In Conversation with Ray Dalio

[Music] thank you very much for that kind introduction and Ladies and Gentlemen please make him feel welcome once again it is the one and only Mr Ray Delio Welcome To abui Sir you thank you very much for joining us and it's such a pleasure and a privilege to have you here so thank you for sharing your time and your insights we've just seen this really fascinating video and I wanted to get your take on first of all what inspired it but also secondly the five forces that you say are now shaping Global markets economics politics countries and Beyond what are they well you understand I'm a global macro investor I'm just basically trying to position myself for what's coming but one of the things that I've learned is that many of the times that I've been surprised by things it's because they never happened in my lifetime but they happened many times in history so there were three big things three are there are three big things still that are happening that Drew my attention to the need to study the Rises and declines of Reserve currencies and all of that and those were an enormous amount of debt creation and also the printing of money and so there's this debt money economic piece that's a big Force the second is the amount of internal conflict that we're seeing in other words populis of the left and the right a populist is an individual who will fight and win at all cost threatens the system and so the degrees of populism that we're seeing are extraordinary haven't happened in my lifetime I knew that they happened in the 1930 to 45 period and of course the third is the great power conflict internationally the changing of the world order in terms of who has the dominance how does that work and of course that's connected to the reserve currency and so I studied those periods and then I dis I discovered the two other big forces the fourth Force um which is actually more powerful than the first three I mentioned is acts of nature droughts floods and pandemics climate the climate issue the cost of the climate issue and all of its implications is an enormous force today and number five throughout history of of course there's technology the inventing of technology so be and they interact and I watch how they interact and by studying that 500 years and the Chinese dynasties for a long time you it's like watching the movie happen over the same time it's not that it's predestined but it's a matter of its particular cause effect if you have a certain amount of debt it's in a different position than if you have a certain amount of assets so so that's what led me to bring it about and I think it's living out that pattern we're talking today about how the world order is changing and how the region the GCC region is becoming an important region it's very classic it's a Renaissance State we're now talking about a Renaissance State here that happens within this greater geopolitical and economic environment so R rello to that point where do you see the UAE sitting on your strength relative to Peak Index right now you say it's a Renaissance State can you elaborate on that um it it's I think it was summarized very well it is a Renaissance State what I mean is it there are three big things I look for fundamentally do you earn more than you spend so is you have a good income statement do you have a good balance sheet are your assets greater than your liabilities do you have a culture in which there's the development of people and the working together of those people to be productive and number four would be are you outside of a great power conflict are you in the middle of the war or are you outside the war and so I look at that around the world as to the places I want to invest in the places I want to be and this region is very very attractive and as is at the takeoff point for the reasons that were discussed in the other sessions so I have a lot to ask you I thought we could begin on one of the main forces which is the financial angle first of all you're speaking to a room full of investors capital allocators A lot of them focused in on the region but also around the world so what would you say is the single most important Market Trend or theme that they need to be looking out for in the year ahead well the single most important Market that that determines all markets is the US Treasury Market right so when we think what are interest rates what is the value of money it is off of that curve that everything is compared to so now the biggest issue is that is that treasury market because we have a situation where the United States has an enormous amount of debt debt is one man's debts are another man's assets and you're holding that treasury bond and there's likely to be a supply demand imbalance related to that so let me just take a second on thinking about that market well you have to have a real return that's not so high that it bankrupts or hurts the debtor without it being so low that it it does not provide an adequate return to the to the lender so the debtor and the Creditor both have the balance that means that you need something like uh in the treasury market something like a 2% real return so when you start to think about well what is the core inflation rate that you're going to settle on I think it's in the vicinity of 3 to 4% let's say let's call it three and A2 that means you have to have a three and A2 plus a two or something to bring a something like an equilibrium so that gets you sort of where the treasury market is and where cash is and then we see how these events transpire therefore rates are not going to come down much now we deal with the supply demand question we're still producing large amounts of deficits which means that you have to sell a lot of bonds the appetite for those bonds is not good for obvious reasons but first of all those who bought the bonds are losing money in the bonds but they are who are the holders the Japanese the Chinese foreign buyers of those bonds and the if you take a world portfolio and you say where is it most overweighted it's overweighted in US Treasury bonds because we also as a reserve currency that's what normally uh we save in the world saves in and then there are other issues geopolitical issues things like sanctions some people worry about being sanctioned in terms of those bonds so we have a situation in in which traditional money and traditional stor hobes of wealth are being uh questioned so I I think that as you start you look at the treasury bond you look at the pricing of equities relative to the treasury bonds and there's not much of a uh premium that of in excess returns so I'm speaking about generalizations of those markets those um unlike um inventions and the the tremendous amount of creativity that's taking place in other areas I'm I concerned about those markets money as we know it is questionable over a period of time and it's connected to the politics too talk to me about how you're seeing the rates trajectory in the United States right now you've been writing recently about how you're concerned about the state of monetary policy in the US what is chair pal getting wrong going from money is free meaning you don't have an interest rate you had no interest rate in nominal terms and a minus 1.7% real return on a bond so you have no interest rate and you had interest only loans so you didn't have to pay back principal so now you have a money policy where it's it's terrible for the lender it's terrific for the buyer and you produce a bubble and then the federal government um hands out all the money they hand it out twice as much money as would be necessary to compensate people for loss of income during that because the world doesn't have enough money so then you have the movement to the in the opposite direction I wouldn't call it the opposite extreme because we've come up with about a 2% real rate on that so you've moved that very quickly to an equilibrium and there's not a control of debt relative to in income you you have a basic uh it the only difference between a country and an individual in a company is that the country can print the money so debt is the same same but you print the money and you devalue the money and that produces inflation so not getting that equilibrium right another words I think that there should be a targeted something like 2% real return I think that there should be um a policy uh to not raise debt relative to income because there's in that that self feeding spiral that when you raise debt relative to income Debt Service is going to mean that you have to it's going to take a larger percentage of income and then when the cycle continues these long Cycles then you need to borrow money to pay your debt and then that spiral begins we are quite close to that let's talk about geoeconomics as well I know this is something that you've been focusing on particularly given one of your risk areas is conflict right now Elon Musk has been in Israel where this truce appears to be holding thankfully but at the same time here in the UAE we have cop 28 coming right at the end of this week so how do you explain what we're seeing in the region right now number one on the conflict is it anything different to what we've seen before and number two how does a country like the UAE respond to this on the cusp of what is one of the most critical events that this country will host this year and perhaps this decade well in the broader sense the bigger sense you have now um a ser serious war in Europe you have a serious war in the Middle East um and you have a change in control you used to have a dominant power and as the video described uh Power drives things and so the United States would have a greater role in influencing things now we're having a testing of power and that's going on in different ways and so we're in a period I think of Greater disorder and then it has a it's in economic implications this is all very much in the cycle that spending money on war spending money on climate you refer to cop 28 that's a good example we have war in the region and we have a climate issue and as was mentioned before the cost of of climate in one way or another either adaptation which was referred to or um coming up with new climate techniques or dealing with the repairs from the damage of clate is estimated really between 5 and10 trillion doll a year one way or another it's going to cost5 and10 trillion dollar a year whatever you spend it on the world GDP is uh 10 100 trillion so that's 5 to 10 so where does all this money come from so that creates a um a money question who's got the money and how does that come and it also creates a wealth Gap issue that has a geopolitical implication so I think that what we're seeing now is in the broader sense symptomatic of those you're seeing who has what power and then we deal with the you know the money question you fig we talked earlier they talked earlier about the north south Gap or the rich poor Gap Country Gap figure it out the indust the developed world it's called the rich world and that's changing it's not the rich world anymore in the same way accounts for 15% of the world's population roughly um and you take the uh emerging World a lot of it it's quite poor how are you going to create that investment in even thinking about the green technologies it's going to be very expensive so this is all representative of that I I want to emphasize as an investor I would say important things are first to know how to diversify well to be in those places that have those four qualities I mentioned before the good income statement good balance sheet the civility um of the people and are in the minim and are the Renaissance states that are outside the great conflict States um I think those important and of course then there's industry and that's all very exciting particularly with the new technologies in the investment Community you are what we would call the smart money so where does the smart money see this situation in the Middle East unfolding in particular this conflict between Israel and Hamas I think the uh issue between Israel Hamas and so on is is a power issue in other words it's a test of power it's a test of the relative powers and the and they and so how do I summarize it um I would say um there's a desire to bring back the flourishing of the region the development you're you're seeing this Renaissance with the uh Gulf countries and so on and to be able to go on and have a prosperity in the region and then there are um the other issues that are very important within the region and it'll be a test um an interesting story to see how that transpires in terms of the you know the relative uh powers and that's then you know beyond my expertise one of the other things you touched on as well was uh the changing World Order and obviously that denotes connotations of the conflict between the United States and China not a physical confli conflict but certainly a competition point when it comes to the outlook here you say the risks of a us China military war have declined but a new type of War has begun so what do you see as the next flash point in the US China rivalry and what does it mean for us here in the Middle East um the war the there's a Chinese way of fighting a war and if you study The Art of War or you see uh how it is it's believed that if you're actually fighting a military war you might not have been smart enough to be able to get what you want without fighting a military war and so the war that we're going to be seeing or the is increasingly the war of a competition behind the scenes uh not as much as a military war right a strategic war and that would mean uh uh you know how does the United States or how does China individually remain strong or or are they weak and then they will take each advantage of each other's weaknesses it'll be that kind of a war the most important thing for any country is to be strong so internally in the United States do we have good leadership are we financially strong do we have social cohesiveness can we work well to be productive and the same questions exist in China and the same questions Exist Elsewhere and that's the best immunization to a war best way be strong WR you're going to be okay um but you there is this new war which is not an overt um military war it is a much more strategic war of more like playing chess or playing go so the leadership in China looks pretty locked in what about the leadership in the United States are you concerned about the trajectory at this point I think we have a question of whether we're going to be able to come together as uh country what the country needs is a strong middle it needs two things basically it needs to bring alienate the extremists bring together the smart moderates to work together and then to be able to make important reforms reforms in the system so that it uh is highly productive together and it creates um reduces the wealth Gap the wealth Gap is a productivity Gap appap you have to make most people in one way or another productive you just can't give them money you have to make them productive there's a productivity Gap that's going on and so if you bring the sides together in bipartisan way and you create a strong middle that's what the country needs in order to be healthy I believe and I think that there's there's a test of that we're seeing right now um in the Republican question there's the question of Donald Trump uh there is going to be um the candidates that are the opposition will after the first one two or three probably after the first three competitions in in primaries essentially um there'll be a single candidate probably the others are meant to drop out to create an alternative to Donald Trump on that side and then there's a question on the Democratic side of uh with uh President Biden being his age and also splits with in the Democratic party there'll be a question of how that'll work so there'll be a very interesting and very important political uh issue and then there are big values and wealth differences that we're going to have to be dealt with after that election and hopefully we can deal with it together in a peaceful way that makes the country more productive what's the best outcome for markets in 2024 from an election perspective um by bipartisan strong bipartisan leadership and then they'll be the dealing with the issues the dealing with the debt issue will be a very important issue the issue of do you let the debts just accelerate because we do not want to enforce a debt limit or do you enforce a debt limit there needs to be structural changes as to how that matter and other matters are dealt with H I guess the question we're asking in the region is what would a second Trump presidency mean for the United States and its role in the world and what would it mean for international markets what um it'll mean probably a uh 10% import Duty on across the board tariffs across the board it'll mean um a a greater trade War um it would mean a greater uh nationalism and a greater challenge to be able to coordinate with other countries um it'll mean um that the opposition side which would let's call it the moderate to uh extreme left let's call it the middle um on to the left will have irreconcilable differences with that it'll mean that we wouldn't get probably uh a lot of bipartisan leadership it'll probably mean that more uh individuals will move to States there'll be more emphasis of what the states that are attractive to be in and others that will change the economics of certain States because um you might have people in in some states New York you know Illinois California you you have the move more that changes the economics and the tax base it'll have all of those types of implications where and and similarly if you had somebody um who was more less bipartisan from the left it would have its similar consequences that's why we need I think strong leadership which is bipartisan leadership and there's a real desire the majority of Americans want uh bipartisan leadership and I think that those two candidates should not be candid presidential candidates you don't think they should be candidates I I I don't think they should be candidates no I don't think they should be candidates for the ver for the issues that I'm mentioning but also because um the majority of people there there's an age issue there is um the control of that issue so uh I would say younger generation who could be by work across party lines would be what the country needs most okay we are rapidly running out of time I would love to continue that conversation but we'll have to move on um Ray Delio we only have let's say one minute left so let's wrap up with some final thoughts on 2024 give me one key risk that we should be watching and give me one key opportunity as well when you look at the year ahead what are you seeing uh on the uh on the key risk the big risk is how we are with each other and that's a internal risk political what's happening in the United States politically will be very important for the world but what's happening all around the world will be very important in terms of that in internal conflict can we get um and in terms of opportunity I think that the knock I think this is a region of opper great opportunity it's a Renaissance state I'm going to use that term again and I think like um also um similarly Singapore and the region of the acon region is a very interesting exciting region so as you pay attention to those regions and those new economies India and so on the very interesting places and and then those that benefit from changes in technology a lot of money is going into the technology companies but the where it's not discounted and therefore still attractively priced and where it's going to have the biggest effect of those who are the great adopters of that to have their productivity improved in a great way absolutely fascinating ladies and Gentlemen please make him fil welcome again Mr Ray Delo