An Update on Ray Dalio's Views of The Five Big Forces Shaping 2024

I'm Jim Hasell, editor of Bridgewater Daily Observations. Earlier this year we published daily observations from Bridgewater Founder and CIO, Mentor Ray Delio, where he outlined his Big Five Forces framework and how these

forces

will shape

2024

and the years ahead and us. We will link it here considering everything that has happened in the last 3 months in market economies and certainly on the geopolitical front. I thought it would be interesting to sit down with Ray to get his latest thoughts on these dynamics we did last week and today. We're sharing an edited version of that conversation. Ray addresses each of the big

five

forces

and explains where we stand with each one and also discusses how these forces connect to each other, so in today's podcast you'll hear Ray talk about debt money. and Economic Strength, including Ray's thoughts on the potential for Fed easing when inflation remains above target, as well as portfolio considerations in the current environment.

He also discusses the domestic Law Enforcement Force, which is the second force, with emphasis on the

2024

US Presidential Election, which it hits abroad. Force of World Order, including the growing geopolitical conflicts and the issue of what is happening in China, speaks to the force of nature, particularly climate change and its economic consequences, and finally, speaks to the force of human inventiveness, including the potential of AI to bring about radical change in the world. Over the next few years we start with a question from me, Ray, about his

five

great strengths in general. Ray, it's good to see you.

I think you're in Connecticut, is that right? It's good to know you're back on our soil because we've been all over the world and there's a lot going on in the world right now. I think everyone knows that we are two years into a global tightening cycle and that markets are pricing in Fed easing around the corner, even though inflation is still above target. We have geopolitical conflicts that are apparently getting worse, not better, as we see the conflicts between Russia and Ukraine, between Israel and Gaza, continuing, there is a simmering conflict in northern Israel and Lebanon that could be even more explosive, of course, we have to China and Taiwan. situation gold stocks Bitcoin are reaching new highs we have a major US presidential election approaching at a time of, as you may have noticed, increasing polarization, we have radical new technology in the form of AI, um, which It has huge implications for the productivity and profitability of a subset of companies, and of course we are in the middle of a climate crisis.

I thought it would be a perfect time to sit down with you once again and express your opinion on how you are viewing these types of companies. of the great Dynamics in the world and from today's conversation I thought we would do that by asking you to first briefly describe your five great forces that can explain a lot of what we are seeing and then we can go a little deeper into each one. of them and look at how they are developing across the country so welcome and let's jump right into this with your overview of these five great forces yeah you know that because I learned in my life that a lot of the things that surprised me They surprised me. because they never happened in my life before I knew I needed to study history and I saw that many of them were repeated throughout history and sometimes we lose the big picture because we squint at the details and I reviewed history over time .

Actually, the last 500 years were about first dealing with the first three great forces that had not happened in my lifetime and then I saw the other two. The first is the debt creation amounts and then the monetization of the debts when, um um, there is. There wasn't enough money in terms of supply and demand for credit and its impact on the economy and the value of the dollar, so I wanted to study the rise and fall of reserve currencies over those 500 years. The second is the degree of internal conflict. of populism on the left and the right creating irreconcilable differences that are threatening democracy, threatening the system in many ways, the amount of wealth and value gaps that are behind that and the amount of political polarity that should not be voted . the lines of separation and the like are the largest since 1900 and the third, of course, is the great power conflict.

The great global geopolitical conflict between rival powers, particularly China, competing for power, you know, the last time it happened, the last time all of these happened was in the period from 1930 to 45. and then I learned by studying the last 500 years and uh and before that, acts of nature, droughts, floods and pandemics had an even greater impact than all those other things that I've mentioned, killed more people and felled more. more domestic orders more international orders than the first three so the climate is a big problem and it's certainly a big problem from time to time number five throughout history um the inventions of new technologies learning and invention by man of new technologies um and uh not only its economic implications, but its war and military implications, but, um, the repeated time throughout history of discovering weapons, secretly finding the weapons that you show to the other side and the other side submits because they can't beat the gun that Dynamic has also been in. history and these can't be seen as individual things because they are interdependent, for example, the United States is overextending itself and you know we're in 80 countries and then, uh, fighting two wars, you could have a third war on another front, it has economic implications. o Climate has economic implications and seeing them transpire in cycles for logical reasons cycles exist were discoveries and my framework so those are the things I think almost everything you mentioned and anything that is important falls into one of those five categories and they are certainly related. each other, yeah, and on that front, you know you wrote at the beginning of the year, we asked you to write down your thoughts on 2024 and, if you got the first big one right, which is kind of debt money market economics, you you forced to notice then. that in a cable that we will link to here that that strength was moderately low when looked at in isolation due to current market prices being more or less in line with fundamentals and the lack of major issues associated with that strength on the horizon that could not be managed well, but you also said that the risk increases significantly when you consider the conjunction with internal law enforcement and cited the 2024 elections and external law enforcement, so I wonder if you could

update

us now.

As you look at this debt money economy, force how you evaluate it now in relation to those other two threats you were talking about. Well, there certainly won't be enough money. You know you can get money from two places where you can tax it. or you can print it out, so if we look at the central government situation and do the projections, you can see how the combination of higher debt service payments along with the needs for higher defense spending. um increased climate spending and then you take entitlements and other things, you're looking at debt service that crowds out consumption in budget deficits and then you're also seeing supply demand issues with selling those bonds to the rest of the world. because they are no longer as attractive and as a percentage of their portfolio of foreign portfolios they are a problem, so we certainly have something that cannot be extrapolated to many years before we have that particular problem.

I think let's talk about the bond market. for a moment and easing is built in, so I think there is a misguided popular view that there should be easing, so if you look at the magnitude of the easing, which is the largest since I think it was 1981 or two, there's a lot of discounting, I mean, I think it's almost 200 basis points over the next two, two years, kind of a discount now, let's take a step back and say what the rate structure should be now. I think if you just look at what the balance is. The levels are, I mean, appropriate, that there is a real interest rate that is high enough for the creditor without being too high for the debtor, which by the way becomes a difficult balancing act the more debt is created and Let's look, let's look at the inflation rate.

Um, you can choose the number of what people think is the inflation rate. Those numbers would be in the vicinity of two, two and a half, I would say below 3%, but whatever, two and a half and 3%. and then you take the long-term rate, it is about 200 basis points, which brings it to a level close to 5%, 4.5 and 5% given a normal equilibrium. I think there is a strong tendency to I think the yield curve should be positive. I think it will eventually turn out to be positive, but if you look at the existing level of inflation, it is certainly not on target and they will relax.

On that target, they will probably accept a two and a half to 3% inflation rate, but you mention that and then you look at the existing conditions, the existing stress levels that exist in the shape of the economy, the shape of the markets, the shape of credit spreads, etc., and you say, this is definitely too easy. What is wrong with the existing monetary policy? The existing term structure of interest rates in terms of growth and inflation is growth and inflation such that growth is too low and inflation is too low and that one must have a monetary stimulus policy that is under the normal set of circumstances if we now say what the risks are for those scenarios um, I would say the risks are significantly higher inflation issues, etc., for issues related to political issues and we will probably get into that, but how will tariffs increase, how other things will take place and what is happening geopolitically creates another risk. and then there is supply demand, so when I look at the bond market I think the bond market is at around these levels, with an appropriate price in that area of ​​about a year and a half, I think probably long term It's not going to be like that. too low and then if I take the slope of the yield curve and where the short rates are and where the existing inflation rates are, etc., I think that's working fine, so there's still 200 basis point easing and We still have problems with the large budget deficit and the current account deficit, let's explore inflation a little more by focusing on the fiscal policy side.

Ray, you've pointed out that politically neither presidential candidate has an incentive to rein in spending during the Biden administration. doesn't want to see too many restrictions heading into the election and it doesn't really seem like Trump and his people want to spend less either, so I think the picture you're painting here is a hotter inflationary environment than the current one. quoted in the interest rate markets, can you explain how you are thinking about that? Well, there are two issues: first, the inflation rate and second, there is the supply demand for the bonds, if I'm looking at the inflation rate, um, and I look. at the poor levels particularly income levels um spending levels and then um and and then I um I I can think of I don't know, let me get to about 3% it's two and a half I don't really know the difference so I'm pleased to say that By any measure we are not at the 2% target so we are above that and one would say it is in that vicinity, that is not a very debatable question and then you could add what you already know.

What I said earlier about rates as we move forward in terms of the supply and demand issue, we know we're going to have a lot more supply. Yeah, I'm talking about money supply and money before we get to the supply of things, so, um. about the money supply, um, uh, uh, what we know is that there will be no remediation, in fact, there will have to be an increase in spending and, if we take into account the geopolitical situation, not only is it internal but I said geopolitics. internationally and you look at what, for example, the defense budget is okay, it's a 1% increase in the budget, which is a real negative decrease, um, that's a pressing issue that people on both sides recognize. and um, they don't.

I want to talk about it right now in terms of that issue, but that will not be a sustainable amount of what we are in the world and then, if you then take into consideration the climate issue, the climate issue in one way or another is estimated to be It takes about $8 trillion a year and we're not going to spend, we're spending about a sixth of that, which is also one of the reasons why we're nowhere near keeping the temperature rise at a level. level and medium. degrees because, but anyway, it's um, that's 8% of global GDP, there's a lot of spending and then there's the question of north, south, south, um and then we're looking at the world and you saywho is going to afford these various things that you look at. in Europe and you know, okay, we say that Europe should take care of its defense in terms of those things, well, Europe has its own problems, etc., so what we have is the need or more demands for greater amounts of spending than even are included in that budget and those budgets, so the risks of them are positive and if you simply take what was projected and then apply the debt service payments to that, the maturity of the debt and the amount of the payments of interest that must be paid be on that debt that is creating a classic crunch in other words, I have seen this happen repeatedly in all countries and this is financial, this is not a solid and solid finances where there is a good statement in a balance sheet, so the value of debt assets is a function of these types of things and therefore, as we enter a world also of greater conflict, it must be recognized that a debt asset is an asset risky to maintain because conflicts themselves create greater needs and then there is also a solution problem in terms of what is the asset that can be exchanged around the world if you study the markets during wars and I have studied the markets during wars. wars.

Allies do not accept each other's money correctly because of the fact. that that money, that debt that they will take on, they know that the country is going to go deeper into debt and probably have to monetize the debt and they don't even know what will happen at the end of that, so the risks literally of having money debt debt assets during wars or different types of assets during wars are high and lurking in the back not to mention the problems related to the possibility of unacceptable disruptions in supply lines, let me explore a couple of things that you said, this type of demand does not it matches the paper supply of the United States or for that matter many governments around the world, so this is a threat to fiat currency, this is basically what you are putting forward, you have been talking about this. for a while, you know, we see gold, for example, make new nominal highs, we see Bitcoin U make highs.

I mean, some of that is structural in terms of the development of an ETF, but still the demand is there. I guess given what you're saying, you'd say those market dynamics we're seeing now aren't surprising. No, let me take a step back and say that the most important thing everyone should start with is a balanced portfolio. I've been talking about what could happen. Okay, but if you put aside the uncertainties of supply, demand and things like that and think about what is a balanced portfolio, what are my risks to have symmetrical risks, to be able to go through any environment one would have larger amounts of those assets, inflation hedge assets that are the type of money, okay, so let me pause on that, let's say gold, Bitcoin, is another topic, but it's a related topic, the money that I can pass. from one place to another and is accepted all over the world, it is accepted by central banks today, by the way, gold is the third largest reserve after the dollar and the euro, so it is a money that is accepted and, as the saying goes, it is an asset that is not the responsibility of another person others that you depend on to get paid this you do not depend on possession you know it is the law in essence and it has a significant negative co-correlation with the top of Typical portfolios have a lot of stock beta, but stock or bond beta does.

If you take any of the major crises, you see that this money outflow movement in that way causes an increase in gold and that if you take a portfolio optimizer. and if you said, what would happen if I layered gold in my portfolio? I would add that it would reduce risk and increase expected return if you added it to a portfolio, so the problem is right now, given all sets of circumstances, why not? you move to a more balanced portfolio, why wouldn't you do those exercises to consider now we move to the internal conflict force? You know there are elections coming up around the world, including probably the most important election here in the United States. and at the presidential level and it's

shaping

up to be a repeat of the last one, you've been very vocal about the dangers that you see in polarization in the United States and elsewhere, so I'm wondering if you can give us your thoughts on that. how you're looking at the internal conflict of the Force, particularly as it relates to the US and what the consequences of a Republican or Democratic victory could be when I did the study, it was like watching the movie over and over again, there it is this. movie that happens and what it is is when there are huge gaps in wealth and values ​​and, um, you have populism, which means that people get tired of not having their own needs taken care of and they reject this, that old political system that doesn't Yes no you meet them, then you have irreconcilable differences where you have to choose help and fight and that calls into question the system and whether the system is fair, whether the legal system is fair, whether the Supreme Court is fair or has been corrupted by the La Politicization is the balance of the media, etc., and are we working towards a compromise?

Are we having irreconcilable voting blocks and decision blocks? That means it's black and white and you have to take one side or the other and we haven't done that. I've seen it in our lives before and when I wrote the book, everyone thought it was crazy, this was before January 6th, but I've seen this happen repeatedly, there's a cycle and there's a standard for it and that's where it's at. that we are. When we look at the upcoming elections, the first question we ask is whether these elections will proceed normally and then if the elections proceed normally, where will that take us, because of how different parties have different

views

and how They will work together to achieve results, in other words, politics is normal, so we have a reasonably worrying problem that they may not accept the result in that normal way.

We are getting to the point where it is conceivable that there will be no acceptance and you will get a civil war type reaction. I know my words are evocative. I don't mean for them to be evocative, but it could very well be that the states don't listen to the federal government in decisions that they say they don't make and then you have a collapse of that type of system and I know this sounds evocative to most people. people, but if you read history and see what is happening, that should be considered as a possibility when looking at these types of elections, it is certainly the case.

If there is an election and it goes forward normally, let's say Donald Trump is elected, which by the way could mean a lower risk of a fight because the Democrats might accept that and they might not accept the policies that I think they're probably going to adopt. we have the politicization of the government, in other words, we know that there is a plan underway to take many public officials and get rid of those public officials and replace those who are on their side and that now there is a movement like you are with it or you are against it and you think about the consequences of that and then there is that element of the dynamic that is a reality.

I'm not making this up, okay, so how does government work? If we have more congressional investigations for political reasons, now let's assume that's not a problem and everything is running smoothly, then we can move on to what are Donald Trump's policies and policies will be more nationalist, isolationist, free markets, more, more capitalists, etc. and that will have consequences that will have consequences on inflation, trade, and world affairs because the geopolitical part of world affairs means that the United States will not be the same type of ally, but it will not have to have the associated expenses of being one. the same type of ally, but then it will start to produce geopolitical consequences as there is a reduction of some of the war areas, so now let's consider that if Joe Biden is elected, he probably won't have Joe Biden because he probably will. not be in condition, at least this is the popular thinking that he probably won't be in condition to be president for that entire particular period and of course there's some doubt about whether Trump would be as well, but more so. uh Biden and then when there are elections, the question arises what is a pro-democratic policy, what will the Democrat be, the Democrats are divided, there are moderate Democrats and then there are extreme Democrats, in other words, far-left Democrats who um organize large transfers of wealth, our country is not in good shape, in other words, if you look at the financial situation, the infrastructure, the education, and that kind of thing, we are in a hole, and that is why, being in a hole, it's not that someone is not going to pay and the ones who will pay will be the rich and the corporations, so now you start to think about what that means for corporate taxes and what it means for the markets.

About that, we remember what it meant when Donald Trump was elected, the number one thing is what do you know the stock is worth? It's after-tax prison net cash value, that's the net cash flows, so if taxes go up, that's like interest. Raising rates is bad for markets etc. and can also produce conflicts that could be seen and I would say you are likely to see more polarity in decision making and have irreconcilable differences. There are differences in these. The differences are not just about people's money, which matters a lot to them, these differences are also about values, so there are irreconcilable differences that seem to me to make the political situation in the United States an important situation and when the I relate to the other forces of the financial force or I related to the geopolitical force is more threatening because geopolitically other countries will probably take advantage of what is happening in the United States in the external conflict for us.

I wonder where you think we stand and what the future holds for us is that we have a stalemate where maybe Russia is winning that stalemate in the war between Russia and Ukraine and there is a lack of willingness for funding on the part of the West. , particularly from the United States, and then we also have the conflict simmering beneath the surface, not a hot conflict, but the question of Taiwan and China, Taiwan and of course the other conflicts that are going on, so when you look at this, are these the ones you have in mind the most and do you think any of them are going to become particular? sharper in some way that would increase risk premiums over the course of this year and next year or, in your opinion, are they somewhat stable for the moment and, um, it's not the most important thing, because there are other factors that are that, that. are affecting what's happening, I think it's less important to look at everything through the wars and conflicts that are happening, as much as you look, you should look at the allies and the dynamics behind that, okay, so both There is a local conflict in the Middle East between Israel, Gaza or the Palestinians of Hamas and then other regional entities and certainly there is Russia, Ukraine, but you have to keep in mind that there is a demonstration to a large extent. of a larger conflict that has to do with common interests associated with respect to the powers that exist in the world, such as China, Russia, Iran, and when we look at it that way, we see that both sides perform, so "We are seeing For example, the money and support test, in other words, Europe and the United States, okay, how much money will you put into it and how much support will you put into it?

It becomes a test and we know the consequences of that and that test. . also means, um, that it is a reduction of resources, um, in other words, literally, our ability to produce military equipment and My military equipment inventories are depleted and even the modernization of military equipment is depleted and that is a fact. and it is a fact worldwide and it is also a flat and relevant fact because of the very classic fact in the great Empire in the cycle stage, they are too spread out because they have armies all over the world, the United States has armies in 80 countries and , originally, those presences in others.

The countries were profitable, that's what the empire did, they made them profitable and they were profitable, well they can become very unprofitable and therefore when we look at these issues it also becomes a political issue internally as to to what is the position of the United States, not just an economic question, but what wars will the United States fight? What will you lose? Will you lose people? Will he lose unacceptably in different places? That could be in Europe or the Middle East or it could be in Asia and that is a geopolitical issue. Game problem before moving on from external conflict Force I want to get closer to China because Ray, you just wrote new daily observations and it was titled in China the hundred year storm on the horizon and how the five great forces are developing.

In that article you describe whatis currently happening in China, both economically and otherwise, in the context of what has happened over the last century. We'll link to that article here, but I'm wondering if you could share with our listeners how it's doing. see China today in terms of its trajectory, its leadership and of course the power conflict with the US. The Chinese are culturally, they know many thousands of years of civilization and that means it's like watching the movies over and over again. again, Rises and Declines of dynasties and there is a cycle and I think you understand where you are in that cycle and then the basic thing to know is that be strong, be powerful, and if you are strong and powerful, that will determine your position and knowing how to play your position and it's very much an extension of ISM confusion, which is an extension of family and hierarchy, so you know your position, your position means that if you're in a position of power, you behave in a certain way. manner. with those of lesser power and they call that the tribute system uh in other words he who has less power must respect those who have greater power and those with greater power must treat well those with less power and you never want to occupy a country and force it to do the things you don't want to do, those policies never work, you're not going to occupy and make a people operate according to a religion or a way that they don't want to operate, that's a force against nature, what you want to do is discover Well, what do you want from them and what do they want from you and have good business relationships with them, etc., and I suppose that manipulating them or operating in that way, when we apply it to the existing set of circumstances, in their minds it is natural and admirable that their power has increased. as it happened, you know, since I started going there, 19 uh 84, per capita income increased 29 times and life expectancy is more than 10 years and poverty rates, like going hungry, went from 88% to less of 1% and it's been a pretty remarkable arc and then there are these things like the big cycle that I'm talking about in terms of now we're in a different phase in the big cycle where what happens is you're not going to have the same growth and then you have a debt crisis and then you have the conflict between great powers, so you can no longer hide your power, so now you are a threat, now you have the dynamic and the question is how do you play that dynamic.

I urge people to read the article I wrote that describes how he is operating now he is operating she is operating much more in a Le what is called In traditional history that illegalist way which is a very strict form of behavior with a uh The Marxist M Mayo, in a way, surpassed what that means. You have to understand that they see it as the United States is a declining power that is trying to contain it and then there is the rivalry associated with that, so now, of course, both countries have They have these internal problems.

I would say the internal problems are whether they operate in a way that they have an economically lost decade with a, let's say, Marxist-Maoist bent or whether they do a big restructuring, a debt restructuring. and so on it will be in your court and it is a greater risk that they have that if they have that. I think their basic view of that is that it's disruptive and undesirable but it won't get them to where they are. They were before and that the population, who in their opinion may be spoiled and corrupt, has to shape up, because we have to prepare, they would say we have to prepare for the hundred year storm on the horizon, so I would say I would describe the perspective as if I were in that sense and I would say that the same problems exist in their various forms in the United States, we talked about the United States and I think they are describing it as there is a 100 year Storm on the horizon that, by the way , it brings us back if you go back a hundred years, that's U, you know, you go back 90 years, that's probably where you are, so I think that's the perspective and the only way.

Handling it well is being strong, so doing the right thing to bring populations together and being productive and strong, that's what will determine how these things happen in the end and also being able to come to an agreement. destroy the other one, so Ry, as we hit the other two forces, one of them is, of course, productivity and new invention and human ingenuity and this is something that you've been looking at at length, so explain to us a little bit. how We're thinking about uh Ai and and a potential productivity miracle and what that would look like throughout history.

We have seen that the human being has evolved almost with parts of his body, different parts of the body from the bottom up, being replaced by machines. So in the agricultural era, human beings were like oxen and then we had tractors and then in the industrial revolution we had machines that would replace that and then increasingly we had Ai and there has been a continuous process of its evolution that has been essential to my and Bridgewater's personal development during that period of time that we spent using expert systems to develop that and now there's the Ai and lar generative language models, which is a tremendous tool that will accelerate that and So you could say that they know without a doubt that it will be a fabulous tool in all dimensions and it will be invested in that sense, it will be a tremendously transformative influence and we are only talking about AI um when we take other technologies that are also transformative, so they have to do with everything , from quantum computing to genetic sequencing, the study of body images at the molecular level, and so many different ways, new sources of energy, etc. many different things, the technologies that are accelerating because the brain is improving significantly when you increase your muscles, the power of your muscles with tractors and other things, and that's one thing, but when you increase the power of the mind to invent and deal with things automatically, that's a completely different level of advancement and that's what we're seeing, so I think if I take these five big forces that we're talking about and I look outward, I count a year two years, I think in 3 to five years will be like going through a time warp where we will see a radically different world and these things will come to a head, they are things that we are all talking about and then in this AI. world, so the world is going to be a very different world in the future and then I take climate, which we just mentioned but didn't really address, climate is going to have a big effect, in many different ways, droughts.

Floods and pandemics throughout history, as I said, have a huge effect, so we're going to experience that it's going to cost us a lot of money and then it has implications because it has implications on global temperatures of water supplies. uh, which will lead to migrations of people, will change economic behaviors in many different ways, all of these things are happening, so I think when we step back and look at all of that, we can say that these great things are happening. There are lessons from the past that we can learn and at the same time we should not be arrogant in thinking that we can anticipate well all the convergence of those things and we have to think about how we structure a portfolio well so that, regardless of What happens?

We'll be fine. Ray. Thanks for your time. I love doing this with you and I look forward to sitting down and doing it all over again in several months to hear your thoughts on the five forces. Thank you very much, it is my pleasure, we hope you enjoyed the discussion and we look forward to further engaging with you in our latest research through Bridgewater's daily observations. We also encourage you to rate and review today's episode. Your comments help us improve and help us. To answer your most important investment questions, thank you very much for the additional information and other important disclosures.

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