Source: 《The Diary Of A CEO》
Compiled by: Felix, PANews
Ray Dalio, founder of Bridgewater Associates who predicted the 2008 financial crisis, built the company from his two-bedroom apartment into a giant managing approximately $150 billion in assets. Additionally, Dalio is the author of books such as "Principles," "Principles for Dealing with the Changing World Order," and "How Nations Fail."
Recently, in a podcast episode of "The Diary Of A CEO," Dalio delved into the theory of the "Big Cycle" driven by debt accumulation, wealth disparity, and geopolitical upheaval. He pointed out that the current AI frenzy exhibits clear bubble characteristics, a phenomenon that historically often precedes significant economic turbulence. With heavy government debt and intensifying internal social conflicts, the global order is in a declining phase of power transition, posing severe challenges for traditional nations like the UK and the US.
To protect personal wealth in an uncertain future, Dalio suggests investors hedge through diversified assets like gold, rather than relying solely on cash or single stocks. He emphasized that amidst technological innovation and social change, maintaining strong adaptability and understanding historical operating principles are key to the survival and development of both individuals and nations.
PANews has compiled the highlights of the interview.
Host: Do you see signs that we are in an AI bubble which could potentially lead to an economic crash?
Dalio: Yes, there are classic bubble signs. This will impact the economy, be detrimental to society, and people will lose money. But simultaneously, other issues are unfolding. I am a global macro investor. While we are very excited about AI right now, which will bring revolutionary changes replacing human physical labor and parts of logical thinking, we are also facing geopolitical problems. For instance, China has replaced the US as the largest trading partner for most countries, indicating a changing world order. Furthermore, we face huge wealth disparities and government funding shortages. When an economic recession hits, people tend to attack each other.
Host: Investor Jeremy Grantham once told me we are facing an AI bubble and a potential economic crash. Looking at data, this aligns with history, and the peak might arrive soon. He believes this could be the biggest investment bubble in US history. What's your take?
Dalio: He is right. A so-called bubble refers to prices rising dramatically, companies performing well, and then the bubble bursts, impacting the economy, much like the 1929 or the 2000 dot-com bubble. When revolutionary new technology emerges, people perceive it as a miracle and borrow money to invest, overlooking the asset's intrinsic price. People see many getting rich, but paper wealth is not money; you must sell the wealth to obtain money for spending. When people need money to repay debts due to factors like tax changes or rising interest rates, the bubble gets pricked. This leads to falling prices, people losing money, forced asset sales to repay debts, resulting in reduced demand, lower consumption, and subsequently causing an economic recession or even depression.
Host: Suppose I buy $100 worth of stock in an AI company because I'm bullish on AI. Then I use this $100 paper net worth to borrow $50 from the bank. If something happens (like a war), and everyone rushes to sell, my stock plummets to $25, but I still owe the bank $50. I must sell urgently, asset prices fall across the board, people stop spending at restaurants, the bubble bursts, and we enter a recession, right?
Dalio: Absolutely correct. Furthermore, there's the issue of stock supply and demand. Among companies developing AI, it's impossible to accurately predict future earnings. You either underinvest and get eliminated by competition or invest heavily without being able to precisely calculate returns. Nowadays, it's common to spend only $50 million but have a company valuation reach $1 billion. You become a paper billionaire, but this is just the accounting value of the stock. When market frenzy triggers inflation, central banks hit the brakes and raise interest rates. This means those carrying debt need to raise more funds to repay. Additionally, when the market craves stocks, there is a massive issuance of new shares. When debt costs exceed returns on equity investment, coupled with an oversupply of stocks and people needing to raise cash, the bubble bursts.
Host: You mentioned the "Big Cycle" earlier, besides the bubble. What is that?
Dalio: This is a large cycle lasting on average about 80 years. The last time we entered this new cycle's starting point was in 1945. It encompasses several simultaneous dynamics: first, internal political conflict driven by widening wealth disparity (e.g., left-right polarization); second, governments running massive fiscal deficits, not having enough money to pay bills; and finally, geopolitical shifts (conflicts between nations). People who don't understand this cycle only see daily news and fail to connect these isolated events.
Host: For the average person, how can they navigate a potentially bursting economic bubble to secure their future? For example, a 30-year-old with only $100 disposable income per month.
Dalio: The most important point is "diversification." People often think keeping cash in the bank is safest, but it's actually the worst long-term investment because inflation erodes its value. Even with short-term interest rates, considering an annual inflation rate of 3.5% to 4% and taxes you pay on earnings, it's still a poor return. You need a diversified portfolio including stocks, gold, bonds, real estate, etc. When stocks or bonds fall, assets like gold often perform well. Diversification reduces your risk without necessarily lowering your return. For young people with few assets, your only asset is yourself. You need to figure out how to enhance your skills for better income, strive to align your work with your passion, but never forget the element of "money."
Host: Speaking of money, many are talking about Bitcoin these days. What's your view on Bitcoin? How does it compare to gold?
Dalio: About 1% of my investment portfolio is in Bitcoin. It is a form of hard money that cannot be printed at will. However, I personally prefer physical gold. Gold cannot be hacked by technological means; it is the only financial asset that is not someone else's liability, and it remains the second-largest reserve currency held by major central banks. Digital currencies like Bitcoin could be threatened by quantum computing or be subject to government surveillance and taxation. When governments don't want it, they have the power to do anything. For reasons of transactional privacy and control, central banks also will not hold significant amounts of Bitcoin.
Host: What impact will AI have on ordinary people's jobs? A mainstream view in Silicon Valley is that AI will create new jobs we can't even predict yet, and everyone will be fine. They cite the Industrial Revolution where tractors and factories replaced manual labor, arguing humans always find new paths. Do you agree?
Dalio: Silicon Valley holds this view because they are the producers of the technology, making a lot of money and don't want to be attacked. This is an evolutionary process. The Industrial Revolution replaced human physical strength with machines, while today's AI is replacing human thinking and reasoning at a higher level. In this process, the biggest beneficiaries are the "capitalists" who own the ideas and can use capital to replace workers. In corporate income, the share going to workers is declining, while the share for business owners is rising, further exacerbating wealth inequality. When both human bodies and minds are replaced, what can we sell? Humans possess emotions and intuition, which AI currently lacks. In the foreseeable future, those who can apply superior human wisdom in their work and partner with AI will be at the forefront.
Host: In the UK and the US (like New York and Los Angeles), debates about imposing a "wealth tax" on the rich are intense. Is this a good or bad idea?
Dalio: Operationally, it's a very difficult idea. Because the rich would have to sell wealth to get cash to pay the tax, which could itself become one of the triggers for pricking the bubble. Moreover, it would reduce investment, as wealth is often used for capital expenditures that create productivity. If wealth is merely transferred for consumption without enhancing society's overall productivity, society will face problems. If governments try to enforce it, they might face capital flight from the wealthy. To prevent this, governments might retroactively change laws for taxation or implement harsh capital controls. The UK is currently a classic "case study" in this regard, stuck in a typical cycle of excessive debt, low productivity, and constant internal political conflict. To solve these issues, society needs a strong "centrist" force enabling bipartisan cooperation to share the pain, make tough reforms, and improve productivity for the majority.
Host: You mention "the changing world order" in your book, recurring in cycles over the past 500 years. In the coming downturn, will the world see two superpowers coexisting, or is it usually just one dominant one?
Dalio: Before WWI and WWII connected the world into "one world," the globe was divided into regions with their own major powers. But under a "one world" system, if disagreements arise, they are typically resolved through some form of conflict (Cold War or hot war), with strength ultimately determining dominance, not a so-called "rules-based order." For the future, I believe the most likely and beneficial outcome is a world that becomes "more regionalized." China, deeply influenced by Confucian thought, fundamentally aims to be competitive and not cut off from the world, not to occupy and control other countries. If both China and the US remain strong, and we avoid large-scale destructive wars, the world might split into regional blocs like the Americas, China & the Asia-Pacific region, developing separately.
Host: You mentioned conflict, but the US is deeply entangled in conflict with Iran, seemingly unable to extricate itself. Would this also impact the macro cycle you describe?
Dalio: This exposes US weakness. An emerging consensus internationally (especially in Asia) is that the US doesn't actually want to fight. Because the American public worries about rising oil prices and casualties, they want wars to be quick and decisive, but you cannot win a war that requires long-term occupation and local control that way. Asian countries are gradually realizing that the US might back down, and its military bases in the region could become liabilities instead. You are seeing a power transfer phenomenon akin to the decline of the British Empire (like during the Suez Crisis). People realize that the economic and military power that once allowed the US to command other nations with mere hints is being eroded. Getting entangled in the Iran conflict is a huge mistake; it exposes this American vulnerability for the world to see.
Related reading: In Conversation with the 'Liquidity King': Global Liquidity Has Peaked and Is Receding, This Cycle Will Bottom in the Second Half of Next Year
