8/12/2019 Transcript of Ray Dalios Comments at Davos

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Transcript of Ray Dalios Comments at Davos

January 27, 2013

While most eyes were on a certain fight between two activist investors on Friday, another great investor

also had some really interesting things to say. Bloomberg hosted a debate on the Global Economy at

Davos with Ray Dalio and others. Here is the link to the video(if youd like to watch the entire 50 minute

panel) and below is a rough transcript of Dalios comments (with the times he was speaking):

8 minutes, 40 seconds: Are you concerned about inflation if you look at the way that we have all this

cheap liquidity out there?

I think the economy works like a machine and I think its important to understand how the machine

works in order to answer that question. So if there is a transaction, you could pay with money or you

can pay with credit. If you have money, that is making up for a contraction in credit. Its not infla-

tionary because the total amount spent in comparison to the total number of goods sold will determine

the price.

So when weve added money, weve made up for credit and thats been fine. Whats happened now is

that because of all the money that has been added to the system, there is a great deal of liquidity in the

world. So there is money in corporations, in households. Liquidity is all over the place, a lot of it. And

it has gone there because of monetary policy and it has also gone there seeking safety.

That is changing on the margin. The returns of cash are terrible. So as a result of that, what we have

is a lot of money in a place and it needed to go there to make up for the contraction in credit but

a lot of money that is getting a very bad return. That, in this particular year, in my opinion, will

shift. And the complexion of the world will change as that money goes from cash into other things.

Now each region is very different, each set of circumstances. But the landscape will change I think

particularly later in the year and beyond as those people who put their money there are receiving this

bad return and feel an environment of safety [now] because the imbalances of Europe have largely

been rectified. They have been rectified because the amount of borrowing is now consistent with the

ability to fund that. And so the tail risks were taken off the table and that less risky environment is go-

ing to create that kind of a shift I think.

11 minutes: Do you think we are seeing a credit bubble?

There is a lot of liquidity, but the most fundamental laws of economics is you cant have debt rise

faster than income. You cant have income rise faster than productivity and the long term growth will

be dependent on productivity. And we have these cycles around productivity growth because of debt

cycles. We dont have a credit bubble because of the production of too much credit, but we do have a

bubble in liquidity.

There is too much liquidity and so bonds are a poor investment, they will have a poor return. Cash

will have an even worse return, thats assured. And thats a bubble. Too much money in there. So the

cash bubble exists, but we are reaching an equilibrium in terms of the debt growth.

20 minutes, 20 seconds: (in response to another speakers comment)

I think it is important to understand the adjustment that is happening is not just central banks feel

there was a funding gap, the amount of money that can be lent and the amount of money that needed

to be borrowed, there was a gap. And the central banks needed to come in and help fill that gap.

http://www.bloomberg.com/video/no-growth-easy-money-navigating-the-new-normal-RWXY3LA0STeifwDTeEyWlw.htmlhttp://www.bloomberg.com/video/no-growth-easy-money-navigating-the-new-normal-RWXY3LA0STeifwDTeEyWlw.html

8/12/2019 Transcript of Ray Dalios Comments at Davos

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23/6/13 12:22 PMTranscript of Ray Dalios Comments at Davos

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Whats happened in the adjustment is that the amount of money that is being lent and borrowed has

fallen a lot and with that depressions have historically occurred. So it is important to realize that

when we go back to normalcy, normalcy [will not be] like the past. In other words those countries

cant spend the way that they have spent before. Equilibrium means a depressed economy. And what

that means is the fundamental law is that we cant raise debt faster than income from now on. And if

we cant raise debt faster than income we have to have a low debt growth and the issue will come to

productivity.

So the shift of the discussion is going to change. The shift of the discussion is now going to change in

the economics of how do you become competitive. And so competition will be the discussion and I

wont go on there, but there are clear benchmarks for discussion about productivity and ultimately

you can only spend what you produce.

If you use the measures literally what does it cost to have an educated person in France, the United

States and China? Look at those comparisons and the cost of an educated person in these countries is

multiples of the cost of an educated person in China and so when it comes down to it, there are going

to be very big social questions. Its going to be values of life. How long is vacation? How much sav-

ings? Very much quality of life types of questions. How much will there transfers of wealth? Produc-tivity is going to be the question. There are clear benchmarks of productivity. I wont go on, but we

have a list of those things that correlate with 90 percent correlation with the outcome of the growth

rate the next ten years. They are like a health index. If you look at that health index, you can go down

that and compare it and those are going to be the drivers. Productivity, because the debt cycle will no

longer be the main driver.

27 minutes, 10 seconds: Ray are you concerned about currency wars?

Im not particularly concerned about currency wars. I also think central banks will play a much less-

er role going forward. I think the ECBs balance sheet will gradually taper off. The same thing withthe U.S. So I think they will naturally recede. I think that their next move will be, as described, a

move from liquidity to the purchases and then we have a shift. So I dont think that is the issue. I

think the shift of the cash, that massive amount of cash will be what will be a game changerinto

stocks, into everything. It will mean more purchases of goods and services and financial assets. It will

be into equities, it will be into real estate, it will be into gold, it will be into a lot of.just basically

everything.

39 minutes, 20 seconds: Audience question What are your views on the Feds ability to shrink its bal-

ance sheet before it creates an inflation problem?

Again I think its important to think of the economy as operating like a machine and everything is a

transaction. So the amount of spending is what matters. Now spending can mean money or it can

mean credit. If credit is picking up then money can decrease and so spending is the thing that matters.

When it picks up, it will be incumbent on the central banks to reduce the amount of money so that the

amount of spending is consistent with the productivity growth rate. And so I believe that that can be

done as long as there is balance. As long as debt doesnt rise faster than income, income doesnt rise

faster than productivity, and productivity then grows at a decent pace. Thats what matters.

49 minutes, 25 seconds: Closing remarks

I think it is very difficult to talk about the world as a whole because conditions are very different. I

think in the U.S., its a transition year. Its one of those years that will go down in history as one you

wont even remember. Its a transition in between cycles as we move from one to the other. I think in

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