It's not as effective as um. You know, as a form of storehold of wealth. Liquidity and diversification and rebalancing are very important. So let me ask you a question that I have no idea what your answer is going to be, although you just mentioned liquidly,

so maybe that's a factor. What are your thoughts about cryptocurrencies like bitcoin? I think that at the end of the day, we hasn't They have a number of problems, but so three big problems. First is as an alternative currency of purpose of the currency is a medium of exchange and a store hold of wealth. And number three is it has to them in order to be viable not objectionable to the government. Uh, those are the three problems. You can't go easily transact with a lot of things

with cryptocurrency. Can't go in and put the cryptocurrency on my credit card and buy in the same way as a store hold of wealth, it has enough. It has its own volatility. To that lie Bro was going to be something that would have been more viable in other words, of stable value alternative. But as a store hold of wealth, if it has a volatility, because it has so much speculation, it's tough to say I want that as my store hold of wealth. So it has a little bit of

a chicken and egg problem. And then at the end of the day, governments are if it had any viability or going to object to it, and in one way or another will make it. You'll have to be a criminal to use it. In other words, they will outlaw it. They'll simply say they'll outlaw it, and then you have real problems with it. I don't think, and central banks don't use it in the same way. That doesn't mean

digital currencies. In other words, China will have a digital rem embee or lawn at Europe will and we will have digital currencies, but they're controlled by central banks. They're not an alternative storreld of wealth that the governments will tolerate. And history shown that. You know, why did they outlaw gold around the world and you know in the United States and so on, because they don't want those alternative currencies and digitally, so the medium of exchange, even between

central banks is not going to be digital. Quite interesting. Let me change this up on you. I know you've been practicing meditation for a long time. How does that factor into your decision making process? Does it have any impact on the way you actually allocate capital? Analyze companies think about the world. Meditation has given me and it gives other people and equanimity what it means. What I mean is I feel that I can look at things in a less emotional way. I can accept realities as

as what they are. Basically. Mechanically, what happens is you you go from your conscious brain to your subconscious brain. You repeat a mantra and now work. It's a word, that's a sound basically, and it therefore cleans your mind of thoughts. And then when you repeat that sound, it eventually disappear and you're in a subconscious state pretty much, and that's very peaceful, but you're not conscious and you're not unconscious. You're in your subconscious mind. That helps to

connect the subconscious and the conscious mind. And it also helps to people to become more creative because a lot of creativity comes from the subconscious and it allows me and other people who do it to sort of do things with a calmness, accepting the world as it is and thinking the world is a puzzle and you have to solve it. So meditation, uh, you know, has helped me in those ways. And you've been you've been practicing this for quite a while haven't you since nine that's

quite amazing. So I have to ask you about what's going on with this election depending on the outcome, is there anything that might happen that would force you to rethink your views on the economy or how you would allocate assets or is it really just a temporary blip and things continue on afterwards. No, I think it's very important. Um Let's say, if I was to take both parties

will have um large deficits and and monetization. Both parties will have an aggressive China policy, I think, but one party will be more capitalist and say favor asset holders and so on, than one will be more um left

and favor the redistribution. That doesn't mean let's say if you have a Biden election and you look at the particular policies, I think it would look more like the Roosevelt years in that you will have larger deficits, probably larger spending, larger stimulation and the like, but you will have more of a monetization of that, and that will

be quote the stimulation for the policy. But at the same time, you're going to have the rise of tax rates, in particularly eliminating the tax changes the corporate tax changes, changing capital gains rates and so on, and those those rate changes will have an impact, and you'll have specific policies that will stimulate certain areas of the economy, like the green policies. You know, it's roughly targeted to nearly

two trillion dollars. Anyway, we don't know how much will come of it exactly, but that will be a very big area. I think you'll see more infrastructure and so on, and so you'll see particular areas of the economy benefit and other areas of the economy are not benefit. And and so there's you know, you get into the which sectors and all of that would would benefit on you know, and how much of the discounting thales will have implications. I think the most important issue will be whether the

country can be brought together. And I'm worried that capitalists know how to increase the size of the pie. They understand the profit system, they understand productivity and so on, but they don't know how to divide the pie that well. And socialists or those that are more of the left, have a problem for using as much the increase in productivity.

And so if you know, my my hope My dream would be that you have and all encompassing that brings together smart people who understand the mechanics of economics, UM and policy and UM and but represent different points of view. It can be brought together to get us to be productive and do the right things, whether they're education and be productive and all of those things and move in the right direction. And I think whether that happens or

not will be of paramount importance. It's a difficult um situation to be because of where we are in the cycle. In other words, every day is not a brand new day. So we whoever inherit the presidency, whatever party, whatever president, will inherit an income statement and a balance sheet that is what it is today, and will inherit certain circumstances, and that's going to be tough. So the real question is how we're going to be with each other, I think,

and that's the most paramount important question. I think you mentioned the Green Deal that the Biden camp has been talking about. I know that you've been very interested in oceans, and your Blue Ocean project has been very successful. So let's use that as an excuse to dive into your philanthropic works. Tell us a little bit about what you've been doing in Connecticut with schools and buying computers for kids, and what you've been doing in terms of the Dahio

Center for Health Justice. You know, I'm very lucky also to have a wife who who shares my concerns, and she really were We live in a state which is the highest per capita income, has the greatest gap in incomes, and owes a lot of money. So it's a it's a terrible thing and that we feel like, you know, as our community and we see see those things and so it's you know, it's bad and basic. So COVID

highlights this, but the difference in education. So we encountered the fact that um, sixty kids in the state of Connecticut didn't have any computers. Well normally you should have it, and they don't have connectivity. I'm not having computers. Not having connectivity is you know, it's not it's like not having toilets and not having running water in your house today. Um. And when we had education as an issue, you know, what what are you going to do just just not

educate the kids? And the state didn't have the money and um so anyway, we uh, we bought you know, sixty computers, and we're trying to deal with you know, the connectivity and partnership with the locals. We the people on the ground really like the teachers. We have the utmost respect for are the teachers who are in these positions. They know the best and we and my wife particularly works with them, and so we try to help in

those ways. And and you know, other ways. We're bringing micro finance to here, to the state, and we're doing other things to try to help in our small ways. We're still you know, dropping the bucket related to that. And then you're asking about the health. So education is a fundamental right and so on, and I feel with my wife and I feel very blessed and so we feel um that that's something we want to do. Education. And then this health justice thing, yes, we've created with

New York Presbyterian. We initiated Health Justice Center because there's such a big difference in poverty rates, you know, particularly among black and brown communities. I mean, it's just so difficult the poverty, the a number of people together in the places, the rates of contracting, COVID, all of these things, and even attention to how the bodies work differently and all of that has been neglected, and I think it

must be. It must be very difficult to be in those circumstances and not receiving it any health So we um, you know, we just made a donation of fifty million dollar donation to set up that Center for Health Justice. You know, we're lucky philanthropically that you know, we have those resources and we have a certain perspective because you know, we've come from not having much to having a lot, and we see these things. So anyway, that's what we're

lucky enough to do. And I know you've done a couple of projects on the oceans with Mike Bloomberg, and you've done a number of projects. And I do recall reading you say something about the giving pledge. Am I am I recalling that correctly. Yeah, my wife and I decided to give away more than we're going to get away a lot of most of our network and then Bill Gates asked me about that, and we were delighted

to do it. We we learned from each other. Uh doesn't change the amount of money that we would donate, but we I learned a lot and we learn a lot through that process. And yes, you know you touched on ocean exploration, which is also a sort of a passion which I could get into. But we we do a number of things micro finance. We make it a

family activity. Um, so we have four sons and daughters in law and so on, and so we view the philanthropy as pursuing each other's philanthropic passions and that's how we do it. Sounds interesting, So I know I only have you for a few minutes more. Let me jump to our speed rounds, our favorite questions we ask all our guests, and um, let's plow right through these. So everybody under lockdown these days is streaming a lot out of media. Tell us what you're either watching or listening

to these days. Well, by and large, I'm so um targeted to try to learn about the things that I want. And I'm very lucky to be able to speak to almost speak with almost anybody that I can speak with, and so, um, it's not general media that I'm doing, it's it's what I do or podcasts and so and although there's so many fabulous ones that I'm that I feel I'm missing out on. But if I can get the person and I can ask them questions and do the research. That's what I've been doing a lot of it.

And because I can do it so easily, I can go from one to the other and anywhere in the world. Um, I've been like a kid in a candy store doing that. Well, everybody is stuck home, just waiting for the call from Ray. That's that's pretty funny. Tell us about tell us about your early your early mentors who helped shape your career. Well, you know they were they were mostly um, just like individuals who cared about me. UM. I remember I started

um don stock. I caddied and I was at a twelve I bought my first stock and I would walk around UM and this nice man UM who was a specialist on the New York Stock Exchange floor, was just a great guy and talked and we talked about markets and things. UM and his kindness and his insights and so on helped to get me, you know, hooked on the game. And so he had a fit and a fact. You know, I remember, you know a teacher of mine,

a particular teacher, UM I remember. And then as I got older, let's say Paul Boker, Um I UM not since before vente when was the breakdown? Of Monetary System UM nine seventy seventy one. I first got exposure to Paul Boker, and then over a period of time I was lucky enough to get to know him and have him become a good friend of mine. And uh, he was definitely UM a role model. And I think role

models and heroes. UM. I think we're in an environment, by the way I'm digressing a little bit UM, in which where there's so much criticism it's fashionable to criticize and bring down, and we don't have any agreed upon heroes. But he was. He was a hero of mine. UM. And then UM, and then there was there was a from my son's there was a scout master and well, anyway, I can go on and on UM. Of those different people.

The personal in my life had the biggest effect. But also, you know, seeing what heroic characters were had an effect on my life. And then I would say for markets it was don start quite fascinating. I know you're a big reader. Tell us what you're reading these days, and give us some of your all time favorite books. I

don't read as much as I hunt in books. In other words, I'm like I'm going after something and so I have many books that I then drill into, but I do it in a certain way where I can almost get to the part of the book that is

the part that I need to understand. And so for the last year and a half, I wanted to study, um the rises and declines of reserve currencies then, which led me to the rises and declines of empires, and and that led me to study, you know, a whole bunch of books and then speak to the people, Paul Kennedy's Rising of the Empires. I mean, I can go

on and you know, on list those, um. If you're asking for good books, I would say three good books that I recommend as um Lessons from History by will and Ariel Durrant, which is like a hundred and four page book, I think, and it's a summary of these great historians who um wrote five thousand pages on something like five thousand years of history and sort of distilled the themes down to that. I would say, Uh, Paul Kennedy's Book of Rising client Great Empires or Great Powers

is a great book. I would say on evolution, I think evolution is very interesting in it so it's humanity and how uh and goes beyond humanity to all the species. I would say I really liked Richard Dawkins A River from Eden. My son gave me um Joseph Campbell's Hero of a Thousand Faces, which I think is just you know, it's an arc life arc and very very practical, very interesting. These are the books I suppose. I think some good books that are just recently came out. Uh. Read Hastings

and I believe about organizational culture. Read Hastings, Netflix founder and running of Netflix, and we believe in certain culture things in our organizations. He wrote a good book. H R. McMaster's book that just came out is a very good one. Richard Hans just came out with who Authory. I can't remember the exact names, but it was the history of the world or something that gave a good overview. Those are a bunch that I all think are are good

that'll key people busy for a couple of days. If a high schooler or a recent college graduate asked you for advice about beginning a career in the world of finance, what would you tell them You couldn't have picked a better area to do it. Markets. I love I love markets because particularly global macro because you cover almost everything in the world and you can bet on it and test how good you are, and you could go short or along and and so it's great exposures you to

the world. But I would say, you know, play the game, and that you don't know what you're doing, So be humble, get beat up, and learn your lessons. What you will learn, I think is that what you don't know and how you deal with not knowing is even more important than anything you know. So the power of diversification, the ability to gain humility, it'll teach you humility, and it will teach you open mindedness, and if you're curious, it'll be it'll be great, and it will give you a measurement

you know of every day of how you're doing. That's an objective measurement that's terrific. And if you get good at it, um you know, it's one of those careers that's rewarding. I mean, I did it because I love to play the game, and I just happen to be lucky that it made money. I didn't, you know, I could have been something an architect or something else and wouldn't have been the same. So it's got those benefits, but it it's a lifelong journey and it's it's expect

the ride. Learn your humility. I have an expression, pain plus reflection equals progress. And how you make your mistakes and how you learn from those mistakes, how you learn how reality works, and how to deal with reality, and to then write down your principles that you learn and learn and build on them. That that's, you know, it's a great path, really good answer. And our final question, what do you know about the world of investing today that you wish you knew forty years ago or so

when you were really ramping up. Well, what I learned over and over again is that, you know, let's say forty years ago, I thought I I just learned from my experiences, and I was arrogant enough to think I'm going to go in there and just pick the things. And what I learned along the way was how to systemize, how to convert look back in time and the same

thing happens over and over. To look at reality as a machine, to understand how the machine works, and then to convert that learning into algorithms so that it works in parallel with my brain. Because my brain is limited in its capacity to juggle a lot of things and um, and then you know, to keep learning that humility and finding out, you know, what's the next new thing that's going to happen that I might have missed. I missed

the pandemic. The pandemic took me by surprise. I figured I didn't have an edge on the pandemic, and that was stupid, because you know, you read history and you see that these acts of nature could be pandemic, could be endwat diseases and so on of had big impacts and so um, you know, I guess I learned that I you know, what's going to hit me in the head to worry about that, and so um, I wish

you know. And that's something I think I've learned, and the markets will teach that new young investor um that pretty quickly. So I learned it then, and I wish I knew more about the things like I wish I knew more about pandemics before uh this year. But anyway, that's kind of my answer. Thanks Ray for being so generous with your time. We have been speaking with A. Dahio, the founder, chairman and co c i O of Bridgewater Associates. If you enjoy this conversation, be sure and check out

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