Following is the unofficial transcript of a CNBC interview with Bridgewater Associates Founder Ray Dalio on CNBC’s “Squawk Box” (M-F, 6AM-9AM ET) today, Wednesday, September 15th. Following is a link to video on CNBC.com:
Ray Dalio: U.S. Spending More Than It Is Earning
ANDREW ROSS SORKIN: Welcome back to “Squawk Box.” We are joined now by a very special guest right here at the SALT Conference in New York City, Bridgewater Associates Founder Ray Dalio is with us. It’s great to see you in person I think for the first time in a very long time.
RAY DALIO: We're coming out.
SORKIN: Right, we're coming out. We've all been trying to make sense this morning as we do every morning of where we are in this economy and where we are in the markets and I haven't had opportunity to, to hear from you and ask, ask you where you think things stand right about now. I know you always think about things sort of in this, in the machine, the economic machine. So help us understand what's going on inside Ray Dalio’s mind right now.
DALIO: Well I think it depends on the timeframe and I think the relevant time frame is the next few years. And I think you have to put things in the context so there are three big forces that have been at work and I think you have to understand those. First is the debt money thing how much debt and what are the repercussions, how does that pass through the economy, what does that mean for markets, inflation and so on. That we're in a different era now. Zero interest rates produce a lot of debt and monetize it. Second influence the conflict, internal conflict over wealth, left, right conflict that conflict. And then the third is the rising of a great power in the form of China challenging an existing great power and challenging the existing world order. Those three things are coming together at the same time and then we have a pandemic. So, I think each one of those is a cycle. They, what's happening now has not happened before in our lifetimes but has happened in the 1930 to ‘45 period. I went back and studied it over 500 years. And so, it's that context so I think we're talking about anything we should look at that, within that.
SORKIN: Okay let's, let's break it down then and let's start with the debt situation that we have in this country and the zero interest rates. Given, given you're a student of history, what happens next.
DALIO: We have, there's not enough money to go around right? We're, we're spending a lot more than we're earning and we have to do that, partially because of the social or any distribution that necessity and they can’t take it all from taxes. And what that means is the printing of money so it's the mechanics of that. So what we do is you get more mone, and so that the values, the value of money, in other words, cash is trash.
SORKIN: You came, you came on our air I think in Davos and said cash is trash, do you still believe it?
DALIO: Of course you don't, look, this is guaranteed. You are not going to have an interest rate that's going to compensate you anywhere for inflation so you have to look at the cost of the money, right? And so, that interest rate, whether it's the bond rate or whether it's the cash rate, certainly, you're not going to get that. And so you, we have this wonderful sugar high which is to distribute the, the checks and so on. But that means everything else goes up in relationship to cash because it's better to borrow cash, that’s just mechanics. So we have that dynamic underway so we produce inflation but what you do know is that interest rates must be below inflation rates and must be below the nominal growth rate in order to deal with all of that debt in order to finance it and that depreciates the value of cash and money. So, you have to invest it elsewhere. That's the dynamic right.
SORKIN: So, that suggests to me two things somewhat bullish therefore on the markets I would think.
DALIO: On, that's right, on the margin. So if we look at the expected return of equities, let's say US equities and so on, and you do the projections of the present value of discounted cash flows type of thing, you probably can have somewhere in the vicinity of 3.5% or 4% return. And you probably can get so return, relative to the return of cash, it's a better deal but those as equity prices go up those excess returns go down that's what produces more of a bubble, in other words, the lower returns there. And as that shrinks and then if you should have rates to rise that cushion narrows, and as that cushion narrows you come into more and more danger and so that's what we're seeing happening.
SORKIN: Do you believe we are in an inflationary environment and, and I say that because that seems to be the prevailing view right now, however, we talked to Cathie Wood on Monday, she said, “You know what actually next five years, deflationary because the technology.”
DALIO: Well there's, there's the, those are the pros and cons, right. So, we're in an era where there's much greater inventiveness and that's going to produce productivity if it's managed well in this politically challenging environment but if it's converted into productivity, does that, that is deflationary and force. But we're simultaneously in this world in which nobody is really going to get paid for those assets. Okay, so you have to have the debt monetization. There's nothing that you can increase in supply quicker than money, and money and credit. So let's look at it this way. There's a big increase in the value of financial assets. So think about yourself, each individual and say how much of your net worth is in financial assets versus actual things, your house, your other things, your equity. And a lot of that money will there's too much of that money in financial assets that we'll never be able to get paid because if you calculate how much is it in financial assets and a financial asset is only a claim to buy goods and services, otherwise it's worthless. There's an enormous amount of that, how is that going to be dealt with. It has to be dealt with, with the printing of money. So you have those two forces, I think the greater force is the force of those financial assets that the world in together will never be able to convert into goods and services because they're just too much of it.
SORKIN: So, what do you do? Does that mean you want to be owning as much real estate as possible leverage yourself and does that say to yourself that crypto and Bitcoin is more valuable than, I mean this goes back to that cash is trash. Where do you put the cash?
DALIO: Okay. First, no cash is trash. So, don't keep it in cash right. Second, the most important thing I think that an individual investor or any investor could do is know how to diversify well because all those asset classes will outperform cash. And so, if you, but also risk when you can diversify well and what I mean diversify, diversify across countries, currencies, asset classes and so on so that you have that balance then you take your tactical moves from there. But the most important thing I think is to divert, know how to diversify well. I think most people are not doing that. I think most people think okay, it's the stock market, and, and the stock market I think is relatively attractive in relationship to the alternatives but that dynamic is going to start to change as monetary policy gets tighter, and so on and so forth. So diversify well in those various areas, the country, the currency, the asset class.
SORKIN: I mentioned briefly the idea of crypto and I know you've had different views of this. A lot of people think of that as a new investment class that has had an enormous run thus far but also as a way to mitigate, if you will, against the idea of what the value of cash becomes.
DALIO: Well I think it's worth considering all the alternatives to cash and all the alternatives to some of the financial assets. And so, Bitcoin has, has that is a possibility. I have a certain amount of money in Bitcoin. It's a small percentage of that which I have in gold which is a relatively small percentage of what I have in my other asset classes, and so on. And I think that that has the merit. It's, it's an, it's an amazing accomplishment to have brought it from where at that programming occurred to where it is and take, the test of time. On the other hand, it's if, if it's successful, it's going to not be, the governments don't want to have it successful. You don't want to have a—
SORKIN: But we are starting to see governments like El Salvador, I know that's not exactly going to be the leading government on this, but they're governments that may take this on.
DALIO: But, no, no, no, no, no. You have El Salvador take it on and you have India, China and you have the United States, talking about how to regulate it, and it can still be controlled so that's what it looks like. If you’re El Salvador and you talk about your alternative monies, you know it's a different thing.
SORKIN: Do you believe that regulation ultimately will make something like Bitcoin and other cryptocurrencies have a future, or do you think regulation will kill it.
DALIO: Well I think regulation, I think at the end of the day if it's really successful, they'll kill it. And they'll try to kill it and I think they will kill it because they have ways of killing it but that doesn't mean it doesn't have, you know, a place, a value and so on. But it's one of those things that has—
SORKIN: But if you kill it because right now—
DALIO: But it doesn't have intrinsic value. If you, if you put crypto currencies or let's say Bitcoin in the historical perspective, right, there were so many things in a historical perspective that were given intrinsic, that didn't have intrinsic value and were have perceived value, and then became hot and then they become col, and so it could be either way. You just have to know what it is, right. I mean like, you know, it can be a tulips in, in Holland, you know, intrinsic value. So, what is the value and then there are technological changes. I don't, I'm no expert on it. I'm just trying to say that, who asked me what my opinion is, take it for what it's worth, I'm no expert on it. I think, I think diversification values, it matters. I suspect the real question that investors should be asking themselves is how much stuff like that do they have. How much stuff do they have, do they have gold. Okay, should we be talking about how much you have in gold versus how much you have in Bitcoin. And do you have a diversification and those kinds of things that we might call intrinsic value money, because we have a fiat monetary system, okay. With a fiat monetary system, where is your hard money, that's the question, and I, however you go after it, I think that's the question to be answered.
SORKIN: Okay, there's two other pillars to the, to the conversation we're having here. When you spelled out three, three different sort of pieces of machinery. I think actually maybe five in total but let's focus on the three. The political environment right now, you have long talked about taxes and inequality and what's happening here. Overlay that on top of what you just said.
DALIO: Well, we have a, we have large wealth and opportunity gaps. You know, a couple years ago I wrote a piece which was called, “Why and how capitalism needs to be reformed” because besides not being fair, it is not achieving the goal of being able to have broad based opportunity because capitalism intrinsically creates prosperity but it creates it in a different way for different people and that tends to be self-perpetuating because those who earn the money then take care of their kids and they have better education and so on and if you look at the bigger cycle, when you get up and rich and then you get into some problems you have wealth gaps and the whole thing gets challenged and that's the cycle that we're in. And so the question is the, how do you make productivity continue to increase rather than just redistribution. And so that's where we are politically. We have that conflict, we see the left right conflict, we see it play out now in the tax bills and so on. We're going to see it in the 2022 elections, you're going to see it in the, to and that conflict itself is the ingredients of some form of civil war, conflict, it doesn't lend itself to working together—
SORKIN: Do you really, I mean you’ve talked a lot about, you’ve used the phrase civil war before. Do you think that we really are headed that—
DALIO: Well, I think the question is what's a war. You know, a war, it doesn't have to be killing each other, okay, well I don't mean it that way. I mean, but, but sometimes when it gets out of control, it does lead to that. It's a good thing that we read history and see how it is left in the past, how moderation has gone to extremism is something we should be aware of but it is, we certainly have kind of a war developing between the various factions, the states, and so on. And how that'll be resolved like in the 2022 elections, there's still the question. There's talk of systematically challenging those elections and if, and if there's a systematic challenge that's a challenge to democracy because if you don't know who gets to sit in the seat to make the votes, how do you resolve that kind of thing if the system isn't there. It depends how extreme we get. I'm not talking about the fact that we will go there. I'm just saying you have to be aware of it and the more we're aware of it, maybe the more cautious we're going to be not to be that way. But if we don't pull together as a country, okay, if we keep fighting with each other and have this together with the bad finances, and together with a rising power challenging the existing power, that's not going to be putting forward our best.
SORKIN: As an investor, though. How do you assess the tail risk to the extent that the tail risk of, of the situation you just even described in 2022.
DALIO: Well, you always have to take the tail. The first thing you have to do is deal with the tail risk, eliminate the tail risk in one way or another and then go from there. You can eliminate tail risks with a very small percentage of your portfolio, right, it can be done. And that's a structural question, not only what assets you hold, but also what options you might hold or whatever you might do to eliminate that tail risk, right, because the market is not really taking that tail risk and pricing it in so eliminate it. Okay and so, in market positions and so on, you can do that.
SORKIN: Let's talk about China because you have a view that that China will eventually I think overtake the great American empire, no?
DALIO: Well, I mean if you just take lines on charts and you get basically see what's going on in terms of basic fundamentals, they were four times more than four times as many Chinese and so if they had an average per capita income that was half the average American, they will be twice as large as the United States. And if you take their growth rate and so on, it is likely that China, and today, China is comparable in many ways. They have a larger percentage of world trade, they're comparable in GDP production depending on whether you're doing it PPP adjusted or not, and so on. So, it is a reality today that they're roughly comparable and that they are increasing, get their strength at a faster rate than we are, that's a reality.
SORKIN: Given though the regulatory crackdown in China right now, there are a lot of people say you know what, you shouldn't be investing in China. You have a different view.
DALIO: Yeah. First of all, I think people have not, a lot of people have not spent a lot of time there. I've been going there since 1984 and I've been very lucky to know many people from the most common people to the most senior leadership and so on, so forth. And I think you have to understand what's going on and I'll just try to say it in a nutshell, okay. Everybody follows the approach that they believe is best for their own country. I can't tell you whether their approach, our approach, my job isn't to do that but they have a top down approach rather than a bottom up approach, very much like a strict parent so the question, the riddle that you have to have then asked yourself, answered before, is how does a Communist Party that talks about Marxism-Leninism and at the same time has such, the second largest capital markets and the development of capital markets coexist and the answer to that is that they believe that capitalism is a way of increasing the wealth and power of the country that's been key, key at the same time as the, there's an important to redistribute. If you look at the policies of that are being dealt with now and I can rattle off the four elements of those policies, they're not going to disrupt they're not going back to what you would call the old communism that your, your, they're very practical people. And so, the issue is really the issue is more control like they will tell your kids how many video games they can watch where you wouldn't. It's like a strict parent and they're and they will redistribute the wealth but if you take the measurements of capitalism right now and I can continue I have a lot of measures I won't get into but capitalism, the United States and China are the most capitalist countries, right, and if you were to say, will they go as far to the left as Europe has gone. It's unlikely that they will go as far to the left as Europe has gone on those measures whether those are tax, redistribution, the effect of capital markets and the like and you can't get in and out of a place on basis of that. In addition, you need diversification. Okay so, if you have two great powers, two developments of technologies and so on and so forth and you're looking what percentage of your portfolio do you have here and what percentage of your portfolio there, diversification is a key element. So when I look at it I think that there are risks in the United States, there are risks there we can talk about those, diversification’s important and I think the fundamentals are basically sound.
SORKIN: To the extent that there are critics who say, you know, you're funded, I believe manages some money for the Chinese government that your view is related to that, what do you tell those people?
DALIO: I manage money for the American government, I manage money for investors all along the way. I can't, I can't survive and it's also, I can't be myself if I'm not speaking honestly and directly about that. I went to China and I’ve been in China for 20 years before I ever did anything economically for them. I went in 1984, they didn't have any money and I, and I liked them and I, and I was pleased to be part of helping them develop their capital markets and the like over that period of time for not money reasons and money, if you think money, I've got enough money. And what do I have in terms of my choice, but I do business with a lot of other people who can choose those types of things. The issue is, the issues I'm talking about, okay, you have these two competitors. Do you want to bet it all on one, okay? And besides, look at the track record.
SORKIN: This is going to become a longer conversation and we're actually going to have it a little bit later at the SALT Conference. I want to thank you this morning Ray for a great discussion.
DALIO: Thank you, Andrew.
SORKIN: Thank you.
DALIO: It’s a pleasure.