Davos 2014 | Ray Dalio Explains Where in the Economic Machine We Currently Are – CNBC

published on July 20, 2020

Be guest right now the head of the world's largest hedge fund joins us in an exclusive interview Ray Dalio is the founder president and chief investment officer for otter associates Bridgewater currently has one hundred and fifty billion dollars in assets under

Management array were thrilled ahead good morning oh you have been on our show several times now and we have we have started dialogue around what you call the economic machine it's your theory of how you see the marketplace

The world the economy has been praised by people like Volker and Bill Gates and other people like that and part of my understanding of the theory is that there are short term cycles and long term cycles the long term cycle I would

Argue is probably bad given the amount of debt that we're just building but when you think about the short term cycles and where we are now when you start thinking about the US and Asia and Europe how do you see your economic

Machine applied to those markets well the first thing I'm going to get to answer your question in a minute but in a second but I do want to convey that I think that we go so quickly to try to think what's the economy going to do

Next year without agreeing on how the machine works and the economy works like a machine and the only reason I'm doing this interview and only reason I did that video how the economic machine works is so that to draw attention to

How does it work because if we can agree on how it works then so many other things come from that so that's we'll talk about what I think is happening now and so on but within the context of that the economic machine is nothing more

Than a transactions very simple thing if I buy something from you I can buy it for money or I can buy for credit and when I buy it for credit over a period of time a credit is a promise to deliver money

Right and so we begin a cycle and in that cycle there are two cycles around income at the end of the day you can only spend what you earn but that's not true over the short-run because you can borrow money and so around that income

Growth is our debt cycles and there's a short-term debt cycle which we call the business cycle we're used to recessions expansions and then tightening and monetary policy and recessions again and with that also produces market cycles

Around that so I'd like to put where we are in the context of that ok sorry for that background but at least we can then look at the world that way so now where the us is because it could print money

Print money means the purchase of financial assets financial assets went up a lot and as a result of the them going up a lot future expected returns went down a lot so the return of equities has gone down to probably about

4% and which is by the way in line with cash being about 1% bonds being about 3% return of equities about 4% so that liquidity has has happened we are now in the middle of the short-term debt cycle in other words you're out of the

Recession and you're not into yet the tightening those middle periods are kind of the boring years you know they're the years like 2004 and 6 you forget that they even existed what happened in 2004 and 6 you'll never remember 2007 8 you

Remember so we're in that kind of period in the United States what Europe now markets went up incredibly between 2003 4 5 & 6 right no 2000 deputy mark no no 2004 at 5 & 6 were boring markets didn't do anything for they flat out they start

With a language like that things a little flat they started moving into the financial probably had it returns the returns in each of those years of single digit returns hardly doing anything boring we had 15 years of nothing

Oh no but I'm also referring those particular years in other words you take 2000 2000 was a period we have the recession we have a thing then you pump it with liquidity then you get the ball market the big bull market in equities

And then in that middle period when that things are not too tight or too loose then you have that period so that's where the United States is I would suggest we can only go down from here maybe not all black and then down I

Don't know you know you're you're in that middle that means that the central bank's got leeway not too tight let me yeah that's where we are and that's also means probably pretty boring for equities also you look at the return

There was a big gap between cash returns and bond returns and equity expect two returns if you look at yields what would the expected yield be and that normalized I'm just talking about the us now let's go to Europe

Because the by the way all these countries are in very different parts of their cycle which is the interesting thing so now Europe southern Europe because it could not print money could not have the

Same reactions that we could could not have that response and as a result what happened is they were in a debt bubble meaning their debts were rising faster than income if there's one thing to pay attention to is debt rising faster than

Income is debt rising faster than income if debt is rising faster than income it can't do it forever and it won't do it and if it's doing it fast for a long time you're gonna have a bubble the United States debt is not

Rising faster than income now in equilibrium and I'm talking not government debt I'm talking about the total debt if you take all the sectors of the economy in Europe what it was rising much faster than income and

Unsustainable so you couldn't fund it if you look at who buys the bonds they wouldn't buy the bonds there's not enough money to so they need a funding gap they needed to have an adjustment to bring debt right down to income white

Right now what happens is in terms of there's a result they only have to roll over the debt they don't have to sell a lot more than they sold before and so that's an easier thing to do and so but that's a depressed economy right because

You can't finance it on debt so they are in a chronic depressions essentially depressions that will remain there and then there's a fiscal policy and monetary policy the ECB will have to ease another monetary policy but a very

Different position in the cycle now take China totally different position so China is in the part of the cycle where they need to type the debt is rising very fast relative to income particularly certain sectors of that

Debt and so what you're having is a tightening of monetary policy and you need to have a tightening of monetary policy now all the markets and all the economies are connected so what does

That mean ok it means that we're in brief we have a world in which we have an enormous amount of liquidity liquidity means that people want to buy financial assets so we build up the prices of financial

Assets and there they're not too high they're not too low there seem to be appropriate we also have a lot of longer-term debt you were referring to that that longer-term debt means it eats money in

Other words it requires money to pay for it we have a lot of liabilities there unfunded liabilities beyond the debt that eats money and we also have a world in which there's excess capacity a lot of the capacity was built in China a lot

Of capacity was built in the wall around the world that produces a deflationary pressures so we're in a world with a lot of liquidity and also a lot of also deflationary pressures existing at the same time I want everybody if they can

Though to do what watch this half hour video how the economic machine works I'm here at Davos with policymakers and we are discussing the most important right the central banks and so on and it is all around

That it's 30 minutes and if they can people can understand that I think it would help them a lot okay great Ali oh thank you that video is on YouTube we should tell everybody see

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