The transcript from this month’s MIB Live with Ray Dalio, is below.
You can stream/download the full conversation, including the podcast extras on iTunes, Bloomberg, Overcast, and Stitcher. Our earlier podcasts can all be found at iTunes, Stitcher, Overcast, and Bloomberg.
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MIB LIVE Ray Dalio
BARRY RITHOLTZ, MIB HOST: So, I have to admit to cheating a little bit when — when we first proposed the idea of Masters in Business Live, Al and Dave were very supportive and I said, I’m going to bring in a ringer with Ray Dalio, so I really don’t have a whole lot of work to do. I assume most of the viewing and audience present knows who Ray Dalio is, but let me just give you a quick version of his background.
He is the founder, co-chairman and co-CIO of Bridgewater Associates, the world’s largest hedge fund, managing over $160 billion in assets for institutional clients. According to Forbes, Bridgewater has made more money for their clients than any other funds in history. He is the author of the New York Times Best Selling Book “Principles: Life and Work” and most recently his new book is Principles of Big Debt Crises — Ray Dalio, thank you for being our first guest on Masters in Business Live.
Let’s start with the reboot of Bridgewater, which you describe in great detail in the first book, which came about after a not so great 1982 for you; in fact, you describe it as disastrous. What happened in 1982?
RAY DALIO, FOUNDER, BRIDGEWATER ASSOCIATES: Well you know, I formed Bridgewater in ’75, so ’82 is like seven years later.
RITHOLTZ: Now that’s the reboot.
(CROSSTALK)
DALIO: Yeah, that’s the reboot, right. And I had, in 1980, ’79-’80, I had calculated that American banks had lent way more money to emerging countries and those countries were going to pay back and it was about 250 percent of their bank capital — and so we were going to have a big banking crisis, and I thought that was going to happen and I got a lot of attention for that. And then in August ’82, Mexico defaulted and there was a sequence of other defaults and there was a big debt crisis, and I thought that that was going to cause an economic crisis.
And I couldn’t have been more wrong. That was the exact bottom of the stock market, when Mexico defaulted. And anyway, I received attention at the time. I was on Wall Street Week and I was on, asked to testify to Congress and I was wrong. And I had, I think at the time, maybe eight people who worked for me — I had to let them all go.
And I lost money for me, I lost money for clients. I had to… borrow $4,000 from my dad because I didn’t have really enough money even to take care of my family at that point. That was very painful. But it was the most valuable thing, probably, that happened in my life; certainly one of those, because it changed my approach to thinking, because it made me start to think, you know, how do I know I’m right? How do I continue to take risk and not go through these mistakes? And it made me change a lot, like I wanted to find the smartest people I could who would disagree with me.
I wanted to build an IBM meritocracy in which independent thinkers would challenge each other and — and I wanted to deal with risk. How do I maintain the returns but diversify and do certain things to deal with risk? And it was from that point early on that everything started to change.
So that was my terrible experience, and I think that that’s, by the way, one of those lessons. Like there was a book that my son gave me in 2014 on Joseph Campbell, “The Hero of a Thousand Faces” — and he describes about how that crashing occurs and that changes due to a metamorphosis.
So the whole approach to learning from mistakes and painful mistakes and making the most of them and writing principles down — in other words, recipes for how do you deal with the circumstances? Learn the lesson, write those principles down — this is the thing that I would recommend to, you know, everybody — write them down. And I learned also that by being able to write them down clearly enough that they can be expressed in what were then called “equations” or now “algorithms” that allowed me to make decisions and us to make decisions in a very powerful way. So that experience was really the turning point.
RITHOLTZ: And that’s very abstract — I want to describe some of the ideas and products that came out of that post-’82. You describe in your early history some of the products that you had a roll in the creation of — TIPS, the inflation-protected treasury bonds; the U.S. dollar futures index; the entire concept of risk parity; you’re very humble in saying you had only a little bit to do with the Chinese stock market creation, but I know you consulted with very senior people there and helped that come about. And what I think is the least-known thing about you, but the most fascinating — you helped to engineer Chicken McNuggets.
(LAUGHTER)
RITHOLTZ: Explain that to us, because it’s absolutely intriguing.
DALIO: Well, I traded commodities then, back then and that was my big thing and I really learned, you know, how to make chicken and how much feed, what a chick cost, how soy beans were grown, how they competed with cotton and corn and that whole mechanics; I liked that whole mechanical thing. And at the time — and McDonald’s was a client of mine at the time. And they wanted to come out with this Chicken McNuggets, but it was very volatile, prices were volatile at the time and they were worried about whether they could get stable menu prices, or they would have volatility and that be disrupted.
And I had a chicken processing producering — was I think the largest at the time and a client — and I could engineer the ability to lock in the feed prices, because basically the cost of a chick is not much relative to the cost of the feed and you have futures contracts on that — and I was able to work a deal so that that chicken producer could get the McDonald’s contract and McDonald’s could get a stable price by engineering how they could do the hedge to be able to do that.
DALIO: So that was what I did.
RITHOLTZ: The word engineering comes up a lot for a person who’s not an engineer. And I was very much reminded that in one of the first long-form videos you did, how the economic machine works. So first, what’s the engineering background for the overall economy? And what motivated you to put that together in a video and release it to the world?
DALIO: Well, the one thing that I learned over the years is you know like — everything is — every effect, everything that happened has a reason it happened — cause/effect relationships — and these things happen over and over again. So whenever I got surprised by something, it was usually because of something that didn’t happen in my lifetime before, but it happened. You know, like these financial crises and so on — and what I did is I went back and I started to see that if you start to see everything as happening over and over again and then you study the cause/effect mechanics behind that at a nitty-gritty level, you’ll learn how reality works. And then you can write your principles for dealing with reality, which are the recipes, essentially, to making good decisions.
So to me it, you know, history has shown like the same things happen over and over again for the same cause/effect relationship, so that debt book that you’re referring to, you know, it’s a good example. If we don’t spend time understanding the mechanics and the cause/effect relationships, we just argue with each other about what should be done and it’s like two doctors who have not spent time understanding and agreeing on how the body works — arguing about, you know, what should be done for the body. And so the reason I did that video on how the economic machine works, and the reason that I did the book and the reason that I wrote Principles is — to put on the table what I think that those cause/effect relationships are, so we can understand the timeless and universal mechanics behind it.
And that’s been invaluable to me because once I understand that mechanics and we can test it, we could test it in all time frames, we can test it in all countries, we could understood it and then with that framework, we know how to deal with it. And nowadays being able to deal with it with algorithms and technology means you can deal with it all over the world and it’s been a powerful force. So it’s evolved from those experiences. Like I remember the first time I was clerking on the floor of the New York Stock Exchange in 1971 — I was just between college and going to business school, and the stock — and we have a dollar crisis.
We can’t pay for our goods in Europe — nobody’s accepting dollars. And on August 15th, Richard Nixon gets on the television and he basically says we’re severing the connection between dollars and gold. Back then money was like a check and a check in a checkbook has no value; it only what the money is, has value. And so it would get you — money would get you gold and that was — and it was a breakdown, so it was a default. And I remember thinking, when I was going to walk in on Monday morning to the New York Stock Exchange — this is a big crisis. And I thought the stock market would fall a lot.
And the stock market went through the roof. And I realized, I said, well, did you have currency breakdowns before? And then I was, I studied currency breakdowns that happened in the system and I realized why, when you devalued the currency, it’s bullish and how that whole thing works that I didn’t understand. So it’s that perspective about mechanics — do we understand, can we agree on the mechanics of how it works? Because once you can do that, then you know how to deal with it.
RITHOLTZ: So you mentioned Principles before we talked about big debt crisis; let’s talk about the book a bit. It came out last year, it became a New York Times best seller and you kind of went on a not quite world tour on the book — you said that experience was really educational. What did you learn speaking to people about the book Principles?
DALIO: Well, I didn’t like, I didn’t like, I never like being in — above the — in the press or in — above the radar.
RITHOLTZ: You don’t do a lot of media historically.
DALIO: Right.
RITHOLTZ: Although you’re beginning to flower now that you’re an author.
DALIO: I’ll do this — I’m in a phase of life — which is the transition from my second phase to my third phase and — so the way I look at it is — in the first phase of life one is dependent on others, one is learning, one’s basically a student. In second phase of life one is working, others are dependent on them and one is trying to be successful. As you get to my stage in life, which is a transition from the second to third stage, the way I think it is, the joy is no longer as much to be successful, as to pass along what you’ve learned and it’s helped you to be successful — the joy is in seeing other people be successful.
And because these principles have been written down over a long period of time and they’re kind of the recipes, I wanted to pass those along and that’s what I’m in the process of doing. And then I’ll phase out. But to answer your question in terms of the surprises — like I thought that was going to be a very uncomfortable experience; I thought even the communications would be bad — and I have found such a joy in the interactions that I’ve had with people in the public and so on. So it’s been a really pleasurable, good experience, a sense of relationships and I think people are now looking for principle — and I’m going to emphasize — forget my principles; they don’t have to be my principles — but I do think that everybody would benefit enormously by being crystal clear about their principles.
I want to pass this thing along. Number one, I want to pass this along. That if every time you’re encountering your situation — at that moment or right after, you write down the criteria for making your decisions in words. And that allows you to communicate with others, it allows you to clarify your decision-making and you can take in from others what the best criteria is for those circumstances in the future. That is invaluable because in all your relationships with people, people will know what your principles are; how you will interact with them and why and then you can go even beyond that, to convert those into equations and help them make the decision-making — I think that’s a powerful thing in the future.
So I want to pass along mine, but I also want to more importantly pass along the importance of other people doing that and that’s what I’m in the phase of. There are two things — so I did the Life and Work Principles and now I’m working on Economic Investment Principles.
RITHOLTZ: That’ll be the third, third book in the series.
DALIO: Yeah.
(CROSSTALK)
DALIO: That middle one was sort of an accident, I mean —
(CROSSTALK)
RITHOLTZ: Well, we’ll get to the middle one in a moment. Before we leave Principles, I have to ask about what I think is the most interesting approach you bring to managing a firm, which you call “being radically open-minded, having radical transparency” and bringing about thoughtful disagreement. Tell me how that developed, because that doesn’t seem to be the way most of corporate America operates.
DALIO: That’s our edge.
RITHOLTZ: Your edge is thoughtful disagreement.
(CROSSTALK)
DALIO: (INAUDIBLE) Okay, yeah. Okay, so let me give you one sentence. I want an idea, meritocracy — in other words, I want the best ideas to win.
RITHOLTZ: As opposed to where to comes from.
DALIO: Right. I don’t have to be the — it doesn’t have to come from me. I just want the best decisions to be made. And I want to — what I want is to have meaningful work and meaningful relationships — meaningful work meaning you’re on a mission to gather and those relationships are deep and meaningful and they’re high quality; they’re a reward in and of themselves and they make an organization more effective so — an idea meritocracy — I’ll get it out in one sentence — an idea meritocracy, in which the goals are meaningful work and meaningful relationships… through radical truthfulness and radical transparency — radical truthfulness means say what you’re thinking and others will say the same and now let’s get away from the… behind-the-scenes and the politics of it.
And the radical transparency means most people can see most everything so that they can form their opinions on what’s going on themselves, independent thinking — and that builds trust. First of all, it cuts through the notion of — politics and bureaucracy. By everybody being able to see most things, you build trust… and you’re dealing with most things without the blur of hiding stuff that’s in people’s heads. And in the investment business, I think it’s particular special and important, I think it’s also an entrepreneur’s… it’s especially important… because you have to have the independent thinking.
In the markets, the markets discount the consensus. So whatever the consensus is, it is in the price. So in order to be successful in the markets, you have to think differently than from the consensus and you have to be right. And in order to have that, you have to have independent thinkers. And when you have those differences and independent thinkers, if you can work that through, through thoughtful disagreement, you have the art of thoughtful disagreement — if you work that through, you raise your probabilities of getting at the best answer and that’s been a very, very powerful thing and it also builds trust and it builds better relationships, because trust comes from, you know, operating in organizations that have this politics; it’s all behind-the-scenes — everybody gives them high-fives and they’re all happy and so on and they talk behind each other’s backs. So that’s been, it’s been a big deal for us.
RITHOLTZ: That’s your edge. So let’s go forward to the new book, which just came out, Navigating Big Debt Crises, you mention you decided to write that because a couple of folks ask you to put it together — Ben Bernanke, Tim Geithner, other people — I really like the way the book is assembled. It’s broken into three parts — the template for what the big debt cycles look like; then you use three detailed cases, the Great Financial Crisis, the Great Depression and Weimar Republic — and then you put together 48 case studies from the past century.
So let’s start with the first one, the template. What makes all of these very different crises follow the same mechanical sort of cycle? How is that even possible?
DALIO: Well I mean, everything has got these cause/effect relationships and the way, you know, in a nutshell, I’ll try to make it simple — there’s productivity; over a period of time our living standards rise because we learn how to do things better and the output per man hour of work increases and that moves at a fairly — it’ll go up and down… its pace… but by and large, it’s not what causes volatility.
And around that we have two debt cycles. We have a short-term debt cycle, which we understand because that’s the business cycle. You know, you’re in a recession, central bank sees monetary policy; they change the relationship between short-term interest rates, long-term interest rates, asset prices, put liquidity in — and then you have debt growth.
Credit is spending power. So when you extend credit, you are extending spending power and that’s good for the economy, when that credit can be paid back. And what it does, of course, it pushes asset prices up while levels of debt continue to increase. And at that part of the cycle, people and everybody sort of… conservative about that — and it pays back. But as the prices rise —
(CROSSTALK)
RITHOLTZ: When you say “pay back” you mean the borrowers have the ability to service that debt, even as asset prices rise.
DALIO: That’s right. And everybody wins and that’s good credit growth and it’s a wonderful thing. Then as you get later in the cycle — it’s a very self-reinforcing cycle because as asset prices go up, you have more collateral, people are more confident. They believe asset prices will continue to rise. They become a little bit less careful in terms of that kind of lending. They extrapolate that into the future. And then — and of course, as — then there’s the Shadow Banking System. There’s always a Shadow Banking System.
RITHOLTZ: Really? Not just ’08-’09? That’s (INAUDIBLE) —
(CROSSTALK)
DALIO: Oh no, but all the time, there’s always the Shadow Banking System. There’s a Shadow Banking System now. In other words, there’s the banks and they’re regulating control within their parameters and then outside of those banks are other kind of new forms of lending and capital markets and so on or it could be online, it could be in different forms. And the — there’s a pressure to develop that outside of the systems… Shadow Banking, because the more regulated, more controlled one doesn’t make as much money and so on and so by being at the periphery, you can use higher amounts of leverage, you can do certain and so that grows.
So you develop this Shadow Banking System, which is not regulated, and also investors want to go to because they’ll give you a big higher return. Like I mean even think about how the money market funds develop because bank comparison to banks and so on and so that develops outside. And it becomes so self-reinforcing because everybody makes money at it and also they believe it because when things go up, you know, everybody — things will go up.
RITHOLTZ: So less regulation, more risk, better return.
DALIO: That’s right.
RITHOLTZ: And that’s late in the cycle and then what happens?
DALIO: And of course, what that does is all that demand and liquidity causes rates to come down, liquidity go out — so like we see in this cycle — last cycle we brought interest rates basically down to zero… (INAUDIBLE) practically down — that wasn’t good enough. So Central Banks bought $15 trillion of assets, pushed the asset prices up, pushed liquidity into the system and so asset prices go up and people extrapolate. And the funny thing about it is, as you get to later in the cycle, when there is more debt and you know that you’re coming closer to the end of the cycle, there is more of an extrapolating in the market prices of that moving on.
So if you look at what the discounted growth rates are, late in the cycle they become high; they’re difficult to meet and then you get the changing, you get the typing and monetary policy — typing and monetary policy has its effect, first on asset prices and then it becomes a self-reinforcing effect. And that’s the normal business cycle and normal sort of debt cycle — because debt is credit and credit is buying power and the economy runs on that.
Then you have this longer-term debt cycle, which is the accumulation of those other cycles, because the world wants to be long — the world wants to be leveraged long. They want everything to go up. We all do. You know, Central Banks, better times, assets go up, business’s activity and so on and there’s a strong desire to push credit. And so the limitations that start to encounter is when you get close to zero interest rates, like we have zero interest rates — that changes the game.
And when you have — and then the — you need to print money and buy assets. That happened in 1932. So ’29 to ’32, interest rates hit zero — that Central Banks need to buy assets, they buy assets, they cause that carried to 1937 — very similar situation that we’ve been in and so when we carry that from 2008 and ’09 and then you come into about, you know, a year, a year-and-a-half ago, we start to tighten the monetary policy, we pull that in, we have higher rates of debt growth — that thing goes on and on all over in all countries; that same basic dynamic. There’s a lot more on that in the book; I think we don’t have the time to go through it.
(CROSSTALK)
RITHOLTZ: So let me, let me pull you forward to today. Given that these things are cyclical, they repeat, they look very similar — what parallels would you draw from history to today? What era does today most remind you of? What’s the most intriguing aspect of the current setup?
DALIO: Well, the most recent period that’s analogous of this is the late ’30s. Let’s say, if you take 1937. So why do I say that? I’d say we’re well along in the business cycle, the short-term debt cycle. We’re in the seventh or eighth inning of that; Central Banks are tightening monetary policy; that’s where we are in that cycle.
Similar to then, we have, because of the printing of money and because technologies and other reasons, we have a greater amount of polarity, political polarity. I think this is an important, important issue. And that political polarity causes Populism around the world. In other words, a strong individual to come in and get control of that situation, while they’re having that type of polarity — so the word “Populism” for example, in developed countries was not widely used until — you go back to the ’30s, until more recently — now it’s, of course, common.
And we’re also late in the longer-term debt cycle, meaning if you were to turn down — if the economy was to turn down — the ability to deal with that, with lowering interest rates is very limited and the ability to deal with that with quantitative easing is very limited for a variety of reasons. So it’s very much like the late ’30s. You can’t find a time in which both of those circumstances exist. Populism together with (ph) that differences, wealth caps and so on — and then also we have a situation, which is quite similar, I think, in we have a rising power in the form of China —
RITHOLTZ: Let’s talk about that, because in the ’30s you had Italy and Japan and Germany rising to challenge the existing powers — how parallel is the growing China today to that era?
DALIO: I think it’s not only analogous to that era, but there’s a concept — called “The Thucydides Trap” by the way that — and an excellent book by Graham Allison — called Destined for War — he goes through, but (INAUDIBLE)
(CROSSTALK)
RITHOLTZ: Destined for War.
DALIO: Well, he’s dealing with China relationship and — but another excellent book, by the way, is — Paul Kennedy’s The Rise and Decline of Great Powers. And if you study history — I’ve made a point now to study history of the last 500 years very, very carefully — what you see is that in the last 500 years there have been 16 times where a power comes to challenge an existing power, a rising power. So like you say in Germany, within Europe or Japan within Asia, that was the nature of that beast. That means that there’s certainly rivalry. So a trade war — a comparable power that creates an issue. That (INAUDIBLE) —
(CROSSTALK)
RITHOLTZ: So 16 previous examples of a rising power —
DALIO: Twelve of which lead to — actual shooting wars. But I’m not saying —
(CROSSTALK)
RITHOLTZ: So we have a warning —
(CROSSTALK)
DALIO: I’m not saying we’re going to get into a shooting war. But I am saying that — the history that has shown that when you have wars, after a war you have a dominant power and you have periods of peace — because you have a dominant power. After World War II the United States was powerful, both economically and also it had a monopoly on nuclear power.
And so as a result of that power, you know, the United Nations is in New York, the World Bank and the IMF are in Washington, D.C. because it determined that. And in history, then when you have the rising power, to challenge the existing power, you have elements of conflict. I’m saying, I don’t want to overdo this, but I am saying that we are entering an era in which anybody who reads history and policy-makers around the world recognize this — that this issue with China rising means that there are naturally going to be conflicts and how do you resolve conflicts in a world market?
You don’t go to a court system. There’s not a rule of law in the world that becomes dominant, so there is more of a rule of power and that’s a dynamic. So all I’m saying is, if I was to pick U.S. may win — is most analogous — and I would say that the 1930s, where you take that period, the late 1930s, is an analogous period if you were to say cause/effect relationships because how much power do we have in terms of monetary policy? How much Populism do we have? Analogous? These are important things.
And then also you know, where are we in the economic cycle? How are asset prices priced? And so on.
(CROSSTALK)
DALIO: So it looks — with the most analogous period. You can go back to periods, in other periods in history and you can find also other analogous types of periods. But that’s what it looks like.
RITHOLTZ: Well, we know how the 1930s ended it and it was wasn’t well, with World War II — what’s the implication? Are we at risk for a shooting conflict with China? Or is this going to take more in the terms of an economic or a competitive —
(CROSSTALK)
RITHOLTZ: — sort of war?
DALIO: I think that what our circumstances lead to has a lot to do with how we all deal with each other, given those circumstances. In other words —
RITHOLTZ: You mean us individually? Or do you mean, between President Xi and President Trump?
DALIO: In between — (INAUDIBLE) history has shown that how conflict is handled is the big thing. So — there’s a tendency of polarity to cause greater conflict and then hard times to cause even worse conflict. In those cases, you even had — in Germany and Italy, Japan and Spain, you had four democracies that chose to be autocracies —
(CROSSTALK)
DALIO: — because of the — would somebody get control of the situation, because it was fairly — the chaos of the conflict, it became worse. And so there was conflict within countries and there was conflict between countries. And I think the real question is, you know, can you have thoughtful disagreement? Can you have strong negotiations, but with the notion of reaching… whether they’re compromising or paths that are, you know, not damaging type of conflicts.
I don’t know, this is beyond me. But I am saying that I think I — I can’t tell you whether you go to war — I think that — and that shooting war — I would say that — it would be — to not consider it as a possibility, and not be worried about it — internal conflict and external conflict would be dangerous.
(CROSSTALK)
In other words, I think it’s the worry and the attention paid to it and the notion of, you know, how do we work together? How do we work together as country? Is there an America —
(CROSSTALK)
— that has common values and we’re pursuing a common mission — and what is the… how do you deal with that polarity issue? You know, I mean, there are… issues in terms of how effectively capitalism is working for everybody.
(CROSSTALK)
It’s working, I think, less effective — I’m a capitalist, I’m a professional capitalist; I believe in the system. But as it — how do you deal with all of those? Those are education, equal education; these types of things become fundamental and they’re big challenges. Anyway, we getting —
(CROSSTALK)
RITHOLTZ: Well, before we move from that, you point out —
(CROSSTALK)
DALIO: We’re getting away from markets and —
RITHOLTZ: But you point out in the book that every time there’s a financial crisis, we seem to run into issues of economic inequality and widening gap between the haves and have nots — is that part of the machinery? Is that something that always happens when there’s a financial crisis?
DALIO: History has shown that in places where there’s a big disparity in conditions at the same time as you have an economic downturn, there’s greater levels on conflict. Now, you could be a poor country in which there’s not much difference, and you have a downturn and you have less conflict. Or you could be a rich country – you know, Switzerland is going to have less conflict down there, because they’re not that same element of disparity.
RITHOLTZ: Yes.
DALIO: So history has shown that when there is that and there’s a downturn, there’s more – like, there’s more to argue about.
RITHOLTZ: Yes, interesting. We’re going to open this up for questions from the audience, but first we’re going to do a speed round, five questions in a minute.
DALIO: OK.
RITHOLTZ: And then we’ll – and then we’ll do Q and A. So let’s jump right into this. Tell us the most important thing that people don’t know about you.
DALIO: Most important, that I have a great wife for 40 plus years who is a – is a force of nature that I’m crazy about, and that is also doing amazing things in her work.
RITHOLTZ: You mentioned a few books. Give us your favorite book you would suggest people should read, outside of your own.
DALIO: I would – I would say Lessons from History, it’s 104 pages.
RITHOLTZ: Will Durant’s, is that it?
DALIO: The Durants wrote that who are the great – one of, probably, the greatest historians, broke 5,000 years apart. They distilled it down into 104 pages, fabulous. I would say “The Hero of a Thousand Faces”, the Life Cycles which is great. And I particularly —
RITHOLTZ: Joseph Campbell.
DALIO: — Joseph Campbell. And then, I would particularly say that now they should read, which I think is a masterpiece, Paul Kennedy’s the Rise and Decline of Great Powers.
RITHOLTZ: So, we have some millennials in the room. If a millennial came up to you and said they were interested in a career in finance what sort of advice would you give them?
DALIO: Well, let’s see. I think the most important thing is, as you’re young, is to realize that your success comes from knowing how to deal with your not knowing more than it comes from anything you know. So how to be open minded, how to take in the best of the – around there, don’t think that you’re – be humble. Take in the best. Know how to deal with not knowing, and then you’ll be more successful.
RITHOLTZ: What is your favorite philanthropic focus these days?
DALIO: For me, personally, it’s two things; ocean exploration and, particularly, microfinance.
RITHOLTZ: Microfinance, interesting.
DALIO: Microfinance and ocean exploration —
RITHOLTZ: And – and —
DALIO: — because I basically believe – I believe this issue is a big issue. And I think that the fundamentals are can – can – the blessings that I’ve had. Can I have a family that’s a good family and take care of me? That – that’s the very important thing, and sometimes that’s difficult.
Education, I was able to go to a good public school. Can you have good public education? And then a few bucks to get you going in terms of being able to make decisions.
I’ve seen on microfinance, I’m a supporter of Grameen America from the beginning. For every dollar that I give to that there’s $12 in lending that gets paid back in the – in the first 10 years, and it just keeps going around and around and it becomes self-financing. So I think that’s an important area. And then I’m thrilled about ocean exploration, because I think it’s our biggest asset, and it’s – and it’s thrilling.
RITHOLTZ: And my final question, what do you know about the world of investing today you wish you knew 40 plus years ago when you were beginning?
DALIO: I guess it would be the same thing which is I wish I knew how to deal with my not knowing, how to – how to bring in the best, how to deal with that thoughtful disagreement, to be radically open-minded, to be audacious in going after my goals, to try to do great things, but to know that I could change my risk return ratio by being able to raise my confidence by the art of thoughtful disagreement, and to diversify, effectively, my best so that I could not have anyone that dominates my returns and, you know, to place those bets with, both, aggressiveness and humility.
RITHOLTZ: All right. So, let’s open this up to the audience, I know there’s a couple of handheld mics running around. What questions do we have from the audience anywhere, right over here on the corner? I told you there was a plant.
UNIDENTIFIED MALE: I’m not a plant, but I’ve always wanted to ask you this. Thank you for this by the way, Ray, this has been great. You’ve been one of the most successful funds ever, maybe the most successful.
A lot of funds that have had success have eventually either kicked out their investors and run house money, or have drastically limited how much outside capital they’ve taken, or had become family offices through the years. Is that something that you ever considered, and why have you completely gone the other way, grown the firm, given how successful you’ve been?
RITHOLTZ: Good question.
DALIO: We’re – we’re – there’s alpha – there’s alpha and there’s beta. So I’m – this is going to probably be – yes, a little bit of a technical answer to your question, first. But a beta which is what is your strategic asset allocation mix; they’re timeless and universal. There’s a lot of liquidity, a lot of capacity.
And so, those are the only takeouts we’ve taken. Alpha, we have capped our alpha. We – I don’t think, you know, we just don’t take in new money. That is capped. And then, the way that we do it is, yes, we – we invest a lot in there, but there’s $160 billion of total assets invested and we haven’t had the need to not invest through other people. So I don’t expect it – I have no expectation that that would change.
RITHOLTZ: I saw a hand back in the corner over there.
UNIDENTIFIED MALE: Hi. I’ve been lucky enough to read this book already which is very – very entertaining. Could I just ask you to talk in a little more detail about one of the shortest, most punchy sentences in the – in the book which was, in the end policymakers always print? Are we confident that they will indeed always print? Might there be any exceptions? And – go ahead.
DALIO: Well, it just takes how much pain (ph) it gets them to print, you know? I mean, at the end of the day what I’m saying is when you have a debt crisis and it keeps going and it becomes painful, you’ll print money. When you hit zero interest rates then you print. That – that’s been true throughout history.
And there’s not a case that I know of that’s – that’s different from that because it’s the better alternative. So, yes – and the – in the end – you know, when it gets bad enough they’ll always print.
RITHOLTZ: Some – a question over here? And we’ll try and get through as many questions as we can.
DALIO: Which is, by the way, an interesting consideration if you take longer term, not immediate, but you think of what – what does that mean longer term in terms of a reserved currency.
If you start to think, where are we in the cycle? And you start to extrapolate what – you know, what is going to have to be sold? The unite – unite – United States is going to have to sell a lot more debt in the world because of the larger elements of budget deficits, you’re going to have to sell more.
And from a buyer of that, that – what a – what a bond is is a promise to get a lot of currency. That’s what it is. You get currency. And so – and we’re in a – in a fiat monetary system.
So if you take, you know, I don’t know, five, ten, 15 years later I think it will, increasingly, be an issue. You know, what is the currency? What is the store holder wealth? You know, those are elements that lurk in the back, not immediately as – as – as issues.
RITHOLTZ: Next question.
UNIDENTIFIED MALE: Thanks. With a – on – on – on that path of the maintaining power – global economic power, you know, many of the economies on a stimulus – a stimuli that can be quenched (ph) with a little bit of steroids. You know, you mentioned that for those economies to succeed in remaining power they have to keep the growth growing.
So given the current scenario and the trade agreements that we’re trying to reach, do you have an expectation of which economy will fold first?
DALIO: You know I don’t have a — I think that Europe is — is an area of conflict and there are issues that exist within Europe but they’re — you know so I don’t know that I have — I would say when we have the down turn it’ll be an issue of – in of continuity cohesiveness.
I think Europe will have a great amount of challenge, because they don’t have a common fiscal policy. They don’t have unity within the countries. They don’t have unity between the countries, and they have big structural issues. So I would say that Europe probably would be the most strained.
RITHOLTZ: I saw a hand back over there.
UNIDENTIFIED MALE: Hi it’s (INAUDIBLE) from (INAUDIBLE) global partners. Question is in the long term what do you think the U.S. market will be?
DALIO: In what …
RITHOLTZ: In the long term U.S. markets, where do you see them going?
DALIO: I think U.S. market — you mean in terms in size or valuation or —
UNIDENTIFIED MALE: In terms of performance.
DALIO: I think that we’re closer — we’re not — we’re — long term, let’s say five or 10 years, I think we have squeezed a lot out of the U.S. market. I think we’re in an environment that we are going to have low returns going forward for a very, very long time because if you look at returns, there is the present value effect of lowering interest rates and putting liquidity into the system.
And that has largely run its course. And all assets compete with each other. So you could almost look at the yields of those assets. What’s the yield on cash? The yield on cash, the yield on bonds, and then assets, equities and so on; the brisk premiums of each of those. And then that carries through to private equity, carries through to real estate and so on. And because so much money has come out and interest rates were squeezed, we’ve brought asset prices up to very high levels in a store context but no relative to cash.
They haven’t gotten to such extraordinary high levels. And now in that tightening, as we’re raising cash rates and the spreads between short term interest rates and the longer term expected returns get squeezed, that also squeezes those returns.
So when you’re at a — almost a zero interest rate low in the United States, a zero interest rate in Europe, and a zero interest rate in Japan, which are the main reserved currencies and that that has all be supported by quantitative easing.
Beyond that I think we’ve squeezed out a lot of assets. I think the world buying large is leverage long meaning assets — say the buying of debt — corporate debt. One of the biggest sources of returns on assets was the fact that the interest rate was low relative to the return on equity and so there’s been a lot of buy backs.
A lot of mergers and acquisition, in other words, by companies buying companies and bidding that up and that’s been a factor. And that’s also — then you had the tax boost because if you lowered corporate tax rates, companies are worth more.
All of those things have pushed those asset prices up to levels where it’s difficult to see how you can squeeze that with — and so you can’t get the rate structure down much and — which is the wind to the back and you can’t — so all of that means — I think you’ve squeezed out a lot.
RITHOLTZ: So — so going forward from here, if you’re an investor does that mean you just have to prepare for lower expected returns in the future or is there a place where you can hide? Like Krypton.
DALIO: No, I think — I think if you’re an average investor I think that you — again, there’s alpha and there’s beta, you have to repair for lower expected returns in the future because if you take all of these obligations, I’m talking to some extent about the debt obligations but they’re a — unfunded pension obligations.
There are also health care obligations. There’s a lot of obligations and essential a lower real interest rate and therefore lower asset returns. Assets are held by those who are more rich relative to that.
I think all of those things are going (inaudible) that you can expect lower returns and you can expect probably more taxes, those in a larger term. So that’s going to be the nature of the beast. As far as — and how to deal with it, I think most people should not be making tactical movements in and out of the markets to produce alpha.
I think that’s difficult so I think that they have to know how to balance their accounts. That’s why when I refer to what we call all whether, what’s risk parody, how do you balance those things?
You have to have a balance portfolio. Unless you’re going to be able to — you know concentration is risky thing. And then — or you have to be able to time markets. And of course that’s — that’s a difficult thing too.
RITHOLTZ: I saw a bunch of hands up. Why don’t we come down to the front row over here with this woman.
UNIDENTIFIED FEMALE: Thank you. Hi Ray.
DALIO: Hi.
UNIDENTIFIED FEMALE: So my question is actually more about management because I really think that’s been — that’s what my (INAUDIBLE) for principles, which is what an incredible and strange culture you’ve built at Bridgewater.
And I love your advice, you know, that to deal with not knowing. That’s such a hard problem for most people. People are uncomfortable to admitting I don’t know. So how do you teach someone who is either resistant to admitting I don’t know or worse yet, who is not aware of how much he or she doesn’t know.
DALIO: Well, one of the best — I was going to just say play the markets and then you’ll realize how difficult that is to be confident that’s it (ph). But honestly what happens is to make the transformation you have to explain it to them in a way where — let’s go through this.
Like if I was to stay do you want to know what your weaknesses are? Do you want to know what I think? Do you want to know — you’d be able to tell me what you think? Do you want to have disagreement when we’re disagreement?
Do you want to have thoughtful disagreement? Because if there’s disagreement, there is some chance it may be you that’s wrong rather than the other person. Intellectually you can get people there. Not all people. But intellectually you can buy in, say you’re struggling with yourself really because there’s this intellectual self that said yes, I’d like to know my weaknesses.
I know everybody has strengths and weaknesses. I can develop. I’d like to have that honest relationship. And then you will — once you intellectually get that you want it, then you’re going to encounter your emotional barriers to it.
And the emotional barriers are either your ego barrier that you know that you’re going to have to get over or your blind spot barrier. I mean — in other words by ego barrier means you somehow feel challenged or whatever. You feel bad about not knowing.
Feel good about not knowing and curiosity. If I can get you to see that world that way intellectually you’ll want it. And then the blindness barriers, you can be really curious but minds — different people’s minds work differently. They see things.
Some people see the big pictures. Some people see details and so on. And when you come to see that different people see things differently and you could — when you see things through other’s eyes that you can see in three dimensions and color rather than seeing in this one flat dimension black and white and you can do much better.
If you get them to intellectually understand that and say we’re going to go through this in a way where there’s trust, where’s there’s meaningful relationships but you can get trust because you can get to see things for yourself.
Everything’s transparent. We’ll talk about it and so on. Then you get people to want to be that way. But they have to start to realize intellectually that it’s really a good way of being.
It builds better work results. It’s builds better relationships and that’s a tremendous power to get to the right answer and also get the rewards of good work and good relationships.
They have to go through that and then they have to go through the experience. And then when you take them through the experiences, you have to help them through that experiences because some of that is different.
I think it’s also how we teach kids and we teach out — in our own environment that, you know, oh did you get the great grade in there and it’s all kind of do you know and the life is not like this.
Life when you leave school is not like did you get the great grade. Life starts succeeding when you start to fail. When — and OK — and — and then it’s the learning that comes from those failures that produces it.
So I think that whole intellectually getting — that being that way is healthy in all of those respects and then once you have that in their mind and they experience it, you help them through that, then they know they’re experiencing it and that’s what works for us to help people make that transition.
RITHOLTZ: Thank you. How about right over here? Other way, this way. Up, got it.
UNIDENTIFIED MALE: Hi, Ray. One of my favorite shows is this show called “Billions” and some people have said that the character Bobby Axelrod in his office is somewhat based on you. Have you ever seen this show? Is there any truth to that or what do you think of that?
DALIO: I have no idea, speak to those guys. I have no idea whether it’s true. I watched three episodes out of curiosity. I thought it was entertaining, and then I just didn’t have the chance to pursue it so I don’t have much to add. You’ve got to ask the writers (ph).
UNIDENTIFIED MALE: Did you read the book Paul Kennedy, the book the Accident, I read that book (ph). Love that book, and the message I take from that book is that every great power is because they’re all leverage (ph), they borrow too much debt. The message – one of the messages I took (ph) from the book (ph) is now the U.S. really looks like (inaudible) that’s where we’re going and now what’s the implication to the currency of the U.S. dollar.
RITHOLTZ: So in the Paul Kennedy book, overleveraged is the U.S. overleveraged relative to historical companies?
DALIO: Yes. So there are a number of lessons, one of those is and it could take, the arc by the way typically is 200 years – 250 years so the arc is quite long. And it – by the way it starts off with technological advances that raises GDP and then makes them very competitive in the world markets like the Dutch was the reserve currency before the British Empire and ours.
And then what happens is later in the cycle there is that desire to push it in leverage. Usually it’s a matter of they become global, they have global trade routes, when they travel around they’re carrying their currency then people then use that currency. That’s what they pay in, that’s what they lend in.
Holland, essentially Amsterdam, became half of world trade at that time, and it became very rich because of those things and the world used that reserve currency. So there was borrowing and lending and then the cycle goes that of course when you have a reserve currency others want to save in it, because what the choice is their local currency and so on and they believe that’s the thing to save in.
And when they’re saving in it that means that there’s borrowing in it by that country and they usually overextend, and as a result of overextending they make the – they get the debt problems that you’re dealing with and then it becomes a challenge.
I think the United States is following that kind of an arc and we are over extending and that we’re operating in this world reserve currency, fiat currency type of system and so if you were to take lets say years in the future I think that the role of the U.S. dollar will diminish and returns on U.S. dollars will – U.S. dollar denominated debt, I think will suffer for the reasons that we’re talking about here.
And then I think then you’ll see the emergence of other currencies. What those currencies will be exactly and how that will work is an interesting question so that’s too big of a topic to get into and answer here in this brief couple of minutes but I would say that becomes an issue and that probably over the next five and ten years we’re going to see that play more of a role.
RITHOLTZ: Ray, given in Kennedy’s book each of the great powers became global powers by expanding beyond their borders. What do you make of the current deglobalization that seems to be taking place in the United States, in the UK, and elsewhere?
DALIO: Well I think you’re talking about – there are two different things. In those cases it wasn’t so much the globalization. There was the globalization of those countries. Just like the globalization of China. We’re now seeing the one belt, one road; we’re seeing investments all around the world. That’s carrying that forward.
With that you will see more lending in renminbi. You will see more Chinese banks in the world and so on so forth and that will expand very, very analogist (ph).
Regarding globalization, which is the idea of producing at one place and selling at some place else in the most efficient way is that there’s not much trade barriers so that they can do or the globalization of capital markets, the free flow of money into and out of countries and all of that.
I think that that’s peaked and that we’re now in an environment in which we’ll go to a more of deglobalization kind of environment, and because of this somewhat threatening environment the perceived worry that you could have a conflict, I think that creates a force that reinforces the deglobalization, because let’s say if you’re going to produce something — if you’re producing things in China that we need in the United States by way of example, there might be a concern about doing that.
So if you’re producing PC’s you might say I need PC’s here, there might be a pressure to go deglobalization that sort of feeds on itself. I think that we’re seeing those kinds of pressures.
I think the same thing is true that could happen with capital flows. If Chinese investors are more concerned that you could have a conflict there could be more sanctions of investments in the United States. So they’re less inclined to invest in the United States and so on.
So those issues I think – I think we’re moving more towards deglobalization and almost independent self sufficiency is probably more of the direction.
RITHOLTZ: And we have time for one last question. Let’s go right over here.
UNIDENTIFIED FEMALE: I have two questions regarding China. The first one is where do you see China’s debt situation today and the second being, given that China has started to increase the amount of stimulus is that an area that you would potentially increase an investment in this – at this point in time?
DALIO: Like I said, applying the template to China. Chinese debt is mostly in their local currency. The amount of foreign currency denominated debt for China is very small. OK so now you’re dealing mostly with an internal issue. Also the lenders to China are within their system and the, like I said, the capacity to handle a debt crisis by spreading it out in one way or another is quite large.
They have the expertise to know how to do that – to do that spreading it out. So I think when you look at debt cycles, there are four cases in which I know the United States defaulted — had major debt crisis and what rattled them all off and that they were able to be managed.
The lesson I gave, for example, of the 1980, ’82 debt crisis that I was so wrong about was the ability to spread that out and lower interest rates at the same time. China has that ability. I think everybody’s focused in on that and too focused in on that and they’re not focused in on their productivity growth and how they’re making changes in terms of that productivity growth.
I think like a bad year of growth will be probably twice as good as a good year of growth from us in terms of that whole productivity thing, and if you look at indicators of productivity over a period of time – quality of education, quality of infrastructure, things kinds of things. They have the reasons to continue to have not high productivity. So to me it looks like one of those cycles – their version of a cycle to do a debt restructuring and debt organization.
They’re doing it on a proactive basis before the cycle has actually caused the crisis. In most of the other cases like in our financial 2008 financial crisis, we had the crisis and then you have reactive that are doing proactive. So I’m very – I’m not worried about the debt crisis in China or the debt situation in China, and I believe it’s going to be a very good place for long term investing.
I think it has to be an important part of everybody’s portfolio; it’s just opening up to foreign investors. It’s a different kind of place so you have to get to know it, but I’m basically (INAUDIBLE). I won’t get into the particulars of what particular investments I would make there though.
RITHOLTZ: So that is all we have time for. I want to thank Ray for being so generous with his time. Let’s give him a nice round of applause.
DALIO: Thank you, Barry.
RITHOLTZ: My pleasure. You’re going to hang around a little bit and sign some books for people, is that right?
DALIO: Sure if you want me to.
RIHOLTZ: Fantastic. So stick around, Ray will sign some books, and thank you so much for coming.
END
