Ray Dalio on Economic Trends, Investing, and Making Decisions Amid Uncertainty

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1:21I'm Adi Ignatius. I'm Alison Beard, and this is the HBR IdeaCast.

1:33So, Alison, there seems to be a consensus that it has never been harder to be an executive. Some of it is internal. We have technology requirements. We have talent challenges. And we've created ever more complex organizations that test our ability to manage them. But a lot of it is external. There's an unstable global environment that we have to understand and manage to lead effectively. Yeah, of course. Economic trends, geopolitics, technological disruption. We've said it once, we'll say it again. These are all things that leaders in every industry and most levels have to stay on top of and have a view on.

2:09So I'm hoping today's guest offers some interesting insights on how to think about this big macro environment. He has a long history of successful investing, and he spends a lot of time thinking about how global forces are remaking the business and investment climate. He's Ray Dalio, founder of Bridgewater Associates, which by most accounts is the world's largest hedge fund, and is the author of several books, including most recently, How Countries Go Broke, The Big Cycle. I sat down with Ray to speak about what he's learned from a career in investing and what he thinks leaders need to focus on most in today's world.

2:46If I could start with the economy, I feel like everyone I talk to is in lockstep, sort of bullish mode about the stock market. Consensus always scares me. Give me a sense of where you think we are in terms of the market. I hate to start with conclusions rather than how the machine works. I'd like to start by stepping back. I learned from the study of history. I studied the last 500 years of cycles of why reserve currencies go up and down and then why empires go. And there are five big forces that interact. The first force is the money, debt, economy, markets dynamic. But related to that force is the internal left-right political force that creates a certain dynamic.

3:38And then there's a third force, which is the world order. You know, how do countries deal with each other in the geopolitical water? The fourth force throughout history is acts of nature. Droughts, floods, and pandemics have killed more people and changed, toppled more orders than the first three. And then number five is technology, man's inventiveness and so on. I think that we are in a world that has a fiat currency that doesn't have, in other words, a limitation to the printing of that currency. And when we have a lot of debt, one man's debts or another man's assets. And so when the world is holding a lot of those bonds, and when there's a large supply of those bonds that has to be sold, and there's a great geopolitical conflict in which countries start to think about, will they be sanctioned?

4:37meaning when China is holding those bonds and they think, will it be possible that what happened to Russia or what happened to Japan in World War II, that you don't get paid on those bonds, that dynamic alters the supply demand balance of that. So to understand what's now happening, we are at the end of most of the developed countries, particularly, let's say, the G7 countries and also China to some extent and Japan to some extent. They're at the end of a long-term cycle, meaning that they can't increase the government's debts the way they are. And we're in a political cycle so that when we look at ahead and we say, what will happen ahead?

5:20We're in a situation where we'll have midterm elections. And the likelihood of those midterm elections is probably at this moment, I would say probably the Democrats will take the House and so on. I'm looking at that, and I'm looking also at the very large wealth differences and values differences that has created a two-part economy in which there's the top 10 % of the population, which is in a boom or maybe a bubble, and the bottom 60 % of the population, which is really hurting, and the implications of that. So when I look ahead, I think we are going to be heading into more difficult times. Things like how does taxation enter into this and does that create wealth taxes?

6:07And if you have the wealth taxes, does that create selling of assets to pay those wealth taxes? I think those parts operating and that cycle is going to become more difficult. You know, I feel like for all of my adult life, you know, I've been told the deficit is a problem. Debt is a problem. Right now, I don't know, we have$38 trillion, sort of national debt, way over 100 % of GDP. At what point, you know, does debt, I've been telling people debt matters and, you know, the bond market seemed to live with it. People still are buying American debt. You know, at what point does this debt matter?

6:40The way it works is that the credit system is very much like the circulatory system that brings credit throughout the system. And if it goes to those who use it and produces an income to service the debt, then it's a very, very, very healthy system. But what are the mechanics that create a limitation to debt? What happens is, like that circulatory system, credit, which enables spending, creates debt. And debt has to be serviced. and when you raise debt service payments or debts relative to income it's true for the whole economy it's true for the government it's true for every part that that squeezes out debt service payments start to squeeze out spending so in other words you have income then you have debt service payments and what's left over is what you can spend on other things and when that squeezing out happens It's like plaque in the circulatory system that then creates a problem.

7:42The second part of that is the debtor-creditor idea of one man's debts or another man's assets. So they have to be attractive assets. And when they hold too much debt and that you're then selling a lot of debt, the demand for that debt may not be adequate relative to the supply, which causes central banks to do what companies and individuals can't do, which is print money and buy that debt, which devalues it. So it's very much like me saying, when you say, I don't want to get into too much debt. It's like telling a young person, don't eat too much cholesterol, don't smoke, don't do this, because your health is going to deteriorate.

8:24Your financial health will deteriorate. When you're asking when the heart attack will come, it'll come when those two things converge. It'll come when they're squeezing out those payments. Like none of these countries have enough money. Look at the UK, look at France. They can't tax more. They can't go on deeper deficits and they can't cut spending. That's the nature of the dynamic of when you're approaching the stage of the heart attack. So given the research you've done into these historic cycles, what's the biggest risk out there now? We look back at 2008 and say, okay, subprime mortgages, maybe people saw that, maybe they didn't.

9:04Is the biggest risk what you're talking about now, these levels of national debt and debt throughout the system? Or is there something else that you're concerned about, again, maybe from this historic cyclical perspective? I'm going to first answer it in the bigger sense. It's how we deal with each other to deal with all of these issues. But I'm going to narrow it down to your debt question. there's a bubble and how a bubble gets burst. We have this debt dynamic, which means that either interest rates have to go up if there's not enough demand relative to the supply, and that curtails economic activity and then causes a problem.

9:44That's what causes bubbles to pop in the traditional sense. Or then they come in there and they have to print money and buy those bonds, which creates a monetary inflation. And that dynamic naturally leads itself to a stagflationary kind of environment. We have to understand how bubbles occur. How do stocks go up a lot? And why did the 20s, for example, lead to the 30s? And that has to do with the difference between what wealth and money is. Wealth is, it's easy to create wealth. And we're creating wealth all over the place, but it's not money. Wealth, for example, if I issue, I'm creating a unicorn, and I say I'm going to raise$50 million for a billion-dollar valuation.

10:33The world and everybody says, then you're a billionaire, and that you've created a billion dollars worth of wealth. And so wealth can go up a lot. But wealth is not worth anything unless you sell it for money in order to spend. And so when wealth rises relative to money a lot and there's a need to be able to convert that wealth into money, then that causes assets to be sold and so on. All through history, the issue is when there are too many claims on money and there's not enough money, there's a dynamic that either leads to defaults or the production of more money to prevent the defaults. You know, another topic that seems critical and yet doesn't seem to be taken seriously, you know, at certain policy levels.

11:22Anyway, you've been talking about this for years. I doesn't feel like there's exactly a bandwagon, you know, of people who want to solve the inequality problem, at least in the U.S. You know, can these levels of inequality be sustained? No, they can't be sustained. This is for me like watching the movie for the umpteenth time. It's the nature of how the machine works. One of the great things about capitalism is this inventiveness can come along and then you raise living standards and so on. But it creates big differences in wealth that then become perpetual because then those who earn wealth can then have their kids have better educations and so on.

12:01And so if you take the Industrial Revolution, second Industrial Revolution, that leads to the Gilded Age, that then leads to robber barons and the Panic of 1907, you see this pattern again. So what we have are irreconcilable differences between the left and the right, so irreconcilable that the system is losing its power. The belief in democracy is being, you know, they won't say I'm going to settle this by having a vote and we're going to compromise and so on. No, it increasingly becomes a win-at-all-cost type of dynamic. You see the populism that's operating now, and you see greater polarity, and that typically leads to a conflict.

12:46In the 30s, a period that we're going through in many cases last time around was quite like the 30s. Four democracies chose to become autocracies. So which sides win out? That's the dynamic that we're in. If I look at societies over time and what produces success, it's very simple. First, educate your children well so that they're capable of working and being productive and also understand civility. And then come out to a society in which people worked well together following rules and guidance with good leadership to be able to be productive together so that most people prosper. And number three, don't get into a war.

13:33Don't get into a civil war, an internal war that disrupts all that, or an external war. If you could do those things well, you'll have a successful society. So who has the intelligence and the capability to make the country good for most people is the question. And whose vision is that? And there's very, very big differences in vision. There is not a path that I can see to saying we're going to bring all those sides together. We're going to follow the rules and we're going to make the important changes that will bring us into balance to create productivity and prosperity for most people. So you mentioned technology as one of the key forces and the cycles of technology.

14:18I'm interested in your take on AI. I mean, we talk about AI endlessly, as you can imagine. I don't know if it's overhyped. I don't know if it's underhyped. I'm interested in to what extent you think it's going to reshape our very economy. And I'm also interested in how you use it, if you do. I founded Bridgewater 50 years ago. This is the 50th year. I'd say starting 40 years ago, I started to get in the habit, which I'd recommend everybody do, is when I was making decisions, I would think, what are the criteria that I'm using to make those decisions? and I would write them down. They're what I would call my principles for making decisions.

14:59And that helped me understand how things work mechanistically, what are the cause-effect relationships, and what are those principles. And then I computerized them. So when I'm dealing with the markets, or I'm dealing with almost all decision-making, it was computerized. And then AI has different versions. The word AI began in 1956. I used expert systems that would make the computer make decisions as I would make decisions by like making a computerized chess game. And it would make decisions and I would make decisions when faced with the same thing. And I'd compare those two decisions and they should be aligned.

15:41And if they're not aligned, I'll reconcile the differences and we'd both get better. So I did that for a very long time. And now we have the more with ChatGPT and all that's happening elevated that and the capacity to do that. So I've experienced that. I understand that. I think it's phenomenal. But when I say it, it's how you work with it. It has to be a partner. It isn't something that you just follow or just even a source of information. When it works, it is like working as a good partner. It can never be your substitute for thinking, for understanding cause-effect relationships. The computer doesn't have values.

16:24It doesn't have inspiration in the same way. It doesn't have emotions. It doesn't have those things that are so like, what are you going after in life? Who do you love? And all of those things. So it has to operate as a partner. But yes, I'm very excited. I think through the evolutionary process, it'll be very important. All technologies, you know, have pros and cons to it. So it's going to create great power. That power can be used for harm or for good. It will be the main war issue. When we're thinking about, could there be a war with China or Russia or another entity? What kind of technologies can it be used?

17:04So like nuclear, Can it be used well or is it going to be used harmfully? Secondly, it doesn't get us around our question and, in fact, exacerbates our question of the wealth inequality and that dynamic. You can see it happening. If you're in the top 1 % or 10%, wow, you own stocks. And it comes down to a very limited number of stocks and a very limited part of that economy. And it's going through the roof. And it'll also be replacing jobs. How do we deal with that? That's going to be a big question. And then number three question is, who's in control? And when we approach AGI, is that going to mean that it can be in control and we're no longer in control?

17:51These are questions that lie ahead. So I want to talk about global trade and geopolitics. This current U.S. administration is very different from administrations of the past. I mean, We've really broken from a lot of the Cold War certainties. And is the era, the sort of Pax Americana, global trade era, is that over just given tariffs, trade wars, where we are now? Or is this possibly just a kind of a bump in something that we'll see more continuous with post-World War II era as we move on to different leadership? I think that it's important to understand that all monetary orders have, well, through history, broken down.

18:32All domestic political orders have broken down. Some last longer than others. We had a civil war at one point, and we got through it. Most countries, they last 50 or 80 years, maybe, and then they break down. And most international geopolitical orders break down. So that's the norm. People don't sort of realize that. And it's like health. You can go down a list of indicators. Where is your education level relative to your competition? Where is your GDP? What are these things? I put together and I made it public what I call countries power indexes. It measures economic power, military power, all these different powers.

19:21And so you could look at it like you could look at a human being's various characteristics. What is your stress level? What is your cholesterol and all looking like that? It is a reality that the relative position of the United States is no longer the same in terms of its dominance, whatever the measures I can use. And it is the reality that we have this debt issue and that we have this internal conflict issue. But it's like a person who has cholesterol and has these conditions that you have to then get over that. That's very, very difficult to do. And particularly in a world where the other powers have now become very strong themselves.

20:05You know, looking at history, it would be difficult. We have unique characteristics. We're a country of people who have come, the best and the brightest have come all over. And we've created a system of a meritocracy that can get the best talent to go to the best schools. And you can educate your people well. And you can do all of those things. and rule of law and all of those wonderful qualities that have made America great, if they can be regenerated and then you can work on those things together, you know, then perhaps. But one has to realize it's not like, is it just going to happen? No, no, no.

20:48This is going to be, you know, can we operate well enough to be able to get fit again? It's a long shot to that dominant power of being the best of the best. That doesn't mean we can't find a way of being successful, but what does success really mean? What is its form?

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21:45So I want to talk about leadership. You know, I would say HBR operates out of a sense that it's always difficult to be the leader of a company. It is particularly difficult now. You've lived through ups and downs, booms and busts. What's your advice for senior leaders who are trying to navigate what feels like a particularly challenging time right now? Know what you know and know what you don't know. And knowing how to deal with what you don't know is more important than anything you know. Align yourself with your board and your shareholders in a way that you have, you know your common purpose.

22:23And in that common purpose, there has to be an element of what do you do in a socially changing environment so that you know how to navigate the possible consequences of saying something. And you have to be aligned with your employees in terms of what your mission is and how you're going to achieve it and operate in that way, that's the most fundamental thing because otherwise there can be consequences to what you say or what you do so that you almost lose your own beacon of thinking, what am I going after and how do I compromise those things to achieve that goal? What's your advice on how to build a really good senior team?

23:05From your past, what worked and what didn't? For me, my mantra was always, what do I want in life and how does that carry over to what I do in my business. I wanted meaningful work and meaningful relationships. I want to be excellent in my work and have a passion for it. And I want to have excellent relationships that we're not just doing this as in a transactional basis, but we're on a mission together. So I have meaningful work and meaningful relationships through radical truthfulness and radical transparency. That was my mantra. That means if I'm thinking something or you're thinking something that we will deal with that to operate, to make the team the best team in the world, the best team that we can, knowing that we're going to go through the ups and downs together and that it'll make us more effective as a team.

23:56And it'll also be a joy because when you have those relationships that you go through, in many cases with decades or that kind of special relationship, you gain more effectiveness and you also gain the joy of it. What are you after? What are you going after? and who are you doing it with and how do you operate together, those are the most fundamental principles, I think, that you have to have. So, I mean, the principles radical truthfulness, radical transparency, which are associated with you, sound really appealing. I mean, there have been reports that it was a pretty tough climate. People talked about paranoia and punishment and all that.

24:34And I think it's true that your successor has undone some of the, maybe not the principles, but sort of the way that that was carried out. My question, though, is, you know, would you tweak anything if you were doing it all over again? I think the real question, most importantly, is are you going to be radically truthful and transparent? Are you going to share what you think? Can you build that trust of doing it, even if it's tough? In other words, a lot of people, they find mistakes painful. They find facing their weaknesses, painful. But think of it as a great team. If I'm going to deliver the best team and that we work well together, we're going to have to do that.

25:16Okay. We're going to have to deal with that. We can't be avoiding that. And how you do that is the most important thing. And not everybody's going to like it. At Bridgewater, it was something like 30 % of the population won't make it two and a half years. And a huge percentage of the population can't work anywhere else. They go into the other organizations and everything's behind the scenes and there's the politicking and then they can't have the discussions and there's a sense of dishonesty. But you have to create that particular culture. And so the exactness of how you do that, in my belief, that was what I believe, that's what worked.

25:55That's what took Bridgewater from a two-bedroom apartment and led it to become successful. And there are people here with decades that we have that extraordinary power. But how you do it exactly, how do you balance those things exactly? That's up to you. I think people are trying to figure out what is the appropriate work culture. For a while, there was a consensus from places like HBR that you know you wanted your employees to bring their whole selves to work. DEI was a critical component to everything. Now there's a backlash. So the question is you know where do we want to end up? I want to end up where I want to end up and where I began and what carried us through was I want you to be feel totally free to be yourself.

26:43You should never not feel free to be yourself and then be considerate with others and to operate that way. And that includes feel totally free to say, ask any questions or probe anything and, and operate in that way. Otherwise there's a duality. The duality isn't good for you. The duality isn't good for the organization, but to know also how to have thoughtful disagreement, like, can I see it through your eyes? Can you see it through my eyes? And then we have to make a decision. For me, it was idea meritocratic decision-making. So in order to do that, we had believability-weighted decision-making.