Hey everyone, welcome to a very special episode of the Julia LaRosa Show, where I have the distinct honor and privilege of sitting down with legendary investor Ray Dalio, founder of Bridgewater Associates, the world's largest hedge fund firm, in a special conversation for the Greenwich Economic Forum. In this episode, we explore where we are in the changing world order. We also talk about the five forces that are driving the changes that we're all experiencing right now, and how investors can navigate this risky period. I really enjoyed this wide-ranging conversation with Ray. I learned a lot. I think you will too. So, I hope you all enjoy this one as much as I did.
Hello everyone at the 9th annual Greenwich Economic Forum. We wish we could be there in person.
Yes, we do. But I have the distinct honor and privilege of interviewing Ray Dalio, founder of Bridgewater Associates, head of the Dalio Family Office, best-selling author, legendary investor. What a treat it is to be with you today.
What a treat it is to be with you. And again, we wish we were there, but we're there in spirit with those at the Greenwich Economic Forum.
Absolutely. Well, Ray, let's start things off with the big picture, more of that macro view where we are today. I know you look at the world through this framework of five forces that are shaping all of the changes that we're going through. So perhaps let's start there. What are those five forces? Where are we today and where do you see things headed?
Thank you for your question. Just to put it in perspective, I'm a global macro investor. And then what happened when I was young, graduated college, I was clerking on the floor of the New York Stock Exchange, and that was August 15th, 1971. And Richard Nixon gets on the television on Sunday night and says, 'I'm not going to let you get your gold.' So money was pulled, and there was a devaluation. And I went on the floor of the stock exchange, and I thought that it was going to be a big crisis, and stocks went up a lot. And that was the first time I was through a devaluation. And so I studied history, and I found out that Roosevelt did the exact same thing on the radio in March of 1933, and it had the exact same effect when you lower the value of money and all that. And that taught me that I needed to understand what was going on in periods before my lifetime. And because of studying the '30s, I understood what would happen when you had a debt crisis and interest rates hit zero, which is what happened in late 2007. And we ended up making a lot of money, and it was good. My main point is that I started thinking, what is going on before my lifetime that there are lessons? And so I studied the last 500 years. You have a book here. That's my study, which I made into that book. And I see this big cycle, and that's the five main forces. So to answer your question quickly, that was maybe too much of an intro, but what I see is that there is such a thing as a long-term debt cycle. And the way it works is that when you start with a low amount of debt, you can acquire that debt. But what happens is as debt service payments start, in other words, interest and your spending on paying back your debt, as that grows relative to incomes, it creates a squeeze that's like almost plaque building up in your system, and that's part of that cycle. So we have a capital cycle, and we have that kind of cycle.
The second force is the political and social force. When there are large wealth gaps, which are related to the cycles, when there are large wealth and values gaps, and they reach the point that there's populism, which means there's irreconcilable differences that become conflicts between the left and the right, those who want to redistribute it, those who don't, and so on, and they become irreconcilable. And that produces great conflicts such as the conflicts that we're seeing now with those irreconcilable differences, and that's connected to the economic cycle, and they evolve.
And the third is there's a geopolitical, in other words, the political is within the country, geopolitical is between countries, and there's an order there too. There's a monetary order is the first cycle. Second cycle is political cycle. So it has a political order system, and then there's a geopolitical system or order, and it goes through a cycle too. When there's a war, basically in most of these cases, there's a big conflict, there's a winner, the winner sets the rules, you start from a new beginning, then these build up, and then you have a conflict. So geopolitically, and at the end, 1945, we had the end of World War II, the United States won, and basically got to set the rules. So that there was the creation of a system that's somewhat similar to the American representative democracy system. We call it a multilateral system in which there's an idea that there's going to be a United Nations, and there's going to be a world court, and there's going to be a world trade organization and a world health organization, and they together are going to work things out because they're going to take votes and so on. That's over. Okay. So now what we have is no longer that type of order, multilateral. You have a power base. In other words, who has what amount of power and what you want, and you enforce the power, and as a result, there's greater conflict.
The fourth force through time has been acts of nature. Interestingly, droughts, floods, and pandemics have killed more people than wars. It's always a big thing. It's certainly a thing now, and particularly in the next year, we're going to go into a period where we're going to have a super El Niño. So it's worth considering. Each one of these is worth causing more stress. And the fifth force always through time is man's learning, most importantly of new technologies, the inventions of new technologies that change the world and evolve. And so if you look at any measures of well-being like life expectancy, per capita GDP, you see it rises, and then these other cycles happen around it. And so technology right now, and most importantly AI, is certainly going to change the world. They're interrelated. All these five are interrelated. And so you can take measures and you see how they're doing. The debt money thing is an issue. The internal order is an issue. The geopolitical order, you're seeing more problems, more conflicts. Acts of nature is an issue. It's moving in a not advantageous but a disadvantageous way. And then there's the interesting AI. So those are the five forces. They have tended to operate in these cycles because if there's a breakdown in one, it affects the other. If there's a breakdown in the economy, it'll affect the political. It'll affect the geopolitical.
So anything that everybody's talking about will pretty much fall into any of those categories.
Yeah. One of those five categories.
You wrote a piece at the beginning of the year where you were talking about the stages, the different stages. And you made a point that here in the US that we were on the brink of moving from stage five, which is characterized by bad finances and intense conflict, to stage six. And this is for, I guess, the internal cycle here. Where are we today, nine months later since you've written that piece?
I think we are in most of these things on the brink, meaning we haven't yet crossed over the brink, but you're seeing it if you're looking at the dynamic of the measurements that I gave in that book. I wrote a book, 'How Countries Go Broke.' You can see what's happening now with, particularly, the debt cycle has to do with the bond market and interest rates going up. And the basic element of that is the debt issue, particularly that debt issue. And those same measures, you can see it, the debt service payments squeezing out spending, and you see a supply-demand, and that's really what's driving bonds for the most part.
Let's double-click on what's going on when you look at yields, rising yields. What do you make of it? And what does that tell us about how the machine is working?
The supply is large in relationship to the demand. That has to do with the supply of debt, which is an asset that people have to buy or somebody's got to buy. And that is large both because of the government debt. I'll give you some numbers to give you a sense of that. And it's also large because it has to finance a lot of the AI and capital expenditures and so on. So those companies require a lot of raising of capital. So there's a lot of that selling of capital and a lot of that debt. So in the United States, for the government, the central government, just to put that in perspective, there's seven trillion dollars a year that they sell. They spend seven trillion and they take in five trillion, and so they have two trillion, and so they have to sell that amount, and then the half of which is now interest because the interest bill is built up, and then they have to roll over the debt. So that's what you're seeing reflected in the markets.
And there's a pulling back of demand. International investors are pulling back in demand. The Chinese and the Japanese are the two largest holders, and for various reasons, that's been pulling back. Foreigners own about a third of the debt, and that's pulling back, and so we have that supply-demand imbalance.
We have had a lot of conversations on this show about gold, and after the move we've seen lately, there's a natural question: Is it too late? It's understandable because when an asset moves this significantly already, price tends to become the focus. But one of the things that I've learned from the many investor conversations I've had is that price isn't the first question they ask. They want to know why they should own something, the role it should play in their portfolio, and what they are trying to accomplish by owning it. And if you're exploring these questions yourself, Augusta Precious Metals is an educational resource for exactly that. Their experienced education team offers personalized one-on-one web conferences where you can ask questions, learn how owning physical gold and silver works, and understand how a gold IRA differs from purchasing precious metals directly. It's really about getting educated before deciding whether any of it makes sense for you. To learn more, visit juliabysgold.com or text Julia to 35052 for Augusta's free guide. Because ultimately, the question isn't whether or not the price of gold has changed. It has. The question is whether or not the reasons for owning gold have changed. And based on everything I've learned through these conversations, I don't think they have.
I like what you said earlier around this idea of looking at it as like a circulatory system and plaque builds up in the system. Do you think we are headed on the path that we're on right now toward a debt-induced heart attack? In other words, a debt crisis, and if so, what's your prognosis or the timeline there?
Yes, I do. It's like somebody who is, you could see it in the numbers. You can see the plaque building up, and you could see this squeeze taking place. And I think that what it looks like is that there will be a tightness of credit, and as a result, interest rates rise, and that continues until there's a rationing of demand. In other words, the cost of funds goes up, and then as that happens, some are squeezed out of the credit markets because that has to have that rationing. And so you can almost say who will be squeezed out, particularly homeowners, mortgages, those kinds of borrowers are most likely to be squeezed out. And there may be, when you start to see it have a negative effect first on markets and then on the economy, that's the normal cycle. And so in markets now, what's happened is that when bonds have gone down, that means interest rates have gone up, and when stocks have gone up, that means future expected returns have gone down. And if one does calculations of what is the expected return of equities and the expected return of bonds, you have a situation where the equity excess returns are very low. In other words, one would say that the prospective cash flow is not going to be as attractive relative to bonds as it was with this upward pressure on the bond yields. And as a result, we're getting to that spot in the cycle where that cushion is gone, and the upward pressure would likely have an adverse effect on the markets, where until we see that, we don't really know exactly when that'll occur. But if I'm taking the time frame, I think it's going to occur somewhere in the next two years. So what's interesting to me is that all these factors are changing in a way where you're going to see the midterm elections. And in those elections, it's likely that the Democrats will take the House and possibly the Senate. And then that's going to create an increased internal conflict that has an effect on everything. And then we'll also, so I'm worried in that period that I might say would be after the elections, perhaps through the '28 period, will be a period of greater vulnerability.
So I take it the next two years post-midterms, especially risky period ahead. You're referencing just markets, gosh, that the prospective returns for the stock market in particular don't look so great from your outlook. Is that what I'm hearing right?
It is that this has to be turned into free cash flow.
Okay, so where does the cash come from in order to alleviate this squeeze?
So what I'm saying is, if you keep following that cycle, and stocks are now expensive in relationship to bonds, and the supply-demand for bonds is not very good. So, and of course, we must recognize that we are in a risky period. Risky means uncertain and volatile, too. And so there's also one thing going on in the economy, and that really is very much AI and AI-related activities. So how that goes, the fact that it's one thing, the fact that it's uncertain, the fact that it's volatile at the same time as we have this confluence that I'm talking about means that we are certainly in a risky period.
