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Hedge Fund Legend Ray Dalio On The Economy

Hedge Fund Legend Ray Dalio On The Economy-5C43i3yclec.mp4


[00:00:00] Ray D'Alessio is the founder and chief investment officer of Bridgwater the world's largest and most successful hedge fund and he is a best selling author. Coming off the launch of principles which we'll talk about in a minute but Ray welcome. I see you've written one of the largest and I have no doubt most comprehensive analysis of debt crises that I have ever seen. You say this pattern repeats itself again and again. Why write a book about this.

[00:00]Ray D‘Alessio是全球最大、最成功的对冲基金Bridgwater的创始人和首席投资官,也是一位畅销书作家。即将推出的原则,我们将在稍后讨论,但雷欢迎。我看到你写了一本我所见过的最全面的债务危机分析报告。你说这种模式一次又一次地重复。为什么要写一本关于这个的书。

[00:00:26] Well at a stage of my life I want to pass along the principles that helped me. This was really research that was done before the 2008 financial crisis and it lays out a template of how these things happen over and over again. In other words I believe that same 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 another debt crisis. And I wanted to pass that template along. It's actually only in the first 60 pages of the book so it's not a big read.


[00:01:02] If people want to and you're giving it away for free which is great. So where are we in the current debt cycle. You often hear lots of talk about debt. Obviously we're now 10 years as you note past the financial crisis but debt still comes up the deficit is ballooning in the United States. Where are we in the cycle.


[00:01:20] I think that there are six stages to the cycle I'm going to touch on that 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 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 know you borrow money and they leverage and when you in that phase when we do the calculations we 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 banks start to put on the brakes tighten monetary policy and the like. Then you come into the downward leg. And when interest rates hit zero percent 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. Carry that.


[00:02:36] So I think the period that we're in is very similar to the period that we were in in the 1930s. If I may. Absolutely. Explain it. OK. There are only two times in the history of this century where we had debt crisis as 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 dollars of financial assets has put up pushed up financial assets and drive 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 rich and the poor those who have more financial assets see those asset prices go up and for various other reasons a wealth gap has developed if you look at right now the top. 10 percent the top one tenth of 1 percent of the population's net worth is equal about to the bottom 90 percent combined. That's very similar to the late thirties when we had that stimulation and so on. So we are 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 and 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 populism populism around the world is the selection of strong minded leaders who are sort of take charge but tend to be more nationalistic.


[00:04:47] And so we're in that position and you've written extensively and articulately about what happened after 1937 which is we went through a real surge of populism and nationalism and got to World War Two and all the horrible things that happened there. What do you think happens now given where we are. I think the cause effect relationships are analogous meaning. That if you have. A wealth gap. And you have a downturn in the economy.


[00:05:21] Where you're sharing the pie how do you divide a budget. Sharing the budget there is a risk that. The. Both sides are at odds with each other. There's also a greater international risk and 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 inning 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 thirties in that in 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 War One World War One 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. Does it mean that the same outcomes have to happen. But it 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. I would say error on the side of having a little bit more leeway and B and then we have to be concerned about the wealth gap and the consequences geopolitically and if we don't want to repeat what happened in the late thirties and forties what do we have to do.


[00:07:58] What is the. Having studied history the right way to handle this and head that off.


[00:08:03] Well I think one of the things is to make sure that capitalism works for the majority of people to look at the bottom 60 percent of the population and use that as metrics to say is that improving or not. And how do you approach that wealth gap. It's not just the wealth gap. I think it's more important than the wealth gap is an opportunity gap that people need to be made useful by being able to have jobs and so on. So I think that there should be that should be considered an imperative. I think that we have to be thinking about our balance of payments situation and the amount of debt that we're producing. We're in a very privileged position of having a reserve currency. One of the things that distinguishes countries that really have problems for them those who are able to manage their debt problems is whether the currencies 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 debt but even more importantly related to pensions and health care obligations that will happen. So I think these will be difficult times. Not not immediately but I think in maybe a few years and I think it will be very dependent on how we are with each other.


[00:09:29] So let me ask you about both of those. First how do we make capitalism work for everybody. It seems like part of the problem is that as you pointed out the rise in asset values are not accruing to 60 to 80 percent of the population. Any time you suggest that companies pay people more the financial class was out that's outrageous that should be free markets. We can't have minimum wage and it should be. Hey Ayn Rand was right. You want to raise you've got to bargain for it. So how in that you obviously care about the economy. How do we make capitalism work.


[00:10:03] Everybody without wrecking I think I think the first thing that you need to do is realize that it's an issue is a national emergency. I would like the president to declare it as a national emergency and then use metrics to judge that. In other words take the population of Bonham's Expressen 60 percent and take those numbers and make the metrics and then bring together a commission of people a bipartisan commission to be dealing with this. I think there are a lot of things that could be done. I see it to some extent philanthropic last it in education for example in education. We're in a situation where in many cases terrible terrible conditions in education literally and in schools that I know children are having to share pencils. They'll break a pencil in half and sharpen it at both ends or they'll pass it back and forth. They don't have adequate books. There were some but those children in Connecticut state that I'm from which is either the richest or certainly one of the top three richest country states in the country. We have 22 percent of the popular high school population that is either disconnected or disengaged. And so I'll tell you what that means a disengaged student is one that attends high school but doesn't participate they don't study. They don't really make progress a disconnected student is one that they don't even know where they are.

[00:10:03]每个人都没有破坏,我认为你需要做的第一件事就是认识到这是一个国家的紧急情况。我希望总统宣布这是一个国家紧急状态,然后使用衡量标准来判断这一点。换句话说,以Bonham‘s Expressen 60%的人口为例,拿出这些数字,做出衡量标准,然后把一个由人组成的委员会-一个两党的委员会-来处理这个问题。我认为有很多事情可以做。在某种程度上,我认为慈善在教育方面是最后一次,例如在教育方面。我们所处的情况是,在许多情况下,教育的条件非常糟糕,我知道孩子们不得不在学校里分享铅笔。他们会把铅笔撕成两半,两端削尖,或者来回传递。他们没有足够的书。在康涅狄格州,有一些孩子是我所居住的,他们要么是美国最富有的州,要么是该国前三大最富有的州之一。我们有22%的受欢迎的高中学生不是断绝了关系,就是脱离了工作。所以,我会告诉你,这意味着什么意思,一个脱离工作的学生是一个上高中,但不参与,他们不学习。他们并没有取得真正的进步-一个没有联系的学生-他们甚至不知道自己在哪里。

[00:11:38] Twenty two percent of the population in Connecticut is one of those high school students is one of those those those are students that are not going to be able to be productive. They're going to be on the streets. If you look at the cost of incarceration cost of Gaza patients between now 85 and a hundred twenty five thousand dollars typically a year in terms of that. So there were certain things I think I think you could create public private partnerships so that these programs do well. I'm support I support for example microfinance microfinance and being able to bring about. There are many things. Forget the things that I'm supporting I'm saying if we take an initiative and you say a national emergency and you bring together others and you establish metrics like good management of that I think that you are you will be making progress toward dealing with that and in public part private partnership and I don't know what'll happen. I don't think that's going to happen. Have no prospect of that. That's why I'm a little bit concerned that what will the next downturn will be like.


[00:12:45] Does it require our raising taxes because the other problem as you point out is the debt and the debt growth has accelerated with the recent tax changes. Any time you mention the idea of more money to education or more money to other social services. Lots of people freak out and say we can't afford it. So are you suggesting that we do need to have an increase in the tax base.


[00:13:09] I think that most probably we do. But the real issue is mostly productivity. Right. In other words to unleash productivity. There was a time that women weren't part of the world workforce. And when they entered the workforce it it caused a great productivity boom. I think if we didn't. Make it a mission that that group becomes much more productive then has the opportunity. I mean I think the country you know is what are we about. I think it should be the land of opportunity and we bring that together and produce those opportunities because that produces productivity.


[00:13:44] Candidate Trump. Going back to debt campaign. How awful the administration the Obama administration was doing the debt was growing. Now President Trump has a big new tax plan that has radically accelerated the growth of debt. Given your concern and expertise in dead cycles are you concerned about what's happening at this stage of the cycle in terms of the increasing debt the private sector debt.


[00:14:09] For the most part I don't have much in the way of concerns for when we do our pro forma financial numbers and we look at we see pockets that we'll probably have problems servicing their debt. There's a lot of cash around. I am concerned in about a two year period about the amount of dollar denominated debt that we're going to have to sell abroad because we're going to have to fund the deficit. And then in addition we'll have our balance sheets the Federal Reserve's balance sheets go down and that'll involve a significant amount of selling of of dollar denominated debt. When I look at the portfolios of entities that are holding different amounts I think it will be more difficult to sell that amount of debt. I think that will cause upward pressure on interest rates. But the way that works is that pressure will sort of be negative for the economy. Let's say two years from now but it will also probably be at that point more negative for the dollar. Right now we're in a short squeeze for dollars because there's a lot of dollar denominated debt. Debt is a short dollar position because it's a promise to deliver the dollars you don't own. And when you have a lot of countries that have borrowed in dollars and have their cash flows in local currency such as we see it in Argentina and Turkey and Brazil and other countries they're in a debt squeeze that causes the debt to the dollar to rise and that debt squeeze will be passed in two years. At the same time as we're going to have to sell a lot more dollar denominated debt. And I think that that probably would be bearish for the dollar. And you know at that point. So there are parts not the same sectors as last time but different parts. So you've had one of the most successful careers in history and investing huge sums of money.


[00:16:07] As you look at where we are in the cycle. What do you think normal investors should do. You say it's not an immediate issue but a couple of years out we may have a downturn. How do you invest in a retirement portfolio in light of that.


[00:16:22] I think 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.


[00:16:43] Al-Fayez better than average.


[00:16:45] In other words to say now's the time to buy. Now's the time to sell stock at timing. Don't do that. The history of it is clear. I remember learning that when Peter Lynch ran the Magellan Fund and that was the best stock performing fund in all the stock market when the stock market was best and the average investor lost money in it. And how is that possible. And reason it's possible is one that was very hot and the advertising moments were there people bought and when it was 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 Sandras of millions of dollars each year out we have sixteen hundred people at bridge what 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 an operating now how to do that is a conversation that's a you know a longer conversation. Tony Robbins Intrade interviewed me about it and he made a very simple book as part of investing it's described in there but you. There's ways of achieving balance that doesn't cause 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 and it's the same portfolio in inning seven of the debt cycle. That's right. 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. And then you 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 has 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.

[00:16:45]换句话说,现在是买东西的时候了。现在是适时卖出股票的时候了。别那么做。它的历史是清楚的。我记得彼得·林奇(PeterLynch)掌管麦哲伦基金(Magellan Fund)的时候,他是整个股市表现最好的股票基金,当时股市是最好的,而普通投资者则亏损于其中。那怎么可能。而理由是,这是一个非常热门的广告时刻,人们购买,当是一个糟糕的表现,他们走出来,他们感到害怕。因此,市场时机是一件非常困难的事情。这对我们每年投入数百万美元的桑德拉斯来说是一件非常困难的事情,我们有一千六百人在桥牌上,这是一场多么艰难的比赛。所以我想说的是,他们不应该试图玩那种游戏,他们应该明白如何在运营中实现平衡和多样化-现在该如何做-这是一种你知道的更长时间的对话。TonyRobbinIntrade采访了我,他写了一本非常简单的书,作为投资的一部分。有一些方法可以达到平衡,但不会导致你回归并大大降低你的风险。因此,我建议他们建立一个平衡的投资组合,我们称之为全天候投资组合,但这意味着他们不受任何特定环境的影响,在债务周期的第七局中,这是相同的投资组合。那是正确的。如果你想玩这个循环的话。然后意识到买东西的时候是街上的血是一样的。然后,当一切都很好,每个人都在推断过去时,你就会卖出,因为当你进来的时候,你的失业率会越来越低,资产价格会越来越高,债务也会越来越多,而每个人对过去的推断都不会达到预期。这是卖出的时候,但人们很难离开人群,去做这件事。

[00:19:00] And what do you watch to know that everyone is now excited and everyone's extrapolating into the future and I'll give you an example which is that two years ago we talked lots of concerns then about the stock market and valuation. And you said Henry relax we're in the middle of the cycle. Now you say we're in the seventh inning. What do I as a normal person look at to tell me OK. It's one out in the ninth. Time to start transferring and getting ready for disaster.


[00:19:30] OK. First of all you look at how much slack is left in the cycle. OK. Where is the unemployment rate. Where's the capacity. What is the central bank doing is it tightening 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. OK. Third you look at the amount of US sentiment the you know 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 price that you look at credit spreads and things like that they paint a picture of the future. That's the discounted future. And if you look at that picture of the discounted future and that picture is an extrapolation of what happened in the past 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.


[00:20:38] Great. Let's talk about something else which is that you recently wrote a book called principles. It's the New York Times best seller It's read by people way beyond the financial industry. Part of what you talk about is the culture that you developed at Bridgewater which you say yourself is not right for everybody it's tough. It's like the SEAL team of corporate environments only certain people can handle it. And in the book you lay out your principles that have helped you be successful. What have you learned from feedback from the outside world as people have digested the book and does it make you change any of those principles.


[00:21:13] My main thing. It didn't. Meaning it's it's very simple in one sense. What I want is meaningful work and meaningful relationships. Through radical truthfulness and radical transparency.


[00:21:29] Because they reinforce each other and that's what's worked for me. If you're on a mission to do wonderful things understand the world and try to do great jobs together and you're tough with each other but also develop those meaningful relationships so you feel like you're sharing each other's lives and you're committed to that mission. That's very powerful. But the radical truthfulness so that you don't not be asking each other and you know really what's going on and you can be totally straight forward in terms of even looking at people's weaknesses and their mistakes so that you can learn from those and so that radical truthfulness and that radical transparency so people can see things themselves. To me is has been a miracle formula and I'm and I'm so pleased because I get literally I don't know. I don't know if it's tens of thousands or hundreds of a lot of a lot of people who thank me for that changing their lives. However having said that I don't think my principles are important. You could pick whatever principles that you want. What I learned when I was going along is that every time I would make decisions they're paid particularly after mistakes it paid to write down what my principles were for dealing with that the next time I'm going around. And I think the important thing is individuals picking their principles for themselves. One of the things that excited me about it is also people doing it for themselves. They have I don't want them to follow my principles. I want them to think hard about what works and then think about being clear on their own principles to realize that the same things happen over and over again. So every time you have an experience particularly if you have a bad experience a painful experience that there are lessons to be learned and ways to change and principles to develop so that you can do it better next time. And I am one of the key principles is to know that you don't know what's best necessarily to separate yourself from your individual opinion. Have a fear of being wrong. I have a tremendous fear of being wrong because in the market you learn that and if you don't learn that that gives you then the open mindedness to take in from all the people what you've learned those types of things I'm excited that people are learning so I'm excited. This is this will go on for just a short period of time. And then I'm going to go quiet because what I've done is you know what I will have done is pass these principles along like this. These debt principles. I think that they could help.


[00:24:02] And is there another one coming after that. Well life principles and principles. The one that I'm meant to write before this I wrote this debt one was economic investment principles because I think there were two things that I learned about through experiences of my 43 years of running Bridgwater.


[00:24:24] And overseeing in various ways and that is how to run a company with a unique culture and how to be involved in the investment and economic area. And so I wanted to pass those along so that'll be coming but I don't know six or 12 months.


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