I recently did an interview for Bridgewater clients sharing my updated thinking about markets, economies, politics, geopolitics, climate, and technology—and what 2024 and beyond look like to me. You can read the transcript below or listen to it here.
Jim Haskel
I'm Jim Haskel, editor of the Bridgewater Daily Observations. Earlier this year, we published a Daily Observations by Bridgewater founder and CIO mentor Ray Dalio (Trades, Portfolio) where he described his five big forces framework and how these forces will shape 2024 and the years to come. And we'll link to that here.
Considering all that's happened in just the last three months in the markets, economies, and certainly on the geopolitical front, I thought it'd be interesting to sit down with Ray to get his latest thinking on these dynamics. We did that last week, and today we're sharing an edited version of that conversation. Ray hits each of the five big forces and elaborates on where we stand with each. He also discusses how these forces connect with each other.
So in today's podcast, you'll hear Ray discuss the debt, money, and economic force—including Ray's thoughts on the potential for Fed easing when inflation remains above target, as well as portfolio considerations in today's environment. He also discusses the internal order force—that's the second force—with an emphasis on the 2024 US presidential election. He hits on the external world order force, including rising geopolitical conflicts, and Ray's read on what's happening in China. He talks about the force of nature, notably climate change and its economic consequences. And lastly, he talks about the force of human inventiveness, including the potential for AI to bring radical change in the coming years.
We start off with a question from me to Ray on his five big forces overall.
Chapter 1: Five Big Forces Overview
Jim Haskel
Ray, it is good to see you. I believe you're in Connecticut. Is that correct?
Yeah.
Jim Haskel
It's good to know that you're back on US soil, because you've been all over the world, and there's a lot going on in the world right now.
I think everyone knows we're two years into a global tightening cycle with markets pricing in Fed easing right around the corner, even though inflation is still running above target. We've got geopolitical strife seemingly getting worse not better, as we see conflicts between Russia and Ukraine continuing, between Israel and Gaza. There's a simmering conflict in the north of Israel and Lebanon that could even be more explosive. We have, of course, the China and Taiwan situation. Stocks, gold, Bitcoin are all making new highs. We have a consequential US presidential election approaching at a time of—as you've noted many times—ever-increasing polarization. We have radical new technology in the form of AI, which has huge implications for productivity and the profitability of a subset of companies. And, of course, we're in the midst of a climate crisis.
I thought it'd be a perfect time to once again sit down with you and get your thoughts on how you're seeing these kinds of big dynamics in the world. And from today's conversation, I thought we could do that by first asking you to briefly describe your five big forces, which can explain a lot of what we're seeing, and then we can delve a little bit deeper into each of them and look into how they're playing out across countries.
So, welcome. And let's get right into it with your overview of these five big forces.
So, you know, because I learned in my lifetime that many of the things that surprised me surprised me because they never happened in my lifetime before, I learned that I needed to study history, and I saw that many of them repeated throughout history. And sometimes we lose the big picture because we're squinting at the details. And I went back over history over the last 500 years, really to first deal with the first three big forces that hadn't happened in my lifetime, and then I saw the other two.
The first is, the amounts of debt creation and then monetization of the debts when there isn't enough money in terms of the supply and demand for credit and its impact on the economy and the value of the dollar. So I wanted to study the rises and declines of reserve currencies over that 500 years.
The second is the degree of conflict—internal conflict. Populism on the left and the right creating irreconcilable differences that are threatening the democracy, threatening the system, in many ways. The amount of wealth gaps and values gaps that are behind that and the amount of political polarity—not voting across party lines and the like—the greatest since 1900.
And the third, of course, is the great power conflict—global, geopolitical, great conflict between rival powers, particularly China vying for power. And, you know, last time that happened—the last time all of these happened—was the 1930-45 period.
And then I learned, by studying the last 500 years and before, that acts of nature—droughts, floods, and pandemics—had an even bigger impact than all of those other things that I've mentioned. They killed more people, and they toppled more orders—more domestic orders, more international orders—than the first three. So, climate is a big deal, and it's certainly a big deal now.
And then, number five, throughout history, the inventions of new technologies—man's learning and inventing of new technologies—and not only their economic implications, but their war and military implications. But the repeated time, throughout history, of discovering weapons, secretly—finding the weapons that you show the other side, and the other side submits because they can't beat the weapon—that dynamic has also been in history.
And these cannot be looked at as individual things because they're interdependent. For example, the United States being overextended—and you know, we're in 80 countries and then fighting two wars, you could have a third war on another front—has economic implications, or climate has economic implications. And to see them transpire in cycles for logical reasons that the cycles exist were discoveries and my framework. So those are the things.
I think almost anything that you mentioned and anything that's important falls under one of those five categories, and they certainly relate to each other.
Chapter 2: The Debt/Money/Economic Force
Jim Haskel
On that front, at the beginning of the year, we asked you to write your thoughts about 2024, and you hit on the first big one, that's the debt/money/markets/economy force. You noted then that in a wire, which we'll link to here, that that force was moderately low when looked at in isolation due to the current market pricing being roughly in line with fundamentals and a lack of sort of big problems associated with that force on the horizon that couldn't be well-managed. But you also said that the risk rises significantly when you consider in conjunction with the internal order force—and you cited the 2024 elections—and the external order force.
So I'm wondering if you could update us now as you look at this debt/money/economy force, how you assess it right now in connection to those other two threats you were talking about?
Well, there's certainly not going to be enough money. You can get the money from two places: you can tax it, or you can print it.
So if we look at the situation of the central government, and you do the projections, you can see how the combination of the higher debt service payments together with the needs for greater defense spending, greater climate spending, and then you take the entitlements and other things, you're seeing a debt service crowding out of consumption happening in the budget deficits. And then you're also seeing supply/demand issues of selling those bonds to the rest of the world because no longer are they as attractive and—as a percentage of foreigners' portfolios, they're an issue. So we certainly have something that you cannot extrapolate into many years before we have that particular problem.
Let's talk about the bond market for a moment and easing that's built into it. So I think that there's a mistaken popular view that there should be an easing. If you look at the magnitude of easing—that is the largest since I think it's like 1981 or 1982—there's a lot of discounting. I think it's nearly 200 basis points in the next two years kind of discounting.
Now let's step back and say: what should the rate structure be? I think if you just look at what the equilibrium levels are, which, I mean, appropriate that there is a real interest rate that's high enough for the creditor without being too high for the debtor—which, by the way, becomes a difficult balancing act the more debt you create. And you look at the inflation rate, you can pick the number of what people think the inflation rate is. A lot of those numbers would be in the vicinity of 2.5%. I would say below 3%—whatever it is, 2.5% and 3%. And then you take the long rate, it's about 200 basis points. So that brings you up in the vicinity—the bond yield in the vicinity of—5%, 4.5% and 5% level, given a normal equilibrium. I think there's a strong tendency to believe that the yield curve should be positive and eventually it'll settle out to be positive.
But if you're looking at then the existing level of inflation, it certainly is not at target. And they will ease up on that target. They will probably accept an inflation rate at 2.5% to 3%. But as you bring that up and then you look at the existing conditions—the existing stress levels that exist in the form of the economy, the form of the markets, the form of credit spreads, and so on—and you say, this is definitely too easy. What's wrong with the existing monetary policy, the existing term structure of interest rates in terms of growth and inflation? Is growth and inflation such that growth is too low, and inflation is too low, and that you should have a stimulative monetary policy?
That is under the normal set of circumstances. If we now say, then, what are the risks to those scenarios? I would say the risks are of significantly higher issues of inflation, and so on, for issues pertaining to the political issues—and we'll probably get into that. But how tariffs will rise, how other things will take place, and what's going on geopolitically creates another risk, and then there's the supply/demand.
So when I look at the bond market, I think the bond market is, at around these levels, appropriately priced in that vicinity of 4.5%. I think probably longer term that's too low. And then if I take the slope of the yield curve, and where the short rates are, and where the existing rates of inflation are, and so on, I think that that's operating well. Yet, there's a 200-basis-point easing, and we still have the big budget deficit and current account deficit issues going on.
Jim Haskel
Let's explore inflation a bit more, focusing on the fiscal policy side, Ray.
You've made the point that, politically, neither of the presidential candidates has an incentive to rein in spending. The Biden administration doesn't want to see too much of a constraint going into the election, and it really doesn't appear that Trump and his people really want to spend less, either.
So I think the picture you're painting here is a hotter inflationary environment than is currently priced into interest rate markets. Can you walk us through how you're thinking about that?
Well, there's two issues. There's first the inflation rate. And second, there is the supply/demand for the bonds. If I'm looking at the inflation rate, and I look at the core levels—particularly income levels and spending levels—and then I come up with about 3%. It's 2.5%; I don't really know the difference. So I'm happy to say that by any measure, we are not at the 2% targeted, so we're above that. And current, one would say, is in that vicinity. That's not much of a disputable question. And then you could add on what I said about rates before. As we go forward in terms of the supply/demand issue, we know that we're going to have a lot more supply.
I'm talking about money. Supply of money before we get to the supply of stuff.
So on the supply of money, what we know is that there is not going to be any remediation. In fact, there is going to have to be increase in spending. And if you take where the geopolitical situation is, not only internally—but I said geopolitical—internationally, and you look at what, for example, the defense budget is. It's a 1% increase in the budget, which is a negative real decrease. That is a pressing issue that people on both sides recognize, and they don't want to talk about it right now, in terms of that issue. But that's not going to be a sustainable amount in the world.
If you then take into consideration the climate issue—one way or another, that's estimated to be about $8 trillion a year, which is required. We're not going to spend that. We're spending about one-sixth of that, which means also one of the reasons we're not anywhere near approaching holding temperature increases at 1.5 degrees Celsius. That's 8% of world GDP; that's a lot of spending. And then there's the North-South issue.
And then we're looking at the world and you say, who's going to afford these various things? You look at Europe and, you know, OK, we say Europe should take care of its defense, in terms of those things. Well, Europe has its own issues, and so on. So what we have is the need—or, more, the demand—for higher amounts of spending that are even put into that budget, and those budgets. So the risks of those are on the upside.
And if you just take what is projected and then you apply the debt service payments to that—the maturity of the debt and the amount of interest payments that has to be on that debt—that is creating a classic squeeze. In other words, I've seen this repeatedly happen throughout countries. This is not sound, strong finances, in which there's a good income statement and a balance sheet.
So the value of debt assets is a function of these types of things. And so as we come into a world also of greater conflict, it has to be recognized that a debt asset is a risky asset to hold because conflicts themselves create greater needs.
And then there's also a settlement problem in terms of what is the asset that is exchangeable around the world. If you study markets during wars—and I've studied markets during wars—allies don't accept each other's money because of the fact that that money, that debt that they'll take on, they know that country's going to get into more debt and probably have to monetize the debt. And they don't even know what will happen at the end of that. So the risks, literally, of holding money, debt assets, during wars or different types of assets during wars are high and lurk in the back. Not to mention, then, the issues pertaining to the possibility of unacceptable disruptions in supply lines.
Jim Haskel
Let me explore a couple a couple of things you said. So, this sort of demand/supply mismatch for US paper or, for that matter, many governments around the world, this is a threat to fiat currency. This is basically what you're raising. You've been talking about this for a while. We do see gold, for example, making new nominal highs. We do see Bitcoin making highs. Part of that is structural in terms of the development of an ETF. But still, the demand is there.
I would presume that, given what you're saying, you would say that those market dynamics that we're seeing right now are not surprising.
No. Let me step back and say that the most important thing that everybody should start with is a balanced portfolio. Up until now, we've been talking about what might happen. But if you put aside the uncertainties of the supply/demand and such things, and you think about what is a balanced portfolio? What are my risks so that I have symmetrical risks so that I can go through any environment? One would have greater amounts of those assets—inflation-hedge assets—that are the type of money.
So let me just pause on that for, let's say, gold—Bitcoin is another topic, but it's a related topic. Money that I can go from one place to another with. And it's accepted around the world; it's accepted by central banks. Today, by the way, gold is the third-largest reserve after dollars and euros. And so it's a money that's accepted. And, as the saying goes, it's an asset that is not somebody else's liability. Other ones, you are depending on getting paid. This one, you're not depending on—possession, you know, is the law, essentially.
And it has a negative correlation, significant negative correlation, with the typical portfolios, which have a lot of equity beta in them, equity or bond beta. If you take any of the major crises, you see that that movement out of money in that sort of way caused a spike in gold. And that, if you take a portfolio optimizer, and you were to say, what if I was to overlay gold in my portfolio, add it, it would reduce the risk and increase the expected return if you add that into a portfolio.
So the issue is: at this time, given all those sets of circumstances, why wouldn't you move to a more balanced portfolio? Why wouldn't you do those exercises in order to consider that?
Chapter 3: The Internal Conflict Force and the US Election
Jim Haskel
Now let's move to the internal conflict force. We have elections approaching all over the world, including probably the most consequential election right here in the United States on the presidential level. And it's shaping up to be a rerun of the last one. You've been very vocal on the dangers you see in the polarization in the United States and elsewhere.
So I'm wondering if you can give us your thoughts on how you're seeing the internal conflict force—particularly as it pertains to the US—and what the consequences could be of either Republican or Democratic victory.
When I did the study, it was like watching the movie over and over again. There's this movie that happens, and what it is is, when there are big wealth and values gaps and you have populism, which means that people get fed up with not having their own needs taken care of, and they reject that old political system that doesn't deliver for them, then you have irreconcilable differences in which you have to pick a side and fight.
Then that calls into question the system and whether the system is fair. Is the legal system fair? Is the Supreme Court fair? Or has it been corrupted by the politicalization? Is the media balanced, and so on? Are we working to compromise, or are we having irreconcilable voting blocs and decision blocs that means it's black-and-white and you have to get on one side or the other?
We haven't seen that in our lifetimes before. When I wrote the book, everybody thought it was crazy. This was before there was January 6. But I've seen this happen repeatedly. There's a cycle, and there's a norm for that, and that is what we are in. So when we look at the upcoming elections, the first question that we ask ourselves is, is this election going to progress normally? Then, if the election progresses normally, where will that lead us because of how the different sides have different views and how will they work together to achieve results? So in other words, politics as normal.
We have some reasonably concerning issue that you may not have an acceptance of the outcome in that normal way. We are getting to the point that it is conceivable that there will not be an acceptance, and you get a Civil War-ish type of reaction. I know my words are evocative; I don't mean them to be evocative. But it could very well be that the states do not listen to the federal government on decisions—that they say, “No, make me.” Then you have a breakdown of that kind of a system. I know that this sounds evocative to most people, but if you read history, and you see what's happening, that has to be considered as a possibility. As we look at these types of elections, it's certainly the case.
If you have an election and it progresses normally, let's say, and Donald Trump is elected—which, by the way, might mean less of a risk of a fight because the Democrats might accept that; they may not accept the policies—I think you're going to likely have the politicalization of the government. In other words, we know that there's a plan underway to take many civil servants and get rid of those civil servants and to replace them with those who are on his side, and that there is a movement now—like you're with them or you're against them. Think about the consequences of that. So there's that element of the dynamic, which is a reality. I'm not making this up.
So how does government work? It's more going to be, do you have more congressional investigations for political reasons?
Now let's assume that that's all not a problem, and everything runs smoothly. Then we can go on to what the policies are. Donald Trump's policies are going to be more nationalistic, isolationist, free markets, more capitalist, and so on. That'll have consequences. That'll have consequences in inflation, trade, and world affairs because the geopolitical part of the world affairs means that the United States will not be the same kind of ally, but nor will it have to have the associated expenses of being the same kind of ally. It will then start to produce consequences, geopolitical consequences, as there is a retrenching from some of the war areas.
Now let's contemplate if Joe Biden is elected. You're probably not going to have Joe Biden because he probably will not be in the condition—at least this is popular thinking—that he probably will not be in the condition to be the president all through that particular term. There's some question, of course, as to whether Trump would be too, but more so Biden. So when there's the election, there is the question of what is a Democratic policy? What will the Democrats do? The Democrats are split. There are moderate Democrats, and then there are extremist Democrats—in other words, extreme leftist Democrats who would arrange big transfers of wealth.
Our country is not in good shape. In other words, if you look at the financial condition, the infrastructure, the education, and those types of things, we're in a hole. By being in a hole, it's not like somebody isn't going to pay. And those who will pay will be the rich and the corporations. So now you start to think about, what does that mean for corporate taxes? What does that mean for markets?
So when we think about that, we remember what it meant when Donald Trump got elected. The number one thing is what is—the stock is worth its after-tax the present value of its net cash flows. So if taxes go up that is like interest rates going up. It's a negative on the markets and so on, and it also can produce conflict. You might see—I would say you're likely to see—greater polarity in the decision making and having unreconcilable differences. There are differences. These differences aren't just about people's money, which they care a lot about. These differences are also about values. So there are irreconcilable differences that seem to me to make the political situation in the United States an important situation.
When I relate it to the other forces, the financial force, or I relate it to the geopolitical force, it's more threatening because, geopolitically, other countries are probably going to take advantage of what is happening in the United States.
Chapter 4: The External Conflict Force
Jim Haskel
On the external conflict force: I'm wondering where you think we stand and what the future holds. We've got a stalemate that maybe Russia's winning that stalemate in the Russia-Ukraine war. There's a lack of funding willingness on the part of the West, particularly the United States. Then we also have the conflict that simmers underneath the surface—it's not a hot conflict, but the Taiwan issue and China-Taiwan. And of course, the other conflicts going on.
So when you look at this, are these top of mind? Do you think that any of them are particularly going to become more acute in some way that would raise risk premiums looking out over the course of this year and into next? Or are they stable for the moment in your view and not top of mind because there are other factors that are affecting what's going on?
I think that it's less important to look at everything through the wars and the conflicts that are happening as much as you should look at the allies and the dynamic that is behind that. So both are going on. There is a local conflict between, in the Middle East, Israel-Hamas, and then other regional entities. There is certainly a Russia-Ukraine. But you have to keep in mind that that's a manifestation, to a large extent, of a greater conflict that has to do with association—common interests regarding the powers that be in the world, such as China, Russia, Iran.
When we look at that in that way, we're seeing both sides play out. So you're seeing, for example, the money and support test. In other words, Europe and the United States—how much money will you put into it and how much support will you put into it becomes a test. We know the consequences of that. And that test, it also means, it's a drawdown of resources. In other words, literally, our capacity to produce military equipment and the inventories of military equipment are depleted, and even the modernization of military equipment is depleted. That's a fact—and that's a fact globally.
It's also a relevant fact because of the fact that very classically in the great empires at this stage in the cycle, they are overextended because they have militaries all around the world. The United States has militaries in 80 countries. Originally, those presences in other countries were profitable. That's what the empire did. They made them profitable, and they were profitable. Well, they can become very unprofitable.
So when we look at these issues, it also becomes a political issue domestically as to what is the United States's position—not only an economic question, but what wars will the United States fight? What will you lose, people? Will you lose unacceptably in different locations? That may be in Europe or in the Middle East, or it may be in Asia. That is an issue that's a geopolitical game issue.
Chapter 5: Assessing What's Happening in China
Jim Haskel
Before we move on from the external conflict force, I want to zoom in on China because you just wrote a new Daily Observations, and it was titled “In China: The 100-Year Storm on the Horizon and How the Five Big Forces Are Playing Out.”
In that piece, you describe what's currently happening in China, both economically and otherwise, in the context of what has transpired over the past century. I'm wondering if you could just share with our listeners how you're seeing China today in terms of its trajectory, its leadership, and of course the power conflict with the US.
The Chinese—culturally they've had many thousands of years of civilization. Meaning, it's like watching the movies over and over again, the rises and declines of dynasties, and there's a cycle. I think they understand where they are in that cycle. The basic thing to know about it is that, be strong, be powerful, and if you're strong and powerful that will determine your position, and know how to play your position. It's very much an extension of Confucianism, which is an extension of the family and hierarchy.
So you know your position. Your position means that if you're in a position of power that you behave in a certain way with those of lesser power. They call that the “tribute system”—in other words, the one who has lesser power should respect those with greater power, and those with greater power should treat those with lesser power well. You never want to occupy a country and make it do the things it doesn't want to do. Those policies never work. You're not going to occupy and make a people operate by a religion or a way that they don't want to operate by—that's a force against nature. What you want to do is find out, well, what do you want from them, and what do they want from you, and have good trading relations with them and so on, and to more, I would suppose, manipulate them, or operate that way.
When we're applying it to the existing set of circumstances, it is, in their minds, natural and admirable that their power increased as it did. Since I started going there in 1984, per capita income has increased by 29 times, and life expectancy is greater than 10 years greater, and poverty rates—like being hungry—went from 88% to less than 1%. It's been quite a remarkable arc.
Then there are these things like the Big Cycle that I'm talking about in terms of now they're at a different phase in the Big Cycle where what happens is, you're not going to have the same growth, and then you have a debt crisis, and then you have the great power conflict, so you no longer can hide your power. So now you're a threat; now you have the dynamic. And the question is, how do you play that dynamic? I urge people to read the piece that I wrote, which describes then how that's operating.
Xi is operating much more in what's called, in traditional history, a “legalist” way, which is a very strict behavior way, with Marxist/Maoist characteristics. What that means should be understood. They view it as the United States is a declining power that is trying to contain it, and then there's the associated rivalry with that.
Now, of course, both countries have—they have—these domestic issues. The domestic issues, I would say, are—whether they operate in a way that they have an economically lost decade with, let's say, a Maoist/Marxist tilt, or whether they do a big restructuring, a debt restructuring and so on, is going to be in their court, and it's a greater risk that they will have that. If they have that, I think that their basic view of that is that it's disruptive and undesirable, but it's not going to bring them to where they were before, and that the population, which can be spoiled and corrupt in their view, has got to get in shape because we have to prepare, they would say—we have to prepare for the 100-year storm on the horizon.
I would describe the perspective as being along those lines. I would say the same issues are existing in their various ways in the United States—we talked about the United States.
I think describing it as there's a 100-year storm on the horizon—which, by the way, brings us back—if you go back 100 years, you go back 90 years, probably that's where you are. I think that that's the perspective, and the only way that you handle that well is to be strong—to do the right things, to bring the populations together, and to be productive and strong. That'll be what will determine how these things transpire in the end. And also to be able to compromise rather than to destroy the other.
Chapter 6: AI and Climate Considerations
Jim Haskel
Ray, as we hit the two other forces, one of them is of course productivity and new invention and human inventiveness, and this is something you've been looking at carefully. So walk us through a little bit how you're thinking about AI and a potential productivity miracle, and what it would look like.
Through history we have seen that the human has evolved almost with their body parts, different body parts, from the bottom up being replaced by machines. So in the agricultural age, the human was like oxen, and then we had tractors. Then in the Industrial Revolution, we had machines that would replace that.
Then, increasingly, we had AI. And there's been a continuous process of its evolution that has been essential to my personal and Bridgewater's development over that period of time, which we went through using expert systems to develop that. Now there is generative AI and large language models, which are tremendous tools that will accelerate that. So I could say without a doubt that it will be a fabulous tool in all dimensions and will be in investing. So along those lines, it is going to be a tremendously transformative influence—and we're just talking about AI.
When we take other technologies that are also transformative—so that has to do with everything from quantum computing to genetic sequencing to imaging the body at a molecular level, and so many different forms, new energy sources, and so many different things. The technologies are accelerating because the brain is being significantly improved. When you increase your muscles, the power of your muscles, with tractors and other things, that's one thing. But when you increase the power of the mind to invent and to deal with things automatically, that's a whole different level of advancement. And that's what we're seeing.
If I take these five big forces that we're talking about, and I count out one year, two years, I think that in three to five years it's going to be like going through a time warp. We're going to see a radically different world and that these things are going to come to a head—the things that we're all talking about—and then in this AI world. So the world is going to be a very, very different world in the future.
Then I take climate, which we just touched on, but we really didn't get into. Climate is going to have a big effect in lots of different ways. Droughts, floods, and pandemics have throughout history, as I said, had this huge effect, and so we're going to experience that. It's going to cost us a lot of money, and then it has implications—because it has implications on world water supplies, temperatures, which will lead to migrations of people. It'll change economic behaviors in a lot of different ways. These things are all happening.
I think when we step back, and we look at all of that, we can say these big things are happening. There are lessons from the past that we can learn. At the same time, we mustn't be arrogant in thinking that we can anticipate well all the convergence of those things. We have to think, how do we structure a portfolio well so that regardless of what happens, we're going to be OK?
Jim Haskel
Ray, thank you so much for your time. I love doing this with you, and I look forward in several months to sitting down and doing it all over again to hear your thoughts on the five forces. Thank you so much.
My pleasure.
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