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 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%.
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 an 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 the 1929 bubble, okay, or the 2000 bubble, okay, which was the dot-com 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 dot-com 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, it's like right now we're very excited about AI, and we should be very excited because it's going to be revolutionary changes. But then at the same time, 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 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 demand 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, 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 the 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. 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 owe 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, the price of assets drops. 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.
Okay. Good. All right. Fine. 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. Okay. 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.
Yeah. 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 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 can 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 throats. 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 who have money, they say I don't want to be in this tax zone, 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, I see, 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, 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'm 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 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 easy. 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. The 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, put a lot of money into it, particularly if that's in a leveraged way,
With debt, or they can buy a leveraged version, like there are ETFs now that are leveraged versions of the stock market, and so on. And so 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 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.
Right. 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 do they all prepare for an economic bubble that might burst?
He's such a good example, and what that does, and just following up through on what we were saying a minute ago, is that increases the supply of AI stock.
Okay. Yeah. Because he sold stock, more.
Yeah. Right. 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.
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 the important thing always is to diversify. Now we're going to go back to money, the basics of money management. And by the way, I personally have gone through the cycle because I didn't have any money and then I did, then I had 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. I have 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, it would be months and then years and so on to build that security because I take care of my family and so on. And 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? 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 leave it in the bank in whatever form, a money market fund, a whatever it is that is that short term, 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.
