Ray Dalio, Bridgewater Associates founder & CIO, about Europe's economic state and where he sees the next big economic move. Ray Dalio, Bridgewater Associates founder & CIO, discusses how political policy impacts markets, and explains how the economic machine works.
The two videos of the interview and a computer generated transcript for the second one is embedded below:
we're back live here in davos, switzerland at the world economic forum and we're speaking exclusively with ray dalio, founder of bridgewater associated and we're thrilled to have you. you rarely do this so we're happy to have the education. one of the questions that came up in my mind while you were speaking in the last segment was politics. and a lot of the conversation wehave here at the world economic forum is about politics. how is an investor do you put that in to your economic machine, if you will, you know, when it comes to this debt ceiling issue, or it comes to who's going to be elected, or health care issues or what have you. how is that -- how do you put that in to your investing hat? well, everything is a transaction, and it won't havean effect on prices, in any event, unless it has an effect on a transaction. so what i do is i know who the buyers and the sellers are. and then by thinking that through, i think how will it have an effect on transactions. far more important than, over the long term, the leader of a country will have some effect on the whole overall health of the econom but even -- they can't even resolve their own quess. they're, you know, it's a very difficult challenge. the whole political system. you could be president of the united states and it doesn't mean you can change policy.then, if policy changes, it has to basically change the things that produce -- have an effect on productivity. it's something that's peripheral largely. like, for example, a bigger issue is how does financial transactions work such as if you lower interest rate, and you have nothing on a money market fund. right. and you can't do that -- which is what we got now. which is what you got now. what happens? how is there then the trans -- where does the mey go? how does somebody earn a return? how do financial intermediaries earn returns and so on as it affects transactions. those things are far more important really in terms of an effect in longer-term there are certain basic things that determine the health of an economy, and policy can have aneffect. there are also certain points in time that it's very critical. mario draghi and the ecb and how it handled monetary policy at a particular moment in time was critically important. so to try to stay on top of that and not only partially anticipate it, but to know when a change occurs, how to properly excerpt it and what does that mean in terms of the knock-on effect because everything iscause/effect relationships and causes happen before effects.and if you understand the cause/effect relationship, that's what it's all about. scott sperling who runs t.h. lee is back in the studio. hi, ray, how are you? you've done this spectacular job at being able to call macro trends very well, and sometimes very aggressively. one of the things that is -- we've noted over the last, particularly few months, is the use of judicious amounts ofleverage on bond portfolios to try to emulate equity-like returns.i think risk parity is what they call it. and you've done a great job with that sort of thing. ist -- is that a mechanic or is that anindication of direction of attractiveness, relative attractiveness, of fixed income to the equity market? a mechanical thing. the problem of let's say a stock and a bond portfolio, if you put 50% of your money in stocks and 50% of your money in bonds, theproblem is, you have about 80% of your risk in stocks, andabout 20% of your risks in bonds. and so you don't havediversification. but if you just imagine that you had a long duration bond portfolio or a bond portfolio had about the same volatility of stocks and you went through the financial crisis, most of the decline in your portfolio would have been protected.because the stocks would have gone up in value by an amountthat would have had an impact that would have offset the other.so in structuring a very good plel yo, you have to havecomparable basically comparable amounts of risk in that.equities is misleading. when you think you take a treasury bond and you leverage it two to one, realize that the average company in the s&p 500 is leveraged two to one. in other words there's as much debt as there is equity in the company. if there was a law that said that companies could not leverage, then the return of equities and the return and the volatility of equities would bequite like that of bonds. so it tends to be that the one thing we're most confident about is that asset classes over a period of time will outperform cash. that has to be, otherwise we don't have capitalism. and it also has to be compensation. so, it's to get that balance that you need to do that. ray, we're going to have togo. but just final question. given the mood here in the worldeconomic forum, your sense, looking out over the next twoyears, jamie diamond was on yesterday, said he is very bullish.virtually everybody i've talked to seems very bullish. i know you talk about a transition and it sounds like that's what you're suggesting but to the extent the audience is trying to understand your sense of where things are going, where are we right now?so, i think it depends where -- when you enter the question, where are we right now depends where is. if you're in europe, it means one thing. if you're in the united states, it means something else. if you're in china, it means something else.and it sounds to me like we don't have enough time to coverthose. i would say if i was to make a big generalization, europe will be in -- their economy will be terrible. and we will have a gradual restructuring and that will go on for awhile and it will bebad. in the united states, i think you're going to have thisshifting to taking on the more risk. in japan, we are reliquefyingthe printing of money to get out of that problem and it's going to be more liquidity brought in. and in china, it's bouncing backand they have to deal with t fact that debt maybe is growingfaster than income. right. and that's an issue. so we are in a different kind of world. we will not -- so i'm going on too long.that's the best i can do in a time. a minute you just told us a lot.so thank you for that and thank you