Bloomberg TalksBridgewater Associates founder Ray Dalio says the overall picture of the economy probably warrants a smaller interest-rate cut by the US Federal Reserve this week. He spoke with Bloomberg's Haslinda Amin from the 11th Annual Milken Asia Summit in Singapore.
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I'm Huslinda Amen in Singapore where the eleventh Annual Milk and the Asia Summit is underway. We want to welcome Bloomberg television viewers as well as radio listeners all over the world. While joining us now is Ray Dallion, Founder and CIO mentor at Bridgewater Associates.
Ray, good to have.
You with us, Good to be here.
Global leaders.
They're grappling with a host of issues. But you say they are five key factors, forces that are perhaps defining and shaping the globed economy before we get there though, Today a big day for the markets, the FED front and center.
Twenty five or fifty that is a key question.
And I know you said before that you're right sixty five percent of the time when it comes to market.
So what's the bet on.
I think it's such a silly bet, like twenty five or fifty. It doesn't make a different. I think that's the problem with the news cycle and all of this. They're losing sense of the bigger picture. Okay, Fed policy, what does the FED have to do? Fed has to keep interest rates high enough to satisfy the creditors that they're going to get a real return without having them so high that the debtors have a problem.
So, now, if we're.
Looking at this, whether it's twenty five or fifty basis points, twenty five basis points is going to be dependent would be the right thing to do if you look at the whole picture as a whole. If you look at the mortgage situation, which is worse and that affects more people, then it's probably fifty basis point. But let's get beyond that, okay, and talk about these five big forces. The first of those forces is the force that you're referring to, which is, excuse me, the debt, money, economy, dynamic and force. Okay, So we have a big debt increase, an enormous amount of we have an enormous amount of debt and it's going to keep increasing and one man's debts or another man's liabilities.
Okay, So what is that going to mean for monetary policy? Okay?
As you have to sell more and more of those bonds, what will be done? I think the same thing is done in Japan. What happens is there's not going to be a default. Of course, there won't be a default but increasingly they have to drive down real interest rates so that real interest rates are significantly negative. So you're going to have in order to service the debt, you have to have a significantly negative real rate, and you also have to have then the depreciation of the value of money because inflation arises, so that you have to have a nominal growth rate in other words, inflation plus real growth that is above the nominal interest rate, and you have to have a real interest rate that is negative, and you have to have a positive slow yield curve, so that holding bonds is a bad deal.
What is the state of the US economy?
I mean, we're talking about twenty five or fifty based on the assumptions of how the economy is doing. Okay, from the data that we've gotten so far, does it justify fifty?
I mean, what the same.
We have a model for estimating what should be the economy right now is very very very close to an equilibrium level in many ways. If you're just looking at what is and you're not looking at the debt problem, and it would look like there should be a modest easing of interest rates and a move gradually to a more positively sloped yield curve what we would call the normal. It's fairly normal, except it's not normal in the way that it's so skewed.
So if we look at the markets, and.
We look at the way the population's income levels are for the various sectors, if you look at the bottom sixty percent, if you look at the politics the left and the right, and the nature of what is going on the two worlds that we live in in terms of that of the economy and the values that brings us to the election. So if we are talking about let's say monetary policy, you have to look at the five forces.
So back to the five forces.
The first force we talked about, the second fourth is the force of internal order and disorder that progresses in a cycle.
There is hard left and hard right.
So there's ideological differences that are creating a political situation that leads us to not only have possibly different policies, dramatically different policies which will have an effect on the economy or have an effect on the markets, but even worse or more concerning, is that it's conceivable that one side or another might not accept losing. Okay, so how will that will we have an orderly transition of power, and will we have an orderly democracy in which there's the ability to have disagreement and resolve of those disagreements. I think these are really questionable situations. So the second force is that internal order disorder force. The third force is the great power conflict. In other words, throughout history there's a time when the rising power challenging the existing power, and there's a world order thing going on. And that world order thing going on has to do with China, the United States and so on, And of course it becomes even more important than the economy because it is it's considered national security.
Okay.
The fourth influence is through time, is acts of nature, droughts, floods, and pandemics, and climate is a big influence.
It's going to cost US eight trillion.
Dollars a year estimated in one way or another in an world economy that has one hundred trillion. And the fifth force, of course is technology, okay, Man's inventiveness of technology. Throughout history, those five forces have interacted.
So when we look at things, I.
Think that there's the twenty five or fifty basis points.
Let's get beyond that.
Let's look at the whole arc of that in terms of the changing of all of those five forces and their inter relationships.
Let's get back to internal conflict and link it to the US elections. How do you see playing out? How do you see the next few months fifty days elections? How do you see that playing out? Well?
As I say, I think that there's two questions. First, the question of will we have an orderly transition of power? That's quite amazing. Will we have democracy work as it is? That cannot be assured, so because behind all of this is that we have irreconcilable differences, not just pertaining to taxes in wealth and economic policies and so, but in terms of values, you know, it's how do people raise children? Related to sexuality and all of those things. There are those gaps. So I think we hope for an orderly transition of power. Isn't it quite amazing that we would think? Could we not have that? And then we go beyond that, and then we say, what about those policies that are going to be dealt with? Nobody's going to deal with the debt policy that's going to end up being monetized down the path, Then the question is issues of taxation and those issues of taxation will have an important impact on the capital markets if they're bought for after tax returns.
By and large, it's the important thing.
You lower corporate income taxes, you a race corporate income taxes.
It makes a difference to prices.
So we're going to have those issues, a lot of issues to talk about.
Regarding the election.
I think when we go beyond that, most likely there is going to be irreconcilable differences, and I think that you're going to see more movement to states. So there'll be a challenge of what does the central government control and what do the state government's control and is there an obedience in a sense, So we are coming more to a fragment and set of circumstances. What we would need, I think is strong leadership of the middle to bring the country together and leave and isolate more of the extremists, if that was possible, and then to make reforms because we do have a very skewed type of economy.
So is that Kamala Harris.
There's no.
I don't think it's either of the candidates. Okay, I don't think it's no. It's not either of the candidates. I think that the issue of reform, strong leadership in the middle.
I don't see it.
We've been talking about a changing global order. China comes to mind automatically. The conversation right now is a massive slowdown in China, economic malaise. But people seem to be missing the point that amidst all the slowdown, China is still innovating renewables evs.
How are you assessity.
I think that there are real issues in China now and they changed really in the last for years, and that is that they need a restructuring. A lot of the spending, well, let's say individuals seventy percent of their money was in real estate. Real estate has gone down, stocks have gone down, salaries have gone down, and as a result, they're not spending and they're concerned, and they're holding money in cash. The deflation. Cash is a relatively good asset class. That's kind of the household and the business sector is in that state. At the same time, you have the government sector is a problem because most of the government's spending eighty three percent of government spending is spent by local governments. Those local governments got their money by selling land for real estate.
Okay, there are no land sales, and they.
Borrowed a lot of money, and for those that they borrowed the money don't get paid. And so the question is how are you going to get money into those places to up rate. It's a situation that's more challenging than Japan in nineteen ninety. It needs a restructuring in order to be able to do that. And then there's also the question is the property values, the property, the property ownership, is it respected? And dengshall Ping Juring his period said it's glorious to be rich.
Is it still glorious to be rich?
So you have an environment in China which is changing and becoming a more difficult environment. So it's the time right now that you would see either is there going to be a restructuring and getting past that? The innovation, Yes, there's fantastic innovation in terms of technology, there's nothing likely other than in the United States. Europe certainly isn't a competitor in that. However, it's very much government directed. Can there still be entrepreneurship and that inventiveness? These are the big cosmic question.
Given the environment that you have just painted for us, it's China still the place to do business is China still the destination for your investment money. You've said time and again that you should be investing.
Yes, I just want to be clear about the investing in China. In all countries, there are cycles and ups and downs and so on, and in no country should you invest so much money that it becomes a dominant portion of your portfolio. So in China, I still invest in China. The question is the size of the investment and how that investment is structured. So it's been a good experience for us to invest.
The size and what's how are you invested?
Because reports suggesting that Bridgewater, for instance, has been cutting down its exposure to China's holding, it's.
Not my place to talk about bridge works.
How do you see how do you see investing in China?
I see investing in China as largely a very attractively priced place that now has a lot of questions regarding the issues that I've just referred to, in other words, the economic issues and the political issues regarding property rights and whether it's still glorious to be rich and how that will work. Therefore, there's a small percentage of our portfolio which is in China, and we'll stay in China.
You know through this process.
One of big forces shaping the world today is technology. Ai Jenei, You're big on it. You're looking at a bot so that people can have access and have conversations with you. I mean, what is the potential And of course if it's technology, technology.
Goes wrong, your bots could go rogue.
I mean, how are you assessing you know, the risks as well as the rewards the benefits of AI and jen Ai.
Well, for the last thirty five years, I've written down principles and decision rules, literally many thousands of those I and they have operated as systems, decision making systems, and that now I'm very excited about that because I've but you have to train them very well. Because it's been all so specified over a period of time.
It is very educational.
I've then taken a large team of people and gone through asking it questions and dealing with it and training it.
And the reason is a lot of people ask me questions.
I'm going to phase in my life where my main objective is to pass along what I've had that it's a benefit to others, and we interact such as this kind of conversation, and I thought it would be great if there could be I could answer all those questions, or we could have discussions how are you doing and all that.
So that's what I've created.
It's called Digital Ray, at least that's the tentative name, and we're beta testing it. We're going to have several thousand people tested and see how that goes. Will move forward, But I think it's exciting when you have you need to have computerized decision making working with you because the time of making all those decisions in your head, that's obsolete. You know, the smart person who thinks I can weigh everything in my head, they're obsolete. Nowadays you have to have a partner in terms of those decisions making with the.
Computer ray final thirty seconds.
We also know that Jenny I sucks of energy, they say as much as a small country sually.
That is a concern, of course, it's an important concern.
The real question is it's productivity.
I think a lot of attension, a lot of the finances have been in the development with the superscalers. I think the real opportunities are going to come in terms of the users and how that's going to change productivity. In fact, probably invent ways that technology wouldn't be so.
Much right, We have to live in there. Great conversation.
Ray Dalio, founder and CIO mentor at Bridgewater Associates. We're coming to you live from the Milk and Asia Summit. Keep it here with us. This is Bloomberg
