cash is a risky asset I think so many people think if I go to cash I'm going to be safe because it's much less volatile but please realize in this environment of producing a lot more cash the real returns go down it's a seductive asset because let's say relative to inflation you might get taxed 7% a year that's a huge amount of money over time but it's a subtle tax so first watch that then this is a study that I've been doing and then I decided to share it with people because I think it's so
important a number of years ago first with 2008 we got into a monetary situation of course where we're printing money creating a lot of debt and monetizing it and that led me to realize that there are three big things that are going on in the world that are dominant and then Co came along those three voces are first the long-term debt and monetary cycle which I mean creating a lot of debt monetizing it and the implications of that which reverberate through the system in terms of all the markets and everything the second is this conflict
this polarization this wealth Gap and how we're at each other's throats and I looked at the wealth Gap and I looked at a lot of measures of conflict going back in time and I found that they were in the 1930 to 45 period the printing of money as I described the debt monetization was also in the 1930 to 45 period and the third big influence is the rise of China so the rise of a great power challenging an existing great power the United States and that has enormous implications as an investor I think what are
the relative appeals of the markets it has a lot of implications it's not just a trade War so the markets and everything we reverberating the trade War the technology War the geopolitical war in Taiwan and the South China seas and then also the capital War we're seeing that emerge so those three factors required me to then go back in history I wanted to study the Rises and declines of Reserve currency Empires so I needed to go back far enough than I would have a few so I had to go back 500 years so I could
see the rise and decline of the Dutch Empire and Reserve currency the rise and decline of the British Empire and its Reserve currency the rise and beginning of decline for the United States and its Reserve currency and China it is really concerning it's even more concerning when I went back to find the 500 years in the times that repeated over and over again and what I found was there's a cycle there's a big cycle you know you start a new world order in 1945 we began a world order order after the war they decided how
the world would be divided they created the dollar as the world's Reserve currency and so on and then because there's so much fighting and then you've established a power that is a dominant power you have a period of peace and prosperity and then that gets extrapolated and it leads to more debt fear of bad times diminishes opportunities of borrowing and getting in debt particular if you have a reserve currency because the world wants to save in that Reserve currency and that gets the country deeper and deeper and debt and so you have those debt increases
and you have bubbles but you have prosperity and Bubbles are really fun they're really enjoyable they're great but then you get to the point that there is a limitation to that and those limitations become apparent when the Central Bank can't easily produce money in credit that starts when you hit zero interest rate because then you can't do it the same monetary policy one is interest rate monetary policy when that doesn't work anymore you go to the next type of monetary policy which is printing money and buying Financial assets but that purchases of financial assets and
other thing widen the wealth Gap because those who have Financial assets do better than those who don't have Financial assets and you have a wider and wider wealth Gap and when you have that wider wealth Gap and then you have another downturn in an economy that's a formula for a lot of conflict and so that's what we see so what does a central bank then do if it taxes it takes money out of the economy that's not good it's a problem and if it cuts expenses that's a problem so the Central Bank always through history
this goes back literally thousands of years the central bank or the entity that controls money then prints more money think of it we got all those checks in the mail and we needed to get all those checks in the mail but you can't take it away from anybody so where does it come from and what are the implications so that happens for logical reasons and it often happens at the same time as there's a rising power externally as a competitor which is a challenge in that environment so yes it's one of those times and I
think people are not aware of it because I learned from my experiences that uh many things that happened in my lifetime that surprised me never happened in my lifetime before but they happened many times before in history and that if I would go back in history I could see that the first time that happened was in uh 1971 I was clerking on the floor of the New York Stock Exchange and Richard Nixon gets in front of the camera and says we're not going to give you the gold and devalues the dollar and I walked on
the floor of the stock exchange I figured there was a big crisis and I walked on the floor of the stock exchange and the stock market was up 4% which was the most in couple of decades and I said wow that's surprising and then I found out that Roosevelt did the exact same thing on March 5th 1933 and what was done in those two times is the same thing that was done when the federal government and the Federal Reserve decided to produce a lot more money and credit so yes you need these perspectives and I
want to pass that along monetary policy 3 which is now what we are seeing and what is needed is the production of that debt through government borrowing and the government direction of those checks to those who need it most that's what we just saw and that being then monetized by the central banks and so we're in a new era okay of monetary policy three as I call it monetary policy 3 will mean that the free market will play a much less role in determining those Capital Market flows that the government as we come into the
future will be thinking how do I get that money to those who need it the most so it'll be a highly political decision much more political than it was in the past and that the central bank then will monetize those political decisions so monetary policy 3 means there's that type of cooperation so those are the two dimensions of the big change environment you're going to see much more government influences and direction of where money goes which will have a big impact on not only the economy but of markets you have to watch what they're going
to spend their money on and they have to watch where they're going to get their money from what taxes and so on means the government will play a bigger role and it also means that there'll be much more debt that is monetized and that has implications for the value of financial assets it has implications for the value of the currencies and so on when you get to the end of the arc if money is hard when it was connected to gold or it was gold they always broke that link and if it was soft they
would always always print more money and you can't raise living standards by printing more money you can redistribute it certainly the money that is being received by those in the form of checks and they go out and spend it helps their living standards but it what it does is it diminishes the value of that cash and it diminishes the value of bonds because bonds are a promise to receive a lot of currency and it shifts wealth to Financial assets it always sends stocks higher like my 1971 lesson it always sends gold higher so when we're
looking at this we're going to also see I think the rise of the increased importance of China's RMB as a currency it's got a long way to go before it's going to be a reserve currency but I think that one of the important things to see is that you're going to see favorable Capital flows for China and if you do a comparison of their Market where their interest rates are where their Capital markets who's doing IPOs you know nearly half of the IPOs depending we'll find out but something like 45% of the IPOs there will
be done in China's markets Shanghai and Hong Kong this year new offerings and more and more you're going to see the internationalization of the REM andb you're going to see Capital flows move in those directions and those those kind of analogous movements have repeated through history I believe when I look at that and then if I narrow down to investing those would be kind of the main headlines that I'd like to pass it would be first to realize that cash is not a safe investment it's a very risky investment the second big thing is diversify
well and what I mean diversify well I mean diversify globally in countries in markets and in currencies the same thing things happen over and over again and if you study the patterns of them you understand the cause effect relationships and then can write down principles for dealing with them well we dealt with them very well in that financial crisis and in other debt crisises and I wanted to pass that template along I think that there are six stages of the cycle I'm going to touch on them briefly there's the early part of the cycle where
debt is being used to create productivity incomes and then it can be serviced well asset prices go up everything is is great and then you come to the bubble phase of the cycle and in that bubble phase you're in a position where everybody extrapolates the past because asset goes up they think it's assets are going to continue to rise and you borrow money and they leverage and when you were in that phase when we do the calculations you could start to see that maybe you won't be able to sustain that level of debt growth then
you come into the third phase of the cycle which is the top that's typically the part of the cycle when Central Bank start to put on the brakes tighten monetary policy and and the like then you come into the down leg and when interest rates hit 0% you come into a depression part of that cycle because monetary policy doesn't work normally when interest rates hit zero then you have to have quantitative easing and You Begin that expansion and then you carry that along and You Begin the cycle so I think the period that we're in
is very similar to the period that we were in in the 19 30s if I may I'll absolutely explain it okay there are only two times in the history of this Century where we had dead crisises in which interest rates hit zero and in both of those times the central bank had to print money and go to a different type of monetary policy which we call quantitative easing and to buy Financial assets and that drives up in both of those cases the value of those financial assets and produces a recovery but it drives interest rates
down to zero or near zero where they are around the world and that buying in this case $15 trillion of financial assets has pushed up Financial assets and driven the interest rates down to zero so it's caused asset prices to rise it's also caused populism more populism because that process creates a gap between the the rich and the poor those who have more financial assets uh see those asset prices go up and for various other reasons a wealth Gap has developed if you look at right now the top on10th of 1% of the population's net
worth is equal about to the bottom 90% combined that's very similar to the late 30s when we had that stimulation and so on so we in a situation where we're in the part of the cycle later part of the cycle where quantitative easing has been used most of its energy asset prices are up interest rates are low and we're beginning a tightening of monetary policy very much like we began in 1937 and we have a political situation in terms of having more of a conflict between the rich and the poor which is bringing out a
populism populism around the world is the selection of strong-minded leaders who are sort of Take Charge but tend to be more nationalistic and so we're in that type of position I think the cause effect relationships are analogous meaning that if you have a wealth Gap and you have a downturn in the economy where you're sharing the pie how do you divide a budget sharing the budget there's a risk that both sides are at odds with each other there's also a greater International risk in tensions economic tensions produce Global tensions for various reasons so I think
that in this expansion we're about in the seventh inning of a nine ining game Let's say we're in the later part of the cycle the part of the cycle in which monetary policy is tightening and there's not much capacity to squeeze out of the economy and that as interest rates tend to rise if they rise faster than is discounted in the curve it can hurt asset prices and asset prices are fairly fully priced at this level of interest rates at some point we're going to have a downturn because that's why we have recessions nobody ever
gets it perfectly and my concern is what that downturn would be I think that that's not immediate we don't have the same pressures but I think it's maybe in two maybe it's in two years I can't say but I think that that what concerns me is that it concerns me also internationally because the situation internationally is quite similar to the late 30s in that in the these periods of time these geopolitical Cycles there is an established power and an emerging power that then have a rivalry at first it's an economic rivalry and then it can
become quite antagonistic so back then the United States and England won World War I and we had the peace but then as there was a rising Germany and a rising Japan there became that kind of economic rivalry that became more antagonistic I think that we have a situation where there is a rising China and the United States is an existing economic power and there is a rivalry about that and there can be an antagonism about that so when I look at it I think the parallels are quite similar doesn't mean that the same outcomes have
to happen Okay but does mean that I think we have to be alerted to the fact that going forward in a downturn monetary policy will not be able to be as effective as it was last time so we have to be cautious about a downturn uh I would say air on the side of having a little bit more leeway and then we have to be uh concerned about the wealth Gap and the consequences geopolitically we're in a very privileged position of having a reserve currency one of the things that distinguishes countries that really have problems
from those who are able to manage their debt problems is whether the currency is denominated the debt is denominated in one's own currency that requires Us in order to do that to continue to maintain sound Basic Finance I think we're going to have though a squeeze that will be not just related to Dept but even more importantly related to pensions and Health Care obligations that will uh happen so I think these will be difficult times not immediately but I I think in maybe few years and I think it will be very dependent on how we
are with each other you say it's not an immediate issue but a couple of years out we may have a downturn as you look at where we are in the cycle what do you think normal investors should do I think that there are two key parts of investing there is what is your strategic asset allocation and then there's moving around there's tactical bets and Alpha and I think the average man should not try to make tactical bets to try to produce Alpha because he's going to get it wrong Alpha is better than average Market in
other words to say Now's the Time to buy Now's the Time to sell Market timing don't do that the history of it is clear I remember learning this when Peter Lynch uh ran the mellin fund and there was the best stock performing Fund in all the stock market when the stock market Market was best and the average investor lost money in it and how is that possible the reason it's possible is when it was very hot and the advertisements were there people bought and when it was had a period of bad performance they got out
and they got scared and so Market timing is a very difficult thing it's a very difficult thing for we who put hundreds of millions of dollars each year we have 1600 people at Bridgewater it's a difficult game and so I would say that they should not try to play that game that they should understand how to achieve balance and diversification in operating now how to do that is a conversation that's a you know a longer conversation Tony Robbins interviewed me about it and he made a very simple book as part of investing it's described in
there but there's ways of achieving balance that doesn't cost you return and significantly reduces your risk so I would recommend that they come to a balanced portfolio what we call an all weather portfolio but something that means that they're not exposed to any particular type of environment if you're going to play the cycle then realize that the time to buy is when there's blood in the streets is the same okay and then you sell when everything is great and everybody's extrapolating the past and you're near the end of the cycle because as you come in
as your unemployment rate gets low and asset prices are high and debts are being built up and everyone's extrapolating the past the past will not perform up to expectations and that is the time to sell but it's very difficult for people to step away from the crowd and to do that first of all you look at how much slack is left in the cycle okay where's the unemployment rate where's the capacity what is the central bank doing is it tidying monetary policy or is it easing monetary policy that's one so how much slack second you
look at how much debt has been used to finance those purchases okay third you look at the amount of sentiment the Euphoria and fourth I would say you can see the pricing of how much debt is how much growth is built into the pricing in other words by comparing the yield on stocks and the yield on bonds and you look at the pricing you look at credit spreads and things like that they paint the picture of the future that's the discounted future and if you look at that picture of the discounted future to something that's
unlikely to happen going forward then you would know that prices are too high and then you have to think about timing the problems are going to be based on the fed and so it becomes political and um yeah so I worry about that I feel that it definitely should remain its independence if I'm holding a bond it is certainly in the government's interest all the time to borrow and spend particularly under your term and then you let somebody else deal with the mess you created and the when they come to power okay so that's always
the case so it undermines the storeold of wealth I think the FED should Target a real bond yield of 2% by and large okay 2% is not too high real and it's not too low and they should Target that kind of a real bond yield which you can see by the way in the inflation index bonds pricing I think that the cycles that we're going on from one extreme to another are very disruptive but I think it's going to become a lot more political particularly if there are problems because the problems are going to be
based on the Fed
