Ray Dalio On ‘Floods Of Money,’ Bitcoin, China, And Social Safety Nets

Ray Dalio held another one of his “Ask Me Anything” Reddit events on Tuesday.

It sounds funny (and it is) but to be frank, Ray deserves some credit. It’s true that Bridgewater’s performance has apparently faltered at various intervals over the past couple of years, and some took the opportunity to suggest Dalio is spending too much time writing, researching history, waxing philosophical, and otherwise pondering the mysteries of the universe, to take care of business.

There may be some truth to that criticism, but he’s trying to make a real contribution to society, which is more than you can say for most people. This year, for Christmas, he sent out thousands of charity gift cards worth $100. All you had to do was claim one, and donate it to a charity of your choice.

When he’s not busy making comparisons between the 2020s and the 1930s or writing voluminously on the rise and decline of empires, Ray can be found critiquing American capitalism — and lord knows it needs critiquing.

With that as the backdrop, I wanted to present some highlights from Ray’s latest “Ask Me Anything” Reddit event because, again, he’s trying — there are less constructive things a billionaire could be doing with his time than conversing with the public in an open forum about anything and everything.

Reddit: Can you provide a 30,000-foot perspective on where the financial markets are and where they’ll go? What’s a good way to think about it? Are we in a bubble that won’t pop? Is no interest rate the new normal for the decades ahead? Are governments just going to be ruthless deficit spenders forever?

Dalio: We are in a flood of money and credit that is lifting most asset prices and distributing wealth in a way that the system that we’ve come to believe is normal is unable to, and that is threatening the value of our money and credit. Most likely that flood will not recede, so those assets will not decline when measured in the depreciating value of money. It is important to diversify well in terms of currencies and countries, as well as asset classes. Internally, this is taking place in a politically and socially threatening environment, which will affect taxes, spending, and how we are with each other. Externally, there will be greater competition, particularly by China. If done well, the competition will bring us better alternatives, and if done poorly, will bring us a terrible conflict. I want excellent diversification at this time.

Reddit: With the Fed buying corporate debt, money being pumped into markets, and economic cost of lockdowns, do you believe current equity prices are “a house of cards” with higher inflation coming and what would you advise to hedge?

Dalio: I believe that with the enormous amount of debt and money that has been created and will be created in the future, the most important thing to pay attention to is the value of debt and money relative to the value of assets and other currencies. The monetary policy that is going on now, which I call monetary policy 3 (MP3) and which is the central government borrowing a lot of money that the central bank prints to direct it to where they believe it needs to go. I know that this is necessary now and at the same time know that not enough attention is being paid to whether this debt and money is going into things that will produce broad-based productivity gains.

As for stocks, they compete with bonds. With bond interest rates where they are, bonds are trading at roughly 75x earnings. With the amount of money out there, and cash being such a bad alternative, there’s no good reason that stocks couldn’t trade at 50x earnings. You get the idea. Just like you never might have expected bond yields to be at or slightly above 0% (unless you studied history), you might not be comfortable with these kinds of multiples for stocks. However, all investments compete with each other and where would you prefer. I would recommend smart diversification in terms of a) asset classes, b) currencies, and c) countries.

Reddit: I think it’s clear that the inequality in this country has gotten too rampant and we have lost our way as a capitalist nation. I believe you recognize that central bank stimulus has played a big role in this. Is Bitcoin a potential answer to this issue that the global new world fiat monetary system has caused?

Dalio: I think that Bitcoin (and some other digital currencies) have over the last ten years established themselves as interesting gold-like asset alternatives, with similarities and differences to gold and other limited-supply, mobile (unlike real estate) storeholds of wealth. So it could serve as a diversifier to gold and other such storehold of wealth assets. The main thing is to have some of these type of assets (with limited supply, that are mobile, and that are storeholds of wealth), including stocks, in one’s portfolio and to diversify among them. Not enough people do that. As far bitcoin relative to gold, I have a strong preference for holding those things which central banks are going to want to hold and exchange value in when they are trying to transact.

Reddit: Your focus right now is clearly on the rise of China and your comparison charts paint a gloomy picture for the U.S., in particular the switching of the reserve currency. My question is, do you think that it is too late for the U.S to course correct and maintain its status or is China pretty much guaranteed to takeover at this point? If not, what needs to happen in the U.S to prevent the switch from happening?

Dalio: Because of what we have done in the past, we have circumstances that we now face, which are much more challenging than if we did things differently. The biggest question is how we behave ourselves as individuals and with each other to deal with these challenges. The capacity of humans to adapt and deal with problems is enormous if they approach their challenges in a united way–and smartly. I worry that we are our own worst enemies and/or that we collectively aren’t willing to make the revolutionary changes that are needed to be on the best path for dealing with our circumstances. However, it is certainly possible that we can get on that path.

Reddit: My question largely revolves around workplace culture and future of jobs in our society because of your previous work on productivity and growth. There is a huge gap in the working hours between slow growing western nations (~35 hrs/week in Europe, ~42 hrs/week in USA) and the fast growing developing world, mostly Asia, where the working hours even in the likes of advanced countries like Korea and Japan regularly touch the 10+ hours a day mark in offices. Ever since ’08, most of the western world has witnessed a huge fall in labour productivity levels and in some cases like the UK and Italy, it has only gone sideways.

Considering the renewed focus on remote working, work-life balance and the newly discussed idea about 4 day work weeks, will the Asian workplace culture converge towards their western counterparts or will the West lose out much more in the long run considering that 2/3rds of the world GDP will be concentrated in Asia in the not so distant future?

Dalio: Of course how hard one works is an important consideration in determining one’s productivity and big differences in that have big implications for competitiveness. However, what is most important is inventiveness–the capacity to get much more out of an hour’s work. People often ask me how to make choices between work and life to get the right balance and I explain that the most important thing is to know how to get the most out of an hour so that one minimizes the tradeoff and gets as much out of life is as possible.

My fear, which is turning into a reality, is those countries that are working the hardest are also increasingly finding ways to work the smartest, which is hurting the competitiveness of those who are working less hours and less efficiently. I do believe that those parts of the world will do better for those reasons as well as because their finances are in better shape and they are socially and politically operating more harmoniously. This is apparent in almost every day. For example, look at the differences in COVID death rates. It doesn’t need to be this way, but it is. It is up to us collectively to make the changes. if we don’t want these outcomes.

Reddit: What are the biggest things people who ignore China are missing?

Dalio: That it is a very civilized society that is doing extraordinarily well and is not consistent with the stereotypes that one might believe are true. It is by no means perfect (nor is any other country) and should be open-mindedly assessed based on evidence, rather than emotionally reacted against based on derogatory characterizations.

Reddit: Do you see the increase in the black lives matter movement in 2020 as a revolution that could help the US transform certain policies and social injustices to potentially avoid a civil war? What types of social and financial changes do you believe are necessary to avoid a civil war?

Dalio: I think there must be, and can be, investments in the basics of education, health care, and opportunity that are good investments that could be measured in terms of both having a fair system and having a productive system. For example, areas that I am supporting philanthropically are microfinance that puts small amounts of capital into the hands of disadvantaged people who convert that into better lives for themselves, productivity such as getting high school students in deprived neighborhoods through high school and into jobs, and supporting the creation of a health justice center at New York’s Presbyterian Hospital for the purpose of reducing the extra health handicaps that those who are disadvantaged face.

My family and I can only have a tiny impact relative to the need and I regularly ask myself why our government cannot establish a floor in conditions beneath which we will not allow people, especially children, to fall.

Besides being unfair, we pay a terrible economic price when people become liabilities rather than assets to society. For example, we find that the cost of getting a high school student through high school and into a job is less than the cost of not doing that.