AI Bubble Will Burst Eventually Says Bridgewater's Ray Dalio

Yes. We're past the point of no return, meaning when debt service payments squeeze out spending, like plaque in the circulatory system squeezes out the flow of blood. It's the same kind of thing. It could be measured. So we're seeing that happen. And then there's a supply and a demand issue. The supply of one budget deficit means that debt has to be sold, and you have a supply-demand issue. And we could see it happening in the bond market, and we could see that bonds have been a bad investment and that there's pressure in interest rates and there's borrowing. And that's one of the five factors as you're saying. But that dynamic is happening. People are treating it like it hasn't happened before. They don't understand that, like plaque in the arteries, that it builds up and they have that exposure. So I think when you're looking, I think of a particularly vulnerable period is after the midterm elections and before the presidential election, because as we connect these forces, we have that issue, right, the debt issue. And we also are going to have a great deal of political conflict that has implications for taxes. It has implications for all sorts of things.

Well, it could be seen, excuse me, in either the bond market, the market action. It's by long rates rising relative to short rates. In other words, they're trying to hold the short rates down, and the long rates are rising. And we are seeing some of that. And then you're seeing the weakening of the dollar, and then you're seeing movements such as in gold and other assets. And when you see that rise in rates, then that starts to affect the stock market. Because what's happened now is that with bonds going down and stocks going up, the perspective returns now of stocks are now down low relative to the perspective returns of bonds. And so that upward pressure then starts to translate into a stock market pressure. That is the classic dynamic and something that the Federal Reserve then or any central bank is in a position of not easily being able to manage because it becomes more of a stagflationary environment. So the stagflation that we're seeing right now, the Fed wrestles with the question if it's tightening or if it's easing. That also has, in an economy where there is such a wealth disparity, but also think about the implications of whether you own stocks or whether you don't own stocks and that difference. That impact is very different. That has huge political implications.

Of course. One man's debts are another man's assets, okay? And if there's not a high enough real return, then those bonds are not appreciated, okay? So what are you holding the bond for? You're holding it for a real return. So the markets ultimately, the marketplace can ultimately decide whether it owns it or not, right?

That's, I think it's exactly headed to that kind of thing, which we also saw a number of times through quantitative easing. It's called financial repression, and the idea is that you drive the bond yields down with buying of assets and so on. Sometimes it includes even foreign exchange controls to try to prevent money from going outside the country and so on, but to have that forced low real rates. And then that's usually accompanied by high taxation and a higher level of inflation to bring in revenue. And because money wants to go to other things, that's when gold has been illegalized. That's when foreign exchange controls come in and so on and so forth. I'm not saying we're going that far, but I do think the reality is, yes, that the bond market either is fundamentally good by providing a high enough real return to compensate people, or it's going to be manipulated in a sense this way that will make it unattractive. In either case, it's relatively unattractive. And so money goes elsewhere, and, you know, that's just the way it works.

What we're seeing now, indisputably, and I travel around the world, and I speak with world leaders. I was just a month in Asia and ten days in China and so on. And what we're seeing around the world is the question of will the United States, can the United States fight a war in defense or an offsetting set of pressures of other powers, particularly China. Right. And in Asia, right now, all the leaders I spoke with would say, it's clear that the United States cannot fight a war because the population doesn't want the cost of living impact, that they don't want people to die. They want it to be over fast, okay? And also, the country can't be overextended. How can it fight a war in the Middle East and fight a war there? It's getting overextended. Well, that fact, that realization is having very big geopolitical implications for those who expect because it was a policy of containment for China, okay? There's the Taiwan issue. And then around the Taiwan issue are questions of borders and so on. There was a process of containment, right? That's over pretty much. And so, as a result of that, there's a dynamic. Taiwan and Taiwan's a very serious case because it's not just political. It's chips. That's right. And for example, it's entirely within the power of the Chinese government to basically say, let's take, let's put a blockade or let's have a week of no chips coming out. Let's just imagine that that signal was given to the market that all the tech stocks, AI stocks, and everything would crash. The stock market would crash.

All great technology changes produce bubbles. And the reason they produce bubbles is because nobody can get it exactly right, okay? There, you have to either spend a ton of money to capture your market share and so on, and don't worry about whether it's too much or not. Or you don't spend enough money and you lose your market share. And it's very imprecise with a lot of competition, okay? And then when people bet on the technology, which I'll bet on the technology, but they think that buying the stocks is betting on the technologies, which is a different thing because the stocks can be expensive and so on. That's a problem. And what happens is when wealth grows a lot relative to incomes, I want to distinguish wealth from incomes, okay? Wealth is, you can create wealth very easily in the following way. You say I'm going to raise $50 million on a billion-dollar valuation, okay? That's counted as a billion dollars of money, and now you're a billionaire, but you only put up 50 million, okay? And so wealth, you cannot spend wealth. Wealth is, you have to sell wealth to get money because you can only spend money. So when there's a lot of wealth relative to the amount of money there is, there is a vulnerability and bubbles burst when wealth needs to be converted into money. Well, what is the trend for that? Well, often that's because of debt, but it could be for anything. It could be for wealth taxes, for example. Supposing you put in wealth taxes, then those people who have wealth are going to have to sell some of that wealth to pay taxes. That dynamic that I'm talking about accompanies the miracle technologies that over a period of time have wonderful implications for productivity. So I don't think it has a problem with productivity. I do think that, but productivity, it has a big wealth gap implication. A very small percentage of the population is going to do unbelievably, and a lot of people won't. So what do we do? Can we work together politically to deal with those issues, and how do you... Are you optimistic? I'm not optimistic on us working together to solve some... So what's the end? Is it a bubble that bursts eventually? So I think it is, yes. And then that moment, there's always the issue of a bubble, and we can measure a bubble. I have indicators, and that there's how many people are over-owned, what's the sentiment, a lot of indicators for bubble. And we are right now rising closer to, not at, the same level in 2000 and same level in 1929.

The thing about it is there's two parts to it. There is, quote, a bubble, and then there's the pricking of the bubble. And the pricking of the bubble happens when there's a need for wealth to be sold to get the money, like, normally in a dynamic of a debt problem, okay? If you take the Japanese bubble, take the '29 bubble, take the 2000 bubble. All of them have an element of, you know, tightening money because it can't go on forever. It'll find its bubble. The question is how long you let the bubble go before there's the pricking. So in order to do the market timing, to know how to market time, it requires both the understanding of the bubble and the looking for the pricking, and the pricking is the converting of wealth into money because I need money in order, but I have wealth, but so I have to sell some of the wealth in order to get the money. That's how it works. That dynamic is following that kind of path even though it's a wonderful technology that'll have great...