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Ray Dalio: Central banks will get so desperate they will give money away

Feb 27, 2020
Those who follow him know that

they

have developed models to explain how the economy works, and anyone remotely familiar with Bridgewater knows the machine, for example, knows the importance of the business cycle, and furthermore, the importance of the long-term debt cycle. those models tell you right now, well let me take a second and review the model so everyone knows, so I'm saying that over a period of time, productivity is the most important thing, what you earn is what you can get to spend, but there were two cycles there, there is a short-term debt cycle that allows you to spend more than you earn in a short period of time, but when you pay, you spend less and that's the cycle, the five to eight years is the business cycle we're used to everyone understands that and then there's a long term debt cycle that goes from 50 to 75 years and you hit your limitations when you have too much debt relative to income so you already you can't afford it and when interest rates hit zero then there can be no stimulation we ran out of monetary policy number one and we have to go to monetary policy number two monetary policy number two was quantitative easing this happened in the Great Depression that happened recently and that means the purchase of financial assets by the

central

bank and the sellers of those financial assets and then for other financial assets and caused those other financial assets to rise in price and had the effect of reducing returns those expected returns and when those other expected returns are low relative to cash that one is almost indifferent and so when you buy that bond when the Federal Reserve puts that

money

into the system that person is going to go then it's no different and that's called pushing a rope and pushing a string started in 1935 and we're getting into a situation that's generally globally somewhat analogous to that so again we're getting close so if I just take country by country now if I could

give

you a little Tourette , do it quickly ok so japan was there first for a couple of decades for a couple of decades

they

press do a string because they hit interest rates at zero and some of the most aggressive quants. easing program that the world has ever seen and they are trying to stimulate to get 2% inflation and they are not going anywhere it is not working and it is not working so Europe is there okay okay Europe if you look at the curve crossing us to have interest rates at zero or slightly negative depending on where it's okay then interest rates certainly aren't going to work and then purchases of those financial assets pass through and currency movements and the like and the effect of growing those assets is not very limited so we are in Europe very close to being in Europe in the United States we have a little bit more room we are very close to zero interest rates and then if you take the spreads the spreads are are relatively low so a little less than two percent of bonds, you know, we think the expected returns on stocks are probably around 4%, so There's some headroom, some capacity, the problem is if that creates asymmetric downside risks, so the downside means it's tightening. it's always going to be effective it's easy if you raise interest rates and things

will

slow down because everyone has a lot of debt no problem the situation is downside risk because if you have a move down it's a risky situation then we're going to have to see and you

will

see further exploration of the movement to be able to do other forms of stimulation that I call monetary policy three monetary policy three will not be only through quantitative easing as the financial assets of the people who have it and stay in the community we are going to have to move more and more towards making purchases that put

money

directly in the hands of spenders because seeing the link between having money in financial assets and having spending is getting weaker and weaker, can i make a pause for a moment? what you are effectively telling me is that monetary policy wants interest rates to run their course, ineffective monetary policy has become too much quantitative easing if I understand that correctly ineffective

central

banks

are now going to have to print money and hand it out to consumers one way or another they're going to have to go more directly to the spenders how that works well it can work in a mix of fiscal and monetary policy in some there's a continuum of how it's worked in history in some cases it can make the federal government runs deficits that the central bank essentially monetizes by lending the money and that's one path some and then there's a continuum and on that continuum the other side of that continuum is called helicopter money which means helicopter money is the process of essentially p By putting it directly into their hands, the central bank has the legal ability to essentially put money and in his hands.
ray dalio central banks will get so desperate they will give money away
There is a legal exchange in the Loess from one place to another to put it directly in your hands for you to spend, in other words, not to be overlooked. circumventing the financial markets to do that so if there are a variety of ways that can be done history is littered with them we just don't know about them because they haven't happened before in our lifetimes in other words this debt to long term cycles happen once in a lifetime and people aren't sure even once a century though they are rare and but if you go back in history and see them they have happened many times so let's look a little more short term because that's going to take some time to develop I take it and analyze it and look at what's going to happen in the next while well you've been saying for some time that you anticipate that the feds will have to relax again and possibly even embark on a new round of quant making it easier for the next big move to be minor moves like you can get another 25 basis point move but then not see Dean yeah he could go up good he could see another 25 basis point rate hike I'm not saying that I couldn't see I just want to be clear yes I think the next big move is going to have to be towards QE rather than a big tightening you won't see a big next move because we could be up it could be until the tick yes it could pick up next a couple of weeks from now I don't think so.
ray dalio central banks will get so desperate they will give money away

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ray dalio central banks will get so desperate they will give money away...

I think he would be a seer. I think the Federal Reserve has come to the notion that we are living in a world economy and the circumstances that are now happening or surprise them have surprises because they are not paying enough attention to the long-term debt cycle in other words, what is ? There's a reason their attitudes have changed, okay, and then I think nk is great that their attitudes have changed towards that risk, but if you look at their around the world, our risk is not inflation and our risk is not it's economies overheating, okay, so you still feel the same way about the Fed's trajectory and that's correct if the risks we've talked about are asymmetrically downside to the global economy and to policy effectiveness monetary because of this spread compression between fixed income, you know in risky assets, what does that mean for asset prices, well, it means asset pricing is right to the point that premiums risk come back nothing a little bit of that that's right in other words the correction that happened in the stock market let me be clear I am not bearish on the stock market Nerd.
ray dalio central banks will get so desperate they will give money away
I am not bearish on the stock market. 4% return in other words long-term return 4% that is a problem for many savers but nevertheless the options are not in funds like the university where we are now, they are in pension funds and many savers it is a big problem that it's like a slow growing cancer because it won't happen overnight but it will mean we won't have enough money to fund those things but nonetheless investors pick the assets and the options are cash which like zero returns a bond which has less than 2% return and the stock as we calculate it says something like 4% expected return so when you look at those assets what would happen is as they sell you have the effect of making those assets more attractive and then drawing us to engage or draw others into the issue we're dealing with here is the possibility of the negative feedback loop that comes from that and the ineffectiveness of the po currency policy so when stocks go down and you have a negative wealth effect that has a negative effect on the economy and when that has a negative effect on the economy and you don't have the ability to alleviate what I'm concerned about is if the situation becomes weak enough in the economy like Japan's situation, the strong as you said two decades, you will have a situation where they then have to do something else say I'm going to take this opportunity just to remind everyone that this is Ray Dalio , of course, the founding president Co CIO of Bridgewater Associates and we are simulcasting live on Bloomberg radio welcoming everyone to the conversation let's go beyond stocks if the long-term average annual return of stocks is 4% and obviously it's lower for government bonds and cash right now and at the moment it's zero what makes sense is an investment strategy what what would i buy?
ray dalio central banks will get so desperate they will give money away
Did you know? Are you sure that indeed? Do you know in general terms where? What? What will work well? You might think about investing one if you're going to create a good strategic asset allocation mix that's a balanced portfolio, meaning you're not going to go to the betting table and bet against active investors like me. getting the markets wrong it's not easy to win in the market it's harder to win in the markets than competing in the olympics wait a second wait a second you guys have an amazing record of winning yes it's harder to compete in the markets today than it is which has been since he found in Bridgewater no I don't think so it's really not the way we do it and the reason I say it's not the way we do it is we don't take systematic biases I think a lot of people are systematically stretching out everything you know so we have a world where when the world gets bad it's bad for them in 2008 it was great for us I don't know we had almost 10 percent. come back in 2008 so we have a chance to go either way maybe we're wrong g ok if we're wrong so I'm so scared of being wrong it's helped reduce my chances of being wrong because I'm so scared not to take on debt you know that I don't feel good about and we diversified our portfolio and that's how we got the track record.
I was just commenting in terms of if, let's say, um, you asked me about inverters, so I'm trying to get back to what an inverter should do absolutely right and what you guys think is appropriate so this is what I'm trying to do you guys are doing well I just want to convey to investors I think the average investor most people don't compete against professionals like us or other people who don't make tactical asset allocation bets or moving in the markets because you're probably going to lose it's hard for what was really beautiful place points you don't have to have a devotee a balanced portfolio in other words think about how you're going to have a balanced portfolio what you know is that the asset class as a whole over a period of time i'm going to outperform the effective ok that's the most you could be most comfortable with if they don't you have a depression the only times it hasn't happened but ro know how to achieve a balanced portfolio and that is another topic.
I don't know if you want to talk about tactical betting, in other words I can go on the show and I could say I think this is good, but then what happens is if I come back a month later and then I change my mind because something happened then I go to leave a few I'm going to fool people into tactical betting I don't think it's going to be helpful I would say that we're in an environment where it's very important to have good diversification and that will include assets like, to some extent, such maybe some gold in your portfolio, in other words, what could you say to investors trying to break even in various ways? the whole issue of how to do it and also I think you know a gold you know, in five percent of your portfolio, five or ten percent of your portfolio,

give

n the circumstances, it would also be prudent to act, prudence is the important thing , the reason I'm also referring to is that we have a situation where there is a money, in other words we also have a fiat money system, so we are having problems as the central bank operates, so it is think of it as another form of cash and when cash now has interest rates of zero or zero percent or less think of this as one of those possibilities in terms of how do you create diversification I respect the fact thattactical view needs to change if you're going to be an effective investor but I'd like to get your tactical view on two things if you'll excuse me we'll see oil no I'm not going to give you a tactical China um ok I'll give you some , I'll give you what I think a little about China, I think that China is going through a situation that is very similar to what the United States does and other countries have gone through several times, which is that there is a debt problem, the debt is rising too fast just apply the template you can't make debt grow faster than your income for long ok so that's what it's been like having to run out of space and so you just apply the temple to china for that they have a slower debt rate and they are going to have to restructure the debts and are in the process of doing it.
We have had three major debt crises in the United States. United States and we have made that every time they have to restructure their economy they have to have a different type of economy the old industries are out the new industries have to come in this has happened to us many times I remember one was a steel industry and we were heartbroken because we would lose the steel industry so we went from manufacturing to services and now for services we were going to digital technologies and South on they have to restructure their economy that's a hard thing to do and they have a bullet The balance of payments challenge it's a balance of payments problem in other words the flows we've had three challenges and balance of payments flows so we have a situation in China that is very similar to those cases and there are good ways to handle these things and there are bad ways to manage those things and leadership is important so by my contacts I mean my contact that I've had there who has pers You were very capable, very capable in leadership, managing the stock market was not capable, no.
I don't confuse the COO's stock market handling with the ability to restructure their debts, the processes that they're going through, and therefore the leader, if he's confident, I'm confident, he's got the way I've described. is to have a heart transplant so if I said you're going to have a heart transplant this is what you're probably going to be okay with in the long run it's probably going to weaken you that's okay and it has to be well executed and if you know it's a little bit it is a difficult situation that will weaken you and you will overcome it and be better than you were before I think that is the situation in China I think that the people who have exaggerated it in one way or another, there are people who have seen it as a boom or there are people who have seen it as a disaster that will completely collapse the system.
I think they're actually missing out on what's going on. He mentioned the stock market crash we witnessed in China last year and how that's not necessarily terrible but it doesn't reflect how the leaders are handling the economy based on what he's seen. Do you feel better about your ability to handle your debt situation now? from what you said six months ago um probably pretty much the same thing the balance of payments problem is going to be challenging lemme if you want to get into balance of payments i'll explain it a bit but the balance of payments he has to make t he currency a lot of money leaving the country yes or well and there and they are draining the reserves very quickly that is at will because the money is leaving the country and these cycles also happen everywhere yes but what happens is when money is leading in the country and less money wants to come into the country it creates a balance of payments problem in terms of that money going out of the country they have a lot of control over the nature of that money because a lot of it is state owned and stuff , for example, we just opened the bond market to foreign investment, we estimate that probably in maybe 18 months or two years it will probably be worth around maybe 200 billion dollars of influence Oh in flows, in another s words, you can have by opening up the bond market and having foreign investors invest in the market will also attract money in many of your companies are state-owned companies and multinational companies and they have greater controls then we can think for ourselves and so on, although there is a balance of payments challenge, there are ways to deal with that as well.
I'm not saying it's not a challenging situation, it's a challenging situation, but in the tools for and I would say the capabilities to manage it are excellent. I will say that you know that I get to know different economic leaders around the world in different ways and I would say that their capabilities are equal to the best out there anyway in terms of the things that need to be done with their fiscal monetary policy, restructuring of debts, I mean all those kinds of things and there is an advantage, look, there are many disadvantages to a system like that, but one of the biggest advantages is that there are also more controls over things, do you think that to solve this problem of balance of payments that you have described will have to devalue their currency? there is a pressure on the balance of payments.
It's one of those things where it's too close to call the tools that are out there are really cool in a lot of ways and then it's just one of those too close to call situations when we go back to what you were describing the failures of monetary policy one interest rates monetary policy failures for quantitative easing the possibility of monetary policy 3 where governments somehow put cash directly into the hands of consumers does that our ger us what makes that our ger right or wrong? because you know that if you're thinking about an investor, well, well, if you think there's the economy and there's the investor, I was going to ask the answer, the economy is part of a first, but you asked from the perspective of the investor from the perspective of the investor, I would say that Japan is more than likely, unless there is a debt restructuring to deal with these things, which means that we have an increase in the limits as far as the debt ratio sees our income as a group something there is the private sector does the public sector but let's take us as a country and then let's take as the world so include Europe take China take the whole world the world has a limitation right now in terms of not being able to borrow a lot so we can't we can't borrow our ways to increase spending at zero interest rates down there that's where we are and then in terms of yield we're going to have a low environment performance. and that low return environment is the main problem which becomes the main problem when you compare it to japan ray and i just want to remind everyone who is watching again bloomberg viewers and bloomberg radio listeners all over the world, does that mean the United States and Europe the developed world broadly, of course Japan is part of that, but is that the trajectory is that the path we're headed down is a suction loosely speaking, I think that is the most likely scenario, which means slow growth very slow growth deflation ups and downs ok the biggest difficulty in stimulating monetary policy that manifested itself in deflation the move towards more and more alternative ways of having monetary policy that will produce stimulus more currency volatility but in other words I don't expect something like 2008 because in 2008 there was a debt crisis there were a lot of debts that were due and could not be They were going to pay and that was what 2008 was.
This is not like a crisis situation left that way. It's not one of them, you know, I don't think we're probably going to see the big bang type of crisis. I think what we are going to see is this type of situation where there is the dynamic of relative stagnation, low returns, and also, you know, not much of a rally and low returns. and zagnut and volatile markets choppier markets probably for a period of time because like what we've seen like a star you see some of this year yeah because like you have zero interest rates and t When a sell off occurs in the market selling off in the market creates risk premiums and there's a lot of liquidity so from an investor standpoint it's okay then you can go from something like cash or a bond or something to an asset . like stocks and you could move so you have this move up and down as risk premiums change but investors have to decide that those risky assets have changed in price enough to create that spread attractive enough between that's right, are we there yet? well, you know that no one knows exactly what that range is.
I think it becomes his nature and then we have to see if there is that negative feedback loop. I see well because that part of the negative feedback loop is in another. In other words, stocks go down and that means the wealth effect goes down and as the dollar goes up the wealth effect is and that makes us less competitive, doesn't the value of the dollar go up as well as the decline in value? The equities is essentially a tightening of monetary policy and there's a tightening globally, there's a tightening of global economic activity and those negatives are exactly how they're transmitted to the economy, it's the asymmetric risks that I'm talking about .
I'm sitting here, I want to touch on something that I know is important to you, but it's been getting a little bit of attention lately, let's say it's the culture of Bridgewater, and the attention it's getting is because of this notion that there's some kind of Dispute. if you will do it between you and your co-CIO Greg Jensen. Give me an idea of ​​what goes on behind the scenes. The way we succeed is by having a thoughtful disagreement when I am so afraid of being wrong and the key to my success and our success is to try to find people who disagree with us who are smart and try to understand their point of view to that we can have disagreement so that we can have independent thinkers, there will have to be disagreement and you have to do to be able to disagree well and you have to have those processes, you also have to know what your strengths and weaknesses are: you have to bring all the weaknesses to the surface this is the essence of the culture and people can say that everything is dirty from your beginning that is correct so you have to bring all the weaknesses to the third party you have to bring all these things tensions individual and we consider and you have to work for yourself and not in a thoughtful way this is how we are successful in the markets this is how we are succeeding to and that also builds our community in one sentence what we want is ours the goal is meaningful work and meaningful relationships the relationships part is just as important as the work part meaningful work and meaningful relationships through radical truth and transparency radical what i mean by radical the truth means we can talk about weaknesses, who's good and who's not and so on, and bring all of those things to the surface issues and then radical transparency so everyone in the company can seeing all these things happen so there's no turn behind it that's what's happening so as we work our way through this me and greg have been working together for 20 years it's also very over the top because you You do, Greg and I, there are some great people, you know David McCormick, I'm sure Aileen Murray.
Bob Prince has been with us for his CIO the years that we have a whole team of people there it's a 1,500 person company okay so if it's almost a character they want you to know okay there's one that knows that there is a character in your story, who can be painted in the media as something that is not right, well, that is precisely why I presented your question because I think it is important that you clarify things, thank you, give me the opportunity, but that's what what's going on, in other words, do you all care about this drama, well no, Greg and I disagree on some things, yes, but also how much is there David McCormack, who might disagree on some things , and Eileen Eileen, but and will help. we have a process to work ourselves out as i started my transition out of management i will always play the game because i love the game as long as i am welcomed into bridgewater they will only let me play later yeah but as far as the part management in that transition, we think it's going to take a while to figure out how it works and that's what makes you one last question, Ray, I'm curious because we talk a lot about the Machine We talk a lot about cycles and how the economy works.
What role does politics play in that American politics is attracting an enormous amount of attention? Two days ago we had Super Tuesday, it looks like Mr. Trump is on his way to winning the Republican nomination. Things could change. Do you have to recalibrate your models to account for things like that? I'm going to take the first part of the question instead of the recalibrating part just to be answering you know if you go to YouTube I connect because there I took 30 minutes to say how the economic machine works and there's a photo and then it's on YouTube which is 30 minutes and will explain everythingwhat I know and basically what happens is that there is a part in a cycle where there is tension and when you get to this phase of the cycle there is tension between the haves and the have-nots and there is also a frustration with the government and what is happening in the United States it is not very different from what is happening in Spain with pidemo or what is happening in many countries that there is a frustration we have a situation in which emotionally charged individuals who may not be well informed to choose the leaders they can select leaders who are not capable and our emotionality and if that happens in these countries, which is much more likely to happen in the circumstances given these stresses, that means you get a type of leadership that handles situations worse than if you had a type of people more capable and moderate than to understand how the machine works and how they should operate it, so in whose hands it is important, yes, okay, and what and how the fragmentation if we are a group fighting against another group it will be bad if there is in some sense a moderation and a coming together of people in terms of a common mission and thoughtful disagreement as we talk about agreements of thought if you could work your way to get the answers correct, then this is all manageable so that policy does matter.
In response to your question about how we handle it, we measure what your actions are and based on your actual actions, we make our responses. I want to thank you very much on behalf of Bloomberg Television listeners around the world have been a pleasure here at the University of Texas Ray Dalio is the president of Found

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