Ray Dalio Talks About The Changing World Order With Steve Forbes | Forbes Iconoclast Summit
well thank you uh very much and we've got a very distinguished guest here this morning uh Ray dalio is one of those individuals who's not only one of the greatest investors of our time but he also is a individual who also uh realized and we're going to discuss it that uh what Mark Twain said was right Mark Twain once said history may not repeat itself but it Rhymes and Ray why don't you uh start off you've always been interested in investing but then in 1971 you're a clerk The Exchange Nixon goes on TV on Sunday tell us what happened then and what you learned uh okay well I'm clerking on the floor of the exchange 1971. um President Nixon announces to the world that the United States is defaulting on its obligation to take that paper that they have which was like checks in the checkbook and give them the gold close the gold window close the gold window so he defaulted on the obligation to pay the money because the gold was running down they didn't have enough and it was like a bank run so I walk onto the exchanging floor expecting you went early because you thought yeah I expect that there's going to be a chaos and things would be bad and the stock market went up the most in decades and I didn't understand it and and that's because that was the first time an evaluation happened I never went through one of those and I studied history and I found the exact same thing happen on March 5th 1933 except it was with Roosevelt and a radio rather than a TV and the exact same thing and the stock market went up a lot for the and so what I learned and I had this repeatedly in my life that things that surprised me often surprised me because I didn't happen in my lifetime but they happened many times in history so for example by studying that 19 the 1920s to the 1945 period I saw that uh the same I understood the nature of the 2008 financial crisis when we anticipated the 2008 financial crisis because what happens when you have a lot of debt and interest rates at zero how does that work and that Dynamic is what happened in 2008 and so it's very much emphasized in my mind how uh in order to understand things that never happened in my lifetime I have to study history and there were three major things there are three major things that are now happening in our lifetime that didn't happen other than you'd have to go back in history those three things are we're producing an enormous amount of debt particularly government debt but a lot of debt and monetizing that in amounts that you would have to go back to the 1930 to 45 period number two we have a level of internal conflict the largest wealth gaps since back then the largest internal conflict and populism of the left and the right in our country and at War and a populist as an individual who will not accept losing they'll win at all cost so that Dynamic is new you have to go back really to the 30s around the world or before and the third is the great power conflict in other words the rise of a great power in the form of China that is a comparable power in the world and that Dynamic so in order to see that I needed to then study the past 500 years of history now I know people think it's odd because here I am I'm just trying to make money in the markets I'm a practical guy dealing with that but in but we would not understand that and the picture of the world is a very different picture than we have grown used to because of the nature of these longer term Cycles so you uh studied uh 10 Empires four in particular particular relevance to us the Dutch the British the U.S and China and uh you have come to the conclusion that there are uh these these Empires are great Powers go through cycles and as you say even though times and circumstances have changed the Cycles don't and be prepared even though it has not happened in your lifetime big disruptive things can happen well I I think it's not adequate to just assume that because it happened in the past that it's going to happen or the Cycles what the Cycles do is they shine light on the cause effect relationship so let's take a basic dynamic if you have a financial crisis and there's we can get into what causes it at the same time as you have large wealth gaps and therefore big disagreements you are likely to have populism and if you have those two things coming together it's an explosive combination it was said in the earlier session for example uh capitalism what about capitalism it's becoming unpopular now imagine a bad situation with capitalism and and and then there's and that's played out through history for good reasons if you combine that with the external conflict the war of the external when I say War it is a reality that there are measures of Health in an economy's rising and declining and so when you have that geopolitical conflict and you put that on top you have a dangerous set of circumstances in doing that examination of those periods I found also that there were two other big factors that mattered those were um interestingly um acts of nature droughts floods and pandemics killed more people on top of more of the civilizations than the first three I mentioned then inventiveness and then number five is inventiveness which then takes technology um the technology so when I look at these all of these five coming together I think we're going to go through like it'll be almost a like a Time Warp that we're going to go through that over the next five to ten years the world is going to be very very different than it is today so uh let's uh quickly touch on uh you talk about the rise of a power or an Empire it Peaks and then it declines uh Walkers pick the Dutch or any Empire walk us through those kinds of phase and what we can what what we can expect okay an order when I say a world order or domestic order is the way you're operating the system that you're operating on how people and they work they change each other well in other words 1945 would be on a new world order or in some countries they change their domestic order they have a revolution but there's always a war at the beginning some kind of conflict at the beginning and the system changes okay 1945 we have a war there are new winners of the war whether that's domestic or internally there's a war and now the new folks are in charge and they then determine what's going to happen they set the rules the United States since 45 we've been the American World Order the reason the United Nations IMF World Banker in one in the United States the reason the current dollar is the world's Reserve currency is because of that they set the rules over that period of time then you don't go into a war you have a period of rebuilding and then usually a period of prosperity because nobody wants to go into war Oregon and then they they it so you begin this cycle and then that cycle then up to take you through very quickly that um has higher levels of productivity and so on Basics matter uh things like um education and when I say education well just for for the audience sake a raise come up with 18 metrics of measuring Health eight particular very important ones you mentioned education I just want you to touch quickly on it's not just knowledge and learning but also you talk about character and other aspects defines that for us that's very important uh education of course of the abilities do your reading arithmetic and all of that but it also is character development in other words you do you build certain types of people who are capable and also understand characters the ability to get themselves through the difficult things to um and to work in a community for a better purpose that is a fundamental ability so all of these early stages have those elements and then they have Capital markets in the early stages always it's a great benefit if you can put resources in the hands of those who are capable and and make those those things happen but over that period of time debt Rises relative to GDP and there's a mindset change from a mindset of conservativism um you know those who went through the war my dad who went through the Depression was not going to be a quick and easy Speculator in the stock market so but and then they pay get paid and you get rewarded because the environment uh improves and then you become a World's Reserve currency because when you're dominant in the world and trade let's say the United States had the highest percentage of trade it was half the world's economy half world GDP and a dominated trade if so through all of these cases they bring their currency along and they and and that becomes the vehicle that others want to save it and when they save in that currency then of course they are Lending you money and so that compounds in other words when a foreigner buys a bond what they're doing is lending you money and so the debt tends to compound over a period of time and then new powers come along they learn from the great power you know the uh British learn from the Dutch how to build ships that would take them all around the world so that learning and that rise in their capabilities produces competitors in the world and so you start to see the new empires becoming more competitive and also having that those aspects and the British also learned uh Capital markets when William of Orange became king of England and the bank of England right each one of these Empires then has the financial center so the Dutch had the world's Financial Center they had the world's Reserve currency they had the best education system they had these elements so Amsterdam was the world stock market yep Financial Hub then in the British Empire London was then in the United States Empire of New York was or still is and then what now what you're having is a change in that Dynamic of course where there's then that competition the great power competition when those things operate in line together that's important so now there this is a bigger cycle within that bigger cycle there's a shorter cycle okay look we all know what the classic business short-term debt cycle is because there have been 12 since 1945 we're now 12 and a half Cycles into them they're the ones you know you have a recession uh high unemployment low low inflation central banks produce a lot of money and credit um you have that Improvement productivity it's The Sweet Spot of the cycle then you get past the sweet spot you produce inflation then they tighten monetary power policy and then with the Titan monetary policy they pull the money the credit and then things uh slow up and then you have the downturn and you do that over and over again so we know where we are in this cycle we are in uh 12 and a half Cycles into this we're about halfway through this cycle where so we're in the part of the cycle where the central banks have tightened monetary policy probably close to enough but maybe but not in my opinion not um that term structure of interest rates has too much of it uh an easing built into it where there will need to be interest rates will need to stay higher for a longer period of time putting that in perspective let's say if we uh use some uh that um with that level of tightness um and you're you have to have a real rate which is high enough for the Creditor without having a real rate that's too high for the debtor so if you take about a one percent real rate which is um I would say that that rule of thumb that it should be in that probably that vicinity one percent real rate and then you take a core you're gonna you if you're lucky you get the three and a half percent probably four percent inflation I think it's going to be sticky and it's going to come down very slowly in an orderly cyclical fashion then you're looking at a four and a half or five percent interest rate you have that close to that in the short end of the yield curve and then it but you have a big build and you have a bond yield which seems too low and so I think you're going to keep relatively High interest rates that is if there's a normal Supply demand condition if more but there's also a risk okay what's the risk of the two just let me get this last punch line point out because I think it's important um what is the risk of of too much debt how does that work well mechanistically the more debt you have the more Debt Service you pay have to pay and and you and it starts to encroach on your other spending like in Singapore 20 of the income of the government comes from net savings that they have and it earns the United States it's about 20 it goes the other way we have to pay it that increase but the big risk and the on and the risk that we have to watch out for is when the holder of that debt doesn't want to hold that debt anymore or let's say the supply demand balance so for example right now um we have to sell a lot of debt and uh the holders of that debt globally are holding a lot of government debt so so the bottom line is when the potential buyers decide they don't want to buy government has two choices a central bank either raise the interest rate to bring the buyers in which is going to hurt the domestic economy or print the money they always go for printing the money now in terms of uh in these metrics that you have the U.S you'd make the case as a declining power China is a rising power but you have spent a lot of time in China you've spent a lot of time talking to leaders there and around the world you said you believe that U.S and China
on the brink of war and Beyond the ability to speak beyond the ability to speak is crucial because in the Soviet Union Cold War days we had mechanisms in place where if something went wrong you could make sure this thing didn't spin out of control as it almost did in 1962. today in terms of two kinds of Wars one is economic sanctions War and the military and the economic sanctions War we tend to think oh well that's just a few tariffs and things like that talk about how this can spin out of control starting with Micron Technology which China's threatened with okay let me let me first make clear I'm just describing what has happened the relative position of the United States has decline the relative situation in China has risen they are now comparable Powers I am not saying that the Chinese are going to win over the Americans or anything like that I'm just trying I don't know how this game is they're going to be comparable powers in a conflict and that those conflicts are multi-dimensional so the they're um they're about Taiwan uh chips Russia these are red lines these are red lines we are now at a spot in that relationship where um they're at close to each other's red lines and um they recognize that almost talking is counterproductive because there's so much blaming and trying to untangle how we got here that it it talking so they are at the red lines they're at the Brinks and talking is a problem um both sides are very concerned about the possibility of War um of different types of War economic War certainly a chips war and economic war is a very big um risk and that that is happening at a time of um that probably conditions might get more contentious because of the political season we're in so in other words between now and two years from now when the new Administration comes in you're going to have um there are a lot of hawks that want to push those lines too and so there's that that edge I'm saying simply that that is a highly risky situation and on many things you will see a tough game being played because there's in world affairs there's not a judge and jury that you plead your case to and resolution it's purely a matter of brinksmanship and and pushing each other so that that issue is an important issue it's a it's an existential economic issue I mean if we start to think where do where would a chips War lead or where those even in good times it's a big issue because of the uh the fact that supply line changes we're no longer in a world in which producing most efficiently wherever it can be done is the primary goal it's instead self-sufficiency to prepare for war and that has an inflationary consequence it has an economic consequence so we're kind of very close to that I want to just in closing because I know we're about to run out I just want to emphasize that something particularly that Mary erdo said um I I think when you throw in the new technologies um um I'm deeply involved with um generative AI Technologies and so on and if you move that forward and you start to the world is going to change in ways that we cannot anticipate and and going to be it's going to be a different world and the emphasis of a few points that I were made and I want to re-emphasize is a few things first um that diversification to understand how you can diversify well without reducing your returns because if you buy equally good things that are not correlated and then you can do that you can reduce your return your risks by about 80 percent if you can know how to do that so diversification and knowing how to do that and looking globally in terms of the differences is very very important um I would also say that I think the new toxic debt is government debt so if we look at that where we're looking at uh what are the bank what's the real problem with the bank the real problem with the banks is the same as the problem with the Federal Reserve if the Federal Reserve was a commercial Bank it would be in the same position because it's lost a lot of money in its bonds and its short-term liabilities and that's true in Europe that's true around the world so um so these are certain themes I know we're running out of we're overtime so um I just want to make sure I got those things out well when you make uh study history as you have and made so much uh created wealth for clients uh you have earned extra time and uh and uh and you can go economic principles.com to get to raise a constant insights I think it's dark at work but I'm not sure I think it's I think it's com but anyway you're probably I'm not going to argue with you um you're on the Forbes list I'm not so um but uh but but uh but what uh but but in turn terms of uh the the investing uh David talks about quads uh you can look it up whether it's a high inflation low inflation high growth low growth if you uh go around the quads that you talk about you can have an all-weather portfolio which has been one of your Hallmarks but also too in terms of the future well there's a very real chance of a war economic war or a bad military war it's not as David I mean Ray makes very clear in his writing's not inevitable but patterns of the past should caution you uh because it hasn't happened before it does not mean it won't happen yeah just an echoing that in part of the of the book I wrote read the from 1900 to 1950 what it was like and just make some comparisons today and that might have implications for the future I'm just trying to pass that along so Twain was right it Rhymes Ray thank you very much
2023-06-15 22:31
