In this episode of 'Influencers', Andy speaks with billionaire investor and Bridgewater Associates founder, Ray Dalio, as they discuss the volatility in the stock market, Bitcoin as a substitute for gold, and the rise of China as an economic superpower.
ANDY SERWER: Finally, the end of the pandemic is in sight, but the uncertainty about what comes next and who will benefit has thrown the market out of whack. You can be sure Ray Dalio sees through the chaos. Over nearly five decades, the hedge fund billionaire and investing legend has built an iconic set of principles for how to thrive in the market and in life.
He made his first stock pick at age 12, and at 26, launched Bridgewater Associates. Now, it's the biggest hedge fund in the world, with about $150 billion in assets under management. On this episode of "Influencers," Ray joins me to talk about what the COVID-19 stimulus will do to the stock market, whether the government could outlaw Bitcoin, and what worries him about a wealth tax.
Hello, everyone and welcome to "Influencers." I'm Andy Serwer. And welcome to our guest, Ray Dalio, founder, co-chairman, and co-chief investment officer at Bridgewater Associates. Ray, welcome.
RAY DALIO: Good to see you, Andy.
ANDY SERWER: Let's start right in and talk about the markets, Ray. There has been a tremendous amount of volatility this year. Why is that happening and how do you expect things to pan out?
RAY DALIO: Well, it's simple-- you know how the thing works. If the pulse of the economy goes down, then the policy-makers, like doctors, you know, rush to the patient and inject it with a whole lot of stimulation. And so what they did is they wrote out a bunch of checks, and they're writing out a lot of checks, which are about seven times-- five to seven times-- the size of the hole. And they got that money out.
And what that did was, of course, the government doesn't have money. They print money, so they have to borrow that money. But the Federal Reserve can print money. And so the same thing that is happening like on March 5, 1933 is the same thing now in terms of that big stimulation. So the way it works is real interest rates are so bad, money's so cheap, and it's so abundant that it changes a lot of financial assets, and it causes those financial asset prices to rise.
And when they rise, future expected returns go down to start to approach those of bonds and the risk-free return. And so that's what we've gone through. So you see it domestically, you see it also in the currency, in the dollar, you see it in other assets-- gold, Bitcoin, and so on. So the world has got a lot of liquidity.
And now we're in a spot where we're going to have the supply demand question. The big question is the supply demand question, because we're going to have to sell a lot of debt. And I don't know if you want me to go into that, but we're going to have to sell a lot of debt. And then the question is how that goes-- will the demand be there, or will the Fed have to monetize more? That's the dynamic.
ANDY SERWER: Yeah, I do want to get into that debt question, but first of all, I want to go back to stimulus, which maybe is before that. And am I to understand, then, you think there is too much stimulus coming from Washington at this point, Ray?
RAY DALIO: It depends, like you say, too much for what? Too much for the supply demand? Yes, probably. OK? We'll get into that. Too much because, fast, a lot of people needed to get a lot of money? OK, if you look at the needs and a lot of things like, OK, err on the side of too much-- we have a big wealth gap. We have a big opportunity gap. We have big gaps that are issues.
We see it here. My wife, particularly, in the state of Connecticut works with disengaged and disconnected high school students in poor neighborhoods and so on, and you see their conditions and what the budgets are. There are a lot of needs. So I'm not saying the needs are not there, I'm saying just the right way the machine works, the reality of it is you're making this big supply demand move, but it's not like it doesn't have risks and costs associated with it. So from the market's point of view, it's a real big deal.
ANDY SERWER: Yeah, so does that mean you sort of flood the zone to mitigate and obviate these sort of social problems and sort of by definition, you're going to overshoot, and then we have to deal with those consequences?
RAY DALIO: Yeah. Because like debt, at the end of the day, it's going to be one way or another. It's either going to be when somebody borrows and you're using that debt, is that going to produce productivity, so that in hard money terms, that that money can be paid back in a way where, OK, it paid off in a productivity increasing way? Or is that not going to be paid off?
And somebody is always going to pay, but it's going to be the bondholder, it's going to be the cashholder who is going to pay if that doesn't come back with real productivity. And right now, it was an emergency situation with COVID mixed with a political situation to disperse a lot of money. And that's what we have. But it's not ending there, because that's the new policy.
ANDY SERWER: So can I infer, then, that we're suggesting we're going to have an inflationary period ahead because of what you've just outlined?
RAY DALIO: There are two types of inflation. OK, let me just clarify-- there's supply demand inflation, like if demand is pressing up against capacity to produce things-- and maybe that's labor, maybe that's capacity constraints, and so on, and so forth-- prices rise because of that. And then there's monetary inflation.
And monetary inflation is because the currency and the value of money goes down. And so you can see, like in the 1970s, stagflation. You could see inflation is not coming from the first of those types of inflation, it is coming from the second of those types of inflation. And the way that would occur is because people don't want to own bonds. To me, it's pretty crazy to want to own cash or bonds, OK?
We can get into why that is. But if you have that movement out of that type of financial assets to other assets, which we are seeing, then that has the effect, first, of causing financial inflation. In other words, an investor shifts it to another investment, and they go up in value. And then that wealth effect has an effect on those items that people who acquire the money want to spend on it. So maybe it's on penthouses, or maybe it's on something else, but it depends how that's spent.
I'm more worried about the monetary inflation, which would look something like a currency defense. It means that what happens is let's say people don't like bonds, and then they start to sell bonds, and bonds then go down in value because they have a capital loss, and they don't offer anything in interest rates-- negative real interest rates and so on, they don't like that. Then the Federal Reserve or other central banks are faced with the choice of either rates rise, and that is bad for financial asset prices, and it's bad for the economy, or they make the purchases.
They make money and they make the purchases of that, and that then produces more of a monetary inflation. So it's the second that I'm more concerned with. But the supply demand of debt will be, I think, the big driving influence. And I want to emphasize this-- because so many people say, OK, they look at this stock or they look at this. But what you saw was the v-bottom in all markets. And that was due to debt and money dynamic happening. So that's the biggest dynamic to pay attention to.
ANDY SERWER: So that v-bottom, you mean, a year ago?
RAY DALIO: Yeah, that's what I'm saying. I think it was April 8 or 9, the exact same action was taken, basically almost, as happened on August 15, 1971, which was also the exact same action which was taken on March 5, 1933. In other words, the big jolt, the separation in terms of that value of money, that dynamic-- and that is the new paradigm.
ANDY SERWER: And so what does that mean? So on the one hand, you're seeing this rotation in equities from growth stocks to cyclicals. Number one, is that going to continue? And then number two, the 10-year is up 100 basis points this year-- is that going to continue?
RAY DALIO: Well, what's happened is that a lot of, like these cycles go, a lot of new ideas, new technologies, new things come along. And they make fabulous revolutions, and they grow things. And that's great. But there's a tendency of investors to extrapolate the past and not pay too much attention to price.
And when that happens, you start to emerge as somewhat of a bubble. By our measures, the bubble is not as what it was in 2000 and not what it was in 1929. But it's kind of like halfway there, if I look at the types of qualities. And so what that means from a value point of view if you're calculating, you know, what can I realistically expect, its expected returns shrink relative to the others.
However, the kind of meat and potatoes type of companies didn't benefit as much from those, and they're fairly stable and so on. And so that's why you're starting to see that kind of rotation. Now, that can change. It can come and go in those phases-- like when people get stimulus checks, and then, you know, they might be hot on the exciting things and they run up again, and so on. But that's going on. And of course, there's Bitcoin and other things that are going on.
So however, the big thing is plenty of liquidity and ridiculously low interest rates. Now, you ask about the 1.6%-- I think we have been in a 40-year bull market in bonds. So now you look at that 1.6%-- that's a negative 1% about real, OK? So you're guaranteed. And you ask yourself if you're going to hold a bond, any investment.
The only purpose of an investment is so you can sell it to buy something you want. And so when you look at what is the length of time it's going to take me to get my money back-- if I give an investment nowadays, in the United States, I'm going to have to wait about 50 years to give back the buying power to start, and then I'll start earning money. If I'm in other countries-- Europe and Japan-- I'm allowed less.
And if I measured in all those countries in real terms, I'm going to have less money. So basically what that means if I just bought anything that didn't depreciate in real terms-- if it just matched inflation, I'd be better off than to have those things. And so now, those rates will only stay down there, I think, if the Federal Reserve does what it did like in the 1930s in the war period, which is to put a cap on rates to make short-term interest rates low in relationship to the cap.
Like back in the '30s in the war years, they made 1% was the short-term interest rate, and 2.5% was the bond yield. So it was profitable to buy those bonds, funding it with 1%, then you got 2.5%. That could put a lid on it. But because those two assets, cash and bonds, were such bad investments relative to other things, there was the movement to those other things still, and then the government outlawed them-- I mean, things like gold. They outlawed gold. That's why also outlawing Bitcoin is a good probability. And they also established foreign exchange controls, because they don't want the money to go elsewhere.
ANDY SERWER: Let me jump in, Ray, because that comment you made about Bitcoin-- I mean, so it's a two-part question. Is that in a bubble-- maybe a three-part question-- is it dangerous? And what do you think the likelihood of the government outlawing it is? Is that even feasible?
RAY DALIO: Bitcoin has proven itself over the last 10 years. It hasn't been hacked. It's by and large, therefore, worked on an operational basis. It has built a significant following. It is an alternative, in a sense, storehold of wealth-- it's like a digital cash. And those are the pluses.
Bubbles are financial assets that have imputed value. It's an asset that doesn't have intrinsic value, it has imputed value. It's whatever we think it is. And if you look at some of the bubbles in the past-- a great book is "Extraordinary Popular Delusions" and "The Madness of Crowds" by McKay-- 1845 or something. But he talks about the South Sea Bubble, and he talks about the Mississippi Bubble, and so on.
It is when people love-- it's the dotcom bubble and so on. And that could be. So when you look at Bitcoin, it's a possibility. You know, it's an alternative because there aren't many such assets. There are not so many assets that might have intrinsic value that can't be messed around.
As far as the government allowing it, the history was, you know, banks always used to exist, and then with the Bank of England, they decided that it was in their interest to have a monopoly on banking at a country. And so what we did is every country treasures its monopoly on controlling the supply and demand. They don't want other monies to be operating or competing, because things can get out of control.
So I think that it would be very likely that you will have it, under a certain set of circumstances, outlawed the way gold was outlawed. And you're watching that question arise in India today. India today is making a move to outlaw it-- outlaw possession of it. OK, so we have to see what that means.
Now, can they do it? Now we get into the particulars. My understanding from people who are sort of in government surveillance and so on, is, yes, they can understand, they can track it, they can know who's dealing with it. I don't know-- like, I'm not an expert on that. But you know, there's a whole way-- is it private wallets? Is it not private wallets? How do you do this, this, and the other thing? I would suspect it would be very hard to hold up against that kind of action. So that's what it looks like to me.
ANDY SERWER: Right. What do you make of-- how do you assess so far the Biden administration-- the president, and in particular, Janet Yellen?
RAY DALIO: Well, I'd say politically, it's a reality that there are two political parties. In both cases, there are rather extreme elements to that-- we can call it capitalist and socialist, or we can call it whatever we want to call it. But there is a range. And there is not much in the middle. It's difficult to be in the middle, because they have to align with either of those.
So in terms of, let's say, economic policies generally speaking, there is not much-- you know, it's tough to fight with both your Democrats and the Republicans, and what does that mean? Things like the wealth tax might be a litmus test. But in any case, I think that there is a big movement to deal with those gaps I'm referring to.
So we should expect significant increases in taxes and so on in various ways. We can get into a discussion about that if you want. And depending on whether that's done smartly or not will affect the markets. For example, when we cut corporate taxes that benefited stock prices. Depending on how the tax rates are changed and so on, that will certainly affect asset prices and capital flows.
ANDY SERWER: Let me ask you about the wealth tax-- tell us what your idea of a correct wealth tax would be.
RAY DALIO: I'm a mechanic. I'm not an ideologue. I'm basically somebody who basically thinks, if you move the lever this way, what will happen? That's basically it. What I did was to do a study of all the cases of wealth taxes in different countries that have existed, and look what happened to those, and I passed that along.
I didn't comment on that, but there are facts. Which is-- like, I looked at 33 cases, and in none of those cases were they sustained and raising a significant amount of money. In some cases-- like Switzerland has a wealth tax-- it's a very small tax and it was sustained. Norway has a tax, and it was small, and it sustained. Those that are big haven't lasted because of a variety of reasons.
They're operationally difficult and so on illiquid assets-- I won't get into all that. But there are different types of ways of taxing wealth. And so you'll see-- I think you'll see the easier ways to tax wealth become more popular, such as stepped up basis. In other words nowadays when you die, if you assets appreciated, you don't have to pay the capital gains tax on that and the inheritance tax. I think that's probably in jeopardy.
And I think that you'll find different other types-- property taxes, other things-- they may come about, but that's my thought on the wealth taxes in general. They also have-- the big risk is, is this an environment that's hospitable for capitalism and capitalists? That affects capital flows a lot.
And it's not just affecting American capital flows. Americans think it's just Americans. No, no, no-- foreigners own way more American bonds than Americans own. So just the whole notion of where to go where it's safe market for capitalism and capitalists has an effect on capital flow. So those are the mechanics.
ANDY SERWER: Speaking of foreign investors, Ray, what is your take on our relationship with China right now? And how do you perceive it moving forward?
RAY DALIO: Well, every empire rises and declines. For those who are interested, I needed to study reserve currencies, so I studied this going back 500 years, and it's on LinkedIn. It's called "The Changing World Order," you can see the patterns, and you can see what's happening. China has gone-- I started going there 36 years ago. They were dirt poor. I would bring a calculator and give it to gifts like CEOs, and they thought they were miracle devices.
Now they are, in many ways, in AI, and quantum computing, and so on at a comparable type of level. So China, by all measures of its power and prosperity, is a very, very strong competitor. So now you have the leading empire-- 1945, we created the American world order because we won World War 2. And so we had a new monetary system and so on.
And now we're having a challenge of that, partially because of Chinese, but partially also how we're handling ourselves. I mean, we're not doing great in handling ourselves in a lot of the most basic ways. So yes, we have that conflict. In China's, I would say I've had a lot of contact there over decades, and I really believe it's just an evolutionary process. There are certain things from the Chinese perspective-- you know, they would believe you if you can't suppress or compress me, that would be their view-- that the United States is trying to do that.
I suspect there will be tensions. And the question is whether, you know, one side becomes too confrontational to let evolution take its course. But it's true that evolution is more on China's side than our side, although it really depends whether we can get our basics right. And our basics are things like broad-based public education-- you know, the quality of education-- civility of the people. Do people work together in a civilized way or are they at each other's throats-- and, you know, innovation and, you know, those things.
So China-- China is a very exciting place. If you spend time there, and you see what's going on with entrepreneurship, the creation of new businesses, new investment things-- there's an energy, and it's-- you know, it's quite something.
ANDY SERWER: Let me ask you a couple questions about Bridgewater and about you, Ray. First of all, Bridgewater, it was a bit of a choppy year last year for the firm. How are things shaping up this year? How is David McCormick treating you?
RAY DALIO: Oh, David's a star. So yeah, you're referring to this transition, which is I think the most beautiful thing. It's not easy to start off to make a founder-owned company, let's say-- founder company-- to then be able to transition and to be sort of a mentor and CIO, and to let the talent rise. And I'm very, very, very lucky to have Dave McCormick in that role. And we have a team.
The investors, Bob Prince has been with me-- I think it's been 34 years, something like that. Greg Jensen's been with me for 26-- I don't know, a lot of, you know, decades. We will fight like hell, but we're together, and so on. And so I'm at 71, and the most beautiful thing for me is to complete that arc.
And you know, that's what we're doing. We're doing it together. So you know, it's doing great, and we're learning. But you're right-- the second quarter, the pandemic caught us. In prior years, I don't know how many years, we had no losses. And again, there's an alpha fund and a beta fund in the first half.
But for the most part, that all rebounded and we learned a lot. So I think it's good. I think it's good on all of those fronts.
ANDY SERWER: What about some of the thinking that you're now famous for, Ray-- meditation, radical transparency, your principles? Have any of those changed in recent history-- maybe because of the pandemic, changes in society. What was your latest thinking when it comes to some of those facets?
RAY DALIO: Well, the things you mentioned hasn't changed at all. I really want to pass that along. At my stage in my life, the main thing I'm doing is want to pass things along that have been valuable to me. That's why I'm doing the interview. And so meditation-- wow, I started that about 50 years ago, and that has given me the equanimity when things come at me to deal with those well.
It also gives creativity, because one goes into one's subconscious. And that's where the creativity comes from. You know, it's like if you take a hot shower, the great ideas come to you, and it's not because you muscle it. So that's been valuable. And yeah, Bridgewater, the culture has been, and is, an idea of meritocracy. In other words, let the best ideas win out-- in which the goals are meaningful work and meaningful relationships.
So you're excellent at the work, and then also if you have the relationships, that reinforces the work and it reinforces the mission with people you like and you care about. That's powerful-- and through radical truthfulness and radical transparency. Radical truthfulness means, like, we're going to be totally honest with each other. It may be brutally honest.
But misinformation-- because you've got this scenario going on in your head that you don't really know what the other person's thinking-- is dysfunctional. And it also means that you don't build trust. If you're in a political organization and you know, you know, that that guy's acting really nice guy, high five, and so on, but it's not going on the same behind the scenes, that undermines trust.
So those have been the things-- the thing that I learned the best, and I learned from failure-- I learned from my failure, 1982-- I expected a big debt crisis. That was going to cause problems. That was the bottom in the stock market. I couldn't have been more wrong. And that gave me the humility to realize that what I think in my head or what any one individual thinks in their head might be wrong. And the markets help you understand that.
And so the idea of having others stress test each other with that radical truthfulness and that strategy of transparency raises the ability. So I'd say whatever Bridgewater's success has been it's been because of that way of operating.
ANDY SERWER: It's a good segue to my final question to you, Ray, and that has to do with your legacy. Would you want to be known as a thought leader or as an investor? Or maybe it's both.
RAY DALIO: I don't care what I'm known as. I don't think anybody will actually remember me or anybody. Because, think about it-- like, how many people do you remember from a generation ago? Think about the rock stars, the movie stars, the other famous people-- they all disappear. We all disappear.
The legacy-- the way I view legacy is, what is the gift that you're passing along? And the things that I want to pass along in that are these kind of principles like, how does the machine work? How does reality work? And how does one interact with reality to get what one wants? Those are what I mean by principles.
And they don't have to be my principles. We're all in a discovery to try to find out, what is reality? How does it work? And how do we interact with it well? And those are the things. So I wrote one book, "Principles," I wrote another book, which is "Principles for Understanding Big Debt Crises." I'm writing the other ones, which has to do with the changing world order-- those principles.
And I'm writing these, actually, like, for my grandkids, I mean, as well as everybody else. I've got them in mind-- like, when I'm not around, you know, it can almost deal with anything-- when you're thinking about your job or whatever, here's some of the things that might be helpful. But most importantly, you should have your own principles and think about them well. So I pass along those principles-- like pain, plus reflection, equals progress, and so on. Don't get caught up in your own head-- have radical truthfulness and radical transparency.
ANDY SERWER: Great,
RAY DALIO: Those are the most important things. Your approach to life-- one's approach to life is the most important thing. And when you start to understand that each person has their nature-- do you know your nature? And then once you know your nature and you're on a journey to find your clique, find the fit that is the thing that allows your nature to flourish and deal with other people when they know their nature.
Those are the most important principles, I think. That's what I'm trying to pass along. If it lives beyond me without ever me being referred to, that'd be great.
ANDY SERWER: OK. Ray Dalio, founder, co-chairman, and co-chief investment officer at Bridgewater Associates, thank you so much for your time.
RAY DALIO: Thank you, Andy.