April 10, 2025 • 32 mins
Host Francine Lacqua, sits down with founder of Bridgewater Associates, Ray Dalio.
They discuss a turbulent week in markets and identify driving forces, which shape economies and fuel the rise and fall of nations.
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News. Welcome to the City of.
Speaker 2 (00:13):
London, the City of the City, the City of London.
Speaker 1 (00:19):
Please mind the gap between the tree and the platform.
The financial hearts of the country, the city, the city.
Speaker 3 (00:31):
Welcome to in the city.
Speaker 1 (00:34):
Stand clear of the doors, pea Welcome to in the city.
Each week we unpack a story that's crucial to the
world's financial capitals. I'm from Saint Laqua and this week
we speak to Ray Dalio. It's been a crazy week
on the markets because of Trump's tariffs. Well, Ray Dalio
(00:54):
warns that investors are way too focused on tariffs and
just not paying enough attention to the breakdown in major monetary, political,
and geopolitical orders. He says the US reliance on debt
to finance success and creditor countries like China holding too
much debt is a worry and that will lead to
our correction of these imbalances and a change in the
(01:15):
monetary order. Let's begin, Ray Dalio, thank you so much
for joining us now. This week was a little bit
rough on the markets. I know you've also the way
you view the world is basically by identifying five major
forces that drive the rise and fall of nations and
shape the global economy. So we have debt, money, economic cycles.
(01:35):
There's internal order and disorder, external geopolitical order and disorder,
acts of nature and technology. Given all these competing forces,
what do you think is the most worrying right now?
Speaker 2 (01:51):
Yeah, I think it's important to step back and see
this big picture to understand where we are and what
I What I mean is there are orders, which are systems,
like a monetary order. We have a monetary order, and
related to that monetary order, it has to do with
a debt cycle. And when you get into too much debt,
(02:15):
it's a problem. Too much debt one man's debts another
man's money. And then it's related of course to the economy,
and it's related to the imbalances such as we have
a very large imbalance in trade, and we have a
very large imbalance in capital, and there's a supplied demand
problem with debt. The second influence through time is the
(02:42):
domestic political order in other words, for example, democracy and
so on, and we are changing in a form that's
very similar to the thirties. All of this pattern is
very similar to the thirties, in which there's an internal
conflict you know in Europe, make the trains run on time.
(03:06):
The inefficiency, the conflict of the wealth gaps, the opportunities gaps,
the left and the right getting to the point where
they have irreconcilable differences, and there's great internal conflict about that.
Speaker 3 (03:22):
The third force changes in the.
Speaker 2 (03:26):
World order, the world geopolitical order, you know, which began
in nineteen forty five as a result of what happened
in the thirties, which is then you have a new
world order, an American world order. The winning country desides
how things are going to go. And we had an
American world order, which is why we have the United
Nations and the IMF and the World NINK and so on.
(03:49):
In the United States, and the United States was a
dominant power, and now we're having a conflict. There's no rule,
who rules, and there's a conflict. Those orders are changing
because of excesses. In addition, through time, there's always been
acts of nature. Droughts, floods, and pandemics have killed more
(04:12):
people than wars.
Speaker 3 (04:15):
And then there's technology.
Speaker 2 (04:16):
So those forces and you could see them in a cycle.
So right now we have imbalances. We have a lot
of debt, we have and it'll be it. There's a
supply demand problem. We have a lot of debt with
more men's debts from another men's assets. That means that
(04:37):
some people, some holders of these debts are concerned about
those both because they have.
Speaker 3 (04:44):
A lot of it. Then they have to buy a
lot more.
Speaker 2 (04:47):
When this treasury runs a large deficit, that means they
have to sell bonds. And then in this environment it's
not as desirable. There are countries that worry about actions
and so on that with China and other countries worry
about those things, and so there's a supply demand balance.
Speaker 3 (05:07):
These are the main drivers their problems.
Speaker 2 (05:14):
They have to reduce the debt issue, they have to
reduce the imbalances, you know, the trade imbalance and the
capital and balance, particularly at a time when there's conflict
and there needs to be a sense of self sufficiency
that you produce it at home. And then also there's
(05:34):
the hollowing out of the loss of manufactory.
Speaker 3 (05:39):
So anyway, that's the framing of it.
Speaker 2 (05:42):
And now we're seeing the particular manifestations and actions pertaining.
Speaker 3 (05:47):
To that.
Speaker 1 (05:50):
Y what we've lived through in the last week with
these traffs by Donald Trump that really sent the markets
in disarray with possible distress. Was it good idea badly
thought out or was it just a bad idea.
Speaker 2 (06:08):
Let's go to the problem, the problem, and then we
deal with the solution. The problem is in a world
that's in war, almost in conflict, and there's too much
debt somehow, and the hollowing out of the middle class somehow,
(06:31):
those imbalances, which means interdependencies have got to be reduced.
Now the way that was handled rather than through negotiations,
you know, I'm not the politician.
Speaker 3 (06:50):
I'm not the negotiator.
Speaker 2 (06:51):
I'm not the person to say whether that style of
handling it was better or worse. I would say that
it dramatically affected psychology and attitude about the United States' reliability,
and also it exacerbated concerns, so I would say it
(07:15):
could have been handled better. I would also say that
it's very theoretical too to think that we are in
the necessary timeframe to eliminate those imbalances, which have our
capital balances as well as trade imbalances. That it's difficult
(07:35):
to make manufacturing happen here in the same way because
of the structural things. Do you have the labor force,
what are the regulations. It's very difficult nowadays to produce here,
that's part of the bureaucracy. How do you get to
become efficient? How do you get that population which has
(07:58):
been hollowed out? Sty percent of Americans have below a
sixth grade reading level and are having a problem to
be productive. So can you build the alternatives that can?
You build ships? And with that, I use ships as
an example.
Speaker 3 (08:17):
If you.
Speaker 2 (08:19):
If you're a shipbuilder, it's going to be very difficult
to in a reasonable time frame to build be become
an effective shipbuilder. And even as a shipbuilder or the
analogous UH industry, you still have to you have instability.
(08:39):
You don't know if the next administration is going to
have that, and then all of a sudden you're competing
with the Chinese or alternative shipbuilders around the world. So
I think it could have been UH. I think it
could have been handled better. I think it's you know,
very very to And then when you have the retaliatory tariffs,
(09:07):
you have a situation where basically production sort of grinds
to a halt because there's these interdependencies.
Speaker 3 (09:16):
And that is very bad.
Speaker 2 (09:18):
It's almost like another COVID in that it raises costs,
it lowers revenues for companies, and it worsens the capital markets.
That the capital markets are very important for a lot
of companies to be able to do things, particularly let's say,
(09:39):
if you're developing technologies or whatever that you so that
market is tightening up. So this, I would say was
not done in the best way. And I'm pleased at
least that that's been changed. I think that was a
(10:01):
smart move to change it, and we have hopefully negotiations.
But you still have these very big issues and the
budget issues.
Speaker 3 (10:11):
You see right now we're.
Speaker 2 (10:12):
Paying attention to the tariff.
Speaker 1 (10:18):
And the budget issue. Yeah, and the budget issue is
probably the one that will also focus on, which I
know is a subject of your new book. But did
you see the risk of a global financial crisis this
week on a scale of what we saw after Lehman collapsed.
Speaker 3 (10:33):
Yeah.
Speaker 2 (10:34):
Well, as explained in my earlier book, The Changing World Order,
and as explained in this other book, How Countries Go
Broke the Big Cycle, these risks have been I think
apparent for some time. They're measurable and so on. So yes,
(10:56):
I think that I think now when I thought before,
as expressed in the book when I do the pro
form of financials for the supply of debt and who
are the buyers of the debt, I'm deeply concerned it'll
be about the deficit will be probably in the order
(11:19):
of seven percent of GDP. And when I do the
supply demand estimates, if the demand is probably going to
be closer to three percent of GDP, so there needs
to be a cut in that. And in my book
I explain how that could be done as it was
(11:43):
done between nineteen ninety two and nineteen ninety eight through
a mix of policies. I'm not the political person to
decide which it is, but I would say there's a
mantra that I have. Everybody should take the three percent
pledge in one way or another. They have to bring
that deficit down to that or I do believe we're
(12:03):
going to have a supplied demand problem. And if you
have that together with the other problems, the tariff problem
and the like, and you have that in an environment
that is socially and politically very sensitive, imagine you know
(12:24):
how much we'll be fighting with each other if you
have that perfect storm, and you know those circumstances are
all significant.
Speaker 1 (12:38):
Have players become too big to fail in the US
was you know, the rescue effectively from President Trump about that.
Speaker 3 (12:49):
Of course, you know, of course, of course.
Speaker 2 (12:55):
And that's why, in one way or another, the government,
either directly through the central government or indirectly through the
Central bank, always needs to make those that are makes
a choice which are those that are too big to fail?
(13:18):
And then the way they do it always is the
central government does its thing, which has provide supports in
one way or another, and the central bank works with
the central government to create the credit and the money
(13:38):
that's necessary to do that. And so this is always
the case, and it's so this is certainly the case.
We've seen this many times before.
Speaker 3 (13:50):
Right.
Speaker 1 (13:50):
Do you think some investors would have basically blown up
if the President hadn't reverse course on teriffs because of
the market turmoil?
Speaker 2 (14:03):
Yes, some some certainly would, not only just because of
the tariffs, but because of the capital markets implications. So
there's a spiral that is reinforcing. When the capital markets
tighten up for certain companies or certain people, and then
(14:25):
there is the concern and that goes down there needs
to be.
Speaker 3 (14:31):
An action, and that's you know, always the case.
Speaker 2 (14:35):
So, yes, we have these vulnerabilities, and then we have
what governments do in the face of those vulnerabilities.
Speaker 3 (14:43):
This is this has always happened.
Speaker 1 (14:47):
But so given all of this, and given the market
to themal that we saw, where should regulators be looking
for risks?
Speaker 2 (15:00):
We went through the two thousand and eight financial crisis,
a number of rules were put into place about how
governments should and central banks should be handling things. So
many rules that there was an absence of discretion and
(15:24):
in other words, discretion was taken away for dealing with
some of these issues. It's dependent on those rules working
very well. Those who went through that time, Tim Geidner,
Ben bernanke.
Speaker 3 (15:43):
Hank Paul Said, and so on.
Speaker 2 (15:46):
Spoke very clearly about the fact that you can have
so many rules and in a crisis there needs to
be a quick.
Speaker 3 (15:58):
Action.
Speaker 2 (16:00):
So my bigger worry is not that there would be
it's a little bit that the rules themselves and the
need to operate by the rules might could stand in
the way of that. I'm not especially concerned about that,
but I am concerned about that.
Speaker 3 (16:21):
What I am really mostly.
Speaker 2 (16:23):
Concerned about is the basic supplied demand of debt. It's
together with these other factors because they work together. The
debt combines with the politics, combines with the economy, combines
with the geopolitical and so we talk about China, of course,
(16:45):
but there are now dynamics at work Russia and Europe,
the Middle East, there are, and there is not the
same order in dealing with those. So it's that combination
(17:05):
that I think is particularly dangerous. Any one of them,
the supply demand would be dangerous, but these other things
are dangerous.
Speaker 1 (17:16):
So we know ray that a lot of the banks
are looking at their risk levels, and some have grown
so much in prime brokerage, right, they've done this quite
aggressively that they've had to give margin calls to some clients.
Could they just terms under which they provide repo financing
against treasuries? Is this a way to cool off the system?
Speaker 3 (17:38):
Yes, and they always do. And then.
Speaker 2 (17:44):
And I'm I'm not particularly concerned at that level because
I think that those things can be handled. They'll be
if you look at liquidity measures and ill liquidity measures
and the tightness I've we have a liquidity gauge that
(18:05):
you know has gone back actually you know, to nineteen
thirty and so on a new you can measure these
ill liquidity and this country, it has not reached and
I think it would be unlikely to reach such extreme levels.
Speaker 3 (18:21):
And if it does, I think, except for.
Speaker 2 (18:24):
These regulatory hurdles, I think, you know, buy and large,
they'll be handled. I think it's the greater watch the
thirty year bond. Look at the market action of the
thirty year bond relative to the ten year bond relative
to cash, and that's reflecting the market action. Watch when
(18:51):
the bond market goes down at the same time as
the dollar goes down, at the same time as gold
goes up, it is reflecting a shift in the capital market.
Speaker 3 (19:06):
So if the yield curve becomes more.
Speaker 2 (19:09):
Steep at the same time as the currency is going down,
and you have that market action, it's reflecting the movement of.
Speaker 3 (19:21):
A supply demand in balance.
Speaker 2 (19:23):
So I would I'm concerned about that supply demand in balance,
and I should say I don't want to just complain
about things. In this book, I suggested what I call
a three percent solution and three factor solution.
Speaker 3 (19:42):
Three percent of GDP which.
Speaker 2 (19:43):
Can be gotten, and three Let's keep in mind there
are three factors they're spending. There's Texas, and there's interest rates,
and interest rates are now more important than spending or taxes,
even because of the size of that debt, so that
(20:06):
we're dealing with a trillion dollars in interest rates and
about nine trillion dollars more than that that has to
be rolled over, which means has to be sold again.
Speaker 3 (20:17):
That's the issue. I think.
Speaker 1 (20:20):
There's also a number of papers right that talk about
safety valve given really in the more immediate term what
happened in the last week, and one of them said
that the FED could consider, for example, setting up an
emergency program that would close out highly leveraged hedge fund
trades in the event of a crisis. Does that seem
like something that you'd agree with? Does that seem like
(20:41):
a good idea?
Speaker 3 (20:43):
I don't think that there's the understanding of that.
Speaker 2 (20:48):
I I'm all in favor of smart controls in a
certain circumstance, but the amount of knowledge and the elements
of whether it's a hedge fund or whether it's a bank,
(21:09):
or whether it's some form of dealer, the actual knowledge
to quickly make smart decisions is of concern to me
that it's not adequate.
Speaker 1 (21:26):
Do you believe there's yea? Do you believe right there's
permanent damage from the trade war. Right, despite Trump's turnaround,
has damage been done to the global economy by this
lingering sense of unpredictability in US policy?
Speaker 3 (21:43):
Yes, that all entities that I speak with.
Speaker 2 (21:54):
Here or around the world have an element of trauma
or shock or fear and lack of confidence that there
(22:14):
will be And I'm going to be careful not to
say lack of confidence in general, but lack of certainty
or the volatility is a scary thing together with the
underlying circumstances. So the sense of stability has gone down
(22:37):
a lot.
Speaker 3 (22:37):
The sense of the trust in.
Speaker 2 (22:42):
Policy being stable and the environment being stable has gone
down a lot. The sense of being able to work
things out has gone down a lot.
Speaker 1 (22:57):
How does the US regain that trust and what does
that mean for treasuries, the US dollar as a reserve
currency and actually US exceptionalism.
Speaker 2 (23:11):
Rust is the most important thing in all the capital markets,
and I think that there's I think that that's a
source of great of great concern. It takes a very
(23:32):
long time to build a reputation that the capital markets
are free, safe, that there's reasonableness, and that there's a
way of working things out collectively that's not damaging. And
you know, I don't know what the saying is, but
(23:54):
you know how long it takes to build a reputation,
and it only takes one or two times to lose
that reputation, takes a long time to.
Speaker 3 (24:02):
Get it back. So I think.
Speaker 2 (24:08):
A lot will depend on the quality of all these
decisions making the cooperation. And I'm not saying it won't happen,
but it it better happened quickly, I think. And so
in other words, how does it work? Negotiations and beyond negotiations,
(24:33):
less volatility, just the sense that the capital markets now
could lock up itself creates a change in the way
that everyone, most importantly companies deal with their businesses and
(24:54):
their capital capital raising and all of that.
Speaker 1 (24:59):
And so what's the right way of dealing with China
given all of this, and given your specific worry that
you've had for quite some time about US debt.
Speaker 2 (25:11):
Well, first, there has to be a recognition that we
have a structural problem in that we have an interdependency
that the United States can't either financially or geopolitically, because
(25:31):
of the risks be in a position where it's dependent
on getting stuff from China and Similarly, for the Chinese,
they can't be feel safe about getting their capital returns.
Speaker 3 (25:52):
In that way.
Speaker 2 (25:53):
So in a global economy you can't have by definition
large imbalances. So now the question is how to deal
with that. That's an engineering exercise in my opinion. They
can have a negotiated way in which.
Speaker 3 (26:14):
The currency is raised.
Speaker 2 (26:17):
They have to in one way or another to deal
with this reduce that so the currency can be raised
or mm B, which would happen by then starting to
sell off reserves. The United States likes the fact that
the currency would appreciate, and that the and probably the
(26:40):
Chinese like the fact that they can get less in
debt by selling off some of their holdings in that
dynamic to support the currency, in which case then China
has to not just be a manufacturer, but it has
to be a consumer. And so right now about thirty
(27:06):
three percent of all manufacturing in the world, which is
more than the United States, Germany and Japan combined, is
from China. So they manufacture. The United States does not manufacture,
and so what the world needs now is the Chinese
(27:27):
to be consumers. So if you would have that foreign
exchange increase and you were to deal with trade together
in a sensible way. I think ideally then you would
also have naturally Chinese doing an increase in monetary and
fiscal policies to raise demand, particularly consumption, because exports.
Speaker 3 (27:55):
Are going to go down. Manufacturing is going to be
a problem.
Speaker 2 (28:01):
So that if they raise consumption and the United States
becomes less consumption driven and more production driven, at least
those are movements in the right right direction. Such negotiations, unfortunately,
and such actual big changes are unlikely to take place
(28:26):
quickly enough and well enough is my fear.
Speaker 3 (28:33):
Right.
Speaker 1 (28:33):
I mean, given that, and given this possible permanent scarring
of US dollar and treasuries, is a US recession actually avoidable?
Speaker 2 (28:47):
I think it's likely that we're going to be in
a recession. And the question really recession is you know,
a line at zero you get and then you know
sort of two quarters in that And I think right
now it's you know, it's it's close call, and it's probable.
Speaker 3 (29:07):
But who cares about.
Speaker 2 (29:10):
Stat let's say two quarters of stagnation or a little
bit of negative. I'm more worried about the greater dynamic
of these conflicts. Uh they you know, I'm worried about
more serious.
Speaker 3 (29:29):
Issues that are structural, financial.
Speaker 2 (29:35):
Political, the financial, the political and uh and the geo
political because they feed on itself if you get a
bad one, you know, yeah, this is not this is
not a normal recession kind of situation. We are changing
(29:58):
the monetary order in other words, when we start to
think there's supply and the demand for debt and one
man's debts or another man's assets, as I said, and
then the question is money which is debt is supposed
to be both the medium of exchange and a.
Speaker 3 (30:17):
Storehold of wealth.
Speaker 2 (30:20):
And there are times in history and this is one
of those times in history that there's a question of
whether bonds are an effective storehold of wealth because of
this supply de man and so on, and then the
need for you know, what does the central bank do?
(30:41):
They try to push down the rates and provide liquidity,
and that we.
Speaker 3 (30:47):
Cans the value.
Speaker 2 (30:47):
So the question is what is a good store hold
of wealth? And of course you know that the treasury
market is the backbone of all capital markets. You know,
everything trades off of treasuries has spreads to treasuries. Equities
in terms of expected returns relative to treasuries, and then
(31:08):
credit spreads and everything. So I think a lot is
going to depend on the prudent handling of the supply
demand situation for treasuries, and then the political ability to
carry this through without great internal disruption, and then the
(31:33):
international world order and so cooperation and working towards stability,
harmony is and dealing with these things as common problems
would be the path to do that, and we'll there's
reason to question that, right.
Speaker 1 (31:52):
Thank you so much for your time today. Thank you,
thanks for listening, because this week's in the City from Bloomberg.
This episode was hosted by me Francine Laquang, who was
produced by Moses and dam Brandon. Francis Newnham is our
executive producer. Special thanks to Ray Dalio. Please subscribe, rate,
and review wherever you listen to podcasts.
Bloomberg Audio Studios, Podcasts, radio News. Welcome to the City of.
Speaker 2 (00:13):
London, the City of the City, the City of London.
Speaker 1 (00:19):
Please mind the gap between the tree and the platform.
The financial hearts of the country, the city, the city.
Speaker 3 (00:31):
Welcome to in the city.
Speaker 1 (00:34):
Stand clear of the doors, pea Welcome to in the city.
Each week we unpack a story that's crucial to the
world's financial capitals. I'm from Saint Laqua and this week
we speak to Ray Dalio. It's been a crazy week
on the markets because of Trump's tariffs. Well, Ray Dalio
(00:54):
warns that investors are way too focused on tariffs and
just not paying enough attention to the breakdown in major monetary, political,
and geopolitical orders. He says the US reliance on debt
to finance success and creditor countries like China holding too
much debt is a worry and that will lead to
our correction of these imbalances and a change in the
(01:15):
monetary order. Let's begin, Ray Dalio, thank you so much
for joining us now. This week was a little bit
rough on the markets. I know you've also the way
you view the world is basically by identifying five major
forces that drive the rise and fall of nations and
shape the global economy. So we have debt, money, economic cycles.
(01:35):
There's internal order and disorder, external geopolitical order and disorder,
acts of nature and technology. Given all these competing forces,
what do you think is the most worrying right now?
Speaker 2 (01:51):
Yeah, I think it's important to step back and see
this big picture to understand where we are and what
I What I mean is there are orders, which are systems,
like a monetary order. We have a monetary order, and
related to that monetary order, it has to do with
a debt cycle. And when you get into too much debt,
(02:15):
it's a problem. Too much debt one man's debts another
man's money. And then it's related of course to the economy,
and it's related to the imbalances such as we have
a very large imbalance in trade, and we have a
very large imbalance in capital, and there's a supplied demand
problem with debt. The second influence through time is the
(02:42):
domestic political order in other words, for example, democracy and
so on, and we are changing in a form that's
very similar to the thirties. All of this pattern is
very similar to the thirties, in which there's an internal
conflict you know in Europe, make the trains run on time.
(03:06):
The inefficiency, the conflict of the wealth gaps, the opportunities gaps,
the left and the right getting to the point where
they have irreconcilable differences, and there's great internal conflict about that.
Speaker 3 (03:22):
The third force changes in the.
Speaker 2 (03:26):
World order, the world geopolitical order, you know, which began
in nineteen forty five as a result of what happened
in the thirties, which is then you have a new
world order, an American world order. The winning country desides
how things are going to go. And we had an
American world order, which is why we have the United
Nations and the IMF and the World NINK and so on.
(03:49):
In the United States, and the United States was a
dominant power, and now we're having a conflict. There's no rule,
who rules, and there's a conflict. Those orders are changing
because of excesses. In addition, through time, there's always been
acts of nature. Droughts, floods, and pandemics have killed more
(04:12):
people than wars.
Speaker 3 (04:15):
And then there's technology.
Speaker 2 (04:16):
So those forces and you could see them in a cycle.
So right now we have imbalances. We have a lot
of debt, we have and it'll be it. There's a
supply demand problem. We have a lot of debt with
more men's debts from another men's assets. That means that
(04:37):
some people, some holders of these debts are concerned about
those both because they have.
Speaker 3 (04:44):
A lot of it. Then they have to buy a
lot more.
Speaker 2 (04:47):
When this treasury runs a large deficit, that means they
have to sell bonds. And then in this environment it's
not as desirable. There are countries that worry about actions
and so on that with China and other countries worry
about those things, and so there's a supply demand balance.
Speaker 3 (05:07):
These are the main drivers their problems.
Speaker 2 (05:14):
They have to reduce the debt issue, they have to
reduce the imbalances, you know, the trade imbalance and the
capital and balance, particularly at a time when there's conflict
and there needs to be a sense of self sufficiency
that you produce it at home. And then also there's
(05:34):
the hollowing out of the loss of manufactory.
Speaker 3 (05:39):
So anyway, that's the framing of it.
Speaker 2 (05:42):
And now we're seeing the particular manifestations and actions pertaining.
Speaker 3 (05:47):
To that.
Speaker 1 (05:50):
Y what we've lived through in the last week with
these traffs by Donald Trump that really sent the markets
in disarray with possible distress. Was it good idea badly
thought out or was it just a bad idea.
Speaker 2 (06:08):
Let's go to the problem, the problem, and then we
deal with the solution. The problem is in a world
that's in war, almost in conflict, and there's too much
debt somehow, and the hollowing out of the middle class somehow,
(06:31):
those imbalances, which means interdependencies have got to be reduced.
Now the way that was handled rather than through negotiations,
you know, I'm not the politician.
Speaker 3 (06:50):
I'm not the negotiator.
Speaker 2 (06:51):
I'm not the person to say whether that style of
handling it was better or worse. I would say that
it dramatically affected psychology and attitude about the United States' reliability,
and also it exacerbated concerns, so I would say it
(07:15):
could have been handled better. I would also say that
it's very theoretical too to think that we are in
the necessary timeframe to eliminate those imbalances, which have our
capital balances as well as trade imbalances. That it's difficult
(07:35):
to make manufacturing happen here in the same way because
of the structural things. Do you have the labor force,
what are the regulations. It's very difficult nowadays to produce here,
that's part of the bureaucracy. How do you get to
become efficient? How do you get that population which has
(07:58):
been hollowed out? Sty percent of Americans have below a
sixth grade reading level and are having a problem to
be productive. So can you build the alternatives that can?
You build ships? And with that, I use ships as
an example.
Speaker 3 (08:17):
If you.
Speaker 2 (08:19):
If you're a shipbuilder, it's going to be very difficult
to in a reasonable time frame to build be become
an effective shipbuilder. And even as a shipbuilder or the
analogous UH industry, you still have to you have instability.
(08:39):
You don't know if the next administration is going to
have that, and then all of a sudden you're competing
with the Chinese or alternative shipbuilders around the world. So
I think it could have been UH. I think it
could have been handled better. I think it's you know,
very very to And then when you have the retaliatory tariffs,
(09:07):
you have a situation where basically production sort of grinds
to a halt because there's these interdependencies.
Speaker 3 (09:16):
And that is very bad.
Speaker 2 (09:18):
It's almost like another COVID in that it raises costs,
it lowers revenues for companies, and it worsens the capital markets.
That the capital markets are very important for a lot
of companies to be able to do things, particularly let's say,
(09:39):
if you're developing technologies or whatever that you so that
market is tightening up. So this, I would say was
not done in the best way. And I'm pleased at
least that that's been changed. I think that was a
(10:01):
smart move to change it, and we have hopefully negotiations.
But you still have these very big issues and the
budget issues.
Speaker 3 (10:11):
You see right now we're.
Speaker 2 (10:12):
Paying attention to the tariff.
Speaker 1 (10:18):
And the budget issue. Yeah, and the budget issue is
probably the one that will also focus on, which I
know is a subject of your new book. But did
you see the risk of a global financial crisis this
week on a scale of what we saw after Lehman collapsed.
Speaker 3 (10:33):
Yeah.
Speaker 2 (10:34):
Well, as explained in my earlier book, The Changing World Order,
and as explained in this other book, How Countries Go
Broke the Big Cycle, these risks have been I think
apparent for some time. They're measurable and so on. So yes,
(10:56):
I think that I think now when I thought before,
as expressed in the book when I do the pro
form of financials for the supply of debt and who
are the buyers of the debt, I'm deeply concerned it'll
be about the deficit will be probably in the order
(11:19):
of seven percent of GDP. And when I do the
supply demand estimates, if the demand is probably going to
be closer to three percent of GDP, so there needs
to be a cut in that. And in my book
I explain how that could be done as it was
(11:43):
done between nineteen ninety two and nineteen ninety eight through
a mix of policies. I'm not the political person to
decide which it is, but I would say there's a
mantra that I have. Everybody should take the three percent
pledge in one way or another. They have to bring
that deficit down to that or I do believe we're
(12:03):
going to have a supplied demand problem. And if you
have that together with the other problems, the tariff problem
and the like, and you have that in an environment
that is socially and politically very sensitive, imagine you know
(12:24):
how much we'll be fighting with each other if you
have that perfect storm, and you know those circumstances are
all significant.
Speaker 1 (12:38):
Have players become too big to fail in the US
was you know, the rescue effectively from President Trump about that.
Speaker 3 (12:49):
Of course, you know, of course, of course.
Speaker 2 (12:55):
And that's why, in one way or another, the government,
either directly through the central government or indirectly through the
Central bank, always needs to make those that are makes
a choice which are those that are too big to fail?
(13:18):
And then the way they do it always is the
central government does its thing, which has provide supports in
one way or another, and the central bank works with
the central government to create the credit and the money
(13:38):
that's necessary to do that. And so this is always
the case, and it's so this is certainly the case.
We've seen this many times before.
Speaker 3 (13:50):
Right.
Speaker 1 (13:50):
Do you think some investors would have basically blown up
if the President hadn't reverse course on teriffs because of
the market turmoil?
Speaker 2 (14:03):
Yes, some some certainly would, not only just because of
the tariffs, but because of the capital markets implications. So
there's a spiral that is reinforcing. When the capital markets
tighten up for certain companies or certain people, and then
(14:25):
there is the concern and that goes down there needs
to be.
Speaker 3 (14:31):
An action, and that's you know, always the case.
Speaker 2 (14:35):
So, yes, we have these vulnerabilities, and then we have
what governments do in the face of those vulnerabilities.
Speaker 3 (14:43):
This is this has always happened.
Speaker 1 (14:47):
But so given all of this, and given the market
to themal that we saw, where should regulators be looking
for risks?
Speaker 2 (15:00):
We went through the two thousand and eight financial crisis,
a number of rules were put into place about how
governments should and central banks should be handling things. So
many rules that there was an absence of discretion and
(15:24):
in other words, discretion was taken away for dealing with
some of these issues. It's dependent on those rules working
very well. Those who went through that time, Tim Geidner,
Ben bernanke.
Speaker 3 (15:43):
Hank Paul Said, and so on.
Speaker 2 (15:46):
Spoke very clearly about the fact that you can have
so many rules and in a crisis there needs to
be a quick.
Speaker 3 (15:58):
Action.
Speaker 2 (16:00):
So my bigger worry is not that there would be
it's a little bit that the rules themselves and the
need to operate by the rules might could stand in
the way of that. I'm not especially concerned about that,
but I am concerned about that.
Speaker 3 (16:21):
What I am really mostly.
Speaker 2 (16:23):
Concerned about is the basic supplied demand of debt. It's
together with these other factors because they work together. The
debt combines with the politics, combines with the economy, combines
with the geopolitical and so we talk about China, of course,
(16:45):
but there are now dynamics at work Russia and Europe,
the Middle East, there are, and there is not the
same order in dealing with those. So it's that combination
(17:05):
that I think is particularly dangerous. Any one of them,
the supply demand would be dangerous, but these other things
are dangerous.
Speaker 1 (17:16):
So we know ray that a lot of the banks
are looking at their risk levels, and some have grown
so much in prime brokerage, right, they've done this quite
aggressively that they've had to give margin calls to some clients.
Could they just terms under which they provide repo financing
against treasuries? Is this a way to cool off the system?
Speaker 3 (17:38):
Yes, and they always do. And then.
Speaker 2 (17:44):
And I'm I'm not particularly concerned at that level because
I think that those things can be handled. They'll be
if you look at liquidity measures and ill liquidity measures
and the tightness I've we have a liquidity gauge that
(18:05):
you know has gone back actually you know, to nineteen
thirty and so on a new you can measure these
ill liquidity and this country, it has not reached and
I think it would be unlikely to reach such extreme levels.
Speaker 3 (18:21):
And if it does, I think, except for.
Speaker 2 (18:24):
These regulatory hurdles, I think, you know, buy and large,
they'll be handled. I think it's the greater watch the
thirty year bond. Look at the market action of the
thirty year bond relative to the ten year bond relative
to cash, and that's reflecting the market action. Watch when
(18:51):
the bond market goes down at the same time as
the dollar goes down, at the same time as gold
goes up, it is reflecting a shift in the capital market.
Speaker 3 (19:06):
So if the yield curve becomes more.
Speaker 2 (19:09):
Steep at the same time as the currency is going down,
and you have that market action, it's reflecting the movement of.
Speaker 3 (19:21):
A supply demand in balance.
Speaker 2 (19:23):
So I would I'm concerned about that supply demand in balance,
and I should say I don't want to just complain
about things. In this book, I suggested what I call
a three percent solution and three factor solution.
Speaker 3 (19:42):
Three percent of GDP which.
Speaker 2 (19:43):
Can be gotten, and three Let's keep in mind there
are three factors they're spending. There's Texas, and there's interest rates,
and interest rates are now more important than spending or taxes,
even because of the size of that debt, so that
(20:06):
we're dealing with a trillion dollars in interest rates and
about nine trillion dollars more than that that has to
be rolled over, which means has to be sold again.
Speaker 3 (20:17):
That's the issue. I think.
Speaker 1 (20:20):
There's also a number of papers right that talk about
safety valve given really in the more immediate term what
happened in the last week, and one of them said
that the FED could consider, for example, setting up an
emergency program that would close out highly leveraged hedge fund
trades in the event of a crisis. Does that seem
like something that you'd agree with? Does that seem like
(20:41):
a good idea?
Speaker 3 (20:43):
I don't think that there's the understanding of that.
Speaker 2 (20:48):
I I'm all in favor of smart controls in a
certain circumstance, but the amount of knowledge and the elements
of whether it's a hedge fund or whether it's a bank,
(21:09):
or whether it's some form of dealer, the actual knowledge
to quickly make smart decisions is of concern to me
that it's not adequate.
Speaker 1 (21:26):
Do you believe there's yea? Do you believe right there's
permanent damage from the trade war. Right, despite Trump's turnaround,
has damage been done to the global economy by this
lingering sense of unpredictability in US policy?
Speaker 3 (21:43):
Yes, that all entities that I speak with.
Speaker 2 (21:54):
Here or around the world have an element of trauma
or shock or fear and lack of confidence that there
(22:14):
will be And I'm going to be careful not to
say lack of confidence in general, but lack of certainty
or the volatility is a scary thing together with the
underlying circumstances. So the sense of stability has gone down
(22:37):
a lot.
Speaker 3 (22:37):
The sense of the trust in.
Speaker 2 (22:42):
Policy being stable and the environment being stable has gone
down a lot. The sense of being able to work
things out has gone down a lot.
Speaker 1 (22:57):
How does the US regain that trust and what does
that mean for treasuries, the US dollar as a reserve
currency and actually US exceptionalism.
Speaker 2 (23:11):
Rust is the most important thing in all the capital markets,
and I think that there's I think that that's a
source of great of great concern. It takes a very
(23:32):
long time to build a reputation that the capital markets
are free, safe, that there's reasonableness, and that there's a
way of working things out collectively that's not damaging. And
you know, I don't know what the saying is, but
(23:54):
you know how long it takes to build a reputation,
and it only takes one or two times to lose
that reputation, takes a long time to.
Speaker 3 (24:02):
Get it back. So I think.
Speaker 2 (24:08):
A lot will depend on the quality of all these
decisions making the cooperation. And I'm not saying it won't happen,
but it it better happened quickly, I think. And so
in other words, how does it work? Negotiations and beyond negotiations,
(24:33):
less volatility, just the sense that the capital markets now
could lock up itself creates a change in the way
that everyone, most importantly companies deal with their businesses and
(24:54):
their capital capital raising and all of that.
Speaker 1 (24:59):
And so what's the right way of dealing with China
given all of this, and given your specific worry that
you've had for quite some time about US debt.
Speaker 2 (25:11):
Well, first, there has to be a recognition that we
have a structural problem in that we have an interdependency
that the United States can't either financially or geopolitically, because
(25:31):
of the risks be in a position where it's dependent
on getting stuff from China and Similarly, for the Chinese,
they can't be feel safe about getting their capital returns.
Speaker 3 (25:52):
In that way.
Speaker 2 (25:53):
So in a global economy you can't have by definition
large imbalances. So now the question is how to deal
with that. That's an engineering exercise in my opinion. They
can have a negotiated way in which.
Speaker 3 (26:14):
The currency is raised.
Speaker 2 (26:17):
They have to in one way or another to deal
with this reduce that so the currency can be raised
or mm B, which would happen by then starting to
sell off reserves. The United States likes the fact that
the currency would appreciate, and that the and probably the
(26:40):
Chinese like the fact that they can get less in
debt by selling off some of their holdings in that
dynamic to support the currency, in which case then China
has to not just be a manufacturer, but it has
to be a consumer. And so right now about thirty
(27:06):
three percent of all manufacturing in the world, which is
more than the United States, Germany and Japan combined, is
from China. So they manufacture. The United States does not manufacture,
and so what the world needs now is the Chinese
(27:27):
to be consumers. So if you would have that foreign
exchange increase and you were to deal with trade together
in a sensible way. I think ideally then you would
also have naturally Chinese doing an increase in monetary and
fiscal policies to raise demand, particularly consumption, because exports.
Speaker 3 (27:55):
Are going to go down. Manufacturing is going to be
a problem.
Speaker 2 (28:01):
So that if they raise consumption and the United States
becomes less consumption driven and more production driven, at least
those are movements in the right right direction. Such negotiations, unfortunately,
and such actual big changes are unlikely to take place
(28:26):
quickly enough and well enough is my fear.
Speaker 3 (28:33):
Right.
Speaker 1 (28:33):
I mean, given that, and given this possible permanent scarring
of US dollar and treasuries, is a US recession actually avoidable?
Speaker 2 (28:47):
I think it's likely that we're going to be in
a recession. And the question really recession is you know,
a line at zero you get and then you know
sort of two quarters in that And I think right
now it's you know, it's it's close call, and it's probable.
Speaker 3 (29:07):
But who cares about.
Speaker 2 (29:10):
Stat let's say two quarters of stagnation or a little
bit of negative. I'm more worried about the greater dynamic
of these conflicts. Uh they you know, I'm worried about
more serious.
Speaker 3 (29:29):
Issues that are structural, financial.
Speaker 2 (29:35):
Political, the financial, the political and uh and the geo
political because they feed on itself if you get a
bad one, you know, yeah, this is not this is
not a normal recession kind of situation. We are changing
(29:58):
the monetary order in other words, when we start to
think there's supply and the demand for debt and one
man's debts or another man's assets, as I said, and
then the question is money which is debt is supposed
to be both the medium of exchange and a.
Speaker 3 (30:17):
Storehold of wealth.
Speaker 2 (30:20):
And there are times in history and this is one
of those times in history that there's a question of
whether bonds are an effective storehold of wealth because of
this supply de man and so on, and then the
need for you know, what does the central bank do?
(30:41):
They try to push down the rates and provide liquidity,
and that we.
Speaker 3 (30:47):
Cans the value.
Speaker 2 (30:47):
So the question is what is a good store hold
of wealth? And of course you know that the treasury
market is the backbone of all capital markets. You know,
everything trades off of treasuries has spreads to treasuries. Equities
in terms of expected returns relative to treasuries, and then
(31:08):
credit spreads and everything. So I think a lot is
going to depend on the prudent handling of the supply
demand situation for treasuries, and then the political ability to
carry this through without great internal disruption, and then the
(31:33):
international world order and so cooperation and working towards stability,
harmony is and dealing with these things as common problems
would be the path to do that, and we'll there's
reason to question that, right.
Speaker 1 (31:52):
Thank you so much for your time today. Thank you,
thanks for listening, because this week's in the City from Bloomberg.
This episode was hosted by me Francine Laquang, who was
produced by Moses and dam Brandon. Francis Newnham is our
executive producer. Special thanks to Ray Dalio. Please subscribe, rate,
and review wherever you listen to podcasts.
Host
Francine Lacqua
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