right now the US is imposing sanctions sanctions are it's an form of economic Warfare and it has a big implication for the dollar okay now others are trying to get out of the dollar system there's a dollar system that now is being changed India is dealing directly with Russia and holders of dollars and nominated assets don't want to hold those dollar anets if they feel that they're going to be grabbed and so on so what's happening now has happened many times before and I learned this in my past uh because in 1971 I was clerking
on the floor of the New York Stock Exchange and President Nixon gets on and he says we're not going to give you the gold that the dollar is back by and we had a devaluation it took me by surprise I walked on the floor of the stock exchange I thought it was going to go down a lot it went up a lot and that's because I never experienced the currency devaluation I found the same exact thing when I studied history same exact announcement took place on March 5th 1933 by Roosevelt and had the same effect
so I understood then how history before me was important studying the Great Depression allowed me and Bridgewater to anticipate the 2008 financial crisis if I didn't study that what's happening now is very relevant the past is a guide to what's happening now as we are approaching a challenging of the world order in other words a great power challenging another there is an increased likelihood of some kind of War there are five kinds of Wars there's a trade War a technology War a geopolitical influence War a capital War which we're in the midst of and then
there's a military war and those things Drive countries to be self-sufficient and independent and as a result globalization diminishes and nationalism increases it's not the stock market stock market so it's in the book it uh takes you through the stock markets during war periods and so the only thing that matters for stocks is the cash flows and as you get into the conflict that's a different story if you begin to see as it progresses those that are affected by the individual events have an effect for example tax stocks but anyway in in answer to the
question how does it affect the markets it affects the value of money most fundamentally like what we're seeing now is that the Val Val of money when you run very large deficits you have to spend a lot you have to spend a lot on uh social programs you have to spend a lot on defense you have to spend a lot on uh environmental programs and so on and so when you spend a lot more money than you earn then you have to print money to make up that difference to make the purchases and then that
devalues money and so it's like the examples I gave you of the two currency devaluations that you had before 1971 led to the the inflationary period of the 1970s and so you have the stock market yes the stock market goes up and other things but cash is trash and people then begin to learn that the bonds that they're holding have negative returns and it starts to change the value of money the value of dollars and so on so money goes into other assets it produces more of an inflation and you start to enter a certain
type of environment and the environment that we're in is beginning to be very much like that of the 1970s there's two ways of dealing with debt you pay it back in hard money or you pay it back in soft money you pay it back in hard money and you have um a problem you have a depression so throughout history whenever that was done pay it back in hard money eventually that was abandoned and you print money that was what 71 was that was what March 1933 was and so I think that what you have to
think about is the value of money how much money does one have in debt instruments and do you want to own that as an asset I think they're Bad Assets and then how do you diversify and the system also has to deal with um what is money is the dollar going to remain the same sort of Reserve currency and then you see the development of alternative monies we're seeing uh variety I think different types of money will compete with each other in the environment we're in maybe it's crypto maybe it's U maybe it's gold maybe
it's um other things U maybe the digital mnb competes with the US dollar we're going to come into an environment think about how much money is being stored in debt instruments those debt assets think about how poor those returns are so that kind of a shift I think is very important all currencies have a lot of debt so when you look at one relative to the other there will be a lot of printing I mean currency equals debt and when you hold a currency you're holding a debt instrument and so all of those will decline
in value relative to other things now will the dollar decline more than other currencies it's almost certain that we're going to come into this environment we're in this environment in which there's a shifting of those currencies so you're going to see more of China's REM andb being used you're seeing India have a direct link with Russia on the currency so we're an important change in the currency but how that is a store of wealth is a different question so a currency is a medium of exchange and a storeold of wealth and its storeold of wealth
is now a problem particularly for the dollar but it's also a problem for other countries so that's why you have inflation as money goes into to other things and the cost of borrowing is so low relative to the inflation rate then encourages the borrowing of money and the sale of money in other words not holding Financial assets like that so that's yes I think you're changing the nature of what money is and what the dollar is as a storeold of wealth we're beginning a paradigm shift a paradigm shift is a shift from a mindset and
positioning of that mindset to another mindset and another positioning of that so for example the mindset that we were in was that you have low inflation and when you're owning bonds and you're owning cash or you are operating one way and you don't worry about that and companies don't worry about it in their inventories having larger inventories or homeowners don't worry about inflation as much in the purchases of the houses and so once that shift begins it causes a reinforcing Dynamic it's like everybody is long bonds we've been in a 40-year bull market in bonds
and so it's been fine to have and when that shift starts to take place you see behavioral shifts that reinforce that cycle in the Paradigm so for example when there is the selling of bonds that makes it more inflationary in and of itself because the amount of debt that has to to be sold is not just the deficit but also the amount that debt that's being sold is those bonds so now interest rates have to rise a lot or the Federal Reserve has got to come in there and buy more and then you get wages
people make wage settlements and such things so a paradigm shift is beginning to take place and that will be also self-reinforcing and it's taking place in this context of the conflict which then creates the breakdown of um efficient systems each country wants to be self-sufficient it needs to to protect itself and in being self-sufficient in that way then you have less efficiencies in the system and all of that becomes self-reinforcing so it's all happened before it's all happened many many times before yeah I'm concerned about that when you raise the return on bonds and you
raise the return on cash and you tighten money then that makes other assets less attractive such as risky assets particularly long duration assets like tech stocks and the like so you produce that squeeze yes but that's still only at 2% or a little bit over 2% with an inflation rate which is considerably higher than that we've had a 7% inflation rate and we'll probably settle it'll be a 5% is or something and so you're still losing that money to inflation people are so what you have is enough tightening by the the Federal Reserve to deal
with inflation adequately is too much tightening for the markets and the economy so the FED is going to be in a very difficult place a year from now as inflation Still Remains high and it starts to pinch on both the markets and the economy here's the problem if you're borrowing more money than you're lending and you have a lot of debt you either are going to pay back in hard money or in soft money and so it creates a very difficult tradeoff so what can you do do you spend less money so that the tradeoff
becomes more and more difficult and that's what brings about a stagflation environment because they tried to navigate between those two undesirables in other words they want to contain inflation but too high of an interest rate that's good enough for inflation causes too much economic environment so what can they do no they're in a position already because of that Dynamic spending more than they're earning creation of a lot more debt and a lot of other debt which one man's debts are another man's assets and that as the holder of that assets is losing money imagine holding
a bond now look at how much money is in bond funds and cash okay not only in cash you don't get any return to compensate for the interest rate and in your bond fund you get Negative returns and how's that feel so are you going to continue to hold those Bonds in that bond fund it's a dynamic that they they have to deal with that is really beyond their capacity to deal with it they can't change those fundamentals I think that most likely what we're going to have is a period of stagflation and then you
have to understand how to build a portfolio that's balanced for that kind of environment so every investment is an exchange of a lump sum payment for a future cash flow and so the cost of money is a consideration relative to the return on money and so when we look at that return when we say I can hold cash or I can hold a bond that changes the inclination to hold cash but also one has to look at the return expect a return on equities in other words one calculates the present value of future cash flows
you estimate what are those earnings going to be in the future and what are they worth today stocks are now having expected returns which are not very much more than bonds which would be not very much more than cash so as that happens so that why should I own equities farther out you know and have the volatility of equities so that shift in the curve in other words the relationship between cash bonds and then the relationship between bonds and equities and the relationship for corporations between the rates at which they borrow borrow at and the
rates at which they can earn money at have a pervasive effect on the economy and the markets so no it's important to take a look at that relationship that yield curve structure that way but you should go beyond that and include the returns of other assets what can you do in the way of generating returns relative to the costs of money the relative attractiveness of those instruments you have to have an economy in which the people believe that you have a fair system and you have to have productivity so I would say the most important
thing is the redistribution of opportunity to make people productive and to eliminate the internal conflict or to reduce the internal conflict which can be so disruptive when you see large wealth gaps and at the same time you see economic problems you have a lot of internal conflict and that internal conflict is bad economically and it's bad socially but it's not just the wealth Gap it is the productivity level that results and it's certainly going to be a political issue so when we talk about markets and the economy and all of these things we have to
realize for example that um internal conflict will have a big effect the world order was made in 1945 at the end of a war and a civil war can begin a new order inside of a country the Chinese Civil War began their new order 1949 and so that's like a new beginning they always come out of wars and a war is a fight for how the system works so we'll begin there after the fight of how the system works it's a great leveler it gets rid of a lot of the debts and it starts over
and then there's a new power in the United States the new world order it was an American World Order because the United States won World War II it had 80% of the world's gold gold was money it had the dominant military power it had nuclear weapons and because of that we began the American World Order they carve up the world here are the borders this group gets this piece and so on so forth and then they begin and by the way this has happened repeatedly throughout history and so they start off with those new rules
of the game and you enter a period of peace and prosperity and it's peace because nobody wants to fight the dominant power the dominant power won and there's a change in Psychology really that you're dealing with because quite often these things take place they take a generation or more to take place a lifetime and the people who enter the war do so so boldly but everybody who enters the war and then goes through the war wish they never went through the war because it's so terrible but they come out and the war is over they
want peace they want productivity and so on and it's a great leveler less wealth gaps and so on and they work well together and they build a period of peace and prosperity that is a long period of peace and prosperity but during that peace and prosperity more and more Prosperity takes place and they increasingly bet on that prosperity and people get more in debt and so you see the debt levels rise and you see naturally as Prosperity comes it comes in unequal ways and some get richer than others and so wealth gaps rise and then
those wealth gaps increasingly create opportunity gaps because the rich people have more resources to educate their children and of them the benefits and so that happens over a period of time while the economy gets more indebted and of course as time progresses other countries also rise those maybe that even lost the war like Germany and Japan they rebuild and they become competitors and so what was a unique power of having won the war becomes less unique as there was more competition and then you get a new generation of people who have a different mentality they
get used to those benefits and so on and they are let's say less cautious less cautious in their financial behavior and so on and so the classic ingredient also is that that country that wins the war also has the world's Reserve currency because okay you need a currency to transact internationally it's like a language you need a language to transact internationally and the winner of the war gets the world's Reserve currency because everybody thinks that's the most stable and they also want to save in it so I think there are three things three big forces
to keep your eye on and when you see them in their cycle then it's clear first are you earning more than you are spending I want them to look at it as the country but the country is nothing more than the aggregate of the people and so when you look at those three forces I want to make sure that they're clear and you could align them up and you could see where you are is the country earning more than it's spending and building savings or is it spending more than it is earning and creating debt
because one man's debts are another man's assets and when somebody is holding those assets and they're producing a lot more of that money in debt money goes down in value as they produce it to produce that buying power and then that gets people bad returns it produces a higher amount of inflation and then people get out of cash and bonds and that produces Rising interest rates while there's Rising inflation and that produces stag flation so I want them to get the mechanic mechanics of that because that's happening now you could see it this is not
controversial we are producing a lot of debt we're spending a lot more than we're earning and as a result they're printing a lot of money and the printing of a lot of money creates a lot of inflation and with that inflation you know cash is trash you don't want to hold cash and you get out of that and that causes rates to rise and that's one of those three factors so you can see it happening the second force is the internal conflict Force how you are with each other are you operating cohesively common Mission and
moving in the right direction the system working or are you at each other's throats is the system threatened because history shown when the causes that people are behind are more important to them than the system the system is in Jeopardy and that is a risky situation it's a risky situation because if produces disorder and it can produce a form of Civil War and at those times when you have that you see greater and greater polarity in politics it shows up at greater and greater populism of the left and populism of the right and populists want
to fight for their side they're not moderates moderates want to work together to try to find a compromise that's best for the whole populists appeal to their Crowd by saying I am fighting for you and they will fight each other and that fight can be at the threat of the system so in history for example we saw four democracies in the 1930s choose to become dictatorships as one side fights to the other because they become so disorderly and we have a system right now that you could see that it is possible in elections that neither
side might accept losing and so the system becomes in Jeopardy and you see that the moderates leave the system they can't be moderate you have to pick aside and fight and so you see this in the French Revolution there were moderates in the early part of it that recognizing that there were problems and wanting to work together the moderates got guility polarity began the same was true in the Russian Revolution the same was true in the Chinese Revolution the Cuban Revolution and so on polarity gets greater and greater as there's a greater intensity to fight
and that is the internal peace so that's the second force and the third force is the rise of a great power the geopolitical force that's going on that we're seeing today with China and Russia and so on and how that's changing because when the power of a country diminishes when we get weaker financially or how we are with each other and so what there are greater vulnerabilities and there's always the competitive power that learns how to become stronger competition always happens there's the establishment and then there's the new competition and as they get stronger they
get stronger in all ways militarily and commercially and so on and that's the dynamic that we're seeing the events that happened in the Ukraine and that is bringing all this development internationally up at a little bit quicker Pace it's the same Dynamic there are two sides and there'll be neutral countries just like in the war there was the allies and the Axis powers and then there are neutral countries and so that part is developing the US conflict part is probably progressing a little bit quicker on the world order the developments in the Ukraine maybe I
should put those in perspective there is a a very close relationship a common objective of the Russians and the Chinese so there is a competition in the world and there's a dominant world power which is perceived as being overly controlling and there are five types of Wars there's a trade War as a technology War there's a geopolitical influence War there is a capital war and then there's a military shooting war and we are in the first four of those Wars in this competition with China we are in a shooting war of sorts with Russia and
the Ukraine we're providing arms and so they're shooting and so there's a military war going on and we're in it in our way so we're at those particular spots and the capital war is sanctions we hear the notion of sanctions and what that means is they're economic and the way they work is to shut off to produce economic Pain by either not letting them get at their money or not letting them get to Goods that they can import and these have happened through time in Japan that was what set us up for the bombing of
Pearl Harbor because the United States cut off Japan's oil supply was in the process of doing that and also confiscated its bonds much the same way is happening now and that put them into a corner that led them to bomb Pearl Harbor and then we went to a military war so that's where we are now and that also is risky because it threatens the value of the dollar because right now debt is dollars any currency the way you hold it is you hold it in the form of debt you don't hold it just in paper
and um because there's a rising inflation and because there's a lot of printing of money and because there's also a greater fear on a number of countries that they too could be sanctioned there is a selling of dollar denominated debt so you're seeing that the bond market is going down and so there is that Dynamic that's going on the capital Wars are the ones that accelerate immediately before the military Wars usually the coffers are empty they're printing a lot of money and then they're trying to use economics as a weapon so we're in that part
of the cycle now in terms of how this will transpire I think there are three big questions that we're going to get answers to pretty quickly the first is does Putin and Russia win or lose I'll describe when as what he wanted at the outset which is when for Russia would be to have the Ukraine be some non-threatening position such as a neutrality guaranteed neutrality and for Russia to have control over Eastern provinces and for Russia not to be economically devastated instead to be maybe have it something like a 10 or 12% decline in GDP
and for Putin to be in power if those four things happen then the cost of his action will have been worth what was obtained from that and that would be viewed as a win it would be then also a loss from the Western countries the world is looking at the power of American sanctions because American sanctions are the greatest power the United States has because it controls the world's Reserve currency that's a biggest asset but in weaponizing the dollar it is leading those to get around and not want to hold dollar because they get worried
that they're going to be confiscated so we will see if that dollar sanctions power we'll see how powerful it is if it isn't very powerful that's going to be a problem while Russia is throwing in military we are throwing in sanctions and these sanctions don't cause lives it's not a military war so we're fighting it with sanctions and they're fighting it with military if you didn't have that how would you fight this war it would be a much more difficult situation and the third thing that we're seeing is how the world is lining up U
which you know there are in Wars typically ex's and allied powers and you could see by the actions that are taken as to which are lining up who voted in favor of what at the United Nations who is allowing what rules who is trading with the other party Russia actually put out a list who are friendly and adversarial countries and that's making clear how the sides are lining up so you're seeing those sides line up and all sides are in preparation for war and so psychology should change and is in the process of changing to
realize that you have to think in terms of buying power not the number of dollars you have and you have to think how much is your buying power and so the worst thing is to be in cash like I say cash is trash and to be out of the bonds the next thing is to have a diversified portfolio of assets with a bias toward inflation protected assets and I would want to diversify between locations countries in terms of the investment based on the criteria I've just mentioned
