Ray Dalio: The Collapse That Will Change A Generation...

over the years there are always Paradigm shifts you know one gets used to a certain type of environment and then there are periods of time where they shift to a very different kind of environment for example the 1920s were the exact opposite of the 1930s so the transition from the 20s to the 30s shock people and so you come to periods of time where something has gone on for a long time such as the easing of monetary policy but also the quantitative easing that Paradigm that Leverage in up for example can't continue but yet late

in Cycles people extrapolate that which happened in the past and so there are these surprises I think there are always these Paradigm shifts and I think by stepping back and seeing history from a longer term perspective is very helpful I think the FED made a mistake and I think the FED understands that it made a mistake in assuming that this is a normal cycle and what they thought was if you pick up growth and lower unemployment you're going to produce inflation we're living in a different world now for various reasons a world of a lot

of excess capacity a world of digitalization and so on in which that's not the big thing the big thing is the fact that we're approaching an end of the power of central banks to stimulate so the big thing is that we have a very big asymmetric risk if the economy turns down and we are late in the cycle so a downturn will come there is a lack of ability by central banks to be able to be stimulative and to reverse that and that's happening at a time where there's great wealth polarity so if the left

and the right or the rich and the poor are at each other's throats at this time and this is when times are good imagine what it's going to be like when we have a downturn and there's an inability of central banks to respond to that so that shift in fed policy which came at the end of the year was uh necessitated by these uh weakening conditions around the world I think the key is us staying on top of these changes that we're talking about and responding to them first of all I think every portfolio should

have the right amount of diversification in it gold is an important portfolio diversifier however let me be clear I don't think anyone should have a concentrated portfolio now okay so people can hone in on one comment I'm making I think that the notion of creating a balanced portfolio is the most important thing that they can do right now because wealth can't so much be destroyed as it can be shifted and so the world right now largely looks to me leverage long in other words there's been a lot of borrowing to buy assets to buy companies

companies have borrowed money to buy their equities back and so on that whole move of Leverage long is where the markets is I think there's a vulnerability what I'm saying is to that kind of a portfolio and that gold is one of the items that can diversify that I believe it always should be a certain part of a portfolio because there's a certain environment that it diversifies the portfolio well and a certain environment to worry about I also think that that environment is riskier more likely recently now and that environment is one in which it

becomes very difficult to stimulate the economy and there's a desire to depreciate the value of currencies now think about a bond is really the currency so when one owns a bond or one owns a debt instrument One is paid a pile of currency over a period of time when there are a lot of obligations like that a lot of debt or even unfunded obligations like pension obligations or Health Care obligations that the world has a lot of obligations and there's not an effective monetary policy to lower interest rates and stimulate as we're talking about there

needs to be a printing of money the running larger deficits we're going to come into an environment I think in which there are going to be larger deficits that are increasingly monetized and in that kind of an environment the currencies are depreciated I think that in an evolutionary way over the next uh 1 2 and 3 years that there will be a turn for the worse yes I think that there'll be an environment in which you're going to have excess capacity and debt restructurings and political issues entering into it I think there's going to be

an effect a risk well of course recessions are always inevitable the only question is when and I think that you're seeing this around around the world you could see it through Asia you could see it in Europe and you could see it in the United States let's step back maybe and put the big factors in perspective I think and then put a Time Horizon to that I think the big factors are we are rather late in both the shortterm debt cycles and the long-term debt Cycles meaning the capacity of central banks to produce stimulation it

can be measured by their ability to lower interest rates significantly and do quantitative easing and have that purchased we have a problem there okay that's a big thing but it's not an immediate problem it's a problem that is going to come in the next one or two years you're seeing it in Europe you see it in Japan and to some exent you're seeing it in the United States in addition we have the wealth Gap and with that wealth Gap we have the classic political conflict very much like the 1930s in which that means that there's

greater polarity greater Extremes in both of those and that will be play a role because if you change policies you will have a big effect for example when we cut the corporate taxes that puts stocks up because after taxes You' get more so you'd pay more for your stocks that'll change so we have this polarity very much like the 1930s an inability to stimulate in the same way and a polarity in addition we have China as an emerging country challenging the United States as an established country and that creates a theme that creates a protection

type of environment very much like the 1930s and it also has implications in terms of all sorts of conflict and frankly uh sand in the gears of the efficiency of the economy for example the supply lines in other words we built an economy in which there was interdependency and efficiency coming from supply lines working in a certain way now as we enter this environment of conflict there needs to be for personal security for the security of the countries there is a move toward Independence the United States says I don't want your Technologies and China says

I can't depend on you giving me your Technologies and that changes that separation changes the nature of the dynamic which is also an economic influence those influences are very similar as I said to the late 1930s they will be dominant they are evolutionary influences but they'll play out over the next one 2 3 years I think in creating a paradigm shift the world we're going to be in is a very different world than the world we were in the world we were in started in 2008 and had to do with central banks printing money and

stimulating and that is reaching its limit and that's why I think we're going to see a paradigm shift so what do you mean by a depression okay something like happened in the 1930s so just to repeat 1929 to 1932 there was a fall in the economy and a very double digit unemployment rates and a magnitude of fall in the economy like about 10% how was that dealt with 1933 what they did is they printed a lot of money and then that money causes an expansion from that point how long does it take for the stock

market to exceed its highs or how long does it take for the economy to exceed its former highs a long time we've seen that happen repeatedly in history many many times it's just the most recent one and there's a structure to that so yes this is not a recession this is a breakdown an operation that I'm just describing in terms of How It's dealt with the production of money and credit and all of that that's what we're in I think what you're going to see is um a combination you're seeing of printing money and redistribution

and I think it'll last these things happen pretty quickly they last maybe a couple or three years in terms of that process and then you have rebuilding and they're dealt with with creativity the greatest Force Through Time is inventiveness human inventiveness adaptability so you're going to see these restructurings happen and it's the power of that adaptation that is the greatest power I did a a study it goes back 500 years and it shows real GDP in other words economic activity going back there and there's a line and you don't see these depressions as we're calling

them even on that line they barely a Wiggles when you go into it and you look at that piece that's what it looks like GDP Falls 10% unemployment goes up and it passes because the greatest force is the force of adaptation and inventiveness if we can operate well together the world will be very different there'll be a new world order but it will pass and will be inventive because what we're dealing with now is just money and credit how do you value this market today I think that just the way you said it is going

to be a Fool's journey to say here's the stock market and I'm going to time the movement into the market I'm going to time the movement out of the market okay you know what that means you're going to out guess what the next variant move is and what the next other thing is a lot of things depend on a lot of other things and everything readjusts what has to happen I think is investors most importantly have to realize two things first that uh cash is not a safe investment it's not a safe place because it

will be taxed by inflation there will not be an interest rate that will anywhere near compensate and it seems good because it's not volatile but you're paying a tax of a few perent a year on that so A stay out of that and then B know how to balance a portfolio because the way portfolios work it's almost like for some part something happen happens um another thing happens in other words what you can see in the markets today is that um let's say when equities go down because growth expectations falter and there's a greater likelihood

of easing then you see the bond market go up or you see other Market's gold you're seeing watch the market action on every day and you could see those relationships by be wealth is not destroyed as much as it is transferred and if you know how to balance those Investments we do it in a what we call an all weather portfol folio but if you know how to balance those Investments that's the most important thing be in a safe well balanced portfolio you can reduce your risk without reducing your return and you can you will

not Market time this because even if you were a great Market timer you're the things that are happening can change the world so it changes what should be priced into the markets let's go back to sort of basics for every individual for every company for every government over a period of time you have to earn more than you spend and you have a balance sheet there's an income statement and a balance sheet when one becomes a reserve currency others want to save in that and that gives one the exorbitant privilege of being able to borrow

in that and to create debt and money because that's the thing and it also gives us powers like a lot of our sanctions come from the dollars being a reserve currency and so on however through history it has always happened that currencies are devalued or destroyed and in that cycle when it becomes unattractive to own bonds or debt instruments in that currency there's a supply demand problem because a bond is a promise to receive currency so what you are is when you own a bond you're long a lot of currency because that's what they promis

to give you and they have the printing press and then there are shifts that happen who is accounting for World Trade right now China counts a larger share of World Trade than the United States for example so what we are doing is we are in a Fiat monetary system in which we are running very large deficits that we are monetizing and that those deficits produce bonds that have to be sold when when I look at the supply and demand for those bonds I know who the buyers are you know they're a limited number of really

big buyers and so on look at their portfolios and so on calculate what that is there not going to be enough demand for those bonds and there's going to be a need for more monetization of that debt and so the answer is yes we're producing a change in the stor hold of wealth and you've seen it in the markets because just think of it in a mechanistic sense when there was that stimulation and the buying what the Federal Reserve did in terms of buying that assets there was not only the decline in real interest rates

we had you know about 150 base points decline in real rates and nominal rates down there so the discount rate was lower you also had a lot of liquidity which came in and the world now has an enormous amount of liquidity bidding for financial assets and so if you increase the supply bonds and you increase the amount of money bonds are going to be worth less relative to other things and you're seeing a shift in the storeold wealth and like the 1933 period when Roosevelt did the same moves in 19 33 you then saw assets

rise because they're alternative stor holds of the wealth that's what we saw in terms of the liquidity move that we've happened in Market also included in gold and so on and so that's how it looks to me in terms of the comparison uh we're now in a new era we're in a new era we are pressing the limits of that that money at the end of the day whoever is accepting that Reserve currency's got to believe it hey Ray one of the things you do right about is China somewhat AR that you have a generous

or more sympathetic view to China than perhaps uh some of the most Hawks uh if you will about China uh but you think that there's sort of an inevitability to the transfer of wealth of sorts well okay two things China transfer of wealth I just know China very well and I come as a perspective uh with a perspective as an investor I've been going there since 1984 I have I know leaders and I know how they're thinking and I know the moves that they're making in a detail way and I'm just trying to share what

that perspective is because I think a lot of people make stereotyp typical uh moves and I think you have to really understand first thing you have to understand because it has been a remarkably successful place since I started going there in 1984 per capita's increased by 26 times and so on so to not understand it or to approach it with a great bias is a great disservice okay in terms of the ele of let's say um a transfer of wealth or let's call it common Prosperity yes there's a world in this world right now there

is a much more there's a move to Common Prosperity I think that um that that move what does it mean at a technical level that's not take your money away but here I I would say what are called progressives here are much more left than what we would call progressives or or whatever the Chinese policies are doing um but yes worldwide there has to be common Prosperity or let's call it broad prosperity and the question is whether there that's going to come back by productivity or not it doesn't mean that you're going to have like

a communism that's going to take all of that there's going to be a lot of productivity in China and so again diversifying the portfolio um you know you look at the United States elsewhere you have to diversify and there are things that are going on and also uh let's just think about Capital flows China is becoming an effective place to invest money uh something like 40% over 40% of the IPOs are going to be Chinese stocks on Chinese markets and so on and capital flows work that way and history has shown us that when there's

an Empire an emerging Empire they build the financial markets they build the financial system so Amsterdam was the world's Financial Center during the Empire when there was the um Dutch Gilder London was the financial center in the British Empire us uh we had New York and so we're seeing that merge all of that changes the supply and the demand that is threatening to the reserve currency status just imagine it's a state okay the state of Connecticut the state of Illinois and so on and you can't print the money that means you either have to raise

taxes or cut spending and history is shown in these Empires that that causes great conflicts because taxes raising taxes and or cutting spending has been all through these Empires and I've studied I don't know how many over a long period of time the number one reason that you have Civil Wars so yes it's easy to say we have to earn more than we spend and so on but in this environment in this highly fragmented environment how are we going to get there what I decided uh to do I was doing the research for myself in

Bridgewater because I what I learned through my life is that all the surprises the big surprises and mistakes I made uh whenever they occurred were things that didn't happen in my lifetime before but happened before my lifetime like in 1971 I was clerking on the floor of the New York Stock Exchange August 15th I remember it very well um Nixon announces that money as we know it is not any longer going to exist and people wouldn't accept money dollars in Europe and I went on the floor of the New York Stock Exchange where I'm clerking

the next day and I thought them it was a crisis and I thought the stock market was going to go down a lot and the stock market went up a lot and then I said okay well why and I studied history and I studied evaluations and I studied that the exact same thing happened on March 5th 1933 with Roosevelt's move and I understood when you de value you reflate and it has this positive effect on that so what's happened recently is that I've observed three big things that are going on that haven't happened in our

lifetimes and that they're big big big things and so those three big things led me to want to study them in history and they are what's going on with money and credit as you get the zero interest rate and everybody needs a lot more spending power the production of a lot of debt that is Monet ized and directed by the central government to the places they wanted to go because the capital markets won't get them there in that way that phenomenon came loud and clear through covid but it existed before and so that leads me

to the supply and demand of money and credit and I realize who gets it and who doesn't get it drives not only the markets it drives our lives so that's one the second factor is the emergence of populism and the wealth Gap so when Donald Trump got elected and there's a lot of populism around the world that didn't used to happen in developed countries in the same way and I decided to study the distribution the desiles so I took the bottom 60% of the population and I looked at those conditions and so on and I

realized that the wealth Gap today is the largest since it was in the 30s the monetary policy I'm talking about last time that happened zero interest rates lot of monetization 1930 to 45 period the wealth Gap and the conflicts that we're dealing last time that happened 1930 to 45 period so that factor we're at each other's throats we have conflicts primarily over money and wealth and that defines tax policy so when we look into the new Administration whatever that may be uh we're going to think about those policies I needed to put that in perspective

and then the third is is the rise of a great power to challenging and existing great power the world order that we're in began in 1945 the United States won the war basically it accounted for 50% of the world's economy had 80% of the gold gold was money and so we built a dollar-based and us-based Order and now we're in a position where the Soviet Union was never economically comparable rival they had nuclear power but not the same and so we're now seeing every day that rivalry and as you know like me me like you

go there and we know the people makes decisions and so on and so forth and so by being able to see that we perceive changes pertaining to that so those are the three factors of our lifetime which then said I need to go back and find out what determines a reserved currency and not so I went back 500 years because I needed the Cycles it used to be the Dutch Empire the British Empire and the American Empire and that's what I did