Ray Dalio on the Economic Impact of the Coronavirus Crisis

Good morning everyone and welcome. I'm Eric Schadt, managing editor here at Bloomberg. I specialize in Wall Street and global investing, and on behalf of Bloomberg, I'm delighted that you can join us this morning for the first time in our investment talk series, what is sure to be an insightful conversation with Ray Dalio of the associates of Bridgewater, before we begin, a few housekeeping issues, it's normal for this type of thing, although we are also experimenting with virtual conversations if you experience any problems with your audio or video. during our stream just refresh your browser and that should take care of everything.

You will be able to submit some questions and I encourage you to participate, we will answer these questions during the interview and although I will not be able to do so. reach all of you. I will certainly do my best to submit a question, type it in the Q&A box below the slide window and then click the submit button. One additional thing when you submit a question, also include your geographic location, whether it's New York London Singapore Dallas doesn't matter, just throw it in there. I'm not going to name you, but I'd love to know where you're watching from.

I will also survey you several times during the During this event, you will see the survey questions appear on your screen as we speak. Take a moment to record your answers. Of course, we're on Twitter with the Bloomberg Invest hashtag, so interact with us there too. With that, let's welcome everyone to Ray Dalio, he's the founder of Bridgewater Associates, he's a deep thinker, he's the author of the best-selling book, Principles, Ray, welcome, it's a pleasure to see you, thanks for joining us, that's great being here, thanks for the holes I mentioned. Ray, this is a question for our audience, not for you, and here's everyone, when do you expect it to be normal?

And I say normal in quotes for normal business conditions to return to your industry, as you can see here, we have four answers third. quarter of 2020 fourth quarter of 2020 some I'm in 2021 and this last one is later than anyone thinks so record those answers and we'll see when we've heard enough from you what it all looks like darn I think it's a It's convenient continue our conversation and I'd like to start by asking you this question, or at least asking it, tell us if you would about the work that you and your Bridgewater colleagues have been doing to try to understand this pandemic and share it with us. some of the conclusions you've come to about its

impact

on the economy, well, I think you know I think basically almost everything has happened before you know one of the best things about getting older and reading history is when you see these things happen. and again. over and over again so this is an

economic

recession caused by the pandemic and you know we can even study pandemics and what they look like what we have done now we wish we had done it sooner but there is this

economic

recession and the way it works It's basically that everyone has a certain amount of income, every individual, every company, every country has a certain amount of income, a certain amount of expenses and a certain amount of savings on their balance sheet, so this has been a financial blow to income and It has been a blow to the assets of the balance sheets and then those who consider them holes, there has been a hole in the income and a hole in the balance sheets, and then there is the capacity of the central banks and the governments to fill those holes so that there is a financial balance. world and then the governments of the financial world produce money and credit out of basically nothing and can fill those holes and so this is a moment that is very analogous to the announcements that occurred last March, didn't Roosevelt announce that there would be the impression of money and credit and there would be a breakdown of the relationship with gold at that time so that they could print money and credit and create credit and fill those holes and that was exactly the bottom of the economy in March of 1933. of 1933 the exact bottom of the markets the exact bottom of the economy similar things have happened throughout history we can remember that when the financial

crisis

of 2008 the bottom occurred when the federal government, Congress and the President created a program to save the banks and fill that hole with money and credit, but it is also produced by the Federal Reserve to resort to financial transactions and make those purchases and that created that fund because they filled the holes and you could take that Mario Draghi um he said he will do whatever he wants take and then the European Central Bank but it produces money and credit and fills the holes and then the problem is really that in those moments you have to fill the holes and then there are two dimensions in which you cannot row, you cannot increase production cannot be increased real wealth by producing money and credit, you can simply fill the debt holes and you can that process, so now we are in a process of filling those holes and it is very important to observe what holes exist and what they will be filled with and what What I mean by this is that Americans have holes in different ways, different Americans will have them, but and what will occur, we are very fortunate because we have the central bank of the world, so think about it.

In this way, 70% of the world's transactions and savings and almost everything is in dollars, so they buy, sell and save mainly in dollars and since the Federal Reserve produces that money in credit, it will go to Americans and they they will resolve. exactly what Oh, we'll fill in and so on, but in a sense we are the world's money, the world's credit is what our central bank produces, but that money in credit won't really go much further than the Americans and We'll have to talk about what that means for Americans, but it won't go much further and then there's a European Central Bank that's not as powerful, so there's all that going on.

I'll probably continue with everything, but it's filling the hole. I was just going to say one thing about who they're going to be before we get into some of that, digging into those holes and digging into the programs that the Fed and the government have undertaken to try to fill them. Can you give us an idea of ​​two things? First, how big the hole is and how big the hole is. We're talking about how long that hole will last, just to give you an idea of ​​what the audience thinks our viewers do. I don't think they're going to come back and get their businesses back to normal conditions until sometime in 2021, which will probably be a year from now, so give us an idea of ​​how long you think it's going to take and how big. a hole that we are going to have to fill well: the holes in income in the United States we estimate will be around five trillion dollars and the holes in the global economy will probably be around 20 trillion dollars and Look in particular who has what holes and then how they will be filled so that the economy as a result of this, the real economy, which is a good production of services and all that, in the world over the next year we will probably have a decline. of maybe four or five percent, which is a bigger nonsense, this is a bigger event than the 2008 financial

crisis

and it's more comparable to the period from 1930 to 1445 in terms of, you know, the size of the rates of interest and those types of

impact

and then we will adapt.

One of the great things about the greatest force is in humanity and the greatest force in productivity is the ability of humans to adapt and change the way they do things and we are doing that right now. So I'm pretty sure that inventiveness, adaptation will lead us to a new way of operating and let's say if we take that decline, it will be a peak to valley decline of somewhere of that magnitude that will exceed that. but it will be in a totally new world order, the world will not look like the world they were used to, it will change in various ways, so it is a big hole, it is not an unsustainable hole because the ability to produce money and credit is unlimited, it means we have to look at what is the value of money and credit, okay, that new world, what is the value of money and credit, what is a store of wealth, what is okay, you just can't produce it without that will have its effect on its value and when we talk about production we will adapt and overcome it, but how wealth will change will be very, very big and different, that's all.

I'll come back to that in a moment. and I keep saying that I'm going to go back to the things that you're mentioning, but I promise you that I will express your opinion on what we've seen so far in terms of fiscal stimulus from the federal government and monetary stimulus from the federal government. Both bodies of the US government are appropriate for the reserve, if they do what they should do, and if they are not already doing enough, what else should they do? Yes, in my reaction, you know that there is no other option, yes, it is like that.

In the 2008 financial crisis you are faced with the choice of whether you want those banks to exist in the future or you want to get rid of those exchanges and they may have gone bankrupt and they may not have had enough savings and there may even be things the ones who should bear the consequences, but you want to save their backs, so this is a similar crisis except it goes way beyond the banks, so when you start thinking about who you want to save, you have to think about what to do. You provide them with income and how you deal with their balance sheet and if you don't, the consequences are enormous, so the necessary reaction must be of the type where we have to think about the consequences of producing all that money in credit, do you? where does it come from and what does it mean?

We'll turn it into that in a minute, but doing that is like there's no depression in rates and you'll need to do more and we'll argue about what we should do. do and who gets what and that will be our big discussion, but yes, there has to be more money and credit and you have to operate in a way that saves important things and that only imposes a certain amount of suffering on certain people. that they can handle, otherwise you will have a revolution and you will have no productivity. Can we talk about some of those consequences?

I think that's a critical part of this conversation when you say the word consequences, are you thinking about the economic consequences? like inflation, for example, a product perhaps of all the liquidity that the government is generating. Are you thinking about the impact it has on the Treasury bond market? Are you thinking about the impact it can have on the forex market? You are thinking? About those things, are you thinking more broadly? Tell me, of course, it's my responsibility to think about all those things and that's my passion since I was a child and I'm thinking about all those things and then you also have to incorporate the elements. of wealth gaps in politics and and the world doesn't work simply without considering how wealth is distributed, so I'm thinking, for example, that when we look forward, the world will be very different than when we think about how we will pay it, OK?

Will there be a reversal of the corporate tax cut? are probably not repeatable, for example, when the corporate tax was reduced, the decrease in corporate tax rates benefited stocks when interest rates fell, the effect of reducing that interest rate caused all asset prices will increase because everyone competes and that causes an expansion of profit prices, but we will not have in the future interest rates falling in the same way that there was an expansion of profits and the prices of wealth assets rising for the buying those and that benefited those with assets more than those without assets and that created a wider wealth gap, so there were low levels of interest rates, it caused corporations to take out loans and buy back shares and buy other corporations because the returns on the shares were greater than the cost of financing and that supported the prices and that created a certain cash flow.

We're not going to have that, so as we enter the new paradigm we have to realize that even in you know what capitalism is like, how it will work mechanically, what it means for wealth redistribution, all of those questions are part of the same series. of questions you asked, so when I think about currencies, when I think about each of the markets, I have to look at it holistically to figure it out and then I think about it globally, you just can't think about it as one. What the conditions of the United States are different from those of Europe and a difference from China and other countries and those differences are important, so I have to think about all that.

Yeah, now I was just going to say, could you give us an idea so that we have You've set some really valuable context, but I want to try to get a better idea of ​​how you think it's going to play out so that things aren't the same as what's going to happen with inflation in the period after the financial crisis. we saw this monetary levitation we saw asset prices rise as you pointed out we saw a widening of the wealth gap if you want the rich to get richer we saw the buybacks you talked aboutwho tries to be a practical guy, so when I answer these questions I don't answer them ideologically, I just try to answer them mechanistically, so in terms of what I believe in what I have written, I wrote an article about how and why it is necessary to reform the capitalism and I'm a capitalist so sometimes it's just included as a generalization and before this I realized that if we have a recession and we don't have a lot of effective monetary policy, we're in a particularly risky position and it's fundamentally not well that we don't have this, that we have such a problem in terms of the results, it would be Becca mystically for the story when you have people who share a budget or share wealth and they have a big wealth gap and um, when there's a big wealth gap and there's an economic recession, there is a high risk of fighting for wealth and that's just history, we see that happen over and over again.

So most likely there will be a question of whether we will do it well or not, and I can give historical examples of how to do it well and not do it well, but above all it is a risky thing that people don't I didn't do it well and also I realized realize that the system is not producing the desired results in its entirety because if you know what the desired result is when I was a child, we created a new world order in 1945, 1945 and the world war. With 1945 we created a new monetary system based on the dollar. 1945 would begin a new world order and we had the United Nations in New York and we had the World Bank and the IMF in Washington because it was Americans and corporations and then we had 80%. of the world's gold and we started a process now we are very indebted and we are at that type of limits and so on, how are we going to restructure that world order?

So when I look at it, I think in terms of his response. A lot depends on how we are together and whether we will unite the country. You know, togetherness and being behind a common mission. And what is that common mission? I believe what the American dream is. Do we know what the American dream is? Do each of us have our individual dreams? I want to get richer and I want to do something else. So when I was a kid, the American dream meant something like equal opportunity. I was very lucky to be raised two pounds.

My dad was a jazz musician, he had a modest income, but I was able to go to have parents that loved me and then I was able to go to a public school and I got a good public education and then I was able to go to a world. of equal opportunity and they are those kinds of fundamental things, so we will need an American dream, we will have to do it together and we have to do it in harmony with those who are competitors in the world, like China, if we want to achieve it. This is fine, so I think we're at a juncture where we need to decide that we're at a fork in the road that you're going to figure out pretty quickly in the next year or two if we're going to do this in a harmonious bipartisan way. way we can overcome our disagreement or not and it all depends on there being enough wealth in the world and enough opportunities and still inventiveness, so what we have to do is an engineering exercise, what we have to do is design intelligently how to increase the size of the pie so productivity increases and you increase the size of the pie and then you also divide it well so we not only divide the wealth well but also divide the productivity opportunities well so investing in education it is a big thing, but in any case yes, how we are going to be with each other when we are creating this new world order will be the most important thing.

I would like to direct our attention to some of the questions from the audience, many of them are very similar, which gives you a very clear feeling that there are a number of specific things on the minds of the people who are out there and, more Importantly, from the people who are listening to you right now and I am going to try to summarize these questions. because you know there are several of them dancing around the same issue some critics say it's specifically about the race for Fed programs some critics say it's wrong for the Fed to be in the market buying corporate bonds, buying grade bonds investment and buying junk bonds as opposed to what they used to do, which was Treasury and agency bonds, because it's about picking winners and losers in the real economy, what do you think?

I think it's all a matter of weighing the pros and cons and what happens over a long period of time is that whoever takes the position inherits what came before them and then handles it as best they can over a long period of time. time, that's bad because let's say a government official becomes governor of a state and what happens is there's an incentive to spend money and borrow money because at that point, if you borrow money and spend money, people look how much you are spending and can produce prosperity with the borrowed money and then you leave your term and then the next person. inherit what they have and therefore when you are head of the Federal Reserve, when you take over the existing job, you have an overly indebted economy and you have a situation where if you were to simply buy government bonds in the traditional way where it is not itself a problem in a sense and you just bought it, then you have to allow the other parts of the economy to go bankrupt and then when you think about that, you have to say what do you do with it and and You have to do it quickly and you have to do it right. vaguely, so the option we face is that those domestic companies that were suddenly investment grade due to deterioration and their revenues and their balance sheets have become garbage and therefore all Many of you know good quality At one level they consider good quality to be rubbish and they also say I'm not going to give you that money, it's just an option, you have that option, it's fine and you have to think about the consequences. of the election, so yes, it is correct that history shows that central banks have bought stocks, central banks have done anything, they will do practically anything and for practically anything to save the system, so one wonders what is systemically important and they will probably buy it and therefore it will not have a regular market and then you as an investor will be able to choose what it is that you own, you have that freedom, so what do you own, what goes to possess?, you have that freedom right here.

A question for you about how you think about the company you founded because it's a question that almost everyone who owns a business anywhere in the world thinks about. I want to know how you're dealing with the debate over reopening the economy. Will you decide when employees will return to Bridgewater and what impact working from home has on a culture like yours? A unique company culture, a culture of radical transparency, how are you grappling with those questions and what do you think that will look like in the future? In the months and even years to come, well, we've been, I don't know, lucky or whatever, what we've done years and years ago was assume that for one reason or another it could be a hurricane that destroys everything or there could be some reason why we would have to be able to operate digitally and so on and we have, we have operated this way and it did in our normal practices to be able to operate this way and so when there was the beginning of the virus, I mean it, we knew how It would look.

We studied it in the past because it happened in China and then it also gave us a good idea and we studied what it was like and then I quickly started operating this way and it's there are some differences but the way we are operating is okay yeah you know which is good and, like human evolution, everything is a matter of knowing how to adapt and there will be new ones. inventions and humanity, you know it's going to be zoom, it's very popular and now online education is going to be very popular and it's going to prove it, and I'm sure man will adapt, so when we look around us, let's say we're coming back.

We are going to approach the health case very seriously: there is a lot of silent transmission and we are going to be very conservative in terms of coming back because this way of operating works well and therefore it will be conservative and when we come back and we also believe that, already You know, studying pandemics, they come in waves, so you know this is not just one wave like it's going to go away, it's actually going to be more of a matter of human ingenuity in terms of coming up with testing processes and you know that vaccines they still seem pretty advanced, but the testing processes and various protocols and changes and protocols and I'm sure we'll find good ways to adapt to that as the world does and so we'll see, but we'll be conservative going back and with the The way we're operating is fine, we're with it.

I want to thank you so much for joining us today, ladies and gentlemen, Ray Dalio and thank you. to our audience for tuning in, this is the first in a series we call investment talks. We are delighted to have Ray as our first guest. We would also love to receive your feedback on this event. An exit survey will appear on your screen shortly. You can also find a replay of this conversation with Ray Dalio by following the stream registration link he started with today. Stay tuned for more interviews in this Invest Awk series. You can follow us on Bloomberg live on Twitter and LinkedIn for updates.

Also be sure to follow our ongoing financial and markets coverage on Twitter under Business is the name of Bloomberg and of course on Bloomberg Comm, if you haven't already, consider subscribing to Bloomberg at Bloomberg Comm slash subscriptions I'm Eric Schadt scre here in New York I want Thank you all so much for joining us today, see you at our next conversation here about investment talks.