When Ray Dalio was 23, President Nixon announced that the United States would no longer be adhering to the gold standard for American currency. Clerking on the floor of the New York Stock Exchange, Dalio expected to see chaos — but instead stocks soared. Curious to understand this phenomenon, he began to read about similar events in 1933, and it opened his eyes to the lessons that could be drawn from history. His latest book draws on the patterns he’s gleaned from studying dynasties and empires throughout time, as well as his own experiences as a hedge fund manager and founder of Bridgewater Associates.
Ray joined Tyler to discuss the forces that will affect American life in the coming decades, why we should be skeptical of the saliency of current equities prices, the market as a poker game, the benefits and risks of the US dollar as the world reserve currency, why he thinks US inflation will not be transitory, the key to his success as an investor, how studying the Great Depression enabled him to anticipate the 2008 financial crisis, Bridgewater’s culture of radical transparency, the usefulness of psychometric profiles, where the United States is falling short most in terms of moral character, his truth-seeking process, the kinds of education crucial to building a successful dynasty or empire — and what causes them to fail, how transcendental meditation helps him be creative and objective, what he loves about jazz music, what we undervalue about the ocean, why he loves bow-hunting Cape Buffalo, and more.
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Recorded November 5th, 2021
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TYLER COWEN: Today I am here with Ray Dalio, who needs no introduction. Most notably, Ray has a new book out, Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail. Ray, welcome.
RAY DALIO: Thank you. Thank you for having me.
COWEN: The very first sentence of the introduction in your book is this: “The times ahead will be radically different from those we’ve experienced in our lifetimes, though similar to many times in history.” Do we see this today in current market prices? And if so, which ones?
DALIO: We certainly see it today in market prices and in everything that’s happening. There are three — sometimes, maybe we could stretch that to five — big things that are happening. They are reflected in market prices and the dynamics behind them, and their change will be reflected in changes in market prices.
Those three big ones are, first, that which is happening with money and credit. In other words, when you get close to a zero interest rate, and you spend a lot more money than you earn, then the government does that, that means that a lot of money is printed, and it moves its way through the system in a way that is reflected in market prices. That is what is happening now.
The second is the very large internal conflicts that we’re having that are due to wealth gaps, political gaps, and so on, that influence the left and the right and the dynamic between them, that affects tax policies, that affects capital flows and the like. They’re reflected in market prices and will change as those circumstances change.
The third big influence is the rise of a great power, China, to challenge the existing leading power and the existing world order. That is being reflected in market prices but will be reflected more as those circumstances change. Those are the three big influences — to answer your questions — that are reflected, maybe not yet adequately, and we have to look ahead of what things will change.
The other two that have been reflected through history — and I didn’t have a full appreciation of until I studied the last 500 years of history — those two are technology and inventiveness changes. We’re accelerating the rate at which they are occurring. That adaptability and change is affecting our lives in big ways, so you cannot ignore the technologically and inventiveness changes.
The fifth is acts of nature. The one thing that was interesting to me when I studied the last 500 years of history is that acts of nature — and they could be climate-related droughts and floods and pandemics — had cost more lives and toppled more civilizations than anything else, including wars. They are something that comes along irregularly. When you have the pandemic or the drought or that event that comes along once in 100 years or so, they have had big effects, too, so pandemic is a reminder of those.
Those are the drivers, and they will remain the main drivers, and as they change, prices will continue to change.
COWEN: If I look today, say, at equities prices, they seem fine. If I look at the 10-year yield for the US, it’s not crazy high. Should I just assume that these matters are more or less going to work out fine, given those market prices? Or are those prices wrong?
DALIO: No. I think you have to look at the dynamic behind those prices. I think I would look at them a bit differently. Regarding the dynamic behind those prices, it is that we are spending more than we are earning by a lot — individuals and the country as a whole. We need money, partially because of the political issues, partially for all the reasons that you know.
A lot of debt is being created that is also producing the need for a lot of money. As a result of that, we have very negative real interest rates. Real interest rates of short-term interest rates are significantly negative. Even bond yields — real bond yields — are over 100 basis points negative.
When one looks at the return of owning those bonds, that is a very bad return. It means that if you save in those assets and you put it away, that you will lose buying power, at probably a rate of 3 percent to 5 percent per year. We can guess what inflation is, and we can talk about that. But you will lose that, and that tax on your buying power makes one not want to be saving in those assets. It makes one want to borrow in those assets.
The availability of credit and that set of circumstances drives money into other assets. Those assets are investment assets, as well as goods and services. What we see now is that stocks are not expensive — not very expensive, maybe a little bit more so than normal — relative to bonds, which are very expensive, but still not expensive in relation to cash.
They are all having expected returns that are comparatively low, and we have an inflationary period. It’s very important to understand the paradigm that we’re in and how that dynamic works. As the inflation pressures become an issue and we have relatively, let’s say, stronger growth, those things will start to change.
The big question that the markets look at is, how will that change as a result? And will the Federal Reserve and other central banks begin to tighten monetary policy? Because these things will change. What will tax policies be and the like? Those things will affect market prices going forward. It’s unsustainable.
COWEN: Help me put this in the context of finance theory. If I look at the literature on finance, it’s very hard to predict excess returns. We’re not even sure beta predicts excess returns. Firm size, maybe a little. Price to book value, maybe a little.
Are you suggesting that the factors you’re citing predict excess returns? If so, why don’t we find that in the research literature? If not, why do we think they have predictive power? Do they predict excess returns? Polarization, credit, rise of China — they don’t seem to, in finance papers.
DALIO: There are so many people who write finance papers, and then there are people who make money in the markets. I can’t speak for those who are writing the finance papers, but I can answer your question in terms of the predictive value of those things, okay?
As we deal with the mechanics of debt, or excess returns, there’s always, throughout history, a debtor and a creditor. There’s always, throughout history, the ability to create demand by creating debt and by creating money. Then there become clear preferences for doing one or the other.
There are environments like the late 1970s, when Federal Reserve Chairman Paul Volcker tightened money and wanted to make it good to save and bad to borrow and have credit. That set of circumstances was caused, and that action was caused, by things that happened before it. That produced high real interest rates and the like, and that produced the environment that we had, largely, the disinflationary environment that followed.
Similarly, the 1960s led to the 1970s. The ’60s had too much debt creation due to war in Vietnam and what we call guns and butter policies. We were spending more than we were earning. That led to the necessity, in 1971, for the Federal Reserve, for the president of the United States to acknowledge that they would no longer be able to pay the dollar claims in gold and to default on the gold claim and to devalue the exchange rate and to devalue the dollar, which led to the 1970s inflation, and so on.
There were always, all through history, the dynamic in which there are high real interest rates, and it pays to be a saver for some times. There are times when there are very, very low real interest rates, and the need to create a lot of money and credit, and it pays to have the opposite side of assets positioned in the opposite way. And that’s been true throughout history, and that’s the main driver.
I think, when we look forward, we can use those as guides to what’s likely to happen in the way of excess return. It’s, in fact, the way the system works. In other words, investors, borrowers, and lenders look at the relative expected returns of cash, bonds, and other asset classes, and move their money between those things based on the relative pricing.
That’s why, for example, when there is a rise in interest rates, a tightening of monetary policy, and short-term interest rates rise relative to short longer-term interest rates — so the yield curve begins to flatten, and so on — that we see that there’s a slowing in the economy and a slowing in capital availability lending — long-term lending. There’s a shift to saving, and as a result, there’s a slowing of the economy. That’s, to me, how the system works.
COWEN: If I look at the macroeconomic literature, it seems to me, even GDP — when we run statistical tests, it’s hard to distinguish that from a random walk with trend. There’s not a lot of obvious mean reversion in the system.
DALIO: I think we’re referring to different things. You’re referring to what you’re reading in the literature, and I’m referring to my 50 years of experience and what I’m doing, so we have a different perspective about those things.
COWEN: Tell me what’s wrong with the literature. Those are actual numbers taken from government databases. You run statistics on them — returns are close to a random walk. GDP is close to a random walk with trend.
DALIO: It’s not random at all. In other words, do you think where interest rates are is random? Do you think it’s random? Do you think that if these things change . . . let’s take that example. Do you think that it would be random that the Federal Reserve would tighten monetary policy? Do you think it’s random that we’re having inflation pressures? Do you think it’s random? Do you think those things are random?
COWEN: I think the market has a model of what will happen. It’s hard to beat that model. But look at it this way: the factors you’re citing to me — they’re publicly available information. We’re talking about them on a podcast. Why shouldn’t they already be in market prices?
DALIO: The market is like a poker game. I’ve played the poker game for over 50 years. I’m saying it’s a zero-sum game relative to what’s priced in, and the smart people take money away from those who are less smart. That’s the way it works. I wouldn’t be in the business — I wouldn’t be on your podcast, I presume — unless that was true.
COWEN: Well, it’s one thing to think some people are smarter than others, but if they’re smarter than others with respect to the ability to just spot publicly available information, it seems that’s easy to copy. We should then be able to go back in history, look at those same pieces of information and use them to predict expected returns, but we can’t do that.
DALIO: Some can and some can’t. I guess you look at the track records over long periods of time, and you decide who can and who can’t.
COWEN: Let me ask you a few questions about reserve currencies, which is a key theme in your book. If deindustrialization is a real problem, including for national security, isn’t having a reserve currency actually a disadvantage?
DALIO: I’m sorry. I didn’t understand your question. Deindustrialization is important —
COWEN: To the United States.
DALIO: You stated a premise that I didn’t hear clearly. If deindustrialization . . . please clarify your question.
COWEN: If deindustrialization is a problem for a nation’s middle class, for its national security —
DALIO: You mean the deterioration of its capabilities to earn money — industrialization. Services would work just as well. It doesn’t have to be industry per se. By deindustrialization, I presume you mean the weakening of its earning power, the weakening of its economy. Is that what you’re referring to?
COWEN: And it’s hard for the United States to build its own ships. We depend on inputs, say, from South Korea. A strong dollar, in that sense, is bad. Isn’t it, then, also bad if the dollar is a global reserve currency? Rather than good?
DALIO: The dollar as a reserve currency gives one the ability to print the world’s money.
COWEN: Is that, on net, a good or bad thing?
DALIO: Net — it’s like debt. Is debt a net good or bad thing? It is both a good and bad thing. Being able to create debt gives you the buying power. Being able to print the world’s currency — such as when we were in the COVID crisis — and being able to print the currency that, around the world, will be accepted, allowed us to sell more debt. We could sell more debt because, when you buy debt, it’s somebody else’s currency.
In other words, when one owns debt, the buyer of that debt is owning your promise to deliver them currency. When you have the world’s reserve currency, it allows you to get into more debt. Now, getting into more debt has historically, if not done correctly or not done sustainably — in a way, it creates obligations to pay back. Those obligations to deliver currency and pay back have produced different types of problems in the future. Debt is very short-term stimulative, and it’s longer-term depressing, and the ability to do that and have others take on our liability.
As John Connally said, when he was the Treasury secretary and the dollar was devaluing and at risk, he said, “The dollar is our currency, but it’s your problem.” That has a net benefit. It’s a net benefit, but like most things, it’s cyclical because you have to pay back, and it produces problems sometimes when you pay back. The United States is more indebted as a result of it being a reserve currency, and it all depends on who’s going to get stuck with that.
COWEN: Germany and Japan can often borrow at lower interest rates than we can. Does having the number-one reserve currency matter so much?
DALIO: It matters to the extent that Germany and Japan don’t have anywhere as much foreign debt, and their amount of debt —
COWEN: Japan has incredible levels of debt. It’s domestic, but they still find people willing to take it.
DALIO: It’s domestic debt.
COWEN: You can trade it on foreign markets — trades at very low yields.
DALIO: But it’s domestic debt. In other words, they found their population to buy it. They’re a net creditor country. The United States is a net debtor country.
COWEN: Sure. Again, at the margin, if you look at the debt position of Japan, how much of it they’ve de facto monetized by trading for zero-coupon bonds, the fact that debt sells perfectly well on global markets for the prices and yields it does . . .
DALIO: Almost all the main owners of Japanese debt are the Japanese central bank and the Japanese population. It sells very little net on public markets.
COWEN: Sure, but the yen is traded internationally, and Japan has done this without the value of the yen collapsing, hardly.
DALIO: Because of the supply and demand that I’ve just described to you. If the United States had to . . . we would then have to have this giant debt monetization. We would have to do what they are doing and end up in a whole different position. If we had to take our debt — the external amount of debt — and then say that we’re going to get into a creditor position, and if we get into a creditor position, then we’re in a situation where all of our population’s owning it. Then we could be in a position that’s analogous to that. I think I’ve answered your question. We just have a different view.
COWEN: If we think about macroeconomic cycles, Christina Romer claims a lot of downturns are the result of Fed contractions. Jim Hamilton claims that some downturns are the result of high oil price shocks, and you have a theory of debt cycles. If you’re just trying to apportion out mentally, how many of the cycles are Fed contractionary shocks? How many are oil shocks? How many are debt cycles? How do you see that landscape?
DALIO: I think that there’s goods and services that exist in a certain quantity, and then there’s a certain amount of money and credit, and they interact. And throughout history, if you have, let’s say, an oil shock that is not accommodated by an easing of central bank policy — in other words, the production of more money and credit — then, what I’m saying, if there was the same money and credit and you had an oil shock, then as oil goes up, something else would have to go down, and it would produce one set of circumstances.
It wouldn’t produce the same inflation. It would produce a consequence, and it would produce a transfer of wealth for those who are selling the oil at a high price — they gain wealth. And it would produce a decrease in the wealth for those who are having to pay that higher price. For example, it would make Middle Eastern countries richer, and it would make American companies and American entities poorer. That’s what would happen in a world in which we were to look at those items, and that certainly can cause a downturn in the economy.
Similarly now, where you can print money and credit, you can create money and credit, and it could have its effects. But to answer your question about do oil shocks or Fed policy have an effect? The answer is both because, for other reasons, the tightening of money and credit reduces demand for things, and as a result of reducing the demand for things, it weakens the economy.
Both an oil price shock or some other shock or a Federal Reserve tightening can cause the economy to weaken. That’s the answer to your question. Then it would have different implications, depending on whether the central banks provided more or less money and credit.
COWEN: We’re speaking in November of 2021. Are currently observed rates of inflation in the United States going to be transitory? And what do you understand by that term?
DALIO: Well, I’ll start by what I understand by the term, and then I’ll answer your question. By transitory, I think everybody understands that to mean temporary shocks that don’t become chronic, and therefore, we don’t have a chronically higher rate of inflation. It settles back to the older rates of inflation that existed before it, but it’s not a problem. That’s what I mean by transitory. Do you agree with that definition?
COWEN: Sure, it’s fine, yes.
DALIO: Okay. No, I don’t believe it’ll be transitory. I believe that there are two main sources of inflation. There’s the usual supply and demand for goods — cyclical inflation — so that when there’s a demand for something that there can’t be a greater amount of supply being produced for it, there’s an upward pressure in that price, and that comes from strong demand pressing up against capacity limitations. That’s cyclical inflation, and it depends on how far the central bank accommodates that. That’s the cyclical inflation.
The second is monetary inflation. When the production of debt is large, but the central bank produces more money and credit, that has the effect of devaluing the value of money and credit, which doesn’t show up, really, as it looks. It doesn’t look like it is going down as much as it looks like other things are going up so that you see things going up, as they are now, and that’s monetary inflation.
I think right now we have both cyclical inflation and monetary inflation, so that if you look at the demand for everything, right now the demand is greater than the capacity. It’s really an excess demand issue, but provided by a lot of money and credit being put out.
We also are running large deficits, and as we start to look farther forward, we have these very cheap interest rates, which means that it pays to buy things like, let’s say, houses. Practically, there’s no interest rate to speak of, and now a lot of loans are made on interest-only loans even. So, with hardly any interest rate, and not having to pay back principal payments in terms of the amount of ridiculousness that it’s gotten to that way, there’s a lot of demand for those kinds of things. Now, that could be cyclical, but I don’t believe, when I look forward, that our deficits will be primarily cyclical.
I look then to the issues of politics, and the issues of the deficits, and the needs for money and credit or the desires for money and credit, and I think that they’ll be structural. Also, there are certain changes in expenses . . . for example, while I believe that climate change and moving to cleaner energy and other such moves is very good for our ecosystem in the long run, it’s also very expensive, and it makes less efficiency. So, that’s going to, at that same time, add to inflation.
My worry or belief is that that will increasingly be built into the process, which we’re seeing, for example, in terms of changes in compensation, changes in many, many things. Everybody’s seeing inflation around them, and it’s not just something that’s going to settle back.
If I take the cyclical piece, it’s going to require enough of a tightening — if you were to deal with that — enough of a tightening in monetary policy to stop that buying. And the consequences of that would be very bearish for markets, and it would be very bearish for the economy and, I believe, too bearish for the Federal Reserve to want to tolerate. That would only deal with the cyclical inflation pressures, whereas at the same time, we have the structural issues of those kinds of deficits that need to be monetized. For those reasons, I don’t believe it’s transitory, that we will go back to what we experienced before.
COWEN: If you had to describe it in its most fundamental terms, your advantage as an investor compared to other professionals — is it that you’re smarter, you process more information, you have better managerial methods? How would you pin down your unique advantage and expertise?
DALIO: Well, a few things. I systemized and built an organization that systemizes the process to seek the timeless and universal truths of the cause-effect relationships. We have 1,400 people or so. We spend hundreds of millions of dollars each year on data and quantitative. I think it’s really the building of timeless and universal decision roles that have gone back. When I say timeless and universal, I learned early on that many things that happened to me and came as a surprise were things that didn’t happen in my lifetime, but happened many times before.
The first of those — 1971, I was clerking on the floor of the New York Stock Exchange when, on August 15th, President Nixon got on and said, “We are not going to pay the gold.” I went on the floor of the stock exchange. That never happened to me before. I thought there would be a crisis and everything would go down, and I was totally wrong. I found out that the stock market that morning went up more than it had in decades.
That led me to research and find out that on March 5th, 1933, President Roosevelt did the exact same thing, and it led to the exact same result. At that mistake, I learned that things that happened in my lifetime, but happened before and I didn’t experience, were good rules.
I needed to study, for example, the dynamic of the Great Depression. By studying that dynamic of the Great Depression, I and we at Bridgewater were able to anticipate the 2008 financial crisis and do very well in it, only because we looked at those things that happened before.
It’s that which led me to do this study. I did this study not to write a book. I did the study because these things that are happening now did not happen in my lifetime, so I wanted to study the cycles, like the rise and decline of reserve currencies, empires, and so on. I needed to study the last 500 years.
What is conveyed in this book is what I learned from doing those studies, those patterns, and I put it out there for people to judge for themselves the merit of them. They can judge for themselves. I understand different people might have different views, and it’s totally their prerogative. It’s out there for people to learn, and it’s been that approach and the systematization of that approach with a lot of great people that has been the basis of our success.
COWEN: Your management idea for radical transparency — where did that come from and how did evolve? When did you start it?
DALIO: I started Bridgewater — I didn’t even think of it as starting a company — just two years after I got out of school. It wasn’t a company, really. There was somebody I’d played rugby with and then a couple of other people, and the idea was, we’re going to be truthful with each other — truthful and transparent. I have this belief that what brings me satisfaction is excellent work and excellent relationships.
I was taught, really, in the markets through my experience that being as accurate as possible is my goal. Then to get at truth — what is true is fundamentally important in both making better decisions and also making good relationships, trustful relationships. For that reason, it seemed apparent that, whether it’s in the markets or it’s dealing with people, being radically truthful and trying to work things through to find out what’s the best thing to do, given those realities, is fundamentally beneficial.
All through my life, maybe to some extent, I was influenced to do that. It just seems like the obviously better thing to do than to be the other. I think it’s very odd that the world questions being very radically truthful and radically transparent with each other, to try to find out what’s true. I think that’s a problem that the world faces in terms of those sorts of things.
Anyway, I came by it that way, and I wouldn’t compromise it. As the company grew from a couple of people — I had a two-bedroom apartment. It came out of the other part of the bedroom, and then it grew. As we grew to, let’s say 1,500 people, there needed to be an organization and a culture that is built around those things. That became of paramount importance.
We built our culture. It’s not for some people, and it’s great for other people. With time, we’ve done that, and that’s what we do. That has served us really great. It served us not only in terms of the investment management aspects of it, but it’s also served us very well in our relationships — that we can talk about anything frankly, and that we can deal with anything.
As a result of that, it produces the dealing with things well, and it also produces better relationships. It’s been something that I believe has been key to our success, and it’s also something I recommend very highly. I understand people aren’t used to it, and so on. It can be adapted, too. I recommend that. That’s how it developed.
COWEN: What’s your model for why more of the world hasn’t followed suit? Is it that leaders are cowards, too many workers are too emotionally fragile, just status quo bias, or what?
DALIO: I think it starts partially neurologically, and partially how we’re raised. There’s an instinct to view disagreement as a fight. There’s a fight or flight response, sometimes, to disagreement, rather than a curiosity to try to find out what’s true.
Then, I think that we’re raised in an educational system in which people are reinforced for having the correct answer. Like there is a correct answer. Certainly, there’s a correct answer — two plus two is four — but sometimes, in things, there isn’t, and to not know well and to disagree are bad things. I think we’re raised that way. It becomes a habit that disagreement causes angst.
My theory — I ask neuroscientists, I ask psychologists about it, and they come back with those kinds of answers as to why that’s the case. I found it in Bridgewater and other ways that that’s, for most people — maybe half the population or more — with practice and in an environment in which it’s valued intellectually, that they can get used to it and then not want it any other way.
Let me just reverse it, and I would say, like I would say to anybody if we disagree, do you want me to have a good conversation with you? Maybe you and I are having some disagreement as to how the economy works, or whether the markets are efficient, and so on. Is this a good thing, or is that something that produces angst? I think it’s a good thing. Do you want me to be totally transparent with you about what I think? Or do you want me to hold it to myself, and ask you the same question?
I’d say I want to hear whatever you think because if it’s on the table, we can deal with it. There’re two parts to our brain. There’s the intellectual part of our brain, and there’s the emotional part of our brain. The intellectual part of the brain usually says, “Yes, I would like to know, and I’d like to be able to have that exchange.” And the emotional part of our brain seems in conflict with that. That’s what the psychologists and neuroscientists say, and that’s why it’s interesting to them to see how we’ve created this different culture.
It’s not easy, but it’s like eating healthy and doing exercise, and so on. If you’re around a lot of people who recognize that it’s healthy, and you live in that kind of an environment, you’d probably want to do that. You, in fact, wouldn’t want it to be the other way.
Many people who work at Bridgewater would find it very difficult to work in most other companies because they wouldn’t operate that way. That’s what I think causes it. The experts, who are more expert at figuring out the reasons, explained to me. That rings true, and it’s been consistent with our experiences.
COWEN: With work from a distance, we’re now recording many more business calls. Do you think your method of recording every conversation in the company will actually win out through a backdoor mechanism?
DALIO: The recording, just to be clear, is for the purpose of providing transparency because I think that wrestling around with questions is something that a lot of people don’t get exposure to. When I was running the company, and everybody comes out with answers but no real thinking behind those answers — that wouldn’t be something that I would have wanted if I was in their shoes, so I wanted to share that.
It’s something people could do or not do. You don’t have to record it. You can record it for truthfulness, but the putting up — the reality of if it’s true, you could show it, and everybody will judge whether it’s true for themselves. That recording and showing it— I don’t know whether others will do it or how they will use it. I suspect they’re not using most of those to try to get at truth. I’m just saying that that’s helped me and us a lot.
COWEN: What do you think you know about psychometrics that other bosses do not? How do you use psychometrics more effectively?
DALIO: I think I know a lot about psychometrics because of my experiences in the pursuit of it as an important interest to me. I think that most bosses don’t know anything about psychometrics, and I would encourage them to learn about psychometrics. Psychometrics are a means by which asking a bunch of questions, and so on, helps to measure how somebody thinks about things. It’s common sense — if we ask a bunch of questions, we can learn what your profile is.
Online, for free, I put out our version that I worked with three great psychometricians to produce, and people can experience it for themselves. It’s called PrinciplesYou. Go online — it takes about a half-hour to do — and see how well it describes how you think, what your preferences are. There’s a cool thing that allows you to have somebody else do the same, and you could put it in, and you could see how it describes your relationship, based on how you think.
Now, the reactions to those things have been amazing. They’re amazingly effective, but it’s not a new science. It’s something that existed a long time ago, started a long time ago. I started because I saw that people’s approaches to thinking were different, and I didn’t understand it. I gave 150 managers in my company, first, the Myers-Briggs test, and it came back. I asked them how accurately it described how they thought, rated on a scale of one to five.
Eighty-five percent of them said it described them as a four or five, so, very well. I read these descriptions, and in some cases I said, “I can’t even believe that people think that way.” We are thinking in ways that are different and based on those preferences. Yes, psychometrics.
I have spoken to the best psychologists, the ones who helped me build these other tests that are now available free for everyone. PrinciplesYou — it’s free online — was developed by me working with Adam Grant, John Golden, and Brian Little. If you look at their credentials and so on, they’ve been doing this for lifetimes. They’re the experts.
That’s my interest, and that’s why I have an interest in it. I think other people who run organizations or really have to deal with relationships should look into what psychometrics can do to help them.
COWEN: Do you think Bridgewater, on net, is selecting for agreeableness or disagreeableness, as one might express it?
DALIO: We much prefer honest, thoughtful disagreeableness because we don’t want answers as much as we want reasoning, to examine the reasoning that leads to the answers.
COWEN: If you apply psychometrics to the United States of America — our moral character and psychology — where exactly are we falling short most of all?
DALIO: I think the greatest problem that we have is fighting with each other over views and opinions, to the point that we are risking a civil war. The question for all disagreements and all major disagreements is, how do you know you’re right? If two people are in a disagreement about . . . There are opinions of whether you like something or not, so let me put them into two categories. You have an opinion about something, I have an opinion — will the stock market go up or down? Or is tomorrow going to be like this or that? And we have an opinion.
If there are two people who have an opinion, how do you know you’re the one that has the right one or the wrong one? I’ve learned from mistakes. I worry about being wrong, and by worrying about being wrong, I don’t know if I’m the wrong one or the right one. The only way I can get to that answer is to find the smartest people I know who disagree with me, and I hear their reasoning.
That’s a path that has worked well. But if we now apply this to the country as a whole, and we have disagreement, I think our best question is, how are we going to successfully and not antagonistically get to the desired answer? I think it requires thoughtful disagreement. Frankly, there are only two things I really care about. I care more than anything that we, together as a country, come up, resolve our differences as democracy used to work, resolve our differences, and be productive.
If we can be productive and resolve our differences so that we have internal order and harmony, I don’t really care much about other things. There are some opinions that it’s got to be exactly this way or that way, and I think that we’re in a dangerous situation. I have a principle, which is, if the cause you are behind or the cause that people are behind is more important to them than the system, the system is in jeopardy. I think that’s the case now.
If I was president of the United States, I think it’s such an important thing, I would probably have a bipartisan cabinet, and I would try to bring together the middle of the middle, and then have those in the middle try to deal with those at the extremes. Because I’m afraid that there will be a pulling to each of those extremes, and that there will be irreconcilable differences between those extremes, and that it will threaten rule of law and threaten democracy. That’s what I think about it as it relates to politics and government.
COWEN: It’s striking to me how much your approach to US history is informed by what I take to be an understanding of Chinese history, so the cyclical emphasis. What is your favorite Chinese dynasty and why?
DALIO: Just to be clear on your first statement, it’s not Chinese or American as is described in the book. I took all powers that existed over the last 500 years, 11 of those powers, the empires, the rising, and I looked at them all. And then, because the patterns existed in China and I feel I need to understand China well, I also took the dynasties back to 600. I saw these patterns over and over again, and they’re not Chinese, they’re not American. They’re universal because human nature is universal.
When I look at a Chinese dynasty or a great European power and so on, the parts of them — they all have risen, and they have all declined. When we say that we like a dynasty, I like the things that make it rise and be healthy, and I don’t like the things that make it decline and be unhealthy. I don’t feel there’s a dynasty or an empire that I admire in totality. It’s those things that I admire, and what those things are across is, they’re measured in the book.
I gave 18 measures of them, but there are certain basic things that they come down to a lot. One, it starts partially with leaders who make things work well. There’s a cycle. There’s a new order. A new order means that after some conflict, the new power takes over. They win. There’s a leader or leaders who then, at that point, have to consolidate their power from those who are in opposition to them, and so on. Then they have to build a direction, and that direction comes down to basic things, such as, first and foremost, education.
When I say education, I mean both education of facts like, “Do you know these facts? Can you read, write, and do arithmetic?” kind of thing, but also education in civility — how to behave well with others and your personal responsibility, which is usually, traditionally has been guided by the family, or could be guided by religion. It could be in the schools, but to know how to be a person of good character and relate well to others.
The dynasties that did that, and you could look at the beginning of all of those dynasties — the Tang Dynasty, the Song Dynasty, the Ming Dynasty — just as you can look at it in terms of the early stages of many, many empires, including our own, the American empire after World War II particularly. Education, and then converting that education and that civility to productivity, to be able to work well in a harmonious way with each other, a competitive harmonious way, to raise the living standards so that you are earning more than you are spending.
This is a fundamental thing — productivity and earn more than you’re spending, so you don’t depend on the building up of debt that eventually you can’t pay back, and that rise. Then I see in all these dynasties and all these empires that there becomes, then, more debt creation, sometimes more speculation, and there become greater gaps — greater wealth and opportunity gaps.
Wealth gaps because the cycle produces these different opportunities. Some people make a lot of money and others don’t, so naturally it produces a wealth gap. But that wealth gap can be self-reinforcing because the parents who have more money give their kids better advantages, and they have more power than those who are born into families that don’t have much.
So there becomes that wealth gap. Then there become higher and higher levels of indebtedness. I’ve seen this all across countries, all across empires. Then sometimes, because they have borrowing capacity, like having a reserve currency, they can borrow a lot of money. They do that, so they produce larger wealth gaps, more speculation, and larger and larger wealth gaps.
Then something comes along, and they can’t do that. They can’t live on the debt anymore, and there are various reasons. Then you see deterioration. You can see deteriorations in even the notion of what people are going after. Some poor family having to struggle, or a poor society having to struggle, develops different values than one that is born rich and is operating — it can be, in fact, decadent in terms of the way that they’re operating, and so on. That’s an ingredient to decline.
All of the dynasties or all of the societies that I’ve seen have had that. In some cases, acts of nature came along, too, and there’s an internal conflict over the things I just mentioned — all of them — not having enough money, printing a lot of money, being in a situation where they’re at odds with each other, and then, often, the rising power challenging that.
You see the decline of the Ming Dynasty for that reason. You see the decline of the Qing Dynasty, you see the decline of France, you see the decline of others for the same reasons. There are also these foreign powers that there’s a conflict with, and everything. Then sometimes, there are these acts of nature, like the big drought or the big flood or something that causes a famine or a pandemic, and then that happens and throws everything off-kilter, too. I see those patterns happening over and over everywhere. There’s no one dynasty. I like those that do it well, and I don’t admire those who don’t.
COWEN: How does transcendental meditation improve your work relationships? Why choose that kind of meditation rather than some other?
DALIO: I’ll take your second question first. Circumstances led me — I learned transcendental meditation because it was the thing that popped in front of me, and I was lucky enough to grab it. It was when the Beatles went to India, and they talked about transcendental meditation, and it was a big thing. There was a center in New York then. I went and I learned then, and that was 1969. I learned years ago. That was a long time ago.
Now, how it affects — transcendental meditation, like (I gather) a number of other types of meditation, has a mantra. A mantra is a sound that you repeat in your mind. You’re sitting there quietly, and maybe one might think of something, like Om would be a classic example. You repeat Om in your mind when you’re sitting there quietly, and what that does — it takes your mind away from your thoughts. Your thoughts are jumping around. They call it monkey brain.
You can’t control your thoughts. They’re jumping all over, and by repeating that word or sound over and over again, you eventually learn to go into that sound rather than it crowds out all the other stuff, and then eventually it disappears. Then you go into transcending, or let’s say transcendental state, which means that there’s quiet and peacefulness, and you actually don’t see anything, and you’re descending into your subconscious.
Now, your subconscious is, like the word implies, below what we’re conscious about, but it’s very important in how we think. Most of our decisions really come from our subconscious. We talk about emotions and things there — they’re subconscious. When you’re in your subconscious and you’ve got this peaceful state, not only does that peaceful state give you tranquility and so on, and it’s very restful, but it also gives you an equanimity, a calmness, and a clarity.
It taps into your subconscious because in your subconscious is where the creativity comes from. You don’t sit there and say, “I’m going to work hard to be creative.” Creative ideas are the sort of things that come to you in a hot shower. You’re not even there, and this idea comes to you, and it bubbles up. By putting it with the subconscious, that’s good. You tap into that.
Then, what I found is that aligning the subconscious and the conscious is also like aligning the emotions with the intellect because we get mixed messaging. Like I said, it’s like your two brains: your conscious brain — that might be your logical brain, and then your subconscious brain — that’s your emotional, and you’re getting different messages. The meditation helps to align those and deal with the things that are coming at you.
Of course, my business and my life bring me a lot of things that are coming at me that could be stressful, and I find that by being able to have that state of mind where I can align them, have that equanimity, and make the decisions — I found that to be very helpful.
COWEN: What do you enjoy most in jazz music?
DALIO: I enjoy most the combination of extreme talent and spontaneity, particularly when people could do that together. That is something. When you listen to really talented musicians who can do it like improv, and they can play off of each other and do it that way —
COWEN: Name a group.
DALIO: I particularly like Jazz at Lincoln Center, and I like Wynton Marsalis and the Wynton Marsalis band.
COWEN: Three quick questions to close. I’ll just give you all three. First, why are we undervaluing the ocean right now? Second, why are Cape buffalo dangerous? Third, what are you going to do next? The floor is yours.
DALIO: First, let’s establish that the ocean is the biggest thing on this planet, the most important environment. We undervalue it because we don’t have contact with it. It’s like a sheet. The earth above the ocean, the highest point, Everest, is equal to the greatest depth, the Marianas Trench — 11,000 meters. They are both a piece of the same, but the ocean is 72 percent of the world’s surface. So that means that the space and what it’s occupying and the lives that live in it and all of that is more than twice as large as all of the continents combined, and it has an enormous impact on our lives.
But when we look at it, we just see this sheet over it that’s going up and down, and we don’t explore it. People who haven’t seen beneath that sheet, or intellectualize what is beneath the sheet, undervalue it for that reason. For me, Jacques Cousteau helped me and excited me. As a result, I have been excited about the ocean, and I realize the importance of the ocean. One of the things — a passion of mine — I’ve created a ship, which is the best oceanographic exploration and media ship on the seas.
We have explorers and scientists go on it, and they use it, and they capture that, and then they’re going to be showing that on National Geographic and Disney+ so that people get inspired about it. Anyway, I think it’s for those reasons that they don’t, and I’m working to rectify that by making that availability. It’s called OceanX. If anyone wants to go on and see what it’s doing, you can go on. You can search for OceanX, and it’ll explain that.
Cape buffalo have killed more people than any other species.
COWEN: More than hippopotamuses have?
DALIO: Even more than hippopotamuses. What do I think about Cape buffalo? I think you’re probably referring to my having bow-hunted Cape buffalo. I love being in nature. I love the interactions with species. That experience, which requires focusing one’s attention, playing the edge correctly, and being in that environment is something that has been invigorating. I assume that’s why you’re asking that question.
In terms of what is coming next, I’m 72 years old. I’m in an arc. There’s a life arc. I’m in the part of the life arc of transitioning out of my second phase of my life to my third phase of my life.
I believe life takes place in three phases. The first phase is, you’re dependent on others. You’re learning. The second phase, you graduate from school, you graduate from whatever college or high school, and you go to work. And increasingly, you’re working and others are dependent on you, and you’re trying to be successful.
Then as you go to your third phase in life, you no longer have any desire to be more successful yourself. You start to care about others, and you particularly care about others who will be beyond you — your children, your grandchildren, and the like, but also the society. And what you want to do is instinctively pass along those things that have been helpful, and that’s the phase of life that I’m in.
While I’m still playing my game of the markets and the economy, I’m also doing these studies and doing these investments and all that. I like it, but the joy of transitioning my company to have others run it . . . It’s like having my family — adult children — I don’t want to be responsible for their lives. I’m there when they need me, and so on. I’m here to pass along things.
I think that what’s next for me — there’s this book, which is passing along what I think are the most important things of our time. People can take or leave them, but I think they’re important. Others have thought — Henry Kissinger, Larry Summers — others said that this is a very important book, and anyway, people could judge for themselves.
My next will be to complete my economic and investment principles because I do think differently about economics and investments than some people, which I believe is what has given me the edge, so I want to pass that along. I imagine then, in something like a year or two, I will do that, and then I will go quiet.
COWEN: Again, everyone, Ray’s new book is called Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail. Ray Dalio, thank you very much.
DALIO: My pleasure. Thank you very much.
Thumbnail photo credit: Bridgewater Associates