Full transcript
The US debt cycle
0:00Ray Dalio. Good to have you with us.
0:01Good to have you on inside. It's always a pleasure to be here.
0:04Ray, you always talk about the five forces, one of which is the debt cycle.
0:09We have a us with a debt of in excess of $40 trillion.
0:14No one. Not quite surprising that 30 year yields
0:17are headed towards 6%. How are you reading?
0:20What's happening there? I think it's just important to
0:23understand the mechanics. That's why I wrote the book How
0:25Countries Go Broke, because there's a mechanical process and people don't
0:30understand it, and it's really quite simple.
0:33Um, the way it works for, uh, countries is the same.
0:36It works for individuals, except countries can print money.
0:40Okay, but one man's debts are another man's, uh, liabilities.
0:45So, uh, what happens is when debts accumulate faster, then, uh, they're
0:51paid back, then debt service costs grow. And so that becomes a higher and higher
0:57percentage of one's cash flow. And when that happens, it starts to
1:01squeeze out spending. And so then you have a problem.
1:06Um, so in the United States. Um, so we have that dynamic as it
1:11squeeze it out. Then also one man's assets are another
1:14man's liabilities for debt. And so you have to think about what are
1:18they holding. And is it holding wealth.
1:20And is it effective. So those are the two drivers.
1:23And so what we're seeing now, for example, on the U.S.
1:27debt is that we spend about 7 trillion a year.
1:31Think about this like a business or an individual.
1:34They spend seven okay. They take in five.
1:38Okay. Spending 40% more than they're, um,
1:42taking in. And they've been doing that for a number
1:45of years. So as a result, debt and debt service
1:48payments are building. And as a result, they are squeezing out
1:53the spending. So we have that kind of a dynamic going
1:57on. Um, then we also have, one man's debts
2:00or another man's assets. And so when you see interest rates rise
2:05naturally because of this supply demand imbalance.
2:08It produces losses in those assets. And so think about bonds as an asset to
2:14hold and how bad bonds have been. As interest rates rise.
2:18And that has an effect. So we have that picture from from from
2:23when you were trading. Right.
2:24Because I mean, you benefited, uh, from investing in government debt for a very
2:29long time. For 50 years.
2:31Yeah. Would you do it differently this time
2:32around? There's always a be long and short,
2:35depending on the nature of the cycle. Right.
2:38When things get worse. But what we have now is a situation
2:42where, um, there's the rate at which it's compounding the size of it.
2:49You know, why does the market go down? The market goes down because there's too
2:53much debt and we're adding to it at that rate.
2:56So, uh, and then we're approaching our limits.
3:00Okay. And then there are geopolitical changes,
3:03you know, the that the United States could run large deficits.
3:08But now because of conflicts, we also have a dynamic in which those who want
3:13to hold US debt, they're holding too much already.
3:16So we have that dynamic going on. Um, and you could see it if you were to
3:23just, um, calculate, um, which is in the book I wrote, you know, how countries go
3:28broke the big cycle. Um, it it shows how that debt service
3:32payment then is squeezing out spending. And so you can see that dynamic work.
3:38So is a debt crisis imminent in the US with yields 30 year yields headed
3:44towards six. Yes.
Interest rates and sectors
3:47In other words, within the next 24 months, 36 months I think within the
3:52next three years. Um, um, what we have is, um, uh,
4:01that issue of, um, that squeezing it out.
4:05And so when you take a look at literally what that means and then what the impact
4:09of that is going to be on asset prices and, um, interest rates matter.
4:15So you have um, uh, a boom which is concentrated in one area really, that is
4:23heavily, um, debt finance didn't used to be, but you could see as that that cycle
4:29happens that what happens is increasingly where it used to be equity.
4:33Now you have to go to debt. And um, that plays a bigger role.
4:38Uh, you got to wonder is 6% is just a psychological level, or would 6% carry a
4:44lot of macroeconomic risk? How might that play out?
4:47If we get to six and is six actually the ceiling might be see six and a half.
4:52I think I think that, uh, you don't look at the interest rate.
4:57It'll have an effect. Of course, you look at the interest
4:59rate, but what I mean is you look at what is the amount of savings, what is
5:05the total amount of capital and what is the demand for capital.
5:10And when you get that imbalance, that supply demand imbalance, then you have
5:15to have the price of it go up until you ration that demand.
5:20So you have to ask yourself what is it that's going to be rationed to it in
5:25that. And and so then we're dealing with it's
5:29not going to be government deficits because they're inelastic.
5:33And in other words, in fact if you had a worse economy they would increase.
5:38So then you find out who would the sectors that are squeezed out.
5:43Is it housing? Housing would be quick.
5:46But with such a large difference in financial conditions of the wealthy and
5:51the poor, you're going to see that happening more at the lower end of that
5:56spectrum. So is it auto loans?
5:58Is it those kinds of loans. Then get squeezed out first.
6:03And uh, something like data centers uh, come later.
6:07And so that's why you start to have more of a wealth conflict because, um, then
6:13the, the people who have less get squeezed the most in that part of the
6:17cycle. Given the current environment you have
Capital flows and geopolitics
6:19said before, the capital isn't necessarily gravitating towards a US
6:23anymore. Where is it going?
6:25Well, the magnitude we're talking about the enormous magnitude.
6:30So, yes, um, the United States now is running large deficits and it is
6:36receiving a lot of capital, however, that because of the changes, foreign
6:42capital represents about a third, almost a third in the amount of money that
6:46we're relying on in terms of debt. And that is also then coming has been
6:50coming from, um, the Chinese and the Japanese.
6:55Uh, they've constituted a high percentage of that debt.
6:59And so and then there were other countries and the Middle East and so on.
7:04But they're starting to get squeezed. And also there were these geopolitical
7:09issues that enter into it. So, um, the Chinese don't want to
7:14continue to accumulate. There are geopolitical issues as well as
7:19economic issues. When you have a debtor creditor
7:21relationship and you have an adversary relationship, that's a very difficult
7:27dynamic, particularly the sizes. And then Japan, Japan has lent a lot of
7:32money because of other, uh, desires to change their economic policies in ways
7:39that I would describe. They've left a lot of money.
7:42Now they want to take back some of that money, a lot of that.
7:46So not only do you have the total size being very large and the size of our
7:51deficits are very large and total financing needs is very large because
7:56it's not just the fiscal deficit of the government.
8:00It is also the I and other large expenditures.
8:04So where does that saving come from? That comes from those sources which are
8:09tightening. And that's why you're seeing the changes
8:12in interest rates. In other words the interest rates
8:15change. It's like the cut.
8:16It is the cost of money. And when there's a supply demand
8:19imbalance, you see then interest rates rise to ration credit.
8:24And that's what we're seeing. And when it comes to debt concerns it's
8:28not just a us I mean take a look at Europe, France in particular.
8:31We saw the massive selloff and some concern that we could see contagion
8:36risks on the back of that. Do you see that happening.
Contagion risk in Europe
8:39Well it's it's the European situation is the same.
8:43And because there is a lack of adequate borrowing, I imagine you've, um, in
8:50Europe and large parts of the United States, you've lived on the borrowing
8:55and then, um, you know, when you reach your borrowing limit, as France has
9:00done, then there's a bind, because then you cannot continue to add to that.
9:05You have to start to run budget deficits, because you almost get to the
9:08point where you have to pay back. In other words, if you borrow, you have
9:12to pay back. And when that happens, then you have a
9:16situation very similar to that. So now you see the desire for greater
9:20taxation. You see people leave, you see whether
9:24they're from France or whether parts of the United States they leave.
9:29And then that, uh, creates a problem. So France is in that particular
9:34position. But it's a European problem too.
9:37So we can see that there's been too much of that debt.
9:41And then of course, it's gone down. So when it's gone down it's like an
9:45asset bonds. And as interest rates rise bonds go
9:49down. And so look at the difference in the
9:52returns of bonds and equities as a result of this, they have been a
9:57negative reinforcement. So now you're seeing money wanting to
10:01leave some of these asset classes. When the supply demand imbalance is very
10:06large. So a contagion is inevitable right.
10:09I guess Europe is concerned that all the capital markets are competitive and we
10:14all have that supply. And but but when we look at the United
10:18States and we look at any country, there has been losses in these bonds.
10:24Right. And so by this dynamic rate we talk
10:28about concerns within the debt market. Yet when you take a look at the equity
Equity markets and AI hype
10:32market, the rally remains intact, especially in the U.S..
10:35Can that continue at equity. Uh, equity um, has always has a higher
10:44expected return than bonds. So what happens is that, uh, it's quite
10:48normal for, uh, equity prices to go up. So keep in mind when prices rise, future
10:56expected returns go down right. And similarly the reverse for bonds.
11:02When bonds go down, then equity then expect the returns for those bonds the
11:08interest rates go up. And so you've seen a convergence of
11:11that. You've seen both of those things happen.
11:14So Abi so the expected returns of equities have gone down as the multiples
11:21rise. And now they're expect the returns are
11:24quite close to each other. It started off where the expected
11:29returns of equities were much higher. So now that cushion between those two
11:33expected returns has narrowed. So when we talk about stocks seeming
11:38expensive and then we do the present value, we use those interest rates to
11:43calculate the present value of future cash flows.
11:46You could see that stocks are expensive by most of those measures.
11:51What that means is the question is, is, is Lynn narrowing?
11:56And so now as we are sitting here today and you see interest rates, you will see
12:02greater interest rate sensitivity to other asset classes, particularly
12:07equities. So at what you level do you think might
12:12we see a collapse in the equity market. Uh right now that cushion of a if you
12:19calculate the present value of future cash flows which every that's what you
12:24use the interest rates and take the present value of.
12:27We are now at a level which is very close to those having approximately
12:34equal, um, present values of cash flows. No one knows exactly what that is in
12:39terms of those cash flows. But you also have a highly concentrated
12:43equity risk. In other words, a limited number of
12:47stocks related to AI particularly and related to that future is a dominant
12:53consideration. So this issue is not just that cushion
12:56which is now disappearing and becomes a little bit more vague.
13:00It also means that there's such a concentration on one thing, and that one
13:05thing is really AI and the implications of the growth of the I.
13:10So I think that you're seeing the hyperscalers begin to encounter issues,
13:16in other words, before they would raise equity.
13:19Okay. Now they're, uh, now they need to come
13:22to debt in terms of more. And so you're starting to see those
13:26limits, uh, being hit. And then as you're going forward, those
13:30returns. I think that there's a shift in those
13:33returns to more toward not only the not the super scalers, but a broadening out
13:38to those entities that can make money from all of this.
13:42In other words, uh, there's the making of AI, but there's also the using of AI
13:48and the using of AI to make great transformations.
13:52I think we're going to see, and we're starting to see more of the rotation, to
13:56the impact, to great the present value. I think they've largely been overlooked.
14:00Before I pick up on I, I just want to pick up on returns.
Systemizing investment with AI
14:05You know, you famously made your bed in your own garage, you know, but now you
14:10see those pot shops, those humongous hedge funds, Citadel millenniums,
14:15sucking in all the money, but not necessarily having the kind of returns
14:19that they should be with that skill. Have we seen the peak of how
14:26those pot shops, you know, can have outsized returns?
14:32I think, um, you know, if you're referring to my
14:37creating Bridgewater or building Bridgewater, which is I think it's still
14:42the largest hedge funds in the world. And so, um, I think that, um,
14:48we are now entering a new era that was, um, in which there's the ability to use
14:54AI to make money in the markets. Right.
14:58So systemizing decision making in terms of creating investment management
15:04systems is the is the future. So I think it's a terrific opportunity
15:09for everybody. Uh, everybody's going to increasingly
15:13have the capacity to make money in different ways if they really are
15:18smarter because it's alpha. If you're creating alpha, then you can,
15:23um, have, uh, great results. I started Bridgewater out of a two
15:27bedroom apartment. It became the largest hedge fund in the
15:30world, and others are doing it. That's the normal path.
15:33So I think that using AI as an as a tool.
15:38Um, I, when I describe I began in 1956 and it's had all different forms.
15:46The idea of systemizing your your decision making, understanding the cause
15:51effect, relationships and using AI to make money in the markets is a great
15:57opportunity for a lot of people, and so the ways it's going to happen will
16:01continue to evolve, and the basics of it is going to be the same.
16:06So yeah, I think that, uh, you're going to see that evolve and, um, you know, in
16:10that way. And the key is you've got to be
16:13competitive in that. You talk about how I will contribute to
Identifying economic bubbles
16:18productivity, but we're also seeing a bubble.
16:21Correct. What are the signs?
16:23They're all. They always come together like I do.
16:26Uh, I've studied the last 500 years of history because, uh, things that
16:30happened before in my lifetime, I realize are happening now.
16:33And so I needed to study that 500 years of history.
16:36And what you see is, uh, for example, I think about the late 20s prior to the,
16:42uh, bust in the late 20s. It was the first time you had
16:47electricity and houses. So you had, uh, Refrigeration and you
16:51had lights. You have first time you had cars, first
16:54time you had airplanes. First time you had the music, um,
16:58movies. First time you had radio.
17:00So all around you, you're seeing this tremendous, uh, innovation that
17:05everybody knows is going to change the world, that everybody wants to bet on
17:08it. But you produce a dynamic as a result
17:11that everybody's excited about. And they say, I'm going to buy it and
17:15I'm going to borrow to buy it. And that creates a big difference
17:19because there's an important difference between wealth and money.
17:23Okay. Uh, wealth is in a sense, easy to
17:26create, but you can't spend wealth. You have to sell wealth in order to get
17:30money to spend it. And so when there's a lot of borrowing
17:34to buy those assets, or there could be even a wealth tax where you need to sell
17:39wealth in order to make money, then you have to then you have a bubble bursting.
17:44And so what we see right now is, uh, that kind of a dynamic going on in terms
17:50of, um, uh, not looking at the price and by, uh, necessity, it's imperfect
17:57because there are those in this new technology where there's a lot of future
18:01that's not precisely known that, um, you can't under invest and compete, right.
18:07And you're probably going to over invest and compete.
18:09So that dynamic goes on to create a bubble.
18:12What creates the bursting of a bubble is the fact that you need cash, and you
18:17start to convert the wealth that you have.
18:21You sell the wealth that you need to do that something like a wealth tax would
18:25have that effect, or having to pay back loans traditionally has that effect.
18:30So there's that dynamic that we have that is going on, and we have to keep an
18:34eye on keeping to the threat or the threat of bubble bursting.
18:39Do you see that bubble bursting in markets like Korea, in markets like
18:44Taiwan, where they've, you know, attracted a lot of eye CapEx?
18:49Has that been misallocation? Well, at, um, it's been fantastic in
18:54terms of the productivity. But what is also happened is they've
18:58gone beyond what their own productivity is, and then they're buying all around
19:03the world. And so they're actually, uh, taking all
19:07of that money in and all that productivity.
19:09And then they're investing it all around the world and they're having a problem
19:13with that. So that's those are good cases of
19:16bubbles beginning. You see the type of bubbles bursting.
19:20You see those price dynamics. And so yes, I think it's um, that the
19:24nature of that beast. But that's not systemically threatening.
19:28But we do have one thing. I, for the most part, a limited number
19:34of companies. And we and it is a very uncertain thing
19:38in terms of present values of cash flows.
19:41And it is a very now expensive thing. So I think the the lesson there is, um,
19:47you know, how do you diversify. well.
19:49For example, I think that those companies that haven't, um, that are
19:54having transitions in their, in their business models that can do a lot better
19:59either in revenue or cutting costs. Generally speaking, have been under
20:03looked. Um, but yeah, you know, I think that
20:07there's that kind of risk that we're under one of the five forces is
20:10geopolitics. I want to bring in us, China.
20:13Do you see a bifurcation? I mean, in terms of technology, in terms
The US-China technology war
20:17of, you know, capital? How do you see this playing out?
20:21Okay. Throughout history, and certainly today,
20:24technology is both an economic battle and also a military and
20:33geopolitical ballot. So we have that.
20:37In other words, you have to be a winner of that technology war.
20:41And there's two different approaches to this.
20:44Um, the Chinese are um, um, picking certain things.
20:48Um, uh, like robotics. Um, and they're, um, uh, just a little
20:54bit behind in the development of, uh, the frontier models catching up faster.
21:00But just six months or it depends on the particular models.
21:04And because they're largely many of them are open source and because they're very
21:09inexpensive. Okay, there's much greater usage of AI
21:14in China. In fact, in the United States now, we
21:17have the issue of whether there's going to be putting a brake on the development
21:21of that. So, um, and so there's that competition.
21:25That competition is to some extent or significantly restricted between those
21:30two countries, but not in the rest of the world.
21:32So, yes, I do think that there is an AI war in terms of the economic war, and so
21:39does involve the rest of the world, because the U.S., it does involve the
21:42rest of the world. It's not confined to the two, because
21:44the U.S. is now saying choose either the U.S.
21:48or China. I know, but the rest of the world.
21:50Most of the rest of the world is not being forced to choose those.
21:54Okay, most of the rest of the world, um, can pick essentially what it was.
22:00It depends. There's domains, but you're you're
22:03seeing the world basically break into these domains.
22:07There's the Americas. Okay.
22:09Think about the Americas. And that's becoming very much like the
22:14tribute system. In other words, that is the American
22:17domain. And then there is more and more the
22:20Asian domain okay. And with a dominant power, um, being
22:25China and so on, with the United States then receding, um, from those
22:31relatively, uh, different domains. And I'm, well, this world competition,
22:36you have that particular dynamic working.
22:39So we see the change in the political or the geopolitical orders.
22:44Here we are in Asia, okay? And we understand in a sense that it
22:48won't be the same. It won't be like it was where there was
22:52a belief that the United States will be a countervailing influence to China in
22:57the region. And so that dynamic means that there's
23:00going to be much more regionalization. And then there were some domains where
23:04then they will compete, like in Europe or the Middle East, and each will make
23:09that. But that domain in terms of um.
23:12So you're going to see, um, um, the Chinese be very competitive.
23:18Who will win where you say it is a tech war that has to be a winner.
23:23Who will be the winner? Uh, um, I don't know, uh, hazard a
23:28guess. Um, I don't, I don't know, um, who will
23:32be the winner? I, uh, I think that what I'm saying is
23:37the most important thing is how we are with the ourselves internally.
23:43So, for example, in the Western democracies, the real question is, do we
23:48work well together? Do we?
23:50Um. No, not only in terms of the rich and
23:54the poor and the left and the right and education.
23:59In other words, to be the best. There's the United States has a great
24:02capacity of innovation and being cutting edge.
24:06Um, in and in China, there is large numbers of highly educated people that
24:13together will be very, very, uh, innovative and very controlled
24:18internally. I would venture a guess that there is
24:21less political risk in terms of disruption of those things these things
24:26represent than the competition. I can't tell you how that's going to
24:30work to, to some extent, because the Chinese have done such a good job of of
24:36combining AI. It doesn't have to be the most advanced
24:41AI. AI being used less advanced in
24:44manufacturing is a tremendous advantage in terms of actually and embedding it
24:50into manufacturing, having products. That's why Chinese exports all over the
24:54world are expanding. So I can't tell you how that's going to
24:58play out. But I do know there's one thing is
25:01whether that can be done peacefully, okay.
25:04And whether that can be done mutually productively.
25:07I just want to jump in before we wrap it up.
Investor risk concentration
25:10I mean, what is the one thing investors have to think about as they digest
25:15what's happening in the world today and decide where to deploy the capital?
25:18Okay. Um,
25:21the risk. Concentration.
25:24Okay. The risk,
25:27um, of being too concentrated in one particular asset, particularly that
25:34which is very exciting, such as AI. Okay.
25:37That risk concentration. That is the most important.
25:40But you also have we have to leave it there.
25:43Thank you. Ray Dalio of Bridgewater Associates.