The Changing World Order

[music] Thank you your excellencies and thank you Sarah uh and thank you ADGM and thank you all for being here at this session today. It is a greater pleasure for me to be here than you can imagine. You see I've been coming to uh Abu Dhabi for over 30 years. So I've seen it evolve from the guidance of its remarkable leaders beginning with Shik Sed. I mean just imagine he was the father of the country and the father of the leaders who built this place which required a tremendous amount of talent and vision.

And by the way, if you want to see how Abu Dhabi got to be Abu Dhabi as we know it, I recommend that you check out the new Shik Zed Museum that is in the new remarkable cultural district where it has five museums. It's something else. because I know Abuhabi so well and because I've found here the meaningful work and the meaningful relationships that I want more than anything else. I'm happy to be here today at Abu Dhabi Finance Week's fourth year and hopefully uh to be of some use to you. You have been all drawn here for your own reasons.

It is probably uh a mix of how wonderful Abu Dhabi is in offering what you are looking for in a world that's also um troubled in many places. And so you've come as a result of how the world order is changing. I hope that in my 15 minutes I can be of some help in putting things in perspective. Because I've been a global macro investor for over 60 years and this is an investment conference. I've been asked to share my very global very macro very long-term perspective about how the world order is changing.

To begin, I want to tell you how I developed my perspective so you will understand uh where I'm coming from and also I think you'll see why history rhymes. Uh then I will discuss the big forces uh that I see that are shaping the world today. I got my start investing when I was 12 working as a caddy at a time when the stock market was hot. When I caddied, I talked about stocks with the people that I cattied for and took the cadding money I earned and put it into the stock market. The first stock I bought was Northeast Airlines.

And the only reason I bought it is that it was the only company I ever heard of that was selling for less than $5 a share. And I figured I could buy more shares. So if it went up, I'd make more money, which was obviously dumb. But Northeast Airlines was under $ five dollar a share because it was about to go bankrupt. But it was acquired and tripled in price.

And I thought this investment game is easy. As we all know, this investment game is anything but easy. The meme at the time in the 1960s was that the economy was well-managed. So the best approach to investing was dollar cost averaging. In other words, when the stock market dipped, buy more.

Quite like the meme today. But in those days, in the 1960s, the US government got into a lot of debt because it ran deficits to finance spending on social programs and the Vietnam War. In the summer of 1971, between graduating college and going to Harvard Business School, I was clerking on the floor of the New York Stock Exchange. On Sunday night, August 15, 1971, President Nixon got on the television to tell the world that the United States was defaulting on its debt, though it didn't say it that way. You see, at the time, money was gold and paper money was like checks that one can turn in for the gold money.

The government defaulted on its promise to let people get the gold because it was it created a lot more debt than it had gold in the central bank. So, it had to default. Money as we knew it ceased to get ceased to exist. The next day, I walked onto the floor of the New York Stock Exchange, expecting the stock market to tumble on the dollar's devaluation, but instead it soared. I was surprised because that was the first currency devaluation that I'd been through.

So, I didn't understand how they worked. Later, I studied history and found that in March 1933, President Roosevelt had gone on the radio and made the exact same announcement for the same reason. And it led to the same result. And I learned then that when there were big government debts that couldn't be paid, the government would probably print a lot of money, which would devalue it. This would make it appear that other things had gone up which we call inflation.

But the most important lesson was that I needed to study big events that happened before my lifetime. This is what led me to study and learn about the mechanics of the great depression which led me to anticipate the 2008 financial crisis and the 2010 to 15 European debt crisis which led my company Bridgewater to make a lot of money for our clients when most investment managers lost a lot of money for theirs. I'm now at a stage in my life that I want to pass along what I've learned to help others be more successful rather than make myself more successful. So I'm focused on passing along what I've learned in my books. Uh so I've written a couple of books about these sort of things and they're available outside I think if you want them.

I want to now take a few minutes to give you a picture of the big historical patterns and forces that I'm closely following to understand the events of today. About five years ago, I observed that uh there that what is happening now with debt, internal conflict and the international great powers conflict had never happened in my lifetime but happened many times in history most recently in the 1930s. This led me to study the rises and declines of reserve currencies, their empires over the last 500 years, which was enlightening. I saw that there were five big forces. I put them up on the board here.

Uh the first is the money, credit, debt, economic machine. It works like a machine that creates the monetary order and disorder cycle. In a in brief, credit is in a circulatory system, the economic circulatory system, it provides buying power. And if that buying power is used to make good investments that pay off the debt because credit creates debt and if it pays off the debt, you have a healthy economic order. But when that continues to rise and debt rises relative to income and debt service rise relative to income, it squeezes out debt service.

It squeezes out spending because debt service payments rise relative to incomes and we could see that. So it's like plaque growing in the uh in the in the system and that's now what's happening and we could watch it. The second influence which is related. All three of these first uh three are uh cyclical in a big cycle and they interrelate. So money matters to politics.

So there's a domestic political order and disorder cycle that is due to wealth and values gaps. And when they become irreconcilable, we have populism of the left and populism of the right having these great conflicts which then threatens the domestic order. And that's what's happening in a number of countries now. And the third great influence which is also cyclical is the international geopolitical order and disorder cycle that is caused by great power conflicts. As we know all orders, all world orders change.

All monetary orders change. All domestic political orders change and all international orders change. The ones that we're in now started in 1945 after World War II, the American world order, and that is now changing. It used to be a multilateral world order, and now it's becoming one of greater conflict. And so those three cycles operate and evolve together.

The fourth influence through history is acts of nature. Droughts, floods, and pandemics have actually killed more people in wars and toppled more orders. And the fifth force which we're certainly seeing now is mankind's learning particularly of new technologies like AI which is certainly going to change the world order. In my studies I've learned that in such turbulent times even in the worst of times when there were depressions and wars not all countries suffered. In fact, the neutral countries that were financially sound and stayed out of wars prospered.

I also learned that there are only three things that countries need to do in order to be successful. First, educate your children well so that they can be productive and civil. If you have productive and civil society and children who grow into adults, that is the great power. Second, have a system that facilitates being people being productive and civil and operating fundamentally soundly like being financially sound by earning more than you spend and saving more than you owe. And then you're financially sound with this talent base.

and third avoid destructive domestic or international wars. So nowadays you will observe that it is the special most desired countries that have these qualities. That is why I and my family and many others and happily are happily spending time living and working in uh in the ab in Abu Dhabi and uh the region. So I many of you are new and I just want to encourage you to think about those fundamentals and and I imagine that they are what's attracting you here. So welcome to Abu Dhabi Finance Week.

I hope that I'll see you at one of my other sessions and I hope that you'll get a lot out of this conference. Thank you very much.

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