The Changing World Order & the Power of Diversification — ft. Ray Dalio

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That means they want dick, jokes Ed. Well, I'm here to give the people what they want. So I'm praying on the side of the bed at night, I'm being very contemplating, I'm asking for guidance.

And my wife says, just get hard, I'll guide the sucker in, and I say, that pisses me off. I bet you couldn't tell me something that makes me both happy and sad at the same time. And you said, Fyi, you have a bigger penis than your brother.

ED What do you call? What do you call someone who doesn't masturbate? a liar?

Welcome to Prop G Markets. Today, we're speaking with Ray Dalio. Oh my god, he's going to freak out when he hears this. Founder, co-chief investment officer and board member of Bridgewater Associates, arguably the best investor in the history of the West or the planet. I guess I'm sure someone will come back and go. Actually, technically, Napoleon was the best.

But from a pure Roi standpoint, Ray is arguably the best investor in history. Also a nice, thoughtful man. But first here with the news is Prop G Media analyst Ed Elson. Before we get to.

So if I'm bad on this podcast from now on, just don't blame me. Well, you're.

All right.

Now it's the time to buy, I hope.

And, finally, the U.

S Surgeon General is calling for warning labels on social media to alert parents about the negative effects platforms can have on children's mental health. The labels would be similar to those on cigarette packages and would remind parents that social media has, quote, not been proven safe. Scott, Any thoughts?

It's actually, you know, shared office space kind of makes sense in a post-Covid economy. Virgin Galactic never made any sense. Companies are one of two things. They're either supply constrained. So if you're boeing no matter how fast, you need an aircraft carrier or a Boeing 777. You know, nine women can't have a baby in a month.

They're supply constrained, and then there's demand constraints, and the majority of companies are demand constrained. And that is almost as many Nike shoes as people need they can produce. It's just not a complicated product.

With Virgin Galactic, what you had was a company that was both exceptionally supply constrained. Sending people into space is exceptionally expensive and dangerous, right? They never launched on time. It's really hard, it makes no sense.

It's fraught with risk and also demand constrained the number of people who want to spend $400,000. To go seven minutes in the air, feel nauseous and then float back down. There just aren't that many people that are that fucking stupid and rich.

I don't even know what it's trading at right now, I just know it's overvalued, this thing is going out of business. Any thoughts on Virgin Galactic?

I think it's actually a really bad call by them. Because I don't think there's basically any worse signal that you can send to the market than, oh, we're going to need to reverse because the stock is so cheap now. What they've done by doing this, though, is they've brought more attention to it. Now they have to deal with people like us talking about how bad the situation is. People are going to hate what they're seeing, which I think will increase the selling pressure on this stock.

I would not be surprised if six, seven, eight months from now they're in the same position as they are today. Which is, the stock has fallen so far again that they have to contend with another reverse stock split. It is fascinating how far this company has fallen. I do also want to give you credit because you called this basically earlier than anyone. From the very beginning, you said this was a shitty company. And then we have the recording as well from last year, where you predicted it would go to zero.

Do you have any predictions for us?

I don't know who they sell it to, but I just think this thing is just, you know, anyways, Enough said.

Let's bring in Claire. Claire seems more adventurous than either of us. Claire, would you go on Virgin Galactic? No.

Look, the other stat that you guys pulled up here. Since Chamath sold his personal stake, by the way, I don't even know if he went on this thing. And I know he didn't go on this thing. I know he didn't do it, but since he sold his personal stake. He just wanted to go on CNBC and talk about how it was a software company, I remember him saying this about this company, there was actually a software company.

Since he sold his personal stake, the stock is down 98. I mean, I wonder if him and Keith Rabois just get together and are like, have, like, let them eat cake parties.

Sam Altman Considering shifting Open.AI to for-profit? Well, that's a shocker. I mean, Ed, I'm shocked, I'm shocked, I'm shocked.

He shifted it. It's always been a for-profit, so at least they're coming out of the closet and saying, Hi, my name is Sam Altman and I'm a for-profit person. It's got a valuation of 86 billion, and, to your point, actually, at that valuation, it's undervalued. They're running away with it.

By the way, Sam, if you give me allocation in the IPO, all is forgiven, all is forgiven. I think it's a great company and I think the move to for-profit makes a ton of sense.

The most irritating part for me, though, is how we all fell for it, and actually not you. And I didn't really fall for it. But the traditional media, for sure, fell for it. Every news outlet, even the most credible ones. I remember this, they were all saying things like, You know, OpenAi is different from other companies. Because OpenAi is what's known as a capped profit organization. And what they forgot to mention is that capped profit is a made-up term. It was invented by, you guessed it, OpenAI. It's totally fake, it's meaningless, it has no legal basis. And yet it was reported on as if this is something that you know that other companies do. No, the answer is we have NGOs and we have companies.

This was a company.

Whoever these guys, he is really making a difference. He's talking about the loneliness epidemic, he's taking on big topics and I just think the world of him. Also, Eddie has really good hair, which I think is important in a leader.

I think it makes him much more effective. Hashtag Why I'm not running for President? I was very cynical about labeling, and then someone I don't know if it was you guys showed that. There's some research that shows that just putting that label on cigarettes actually does help. It reminds people every day that they're making a bad decision.

Having said that, I think all of this is incremental change. We have to age-gate social media. There is no reason anyone under the age of 16 should ever be on social media. And unless you have collective restrictions where everybody is off of it. It's actually worse for the kid whose parents decide, Oh, we're hippies and we don't believe in screens, we're taking their phone away.

Guess what, your kid doesn't know what's going on, your kid's not invited to anything, your kid is ostracized because they're not on snap.

So unless there is collective legislation. And then it just fucking cracks me up and sort of like, I'm really pissed off that they're saying there's first the big tech saying there's First Amendment issues. You should see what happens when my kid decides he has free speech rights in his house, when he decides to assess the situation open and freely. Yeah, okay.

Anyway, I don't know where I was going with that. But until we have age-gating and then they say, Well, how could you do that? how could you pull that out? They know how much you weigh. They're like, Oh, it's a 5'11 girl who's 95 pounds, who's having suicidal ideation. They know exactly what content to give her to normalize suicide and get her addicted to extreme dieting sites, but they don't know her age.

It would be so easy to do. Do you really think that Medicare is about a 14-year-old's?

But honestly, the takeaway for me on this is that any progress is good progress. Because we've been talking about this for so many years, you've been talking about it for as long as I've been a fan of you, which was since high school. We've seen literally no changes in policy, it's just laughable the lack of progress we've made.

Is this demonstrative, illustrative of the lack of progress we've made? Yes, but it's still progress. As you mentioned, there are studies that show that these warning labels do have a certain level of impact on cigarette smoking behavior. It's not going to solve the problem, it's not going to reverse the fact that we have depressed the majority of teens in our nation.

In my view, it's something, it's a start. Honestly, given our track record, anything is good enough for me. I'm just worried that when.

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There's so much to get into, so I'm going to get right to it. I want to start with the premise of your book, which is principles for dealing with the changing world order. And you've studied how empires rise and how empires fall over the past several hundred years, and you've said that, generally speaking, empires collapse. For three main reasons. The first is debt that we're borrowing and printing money in excess, which leads to inflation and defaults.

The second is internal conflict, so polarity within a nation, and the third is external conflict. So there's a rising power that contends with the position of the leading empire. This all sounds like America, so I'll start with a darker question, which is?

It is in relative decline. And so each of the three factors that you described are very, very relevant. And I should say that I discovered two more, which are acts of nature. Droughts, floods and pandemics have killed more people than wars and changed more orders than any of the first three I mentioned. And then, of course, man's inventiveness and technologies have also created big, orderly changes.

So all five of those are at work in the United States, and four of those are becoming worse. One of them, the technology one, may be a great breakthrough for productivity and is also a risky one, depending on how it's used.

So that has a money implication, and it also has a geopolitical. And then you have the fourth, which is the climate issue, which is a very expensive issue, and then you have these technologies. I would want to emphasize, if I was to say one thing that is most important, that one thing is how we are with each other. In other words, the capacity to deal with all of those things in a way that is both smart and doesn't produce fighting.

If we produce fighting, we'll have a terrible, terrible set of circumstances. If we can rise above that, we can be very effective. So the number one thing?

The Middle East ranked like 16th out of 17th. So it's clear that the media, I don't want to say, has over-dramatized it, but it's not as big an issue with youth as the media would have. You believe? What was shocking was that number three, I believe, was the deficit. That young people see, the economic situation, that they're being left, and they are really concerned about it. That's a backward way, or reverse engineering into a question about the deficit. We're spending seven plus trillion dollars, taking in five.

And I hear about modern monetary theory that maybe deficits don't matter anymore, and putting points on the board give us your view of deficits. And do you buy this notion that our generation isn't paying it forward the way previous generations have?

The first part of the question is, it's very simple. There are debtors and there are creditors, and the system has got to work well for both. One man's lending has got to be rewarded to compensate for making that lend. And so you have a process if you accumulate debt, you are accumulating the need to pay back in real terms.

You have to pay back the principal and you have to pay back the interest in real terms, otherwise nobody's going to want to lend and the system doesn't work. And the two issues that you have a choice of is to pay that back in hard money. In other words, money of value that's of comparable value. Or you have to print money and you pay back in deflated money. And so what has happened over a period of time throughout history? These cycles, by the way, go back to the Old Testament years of Jubilee, and the same cycle always happens.

And there's a tendency for debt to rise relative to incomes that are needed to service that debt. And so you see different societies in our society. We have high debt service costs, which then will rise as we have large deficits and large amounts of money to pay back. And if that balance is not well achieved, so that the creditor does not receive an adequate amount of compensation, they will sell that debt, they will not hold that debt.

And so it's not just the amount of new debt that's created, it is also the amount of debt that is outstanding that could be sold. And therefore create a huge imbalance between the amount to be sold and the amount to be bought. And so in history, it's all repeated in the same way when that time comes, where they have to do that, when they do that selling. And central banks come in and they think they're saving something because they're printing the money in order to pay back the debt, as had been done. Monetization, as we call it, that, that creates a bad compensation and devalues money.

So that's the mechanics, so there's no getting it around it. It wouldn't be wonderful if it was like that, that you could, just that debt didn't matter, and you could keep borrowing, but think of it as just.

You're borrowing a proxy for stuff and it has to be paid back. Scott mentioned that, you know, the third issue.

Because it feels like we've had all these no-go numbers about what is too much debt. We're now at 123 percent debt to GDP. But there are other countries that have higher numbers Singapore has 130, Italy is at 150..

Japan's at 260.

They've been above 100 percent for more than two decades, and it feels like throughout the last, you know, 30-40 years. There have been many moments where we said we're on the brink of collapse. This is too much, so I'd love to get your view on when. What is the time frame you think for when this is going to get really bad?

And when it does get really bad, what would that actually look like? What happens? And Japan is the worst.

So the next thing I think that you're going to see with the in the United States is you're going to see a squeezing of consumption. So at the federal government level, as the debt service payments are rising and the debts are rising on those, you're going to see the squeeze. There's very little room between entitlements that are fixed payments and the actual revenues that are coming in, you're going to start to see that squeeze. The real issue will become if you start to see the selling of those bonds. When exactly that happens, you know, I can't tell you.

Cycles The business cycle lasts about seven years on average, give or take three years. So I can't tell you exactly when it will be, but I would say it's probably most likely within the next five years, something along those lines.

There's always alpha or dislocation in times of disruption. Given the things you've outlined, given that you have, arguably people think of you as having some of the best perspective on markets and cycles, where do you think there's opportunity or dislocation in this market? If you were? We're going to talk in a minute about young people and investing, and I imagine that's more about diversification and low cost funds. But if you were going to take some kind of outlier flyer bets, that could have the type of extraordinary return that some of these individuals recognize. When the subprime market blew up and everyone was, it's like, and you don't know this, it's all about timing.

In 1997, the economists called the Dobb bomb implosion perfectly, but they called it two and a half years early, and the market went up another 40. Where do you think? If you were to say, if someone came to you and said? I'm going to take a little bit of mad money and invest in some sort of black swan scenario, what do you think that?

Gold also has the benefit of being uncorrelated, or, by and large, almost negatively correlated with other assets, so it's an effective diversifier. So, um, in thinking of stocks and bonds and so on, if you bring that in, um, actually, you'll lower the risk of the portfolio, so it's very good from a portfolio construction. It's also as a war option in history.

When we have wars, um, nobody wants to lend to anybody. um, even allies don't want to lend to each other because everybody gets in much more debt. And, um, they know that that has to be devalued, um, and the and the question is, what is the common currency? I think the world is leveraged long assets.

That means, generally speaking, most assets are leveraged long. I think when they print money, that'll be supportive to some of those assets as they always do. But I would expect an environment that would be more like the 1970s or the Nine, or in the 1930s. In which, in terms of real terms, um, that equities does, um, poorly, relative to, let's say, hard assets. When you think about what is an alternative money, gold is the third largest, uh, reserve currency. Um, central banks are now buying it.

I think that also in in institutional portfolios and in individual portfolios, they're underweighted. Inflation has edge, assets are. So I would say, you know, my my flyer, even though I want. I believe so much in diversification, so I would say I would diversify more. But if I was to say, what is it? it would, it would be, um, not just gold, but gold and combination. Particularly with some of the inflation index bonds, because gold and inflation index bonds are only 16 correlated. And so they balance each other well, and they're both, uh, over the longer term, good, relatively good assets to hold in. The kind of environment that I I think is more probable than is being discounted and that I worry about.

So it would be an effective diversifier.

However, that works. And and if an alternative money, uh, of any form, is threatening to the system, uh, they can shut it down, they can operate in that way. And that, uh. The behavior of Bitcoin, um, in terms of its determinants, um, past behavior of Bitcoin, um, it doesn't make it clear to me how it behaves in relationship to some of these determinants. Bitcoin is also, just to put it in perspective.

It's it's a relatively small market. In terms of, uh, you know, it's like a fraction of, you know, I don't know, a fifth of the size of Microsoft or something. One stock and there were many stocks. So for, um, all of those reasons, um, I wouldn't, uh, heap a lot of money into the into that. I have a very small bitcoin position, I don't, but I for those reasons, I would say, um, central banks are not themselves going to take on bitcoin.

Uh, central banks are going to take on. You know, there's a saying gold is the only asset you can have that isn't dependent on somebody else making you payments. So I would favor gold over, uh, over Bitcoin for those reasons. But, you know, uh, each to their own. And you know, make sure you're diversified. Because if the type of environment that we're talking about that, um, you know, comes to pass, um, you know. You better be able to turn it into hard buying power wherever you want and probably have it.

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They're barely keeping pace with inflation. What is your sense of the concentration of return in tech and tech in general? If a portfolio manager came into your office and said, I just think we should be all.

They all have a cycle, and you also don't know who the winners end up being in that cycle. And there are enormous amounts of of risk in that dynamic of of of operating that way. If you want to keep money as a storeholder, well, the holy grail of investing is to find 10 to 15.

Good uncorrelated return streams because if if you find a number of return streams, a number of investments that are good and uncorrelated, you will have the average return of those. So you don't lessen your return, just pick ones that are really, really good that you like, but they're not correlated. But you will eliminate up at 15, you eliminate 80 of your risk, so you'll improve your return to risk ratio by a factor of five. Okay?

There is no way you can improve your betting on which one is going to be good by a factor of five. It's a competitive game out there to pick what's going to be a winner. And then also things change in unexpected.

Put yourself on everyone's shoulder. Who's 25 and might finally are 30, starting to save a thousand, 2000, 5,000 bucks a year and is starting to invest it. So your advice to me, basically?

Um, and I would take my savings and I would say, okay, if, let me cut that in half, whatever that number is, because, um, it could go in half with between taxes and performance. Uh, I would take that number. And I would start to think about, what is it that is going to be most important? What's the purpose and use of that money? If I could immunize myself against the type of expenses, if I could prepay my children's education in a sense, or my living or whatever expenses, I think that that's most, the most important things. How do I build that?

I would think about there's liquid savings and then there's, um, your home, which is your environment. There's certain things like your environment is very important. And so there's how I think about, um, the the home and how that works. And and through improvements and forced savings, and also there's taxes, so I, I would want to take care of the benefits first and that quantity.

I would, and then I would try to have that element of diversification, I would, um, a view investing as being two types of investing, that investing for the safe money. That's going to immunize the expenses that I need to pay, and then I, and then the I'm going to speculate kind of money. Because, okay, when you try to beat the markets, um, okay, don't be naive.

Um, you know, at Bridgewater, we put hundreds of millions of dollars met in billions hours to do research to try to beat the markets. So, get the basics down well, including the understanding of of diversification and take care of your needs most. Um, I think those are the most important things. Um, maybe above it all is having a saving mentality.

The impact of of that saving mentality is enormous. What are you most optimistic about in America right now? Well, I. I still treasure the fact that there's only anything that everybody needs is, and a successful society needs is simple. You need parents who raise you, take good care of you and give you a good education. And that good education isn't just formal education, but an education in good character. And how to work well with others so that you can come out and be productive and operate in a country that has relatively equal opportunity.

And that that if you have a good ideas that you can receive in because of the capital markets. Others who will invest in you to make you have the opportunities and contribute to the society. And so, um, I think we have that better than any other country. I love the fact that the country of immigrants who comes for different places run by rule of law. Um, so that we can have a diverse population, uh, all different ways of thinking that can, um, compete with each other and work with each other. These are the things that I think are very much deeply in our bones or our our DNA and and embedded in laws and so on. That's what I'm excited and opera at an opportunity that we we have those things better than any place in the world.

So the the really. That's why when you asked me, big picture, what is the most important thing? The most important thing is how we deal with each other. If we can rise to that occasion, I'd be very, very optimistic. I think life expectancies, quality of life will improve immensely through the technologies and the things that we're doing. I think education can be so much more effective and broadly based for many people.

So I think that, you know, there's an enormous room for optimism. If we behave well with ourselves, with a good character and self-discipline, and work well with others, follow rule of law, all of that, I think that we can be very optimistic.

My sense is you've checked pretty much every box professionally and you are genuine about trying to help the next generation, and I think you're doing that. Appreciate your time.

This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss, our executive producers are Jason Stavas and Catherine Dillon. Mia Silverio is our research lead and Drew Burrows is our technical director. Thank you for listening to Prof. G. Markets from the Vox Media podcast network.

We'll be back with a fresh take on markets on Monday.