What coronavirus means for the global economy | Ray Dalio

be like before. CA: Do you think this is systemic? Threats to the financial industry as great or greater than those that occurred in 2008? RD: Yes, this is bigger than

what

happened in 2008. I will distinguish it. In 2008 we had banks. It's the same thing, that is, you have a certain amount of leverage, things go wrong, too much leverage

means

you're bankrupt, in accounting terms. So you look around and say: who are the systemically important entities that you don't want to go bankrupt? Because do you want to lose those banks right now? And then you can get money and credit back and you can keep it alive in some way, and you did that with the banks, and through the banks, there were the mortgages, and that's

what

it looked like.

This is more complex than that, because there are the banks, and then there are those, all those who are beyond the banks. All the small businesses, all those in all the different places that are beyond. And it is a major crisis. And we have a less effective monetary policy, because the falls in interest rates have reached their limit. And simply buying financial assets by the central bank and buying normal financial assets will not work. They have to buy the government debt and the government, or the many governments, have to be effective in bringing purchasing power and production to those who need it around the world.

CA: I have one last question, and then I'll come back at the end of the hour, Corey, and it's your turn. So, given how bleak this is, people are wondering: what types of industries, organizations and companies have the best prospects of thriving in the future? RD: Well, you see, that's the beauty of it. There are two types, basically. There are those that are stable, meat-and-potatoes, no-leverage companies, you know, the equivalent of Campbell's soup, you know, everyone will use them all the time, kind of. And then there are the innovators. Innovators like it, we're talking about Marko.

You had Marko before. And that new innovation, those that can adapt and innovate well and don't have balance sheet issues, in other words, have solid balance sheets, so they will be able to play without having that. They will be big winners. And that is why there are always new inventions, new creativity, that is the new adaptation that becomes a company and an entrepreneur. And they will do very well, in addition to the things we will always need. Those are the things that are going to work very well. CA: Thanks, Ray. Corey. CH: Thanks, Chris. I guess I'd like to stick with the market for a minute.

Obviously, it is something that interests many people. The state of the market does not always correlate with what is happening in the

economy

. And the market and its players have changed a lot in the past, you know, about 70 years, 70, 90 years. Many more algorithms, machines and passive investments. And how do you think that affects the market's behavior right now, how it will recover in the next few years, you know, as the

economy

recovers? RD: The basics of the monetary credit crisis, who has what income, who has what expenses, who has what balance sheet and how we manage money and credit, those things that people often lose track of because they happen. only once in life.

In this period we must go back to the 1930s as the last period. Those fundamentals of what a bank is and the associated process have existed over time. So they are like technological changes. Technology evolves. And so the ability to take one's thinking and put it into algorithms - we've been doing this for 25 years. The way we operate is to take a principle, "How would you approach that situation?", write it down, put it into an algorithm, and then, because the ability to think has been radically improved, because the human mind has a problem with ability. It is unique to invent.

But it can only process a certain amount in a certain time. So when you work in partnership with the computer, which has the ability to take that thinking and replicate it and do all that influencing thinking, and think in advanced ways, that's the advancement of our time. And then you're seeing that. So when you think about algorithmic, you have to break it down into what it is. Are these sensible cause-effect relationships? It all comes down to "Do you have an understanding and are you successfully banking on a cause-and-effect relationship?" Because that's the only way to make money.

But the computer can do it, process that, in a much more advanced way. So that's what's happening. There will be people who make the mistake of simply applying machine learning to the markets. And that usually doesn't work because of certain things. I guess I should explain it, because you asked, so... In algorithmic decision making, there are two ways to get your algorithm. You can specify instructions to the computer and have it follow them and that will allow it to think. Or you can have the algorithm come from putting a lot of data into the computer and asking, "Computer, what would you do and what is your algorithm?" The key difference between them is: do you understand cause-and-effect relationships?

You must understand cause-and-effect relationships to know what to believe. Because you can't always get that in your sample size. For example, what's happening now is that you couldn't have run your computer and had it in your sample size, because you would have to go back to the 1930s to have an analogous period. So what you do is how you do it, but the ability to learn, invent, and gain that influence in decision-making is greater than ever. And that is the power of our time. Some will do it right, some will do it wrong, but it really comes down to you understanding those cause-and-effect relationships, so you know how to make the right bet.

CH: But that's very different from the passive investing market, which is a very big part of it now, and that's where most people, you know, the average person has their money. And I know that everything changes day by day, but I also know that everyone is going to have this question in their head. So I'm going to ask you: I'm not going to ask you for specific investment advice, but you're all thinking about your 401(k) plans. Do you have any general thoughts on how people should approach this period with that amount of money? RD: Yes. First of all...an investor must understand that he probably won't be able to play the game well.

They probably won't be able to decide how to get in and out of things. To be successful in the markets, it is more difficult than getting a gold medal in the Olympic Games. No one would think of competing in the Olympics, but everyone believes they can compete in the markets. But there is more money competing. It's like a zero-sum game and there's more money doing it, and the worst thing you can do is think you can time all these moves. I guarantee you, the game is a difficult game. We invest hundreds of millions of dollars in this game every year.

And it's hard. So, what the individual investor must do is know how to diversify well. So, the word I would use: knowing how to diversify well and in a balanced way. The biggest mistake of every investor is to think that what has gone well lately is a better investment, rather than a more expensive one. And what has worked worst lately is the worst investment: "get me out of this," instead of "it's cheap." And unless you know how to deal with their differences, which most people don't, they're going to be in trouble. So understand that wealth, the total amount of wealth in the world, essentially doesn't change much, okay?

And that one thing rises and another falls. And know how to diversify. Diversify it across asset classes, diversify it across countries. Diversify it in currencies. It is important to know how to diversify well, to have diversification of wealth. Don't think that cash is a safe investment. Most people think, "Look, I just want security. And those bonds don't give me an interest rate," and so on: "So where can I be safe?" Cash is an attractive investment because it doesn't have as much volatility. But it taxes you and your purchasing power about two percent a year. That's why cash is almost always the worst investment.

So you have to think about that. You should think a little unconventionally. Do you have a little gold? Do you have some of that, in case this monetary system falls apart and money is redefined? I can't address all the different ways one can diversify well. I try to convey those things in my books or in posts on LinkedIn, particularly. But I would say diversify well, be humble, don't waste time and be aware of the dangers of cash. CH: Well, that's great advice. I want to ask one more, more or less general question before we start addressing how we should fix capitalism.

We can talk about that in a minute, address it. But I've been reading your LinkedIn series, "The Changing World Order." It's really fascinating. I'm curious to know what you think about this retreat from

global

ization as something we should all get behind, and I'm curious to know what you think about that in terms of our recovery. This seems like something that's going to require a coordinated effort, you know, financially and spiritually, in a lot of different ways. If we withdraw from

global

ization right now, will that make everything more difficult in the future? RD: If we withdraw from globalization, which we undoubtedly will, things will become very difficult.

And then we get to work comparing idealism with reality. So when you say globalization, who will issue what checks to people in countries that will be outside their domain? And there are a large number of such people. You know, my wife and I are trying to help people in Connecticut. And you know, I can recite everything that is, what job is that, etc. And so when you have Congresses and presidents that start saying who we're going to help, what it's going to look like, and what it's going to mean, it comes down to real practical issues.

And the reality is that many of those people will not receive help. And then you will wonder how they will behave towards each other. The vulnerabilities of one country, the opportunities of another country. In those times, this is the case, because... You know, Graham Allison wrote a book about Thucydides' Trap and he reminds us that, in the last 500 years, there have been 16 countries where there has been a rivalry of one empire. challenging another. In 12 of those cases, there have been wars. Because, after all, there is not even a global legal system. Power is the currency of that.

So when you look at how the dispute over who gets what is resolved, the issue becomes very complicated. So I'm a globalist. I mean, I have a dream and a desire that the best of the best can operate together and work together for that common good, etc. But it is dying because we are in an interconnected and fragmented world. The fragmentation of this: "Can I depend on someone else to give me something I need?" or "Can I depend on not being taken advantage of?" No, you can no longer create those dependencies. And that exists both within countries and between countries.

CH: Yeah, I mean, it sounds like you're talking about productivity and the importance of productivity for all of us to have a better life, and it seems like on a global level, the same thing should be true. If we all focus on being more productive together, and in that interconnected way, we will all do better, rather than hoarding one asset or set of resources. RD: You are certainly right. That has always been true, but never more true than today. And at the same time, read history. And understanding the mechanics, the problems and the challenges of this.

This separation began before we had this isolation of the United States in relation to the rest of the world. This deglobalization started before we had this thing that encourages it more, right? And it happened for reasons, okay? So don't overlook those reasons, and don't overlook reading the story, just because we want it to happen. If you want it to happen, it all depends on the behavior of those who have their hands on the levers of power. I would tell you, for example, right now: I've been going to China for a long time, and the Chinese, in many ways, are helping, in many ways, with things that are needed in this crisis and all of that.

Even saying that is a political challenge, okay? Because we are in such a fragmented world that even publicly saying "thank you" and "thank you" to many people and many companies... it is almost dangerous to say "thank you" to those who are helping, because We are now in an environment where there are enemies . And who is the bad guy? And do you fall into that category? And so the history of these is that there are demonizations of different people. OK? Now you must see it around you. Exists. And so the way we get out of this is going to be the way we behave toward each other.

CH: Yes. That's a very important point, and I think all of us here would say "thank you" to the different people who helped in this situation. We need we a they. I want to address this issue of capitalism. Because when we spoke a few days ago, you mentioned, and also earlier in this conversation, how, in this period of time, we can emerge stronger and better than before. And about a year ago, you wrote an article about how capitalism needs to be reformed, focusing a lot on the wealth gap, the growing wealth gap, and the problems that that's causing.

So what's our chancehere? What changes can we make? RD: Well, you know, what I was looking at was: do we want the results that we are getting, that the system is producing? Do we have... what is our American dream? What's that? We're not even talking about that. When I was a child... I was born in 1949, just after the new world order was created. The new world order was created in 1945. In 1945. And that was when the collapse of the system occurred and then we had a new world order. We didn't have that much debt, we came back from the war and there was an atmosphere of equal opportunities.

And that notion of equal opportunities. And there was an American dream. And there was harmony and going through it together. And, by the way, this is not something isolated. If you read the stories, you see these periods of collapse, crash and struggle, followed by these periods of... you know, you build the balances, you change the system and then you start a new system and you go back and work. together. And then I see, all around me, that children in schools and education systems in poor neighborhoods share... They don't have adequate resources. There is no excuse. Therefore, the idea that the profit system can achieve everything is not correct.

Because the allocation of resources goes to those who have the resource. And so throughout all of history, if we go back hundreds of years, we see that any system works for those who tend to control it. So let's say we have a capitalist system, we have entrepreneurs, we acquire money and all that. And then working with those in government, they have a symbiotic relationship and it works well for them. Then it perpetuates itself, because the education of those who are is better than the education of those who are not. So, for example, in our system, those in the top 40 percent spend on average five times more money on their children's education than those in the bottom 60 percent.

And so it becomes self-perpetuating. So when I look at that, I say, "I'm a capitalist, please understand, I'm a capitalist, I believe in the system, I believe you can increase the size of the pie and divide it." Well, and if we talk about how to do it effectively, we have to do it." But there comes a time when reforms are needed. And those reforms have to create productivity. It doesn't mean just giving away money. I mean, how can you make those people are productive, so that they are also psychologically productive and physically productive and produce results?

You need to make that system. And for the reasons I wrote on that page, that post (it's on LinkedIn if people want it) needs to be restructured. Now "We're restructuring it, okay? It's the inevitable consequence of what we're doing here. We'll get through it. There's been a huge transfer of wealth, whether people realize it or not, through the production of all that money." borrowed. And all that money production is a great force. We will get out of here, and what we will talk about for the next few years, and probably sooner rather than later, is how we do that restructuring.

And my concern now is the same as my concern then. If that will be done in a civilized and bipartisan way that will increase the size of the pie and divide it well, instead of harming the economy, because productivity is lost. There are certain things that are great investments, education is a great investment. The more people you have who are well educated and have the same education, the more people will have the opportunity to compete with each other and improve themselves over a period of time. It is a great investment. It will produce more productivity than it will ever cost, if done right.

But what happens is that states and localities consider it a budget item. Then they look at the expenses. And they skimp on education. Because if you are in a rich city, your children will receive a good education. And if not, a large percentage of the population is missing that. So that has to be well designed, so that they are productive, as well as to divide the pie well, and everyone believes that the system is fair. We can get there. Am I optimistic that we will get there? You know, I don't know. I'd say I'm 60-40 pessimistic that we'll be good enough with each other to pull it off.

But there is that possibility. This is our test. This is our stress test. CA: Ray, there's a lot of interest in the question of how we get out of this, whether it's really possible to rebuild the economy in a more just way. I just want to read one last question, this is from my Twitter account. "Do you think the current crisis is showing that low-paid and/or unskilled workers are what hold countries together, even more so than banks and hedge funds? And if so, as part of the reconstruction, "Can we build an economy that increases your interest?" RD: Those...

Heroes are those kinds of people. Okay, really. But it takes everyone, okay? Efficient resource allocation is needed. As you have probably seen behind the scenes, we see that those who control many resources can make contributions. We are giving 60,000 computers to poor students so they can learn. You know, the difference between a rich student and a poor one is having a computer and having the ability to learn. And I want to thank those who would be embarrassed and almost afraid to know how they contributed to that process. And at the same time, those other people, who serve in many ways every day, so it's good character and it's that...

You know, when people came back from the war, they built the greatest generation. It's that kind of character that unites our country, but everyone has to recognize their role in achieving it. So there's a CEO and then there's someone who's a really big hero on the front lines, and they better work well together, so yeah. And then they have to be useful. And we have to appreciate them. We have to establish (I think it is the reality) that there is a basic level. Basic education, basic health care: basics that cannot be left behind. OK? Otherwise, when you go below that level, there is no opportunity and, indeed, the cost of it, in the form of crime and incarceration.

To make it personal, our mission is to help high school kids who dropped out of high school and can have jobs, so they can get into that high school and through that, get jobs. And we think we can do that and save a lot of money, because the average cost of incarceration ranges from about $40,000 a year to $120,000 a year, depending on the form. And if you incorporate them and move them into a job, you'll save a lot of money and we could do it profitably. But philanthropists can't do this alone. The amount of money is enormous.

So if our country did that kind of thing, I think... I think it would be great. CA: Wow, thanks for that, Ray. Corey, what do you think? Do you have any other questions before we finish? CH: No, I think we're good, I mean, I think we're going to get through it, I guess is what we're saying, but we also have an opportunity here to make some changes, do better and emerge. stronger. And as you said, take a look at the things and structures we have in place and see where we can improve, but it will take collective action and cooperation.

CA: Yes, Ray, I'm definitely inspired by the actions you're taking as a philanthropist right now. And some of your peers, you know, tell amazing stories. I was very surprised by Jack Dorsey's announcement yesterday about his enormous philanthropic contribution. And I mean, that's amazing, but equally important. I was... RD: But it's not enough. CA: Exactly, and I... CH: It would be nice to see more. CA: In a way, I'm a little dismayed to hear you say that you're 60/40 pessimistic, as if your voice is heard in these conversations that take place in the halls of power and you know, It's very important where the money is, yeah This fundamentally becomes cooperation between countries and between companies and between, you know, big-money controllers, or whether it becomes a fist fight.

And listening to him talk about the gratitude that we should feel toward some aspects of, say, what China has done, the extent... Do you find yourself in conversations, like, bringing this up, trying to take the view that, "No, No, no, you are causing unnecessary friction, adopt a more generous attitude"? Because it seems to me that there's a lot at stake between the number of people trying to push that kind of conversation and the hostile, scary conversation. RD: I think there is a widespread misconception: I communicate a lot with the people you say, people in positions of power, whether they are in government or elsewhere, etc.

I think you basically have to realize that very few people make decisions based on the quality of the argument. That most people are... Most of them are in a war of some kind or have a particular goal. And the information that comes out, even in the media, you know, you can almost see which side each media outlet or each person is on. How many people do you really think don't have a side? Almost everyone has done it: they are on one side or the other. And the idea of ​​being able to see things from both sides and come together is perceived, in this time and throughout history, almost as a weakness or a threat.

Because you have to be on one side or the other and so on. And so it's not easy to just say: all the people, and China, for example, would say, "Thank you very much," do you know how many respirators and masks and all those things have arrived? But that is almost a political challenge. Because there will be people out there and threatening, why am I doing this? People will be out there and say, "Okay, he's a lover of China," or "he's a hater," "he's going to the other side." Because there will be people on the other sides, and those people...

So I think I'll turn to you, Chris. You have a forum. Bring the other sides, okay? Bring in those who, let's say, have the most offensive policies and who you believe are in positions of power. And have it all together, so you can have a thoughtful disagreement. I believe in thoughtful disagreement. Open and reflective disagreement to try to arrive at the correct answer and have collectivity. But it's not easy in this world. CA: Well, that's a good challenge for us, and I also believe in disagreement. I think, Corey, we are passionate disbelievers in the spread of irrational hate.

Instinctive, irrational hatred, and I feel like there's so much at stake right now, that if... RD: But will you fight for it? In other words, when someone is going to hit back, because this is what it takes. If someone is going to hit back because you are saying something that is true and controversial, that will be the test: can you hit back for a collective comment, you know, about decision making, decision making and then hitting back ? CA: I'm not going to say punch, I'm going to say counterattack, absolutely. RD: Okay, fight back, that's good. CA: With every fiber we have.

If that

means

we look weak or like we're a threat, so be it, because you know, now is the time. I mean, everyone is impacting everyone else. We have the opportunity to push each other to be better ourselves. And look at the stories of inspiration, the stories of human beings reaching out to human beings, of companies doing incredible things, putting aside the profit motive for a moment, of countries trying to help each other, there are stories about that. I think we need to amplify some of those stories more. And we are certainly willing to do so.

We're trying to do that every day. And Ray, I loved hearing you talk about some of the good things China is doing and everything else. Thank you for your voice and for taking this time and for being, you know, honest and vigorous with us. And thank you all for listening. RD: I appreciate it. CA: A big problem. If you're listening, it will sound like you just got a warning that this could be a multi-year recession, a depression. That's scary, and more than ever, we need to be in this together, as we've said time and time again.

RD: Well, in conclusion, I know we are coming to an end, yes, I think this is a turning point, we will get through it well, we will be restructured in a major way. So it's OK. And thanks for sharing ideas worth considering. CA: Thanks, Ray. Thank you all very much for listening. Corey, we still have more days in the week. Tomorrow there is an incredible program, we are going to take a much more global look at it, which I am very excited about. We have a report from the director of LabourNet, which is an organization in India that looks at mobile workers who are facing this horrible situation right now, where they have to, in lockdown, have to walk hundreds of miles home, or face police action.

We have a report from the front lines about what that looks like in a country with a very different set of trade-offs they have to make between blocking and giving the most impoverished a chance. And then a broad discussion with Fareed Zakaria, who, you know, has this big picture view - you'll have seen him on CNN - has this very big picture picture on how to think about this issue. And compare the different responses from different countries. I think it will be an amazing conversation, I urge you to come back for that. CH: It's so amazing... you know, we were talking about this in a meeting this morning... this is a crisis that everyone is going through at the same time, and I think that's what's unusual about it andThere is a lot to investigate.

There is a lot to learn about how it is affecting everyone in different ways. So I'm glad we're continuing. CA: Thank you all. Thanks Ray. And you can watch a recording of this, if you didn't watch the whole thing, I think it's at go.ted.com/tedconnects. And if you want to see Ray's work on this, just Google Ray Dalio LinkedIn, and you'll find a whole host of resources there. That's "Dalio" with an "L." Ray, thank you very much for this. This was really, really, really interesting. Thank you so much. Thank you all. CH: Thank you.