Are you seeing signs that we're in an AI bubble and therefore a economic collapse?
The classic signs and that has implications for the economy and it's bad for the society and everybody loses money but we also have some other things that are going on that happen around the same time and I can go through these if you want please. So what I'm saying is clear because I'm a global macro investor
And you were one of the few managers to foresee the great financial crisis.
Yes. And so right now we're very excited about AI and we should be very excited because it's going to be revolutionary changes but it's creeping into almost everything. The way I look at it is I look at the human body and I see like it's replacing the body and so on and then it replaces some aspects of the mind levels of thinking and reasoning. But at the same time we have another problem that's existing geopolitics. I mean that China is a larger trading partner with most countries than the United States is
And that's a changing of the world order
That is one of the ingredients right and then also you've got large wealth gaps the government don't have enough money and so when you have the downturn then you have people at each other's throats
So a lot of people they're thinking about how to sort of secure their future how do they all prepare
Let me say that history has shown that it's not the most intelligent people that are the most successful but the key thing to keep in mind is
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Ray, for people that might not know who you are, you founded Bridgewater Associates in a two-bedroom apartment in 1975, and you grew it to the world's largest hedge fund. What was the total amount of cumulative net gains that you delivered for those investors over that period?
I think it was something like 53 billion. We produced about a 12% return with no never any significant losses and it was uncorrelated with other investments. And you were one of the few managers to foresee the great financial crisis which allowed Bridgewater to post positive returns of 9.5% in 2008 while the S&P 500 plunged by almost 40%.
Yeah. Let me start with the thing that I'm most curious about because I sat here with an investor called Jeremy Grantham who you might know. He told me that we're staring in the face of an AI bubble and therefore a economic collapse potentially.
If you look at the data, it would be compatible with history for the peak to be very soon. Everything is in line. This is I think the biggest investment bubble in American history.
What's your perspective on that?
He's right. I don't want to jump to conclusions as much as I want to explain reasonings that lead up to conclusions. I'm at a stage in my life that I want to help people understand cause effect relationships. What they call a bubble is when the price goes up a lot and companies do very well and then it collapses and that has implications for the economy. It has implications for the markets like 1929 bubble, okay? or the 2000 bubble. Okay. Which is the dot bubble.
Does it impact real people as well? Because you said the economy.
Did 1929 bubble bursting impact real people? Yes. The great depression followed because what happens is there's a new technology that comes along that's revolutionary. The dotcom bubble which was 2000 all the stuff that we have that's wonderful new technology. People get into that technology. They say that's miraculous. I can bet on that. I'm sure it's going to be successful and then they bet on it and sometimes they borrow money to bet on it and they lose sight that the price of it matters. So it goes up and up and it's everybody's thing, you know, like right now we're very excited about AI and we should be very excited because it's going to be revolutionary changes and it did at the same time. So I want to buy some of that and everybody wants to invest in some of that and what they do is they don't pay attention to the price and there's a certain mechanics. People will borrow money. Wealth is not the same as money. So you see a lot of people getting wealthy but you can't spend the wealth. You have to sell the wealth to get money because you can only spend money, right? So what happens is when they need money for one reason or another taxes change or interest rates go up and so they have to pay their debt service and so on there is a pricking of the bubble so that what happens is it falls. Okay. And when that happens, people lose money. And as they start to lose money, the process works in reverse because when they made a lot of money, they have a lot of collateral, right? They can go borrow money because they're worth a lot. And that compounds on its way up. And then when it comes down the other way, it works the other way. Okay? Now you got to pay your debt. And so then you have to start to sell assets. And then there's less demand for things, right? So there's less demands because if you're losing money because you put some money in the stock market and that company and so on, you're going to spend less. And as you spend less, then somebody else's income goes down, right? You don't go to the restaurants. The economic downturns that typically follow a bubble like the Great Depression. The late 20s was fantastic. If you talk about changes and experiencing, this was the first time there was electricity in houses. So it was the first time you would have refrigeration and you would have lighting in houses. This was the first time that you had cars popular that you could get. First time airplanes, first time you had radio and so everybody knew that they were going to be great in the future and they were great in the future. But at the same time what happens is as they buy them and their stocks go up and they borrow money to buy them and so on and the profits don't live up to the price then that causes this other dynamic and it produced the great depression.
So let's say that I buy this and this is a unit of artificial intelligence. So, let's say I buy one share in one of the big AI companies right now. Because investors are so excited about AI, they value this at $100. This unit that I have here, they say it's worth $100. So, my net worth is now $100. I go to the bank because I have this net worth, this paper worth $100, and I ask the bank for a 50% loan on this thing that I own. They give me $50. Now, I have $50. And then something happens in the economy which means that the investors who have invested in this and investors generally now need money to pay off their other debts that they have. So this could be a war, it could be some kind of event that takes place and suddenly everybody rushes to sell their assets like this one. And so when I go to sell this, the price of it has now plummeted to say maybe $25. But I took a loan at the bank for $50. So I own the bank $50. But now this thing that I have that was worth $100 a couple of months ago is now worth $25 and I'm $25 in a hole. So I have to quickly sell. And then with everybody selling all the price of assets dropped. People stop spending money at the restaurants. Like you say, there's less money around and then the bubble has burst and we're in this sort of declining.
And it happens because it must happen. I mean meaning in these tremendous changes there's very little that's known. So anybody who's in the business of making AI can't be precise. They don't know exactly how much money is going to come in. Right? So there's either one of two things. You either don't invest enough and then the competition runs away or you invest a huge amount and you can't be precise. Okay. And so when that dynamic happens it's a problem. So yes, you said it very well. So I'm going to repeat one other thing to emphasize. What's quite common now is you can issue stock for let's say you raise $50 million and you value the company at a billion.
Only $50 million was actually spent on that company. But now if you raise that, you're a billionaire.
Mhm. Because the accounting value of that, what do you own? You own stock that is valued at a billion dollars. Nobody paid a billion dollars or whatever it is, right? And now you own that stock. But that stock you can't spend because you can't spend wealth.
In order to spend it, you have to sell some of that stock to get money.
Right. And quite often there's an interest rate rise because that you know let's say as there's a fever and there's an inflation then the central bank wants to try to put the brakes on that a bit. Okay. What does that mean? It means people who have debt in a sense have to come up with more money
because when you own the debt hold the debt you have to come up with money to pay the debt and that dynamic works between us. We've said it clearly I think we understand the dynamic. So they have to exist. Now we have another problem that's existing. Okay. So we're talking about the bubble. Okay. But we also have some other things that are going on that happen around the same time. A big gap between the rich and the poor and which also means the left and the right, the politics of it, right? Just as we have now. When you have the downturn, then you have people at each other's throat. So if we take politics, what you see is this that they don't have enough money. The governments don't have enough money. We have big budget deficits. Okay? Where do you get the money from in order to pay those bills? The UK has had I think six out of the last seven years there's been a new prime minister. And because there's not enough money for the government and so what you start to see is people come in with their claims. But there's this how do we get the money? And then people run who have money. They say I don't want to be in this tax zone that's going to be and then they leave. And so there's a domestic political problem that is not people compromising the same way they used to compromise. Right? So now you have the politics which compounds this. And then you have a world this is what I call the big cycle. You have a world in which also the geopolitics changes. By geopolitics I mean country to country. Okay. There's a system under normal circumstances when there's a more dominant power, they impose their order and that becomes more peaceful. But when you have arguments of how things should go, those arguments start to turn into conflicts, right? And so those things tend to happen together. That's why I refer to that as the big cycle, that dynamic that is the confluence of the money, the internal conflict politically and the external conflict which is what we're going through. And the problem is I think that people don't know the cycle. So every day we go to our sources of information and you see this latest news, but they don't connect the dots in understanding that cycle. Closing off on this point of the bubbles. What is it that makes bubbles pop? So if we are in an AI bubble at the moment and it is going to pop at some point, what is the like they call it a black swan event? There are a few of them. There are bubbles and then the things that prick the bubbles. Okay, the things that prick the bubbles typically in the beginning are something that means that I have to sell some wealth to get money and that's usually a rise in interest rates. It could be something like wealth taxes, something that means I very wealthy, but typically the tightness of money because during that spot there's inflation pressures and central banks decide that they want to tighten monetary policy and so on. It becomes that the amount of money that I can get by owning that debt at the higher interest rates is greater than the amount of money I could get on my equity investments. That's part of it. Also what you see is a lot more production of stock and what I mean by that issuance of stock. Think of that the supply and the demand. There's there's demand, right? And we've been talking about the demand that makes stocks go up. You know how we create this wealth. But there's also supply. So you can issue stock. It's very issue there. There's almost nothing that's easier to produce than stock. So if I own a company, I can just print more equity.
Yes. Today you could probably go out and say, I'm going to make a company and I'm going to take it public and you go to your audience and your crowd and you can say I'm going to make stock.
Okay? So it becomes when there's a market that wants stock, there's a production of stock.
Okay? And that supply of stock together with the other that I'm mentioning the need for getting money and so on causes the bubble to pop.
Are you seeing signs that we're in a bubble?
Yeah. Yeah. Yeah. Classic signs that we're in. And the bubble I should emphasize it's not a you're in a bubble or you're not in a bubble. It's a degree thing. Okay. There is also that it's in weak hands. I can look at now who is in these companies right and is it in strong hands or weak hands classic strong hands is that when weak investors not knowledgeable investors then put a lot of money into it particularly if that's in a leveraged way
with debt or they can buy an option a leveraged version of that like there are ETFs now that are leveraged versions of the stock market and they and so on and they get into that. It's more like they're crapshooting. Okay? And then that's a sign of a bubble. So I've listed a few of those signs. Those are the major signs of those bubbles. And so that when it goes down, then you get the fear. Then you get the need to raise cash and that dynamic works its way out in the form of then the reverse happening. In other words, everything becomes cheap and everybody has the spending and the things you mentioned.
If we are in an AI bubble and it is going to bust, you know, I had a friend of mine contact me and he said, Stephen, I think we're in this an AI bubble and he's running an AI company. So, he said to me, I'm going to raise lots of money now so that when the markets come down and investors are fearful, they don't want to invest in companies. People stop spending as much. They start thinking about their subscriptions and start canceling subscriptions, we're going to be good and we're going to be able to buy up some of our competitors who are going to be struggling. So he's just raised hundreds and hundreds of millions of dollars for his AI company,
right? And it's probably like that easy.
The question here is like what should at different levels? So like the average Joe on the street up to entrepreneurs that are running companies, how does how do they all prepare for an economic bubble that might burst?
He's such a good example. And what that does and just following it through on what we were saying a minute ago is that increases the supply of AI stock.
Okay. Yeah. because he sold stock more.
And so as he and others do that more this greater supply of stock comes in and so he wants to get ahead of it
in that dynamic and then you know that contributes to the bubble but how do they prepare? How does the average
I would also say something the future is very unknown and people should not be timing sophisticated investors have a real challenge even in timing a bubble so on the important thing always is to diversify now we're going to go back to money the basics of money management and I by the way I personally have gone through the cycle because I didn't have any money and then I did then a lot of money and I remember the cycle very well. What happens is as you start off I used to count how many months I would be okay a certain amount of money how much I would be okay if no more money came in if I lost my job or whatever I did I'd mostly never I worked two years for somebody but in other words if money didn't come in and it would be months and then years and so on to build that security because I take care of my family and so on. So as we're looking at these things, these are the choices that you have in order to be able to say, do I buy my house or apartment? Do I put my money into cash? And what happens to money is you have to put it into something because they'll pay you interest on it. Okay? So that's your cash deposit and so on. And people think that that's the safest. It's not. It's the worst investment over a long long period of time because inflation will eat it away.
You mean putting it in a bank? Just leaving in a bank, please in whatever form, a money market fund, a whatever it is that is that shortterm, I'll deposit it and it'll give me an interest rate. Okay.
Okay. And that's what they think about as cash. You know, nobody leaves it literally in cash because if it's literally in cash, it doesn't earn interest. So why shouldn't I put it there and get some interest on it? And so that's cash and people think that that's the safest. It has the lowest return guaranteed almost to have the worst return over the longer period of time.
People keep cash because it feels safer.
That's right. And I'm saying it's not safer because of inflation.
Explain that to me in simple terms.
Okay. Well, if I got no interest rate, then what I would do is I'd lose to the inflation rate.
And what's the inflation rate? Well, three and a half or 4% happens to be about where it is now.
So that de at least $3.5 a year.
If I just leave it in cash.
That's right. Okay. Now I'll get an interest rate on it if I put it someplace and it'll give me maybe an interest rate that's somewhere in that vicinity similar to that.
And then I have to pay taxes on it.
Oh, you have to pay taxes on the gain.
You're Yeah. Okay. Right. Even though you really didn't gain relative to inflation, you still have to pay the taxes on whatever you've earned or something anyway over the long term it's a lousy return because also think about returns also come from productivity and over a period of time people learn how to do things better and so on. So then you can invest in let's call this stocks okay that we'll call that the stock market. This is cash and then you think on the stocks and then the stocks can go up or down and then they have this dynamic that we're talking about that creates these big cycles and the busts and those cycles when they go down go down 60 70%. Okay, that that's what a bear market looks like. Woo! What a dive. Okay, this is gold. That's gold and these are bonds and this is your house and that's Bitcoin. Okay, so these are the choices. They each change for certain reasons. I'll digress into that in a minute, but what happens is they go like this when gold goes up. Tends to be that the bonds will go down in value or your house and these change in a certain way. And so the best thing to do is to have a diversified portfolio of that. When you have that rather than any one, you won't reduce your return, but you will reduce your risk.
And diversified means having a little bit of each,
right? A certain amount. And you have to know how to balance them because of their volatility. This one stocks is more volatile than this one. And my own recommendations are you start first of all with what you need. Should I buy a place or should I use that money and I could travel more and so on. One of the advantages of the house, the apartment and whatever is it's your environment. Your environment is important. It produces forced savings. Sometimes that forced savings is good. It is a it typically is taxed better. It's a better vehicle for tax over a period of time. But I'm not arguing for this alone, but I'm saying when I'm looking at this, then I think this one gold is very interesting because when all of these tend to do badly, this tends to do well. Okay. So it's a very effective diversifying because this was money not until 1971 and it's still the second largest reserve currency. Central banks hold reserve currencies. So it has qualities that are different from this and this has qualities like when the value of money goes down because of inflation. This
bonds okay and bonds are basically lending the government money.
That's right. If you lend the money at a certain interest rate and then inflation and interest rates rise, you're kind of locked into that interest rate. And so it has its own problems. The more important thing I would say is, you know, you save up and you say, how many years can I live if money doesn't come in? Okay. And then you take that and you say, how could I be secure? So I don't want to put it into one thing that can go down 70%. So how do I diversify that? That's my main headline.
A lot of people in the comments of our last episode they were asking this like how does this apply for someone who doesn't have much money, maybe doesn't have any asset. Say they're 30 years old. They have I don't know $100 disposable income and they're thinking about how to sort of secure their future. What is the advice for someone in that situation?
Your only asset is yourself and I guess what you're going to get from the government. How do you sell yourself at getting a better income or how much are you getting money from the government?
You selling yourself is the main thing. This is one of the big problems now with artificial intelligence and other machines replacing people and different types of jobs. It becomes more difficult. It produces that big wealth gap while you're having more productivity. Everybody wants more productivity because it means how do you produce things more efficiently but that contributes to the income gap because your productivity equals your income for a large extent and then you have the political dynamic. It's tough to get yourself out of this position that you mentioned. You know I'm imagining that person. Okay. It's not easy. There is this giant polarity. If you're in the top 10% of talent, let's say the world's your oyster. But nowadays, in order to be there, that's that's difficult. Find something that gives you the ability to sell your time for good money. Is that going to be that you're driving an Uber? Is that going to be that you have the talent and you're going to be able to understand AI and contribute that understanding to a company that values that or what is your skill? You found this. Okay. And you found the way. Okay. But you need money. And the thing that you want to do, what you're doing, and I'm lucky enough to do is to make your work and your passion the same thing. And don't forget about the money part.
Yeah. I am one of the things that I think I didn't realize earlier in my career is that whatever skills you have will be valued differently in different contexts or industries should I say. So for example say that my skill here and I'm not trying to flatter myself but say my skill here is working
having conversations right? Let's say that's what it is. There's lots of places I could have conversations and those places would value my ability to have conversations wildly differently per hour.
So I often think this and speak to my friends about this when they tell me their skills I say let's look at the different industries and how they would value the skills you currently have differently. A good example again you know you could be an Uber driver or you could chauffeur Ray Dalio. Now I imagine those two things pay wildly differently but the same skill of driving a car broadly speaking.
And so I think that's one way to just you know the other way is you go ask your current boss for a promotion but again they're going to value you in the context of their other employees the market in that industry etc. So you might get 10% but you're not going to see a step change necessarily. So that's something that I always say to people.
Absolutely right. And another law of something and I think it's almost a law of everything. It's a law if you buy almost anything is those at the top whatever the thing you're buying. If you're buying a painting, a piece of furniture, a piece of clothing, a person's time or whatever, command premiums that are many multiples of the average. It's almost like if you could invest 10% more of your time, your effort, your skill to go up.
Okay. You will get twice as much
for 10% better something like that. Okay.
So that's part of the formula of life and a formula of employment. And so if I think if you keep what you wrote up and what I'm bringing up in mine, that helps you position yourself and know what to do.
There should be a button just down below here. And if it says subscribed, you're already subscribed. If it says subscriber, that means you're not yet. And if you're not subscribed, please could you do us a favor and hit that button? It helps the show more than you know. And according to the algorithm, you're someone that watches our show, but you haven't yet hit that button. Thank you so much. We didn't mention this thing here actually, so I probably should talk about it because people are talking about it a lot right now, which is
Bitcoin
What's your perspective on Bitcoin? I know the market in Bitcoin is down at the moment.
I have about 1% of my portfolio in Bitcoin because there's different kinds of money and the money that you can't print, that's one kind. This is the other kind of money that you can't print.
Yeah. You cannot crack it with technology. You can hold it, you own it. There's a saying that it's the only financial asset that is not somebody else's liability. Somebody has to give you something for it. It has that. So, in my category of wanting, let's say, make sure that I have some hard money, which for most people should be between five and 15% of their portfolio. I prefer that. I'm pointing to the gold bars here rather than the Bitcoin.
Is it still in your view a gold light asset?
Yes, it's a type of money that can't be printed, but there are technologies that can hurt it. In other words, if there's quantum computing and it can be monitored by governments and so on, it could be taxed and digital currencies are somewhat similar.
But you don't like Bitcoin as much as gold because of privacy reasons as well.
And when the governments say I don't want it, they have the power therefore to do whatever they want with it. And central banks will not own any significant amount of that because of the reason I said they want their transactions to be private and in their control. Think about how different it would be for Russia. Okay? They confiscated these kind of other assets. They didn't get these
