CNBC Transcript: Bridgewater Associates’ Ray Dalio Speaks with CNBC’s Andrew Ross Sorkin Today
WHEN: Today, Thursday, November 15, 2018
WHERE: CNBC’s “Squawk Box”
Michael Zimmerman’s Prentice Capital had an excellent year
Prentice Capital's Long/ Short Equity Fund was up 26% net for the fourth quarter, bringing its full-year return to 53.6% for 2020. In his fourth-quarter letter to investors, which was reviewed by ValueWalk, Michael Zimmerman said the development of COVID-19 vaccines, continued easy money and clarity in the election drove a risk-on environment. Q4 2020 Read More
The following is the unofficial transcript of a CNBC interview with Bridgewater Associates‘ Ray Dalio
Watch CNBC’s full interview with Bridgewater Associates’ Ray Dalio
All references must be sourced to CNBC.
ANDREW ROSS SORKIN: Welcome back to "Squawk Box" this morning. Take a quick look at futures. We’re now in the red this morning. The Dow looks like it would open off about 20 points. Nasdaq would be up to – just marginally about 2.5 points and S&P 500 off by 4 points. Things have swung around. We want to get right now to our first “Squawk Box” newsmaker of the hour, joining us from the Greenwich Economic Forum: Ray Dalio is here, founder of hedge fund Bridgewater Associates. Good morning, ray, thanks for joining us.
RAY DALIO: Good morning and welcome to Greenwich, Connecticut.
SORKIN: Thank you for that. We want to get your sense of where we are in what seems like a very complicated market these days. We have a lot of volatility. We have questions about tariffs and trade, of course and interest rates. You’ve always put the markets in the context of the economic machine. So where are we within that machine?
DALIO: Well, you know, there’s the short-term debt cycle, long-term debt cycle and productivity. We’re in the late stages, maybe the seventh, the eighth inning of the business cycle, right? We’re in the part of the cycle where there’s been a lot of monetary easing. Central banks bought $15 trillion worth of assets, pushed them up a lot. We had the benefit of a corporate tax cut, all of that stimulation, and as a result, we’re in the late part of cycle where there’s a tightening of monetary policy. And you know, so it’s kind of the late part of the cycle with assets fully priced. And in terms of the longer-term debt cycle, we’re at a point where interest rates are comparatively low, the capacity of central banks to ease monetary policy is limited, United States is limited, and other counties it’s limited. So that’s where we ar. We’re in a position also where we have the emerging power China competing with the United States, an established power, as an effective power competitor. That’s very much like the late 1930s. So that’s where I think we are.
SORKIN: Let me just go back a second. The 1930s are a complicated time. But specifically, on the issue of the fed and interest rates in terms of where we are in the cycle, there is a debate, as you know, about whether interest rates should get hiked and how strong the economy really is or isn’t. What do you think?
DALIO: Right now, the Fed expects to raise it one more time this year. And probably three – two or three times next year. I think there’s a problem in terms of asset prices. I think that rate of increase would not be able to be made because we’ve raised interest rates to a level where it’s hurting asset prices. We have now, a flat yield curve. We have -- in other words, the -- you can now get in a two to five-year note, you can get about 3%. And you have no price, no material price risk. So, we’re in a situation right now that the Fed, I think, will have to look at asset prices before they look at economic activity. It’s a difficult position because that stimulation that they have, in the form of those tax cuts, is a big stimulation into the capacity limitations as we have low slack. So that the economy itself will pressure them to raise rates. I think probably too much. I think we have a supply/demand problem for bonds that will particularly come next year and the year after. In other words, because of that tax cut and the deficits, we’ll have to sell a lot more bonds and United States itself can’t absorb that quantity of bonds. So we’re going to have to sell those bonds to investors in other countries. You look at the portfolio of those, and they have a lot of those that are sort of overweight in that bond. So I think there’s a supply/demand imbalance and a difficult position for the Federal Reserve. It’s a risky situation.
SORKIN: Just to put a fine point on it though, it sounds like you’re recommending if you’re Jay Powell, you might slow down, similarly to what the President suggested?
DALIO: Yes. I would look at what is discounted in the curve. And realize that that’s discounted in all asset prices. It’s discounted in bonds. It’s discounted in equities. It’s discounted in real estate equities, private equities -- that rate of change in there. And I would keep it certainly not faster than that, and I would probably keep it probably less than that. I think the -- you know, the risks of asymmetric on the downside, because if we have a little bit overshoot in the inflation rate, you’re going to be in a position where it’s not going to be a problem. Who cares if you have 2.5% or something, it’s not going to run out of control. But if you have a downturn, first in asset prices and then you have a downturn in the economy, it’s an asymmetric risk. It’s a serious risk. We have an economic polarity in populism which is an issue. If you have a downturn, I think the conflict is going to be greater, I think that’s a big issue. And I think also, the tools are not as effective on the downside, so I would err on the side of easier monetary policy -- on the curve.
SORKIN: Let me ask you a question: if you’re concerned about asset prices, one of your peers, Dan Loeb recently just wrote, “we have delevered our portfolio, reduced our tech exposure meaningfully and grown our short book. We expect to be net sellers over the next few months if markets rally.” As an investor out there right now, how cautious are you?
DALIO: Well, as I said I think we’re in the -- we’ve gotten a lot of the good news behind us and I think assets are fully priced and I think there is asymmetric risk. Like I said, I won’t talk about our positions, but I think -- I think the upside position is not as strong and relative to the risk.
JOE KERNEN: Ray, that made never made much sense to me, but you said we have the tools to address a downturn. Some people think we need to raise rates to get to a point where we can cut them if we need to cut them. Does that make any sense to you -- ?
DALIO: That sounds like pretty bad logic to me.
KERNEN: You know what they’re saying. If you’re up there at six, you can keep cutting. But when you’re all the way down near zero, you don’t have a lot of cuts that you can make in case there’s a downturn. But --
DALIO: Yeah, but –
KERNEN: -- to go all the way down is crazy.
DALIO: Yeah, but look -- I’m telling you what’s built into the curve, what’s built into all of the markets is the existing interest rates.
DALIO: So you raise that way if that’s not good. I think the Federal Reserve should use more macro prudential policies. In other words, there are parts right now, there are some bubbles emerging. But macro prudential policies, what that means, if there’s a regulatory authority that can deal with certain bubbles as they’re emerging to be more targeted, than using interest rates as a whole.
SORKIN: And, Ray, talking about bubbles, do you worry about high-yield bonds? We were having a conversation earlier today actually about General Electric, a Connecticut-based company whose debt has come under a lot of pressure of late.
KERNEN: Boston based.
SORKIN: Now Boston based, yeah.
DALIO: the -- a lot of the high-yield debt market has gone into leveraged loans and CLO. And so, as a result, it’s off balance sheet -- I mean, it’s private. And there are parts of that market more than the particular high yield debt market; although if I was to take double "b," some triple "b" types of debt, I think that it’s more than fully priced.
BECKY QUICK: But, Ray, I’m wondering if you can shed a little light on what might happen to the junk market if GE heads towards junk status. I mean, it’s kind of trading there based on the credit default swaps at this point. It’s headed that direction. If that were to happen, you’re talking about ge becoming 10% of a $1.2 trillion market. And that seems like an awful lot to absorb. What kind of aftershocks would that potentially have?
DALIO: BECAUSE -- I think GE’s problems are well recognized in the market.
DALIO: And probably reflecting those. Because there’s a lot of index funds or ETFs where the investor experiencing a sting looks at that asset as a number of assets, you could have more contagion to the other markets, as they say I don’t want that kind of fund and then even less stress funds would experience some sort of contagion. So, yeah, there is that kind of risk.
SORKIN: Ray, I wanted to ask you about China. I know you just announced a new fund that’s actually going to be based in China and you’ve spent a lot of time there. Obviously we are in the middle of what some have already called a trade war, given the tariffs. Just speak to what you think about the potential trade war and how you think it will ultimately shake out.
DALIO: I think -- the trade war I think can be worked out, trade balances I think from a Chinese perspective, American perspective. But it goes way beyond the trade war, you know? There is this now competition, real competition, for -- in the world, in supremacy. This is the first time since the ’30s that we’ve had an emerging country that is a comparable power, really, to the United States. And there are issues there. So, those issues have to do with property rights, they have to do with access competition, they have -- they’re geopolitical. There are a number of things. I think that the trade issues can honestly be dealt with. But it is, you know, it’s a broader issue that will be with us for a long time. And I think what most fundamentally it has to do is a different approach to life. A different approach to how they think governments should work. As one of the Chinese leaders described, it’s basically a top-down, versus a bottom-up type of approach, you know. If you were to look at let’s say gaming, by way of example, playing games, video games and you go in China, they will have a point of view as to what their kids should watch on video games. That exemplifies this. So they will control -- it can’t be a certain amount of hours and it can’t be these types of games and so on. And so that would be a top-down decision. In the United States, we would not want the government – the system is a bottom-up. So, it really goes back to Confucius, in 500 B.C., it’s a very different approach. And that is -- so, when you look at the 2025 plan in China, the government believes that they should have a plan for making China great. And they work that plan. And then they’ll have coordination between the parts. So, yes, the military will cooperate with the tech companies and so on. That kind of activity is objectionable to the United States because that is viewed as something that is different. So, that kind of identity issue, or those types of rivalries, will be with us for a long time, even though the trade issue itself I think can be dealt with.
SORKIN: Ray, before we let you go, I want to talk about a perhaps more local issue than this global issue, which is where you’re based right now. And the conference that you’re attending. And I know there’s a number of big speakers, including yourself later today. This is the Greenwich Economic Forum. But there’s a big question right now about hedge funds and Connecticut. The state of Connecticut. Taxes in Connecticut. Whether it’s actually the right place for firms like yours to be based, given the tax rates there. How are you thinking about that, given that some of your peers have left the state?
DALIO: Well, you see what Greenwich, Connecticut is. I mean, it’s a fabulous town right outside of New York City. So easy access to the city. Fabulous community. And then its vitality, it’s great intellectually, it’s very stimulating. There’s a culture here that is great, community, all of those things. And then there’s this issue of the state issues. I think that the state is going to approach this in a very effective way. We’ll see. You know, there’s a new government and so we’ll see how. But the approach that even New York took, in terms of Long Island City and the bringing in, creating a tax-free economic zone. For example, you could take Bridgeport, and you could take New Haven, and you could take Hartford, Connecticut, and make those tax-free economic zones and bring in vitality to the state. I think that it’s really going to be a test of the cleverness. And it’s an issue that they’re going to have to deal with one way or another. It could be very harmful to the state. It’s a risky issue because the polarity between the high-income areas and the other parts of the state, which are really suffering, cannot be touched it’s a challenge.
KERNEN: Before you pull up states and move down to zero income tax Florida with Tepper, you might wait for the recounts. Just, I don’t know -- wait a couple of weeks before you decide.
SORKIN: He’s not deciding. He’s staying there.
KERNEN: No, I know.
SORKIN: By the way, what do you think of your peers that have moved to Florida?
KERNEN: The joke’s on them, maybe.
DALIO: Well, I think the tax issue is an issue of consideration and the worst case scenario is a bad scenario for, not just Connecticut, but some of the Northeast -- New Jersey is a good example, and New York, different parts. And i think that model has to be department with by bringing in a lot more revenue, by creating, you know, a different approach. But I -- it’s understandable. It’s not just -- it’s the whole area. Wherever you have taxes. San Francisco is dealing with the same thing with -- like Nevada. It’s a national issue.
QUICK: Ray, we only have a few seconds but very quickly, what you’re talking about, creating these zones it coming under protest from people in New York City right now.
DALIO: I’m sorry, I didn’t get that. Say it again, please?
QUICK: People are protesting the tax giveaways to these wealthy companies, like you mentioned for Long Island City.
DALIO: No, no, yeah, I’m saying, I think if you take -- I don’t think you can cut taxes. You have to raise tax revenue.
DALIO: The issue of raising tax revenue is -- it’s much the same as if we’re looking at amazon going to Long Island City.
DALIO: Is that going to be a net benefit? Or is that not going to be a net benefit? And you got to take a sharp pencil. If you take a free economic zone, I’ve seen this happen in a lot of places, and the impact of companies who are not there coming into a tax-free economic zone brings net revenue. And we need net revenue. Because you can’t cut expenses. It’s not humane. And you can’t raise taxes. Because if you raise taxes people are going to leave more. So you have to have something like that.
SORKIN: Ray, we want to thank you. It’s a pleasure. You have to get to a panel. We have some breaking news to get to as well. We want to -- we appreciate your time. Thank you as always. And we look forward to seeing you again very soon. I think in Davos, hopefully.