#620 - Ray Dalio - How To Prepare For The Changing World Order

0:00We're on the brink of war with China for various reasons. I hope we make it to 2050. The demographics is as I describe it and by the way them losing doesn't make us winning. So I think you're in the part of the cycle where you've had the tightening and the dominoes are beginning to fall and I think that that's going to produce more problems. The most important thing is to have this basic well diversified portfolio is important. Two years ago you made some predictions about the future for America and the global economy. How accurate do you think you've been? Uncomfortablely accurate given the whole picture.

0:42It's like watching the movie for over and over again. Maybe I should explain. For about 55 years I've been a global macro investor and I learned that many of the things that surprised me never happened in my lifetime before. So when I would see certain things happen that were like that, I would go back in history and study prior periods. It's studying, for example, the Great Depression allowed us to anticipate the financial crisis in 2008. Anyway, there are three big things that I observed happening that didn't happen in our lifetimes, but happened during the 1930 to 45 period. And they are the creation of enormous amounts of debt and the printing of money to pay for those debts and it having its economic effects on inflation and growth.

1:44The second is internal conflicts over the largest wealth gaps we had since then, values gaps, and the rise of populism of the right and the left. Those conflicts, again, largest since that 1930 -45 period. And then the rise of a great power, producing a great power as conflict internationally, with the rise of China as a great power, challenging the United States and with Russia. So the great power conflict, that also is the most that that's happened since the great depression. So because those three things are happening now, and I didn't study them, I went back and I needed to study the cycles, what's happened over longer periods of time.

2:46So I studied the last 500 years because these big cycles take about 75 years and give or take about 50. And, you know, like the rise and decline of the British Empire, the rise and decline of the debt. And that dynamic I shared in the book, and I also shared it in an animated video, which is called the Changing World Order. And that creates a path. Now it's not just because they repeat in this way, but one can see the cause of fact relationships that are happening. And so that has pretty much transpired according to script. We can get into those pieces, but I'd say those are the three main ones.

3:39There were two others that had big effect that I paid more attention to that I'll mention. One was acts of nature in the form of droughts, floods and pandemics. They were very disruptive when they happened, killed more people and toppled more empires than or waters than others. And then also, of course, over a period of time, there's learning and producing new technologies that raises living standards, you know, it's raised per capita income life expectancy and so, and so, but those five factors transpire in ways that we've seen before to create this big cycle. And it's if we can look at the cause -effect relationships, that's what I want to pass along, because I'm 74 years old and I'm going to phase in my life that I want to pass along the things that are a value.

4:35And I think this is an important thing. But yes, it's transpiring according to script. Cassandra, yet again, unfortunately, what do you think is the likelihood of the meltdown of the dollar? Is America going to be wiped out at some point soon? I don't want, histrionics, you know, just I don't want to overdo it. And I also don't want to just jump to conclusions. My goal here is to show people how the machine works, the cause of fact relationships. So I'm going to answer your question by explaining certain things. The dollar is held by countries in the form of debt. In other words, when say I'm holding the dollar, you're holding a debt instrument.

5:29And when we have a problem with the debt instrument, a few problems with it holding the debt instruments, those problems are that first of all, as a result of what the United States was in the world, the largest trading country, the dominant empire and so on. There's been a huge accumulation of dollar -denominated debt and dollars, therefore. And there's also been a lot of deficits that had to be funded, which happens by selling dollar -denominated debt, which a lot of foreigners and banks and others bought. And so they have a lot of dollar -denominated debt. Now, if you're a creditor, meaning an owner of Dollar Denominated debt, you need to have an interest rate that is high enough to the more than compensate you for inflation.

6:33And so the production now of a lot more debt and then having a lot of debt. And then also sanctions internationally, which means freezing dollar -denominated debt, all have created a reduction in the demand for dollar -denominated debt. There's also concerns in the world about some of the things that are going on in the United States, and that's reduced that. that. As a result of that, you're seeing more transactions take place in other currencies. And if they take place in other currencies, then others want to save in those other currencies because that's how they pay for it. So if you want to save in what you pay for, you save more in it, and less in dollars.

7:28And so that's the dynamic that is reducing the demand for dollars and dollar debt at the same time as the supply of it keeps coming because we have large deficits. So the underlying value that those dollars represent isn't increasing, but the number of dollars spread across that is? Yeah, so that there's a supply -demand issue. That supply the man's issue, by the way, also exists in European currencies. Okay, they have too much debt and they're financed the same way. And Japanese currencies. And so what you're seeing is the movement, all that weight of money and debt, is causing prices to go up inflation.

8:19And that's also being worsened by the supply chain deteriorations that are due to the international conflict. So for example, in the case of, let's say China and the United States and other countries, as they prepare for the possibility of war, they want to be self -sufficient. And so, as a result, they work on being self -sufficient more than integrated and efficient. And so, that dynamic is playing an important role too. What do you think the next few years have got in Stolferus?

9:09Well, I'm going to take all three of those influences and answer it because they're all related.

9:19There's a business cycle or a short term debt cycle, I call it. That recession to recession and the way it works is you have a recession and weak economy, central banks, stimulate credit growth, credit gives you buying power, you go out and buy the economy picks up and then that continues until you start to have inflation. Then they tighten monetary policy and then it and then the economy weakens and it goes into the next recession. Since 1945, when the new world order began, in other words, we had the currency and also the American world order beginning in that. We've had 12 and a half of those cycles.

10:09We are, they typically last about seven years, give or take about three. And so we are now about halfway through this cycle in which they, you know, they did the stimulation and inflation rises, they tighten monetary policy, and we're in the phase of the cycle where there is going to be then the cracks occurring and the negative impact on economic activity and the like. And it's going to be more difficult than normal because there's so much debt outstanding, and we're, you know, what we just talked about. So that is likely to happen over, let's say, the next year and year and a half, which means that it will take us in through the elections.

11:04And what we have is a situation where the second of those influences, the internal conflict influence, is bad. and you have a lot of populism. So populists are people who will fight to win at all cost. They're not compromisers. You know, I will fight and I will win for you and the rules be damned. You know, compromising be damned. And so you're going to have a political situation in terms of, you know, that kind of environment. It's a bad time for that, but it'll end up paying an impact on the nature of the elections, I think. And then you have the international conflict. But we are much closer to a big conflict, a war of sorts, either ascensions in economic war or even possibly a military war with China.

12:05And because of the politics also, that that will be pushing its limits too, because there are the one thing that most Americans are united on, and both Democrats and Republicans considered united on is anti -China and as a result you know and they all want a strong man or a woman strong person on that and so I think you're going to see pushing of the limits there and that becomes a dangerous set of circumstances. So I think that if we take the next, you know, let's call it one, two, three years, I think that those are going to be risky or years. I spoke to an evolutionary psychologist and an evolutionary anthropologist a little while ago on the show.

12:58And they were teaching me about the values and the type of characteristics that ancestral tribes would have preferred in leaders at different states. and in times of warfare, more dominant leaders were the ones that were preferred. In times of peace, more prestigious leaders were the ones that were preferred. Makes complete sense. If you are facing a scary tribe from the other valley, you want someone that's going to stand firm and is going to not take any shit and they're going to go for it. When times of peace, that person becomes a bit tyrannical. It's a little bit too much energy when there's not anybody else to fight.

13:30And it's so funny how you see this just same dynamic to me. It seems to play out no matter how big the populations get. It's essentially the same physics. That's right. It's happened repeatedly. If you're in a war, what you want is the commander and everybody, to God damn follow the instructions and just do what you're told. It's not like we're going to sit there and argue debate and so on. So what you see is the breakdowns and particularly you see the breakdowns. And also when they're at odds, there's a lot more to argue about. Like now, the populace of the left and the populace of the right.

14:17And so in the 1930s, you saw four democracies become dictatorships. And choose to become dictatorships. They had parliaments that chose to become dictatorships. dictatorships. Germany, Italy, Spain and Japan chose that because in order to fight, that's what you need and that your anthropologist, Fred and Sir, right on that. Yeah, they're consolidating power in an attempt to try and be able to enact more change more easily. It's not, we haven't got time. We haven't got time to get this across the line diplomatically. We haven't got time to get everybody on the same page. We'll have one person who knows what they're doing and they'll push it forward.

14:57One thing that I… And another thing that's common is the foreign enemy. When you have a situation where you have internal dispute, it's very, very common to try to bring the country together gets support by the leader, by having the common enemy. And so, we'll all rally around the leader and you could see, you know, it was like, you know, when 9 -11 happened and, you know, the president, you know, Bush gets a standing ovation and we're all behind you in that fight. And so that's, yeah, that's timeless and universal dynamic. If you can't bond yourselves together over shared love of an in -group, shared hatred of an outgroup is a close enough proxy, I suppose, for that interim.

15:53Was there anything over the last two that you didn't anticipate, or is there anything particularly unique about the situation that we're in now? What is it? Every time people say it's going to be different this time? Is there anything that could make things different this time, or is there anything that you've been surprised by? You know, by and large, I haven't been surprised by. I mean, I didn't anticipate that we were going to have the war with Russia, So that, but I did anticipate that we likely, you know, headed in a war -like environment. It's very much fell with, as expected there. The economic and the financial very much is the same.

16:43So I'd have to, you know, buy in large, almost exactly, it's transpired, the way described. And that's why again, look, I did the video for free on YouTube, the changing world order. What I'm trying to do is to just pass it along for people's consideration, to understand the cause -effect relationship that goes there. But yes, it's unfortunately going according to script. That doesn't mean it's destined, okay, but it's difficult to take off track. What do I mean by that?

17:27Each stage is the logical consequence of the stage that preceded it. So let's take the existing situation. The United States has a lot of debt and it has deficits. So it has to sell debt. Now if you say, and others are holding debt, and if you say, how do you get healthy? You have to spend less than you earn to not borrow money and get financially strong. That's difficult, particularly when you have a lot of debt because you have to take a portion of your income and you have to pay the debt. And also you're living in spending more than you're earning. And so how do you rectify that? What cut spending?

18:27I mean, it's very difficult to cut spending or raising income, that's not easy. So rate cut spending, what do you cut? Okay, so we're living in a world now where policymakers don't think how much money do I have to spend? And what should I prioritize it on? They think how much money, how much money do I need to spend without regard to how much they have, and then they go spend it, and then they have deficits that central banks can print. It's just like the same as individuals. They have the deficit, but in their case, they have the capacity to print the money to pay the deficit. So it's not easy to fix the financial problem.

19:19The internal problem, you know what it's like, can you get people to come together to, you know, say there's a common problem, let's have the left and the right and people. Very difficult. People have big differences in values and conditions. And so it's very difficult to bring them together to deal with the problems. and the same is true internationally, you know, easier said than done. So given that dynamic, there is then the stages. And so it's pretty clear normally what comes next. Given all of these changes, what do you think people can do to best prepare themselves financially for the next few years?

20:11Well, I think that in saving, let's talk about that. There is, I think of savings in tiers. The first tier is to secure your well -being, to own a portfolio of assets that are going to secure your well -being. and then after you have that taken care of, then you can go to the next level, take more risk and so on. That well -being, that purchasing power, has to be viewed in terms of inflation adjusted dollars. You know, if you're holding a debt instrument and cash paying instrument and it gives you a 2 % interest, and you have a five or six percent inflation, you lose money at three percent a year, so you have to look at that in real dollars, and you have to hold that portfolio in a way that is balanced to any kind of economic environment.

21:21And then the way I do it, and I remember, I didn't have anything, and then I start to acquire money, and I start to think, okay, how much, how many weeks do I have, months do I have, or years that I'm financially safe, and what do I hold it in? And then, once you got that taken care of, you can go beyond it. And I wanted it in a very well -balanced portfolio, that type of portfolio that does equally well no matter what happens. I can explain that a little bit more if you want. That would be good. Okay. Okay. There are basically two big influences on markets. The growth rate and the inflation rate.

22:24Like if you know that growth is going to be faster than expected and inflation is going to be higher than expected, you know that bonds are going to go down and vice versa. So, the way I give that as an example. So the way I look at it is there are those two big influences and then they can, so I have four environments and each one of them can go up or down. So there are four quadrants that I think of, rising growth, falling growth, rising inflation and falling inflation. And I want to have portfolio that will be 25 % of my risk in each one of those so that I don't have any bias. And so I pick the assets that are going to do well in each of those four quadrants and I hold them in a balanced way.

23:29And I tested that, you know, going back actually to 1900 and so on and you'll maintain, you'll actually increase your buying power. And so that's the kind of thing that I think in the beginning. Then you have to also make provision for taxes to some extent. So I say whatever that amount of money is, I want twice as that. So in case it goes in half. And I want to build a portfolio that looks like that for, you know, I don't know, X number of years, that I have that. and that's the safe savings and then when I go beyond that then I'll take more risk. But I think that being safe, particularly in this kind of an environment, is important and I would take a perspective of how to do that that's like the one I'm just describing.

24:26What would be an example of an investment for each of those four quadrants? Well, I'm worried that we're going to take a long time to explain it. I've explained it elsewhere, but let me give an example. I'll take it. Like if growth, so there's these four quadrants growth and inflation. If growth is less expected and inflation is expected, you would like to own bonds. If it's higher than expected, you would not want to own bonds. Okay, if inflation is higher than expected, you would want to own assets such as commodities and gold and inflation index bonds.

25:26If growth is faster than expected, particularly if inflation is less than expected, you'd one -owned stocks. So you get the idea. One of the things that you brought up Eliron was the changing internal structure. This is driven by a number of factors, but one of them being increasing wealth inequality. At the moment, it seems like there is a decline in praising work ethic, especially in the US. Do Do you think that that is a symptom or a cause of what we're seeing at the moment? Well I think the, I'm referring to the, let's say, the wealth gap. I think that there's a lot of particularly unproductive people.

26:27For example, for various reasons, but I live in the state of Connecticut and my wife tries to help students in the poorest neighborhoods have the worst conditions. And I'll give you this example. I, the state of Connecticut is usually number one, two, or three in the richest state in the country, but 22 % out of the last service, actually higher than this. 22 % of the high school students in Connecticut have either dropped out of high school or have absentee rates of greater than 25 % in our failing classes. And there's a great deal of poverty and the breakup of the families and the guidance. There's a cycle that takes place.

27:20And so you're seeing the general competitive education levels, the conditions. In Connecticut, so we operate philanthropically, and on giving an example, there was COVID. And the kids have to get educated. And 60 ,000 kids didn't have computers or connectivity. And no government was going to do anything about it. So, you know, we had to buy 60 ,000 computers to give it to kids in order for them to have education. Well, this, and there's hunger and there's poverty and there's drugs. It's how the educational system is funded. Education is a state issue by the Constitution. and then within a state, it's a tax, typically within a state, it's a tax district issue.

28:23So I live in Greenwich, Connecticut, which is relatively, it's a rich town. And the public education gets about $24 ,000 per student. The last number I looked, it's probably higher than that now. gets $24 ,000 a student up the road at Bridgeport, Connecticut, 10 minutes up the road, they get $14 ,000 a student because there's no tax base. And they need it more money because the expenses of raising a kid are, you always have to get them the computer, you've got to get them the food, the clothes, those things, and they have less food, less clothes on it, all those things. So, and what, but in any case, what you can see is the education test scores and measures of how we're doing in education relative to other countries have declined.

29:24So part of it is education and circumstances. Part of it is drugs. Part of it is, you know, there are lots of parts of it. And then there's a certain element of it which, let's say, because of COVID or other reasons that people have moved around and say, you know, I don't have to work as hard anymore. So, you know, just, for example, the change in the attitudes of restaurant workers. You know, okay, I can found another way to live and so on and that's playing a role. Of course, also, people as the baby boomers are older, you know, they drop out of it, nor they want to retire earlier, and they do.

30:18So there are a number of factors that affect, you know, this kind of set of circumstances. The bit, the wealth gap is very much do to a self -reinforcing cycle in which if you earn a lot of money, you can't afford to take care of your kids' education. You can raise them in a better way. If you don't earn a lot of money, you don't have that privilege.

31:00So all through history during those such times, wealth gaps have increased. So you look at the cycles. You have a new, you know, like a new world order, like in the 1850s, you know, you have the Civil War and then you have that. And then you have new technologies energies and inventing you. You have the industrial revolution take place and things go great. But what it does is it also increases the wealth gap. Some people make a lot of money. Others don't. And it also increases the level of indebtedness. And you make the turn of the century. You then you see big conflicts over wealth. You have the panic of 1907.

31:51And so what you see is the industrial revolution turns into what's called the gilded age in which there are very rich, but decadent. You know, while there's poverty and, you know, in the early turn of the century, they're living, people are living very, very lavishly, very decadently at the same time as their, you know, sweatshops and all of that and then there's kind of a revolutionary reaction to that. So these things happen over and over again for the same reasons. What would you tell young people then at the moment? What advice would you give them?

32:35Well, first of all, learn how, say a few things. First, know your nature. Everyone has a different nature, a way, a pull, what's their pull toward. I created a personality profile test called Principles U. I put it online for free, and it tells you a lot about, you know, what your nature is. And it also shows if you take the test and you do it and you put somebody else's in, they take the test, it'll tell you about your relationship. So you want to know what your nature is, what your pull is going for. And then you go through your journey of learning experiences that, you know, has its ups and downs and you know, you learn, you have your, you know, your painful experiences, but I have a principal, pain plus reflection equals progress.

33:36You learn, you get that. And then to have perspective, to understand that all of these things, events transpire, you know, know the whole cycle, see the whole thing, gain perspective, and understand where you are in the cycle. Understand where you are in the life cycle. There's a life cycle, from birth to death and let's say it on average it lasts about 80 years and you know that at different parts in that cycle certain things are going to happen. You're going to first, third of it, you're going to be dependent on others and you're learning. Second, third of it, you're going to be independent of your parents and so on and you're going to be, others will become dependent on you and you're working to be successful.

34:30at the various ages. You get married, you have kids, all of these cycles. There's a life cycle. That happens over and over again. And then there are these other cycles, the cycles of, you know, let's call it almost from war to war, whether that's an internal war to change as the internal or an external war changes the external war. And there's a cycle that has to do with a debt cycle and those others. And you have to know what those cycles are like and kind of where you are in those cycles and you navigate it well. I mean, the main thing is being strong, smart, capable and adaptable. But that's why I put out these videos and books to try to help people understand that.