Ray Dalio on The Global Economy

I highly recommend watching the whole thing, but I wanted to share my notes from Ray Dalio’s recent TED interview:

(My) Summary

  • We are going to experience a depression similar to the 1930s – 1945
  • Reading and studying history yields principles that can be applied to the current situation, this is not unprecedented
  • It is a once in a lifetime event for us but it is not meaningful in the long arc of historical GDP (500+ years)
  • The idea of leveraging capitalism to grow the pie for everyone and also increase everyone’s productivity is still the fundamental engine of improving the average quality of life for everyone, over generations
  • We must have thoughtful disagreement so that we can arrive at the best decisions for everyone, in a bipartisan way, otherwise we risk actually destroying productivity
  • The risk of political idealism, the constant partisan battles where everyone, always, has an objective and a battle to pick is an enormous risk right now because it threatens the common good at a critical time
  • Human ingenuity, innovation, creativity are the most powerful forces in history. Everything else is just accounting.
  • For individual investors, be wary of cash as an investment. Focus on diversification of asset class, of country, of currency, and more
  • It’s impossible to time the markets, harder than being an olympic athlete, and yet so many people still believe they can do it. You shouldn’t try.
  • How we restructure during and after a crisis is the key problem: do we experience violent revolution and war in the face of inequality? Or do we find a peaceful solution that has equal opportunity and increased productivity as the goal?

Unfiltered Notes:

  • Tsunami analogy
  • Holes in income and balance sheets
  • Who produces money and credit?
  • US Dollar and euro money and credit
  • 1930-1945 – the production of debt (borrowing), zero interest rates, producing money and credit
    • Federal reserve is buying treasury’s debt and getting it to americans
  • Europeans are doing the same
  • Rest of the world is going to have holes that won’t be filled
  • Who will pay these bills? How will it be shared?
  • Big differentiation between which entities benefit and which don’t
  • Big collaboration addressing questions of wealth distribution
  • A defining moment of how people are with each other: will they come together or will there be a “taking care of oneself” – it’s worth looking at history
  • What’s happened over and over again? What’s the pattern?
    • Productivity coming from learning and inventing. It grows slowly, 1 to 3% a year. It’s not volatile, it raises our living standards over time.
    • Short term debt cycle. Recessions and expansions and booms and busts, lasts 8 to 10 years
    • Long term debt cycle (50 to 75 years) begin a new type of money and a new type of credit. Started in 1945, the new world order at the end of WW2. [[Bretton Woods Monetary System]]
    • Politics – how we deal with each other. Internal and external. Internal: how do you deal with the wealth gap? Values gap? Common mission? American dream that we agree on and pursue together? Or do you fight over wealth? This is what revolutions are. There is always a revolution, sometimes peaceful and sometimes disruptive. A wealth shift that needs to take place. External: between countries, often leads to war, how do different countries treat each other? Is there a greater good? This is the defining moment. Stress test once every 75 years. We are in one now.
  • What do you do when you’re outside the ring of support, for example outside the US dollar?
  • We are in a depression, yes. What did they do in 1933?
    • Printed a lot of money
    • Same types of programs we have now
    • Interest rates hit zero
    • Causes expansion from that point
  • How long does it take to exceed its former highs? A long time.
  • There is a knowable structure here and we are in it.
  • 3 years of printing money and redistribution, and then rebuilding with creativity
  • Human inventiveness and adaptability is the greatest force in humanity
  • You don’t see the depressions on the GDP over the last 500 years, over when you zoom in
  • Goods and services are real, everything else is just accounting
  • This is all healthy in a way, it’s a stress test
  • Reorienting type of experience, like appreciating the basics of life
  • Why hasn’t the market seen this yet?
    • 25% to 50% off
    • 20 trillion dollars of losses
    • if you work it through, it means you don’t have money and credit, your business can fail
    • When there are no payments, there are failures
    • Who gets the check to mitigate this?
    • Giant restructuring of IOUs
    • Hospitals can go broke because it’s terribly costly, they will not fully recover their losses even though we know we need them
    • You have to go entity by entity when you analyze it and figure out who will pay
    • It’s a mistake to attach it to the virus, that it will come and go in waves
    • If it never came back again, there will be those who are broke and loss of income
    • Self sufficiency will now be important
    • Restructure the economy and financial system
    • We will not go back to the way it was
  • Bigger than what happened in 2008
  • Same thing in spirit – too much leverage (you’re broke), who are the ones that are important to save? that can’t go broke? who gets the money and the credit to keep them alive?
  • 2008: Banks got it, through banks it was mortgages
  • Now: this is more complx
    • Banks
    • All of the little businesses
    • Bigger crisis
    • Less effective monetary policy because interest rates are at zero and you can’t go any lower
    • Buying normal financial assets won’t work
    • They have to buy the debt of the goverment
    • And the government shave to be effective at getting buying power and production to those who need it around the world
  • What kinds of organizations have the best prospects going forward?
    • Stable, meat and potatoes, not leveraged, Campbell’s soup type companies
    • Innovators – strong balance sheets, will be able to play the game
      • These will be great winners
  • The basic fundamentals of money, credit, crisis, who has what income and expenses and balance sheet
    • Those things which people often lose sight of because they only happen once in a lifetime
    • Those fundamentals of what a bank is and the associated process have existed all through time
    • Technology changes and evolves, capacity to take ones thinking / principles and put them into algorithms
    • Capacity to think has been radically enhanced. The human mind has a capacity problem, technology expands our capacity in this way
    • This is the advancement of our time
    • Do you have understanding and are you successfully betting on a cause/effect relationship? That’s how you make money. Computers can do it in a more advanced way, that’s it.
  • People will make the mistake of just applying ML to the markets, and that generally won’t work. Algorithms of two types:
    • Specify instructions
    • Data
  • Key difference is: do you have understanding of the cause/effect relationships?
    • What’s happening now could not have been predicted via ML because you have to go back to the 1930s in your sample
  • Specific advice
    • An investor must understand that they probably will not be able to play the game well, how to move in and out of things
    • It’s more difficult than getting the gold medal in the olympics
    • You wouldn’t think about competing in the olympics, but people think they can compete in the markets
    • You cannot time it
    • Know how to diversify well in a balanced way
    • The greatest mistake of all investors is to think that what has done well lately is a better investment rather than more expensive
    • What is done worse is the worst investment, get me out of it, rather than “it’s cheap”
    • Most people don’t know how to deal with these differences
    • It’s mostly a zero sum game
    • Diversify in asset classes, in countries, in currencies
    • Do not think that cash is a safe investment
    • Cash is seductive because it doesn’t have volatility but it taxes you 2% a year in your buying power. it’s almost always the worst investment
    • Think unconventionally – do you have a little bit of gold?
    • Be humble
  • Retreat from globalization
    • it will make things harder for us
    • Compare idealism with reality
    • Who will write what checks to people in country that will be outside their domain? Large numbers of those people
    • congresses and presidents decide who to help, it gets to real practical questions
    • The reality is a lot of people will not be helped
    • How will they behave?
    • Are one country’s vulnerabilities another country’s opportunities?
    • 16 countries over the last 500 years have disputes, 12 of those cases there have been wars. there is not a global legal system. power is the currency.
    • Who gets what is a complicated question
    • Fragmentation: can I depend on someone else to give me something I need, and them not taking advantage of me? No, you cannot make those dependencies anymore, and it exists between countries and within countries
  • READ HISTORY
  • Understand the mechanics, the issues, the challenges
  • This isolation began (deglobalization) before we had this issue, don’t overlook those reasons just because we wish this can all happen
  • Everything is dependent on those who have their hands on the levers of power
  • The chinese in many ways are helping
  • To even say that is a politically challenging thing because we are in a world that is so fragmented, to publicly say thank you to many people, many countries is almost dangerous
  • Enemies are helping. Who is evil? Do you fall into that category?
  • History: demonization of different people, how will we behave with each other?
  • Capitalism in general
    • What is our american dream? We are not talking about that
    • Environment of equal opportunity defined after WW2 defined the american dream, a harmony, a “going through it together”
    • Not uncommon in history – clash and war often precedes a big change, and the new system is people working together
    • The idea that the profit system can accomplish everything is not right
      • It’s a profit controlled system, the people who profit benefit the most
    • Any system works for those who tend to control the system
    • Those in the top 40% spend 5x as much money on their children’s education compared to the bottom 60% so it self-perpetuates
    • Capitalism is good – but you do still need reforms and they have to create productivity. Not just give money away, but how do you make these people productive psychologically and physically productive (producing output)
    • We are restructuring it now. It is inevitable
    • There has been a tremendous transfer of wealth, whether people realize it or not, already, through the production of all that borrowed money
    • The thing we will talk about over the next couple of years is how we perform this restructuring
    • My worry now is the same worry then: is this redistribution done in a civil, bipartisan way that will both increase the size of the pie for everyone and divide it well rather than damage the economy because you lose productivity
    • Certain things are great investments: education is an example
      • I twill product more productivity than it will ever cost if it does well
      • States an dlocalitie think of it as an expense and penny pinch
      • If you’re in a rich town your kids will get an education, if not, no
      • It must be engineered well
    • Everybody must believe the system is fiar
    • We can get there, 60/40 pessimistic right now that we’ll be good enough with each other to do that
    • This is the stress test
  • Do you think the current crisis is showing that low pay / unskilled workers are what holds the country together rather than banks and hedge funds?
    • The heros are those people
    • But it takes everyone
    • Efficient allocation of resources is also important
    • Those who control a lot of resources are able to make contributions
    • Giving 60k computers to poor student so they can learn
    • The difference between a rich and a poor student is this ability to learn in the modern world (a computer)
    • Thank those who are embarrassed about how they contributed to that process’
    • It’s the same thanks I give for those people who are every day serving
    • It’s good character regardless of social and wealth status
    • The greatest generation is an example
    • We each have to recognize our roles in doing that
    • CEO, hero on the front lines, they better damn well work well together
    • People have to have usefulness and we have to appreciate it all
    • The reality: there is a level basics: education, healthcare, that you cannot fall below
    • Otherwise, when you go below that level, there is no opportunity and the costliness of it (crimes, incarceration)
    • Example: getting high school dropouts through high school into a job compared to the cost of incarcerating them is huge
    • Philantrhopists can’t do this alone, the amount of money is enormous. The country has to do it.
  • There is a general mistake in belief – very few people are making decisions based on the quality of the argument
  • Most people are in a war of some kind or have a particular objective
  • The information that comes out in the media, you can almost see which side is media outlet / person is on
  • How many people do you really believe don’t have a side? It’s almost everyone is on one side or the other side
  • The idea of being able to see things from both sides and come together at this time, and in history, is perceived as being weak or a threat
  • It’s not easy to just say “thank you, China” – it’s politically challenging, there are people threatening “he’s an enemy” for saying that
  • People with forums need to bring in the other side, the people that have the most offensive policies you can think of
  • Open, thoughtful disagreement is a requirement
  • But it is not easy to do right now, in the current state of the world
  • What’s needed: if someone is punching back because you’re saying something that is true and controversial, that is the test? Can you punch back?
  • We must be the better versions of ourselves
  • The stakes are very high
  • This is a defining moment, we will get through it fine, we will restructure in important ways

Published by

Dave Paola

Entrepreneur