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Ray Dalio Live (Replay) with Barry Ritholtz (Podcast) · Masters in Business

0:02
Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
0:07
Speaker 1: This week we have a bonus Masters in Business. Addition,
0:12
Speaker 1: it is our premier episode of Masters in Business Live.
0:17
Speaker 1: We recorded a live show in the Bloomberg headquarters. It
0:21
Speaker 1: was in front of a live audience broadcast live on
0:24
Speaker 1: television and radio. People ask me, weren't you nervous about
0:28
Speaker 1: doing this? And to be honest, I didn't have time
0:31
Speaker 1: to get nervous. I just jumped right into our questions.
0:35
Speaker 1: My guest was Ray Dalio of Bridgewater and dear Lord,
0:40
Speaker 1: he was just spectacular. He knows exactly what he thinks. Uh.
0:44
Speaker 1: He understands his own philosophy, and he knows how to
0:48
Speaker 1: articulate it in a way with tremendous clarity and transparency. Uh.
0:53
Speaker 1: He spoke for about an hour, or at least two
0:56
Speaker 1: questions for me for about an hour. Then we opened
0:58
Speaker 1: it up to the audience and we did another thirty
1:00
Speaker 1: minutes of Q and A. And I gotta give Ray
1:03
Speaker 1: huge kudos. He sat and signed a copy of his
1:07
Speaker 1: book for every single person who was in the audience
1:10
Speaker 1: that were over a hundred people there. He didn't have
1:12
Speaker 1: to do that. It was just charming and delightful. I
1:15
Speaker 1: could ramble about how much fun that day was. But
1:18
Speaker 1: rather than listen to me, Babel, why don't we simply
1:21
Speaker 1: say the premier episode of Masters in Business Live with
1:27
Speaker 1: Bridgewaters Ray Dalio, This is Masters in Business with Barry
1:35
Speaker 1: Ridholts on Bloomberg Radio. So I have to admit to
1:39
Speaker 1: cheating a little bit when when we first proposed the
1:43
Speaker 1: idea of Masters in Business Live, Alan Dave were very
1:47
Speaker 1: supportive and I said, I'm going to bring in a
1:50
Speaker 1: ringer with Ray Dalio. So I really don't have a
1:53
Speaker 1: whole lot of work to do. I assume most of
1:56
Speaker 1: the viewing and audience present knows who read value is.
2:01
Speaker 1: But let me just give you a quick version of
2:05
Speaker 1: his background. He is the founder, co chairman and co
2:08
Speaker 1: c i oh of Bridgewater Associates the world's largest hedge fund,
2:12
Speaker 1: managing over a hundred and sixty billion dollars in assets
2:15
Speaker 1: for institutional clients. According to Forbes, Bridgewater has made more
2:20
Speaker 1: money for their clients than any other funds in history.
2:25
Speaker 1: Uh He is the author of the New York Times
2:28
Speaker 1: best selling book Principles for Life and Work, and most recently,
2:32
Speaker 1: his new book is principles of big debt crises. Ray
2:37
Speaker 1: dally Out, thank you for being our first guest on
2:40
Speaker 1: Masters in Business Live. Let's start with the reboot of Bridgewater,
2:46
Speaker 1: which you describe in great detail in the first book,
2:51
Speaker 1: which came about after a not so great two for you.
2:55
Speaker 1: In fact, you just subscribe it as disastrous. What happened
2:59
Speaker 1: in too well, you know, I I formed Bridgater in
3:02
Speaker 1: seventy two, is like seven years later. That's the reboot. Yeah,
3:06
Speaker 1: that's the reboot, right, um. And I had in I
3:13
Speaker 1: had calculated that America, that American banks had went way
3:17
Speaker 1: more money to emerging countries in those countries were gonna
3:20
Speaker 1: pay back and it was about two of their bank capital,
3:24
Speaker 1: and so we were going to have a big banking crisis.
3:27
Speaker 1: And I thought that was going to happen, and I
3:30
Speaker 1: got a lot of attention for for that, um. And
3:34
Speaker 1: then in August two, Mexico defaulted and there was a
3:40
Speaker 1: sequence of other defaults and there was a big dead crisis,
3:43
Speaker 1: and I thought that that was going to cause an
3:46
Speaker 1: economic crisis. And I couldn't have been more wrong. That
3:50
Speaker 1: was the exact bottom of the stock market when Mexico defaulted.
3:54
Speaker 1: And anyway, I received tension. At the time, I was
3:58
Speaker 1: on Wall Street week and was on as to testify
4:01
Speaker 1: to Congress, and and I was wrong and I had
4:06
Speaker 1: I think at the time, maybe eight people who work
4:09
Speaker 1: for me. I had to let them all go, and
4:11
Speaker 1: I lost money for me, I lost money for clients.
4:14
Speaker 1: I had to um I borrow four thousand dollars from
4:18
Speaker 1: my dad because I didn't have really enough money even
4:21
Speaker 1: to take care of my family at that point. And
4:23
Speaker 1: it was very painful, but it was the most valuable
4:27
Speaker 1: thing probably that happened in my life, certainly one of those,
4:29
Speaker 1: because it changed my approach to thinking, because it made
4:33
Speaker 1: me start to think, you know, how do I know
4:36
Speaker 1: I'm right? How do I continue to take risk and
4:39
Speaker 1: not go through these mistakes? And it made me change
4:43
Speaker 1: a lot. Like I wanted to find the smartest people
4:45
Speaker 1: I could would disagree with me. I wanted to build
4:47
Speaker 1: an idea meritocracy in which independent thinkers would challenge each other.
4:53
Speaker 1: And I wanted to deal with risk. How do I
4:57
Speaker 1: um maintain the returns but diversive I and do certain
5:00
Speaker 1: things to deal with risk. And it was from that
5:03
Speaker 1: point really on that everything started to change. So that
5:07
Speaker 1: was my terrible experience. And I think that that's, by
5:09
Speaker 1: the way, one of those lessons. Like there was a
5:12
Speaker 1: book that my son gave me in two thousand fourteen,
5:15
Speaker 1: Joseph Campbell here over thousand faces, and he describes about
5:19
Speaker 1: how that crashing occurs and that changes. Do you have
5:23
Speaker 1: a metamorphosis? So the whole approach to learning from mistakes
5:27
Speaker 1: and painful mistakes and making the most out of them
5:30
Speaker 1: and writing principles down um in other words, recipes for
5:34
Speaker 1: how do you deal with the circumstances learn the lesson
5:37
Speaker 1: write those principles down. This is the thing that I
5:40
Speaker 1: would recommend to you know, everybody, write them down. And
5:43
Speaker 1: I learned also that by being able to write them
5:46
Speaker 1: down clearly enough that they could be expressed in what
5:49
Speaker 1: were then called equations, are now algorithms that allowed me
5:53
Speaker 1: to make decisions and us to make decisions in a
5:56
Speaker 1: in a very powerful way. So that experience is really
6:00
Speaker 1: the turning point, and that's very abstract. I want to
6:03
Speaker 1: describe some of the ideas and products that came out
6:08
Speaker 1: of that. Post eight two. You describe in your early
6:13
Speaker 1: history some of the products that you had a role
6:16
Speaker 1: in the creation of, tips, the inflation protected treasury bonds,
6:21
Speaker 1: the US dollar futures Index, the entire concept of risk parity.
6:26
Speaker 1: You're very humble and saying you had only a little
6:29
Speaker 1: bit to do with the Chinese stock market creation, but
6:32
Speaker 1: I know you consulted with very senior people there and
6:35
Speaker 1: help that come about. And what I think is the
6:38
Speaker 1: least known thing about you, but the most fascinating, You
6:42
Speaker 1: helped to engineer chicken McNuggets. Explain that to us, because
6:47
Speaker 1: it's absolutely intriguing. Well, I traded commodities then back then.
6:52
Speaker 1: I mean that was my big thing, and I really
6:54
Speaker 1: uh learned, you know, how to make chicken. And I'm
7:00
Speaker 1: much feed what what a chick cost, how uh soybeans
7:05
Speaker 1: were grown, how they competed with cotton and corn, and
7:08
Speaker 1: that hole mechanics. I liked that whole mechanical thing. Um
7:11
Speaker 1: and at the time that and and McDonald's was a
7:15
Speaker 1: client of mine at the time, and they wanted to
7:17
Speaker 1: uh come out with this chicken McNuggets, but it was
7:21
Speaker 1: very volatile. Prices were volatile at the time, and they
7:24
Speaker 1: were worried about whether they can get stable menu prices
7:27
Speaker 1: or they would have the volatility and that being disrupted.
7:30
Speaker 1: Um and I had a chicken processing UH producer was
7:35
Speaker 1: I think at the largest at the time, and a client,
7:38
Speaker 1: and I could engineer UM the ability to lock in
7:43
Speaker 1: the feed prices because it basically the cost of a
7:47
Speaker 1: chick is not much relative to the cost of the feed,
7:50
Speaker 1: and you have futures contracts on that, and I was
7:53
Speaker 1: able to work a deal so that UM that chicken
7:56
Speaker 1: producer could get the McDonald's contract and McDonald's could get
8:00
Speaker 1: a stable price by engineering how they could do the
8:04
Speaker 1: hedge to be able to do that. So that was
8:07
Speaker 1: what I did. The word engineering comes up a lot
8:09
Speaker 1: for a person who's not an engineer UM, and I
8:14
Speaker 1: was very much reminded of that in one of the
8:17
Speaker 1: first long form videos you did, how the Economic Machine Works.
8:23
Speaker 1: So first, what's the engineering background for the overall economy
8:27
Speaker 1: and what motivated you to put that together in a
8:31
Speaker 1: video and release it to the world. Well, the one
8:34
Speaker 1: thing that I learned over the years is you know,
8:36
Speaker 1: like everything has it's every effect, Everything that happened has
8:40
Speaker 1: a reason that happened, cause effect relationships, and these things
8:44
Speaker 1: happen over and over again. So whenever I got surprised
8:48
Speaker 1: by something UH, it was usually because of something that
8:51
Speaker 1: didn't happen in my lifetime before, but it happened, you know,
8:55
Speaker 1: like these financial crisis is and so on. And what
8:58
Speaker 1: I did is I went back and I saw I
9:00
Speaker 1: started to see that. If you start to see everything
9:03
Speaker 1: is happening over and over again, and then you study
9:06
Speaker 1: the cause effect mechanics behind that at a nitty grady level,
9:10
Speaker 1: you learn how reality works, and then you can write
9:14
Speaker 1: your principles for dealing with reality, which are the recipes
9:17
Speaker 1: essentially for making good decisions. So to me it, you know,
9:22
Speaker 1: history has shown like the same things happen over and
9:25
Speaker 1: over again for the same cause effect relationships. So that
9:28
Speaker 1: debt book that you're referring to, you know, it's a
9:30
Speaker 1: good example. Um, if we don't spend time understanding the
9:35
Speaker 1: mechanics and the cause effect relationships, we just argue with
9:41
Speaker 1: each other about what should be done. And it's like
9:43
Speaker 1: two doctors who have not spend time understanding and agreeing
9:47
Speaker 1: on how the body works, arguing about, you know, what
9:51
Speaker 1: should be done for the body. And so the reason
9:53
Speaker 1: I did that video how the economic machine works, and
9:56
Speaker 1: the reason that I did the book and the reason
9:58
Speaker 1: that I wrote principles is to put on the table.
10:02
Speaker 1: What I think that those cause effect relationships are so
10:05
Speaker 1: we can understand the timeless and universal mechanics behind it.
10:10
Speaker 1: And that's been invaluable to me because once I understand
10:13
Speaker 1: that mechanics and we could test it, we could test
10:16
Speaker 1: it in all time frames, we could test it in
10:18
Speaker 1: all countries, and we could understand it. And then with
10:21
Speaker 1: that framework, we know how to deal with it. And
10:24
Speaker 1: but nowadays being able to deal with it with algorithms
10:27
Speaker 1: and technology means you can deal with it all over
10:29
Speaker 1: the world. And it's been a powerful force. So it's
10:32
Speaker 1: evolved from those experiences, like I remember the first time
10:36
Speaker 1: I was clerking on the floor of the New York
10:37
Speaker 1: Stock Exchange UM in UM. I was just between college
10:43
Speaker 1: and going to business school and the stock and uh,
10:48
Speaker 1: we have a dollar crisis. We can't pay for our goods,
10:53
Speaker 1: and you if nobody's accepting dollars and UM On August fifteen, uh,
10:59
Speaker 1: Richard Nick's and gets on the television and he basically says,
11:03
Speaker 1: we're severing the connection between dollars and gold. Back then,
11:08
Speaker 1: money was like a check and then checking the checkbook
11:11
Speaker 1: has no value. It only what the money is has value.
11:15
Speaker 1: And so it would get you money, would get you gold,
11:18
Speaker 1: and that was and it was a breakdown. So it
11:20
Speaker 1: was a default. And I remember thinking, um, when I
11:23
Speaker 1: was going to walk in on Monday morning to the
11:25
Speaker 1: New York Stock Exchange, this is a big crisis. And
11:28
Speaker 1: I thought the stock market would fall a lot. And
11:31
Speaker 1: the stock market went through the roof and I and
11:35
Speaker 1: I realized, I said, well, did you have currency breakdowns before?
11:39
Speaker 1: And then I was. I studied h currency breakdowns that
11:43
Speaker 1: happened in this system, and I realized why when you
11:47
Speaker 1: value the currency it's bulls and how that whole thing
11:50
Speaker 1: works that I didn't understand. So it's that perspective about mechanics.
11:54
Speaker 1: Do we understand? Can we agree on the mechanics of
11:57
Speaker 1: how it works? Because once you can do that, you
12:00
Speaker 1: know how to deal with it. So you mentioned Principles
12:02
Speaker 1: before we talk about big debt crisis. Let's talk about
12:05
Speaker 1: the book a bit. He came out last year. It
12:08
Speaker 1: became a New York Times bestseller and you kind of
12:11
Speaker 1: went on a not quite world tour on the book.
12:16
Speaker 1: You said that experience was really educational. What did you
12:20
Speaker 1: learn speaking to people about the book Principles? Well, I
12:25
Speaker 1: didn't like I didn't like. I never liked being in
12:29
Speaker 1: above the U, in the press, above the radar. You
12:33
Speaker 1: don't do a lot of media historically, although you're beginning
12:36
Speaker 1: to flower now that you're an author. I'll do that,
12:39
Speaker 1: I'll do that. I'll do this in my face. I'm
12:42
Speaker 1: in a phase of life which is a transition from
12:46
Speaker 1: my second phase to my third phase. And so the
12:50
Speaker 1: way I look at it is uh, in the first
12:53
Speaker 1: phase of life, one is dependent on others, one is learning,
12:57
Speaker 1: one's basically a student. Um in set and phase of life,
13:01
Speaker 1: one is working, others are dependent on them, and one
13:04
Speaker 1: is trying to be successful. As you get to my
13:08
Speaker 1: stage in life, which is a transition from the second
13:10
Speaker 1: to third stage, the way I think it is, the
13:13
Speaker 1: joy is no longer as much to be successful as
13:17
Speaker 1: to pass along what you've learned that has helped you
13:19
Speaker 1: be successful, the joys and seeing other people be successful.
13:23
Speaker 1: And because these principles have been written down over a
13:26
Speaker 1: long period of time and they have kind of the recipes, um,
13:29
Speaker 1: I wanted to pass those a log and that's what
13:31
Speaker 1: I'm in the process of doing, and then I'll phase out.
13:34
Speaker 1: But to answer your question in terms of the surprises. Like,
13:37
Speaker 1: I thought that was going to be a very uncomfortable experience.
13:40
Speaker 1: I thought even the communications would be bad. And I
13:44
Speaker 1: have found such a joy in the interactions that I've
13:48
Speaker 1: had with people in the in the public and and
13:52
Speaker 1: so on. Um So it's been a really pleasurable good experience,
13:58
Speaker 1: a sense of relationships, and a think people are now
14:02
Speaker 1: looking for principles, and I want to emphasize forget my principles.
14:06
Speaker 1: They don't have to be my principles. But I do
14:08
Speaker 1: think that everybody would benefit enormously by being crystal clear
14:13
Speaker 1: about their principles. I want to pass this this thing along.
14:16
Speaker 1: Number one, I will pass this along that if every
14:19
Speaker 1: time you're encountering your situation, um at that moment or
14:26
Speaker 1: right after you write down the court the criteria for
14:29
Speaker 1: making your decisions in words, and that allows you to
14:33
Speaker 1: communicate with others, allows you to clarify your decision making,
14:37
Speaker 1: and you could take in from others what the best
14:39
Speaker 1: criteria is for those circumstances in the future. That is
14:44
Speaker 1: invaluable because in all your relationships with people, know people
14:48
Speaker 1: will know what your principles are, how you will interact
14:51
Speaker 1: with them and why, and then you can go even
14:54
Speaker 1: beyond that to convert those into equations and help them
14:57
Speaker 1: make the decision that I think that's a powerful thing
14:59
Speaker 1: in the future. And so I wanted to pass along mind.
15:03
Speaker 1: But I also wanted to more importantly pass along the
15:05
Speaker 1: importance of other people doing that. And that's what I'm
15:08
Speaker 1: in the phase of. There are two things. So I
15:10
Speaker 1: did the Life and Work Principles, and now I'm working
15:13
Speaker 1: on Economic and Investment Principles. That will be the third
15:17
Speaker 1: third book in the series. So middle one was sort
15:20
Speaker 1: of an accident. Well, we'll get to the middle one
15:23
Speaker 1: in the moment. Before we leave principles, I have to
15:26
Speaker 1: ask about what I think is the most interesting approach
15:31
Speaker 1: you bring to managing a firm, which you call being
15:35
Speaker 1: radically open minded, having radical transparency, and bringing about thoughtful disagreement.
15:42
Speaker 1: Tell me how that developed, because that doesn't seem to
15:46
Speaker 1: be the way most of corporate America operates. That's our edge.
15:50
Speaker 1: Your edge is thoughtful. Okay, yeah, um okay, So let
15:57
Speaker 1: me give you one one sentence. I want an idea
15:59
Speaker 1: of meritocracy. In other words, I want the best ideas
16:02
Speaker 1: to win as opposed to where it comes from. Right,
16:05
Speaker 1: I don't have to be. It doesn't have to come
16:06
Speaker 1: from me. I just want the best decisions to be made, UM,
16:10
Speaker 1: and I want to What I want is to have
16:13
Speaker 1: meaningful work and meaningful relationships. A meaningful work meaning you're
16:17
Speaker 1: on a mission together. And those relationships are are deep
16:21
Speaker 1: and meaningful in their high quality, there a reward in
16:24
Speaker 1: and of themselves, and they make an organization more effective.
16:28
Speaker 1: So uh, an idea meritocracy, I'll get it out of
16:31
Speaker 1: one sentence. An idea meritocracy which the goals are meaningful
16:35
Speaker 1: work and meaningful relationships through radical truthfulness and radical transparency.
16:40
Speaker 1: Radical truthfulness means say what you're thinking and others will
16:44
Speaker 1: say the same, and let's get away from the behind
16:47
Speaker 1: the scenes and the politics of it. And the radical
16:50
Speaker 1: transparency means most people can see most everything so that
16:53
Speaker 1: they can form the opinions of what's going on themselves,
16:56
Speaker 1: independent thinking, and that builds trust. First of all, it
17:00
Speaker 1: cuts through the notion of politics and bureaucracy. UM. By
17:07
Speaker 1: everybody being able to see most things, you, you build
17:11
Speaker 1: trust you and you're dealing with most things without the
17:14
Speaker 1: blur of hiding stuff that's in people's heads. And in
17:17
Speaker 1: the investment business, UM, I think it's a particularly special important.
17:21
Speaker 1: I think it's also an entrepreneurs it's especially important because
17:25
Speaker 1: you you have to have the independent thinking in the markets. Um,
17:30
Speaker 1: the markets discount the consensus, so whatever the consensus is
17:33
Speaker 1: is in the price. So in order to be successful
17:36
Speaker 1: in the markets, you have to think differently than from
17:39
Speaker 1: the consensus, and you have to be right. And in
17:42
Speaker 1: order to have that, you have to have independent thinkers.
17:45
Speaker 1: And when you have those differences in independent thinkers, if
17:48
Speaker 1: you can work that through through thoughtful disagreement, you have
17:52
Speaker 1: the art of thoughtful disagreement. If you work that through,
17:56
Speaker 1: you raise your probabilities of getting at the best answer.
17:59
Speaker 1: And and that's been a very very powerful thing. And
18:03
Speaker 1: it also builds trusts and it builds better relationships because
18:07
Speaker 1: trust comes from you know, opting, operating an organizations and
18:11
Speaker 1: have this politics. It's all behind the scenes. Everybody gives
18:14
Speaker 1: them high fives and they're all happy and so long,
18:15
Speaker 1: and they talked behind each other's back. So that's been um,
18:19
Speaker 1: it's been a big deal for us. That that's your edge.
18:22
Speaker 1: So let's some Let's go forward to the new book
18:24
Speaker 1: which just came out, Navigating Big Dead Crises. You mentioned
18:29
Speaker 1: you decided to write that because a couple of folks
18:32
Speaker 1: ask you to put it together. Ben Bernanke, Tim Geithner,
18:36
Speaker 1: other people. I really like the way the book is assembled.
18:41
Speaker 1: It's broken into three parts. The template for what the
18:45
Speaker 1: big debt cycles look like. Then you use three detailed cases,
18:49
Speaker 1: the Great Financial Crisis, the Great Depression in the Weimar Republic,
18:54
Speaker 1: and then you you put together forty eight case studies
18:57
Speaker 1: from the past century. So let let's start with the
19:00
Speaker 1: first one to template what makes all of these very
19:05
Speaker 1: different crises follow the same mechanical sort of cycle. How
19:09
Speaker 1: how is that even possible? Well, everything's got these cause
19:13
Speaker 1: effect relationships and the way you know, in a nutshell,
19:17
Speaker 1: I'll try to make it simple. Um, there's productivity over
19:23
Speaker 1: a period of time, our living standards rise because we
19:26
Speaker 1: learn how to do things better, and the output per
19:28
Speaker 1: man hour work increases, and that moves at a fairly
19:33
Speaker 1: um it'll go up and down its pace. But by
19:35
Speaker 1: nine and large it's not what causes volatility and around
19:39
Speaker 1: that we have to debt cycles. We have a short
19:42
Speaker 1: term debt cycle, which we understand because that's the business cycle.
19:46
Speaker 1: You know, you're in a recession. Central banks E's monetary policy.
19:51
Speaker 1: They changed the relationship between short term interest rates, long
19:54
Speaker 1: term interest rates, asset prices, but liquidity in and then um,
19:58
Speaker 1: you have debt grow. The credit is spending power. So
20:03
Speaker 1: when you extend credit, you are extending spending power and
20:08
Speaker 1: when and that's good for the economy when that credit
20:10
Speaker 1: can be paid back. And what it does, of course,
20:13
Speaker 1: is it pushes asset prices up while levels of debt
20:17
Speaker 1: continue to increase. And at that part of the cycle,
20:21
Speaker 1: people and everybody sort of um conservative about that and
20:26
Speaker 1: it pays back. But asset prices when you mean, the
20:30
Speaker 1: barrowers have the ability to service that debt even as
20:33
Speaker 1: asset prices right, that's right, and everybody wins, and that's
20:36
Speaker 1: good credit growth and it's a wonderful thing. Um. Then
20:39
Speaker 1: as you get later in the cycle, it's a very
20:42
Speaker 1: self reinforcing cycle because as asset prices go up, you
20:47
Speaker 1: have more collateral. People are more confident, they believe asset
20:51
Speaker 1: prices will continue to rise. They become a little bit
20:55
Speaker 1: less careful in terms of that kind of lending. They
20:57
Speaker 1: extrapolate that into the future. It and then um and
21:02
Speaker 1: of course as um, then there's the shadow banking system.
21:06
Speaker 1: There's always a shadow banking system really, not just a
21:09
Speaker 1: way or nine. All the time, there's always a shadow
21:12
Speaker 1: banking system. There's a shadow banking system now. Um In
21:15
Speaker 1: other words, there's a banks and they're regulating controlled within
21:19
Speaker 1: their parameters. And then outside of those banks are other
21:22
Speaker 1: kind of new forms of lending and capital markets and
21:26
Speaker 1: and so on, or it could be online, could have
21:29
Speaker 1: different forms, and the there's a pressure to develop that
21:33
Speaker 1: outside of the systems shadow banking because the more regulated,
21:36
Speaker 1: more controlled one doesn't make as much money and so on,
21:40
Speaker 1: and so by being at the periphery, you can use
21:43
Speaker 1: higher amounts of leverage, you can do certain things, and
21:47
Speaker 1: so that grows. So you develop the shadow banking system
21:51
Speaker 1: which is not regulated. And also investors want to go
21:53
Speaker 1: to because they'll give you a bit higher return. Like
21:56
Speaker 1: I mean, even think about how the money market funds
21:58
Speaker 1: developed because by comparison to banks and so on, and
22:02
Speaker 1: so that develops outside and it becomes so self reinforcing
22:06
Speaker 1: because everybody makes money at it, and also they believe
22:08
Speaker 1: it because when things go up, you know, everybody thinks
22:12
Speaker 1: things will go up. So so less regulation, more risk,
22:15
Speaker 1: better return, that's right, and that's late in the cycle,
22:18
Speaker 1: and then what happens, and of course what that does
22:20
Speaker 1: is all that demand and liquidity causes rates to come down,
22:26
Speaker 1: liquidity go out, So like we see in this cycle,
22:29
Speaker 1: um last cycle, we brought interest rates basically down to zero,
22:33
Speaker 1: practically down. That wasn't good enough, So central banks brought
22:37
Speaker 1: fifteen trillion dollars of assets, push the asset prices up,
22:41
Speaker 1: push liquidity into the system, and so asset prices go
22:45
Speaker 1: up and people extrapolate. And the funny thing about it
22:48
Speaker 1: is as you get to later in the cycle, when
22:51
Speaker 1: there is more debt and you know that you're coming
22:53
Speaker 1: closer to the end of the cycle, there is more
22:56
Speaker 1: of an extrapolating in the market prices of that moving on.
22:59
Speaker 1: So if you look at what the discount of growth
23:01
Speaker 1: rates are laid in the cycle, they become high, they're
23:04
Speaker 1: difficult to meet, and then you get the changing, you
23:06
Speaker 1: get the tightening of monetary policy. Tightening, and monetary policy
23:10
Speaker 1: has its effect first on asset prices, and then it
23:13
Speaker 1: becomes a self reinforcing effect. And that's the normal business cycle,
23:18
Speaker 1: a normal sort of debt cycle, because debt is credit
23:21
Speaker 1: and credit is buying power, and economy runs on that
23:25
Speaker 1: um then you have this longer term debt cycle, which
23:28
Speaker 1: is the accumulation of those other cycles. Because the world
23:32
Speaker 1: wants to be long. The world wants to be leverage long.
23:36
Speaker 1: They want everything to go up, said we all, do
23:38
Speaker 1: you know central banks better times? Assets go up, businesses, activity,
23:43
Speaker 1: and so on, and there's a strong desire to push credit.
23:46
Speaker 1: And so the limitations that start to encounter is when
23:50
Speaker 1: you get close to zero interest rates, like we had
23:53
Speaker 1: zero interest rates, that changes the game. And when you
23:56
Speaker 1: have UH and then the the you need to print
24:00
Speaker 1: money and buy assets. That happened in so te to
24:04
Speaker 1: thirty two interest rates at zero that central banks need
24:08
Speaker 1: to buy assets, They buy assets. They cause that carried
24:11
Speaker 1: to very similar situation that we've been in, and so
24:15
Speaker 1: will we carry that from two thousand and eight and nine?
24:20
Speaker 1: Then and then you come into about you know, a
24:22
Speaker 1: year year and a half ago, we start to tighten
24:24
Speaker 1: the monetary policy, we pull that in, we have higher
24:28
Speaker 1: rates of death growth. That thing goes on and on
24:31
Speaker 1: all over in all countries, that same pace of dynamic.
24:35
Speaker 1: There's a lot more on that in the book. I mean,
24:37
Speaker 1: we don't have the time to go, so let me
24:39
Speaker 1: let me pull you forward to today. Given that these
24:42
Speaker 1: things are cyclical, they repeat, they look very similar. What
24:46
Speaker 1: parallels would you draw from history to today? What what
24:50
Speaker 1: eras is today most remind you of? What? What's the
24:54
Speaker 1: most intriguing aspect of the current set up? Well, the
24:57
Speaker 1: most the most recent period, that's a now guess of
25:00
Speaker 1: this is the late thirties. Let's say if you take so,
25:06
Speaker 1: why do I say that, I'd say, Um, we're UM,
25:09
Speaker 1: well along in the business cycle, the short term debt cycle.
25:14
Speaker 1: We're in the seventh or eighth thinning of that. Central
25:16
Speaker 1: banks are tightening monetary policy. That's where we are in
25:20
Speaker 1: that cycle. UM. Similar to then, uh, when we have
25:25
Speaker 1: because of the printing of money and because technologies and
25:28
Speaker 1: other reasons, we have a greater amount of UM polarity,
25:32
Speaker 1: political polarity. I think this is UM an important important
25:37
Speaker 1: issue UM. And that political polarity causes populism around the world.
25:42
Speaker 1: In other words, a strong individual to come in get
25:45
Speaker 1: control of that situation while they're having that type of polarity. UM.
25:49
Speaker 1: So the word populism, for example, in developed countries, was
25:52
Speaker 1: not widely used until you go back to the thirties,
25:56
Speaker 1: Until more recently now it's of course common and so
26:00
Speaker 1: we and we're also late in the longer term death cycle,
26:03
Speaker 1: meaning if you were to turn down, if the economy
26:06
Speaker 1: was to turn down, UM, the ability to deal with
26:11
Speaker 1: that with lowering interest rates is very limited, and the
26:15
Speaker 1: ability to deal with that with quantitative easing is very
26:18
Speaker 1: limited for a variety of reasons. So it's very much
26:21
Speaker 1: like the late thirties. You can't you can't find a
26:25
Speaker 1: time that in which both of those circumstances exist. Populism
26:29
Speaker 1: together with that difference is wealth caaps and so on.
26:32
Speaker 1: And then also we have a situation which is quite similar,
26:35
Speaker 1: I think, and we have rising, arising power in the
26:39
Speaker 1: form of China. Let's talk about that, because in the
26:42
Speaker 1: thirties you had Italy and Japan and Germany rising to
26:46
Speaker 1: challenge the existing powers. How parallel is a growing China
26:52
Speaker 1: today to that, to that era um? I think it's
26:57
Speaker 1: it's not only analogous to that era UM, but there's
27:01
Speaker 1: a concept UM called the fucidities trapped by the way
27:06
Speaker 1: that in an excellent book by Graham Allison Um called
27:11
Speaker 1: Destined for War, he goes through but you can study
27:14
Speaker 1: for war well, he's dealing with China relationship. And but
27:17
Speaker 1: if another excellent book, by the way, is um UM
27:23
Speaker 1: Paul Kennedy's The Rise and Decline of Great Powers. And
27:28
Speaker 1: if you study history, I've made a point now to
27:32
Speaker 1: study history over the last five hundred years, very very carefully.
27:36
Speaker 1: What you see is that in the last five hundred
27:39
Speaker 1: years there have been sixteen times where a power UM
27:43
Speaker 1: comes to challenge and existing power arising power. So like
27:47
Speaker 1: you say, in Germany, UM in within Europe or Japan
27:51
Speaker 1: within Asia, that was the nature of of that beast.
27:55
Speaker 1: That means that there's certainly rivalry. So a trade war
27:59
Speaker 1: a comparable power creates an issue. So sixteen previous examples
28:04
Speaker 1: of a rising power, twelve of which led to UM
28:07
Speaker 1: actual shooting wars. So I'm not saying we're going to
28:10
Speaker 1: get into a shooting war, but I am saying that, UM,
28:14
Speaker 1: the history has shown that when you have wars after
28:19
Speaker 1: a war, you have a dominant power and you have
28:21
Speaker 1: periods of peace because you have a dominant power. After
28:25
Speaker 1: World War Two, UM, the United States was powerful both
28:29
Speaker 1: economically and also it had a monopoly on nuclear power. UM.
28:34
Speaker 1: And so as a result of that power, the you know,
28:38
Speaker 1: the United Nations is in New York, the World Bank,
28:41
Speaker 1: and the IMF in Washington, d C. Because it determined that.
28:45
Speaker 1: And in history, UM, then when you have the rising
28:49
Speaker 1: power to challenge the existing power, you have elements of conflict.
28:54
Speaker 1: I'm saying I don't want to overdo this, but I
28:56
Speaker 1: am saying that we are entering an era in which, um,
29:01
Speaker 1: anybody who reads history and policy makers around the world
29:05
Speaker 1: and recognize this, that this issue with China rising means
29:11
Speaker 1: that there are naturally going to be conflicts. And how
29:14
Speaker 1: do you resolve conflicts in the world market. You don't
29:17
Speaker 1: go to a court system. There's not a rule of
29:19
Speaker 1: law in the world that becomes dominant. So there is
29:22
Speaker 1: more of a rule of power, and that's a dynamic.
29:25
Speaker 1: So all I'm saying is, if I was to pick
29:27
Speaker 1: you asked me when is most analogous, and I would
29:31
Speaker 1: say that the nineteen thirties, where you take that period,
29:34
Speaker 1: the late nineteen thirties is an analogous period. If you
29:38
Speaker 1: were to say cause effect relationships, because how much power
29:41
Speaker 1: do we have in terms of monetary policy, how much
29:44
Speaker 1: populism do we have analogous? These are important things. And
29:47
Speaker 1: then also, um, you know where are we in the
29:50
Speaker 1: economic cycle, how our asset prices priced and so on.
29:54
Speaker 1: So it looks now the most analogous period you can
29:57
Speaker 1: go back to periods in other periods in history you
30:00
Speaker 1: could find also other analogous types of periods. But that's
30:04
Speaker 1: what it looks. But well, we know how the nine
30:07
Speaker 1: ended and it wasn't well with World War two? What's
30:10
Speaker 1: the implication. Are we at risk for a shooting conflict
30:15
Speaker 1: with China? Or is this going to take more in
30:18
Speaker 1: the terms of an economic or competitive I think that
30:25
Speaker 1: what our circumstances lead to has a lot to do
30:29
Speaker 1: with how we all deal with each other given those circumstances.
30:34
Speaker 1: In other words, um, do you mean us individually? Do
30:37
Speaker 1: you mean between President she and President Trump? Between? Let's
30:43
Speaker 1: history is shown that how conflict is handled is the
30:47
Speaker 1: is the big thing. Um so Uh, there's a tendency
30:53
Speaker 1: of polarity to cause greater conflict and then hard times
30:59
Speaker 1: to quasi and worse conflict in those cases. Um. You
31:03
Speaker 1: you even had in Germany and Italy, Japan, Um and Spain,
31:10
Speaker 1: you had four democracies that chose to be autocracies because
31:18
Speaker 1: of the would somebody get control of the situation because
31:22
Speaker 1: it was fairly the chaos of the conflict, it became
31:25
Speaker 1: worse and so there was conflict within countries and there
31:28
Speaker 1: was conflict between countries. And I think the real question is,
31:33
Speaker 1: you know, can you have thoughtful disagreement, can you have
31:36
Speaker 1: strong negotiations but with the notion of reaching um, whether
31:44
Speaker 1: they're compromises or paths that are you know, not damaging
31:49
Speaker 1: type of conflicts. I don't know. This is beyond me,
31:52
Speaker 1: but I am saying that I think I can't. I
31:56
Speaker 1: can't tell you whether you go to world I think
31:58
Speaker 1: that um and that you were I would say that, ah,
32:04
Speaker 1: it would be to not consider it as a possibility
32:09
Speaker 1: and not be worried about it. Uh, internal conflict and
32:13
Speaker 1: external conflict would be dangerous. In other words, I think
32:17
Speaker 1: it's the worry and the attention paid to it, and
32:20
Speaker 1: the notion of, you know, how do we work together?
32:23
Speaker 1: How do we work together as a country. Is there
32:26
Speaker 1: is there in America that has common values that we're
32:31
Speaker 1: pursuing a common mission and and and what is that?
32:35
Speaker 1: How do you deal with that polarity issue? You know?
32:37
Speaker 1: I mean there are issues in terms of how effectively
32:43
Speaker 1: capitalism is working for everybody. Um, it's it's working, I
32:47
Speaker 1: think less effective. I'm a capitalist, I'm professional capitalist. I
32:51
Speaker 1: believe in the system. But as it how do you
32:54
Speaker 1: deal with all of those those are education equal education?
32:57
Speaker 1: These types of things have become fundamental and they're they're
33:01
Speaker 1: they're big challenges. Anyway we're going before we move from that,
33:04
Speaker 1: you're getting from markets. But you point out in the
33:07
Speaker 1: book that every time there's a financial crisis we seem
33:10
Speaker 1: to run into issues of economic inequality and widening gap,
33:14
Speaker 1: widening gap between the halves and have nuts? Is that
33:17
Speaker 1: part of the machinery? Is that something that always happens
33:20
Speaker 1: when there's a financial crisis. History is shown that, Um,
33:26
Speaker 1: in places where there's a big disparity in conditions at
33:32
Speaker 1: the same time as you have an economic downturn, there's
33:35
Speaker 1: greater levels of conflict. Now, you could be a poorer
33:39
Speaker 1: country in which there's not much difference and you have
33:42
Speaker 1: a downturn and you have less conflict, or you could
33:44
Speaker 1: be a rich country. Um, you know Switzerland is going
33:47
Speaker 1: to have less conflict down there because they're not that
33:49
Speaker 1: same element of disparity. So history has shown that when
33:54
Speaker 1: there is that and there's a downturn, there's more like
33:56
Speaker 1: there's more to argue about. Interesting. We're gonna open this
34:01
Speaker 1: up for questions from the audience, but first we're gonna
34:04
Speaker 1: do a speed round five questions in in a minute. Uh,
34:08
Speaker 1: and then we'll and then we'll do Q and A.
34:10
Speaker 1: So let's let's jump right into this. Tell us the
34:14
Speaker 1: most important thing that people don't know about you? Most
34:18
Speaker 1: important that I have a great wife for forty um
34:25
Speaker 1: plus years, who is a is a force of nature
34:28
Speaker 1: that I'm crazy about it, and that is also doing
34:31
Speaker 1: amazing things in her world. Um, you mentioned a few books.
34:35
Speaker 1: Give us your favorite book you would suggest people should
34:38
Speaker 1: read outside of your own. I would I would say
34:41
Speaker 1: Lessons from History. It's a hundred four pages. Uh. The
34:45
Speaker 1: Durance wrote that who are the Great? One of the
34:48
Speaker 1: probably the greatest historians, brought five thousand years of five
34:51
Speaker 1: They distilled it down in to onion four pages. Fabulous.
34:55
Speaker 1: I would say, here of a thousand faces the life cycles,
34:59
Speaker 1: which is right? And I particulate Joseph Campbell. And then
35:03
Speaker 1: I would particularly say that now they should read which
35:07
Speaker 1: I think is a masterpiece, Paul Kennedy's The Rise and
35:10
Speaker 1: Decline of Great Powers, so we have some millennials in
35:14
Speaker 1: the room. If a millennial came up to you and
35:16
Speaker 1: said they were interested in a career in finance, what
35:19
Speaker 1: sort of advice would you give them. Well, let's see.
35:23
Speaker 1: I think the most important thing is as you're young,
35:29
Speaker 1: is to realize that your success comes from knowing how
35:32
Speaker 1: to deal with your not knowing more than it comes
35:36
Speaker 1: from anything you know. So how to be open mind,
35:39
Speaker 1: how to take in the best of the around there.
35:41
Speaker 1: Don't think that you're be humble, take in the best,
35:47
Speaker 1: know how to deal with not knowing, and then you'll
35:50
Speaker 1: be more successful. And um, what is your favorite philanthropic
35:54
Speaker 1: focus these days? Um? For me personally, it's two things, UM,
36:00
Speaker 1: ocean exploration and particularly micro finance. Microfinance interesting micro finance
36:08
Speaker 1: and ocean expedition because I basically believe, I believe this
36:11
Speaker 1: issue is a big issue, and I think that you know,
36:14
Speaker 1: the fundamentals are blessings that I've had. Can I have
36:19
Speaker 1: a family that's a good family take care of me.
36:21
Speaker 1: That that's a very important thing, and sometimes that's difficult. Um. Education,
36:27
Speaker 1: I was able to go to a good public school.
36:30
Speaker 1: You know, can you have good public education? And then
36:33
Speaker 1: a few bucks to get you going in terms of
36:37
Speaker 1: being able to make decisions. I've seen on micro finance.
36:41
Speaker 1: I'm a supporter of gramin America from from the beginning. Uh.
36:45
Speaker 1: For every dollar that I give to that UM, there's
36:47
Speaker 1: twelve dollars in lending that gets paid back in the
36:53
Speaker 1: in the first ten years, and it just keeps going
36:55
Speaker 1: round and round and it becomes self financing. So I
36:57
Speaker 1: think that's um an important. And then I'm, you know,
37:01
Speaker 1: thrilled about ocean exploration because I think it's our biggest
37:04
Speaker 1: asset and it's and it's thrilling. And my final question,
37:07
Speaker 1: what do you know about the world of investing today?
37:09
Speaker 1: You wish you knew forty plus years ago when you
37:12
Speaker 1: were beginning. UM, I guess it would be the same thing,
37:16
Speaker 1: which is, I wish I knew how to deal with
37:21
Speaker 1: my not knowing, how to how to bring in the best,
37:25
Speaker 1: how to deal with that thoughtful disagreement, to be radically
37:29
Speaker 1: open minded, to be um audacious and going after my goals,
37:34
Speaker 1: to try to do great things. But to know that
37:36
Speaker 1: I could change my risk return ratio by being able
37:40
Speaker 1: to raise my confidence by the art of thoughtful disagreement,
37:44
Speaker 1: and to diversify effectively my bets so that I could
37:49
Speaker 1: not have anyone that dominates my returns. And uh, you know,
37:53
Speaker 1: to place those bets with both aggressiveness and humility. All Right,
37:57
Speaker 1: So let's open this up to the audience. I know
37:59
Speaker 1: there's a couple of handheld mike's running around. What questions
38:03
Speaker 1: do we have from the audience anywhere? Right over here
38:07
Speaker 1: on the corner, I told you there was a plant.
38:13
Speaker 1: I'm not a plant, but I've always wanted to ask
38:15
Speaker 1: you this. UM, thank you for thank you for this,
38:17
Speaker 1: by the way, where this has been great? Um, you've
38:20
Speaker 1: been one of the most successful funds ever, maybe the
38:22
Speaker 1: most successful. A lot of funds that have had success
38:25
Speaker 1: have eventually either kicked out their investors and run house
38:29
Speaker 1: money or have drastically limited how much outside capital they've
38:34
Speaker 1: taken or had become family offices through the years. Is
38:37
Speaker 1: that something that you ever considered? And why have you
38:41
Speaker 1: completely gone the other way and grown the firm? Um?
38:44
Speaker 1: Given how successful you've been, UM, good question. We're we're
38:49
Speaker 1: there's alpha, there's alpha, and there's beta. So this is
38:53
Speaker 1: gonna probably be a little bit of a technical answer
38:55
Speaker 1: to your question first, but UMU beta which is what
39:00
Speaker 1: is your strategic acid allocation? Next, you're timeless and universal um.
39:05
Speaker 1: There's a lot of liquid and a lot of capacity.
39:08
Speaker 1: And so those are the only two accounts we've taken alpha.
39:11
Speaker 1: We have capped our alpha. We I don't think, you
39:15
Speaker 1: know what, We just don't take in new money that
39:18
Speaker 1: is capped UM. And then the way that we do
39:22
Speaker 1: it is, yes, we we invest a lot in there,
39:25
Speaker 1: but there's a hundred and sixty billion dollars of total
39:28
Speaker 1: assets invested, and we haven't had the need to not
39:32
Speaker 1: invest for other people. So I don't expect that I
39:35
Speaker 1: have no expectation that that would change. I saw her
39:39
Speaker 1: hand back in the corner over there. I M. I've
39:45
Speaker 1: luckily been lucky enough to read this book already, which
39:49
Speaker 1: is very, very entertaining. Could I just ask you to
39:54
Speaker 1: talk in a little more detail about one of the shortest,
40:00
Speaker 1: most punchy sentences in the in the book, which was
40:03
Speaker 1: in the end, policymakers always print? Are we confident that
40:09
Speaker 1: they will indeed always print? Might there be any exceptions
40:14
Speaker 1: and go ahead? Well, it just takes how much pain
40:18
Speaker 1: that gets them to print? You know? I mean, at
40:20
Speaker 1: the end of the day, what I'm saying is when
40:23
Speaker 1: you have a dead crisis and it keeps going and
40:26
Speaker 1: it becomes painful, you'll print money when you hit zero
40:30
Speaker 1: interest rates, Um, then you print. That's been true throughout history.
40:38
Speaker 1: And you know, there's not a case that I know
40:41
Speaker 1: of that's that's different from that, because it's the better alternative.
40:46
Speaker 1: So yeah, at the in the end, you know, when
40:49
Speaker 1: it gets bad enough, they'll always bread some question over
40:53
Speaker 1: here and we'll try and get through as many questions,
40:59
Speaker 1: which is, by the way, an interesting consideration if you
41:02
Speaker 1: take longer term, not immediate, but you think of what
41:06
Speaker 1: what does that mean longer term in terms of reserve currency.
41:09
Speaker 1: If you start to think where are we in the cycle,
41:13
Speaker 1: and and you start to extrapolate what you know, what
41:16
Speaker 1: is going to have to be sold? You the United
41:19
Speaker 1: States is going to have to sell a lot more
41:21
Speaker 1: debt in the world because of the larger elements of
41:25
Speaker 1: budget deficits. You're gonna have to sell more and from
41:28
Speaker 1: a buyer of that that what what a bond is
41:32
Speaker 1: is a promise to get a lot of currency. That's
41:35
Speaker 1: what it is. You get currency and so and we're
41:38
Speaker 1: in a monetary system. So if you take you know,
41:42
Speaker 1: I don't know five, ten, fifteen years later. UM, I
41:46
Speaker 1: think it'll increasingly be UM an issue. You know, what
41:50
Speaker 1: is the currency, what is the storehold wealth? Where you know,
41:53
Speaker 1: those are elements that lurk in the back, not immediately.
41:56
Speaker 1: As as as issues with on on that path of
42:03
Speaker 1: the maintaining power, global economic power. You know, many of
42:07
Speaker 1: the economies have been on nine stimulus, that is, stimuli
42:10
Speaker 1: that can be considered a little bit of a steroids.
42:14
Speaker 1: You know. You mentioned that for those economies, you know,
42:17
Speaker 1: to succeed in remaining power, um, they have to keep
42:20
Speaker 1: the growth growing. So given the current scenario and the
42:25
Speaker 1: trade agreements that we're trying to reach, do you have
42:27
Speaker 1: an expectation of which economy will fold first? Um? You
42:35
Speaker 1: I don't have it. And I think that Europe is
42:39
Speaker 1: um is a is an area of conflict and there
42:41
Speaker 1: are issues that exist within Europe, but there you know,
42:45
Speaker 1: so I don't know that I have I would say
42:49
Speaker 1: when we have the downturn, it will be an issue
42:53
Speaker 1: of you know, continuity, cohesiveness. I think Europe will have
42:59
Speaker 1: a greater out of challenge because they don't have a
43:02
Speaker 1: common fiscal policy, they don't have unity within the countries.
43:06
Speaker 1: They don't have unity between the countries and they have
43:10
Speaker 1: big structural issues. Um So I would say that Europe
43:14
Speaker 1: probably would be the most strained. I saw handback over
43:18
Speaker 1: there to Tende being from Forrinstan Globe Partners. The question
43:23
Speaker 1: is in the long term, what do you think the
43:25
Speaker 1: US market will be and what the long term US
43:32
Speaker 1: markets where do you see them going? Um? I think
43:37
Speaker 1: US market what you mean in terms of size or
43:41
Speaker 1: valuation or in terms of performance, I think that we're closer,
43:49
Speaker 1: we're not. Long term, well, let's say five or ten years.
43:54
Speaker 1: I think we have squeezed a lot out of the
43:56
Speaker 1: U S market. I think we're an environment that we
43:58
Speaker 1: are going to have low return going forward for a
44:03
Speaker 1: very very long time. Because, um, if you look at returns,
44:07
Speaker 1: there's the present value effect of lowering interest rates and
44:11
Speaker 1: putting liquidity into the system, and that has largely run
44:16
Speaker 1: its course. And all assets compete with each other, so
44:19
Speaker 1: you can almost look at the yields of those assets.
44:22
Speaker 1: What's the yield on cash, the yield on cash, the
44:24
Speaker 1: yield on bonds, and then assets equities and so on,
44:28
Speaker 1: the brisk premiums of each of those and then that
44:30
Speaker 1: carries through to private equity, carries through the real estate,
44:33
Speaker 1: and so on. And because so much money has come
44:36
Speaker 1: out and interest rates were squeezed, we've brought asset prices
44:40
Speaker 1: up to very high levels um um in a storic context,
44:44
Speaker 1: but not relative to cash. They haven't gone to such
44:47
Speaker 1: extraordinarily high levels UM. And now in that tightening, as
44:52
Speaker 1: we're raising cash rates um and the spreads between short
44:56
Speaker 1: term interest rates and the longer term exp active returns
45:00
Speaker 1: get squeezed, that also squeezes those returns. So when you're
45:04
Speaker 1: at almost a zero interest rate low in the United States,
45:09
Speaker 1: zero interest rate in Europe, and a zero interest rate
45:12
Speaker 1: in Japan, which are the main reserve currencies, and that
45:16
Speaker 1: that has all been supported by quantitative easing. Beyond that,
45:20
Speaker 1: I think we've squeezed out a lot of assets. I
45:23
Speaker 1: think the world by and large is leverage long um
45:27
Speaker 1: meaning assets. Let's let's say the buying of um debt,
45:33
Speaker 1: corporate debt. One of the biggest sources of returns on
45:38
Speaker 1: assets was the fact that the interest rate was low
45:42
Speaker 1: relative to the return on equity. And so there's been
45:45
Speaker 1: a lot of buy backs, a lot of mergers and acquisition.
45:48
Speaker 1: In other words, by companies buying companies and bidding that up,
45:52
Speaker 1: and that's been a factor. And that's also then you
45:55
Speaker 1: have the tax boost because if you lower corporate tax rates, uh,
46:00
Speaker 1: it's are worth more. All of those things have pushed
46:03
Speaker 1: those asset prices up to levels where it's difficult to
46:07
Speaker 1: see how you can squeeze that with and so you
46:10
Speaker 1: can't get the rate structure down much and which is
46:13
Speaker 1: the wind to the back and you can't. So all
46:16
Speaker 1: of that means I think you've squeezed out a lot.
46:21
Speaker 1: So so going forward from here, if you're an investor,
46:24
Speaker 1: does that mean you just have to prepare for um
46:28
Speaker 1: lower expected returns in the future or is there a
46:31
Speaker 1: place where you can hide. No, I think like like
46:33
Speaker 1: crypto UM, I think if you're an average investor, I
46:41
Speaker 1: think that you again, there's alten this beta um. You
46:45
Speaker 1: have to prepare for lower expected returns in the future
46:49
Speaker 1: because if you take all these obligations. I'm talking to
46:52
Speaker 1: some extent about the debt obligations, but there are unfunded
46:55
Speaker 1: pension obligations, they're also healthcare obligations. There's a lot of
46:59
Speaker 1: obligations and essentially a lower real interest rate and therefore
47:05
Speaker 1: lower asset returns, assets are held by those who are
47:09
Speaker 1: more rich relative to that. I think all of those
47:12
Speaker 1: things are going to pull that you can expect lower returns,
47:15
Speaker 1: and you can expect probably more taxes those in a
47:19
Speaker 1: longer term. So that's going to be the nature of
47:21
Speaker 1: the beast. As far as and how to deal with it, um,
47:25
Speaker 1: I think most people should not be making tactical movements
47:28
Speaker 1: in and out of the markets to produce alf I
47:31
Speaker 1: think that's difficult. So I think that they have to
47:33
Speaker 1: know how to balance their accounts. That's why when I
47:36
Speaker 1: refer to what we call all weather, what's risk parity?
47:39
Speaker 1: How do you balance those things back? You have to
47:42
Speaker 1: have a balance portfolio unless you're going to be able
47:44
Speaker 1: to you know, concentration is a risky thing. And then
47:48
Speaker 1: or you have to be able to time markets, and
47:51
Speaker 1: of course that's that's a difficult thing too. I saw
47:54
Speaker 1: a bunch of hands up, Um, why don't we come
47:57
Speaker 1: down to the front row over here with this woman?
48:03
Speaker 1: Thank you hi, Raight, So my question is actually more
48:06
Speaker 1: about management, because I really think that's been that's from
48:10
Speaker 1: what my hataway it was from principles was just what
48:13
Speaker 1: an incredible and strange culture. You've built a bridgewater and
48:18
Speaker 1: I love your advice. You know that to deal with
48:21
Speaker 1: not knowing, that's such a horror problem for most people.
48:24
Speaker 1: People are uncomfortable to admitting I don't know. So how
48:29
Speaker 1: do you teach someone who is either resistant to admitting
48:32
Speaker 1: I don't know, or worse yet, who is not aware
48:36
Speaker 1: of how much he or she doesn't know. Well, one
48:40
Speaker 1: of the best I was gonna just say, play the
48:43
Speaker 1: markets and then you'll needalize how difficult it is to
48:45
Speaker 1: be confident. That's a but honestly, what happens is to
48:49
Speaker 1: make the transformation. Um, you have to explain that through
48:54
Speaker 1: them in a way where let's go through this, Like
48:58
Speaker 1: if I was to say, um, do you want to
49:00
Speaker 1: know what your weaknesses are? Do you want to know
49:04
Speaker 1: what I think? Do you want to know be able
49:07
Speaker 1: to tell me what you think? Do you want to
49:10
Speaker 1: have disagreement when we're disagreement? Do you want to have
49:13
Speaker 1: thoughtful disagreement? Because if there's disagreement, there's some chance that
49:17
Speaker 1: maybe you that's wrong rather than the other person. Intellectually
49:21
Speaker 1: you can get people there, not all people, but intellectually
49:26
Speaker 1: you can buy and large say you're struggling with yourself really,
49:30
Speaker 1: because there's this intellectual self that said, yeah, I'd like
49:33
Speaker 1: to know my weaknesses. I know everybody has strengths and
49:35
Speaker 1: weaknesses I can develop. I'd like to have that honest relationship,
49:39
Speaker 1: and then you will. Once you intellectually get that you wanted,
49:43
Speaker 1: then you're going to encounter your emotional barriers to it.
49:47
Speaker 1: And the emotional barriers are either your ego barrier that
49:51
Speaker 1: you know that you're going to have to get over,
49:53
Speaker 1: or your blind spot barrier. I mean, in other words,
49:55
Speaker 1: by ego barrier means um you somehow feel challenged or whatever,
50:00
Speaker 1: you feel bad about not knowing, feel good about not knowing.
50:03
Speaker 1: And curiosity. If I can get you to see that
50:06
Speaker 1: world that way intellectually, you'll you'll want it. And then
50:09
Speaker 1: the blindness barrier is you could be really curious. But minds,
50:14
Speaker 1: different people's minds work differently. They see things. Some people
50:17
Speaker 1: see the big pictures, some people see details, and so on.
50:20
Speaker 1: And when you come to see that, different people see
50:23
Speaker 1: things differently, and you could when you see things through
50:26
Speaker 1: others eyes, that you can see in three dimensions in
50:30
Speaker 1: color rather than seeing in this one flat dimension black
50:33
Speaker 1: and white, and you can do much better if you
50:36
Speaker 1: get them to intellectually understand that and say we're going
50:40
Speaker 1: to go through this in a in a way where
50:42
Speaker 1: there's trust, where there's meaningful relationships. But you can get
50:45
Speaker 1: trust because you can get to see things for yourself.
50:48
Speaker 1: Everything is transparent, will talk about it and so on.
50:51
Speaker 1: Then you get people to want to be that way,
50:53
Speaker 1: but they have to start to realize intellectually that it's
50:57
Speaker 1: really a good way of being. It builds better work
51:00
Speaker 1: results of builds better relationships, and that's a tremendous power
51:04
Speaker 1: to get to the right answer and also get the
51:06
Speaker 1: rewards of good work and good relationships. They have to
51:10
Speaker 1: go through that, and then they have to go through
51:12
Speaker 1: the experience. And then when you take them through the experiences,
51:15
Speaker 1: you have to help them through that experiences because some
51:17
Speaker 1: of that is different different. I think it's also how
51:20
Speaker 1: we teach kids, and we teach our in our own
51:24
Speaker 1: environment that you know, did you get the great grade?
51:27
Speaker 1: In there? In there? And it's all kind of do
51:29
Speaker 1: you know? And the life is not like this. Life
51:32
Speaker 1: when you leave school is not like did you get
51:35
Speaker 1: the great grade? Life starts succeeding when you start to fail.
51:40
Speaker 1: When okay, and and then it's the learning that comes
51:43
Speaker 1: from those failures that produces it. So I think that
51:46
Speaker 1: whole intellectually getting that being that way is healthy in
51:51
Speaker 1: all of those respects. And then once you have that
51:54
Speaker 1: in their mind and they experience it, you help them
51:57
Speaker 1: through that, then they know they're experiencing and that's what
51:59
Speaker 1: works for us to help people make that transition. Thank
52:04
Speaker 1: you have about read on here all the way this way?
52:09
Speaker 1: H got it, Hi rate. One of my favorite shows
52:14
Speaker 1: is a show called Billions, and some people have said
52:17
Speaker 1: that the character Babby as Rod in his office is
52:20
Speaker 1: somewhat based on you. Have you ever seen the show?
52:23
Speaker 1: Any truth to that or what do you think of that?
52:25
Speaker 1: I have no idea you speak to those guys. I
52:29
Speaker 1: have no idea whether it's true. I um. I watched
52:33
Speaker 1: three episodes out of curiosity. I thought it was entertaining,
52:38
Speaker 1: and then I, you know, just didn't have the chance
52:40
Speaker 1: to pursue it. So I don't have much to had y.
52:42
Speaker 1: I guess they got the writers. When you read the
52:46
Speaker 1: book that you talk Paul Kendy, the book that Act,
52:49
Speaker 1: and read that book well. Of that book, the message
52:51
Speaker 1: I take from that book is that every great Paul
52:54
Speaker 1: it's because they're all leverage. They borrow too much. At
52:57
Speaker 1: that the message you wanted the massive from the focus.
53:01
Speaker 1: Now the US really looks like, oh, defice getting bigger
53:04
Speaker 1: and the bigger do you see we we are? That's
53:06
Speaker 1: where we're going. And then what's the implication to the
53:09
Speaker 1: currency of the U store. So in the Polkenny book,
53:12
Speaker 1: over leverage is the US over leveraged relative to historical companies. Yeah,
53:18
Speaker 1: so there are a number of lessons. One of those
53:21
Speaker 1: is UM and it can take the ark by the way,
53:24
Speaker 1: typically is two hundred years, two hundred and fifty years,
53:27
Speaker 1: so the arc is quite long UM and it by
53:30
Speaker 1: the way, it starts off with technological advances that raises
53:34
Speaker 1: g d P and then makes them very competitive in
53:38
Speaker 1: the world markets. Like UM. The Dutch was the reserve
53:42
Speaker 1: currency before the British Empire in ours and then what
53:45
Speaker 1: happens is later in the cycle there is that desire
53:49
Speaker 1: to push it in leverage UM. Usually it's a matter
53:53
Speaker 1: of they become global, they have global trade routes, when
53:57
Speaker 1: they travel around there carrying their currency. Then people then
54:01
Speaker 1: use that currency, that's what they pay in, that's what
54:04
Speaker 1: they lend in. UM. UM Holland. Essentially Amsterdam became half
54:10
Speaker 1: of world trade at that time, and it became very
54:13
Speaker 1: rich because of those things, and the world use that
54:17
Speaker 1: reserve currency, so there was borrowing and lending, and then
54:20
Speaker 1: the cycle goes that. Of course, when you have a
54:23
Speaker 1: reserve currency, others want to save in it because the
54:27
Speaker 1: choice is their local currency and so on, and they
54:29
Speaker 1: believe that that's the thing to save in. And when
54:32
Speaker 1: they're saving in it, that means that there's borrowing in
54:36
Speaker 1: it by that country, and they usually overextend, and as
54:40
Speaker 1: a result of over extending, they make they get the
54:43
Speaker 1: debt problems that you're dealing with, and then it becomes
54:46
Speaker 1: a challenge. I think the United States is following that
54:49
Speaker 1: kind of an arc, and we are over extending, and
54:53
Speaker 1: that we're operating in this world reserve currency uh fiat
54:57
Speaker 1: currency type of assistem. And so if you were to
54:59
Speaker 1: take you know, let's say years in the future, I
55:02
Speaker 1: think that the role of the US dollar will diminish,
55:05
Speaker 1: and the returns on US dollars will US dollar denominated
55:10
Speaker 1: debt I think will suffer for the reasons that we're
55:12
Speaker 1: talking about here. And then I think then you see
55:16
Speaker 1: the emergence of other currencies. What those currencies will be
55:19
Speaker 1: exactly how that will work is an interesting question. Um
55:22
Speaker 1: So that's too big of a topic to get into
55:25
Speaker 1: an answering your uh in this brief a couple of minutes.
55:28
Speaker 1: But I would say that that becomes an issue, and
55:32
Speaker 1: that probably over the next five and ten years, we're
55:35
Speaker 1: going to see that play more of a role. Rate
55:38
Speaker 1: given in Kennedy's book, each of the great powers became
55:43
Speaker 1: global powers by expanding beyond their borders. What do you
55:47
Speaker 1: make of the current deglobalization that seems to be taking
55:51
Speaker 1: place in the United States, in the UK and elsewhere. Well,
55:55
Speaker 1: I think we're you're talking about there are two different things.
55:59
Speaker 1: In those case, says, there wasn't so much the globalization.
56:03
Speaker 1: There was the globalization of those countries, just like the
56:06
Speaker 1: globalization of China. We're now seeing the One Belt, one Road.
56:11
Speaker 1: We're seeing investments all around the world. That's that's carrying
56:14
Speaker 1: that forward. With that, you will see more lending in
56:18
Speaker 1: uh m MB, you will see more Chinese banks in
56:24
Speaker 1: the world, and so on and and so forth, and that
56:25
Speaker 1: will expand very very analogous regarding globalization, which is the
56:31
Speaker 1: idea of producing at one place and selling it someplace
56:34
Speaker 1: else in the most efficient ways that there's not much
56:37
Speaker 1: trade barriers so that you can do that. Or the
56:40
Speaker 1: globalization of capital markets, the free flow of money into
56:44
Speaker 1: and out of countries and all of that. UM, I
56:47
Speaker 1: think that that's peaked, and that where now in an
56:52
Speaker 1: environment in which will go to a you know, more
56:55
Speaker 1: of a D globalization kind of environment. And because of
56:58
Speaker 1: this somewhat threatening environment that perceived UM worry that you
57:04
Speaker 1: could have a conflict. I think that that creates a
57:06
Speaker 1: force that reinforces the D globalization because let's say, if
57:11
Speaker 1: you're going to produce something, if you're producing things in
57:14
Speaker 1: China that we need in the United States, by way
57:16
Speaker 1: of example, there might be a concern about doing that.
57:20
Speaker 1: So if you're producing PCs, you might say and might
57:22
Speaker 1: need PCs here, there might be a pressure to go
57:26
Speaker 1: D globalization that sort of feeds on itself. I think
57:29
Speaker 1: that we're seeing those kinds of pressures. I think the
57:31
Speaker 1: same thing is true that that could happen with capital flows. UM.
57:35
Speaker 1: You know, if Chinese investors are more concerned that you
57:38
Speaker 1: could have a conflict, there could be more sanctions of
57:41
Speaker 1: investments in the United States, so they're less inclined to
57:44
Speaker 1: invest in the United States and so on. So those
57:46
Speaker 1: issues I think, UM, I think we're more moving more
57:50
Speaker 1: towards d globalization and almost independent self sufficiency is probably
57:57
Speaker 1: the more of the direction. And we have time for
58:00
Speaker 1: one last question. Let's go right over here. I have
58:06
Speaker 1: two questions regarding China. The first one is where do
58:09
Speaker 1: you see China's debt situation today? And the second being
58:14
Speaker 1: given that China has started to increase the amount of stimulus,
58:18
Speaker 1: is that an area that you would potentially increase an
58:22
Speaker 1: investment in in this at this point in time, Uh,
58:27
Speaker 1: like I said, applying the template to China, UM, Chinese
58:33
Speaker 1: debt is mostly in their local currency. The amount of
58:36
Speaker 1: foreign currency denomin data debt for China is very small. Okay,
58:40
Speaker 1: so now you're dealing mostly with an internal issue. And
58:46
Speaker 1: also the lenders to China are within their system. And
58:52
Speaker 1: the like I said, the capacity to handle a debt
58:57
Speaker 1: crisis by spreading it out in one way or another,
59:00
Speaker 1: UM is quite large. Um. They have the expertise to
59:05
Speaker 1: know how to do that, to do that spreading it out,
59:07
Speaker 1: So UM, I think that when you look at debt cycles, uh,
59:12
Speaker 1: there were four cases in which I know the United
59:14
Speaker 1: States default had had major debt crisis is and won't
59:18
Speaker 1: rattle them all off, and that they were able to
59:20
Speaker 1: be managed. The lesson I gave, for example, of the
59:24
Speaker 1: two thousand excuse me, the debt crisis that I was
59:29
Speaker 1: so wrong about was the ability to spread that out
59:32
Speaker 1: and lower interest rates at the same time. China has
59:35
Speaker 1: that ability. I think everybody's focused in on that and
59:38
Speaker 1: and too focused in on that, and they're not focused
59:41
Speaker 1: in on their productivity growth and how they're making changes
59:44
Speaker 1: in terms of that productivity growth. I think, um, you know,
59:47
Speaker 1: like a bad year of growth, uh will be probably
59:51
Speaker 1: twice as good as a good year of growth from
59:53
Speaker 1: us in terms of that that whole productivity thing. And
59:57
Speaker 1: if you look at indicators of productivity over a period
1:00:00
Speaker 1: of time, quality of education, quality of infrastructure, those kinds
1:00:04
Speaker 1: of things, you know, they have the reasons to continue
1:00:08
Speaker 1: to have high productivity. So to me, it looks like
1:00:11
Speaker 1: one of those cycles, their version of a cycle to
1:00:13
Speaker 1: do a debt restructuring and and a debt organization. They're
1:00:17
Speaker 1: doing it on a proactive basis before the cycle is
1:00:20
Speaker 1: actually caused a crisis. In most of the other cases,
1:00:23
Speaker 1: like in our financial two thousand financial crisis, we had
1:00:27
Speaker 1: the crisis, and then you have reactive. They're doing proactive.
1:00:30
Speaker 1: So I'm very um. I'm not worried about the debt
1:00:34
Speaker 1: crisis in in China or the debt situation in China,
1:00:37
Speaker 1: and I'm you know, I believe that it's going to
1:00:40
Speaker 1: be a very good place for long term investing. I
1:00:42
Speaker 1: think it has to be an important part of everybody's portfolio.
1:00:46
Speaker 1: It's just opening up to foreign investors. It's a different
1:00:49
Speaker 1: kind of place, so you have to get to know it.
1:00:51
Speaker 1: But you know, I'm basically bullish, and I won't get
1:00:54
Speaker 1: into the particulars of what particular investments I would make
1:00:58
Speaker 1: there though. So that is all we have time for.
1:01:01
Speaker 1: I want to thank Ray for being so generous with
1:01:03
Speaker 1: his time. Let's give him a nice round of applause.
1:01:05
Speaker 1: Thank you very Oh my pleasure. If you're gonna hang
1:01:08
Speaker 1: around a little bit and sign some books for people,
1:01:10
Speaker 1: is that right? If you're fantastic, So stick around rail
1:01:13
Speaker 1: sign some books and thank you so much for coming