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A Conversation with Ray Dalio and Michael Milken

Feb 27, 2020
good morning, we have a lot of topics to cover, here is the book on principles and my book, which sounds like you might listen to it, as it has some small marks and I encourage each of you to use small post-its. as you read the book from that point of view, i thought we'd start with a little why why did you go into finance? the stock market then was the stock market went up for a long long time and if you ever cut your hair or anything you would always be talking about stocks so i took my money when i learned six bucks a stock and i and so i get twelve dollars around and I would like to add money and I put it in the stock market I mean I was curious and the first thing I remember is the first stock I bought was a company by the name of Northeast Airlines and the only reason I bought it because it was it was selling for less than five bucks this year heard and i thought i could buy more shares to make more money if it went up that was my brilliant theory of course it was nonsense but i was a company that was about to go bust someone bought it tripled and I was hooked, so I got hooked on the markets at that time high.
a conversation with ray dalio and michael milken
I was trading Northeast Airlines debt at the time and really cool and we were discussing shorting stock as our long debt was being sold at a substantial discount and I Think about the time Ray is talking about if you ever want to review an archive had a book published happiness like stock doubling in a year and this was a period of time where if you couldn't make 50 or 100 percent of your money they weren't really doing a good job and he looked at the American Stock Market and all the stocks that doubled during this period of time in one year and basically concluded that you need to focus on very low priced stocks so that book symbolized that problem let's talk a little bit about your family and how your life growing up potentially influenced you later well my dad was a jazz musician and my mom was a housewife my dad played late night and you know he's a good n man, but I didn't have much contact with him until he was up later and I was just a normal kid, we played, you know, I played soccer in the streets and my mom loved me so much.
a conversation with ray dalio and michael milken

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a conversation with ray dalio and michael milken...

I was lucky to have a very good family with a lot of love. I know a lot of work was done in education looking back at the 1960s and 1970s and one of the conclusions was that the most important thing in education was to have two parents who loved you enough and expressed trust and good teachers. Yes, there were my circumstances and you. they were absolutely right and when I compare it to some of the circumstances of others like me being ultra rich being able to have two parents who loved me and being able to go to a school where I was well educated and then having an environment that was also inspiring in the sense that I It was an aspirational environment it was the moment you know that John Kennedy was going to go to the moon and we would eliminate poverty and the United States was the richest country in the world with 40% of the world GDP and that all the opportunity aspirational you know the idea of ​​equal opportunity and a great abundance of it and distant parents well you would do better than your parents so it was a different kind of environment and so what Ray is talking about a bit It's from the baby boomers. now Ray is much younger than me, but he's still in that baby boomer group today and this group that was born between 1946 and 1964 and a very different generation than our parents, our parents' success depended a lot on the government, because be in World War II. it was the depression and our parents told those baby boomers they could be anything one person can change the world and in 1964 the first year baby boomers went to college from that point of view if we step b Think back to that time period.
a conversation with ray dalio and michael milken
I was at Berkeley and taking these courses and quantum economics and so on, I was the only person enjoying it in a class and I think he was excited because it was like a chapter, a story in every class. we got new algebraic formulas for how the world worked that we could write and our computers our 360 was almost as big as this room at the time and i am when i think of the book and a lot of the principles you present. Think about the advances in computer technology today compared to us writing those little algorithms in every class to try to define what was going on in the world, and in many ways your effort to create a meritocracy is based on those. little formulas that we had written in that class at Berkeley took us through that guy, well I mean yeah you remember it right as you said and we had those little punch cards right and you would drop them and then I learned what regression analysis was right well a and that was the key to finding out everything you know you just put the data in and you got the two independent variables and then you explained it and then you understood it and but at that point yeah i mean literally i would have colored pens and rulers to plot my graphs and literally operate that way but then I remember when I started my business you know it was 1975 I had an HP 67 calculator so you put the little thing in and you wrote and you got the regressions and that's where I started out good but yeah for you and me.
a conversation with ray dalio and michael milken
I guess I can speak for you. Then I started to understand that we could put things into equations and that we could put our thinking into equations and algorithms. They were called equations. So there are algorithms. Now there's basically the same things and you and then you could get the computer to start thinking in parallel with you and that's when it started so well it would say otherwise, although it wasn't that that thought led me to an idea. a meritocracy was that i wanted to have an idea meritocracy for other reasons i will explain that then he had me use the algorithms to help me do that particular look to be successful in the markets you have to be an independent thinker leaning against consensus because consensus is at the price so no one is good enough to know themselves they can all the answers so you know i learned making you know i was thrown out a fair amount of time i learned a certain amount of humility and then i knew i had no enough correct answers, so I wanted a group of independent thinkers, and when you understand that and you think of independent thinkers, then how do you get past that and you know you're going to want to get an idea of ​​the meritocratic process and then what I found is that the algorithms help me they allowed us to do that because instead of thinking about what decision we were going to make at any moment, we would think about what the c criteria for making the decision. s would be, you know, and then if you write those criteria and clarify them and then put them in algorithm form, then you could test how they would have worked throughout history and that allowed for meritocratic thinking of ideas and we also had some forms.
If we get past that, I'm sure we'll get into those. I don't want to hijack that by explaining it that way, but that led us to make use of algorithms to get a sense of meritocracy to make better decisions than any individual could and that's really been the key to success is one of the working principles here and it's one of those things that I really want to emphasize because I think we're now in an era where when we talk about open source and such things, we're now in an area, an era where meritocratic thinking of ideas can be systematized to produce better results than any one individual can produce so let's talk about a specific best that will go back in time I'm at home watching the election in November results c I go out and as the results come out things are changing and it seems that in the At the time when President Trump is about to be elected and the Asian stock market futures are down 1,700 points.
I call one of the people in this room and I called one of the others and I told them we should buy everything right, not anything based on the fundamental analysis that I had spent my life on, but basically, when people wake up in the morning, the elections would be over, no one would sue the next day and do it. it just finished and after a year and a half or two years every day these problems would be a sense of relief and the most important element in my opinion is that we the government would believe in the private company system and regulation it would only be supported, so that was my vision of what was about to happen, it was a macro vision, not a micro one, of what happened in your company after the electoral agreement, well, what we did is that we wanted to enter into the neutral election to the event because we honor It is true that we do not want anyone to make big bets, particularly political debts, so we try to balance the position with respect to what would be a concentrated bet in terms of the reaction of at that moment, the real question we were addressing. therein was the question of how it would be received in terms of capital flows and it was very clear that it was good for capitalism it was good for capital flows and that lower taxes would be good now the issue of protectionism and those other issues as well were you know the issues so we tried not to bet on politics but we should probably get into the discussion of markets and what is the particular zuv of policies in terms of its implications but basically we wanted to be neutral and then there was the topic of it's certainly great that we're entering a capitalist environment it's certainly great that we're going to make money it's a good thing it's certainly great for taxes stocks will be worth more b Due to the fact that your taxes are lower, it's great at those aspects and then there were the problems of what does that mean for the fragmentation of we are in a populist environment.
What does that mean for the conflict? What is that going to mean too? in terms of protectionism, so when we got to the nitty-gritty, it was very much a company-by-company situation, if it was a multinational company operating in certain types of environments, it was a bad thing in one respect, so anyway Anyway we try to be pretty neutral so let's go back for me the Watts riots happen I go back to Berkeley I write this formula it's 1965 and I basically came to the conclusion that if we're going to have prosperity jobs whatever , we needed to create financial technology that would serve as a multiplier on the world's largest asset, human capital, the world's second largest asset, social capital, and then real assets, and so I'm thinking about these things and Gary Becker wrote an article in 1966 ca.
I asked why irrational behavior could be rational, so I was thinking about the people who were involved in these insurrections in the United States who woke up in the morning and didn't have a job at Cetera, but I was so focused on this element of building financial leverage. . financial technology to people who had the ability and were thinking about how to implement it, so in 1972 I went to Singapore and my goal was to sit down with Lee Kuan Yew and talk about a country that was about to be built on human capital. it attracted the best and brightest from around the world to make it to number one and number two to provide stability.
He had to educate his own population so that they were not second-class citizens. To me in many ways his ideas for a country were mirrored in some ways his ideas for a company I'm right I'm wrong there are a lot of similarities in that the man was a very strong man and he was in a position as you describe if you don't know Lee Kuan Yew is a remarkable man because he took basically from the Miskito he reversed stagnant water in what is in the middle of the heroin drug trafficking triangle and created a vision and built that vision of what would be the place in Asia where companies they wanted to be where families could be raised and of people from all over the world and to do that you had to have a vision where there was a firmness of the kind of behavior that was necessary for there to be rigor in terms of a definition of what a good citizen he was and he built that good citizenship and, at the same time, he did it in a way that respected all the different cultures, so and there, and the divergent differences in people so that the s people from all over Asia could educate themselves and continue. speak their language and be educated in their language as well as English, so I respect their diversity, I respect their idea of ​​meritocratically among decision makers, and I respect the notion of good citizens. ip at the same time that there's, you know, that kind of discipline at the same time that there's this egalitarian way of operating to raise people, so yeah, I mean, he should be compared to Lee Kuan Yew it's a great honor because to me he's been a hero since I think he's probably the greatest leader of the last fifty or a hundred years, he's certainly one of them, so I guess the fact that I look up to him and have gotten to know him.
I have invited him to dinner at my house and talk about those things, which was a great honor not to talk about it, but to gather information from him in terms of his perspective and I would say that we have a lot in common on values. Yes there aremuch. of common values ​​and about how to run an organization that way, so when I look at Singapore and Lee Kuan Yew, as we've discussed with a number of you over the years, it reflected what I was focused on in finance, we would finance and would focus on can we provide capital to people? with capacity and allowing them to create jobs etc so if you go back and look at how we saw many times Singapore versus Jamaica they were both breaking away from the UK at the same time they both had the same GDP in 1960 there was no difference Leeward actually Kuan Yew went to Jamaica to speak with the leader to discuss what his strategy was.
Jamaica's strategy was tourism and natural resources. Singapore's strategy was human capital and this was essentially our concept and idea. Gary Becker finally won a Nobel Prize for this in 1992 and if you look at them today no one would compare Jamaica and Singapore today so this is an example of how it worked for one country but give us a few more ideas of how it worked for a company called Bridgewater and this meritocracy that was created but based on the ability of individuals that was the largest in the world. I want to go back to the mid 1970s and many of you over the years have heard me talk about the 1974 period by far the most important in my opinion post the depression if you are going into finance look at what which happened but definitely the biggest period since WWII so the stock market was down 50% interest rates doubled had credit checks banks weren't even allowed to lend money to new customers the unemployment rate doubled all the financial markets were shut down businessweek brand stories no one will buy a stock again but one of the keys i want you to talk about was ingenuity 50 so all of you who are responsible for managing money for endowments of their pension funds, etc. today this was a period of time where you could buy shares and hold them forever nifty 50 these 50 shares and they sold at an average p/e multiple in 1972 up to 66 times that was the average p/e multiple in that time and if you gave your money to a trust bank JP Morgan or whoever this is what they bought for you well this was tough there were some big companies Eli Lilly Walmart etc Disney but there were some tougher companies obviously Polaroid and others in this group and adjusted for inflation you lost 46 percent of your money so this was the end of it if putting your money safely results in and you he only lost 46 percent of his money the explosion and growth of the money management business finally started the hedge fund business how did 1974 factor into your thinking at the time? the and then the bubble 74 so I'm in the basta 74 so let me discuss them separately the nifty 50 is a phenomenon was a phenomenon that has been repeated over and over again because it is the nature of the markets so the bubble would be the dot-coms of 1999-2000 and to some extent that may be the lesson that might be relevant today and that's the notion that there's a bunch of great stocks out there and everyone agrees that these are wonderful companies and they like A number of companies today if you look at the composition of the bull market leadership and the companies that are leading that bull market, those are wonderful innovative companies and like in 2000, but what is the nature of the brand.
What it does, of course, is that prices reflect demand and so when you're in a situation where people say it's a great company and they're doing well and then there's the notion that's reinforced herself that they're doing well because people seem bought, a lot of them are buying a lot of them make stocks expensive because the nature of our business, the nature of the beast is something that if there's a lot of demand it makes it expensive and when you get to the demand that people don't think about anymore it's also expensive even though they're big companies you have that phenomenon and that was the ingenious 50 and there are lessons and you know the reason I wrote this printed principles is that the same things happen over and over again the same things happen over and over again and you have to know them to see that phenomenon and you know that something that made you a lot of money could be more expensive and you know that's when the money comes in naive and they buy it p 'Cause it's good without thinking how expensive a nifty 50 is 1974 was also a good example of a time you know it was a good example I took my time as a caddy and I'm ticking 1966 was the real buck the peak of the market stocks and 1974 was the bottom and at nineteen and you were describing it quote 1966 that cat era everyone believed the stock market was going to go up it was just dollar cost averaging and so on and then of course it went down in 1974 , as you point out it was the exact opposite everyone believed it was going to go down the last thing in the world you can do is buy a stock and that was exactly the bottom so the lessons are that the future is probably going to be a very different from the present and I don't think the past is going to be representative of the future and that's kind of a timeless lesson I think this gets to the concept of regression analysis that the future is like the past and this period of 74 an example has It would have been the Singer sewing machine it paid dividends for over a hundred years obviously a sure thing it was rated investment grade in January and the bonds were issued Goldman Sachs sold bonds and the big argument in January you should buy it by 8 18 you should buy it by an 8 22 what is the correct yield to buy the debt the interest rates were higher than today people at the end of the year we are selling this value between 30 40 cents on the dollar they were not asking about four basis points more or minus a thousand what's the bit and then something happened and it was maybe the discovery that maybe women in the 1970s emancipation wouldn't be at home sewing and so this conventional wisdom will take us to today and before go back in history.
I rehearsed conventional wisdom. Let's see if they knew that the president of Brazil was going to be impeached. If they knew they were going to impeach the previous president. Yes and You knew that the largest company in Brazil, Petrobras, was going to have all these problems and you knew that there was a Zika epidemic. Inflation. The runs are unbelievably high. Unemployment doubles and rises. the market if you knew the future either you would buy it or you would not invest in Brazil and obviously Brazil in hindsight was the currency and the market one of the best performing markets in the world can you tell us how to look at something? like yeah sure sure you know if you took two years before the three years before it would have been them they all loved Brazil you know and it was very very expensive right if it's loved it's probably expensive right if it's hated, it's very likely cheap right, there's a saying that the time to buy is when there's blood on the streets, so knowing that something that's good can be very expensive and something that's bad can be very cheap you have than knowing how to calculate value and also expecting changes let's look at even something a little more current it's 19 it's 2015 and you were reading the newspaper in 2017 President Trump has been elected you've been able to look two years into the future now he's in a war of words with the leader of north korea, okay, every day they are doing things now, north korea is creating video games that show how they are bombing american aircraft carriers etc. and having students work on how to do this in school a lot of volatility in the world worried people should be investing in south korea in this period of time since i knew the future well in general i would be thinking well i am not going to invest who knows what they're pretty close and half the country's population lives in Seoul so they're having a hard time, well if you look at how the financial markets of South Korea are doing this year you'll see that their currency has gone up against the currency American their stock markets went up substantially take us to 2017 and South Korea well politics is a fading thing too wars are a fading thing I mean a big step if you look at history you could take the Kennedy assassination, you could take most of the wars we've been in and so on, including the bombing of Pearl Harbor and various wars, and I think people exaggerate the implications it is from wars, in other words, there is a tendency to think that politics or global affairs can destroy something and so we are talking about the same phenomenon when it is perceived as something that is not discounting the economy, so if we take Korea if not there is a catastrophic event, you have an economic situation and that is happening in that region economically that is fantastic for companies and very strong for the currency, so I think it is a moment is aware that politics is not something that is an issue general unless you know about the catastrophic event, but it tends not to be the catastrophic optical events, so it's interesting that the North Korea issue gets more press in the media in the US and in South Korea today.
If you want to compare the number of headlines, it's one and two. So what I was commenting on here was really the realism of what occurred. I think we're, I think what we're doing right now is the exercise that would encourage everyone to do everything. go back in time and look at the times we had war look at the break look at pearl hammer harbor and what happened in terms of that look at the european wars in other words the worst and then tell how they happened how they happen they happen in the past to get a perspective because what you're bringing to the table right now is the notion that the same things happen over and over again and the lessons of history and that's the exercise, it's all another one of those things that happen over and over again , so any time you're thinking about one of those, if you go back and say what happened, it will help give you a kind of perspex, oh, I just want a paraphrase that they could for the correct saying, the lesson that Ray is giving us on this topic is to study history to look at what happened and try to figure out how it reflects today and what i found if i go back to 65 so i check out this book that i had to send to me called long-term corporate bond experience and des I cover something incredible that Heckman, head of the Cleveland Fed, had done: he had tracked down the history of every bond issued from 1900 to 1944 and what happened to it to make this data available to everyone and what do you learn? you learned that everything people say about credit is wrong, all the worst credit is sovereign debt, but everyone said it was the best and every country had a triple-a rating, even Venezuela, second, you learned that second weaker credit was that of individuals. and default and then the best credit was small and medium business and big business and that the spreads were too wide even during the Depression now this fact was available to everyone without computers amazing job having to keep track of everything for 44 years then it's updated from '44 to the 1960s by someone else and I think one of the things you're seeing in Rey and his signature is this understanding that you at least understand history and what happened and why others reflect the future I think I think so you ask yourself what is the most analogous period in history and I would say 1937 is the most analogous period in history to where we are today just take a moment if you want to take a moment on that so analogous in the following sense in 1929 back to 1932 we had a debt crisis that was similar to the debt crisis we had in 2008-2009, then you get to zero interest rates and when you get to interest rates s zero, the Federal Reserve can no longer relieve money. state policy by lowering interest rates so you had to expand your balance sheet the other words essentially print money and buy financial assets to increase those financial assets and put more liquidity in the system so as a result 1932 to 1937 was very similar to 2009 to the current time period and during that time period there was also a large increase in the wealth gap at this time the top tenth of one percent of population net worth equals the bottom 90% combined and if you look at that income gap you would have to go back to 1935 to 1940 so we had a situation that was kind of analogous and then in 1937 like now the Federal Reserve started to tighten monetary policy I'm not saying by the way the same thing is happening to happen i hope there is a lesson not to learn from that but there was a symmetrical risk and so what we have is part of the audience not vividly remembering what What happened to the financial markets and period 37, why not? you're just checking with him for a moment, well this, the stock market, the stock market was down 50 percent and we had what then was the first time we called a recession, which was like a read depression and stuff is in a sense that and what happened was and we had the start of populism all over the world so it was populism that was not a term thatwe are used to using here it is a relatively modern term but it was popular it was a term that existed back then and because if we had strong leaders who were also nationalist leaders who were more confrontational by nature and we also had that wealth gap, so one I could imagine that if we had a recession now, well, we don't want a recession, but if we had a recession and I didn't.
I don't think we have one, but if we did have a recession, I think that would cause a lot of social and political conflict, in other words, like a wealth conflict, there is that kind of environment, so we had that kind of environment come or an environment of major conf lict so I think it's interesting that it's analogous I would say if you look at populism when we start to see populism populism is not just I mean I'm referring to the phenomenon not just the people the phenomenon grows in a certain way and to study it I there is something that I put on LinkedIn if people are interested is a case of 14 different populisms what is populism how it grows how it behaves 14 cases and then what is its archetype, but if you look at it, it is found below the surface in Europe, it is it lies below the surface in other places and it's one of those things we have to be careful of and financially, I think as we speak. the problems of our time we have the wealth and the opportunity gap which is a phenomenon that is analogous to we have to make some of those pay some of those pay attention to that I only mention this because it was referring to the same things happen once and again and then you look at a particular period and I think that raises the question, okay, what is the period analogous to the current one, so I think the Institute in many ways was created with the idea, okay, we have a p Problem, how are we going to solve it?
If you look back at the late 1970s and I know Shree is here today, we saw that sovereign debt, people willing to buy sovereign debt at 25 basis points more than IBM, is dead, so we tried to dissuade anyone from from investing in that and ran in the 1970s it got 25 basis points higher than the US Treasuries that were here alternatively then they had a change of administration and Iran and the new administration didn't acknowledge the responsibilities from the old administration from that point of view but this buildup that we saw there was no way it was going to continue but it was essentially financed by the banks and a consequence of these mid 1970s petrodollars being deposited and if you look at history sovereign debt and had a couple of different elements going on right now.
I want to take you back to Ray in 1990 1982. You had a head of the Federal Reserve, Paul Volcker, who believed that no country had ever defaulted. Well that might be true on Jupiter but not in the United States he had a disciple Walter Wriston who wrote a book I suggest you call risk and other four letter words but he believed in it too and essentially almost brought down the whole system banking that the world eventually lost a trillion dollars in sovereign debt and it wasn't until the mid '83 that we started, then we went out and hired everyone in the early '80s who issued all this debt to now refinance it and at that point we focused on well , what are we going to do? what to do with Max how are we going to refinance Mexico and our conclusion Rey was that a 99 year lease in Baja to develop Baja was worth more than all of Mexico's debt and the nationals had more money deposits in the United States than in Mexico so we were getting ready to offer to pay off Mexico's debt you had predicted the same thing would happen in the late 70's early AIDS takes us back to that point in time what are the lessons learned ?
Yeah, it was my biggest lesson at the time, so yeah, I did the math and it was a very controversial point of view that these countries couldn't pay their debts and events started to happen and Mexico defaulted in August of 1982 and because it had early and got a lot of attention i was a young guy and they asked me to speak to congress and i explained what was going on and i was at wall street week and if you want to see ray you can go to a youtube video of a TED Talk, you might see him testify, yeah, go to the TED talk, you'll see that moment and that moment, I'm testifying before Congress at Wall in Wall Street Week and I imagine we're going to have a huge debt crisis. and the economy is going to fall and that was exactly the bottom in the stock market.
I couldn't have been more wrong. I was so wrong. I had to have a small business. 8 people or so these were people I was close to I had to let them go I was so broke I had to borrow $4,000 from my dad to help pay my family bills. This was one of the most painful experiences. How much money were you managing at the time? Oh, I don't want to say anything you know. and you know and i discarded myself up to that point and it was the most painful and probably the best and most valuable experience i've ever had in my life because it changed my approach to decision making you know i went from thinking i was right to thinking how do i know i'm right reason gave me the humility I needed to balance my boldness made me start to think made me want to find the smartest people who disagreed with me and understand their reasoning you know a thoughtful disagreement that led to me was the reason why that we wanted to do this idea of ​​meritocracy was the main reason like giving me the smartest people around me and having those arguments and how we got past them and it led to the idea of ​​meritocracy and it was real From that point on that required knowing how balance risk like you, we talked about going into the Trump election trying to lock in imbalance risk, but you also taught me about looking at history that The surprises I had were things that happened in history, but never happened in my life before, like when I was working on the floor of the New York Stock Exchange in 1971 when the dollar floated, so I walked on the floor of the New York Stock Exchange. stocks and people weren't accepting dollars and money and I thought okay there was a big crash and the stock market went up and I thought it was going to go down a lot you know this is when I was in college and I realized when I came back, there were two valuations that happened not in my previous life, but it happened before, so it was knowing that everything happens again and again.
These were the lessons. The lessons are the ability to have a thoughtful disagreement to increase the odds of being right. find the smartest people who don't agree with you and understand their reasoning so you know how to balance the stakes well so there isn't a bet that becomes a big thing and you get overpowered and whatever and also to go to the story that if if things happened in the past or in some other country and you don't understand them then you will be in trouble so you have to have timeless rules and universal rules so we have a criteria that all our decision rules have to comply. be timeless and universal so those are the lessons I spoke drawn from those very painful experiences and that's really what has served me and Bridgewater well ever since so there's a lesson to be learned if you're going to make mistakes make them at first your life was interesting.
In fact, I saw Ray on TV. He conveyed the appearance of him. Oh you did at the time and what this did is he shaped us and me to feel good. be a great opportunity because the banks had been lending money to keep it going even though Mexico defaulted if you wanted to trade sovereign debt in the 1900s to 1980s you had to pretend it was worth a hundred cents on the dollar because they didn't have to write it down and, if you wanted, if you thought you wanted to trade Honduras for Nicaragua, you had to create like a chef's salad a combination of different values ​​because they all pretended they were on par and it really wasn't until a little bit later in the 80s, but this He told us okay, this is an opportunity for us to use our skills not only to refinance or rebuild companies, but also to rebuild countries and change their capital structure. time and I want to go back and really reinforce something that Ray is saying here and that it's about this topic of conventional wisdom in history so for me if you look back at the 20th century one of the fun fundamental things that changed the 20th century for every person was Sputnik going up and I was in grade school here in California and I know when I was debating Putin akan several years ago whether Russian capitalism or Western capitalism was better on Russian TV he would correct me to tell me it was the Sputnik, not Sputnik, but that was the day the Soviet Union thought this was their finest hour, they surpassed everything, they were scientifically superior, it was in the middle of Cold War bomb shelters, etc., but that would mark the day. the end the end of the Soviet Union because it woke up the United States NASA was formed DARPA was formed DARPA was formed so that the United States would never fall behind in science again and the US economy was relative as the of the US versus New Jersey so ultimately Russia ultimately couldn't compete and it was over with Reagan and Star Wars we say okay we're going to spend a trillion dollars well that wasn't a opportunity for the Soviet Union, so it really kind of woke it up and I think one of the points that Rey makes here, I just want to reinforce when you read this book and look at it, is to learn from things and conventional wisdom, as noted, does that is very difficult in the early 1970s, there was everything that was the market. perfect etc in academic circles, ray, let's talk about one of the challenges that I want to address here, we just had our Asian summit in Singapore, and for many of the reasons that you cited, the Milken Institute decided that we would be based in Asia and not Singapore. in China and not in Japan, not in India, etc., but we had outside of our group that today that group of people who have their own money have between twenty and thirty billion in assets and around fifteen billion represented ed many of these institutions today ray they're not putting up a million they're putting up a billion or they're putting up ten billion or twenty and in the case of piff and we'll be kicking off the Milken Institute Middle East summit in February and we were visiting with them they put up forty five thousand million in one fund and twenty billion in another diversion you are one of the biggest money managers in the world the biggest hedge fund in the world how much do you believe in your meritocracy the way you operate how much in assets do you think you could implement today?
Let me just pause to answer alpha questions in this beta, okay, and then we'll get to the general issue of liquidity alphas, a zero sum game and I'll take a couple of minutes and and just spell it out alpha everyone has to start with a strategic asset allocation mix and how they come up with that strategic asset allocation mix that they then deviate from tactically so when you create that asset allocation mix we create a balanced portfolio that we call an all weather portfolio and we have some capacity in that area because it's a passive portfolio that just has an asset allocation mix that's not active in the sense that we have capacity in alpha, it has transactions and we don't want to have we're closed in alpha we don't want to take more money we've decided that we have been closed for the better part of the last ten years so the answer is that we have no capacity po Because if you also manage a lot of money that their transaction cost is not going to consume it, so I think for any manager, how much they have is a function really of almost how much they trade.
I think we have the greatest capacity because we trade all the liquid markets in the world I mean not just stocks bonds currencies commodities everything that is liquid and we tend to move very slowly in those we take positions in those and we are moving them and we are alone I would say which is our maximum and I don't want to take more money so active management is limited, in other words I know the limits and the limitation for active management is limited. fifteen trillion dollars of your balance sheet buying financial assets so that puts a lot of liquidity in the market and because of that liquidity and all that demand then you have buying all the asset classes because they all compete with each other , so there's the competition of you know you have zero interest rate, you have two and a quarter percent bond yield and then you have equity and private equity and everything is in high demand because there's all that money chasing all that number of investments then as a result of that there will be low returns going forward and that will have major implications as well as going forward so the answer is there is not enough for active management so you have to deal with the strategic asset allocation problem of strategic allocation risk to try to create that balanced portfolio and then when you take that, you'll have that in an environment where you generally entity will below returns because all that money has pushed up the prices of those assets to have relatively low returns and the real thing those institutions need to do is figure out how to design for that, right now, I just can't stress, you know? the challenge to our society and the importance today Ray talked about a really important topic before income inequality, in my opinion we are partly in a knowledge society today that is integrated from that point of view, but if you look at the assumptions reais in japan today is the largest fund in the world a japanese pension fund has about one point eight five that's their goal for all of japan today it's a little over two and a quarter if i wanted to buy a n annuity in japan today you get 25 basis points so you could double your money in two hundred and eighty years if you come to Canada it's in the woods for two four and a half percent and if you come to the United States today still weighted average somewhere between seven and eight percent of expectations if you look at the two dollar trade today that's about 160 180 basis points so if you add that over and over again you're at about four or four years and a half similar to Canada, however what we see of these dramatic unfunded pension funds, the challenge is delivering. or the seven percent plus actuarial assumption that they're dealing with and imagining what that unfunded pension fund would be like, so how do you generate these rates of return, as this is going to affect society so significantly, particularly in the United States and Western Europe and elsewhere.
Do you have a tip for us on this side? Well, first of all, those returns couldn't be generated, they won't be generated because there's only beta and alpha, and if you look at the price of beta, in other words, there are cash returns, the bond returns. and then you take that forward in terms of waiting for stock returns or if you look at private equity what their returns are and so on, there's nothing that has that type of return from a beta standpoint and then you add zero alpha, so we're not going to have those returns for all those people, those entities, and if so, what do we know?
Even if I give my money to Bridgewater all my answers I'm not going to answer It won't achieve that yes I certainly did act if I said no I will answer your question literally from an engineering point of view if you have an asset a balanced portfolio of assets and The return on those assets, let's say, is a five percent return or a three-year four percent return, depending largely on what the return on cash is to think about whether that leveraged return would produce a return greater than that, it is certainly the case that engineering for that is an exercise that is the only way out and there may not be a way out of the problem of most of those returns, however those returns will not be fulfilled and to return to your question , it is also that it will not be fulfilled in terms of health care obligations so if you take the full amount of obligations for our partnership in the form of pension obligations of d euda and health care obligations, it is certainly true that those obligations cannot be met and that does not mean that we are going to have a debt crisis like when in 2008 we anticipated the debt crisis, we went through the form of finance, we did not it was clear that there was not going to be enough money to pay those debts in this case when we finish the calculations we do not have a debt crisis, but we have an emerging squeeze and those are the promises, which means that it will be pension commitments that are delivered there will be compromises on those things and when that happens in an economy where we have essentially two economies and you look at the bottom 60% of the economy, I think it's a social pressure that's going to be a major social pressure and it's a pressure of our time, for I think that the combination of those obligations that cannot be fulfilled is a social pressure and I think that then there is the exercise of what is realistic, how do they design so that it becomes a pr cash flow problem, not just a theoretical problem when there is enough money to fill out the pension fund is fine when you have a situation where you actually have to sell assets to make the funding and portfolio of your assets shrink , that actuary is going to put back the numbers that he needs or it's going to go up so because of that phenomenon we're about to get into that period where the cash flow needs are going to have to come out I mean it's going to be a burden and a burden too large or the pension obligations won't be met or you'll have the cash flow problem that I'm talking about in terms of the need for the actuarial assumptions to rise, so it's an engineering problem that's particularly true because the obligations are large and because the expected return of the asset classes will be low. or yes it's going to be a social and political issue as well as a market issue for our time for the next generation I think so just to comment here we're talking on a very macro basis if you go to a lot of the pension funds for For example, in Canada they have net inflows for the next 15 to 20 years so they don't have to generate any rate of return based on cash flow right now with more money coming in and going out and what arrangement is common and is there a series of others where the outflows exceed the inflows and if you look back to the mid-1970s and late 1970s, when interest rates were very high, people thought they were getting great rates back for large debt coupons, but it was the reinvestment rate that got to them and if that's why Equity Life Insurance is no longer an independent company because they had written a number of new ones --'it's but the reinvestment rate on their cash floo changed ray you just mentioned something that I think is extremely important and the theme of the Milken Institute this year is building meaningful lives and when you talk about populism or other challenges, people feel like they have meaningful lives and many of us, when we were at the High school or college we study Maslow's Hierarchy of Needs and as a triangle and looking at this area we focus on basic needs first then it turns to the safety of your family and you can start thinking about the people you lost your net worth or are you reading about losing your job due to technology and how but as you move up that hierarchy you come to love, belonging and meaningful relationships, self esteem and ultimately self-actualization. sign and here is a note he received regarding comments from you and the other Bridgewater leaders at a meeting.
Could you come back to that and talk about relationships between people? and I remember and maybe we don't allow people into the trading floor generally between 6:00 in the morning and -- it was a distraction and one day we had one of the biggest money managers in the world on the trading floor for a reason that I I don't know how he got there and later when I took him to dinner he said he didn't realize how people dislike each other so much in the apartment because they yelled at each other I told them we don't have a lot of time to sit quietly in a room and discuss in a nest on pillows why that was a terrible decision we only have a few seconds and we quickly phrase it and move on to the next thing and it was nothing to do with personal relationships how you express yourself how can you possibly be sure that point had to be done quickly so my point how the company works is so unique in this regard and when we talk about things to a lot of people in the world of leadership and finance, whether they are money managers etc, to the who are not used to certain terms, such as the point of baseball cards and other areas, how does it work?
Okay, I'll give you a sentence, it's a long sentence, but it stems from the fact that I need the smartest independent thinkers to come up with the idea as well and get past those ideas, so Bridgewater is a meritocracy of ideas, by that I mean a meritocracy of ideas where the goals are to have meaningful work and meaningful relationships, they are equally important, meaningful work and meaningful relationships, support each other, support each other, it's like tough love. ok you can care about a person and you could be tougher on them if you care about them and they're like Navy SEALs you want you to know so that sentence is an idea of ​​meritocracy where the goals are to have meaningful work and meaningful relationships through radical truthfulness and radical transparency, in other words, that anyone can say anything and challenge anyone, so if you put that slide back up, that was the one you were asking Okay, can I go back up?
Yeah, so here's Jim Haskell and we have this radical transparency and he said, ray, you deserve a d-minus for your performance today in the meeting that you didn't prepare at all because there was no way you could have done it but disorganized without preparation. ok it's not that cool it's not that cool right it's cool because if firstly I needed that feedback because he was right then that was good I got the feedback and secondly if he couldn't talk that way then he would bottle that thing he would have to carry that with them and I wouldn't and it wouldn't be good for our relationship so to be able to talk and be radically honest with each other to get over it but and then you let's talk about our baseball cars etc. he has to know how people are, people are good and bad at different things, everyone has weaknesses, so the idea is if you can find ways to really know what people like and if you can accept their weaknesses and do it. do that in a meritocratic idea tic way like me if if you know if I went in and told someone you know you're not very good at this we don't know if you're very good at this just because I say so it means in itself, so how do we get to that and how do we do with that and collectively how do we acquire evidence so if you go to that TED talk the TED talk will really convey how we collect that evidence and then everybody knows if they are genuinely good and bad in different things once you get there then you know each person knows how to improve in a better way or they know what is even more valuable who to pair with someone else because someone can be Let's say someone is very creative and unreliable.
Another person is very trustworthy and not creative. Together those two. You have an effective team or someone's big picture and not detailed. you don't know what they are good at that you're not going to put them in the right jobs and they're not going to get better so the general idea is how Mary idea meritocratic Lee based on evidence through many points and evidence get to the notion of in what people are good and bad to have that idea of ​​meritocracy and that's been our secret sauce to success if you can do it because if you also have a meritocratic idea of ​​Darcy that people believe in then they think it's fair and It gets past disagreements, you know there was a disagreement that I had with the magician, the CEO, about different things, but we have a process that helps us get through those disagreements because everyone believes that the decision-making process is fair, this is how you put together a team of great independent thinkers so you can go for a big collection of decision making instead of just individual decision making because no one is good enough for you to have the opportunity in the book to read about point collector baseball cards paint button problem registration dispute resolution and when I think about it and how this today has been capturing a computer with the data to analyze you know I was very focused on hiring people that they had a meaningful relationship outside of the office for someone to love him, therefore they would be better employees, not necessarily looking for love and acceptance, and would take different opinions and buy into each other.
So the Commission next lightning I noticed this system that I mentioned to you, we usually told the employees that you couldn't tell me or anyone else. to bend for a week it's ok, after a week it was a free and open discussion. I noticed that you have a lot of first-year and second-year employees who participate in third place. Go ahead and I want to comment on it, we put a lot of focus on hiring the person who graduated first in the class who was the brightest best in math etc. but we wrapped up after several years.
It's we had a couple of them with a person who had common sense okay so they may not have even been to college but that team and I think what Ray said and I reflected it in sports very quickly . I grew up in Los Angeles and watched the Lakers. Losing every year to the Celtics is very disappointing, although the Lakers at the time had perhaps better players, but Boston was a better team. Then I went to graduate school in Philadelphia and watched Philadelphia, which had better players. Wilt Chamberlain lost to Boston and I think Ray is telling them that they found a very successful formula to build a team and in the end the team usually wins over a rightindividual I want to switch to two more areas today as we think about the jobs of the future in technology that has operated in a financial industry where when I went to Wall Street in 68 9 Flat fees if you bought a million dollars worth of stocks you had to pay a 1 percent commission so transaction costs were high ten thousand dollars if you bought t thousand if you buy a thousand shares they say amazon if you can't negotiate a better deal loyalty will do it for you for three dollars and fifty cents or Schwab.
I have commented to both of them that this was the competition between AT&T and MCI in the 1980s and I went to the MCA board meeting and said why don't they just go down to zero if everything they offered is worthless and it's just the price when we go down to zero, but we can imagine what happened to two transaction costs today. 60% of assets are now indexed or based on some kind of technology that is assembled. exists and you take algorithms and so we're in a world where you're either going to be writing code and writing algorithms or you're going to be displaced and lose your job because of those algorithms that you know about in the next 20 years or so it's probably something like 40% of all jobs are lost or certainly threatened and that's just the reality and I think the education of speaking knowing how to code is like being literate so we're in a situation where you know it's fantastic and it's terrible depending on where you are right is leverage fantastic so i would say for all of you as it has been for me if you put someone who knows how to write code next to you and then you think every time you make a decision what Am I my criteria to take that? make a decision and you slow down and write them that's why I wrote these principles and then there's economics you could turn those principles that are in words into equations so that data can come in and do and operate in parallel with you and that's a that you have to do that's a phenomenon that to be competitive you need to, so I think that's what the future looks like, I think that's where we're headed and it's fantastic in many ways, but behind it of course is the shot.
The truth is that it generates an income and an opportunity and that generates a lot of people who are then left behind and we have to deal with that problem, that problem, yes, I'm not scolding the way it works, it's our investment processes, which are Our thinking. expressed in algorithms they work in parallel with my individual decision making so it's like trading with the computer chess game in other words I have a computer chess or maybe I think of it as a GPS this GPS is giving instructions and I am making my decisions. in parallel and then, because it's a big association, I can tell if there's a difference in our decision, why is there that difference between what the computers tell me to do and what I would say? let's say if the community algorithm is missing something or I'm missing something most of the time I'm missing something because what the computer can do is process a lot more information you could do it a lot faster and a lot less emotionally but you can There's going to be times where I see something that's not right there and I can take that and then turn it into a modification to improve computer decision making, so the parallel and you are you.
We are in a world in which that parallel is the future and many things do not even need to have that parallel thinking if, depending on the nature of the decision, because it could be done, done mechanically, that is what emerges today and that is the way it is. the future so well when I went to Wall Street, one of the first surprises I had was that what you'd think was the owner and management profit curve didn't necessarily overlap, so I was constantly focused on those companies where that the manager would consider himself an owner and many companies where the owner was divorced, let's call him a shareholder, the manager focused on the managers utility curve first on what was best for them and then second , perhaps in the current company.
Private equity has changed dramatically and our funding of this started in the '70s, so we've brought down almost 50% of the shares that were trading for small and medium sized companies. Today there is less than there was 20 years ago. Private equity today has significant social responsibilities and that controls many more companies than are listed today are deploying leverage and other forms of capital structure to generate higher rates of return from that standpoint, but what's the point of Since private equity controls more companies that are listed on the New York Stock Exchange or Nasdaq today, how does this affect your thinking and money management?
So if they're going to raise five to six hundred billion a year and they're going to leverage at least two to one, if not three to one, we're talking about these new funds that are going to take one and a half to two billion a year from the potentially public markets and stocks will return part of it in the debt markets, but how does this reflect on you? You're thinking about Bridgewater today well, first of all from the point of view of raising money today because you know that there is a lot of money to do whatever you want in the private market, so you don't have to be public and, in Generally, it's a lot. much better not to be in public security than I am in private security because you can operate in a way that is more effective and that is a natural pressure, as you were referring to before, those institutions are eager to make investments and that is what becomes the nature of the beast and so it will change where the liquidity is of course is having that effect that you're describing in terms of the issues in terms of, let's say, the leverage question.
I think that's equally applicable whether it's in a stock or out of the dark, in other words, if I look through that company and decide well whether I want them, whether it's a public company or not a private company, one can decide what amount of leverage you want and in engineering that one can take a company and say whether you have the right amount of leverage to be in it right now, what's happening is, as you point out, there's a lot more financial leverage due to the fact that the cost of financing is because it's significantly less than the return on equity so if you're thinking I can buy you know if my return on equity is 7% or something like that and I have a cost of financing that I can equalize in terms of the time structure of that, then I can have a designed return that is an attractive return and so the real question is how is it designed to be balanced if it is balanced for that the cash flows are balanced and those returns are sustained in that is a good investment and so of course you are seeing a lot of mergers and buybacks and that kind of engineering that is totally fine and that will also change to the extent that the Federal Reserve adjust money and store to change the calculations of that.
If you look at a lot of the stock market support and who was showing off, it's mostly supported by those who buy from the public who sell shares, the public sectors net sell shares and so financial engineering is a you. knows a major positive influence for the stock market, so that's also why the Federal Reserve should be very cautious about adjusting too quickly because it's not just an effect on the economy, its effect on the financial markets in terms of the amount of leverage the The sensitivity of the financial markets is partially affected by the amount of leverage, it is also affected by the fact that the duration of assets lengthens as interest rates fall because, as you know very well, as interest rates fall interest rates, lengthens effective duration, and increases price sensitivity of those kinds of things, so anyway, um, you'll probably see more about leverage and I don't know if I'm responding, I think the problem is real. and it's that more and more, let's say, shares are privately owned, it potentially reduces those that only trade in the public markets, unless you're participating in the other parts of the capital structure from that point of view in the beam of closing wanted to ask a problem and now there's a vibrant market that's private in other words you can know you can pretty much trade private stuff more it's getting more liquid so once we have private companies buying and selling stocks for companies that are valued at more than 50 billion, it is questionable what is public and what is private today closes due to rain and then we are going to answer a couple of questions from the group here.
I wanted to ask you about your own family, so as I reflect on the last 50 years, there was only one out of over 3,000 companies I funded where the CEO told me he was in it for the money and the wealth was really a byproduct of what he they built and their passion for what they built and we all know it is very difficult for r second and third generation and fourth generation we are a first generation it has been very successful particularly financially as you have four children what are you thinking about for those four children and their three grandchildren I think at the moment and if you are thinking I always think about well, what is your legacy, what is happening with your children, what is happening with your grandchildren, and I know many, and I am sure that you do. own success and the way they led their lives, how do you see that?
Well, I was very lucky and my family I guess was lucky and we, you know, so we had nothing and then as we accumulated this, they like me experimented at each of the stages of going from essentially nothing to more and they so that you really know what the differences are that we didn't come up with this and experiencing that so that your grandchildren can't have had, oh I'm saying it's a, it could be, it certainly could be a problem for the grandchildren, but by experiencing that's what i want to say and also knowing well that you know what you value somehow gets to them in terms of what you like Value i remember when we renovated a kitchen and they shut it down and we had to go into this little room with a hot plate and we all remember how the dinners were great on that hot plate and so on so you can know what you went to mass those losses and you can know as you go up there what matters you know you have one if you have a bed and you sleep and have good food and good relationships well security community of belonging that has touched you Community is the greatest source of happiness.
It's not me saying that this is due to numerous studies and not much of a correlation. There is no correlation beyond a certain base level of income. Amount of money and happiness. So, we know those things. We experience those things. and i'm lucky in a sense that my kids have done that and then what i want to give my kids more than anything and those grandkids is self reliance another word you could have in any life you want to choose but you have to be self reliant in the end , you're strong and I've given them, I don't know, a lot of tough love and they understand the concept of tough love, so that's been it, but it's definitely a problem, yeah, the problem. of having too much money we have already talked about this the problem of having too much money in many cases is much more than the problem of having too little money it depends on where you are right community relations and its greatest reward a greater demand I think a source of happiness and knowing that people can become addicted to these things and you have to be very careful with that, you know you still know how to fly commercially, almost generally speaking, my wife is like that, we get used to these things because and the children are like that, so I think so, It's a big deal and it's important to experience this and that as grandchildren, but I think I'm lucky that my own children understand this and like me, they are more in many cases more austere than I am, I'm not going to go into all that, but it's an important topic yes so let's open a couple of questions yes we were buying it yes no no I don't think so let me be clear I think the one with many data extraction I won't even allow it to be done a regression analysis just so we're clear an algorithm i'm talking about sorry for the interruption let me then let me get this straight an algorithm as i see it is an expression of your thing the question is how do you determine if you're going to the data mine to try to determine your algorithm as a regression analysis I think you are going to have problems particularly in the markets because you are not going to understand it could take a regression analysis of two independent variables and it cannot explain why the coefficient if it says point two five times whatever and you say why it should be that if that changes by 0.25 you can't explain it so I'm not talking about algorithms which in a sense are the decision rules it's expressing no matter how it chooses to come by that just wanted to clarify that, sorry for the interruption, that you risk not getting out of the standard deviations, no, I think again, I think it's not a I'm not conveying it adequately You know what I'm saying I would ask you how you take into consideration tail risk no matter how you do it I have my way you have your waythat the algorithm can capture that it's not a mathematical thing I think it's thinking you have that you're approaching that with some preconceived idea of ​​what I'm doing that's not correct so I'm saying we all deal with the question of tail risk so I would if we had a


and we said what is the best way to deal with cat tail risk then we would derive that we put that into words a and then we would turn that into an algorithm to deal with tail risk , that's what I'm using as an example, so the question is if it represents your good thinking, don't you essentially have the preconceived idea that you think that I? i'm putting a lot of numbers into the machine and then i'm trying to deal with it and we can go that way but i just want to explain that it's not real i think it has to be a reflection of your thinking i think the biggest problem we're with dealing particularly in the markets with respect to algorithms is that the algorithms are going to explode if these two things to consider do you understand the algorithm and the cause and effect relationship does it make a lot of sense to you? of algorithmic and machine learning means that the person cannot explain the logic of the cause-effect relationship and that is the first sign of danger the second sign of danger or risk is that the future is different from the past if it has both, we are in the markets, the future is likely to be different from the past, and more importantly, whatever is discovered will be priced right, in other words, if it discovers something correct and the algorithm discovers it. and other people discover the same algorithm, then what will happen is the worst in reverse because everyone finds that but using that algorithm will raise the price let's say and you won't understand why and therefore it's more logical to go the opposite way of the algorithm that to follow the algorithm, you have to short it well and history has shown us that's the capital case in the long run I mean many, many merger arbitrage cases that have any particular style of investment when you've gone through that process where the person doesn't know the logic I think it's very dangerous so I just want to be clear by the way I don't think it's just an investment problem I think it's a problem of our time because as w we get into a decision making more algorithmic decisions I think it's totally fine if the future is the same as the past and you don't understand it by playing chess for example, or even doctors doing surgeries if the same moves are done over and over again slicing and making those decisions etc so there's no reason to believe the future is different from the past you can get algorithms to mimic and that will be effective and we're going to see a lot of that but we're going to push the boundaries of this because some people in terms of competition won't be able to tell the difference and as a result I think the algorithms in our social zone can be quite dangerous because there is no understanding and the future is different. from the past and that's a formula for danger so sorry so I'm a short anxious interruption.
I said in that time period you were buying stocks at 1 cent on the dollar at 50 60 cents in an hour today. spreads have t Clear non-investment grade death sold it at two and three quarters and three and three quarters euros in the US all corporate or high yield was the security traded more on the underlying credit than the company that where government interest rates have contracted so much that spreads have contracted so much that the risk is that these securities will trade more at the level of interest rates are what underlies what is happening in the company and therefore has brought this element of risk into the market today that is not reflected and is that it doesn't have this cushion, it doesn't have 800 basis points 7,000 basis points when the 20 naira causes these spreads to get so narrow and therefore So the real risk in the 1970s was interest rate risk and in the early 1980s, so there were US government bonds trading at 50 cents on the dollar, not because of credit, but due to fees of interest the next question yes sir I want to distinguish Bitcoin from technology like blockchain and that kind of because when we talk about Bitcoin one could be referring to any of those things and I just want to create the distinction between those things well why not why don't i think why don't you talk about bokor uh ok um a cryptocurrency currency there are two purposes of a currency a medium of exchange and a store of wealth can i have a bond and so on and then there is the question of what if bitcoin aetherium is going to be another tech question ok so all those things are on the table right now it's not an effective means of exchange you know it's definitely someone I don't want to spend It is gone.
You may not use it as an effective means of exchange, except in a very limited number of cases that may also be threatened in terms of the confidentiality of those transactions. and the things that governments are doing to go beyond that sequence so it's not an effective medium exchange as of now and it's not an effective store of wealth and that's because the speculation is such and the participant is something which I would say is a type of classical bubble situation, which means if you look at the nature of the participant in it and say what is the level of sophistication in their understanding, the capacity is if we have a sophisticated investor who then is really thinking in terms of expected value terms of what it's going to be and so on or we have an investor who was inclined to flip it and trade in and out and what is that component by the way you can have a wonderful investment that is an investment long term and I still have a bubble in that investment so I'm not saying this is a forever thing but the nature of the participants in that investment and what they're doing h It has become a bubble in which you know when I do it.
It doesn't mean it's a worthless investment, it just means that when you look at the characteristics of what constitutes a bubble, it's being bought for resale by a naive group of people who are attractive because it's going up and has those bubble characteristics. so and then there's the question of which is the version so if I take Bitcoin and then there's an M theory and then there's the I don't know each one that might come and how they'll work I'd say like as opposed to the notion of chain of blocks and the whole concept of cryptocurrency which has a lot of merit but as a currency it can't have the volatility fueled by speculation on it, turn it into a store of wealth so that's a feature of it right now getting in the way for us of its potential it can be designed differently to some extent there you know maybe if you created it on a different engineer if he was trying to make it effective as a currency he would design how I do it differently.
I won't deviate on how I would design it to do it differently, so I think it has a lot of potential as a concept and a blockchain, but at the same time it has these issues that I'm referring to. so we all remember when the US and other currencies talked about what percentage was backed by gold, then when he talked about what is the store of value and then the separation of the currency from gold and I think we see that you just have to look at social media a number of people who have the most views on twitter are now thinking about creating their own security in their own coins so if you're going to come if I have a hundred million people following me on the web maybe I I should also have my own currency so they can back me with money from that point of view.
The next question is resolved. China has four big challenges economies, but if you really look at the nature of these fundamentals and overcoming those challenges, here are the four challenges: So you have to do a debt restructuring you have to do an economic restructuring you have to develop your markets of capital and you have to manage your balance of payments those are the four main challenges that every country in the world has had the ones in the United States had three major debt crises we have had balance of payments challenges and all that kind of thing, the The real question is if you're denominated in your own currencies, debt that's primarily denominated in your own currency and you know how to manage these things well, then what we're seeing in China is we're seeing effective movement toward debt restructurings. debt that you are seeing and will see after we pass the 19th People's Congress and so on, v It's going to be more of that that kind of movement there's a very impressive economic restructuring going on in the old industries, the state-owned companies in those old industries and there's the development, the rapid development of wonderful new cutting-edge industries that are periods that are fantastic, you know , when I originally went to China in early 1984, I would bring a ten dollar calculator for them and they thought it was like a miracle and now I'm looking at it in terms of where they are in artificial intelligence and all that stuff and it's comparable to where we are and I have very good reasons why we are having an economic restructuring that is very effective in terms of the development of the capital markets Wow, I mean and you know blink Hong Kong and the development of securities in recent years the ability to really develop liquidity the depth of those markets opening those markets is extremely effective and in terms of dealing with their balance of payments is dealing with this balance of payments effectively and the reason is because they have capable leaders i know the economic leaders the people who are there i know how well what their skill sets are and how they are handling it and they know that they have an advantage in some aspects in terms of the ability to control some of those things so I'm very, very impressed if you take a look at them, it's their underlying fundamentals, their children's education, this, this movement to reform, In other words, to reform means, in other words, to become a much more market-oriented economy. and also the rule of law of the rule of law eliminating corruption or reducing corruption look at the incredibly impressive achievements there I trust I feel good about China's leadership the capabilities not only at the highest level but also particularly in the economy and then and I'm seeing that, so those are issues that you know create little bumps in the road.
I think people misunderstand China because these existing problems, a lot of people thought they were a problem. That's going to mean it's going to be terrible for China, but they don't essentially understand engineering and you have to look back and say it's been a consistently impressive record since Deng Xiaoping came to power and he was very similar to Deng. Xiaoping was quite similar to let's say a capitalist it's ok if you say who has dated it's glorious to be rich that was deng xiaoping as they brought him to China and that continues in terms of creating that kind of and then the political risks are not too high political risks so they have to build the rule of law anyway I am answering the question too long but I am optimistic about China and their capabilities they will have to change the economy no longer cheap stuff produced on the cheap but its ok because they will have the ability to do that anyway about you most people are too busy doing it to sit down and write a book and i think all of us Rea are envious that you took the time to write a book to capture not only his personal experience, but also the principles on which he has sat and potentially look forward to in this third chapter of his life as a member of The Giving Pledge with you and your family as to what it will accomplish. and how could you change that world thank you for joining us today thank you for having me we have a partnership in that third phase of our life thank you

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