Ray Dalio: The 5 Forces Shaping The Future Of The Global Economy

Good to see you.

Okay. Just so we put it in perspective, I'm a global macro investor, which has done that for about 60 years.

And I'm bringing a perspective of I need to have a game plan. All investors need to have a game plan. And I'm bringing a perspective, which is what is that game plan? How do you deal with that? Because over that period of time, we've seen a lot and then you study history, you see a lot. And so we're in a moment in time, but it's important to take that moment in time and put it in perspective to know how to have a strategy. That's the background. So, okay, five big forces. I studied history going back 500 years in order to help me understand the dollar and markets and so on. And what it told me and what my experience is is that there are these five big things that interact. Okay, there is an economy debt money dynamic that works and you know, we have money and we have credit. And when the money and credit grow, we buy assets, investment assets. They go up in value and you have a cycle. And when debt increases faster than income, and then there's debt service payments, then there are issues. And so, just very quickly on that, there is an issue that the federal government has, and that a lot of government has, which is about the amount of debt. And so, when we start off looking at markets, the first market we look at is the risk-free interest rate. Okay, that's the backbone of all markets and present value of cash flows, and there is an issue there. Bonds are not good. Interest rates are there, and then we have premiums of markets over that. So, that's number one. Okay, I'll be quick. Two is the internal left and right political cycle. Okay. What taxes it affects, shifts in wealth it affects, is very important. Number three...

Okay. Three is geopolitics.

And five is technology.

Acts of nature have killed more people and changed more world orders. And number five is technology. Okay, the invention of new things, and now the greatest of all time, perhaps, artificial intelligence. And if you understand those and the interactions of those, and that's important because the capital markets are tied to the political markets and so on. Those are the five.

Okay. I would say two big things in the world, very big, is the changing belief in the world now that the United States can and will fight a war in defense as a counter influence of China in that region and in other regions.

In other words, there's been a containment policy and then are we... been a belief of holding bases in countries because that'll be for defense as a countervailing force of China. Okay.

No, no, no, no, no. Well, the perception everywhere. That the United States politics, cost of living, don't want to lose any people in the war and so on means that it won't fight a war. Okay. And the bases that existed all around the world. So, for a lot of people they're comparing it around the world to when the British Empire had the Suez Canal taken away.

And that changed the perception of everything. So, anyway, there is in that world the sense that it will not be the counter balancing influence. Okay. So, that's number one and I think that's well viewed around the world. The second is China is making a ton of money. In other words, the exports, if you look at the amount of money that they've earning from exports...

You weren't earning money from exports. That's like us earning income or any company earning income. And those numbers are, you know, like that was a trillion two last year or something. This is building up to huge amounts of money and what they do with that money is what their businesses do, what everything, what they do with that money is a big influence on capital markets, right? Like...

Everywhere. Where they put that money is going to matter a lot to the capital markets. So, those are the two big things in terms of this shift in power. And then we have, of course, the competitions, right? And the competitions in AI are believed to be quite like the competitions that might be in electric vehicles, batteries, solar panels, all of that. And the question is, does the barrier stand? Like when we look at capital formation right now and how much money is going in in the IPOs and so on. Well, how does that work in a competitive environment? Because it's very interesting. Their view of AI is very different from the American view in that what their view is it's like electricity or running water and that everybody should have it and that the overall product activity of China will rise if everybody has it. And that it therefore doesn't have to be expensive or even profitable, but anyway, that's pervasive use of it. So, their advances in that are significant and then their advances in some other areas like robotics and other things are. So, these are the only two competitive and then there's a barrier and the question is does the barrier hold? And so that's a picture.

No.

I have, yes.

I think President Xi views himself and China in the context of the story which would be the long arc, you know, and then where you are. Okay. So, just to give a very quick sense of that. Their story may be like our American 250th, last 2,500 years, not 250 years, right? And so, when they see the story...

So what they see is that China was the leading empire in the world and self-sufficient, and that the British come, and they say we want to trade with you, and they were weak, and then they had 100 years of humiliation, what they call the 100 years of humiliation. 100 years of humiliation was that the foreign powers came in, they were weak, and for 100 years they deteriorated, and they became independent in 1945. In 1945, the end of the world war, while Japan had opened uncontrolled Taiwan, they threw the Japanese out, and they gave Taiwan back to China, and then they had the communist very isolated regime that comes up to where they are and the rising of power. When I started going there in 1984, since then, per capita income has increased by 29 times, life expectancy is in the...

And so on. And so now they've become a great power with a different culture. Okay, so the way he sees it is that there's been a containment policy and Taiwan is part of China. Okay, that's how he sees it. That's what he's living out. So the message that was given to President Trump at the time was largely about Taiwan, the importance of Taiwan. So we're now in a different spot. That's how they see it. He'll have one more day...

You are going to see them play the art of war. If you understand what the Chinese mean about the art of war. You don't fight militarily, you operate with pressure and deceptions and so on. And so right now because there's a belief that the United States cannot fight a war on two fronts.

And we will probably see greater and greater pressure. And so what does the United States or Donald Trump do in reaction to that? And so you'll start to see changes in China, but not just related to Taiwan. You'll also see that the containment policies that affected the Philippines, that affected Vietnam, affected other countries in the region, affected Singapore. Those things are all changing.

And money is a big part of that.

Well, let's be clear what it's like. And how does the system work? The credit market system is like the circulatory system.

Well, it's something like a heart attack. Okay? I can't tell you the day, but I can watch it. I could take the MRIs. And the way it works, because it's shown in the charts and the numbers, and it's true of everybody. When the debt and debt service payments accumulate and start to squeeze out other spending. So, we can see that those debt service... let me get it out, okay? And it squeezes out other spending. Right? And so, you could see that happening. And then there's a supply and a demand, meaning you produce a certain amount. One man's debts are another man's assets. And so, to hold debt assets you have to have an adequate real return. And so, when you have a large supply that has to be sold and at the same time there's not the same demand for it for various reasons, you see the pressures in rates rising. And we're seeing that dynamic exist throughout the world. And so, it's like you could look at it. You could look at the numbers. You're either going to deny reality or you can see reality that there is going to be this problem. So, it's like telling somebody who is eating a lot of fat, not exercising, and built a lot of plaque in their thing. I haven't had a heart attack yet. And you're telling me, I'm telling you that this is a reality.

I think that the only thing that wakes people up to it is the heart attack. Okay, so look at the bond market. The bond market, is it attractive? Has it been a good attractive market? Okay, it's been a poor market, right? You're losing money in the bond market. And then credit. We're even dealing with the issue of private credit and credit spreads and so on. So how's that market been? Okay, despite a very easy Fed policy. So I would say that's not healthy. That doesn't look healthy to me and when you're looking at it and seeing it rising by the long end of the yield curve, right? They're trying to hold rates down and you're seeing the long end rate of the yield curve or if you look at who's doing the buying and the selling, okay? The demand for debt. Central banks are selling US dollar denominated debt and buying gold and there's a reluctance to accumulate that dollar denominated debt.

That's a reality.

I think everybody has to have their investment principles and the game plan. And the key of everything is really to know how to diversify well. Okay, so here we are in a moment and this is, I've got 16 seconds and I can't give the whole story, but what happens is right now you are in a moment that only one thing matters in the markets, right? The concentration risk in terms of IPOs and market capitalization and so on. And AI, are you in on a market capitalization basis, or even more, are you concentrated in that? The answer to that question will be either a yes or a no. Okay? And if we study history and we look at that, you better have a game plan. And what is that game plan? And to know how to really diversify well in terms of being able to do that without reducing returns. Because the thing about it is, if you can have good uncorrelated bets, like my mantra is 15 good uncorrelated bets. If I can have 15 good uncorrelated bets, what happens just the math of it, it means that you can eliminate your risk by 80% up to 80% without reducing your return by knowing how to create balance. So, there are things out there, okay? For example, there are some of the minerals out there, okay? Copper and so on in minerals, or if you look globally, who is making money and how things are changing. And you can create that kind of a diversified portfolio of good things that provide a way of operating. Because your choice, yes or no, is going to be do you then get concentrated because of a FOMO and you're going to be in that one thing, or are you going to diversify? And having played the game for 60 years and studied history and engineered a game plan, that's not my game plan to do.

One can learn from history.