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

Those who follow him know that he has developed models to explain how the economy works and anyone even 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 go through the model so everyone knows, so I say that over a period of time, productivity is the most important thing, what you earn is what you can spend, but around that there are If

they

were two cycles, 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 there is that cycle, the five-to-five cycle.

Eight years is the economic cycle we have. We're used to everyone understanding that and then there's a long-term debt cycle that lasts 50 to 75 years and it goes through its limitations when you have too much debt relative to income so you can't pay it anymore and when the interest rates go down. to zero, so there can be no stimulus, we have run out of monetary policy number one and we have to move to monetary policy number two, monetary policy number two was quantitative easing, this happened in the Great Depression, it happened recently and that means the purchase of financial assets. assets by the

central

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

money

into the system, that person

will

then leave, no, it's different and that's called pushing a string and pushing a string started in 1935 and We are entering a situation that is generally globally somewhat analogous to that, so again we are approaching it, so if I take country by country now, if I could

give

you a little bit of Tourette's, do it quickly, okay, so Japan was there first for a couple of decades for a couple of decades pulling a string because

they

hit zero interest rates and some of the most aggressive quantitative easing programs the world has ever seen and they're trying to stimulate to get inflation of 2 %. and they are not going anywhere, it is not working and it is not working, so what Europe is there, okay, okay, Europe, if you look at the cross of the curve, we have interest rates at zero or slightly negative depending on where okay, so interest rates are certainly not going to work and then purchases of those financial assets are transmitted and currency movements and the like and the effect of raising those assets is not very limited, so we are in Europe very close of being there in Europe, in the United States. we have a little bit more margin, we are very close to zero interest rates and then if you take the spreads, the spreads are relatively low, so a little less than a two percent bond, you know, we think that the Expected stock returns are probably around 4%, so there is some headroom, some capacity, the issue is whether that creates asymmetric downside risks, so the downside, meaning your adjustment

will

always be cash, it's easy to raise interest rates and things will slow down because everyone has a lot of debt, it's not a problem. the situation is downside risk because if you have a downward movement it is a risky situation, so we are going to have to see and you will see a greater exploration of the movement to be able to create other forms of stimulation that I am calling for policy monetary policy three, monetary policy three will not be only through quantitative easing, since the financial assets of the people who have them and remain in the financial community we are going to have to move towards making more and more purchases that put

money

directly into the hands of spenders because the link between having money in financial assets and having spending is becoming increasingly weaker.

Can I pause for a moment? What you're really telling me is that monetary policy wants interest rates. has run its course, it has become ineffective, monetary policy is also quantitative easing, if I am not mistaken, ineffective

central

banks

will now have to print money and

give

it to consumers in one way or another, they will have to do more directly to the spenders, how does that work? It can work in a combination of fiscal and monetary policy. There is a continuity of how it has worked in history. In some cases, the federal government can be made to manage deficits that the central bank essentially monetizes. lend the money and that is one path and then there is a continuum and on that continuum the other side of that continuum is called helicopter money which means helicopter money is essentially the process of putting it directly into your hands the central bank has the ability legally to basically having money in your hands there is a legal change in the Loess from one place to another to put it directly into your hands for you to spend in other words so as not to circumvent the financial markets to do so so if there is a range of ways in which You can do that, history is loaded with them, we simply don't know them because they haven't happened in our lives before;

In other words, these long-term debt cycles happen once in a lifetime and people are not safe even once. Still, in a century they are rare, but if you go back in history and look at them, they have happened many times, so let's look a little more short term because that will take some time to develop. I take it and Well, you've been saying for some time that you anticipate the feds will have to ease again and possibly even embark on a new round of quantitative easing, which is the next big move they'll make. They'll be minor moves, like you might get another 25 basis point move, but then you wouldn't see Dean, yeah, you might go up, well, you might see another 25 basis point rise in rates.

I'm not saying I can't see it, I just want to be clear, yes, I think the next big step will have to be towards quantitative easing rather than a big tightening. You won't see a big move, the next move because we could be up, it could be to the point, yeah, you could get a rally next. In a couple of weeks I don't think they will be psychic. I have always said it and I continue to say it. I think it would be a serious mistake. I think the Fed has come around to the notion that we live in a global economy and the circumstances that are happening now or that surprise them have surprises because they are not paying enough attention to the long-term debt cycle;

In other words, what is the reason why your attitudes have changed, okay and I think it's great that your attitudes have changed regarding that risk, but if you look at the world, our risk is not inflation and our risk is not the overheating of economies. Well, then you still feel the same way about the trajectory of the Federal Reserve and that is correct if the area's policy is asymmetric if the risks that we have talked about are asymmetrically to the downside for the global economy and for the effectiveness of monetary policy because of this compression of the spread between the yield In fixed income, you know, risk assets, what does that mean for asset prices?

Well, it means that the asset price is correct up to the point where risk premiums return. None of that, that's correct, in other words, the correction that occurred in the stock. market, let me be clear, I am not bearish on the stock market, no, no, I am not bearish on the stock market. I'm saying what we have is like you have those mm-hmm risk premiums, but let's say I'm probably expecting stocks. We calculate a return of 4%, in other words, a long-term return of 4%, that is a problem for many savers, but even so the options are not in funds like the university we are in now, but in funds of pensions and many savers.

It's a big problem that's like a slow growing cancer because it won't happen overnight, but it will mean that we won't have enough money to fund those things, but anyway investors choose the assets and the options are cash, which is zero. returning a bond that has a yield of less than 2% and stocks, as we calculate it, says something like an expected return of 4%, so when you look at those assets, what would happen is that as they are sold, you have the effect of making those assets more attractive and then attracts us or attracts others in the topic we are dealing with here is the possibility of the negative feedback loop that arises from that and the ineffectiveness of monetary policy, so when stocks go down, it has 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 it, what worries me is that the situation will weaken enough in the economy like the situation in Japan, the situation is strong like yours.

He said that two decades will have a situation where they will have to do something else. I'm going to take this opportunity just to remind everyone that this is Ray Dalio, of course, the founding president and co-CIO of Bridgewater Associates and we're going live simultaneously. on Bloomberg radio welcoming everyone to the conversation, let's move beyond stocks if the long-term average annual return for stocks is 4% and it's obviously lower for government bonds and cash right now and by momentum is zero, what makes sense is an inversion. strategy what would you buy? You know? what are you sure? you actually know, generally speaking, where what what is going to work well I think about what is working perhaps more appropriately today I think there are two ways the average investor should think about investing One is: are you going to create a good strategic allocation mix of assets that is a balanced portfolio, which means that you are not going to go to the betting table and bet against active investors like me?

It seems strange, I am afraid of making mistakes in the markets it is not easy to win in the market it is more difficult to win in the markets than to compete in the Olympic Games wait a second wait a second you have an extraordinary record of victories yes, is it more difficult to compete in the markets? markets today than it has been since we found out at 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 because we don't take biases systematic, I think for a Lot of people systematically search for everything you know, so we have a world where, when the world gets bad, it's bad for them in 2008, it was fantastic for us, I don't know, we had almost a 10 percent return in 2008 so we have a chance to go in any direction we can just be wrong okay if we're wrong then I'm so afraid of being wrong it's helped me reduce my chances of being wrong because I'm so afraid of not taking on debt that, you know, 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 se, let's say you asked me about investors, so I'm trying. To get back to what an investor should do absolutely right and what you think is appropriate, so this is what I'm trying to do: You guys are doing it right. I just want to convey to investors that I think the average investor, most people don't compete against professionals like ourselves or other people, we don't make tactical asset allocation bets or move the markets because you're probably going to lose. It's difficult because what was really beautiful places points. No, you have to have a devoted and balanced portfolio, in other words, think about how are you going to have a balanced portfolio?

What you know is that asset class as a whole over a period of time. I'm going to beat cash. Well, that's about as comfortable as you could get if they don't. The only times that hasn't happened is if you have depression, but knowing how to achieve a balanced portfolio and that is a completely different topic. I don't know why you want to pass if you're talking about tactical betting, in other words. I can go on the show and I might say I think this is good, but what happens is if I come in a month later and then change my mind because something has happened, then I'm going to drop some.

I'm going to cheat. people, so tactical betting I don't think is going to be useful. I would say that we are in an environment where it is very important to have good diversification and that will include assets like, to some extent, maybe a little bit. of gold in your portfolio, in other words, what could you say to investors who are trying to achieve balance in various ways? That's a whole topic on how to do it and I also think you know a gold you know five percent of your portfolio, five or ten percent. of your portfolio under the circumstances, it would also be prudent to do so.

Prudence isimportant. The reason I am also referring to is that we have a situation where a debt is money; in other words, we also have a Fiat monetary system and So we are having problems with the functioning of the central bank and you have to think of it as another form of cash and when cash now has interest rates of zero or zero percent or less , think about it as one of those possibilities in terms of how do you, how do you create diversification? I respect the fact that the tactical view must change if you want to be an effective investor, but I would like to know your tactical view on two things, if I may, we will see oil, no.

I'm not going to give you a China tactic. Okay, I'll give you a little bit of what I think a little bit about China. I think China is going through a situation that is very similar to what the United States and other countries have gone through several times, and that is that there is a debt problem, the debt is increasing too fast, just apply the model, you can't make the debt increases faster than their income for a long time, well, that's what they've been running out of room for and then you just apply the temple to China, so they're going to have to have a slower debt rate and they're going to have to restructure their debts and are in the process of doing so.

We have had three major debt crises in the United States. States and we have done 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 that 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 the South has to restructure its economy, that is a difficult thing to do and they have a balance. of payments challenge a balance of payments problem, in other words, flows, we have had three balance of payments challenges and flows, so we have a situation in China that is very analogous to those cases and there are good ways to manage these things and there are bad ways of managing those things and leadership is important, so according to my contacts, I mean my contact that I have had there, there are very capable people, very capable in leadership, managing the stock market.

I was not able. confuse the COO's management of the stock market with the ability to restructure his debts, the processes they are going through and, therefore, the leader should have confidence. I am confident that it has the shape that I have long described, it is like China. have a heart transplant, so if I say you're going to have a heart transplant, this is what you're probably going to be fine in the long run, it's probably going to weaken you, okay, and it has to be well executed and you know it's a little bit It's a difficult situation that will weaken you and you will overcome it and be better than you were before.

I think that's 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 cause the total collapse of the system. I think they're actually missing what's going on. Do you think you mentioned the stock market? debacle that we witnessed in China last year and that's not necessarily terrible, but it doesn't reflect how the leaders are managing the economy based on what you've seen, do you feel better about your ability to manage your debt situation now than what he said six ago? months ago um probably more or less the same thing the issue of the balance of payments is going to be a challenge let me if you want to get into the balance of payments I will explain it a little but the balance of payments has to do with the currency a lot of money leaves the country yes or and there and they are depleting the reserves very quickly that is at will because the money is leaving the country and also these cycles happen everywhere yes, but what happens is when the money is leading in the country and less the money wants to enter the country creates a balance of payments problem in terms of that money leaving the country, they have a lot of control over that nature of that money because many of them are state companies and other things, for example, We have just opened the foreign investment bonds.

We estimate that probably in 18 months to two years that will be worth about $200 billion of influence. In other words, in the flows that can be obtained by opening the bond market. and having foreign investors investing in the market will also attract money in many of their companies are state-owned enterprises and multinational companies and they have greater controls over the then we could think for ourselves and so on as long as there is a balance of payments. challenge there are also ways to deal with it I'm not saying it's not a challenging situation, it is a challenging situation but as far as the tools for management and I would say the capabilities to manage it are excellent, I will say that you I know I know different economic leaders around the world in different ways and I would say their capabilities are equal to the best out there anyway in terms of the things that need to be done with their monetary fiscal policy, debt restructuring, I mean everyone.

That kind of thing and there is an advantage. Look, there are a lot of disadvantages to a system like that, but one of the biggest advantages is that there are also greater controls over things. Do you think that to solve this balance of payments problem that you have? described, they will have to devalue their currency. You know, I don't know. I guess what I would say is that there is pressure on the balance of payments. It's one of those things where it's too close to call the tools. The ones there are are really great 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 monetary policy failures, the interest rates, the monetary policy failures, the quantitative easing, the possibility of monetary policy 3 where somehow governments put cash directly into the hands of consumers makes our ger us what makes our ger ger good or bad for you know if you are thinking about a good investor, Well, if you believe that there is the economy and there is the Investor I was going to ask the answer: the economy is part of a first time, but you asked from the perspective of the investor.

From an investor perspective, I would use Japan as the most likely unless there is a debt restructuring. to deal with these things, which means we have raised debt limits relative to our income as a group, something that the private sector does, the public sector, but let's take as a country and then as a country. world, so take Europe, take China, take the whole world, the world has a limitation right now in terms of you can't create much debt, so we can't borrow our ways to increase spending with zero interest rates down there. That's where we are and then in terms of performance, we're going to have a low-performance environment and that low-performance environment is the main problem.

That becomes the main one when you compare it to Japan Ray and I just want to remind everyone. Who is watching again Bloomberg viewers and Bloomberg radio listeners around the world? Does that mean that the United States and Europe, the developed world broadly, of course, Japan is part of that, but the trajectory is that the path we're heading towards is, broadly speaking, shit? I think that is the most likely scenario, that is, slow growth, very slow growth, deflation, ups and downs, okay, the greatest difficulty in stimulating monetary policy, which manifested itself in deflation, the movement towards other forms increasingly alternatives of having a monetary policy that will produce stimulation, more monetary volatility, but in other words, I do not expect something like 2008 because 2008 was a debt crisis, there were many overdue debts and they could not be paid and that is what 2008 was, no It is a crisis situation that is left like this.

None of them, you know, I don't think we're going to see a big bang type crisis. I think what we're going to see is this type of situation where there is the dynamic of low relative stagnation. returns and also, you know, there's not much of a rally and low returns and zagnut and volatile markets, choppy markets probably over a period of time, so, like what we've seen, like a star, it looks like any of this year, yes, because like you like you. we have zero interest rates and then we have the market selloff, then the market selloff brings back the risk premiums and there is a lot of liquidity and therefore from the investor's point of view, okay, then you could abandon something like cash or a bond or something like that to an asset like a stock and you could get out and then you have this movement up and down as those risk premiums change, but investors rent us we have to decide that those risk assets They have appreciated enough to create that sufficiently attractive differential between that.

That's right, have we reached that point yet? Well, you know, no one knows exactly what that range is. I think that becomes their nature and then we have to see what it is, if there is that negative feedback loop. I see well because that part of the negative feedback loop is, in other words, stocks go down and that means the wealth effect goes down and as the dollar goes up and the wealth effect goes down and that makes us less competitive, don't they increase? both the value of the dollar and the The drop in the value of stocks is essentially a tightening of monetary policy and there is a tightening globally, there is a tightening of global economic activity and those negatives are exactly how they are transmitted to the economy, are the asymmetric risks I am referring to.

While you're sitting here, I want to touch on something that I know is important to you, but that has been attracting a little attention lately. Let's say it's the culture of Bridgewater and the attention it attracts is due to this notion that there is something. It's kind of a feud, if you will, between you and your co-head of CIO, Greg Jensen, give me an idea of ​​what's going on behind the scenes, yeah, I mean, I don't know and the writing, but the culture is, ya You know, that's what people do, you ask, cake, okay? Well, the way we succeed is by having thoughtful disagreement when I'm very 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. . point of view so that we can have disagreements, so that we can have independent thinkers, there will have to be disagreements and you have to do well to be able to disagree and you have to have those processes, you also have to know what your strengths are and the weaknesses are: you have to bring out all the weaknesses to the surface, this is the essence of culture and people can say that everything is dirty according to your principle, that is correct, so you have to bring out all the weaknesses to the third party that you have to bring all these things, individual strains and we consider them and you have to work on them yourself and not in a reflexive way, that's how we are successful in the markets, that's how we are being successful and that also builds our community in one sentence, what we want is Our 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 radical transparency. What I mean by radical truth means that we can talk about any weaknesses, who is good and who is bad. t and so on and bringing all those things to the surface problems and then radical transparency so that everyone in the company can see everything that is happening so that there is no spin behind this, that is what is happening as we work on our way. this Greg and I have been working together for 20 years is also very far-fetched because you do it Greg and I there are some fantastic people you know David McCormick sure Aileen Murray Bob Prince has been with us for your CIO the years we have team of people there, it's a company of 1,500 people, okay, so if it's almost a character in your story that they want, you know, okay, there's one that you know, there's a character in your story that can be portrayed in the media as if it's something that is.

It's not okay, this is precisely why I introduced them. The question is because I think it is important that they clarify things. Thanks, give me a chance, but that's what's happening. In other words, everyone cares about this drama. Well, no, Greg and I don't agree. some things yes, but and also to what extent is David McCormack, who might not agree on some things, and Eileen Eileen, but and that will help us have a process to get through it as I started my transition out of management. I always play because I love it, as long as I'm welcome at Bridgewater, they'll only let me play later, yes, but as far as the administrative side of that transition, we think it's going to take a while to figure it out.

Find out how it works and that's what I'll do to youLast question, Ray, I'm curious to know, 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 American politics? attracting an enormous amount of attention two days ago we had Super Tuesday, it seems that mr. Trump is on track to be willing to win that Republican nomination. Things could change. Do you have to recalibrate his models to account for things like that? I'm going to take the first part of the question instead of the recalibration part of the question just to be answered you know if you go to the website YouTube I will connect there it took me 30 minutes to say how the economical machine works and there is a photo and then it's on YouTube which is 30 minutes and it will explain to me everything I know and basically what 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 those who have and those who have.

They don't have it and there is also frustration with the government and what is happening in the United States is not very different from what is happening in Spain with the Pidemo or what is happening in many countries that there is frustration, we have a situation in that emotionally charged people who may not be well informed when choosing leaders can select leaders who are not capable and our emotions and if that happens in these countries, which is much more likely to happen in the circumstances of these tensions, so that means that you get a type of leadership that handles situations worse than if you had more capable and more moderate people who understand how the machine works and how they should deal with it, so whose hands it is in is important, yes, It's okay, and what and how fragmentation exists, if we are a group fighting another group, it will be bad if in a certain sense there is. a moderation and a coming together of people in terms of a common mission and thoughtful disagreement while we talk about agreements of thought, if you could work your way up to the right answers then all of this is manageable, so politics 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 then give our answers. I want to thank you very much on behalf of Bloomberg Television listeners around the world. It has been a great pleasure. Here at the University of Texas, Ray Dalio is the president of the Foundation.