"What's Coming Is WORSE Than A Recession" ‒ Ray Dalio's Last WARNING

Summary

In a recent discussion, Ray Dalio warns of impending economic challenges that could surpass the effects of a recession. He draws on historical patterns to underscore the cyclical nature of economic, political, and social upheavals. By examining past events and financial crises, Dalio outlines the repetitive cycle of debt accumulation, internal socioeconomic conflicts, and external geopolitical tensions. He stresses the importance of understanding these historical trends to anticipate future disruptions. Dalio's insights emphasize the need for balanced investment portfolios and a strong societal middle ground to navigate these uncertain times.

Highlights

• Ray Dalio emphasizes the importance of learning from historical cycles to predict future economic downturns. 🔄
• The accumulation of debt and rising inequality are significant triggers for economic and social instability. 📉
• Dalio highlights the cyclical nature of global power shifts and the potential for conflict. 🌍
• Understanding and preparing for paradigm shifts in economics is crucial for investors. 💹
• The need for a strong socio-political middle to navigate through polarizing times is essential. 🏛️

Key Takeaways

• History repeats itself, understanding past patterns is key to predicting future economic challenges. 📚
• Debt accumulation and unequal wealth distribution drive social and economic conflicts. 💥
• Avoiding war is critical; economic competition should be managed peacefully. 🤝
• Diversification and balanced portfolios are essential in uncertain economic periods. 📈
• A strong societal middle is needed to reduce polarization and foster compromise. 👫

Overview

Ray Dalio, a notable investor and author, discusses the inevitable economic challenges looming ahead, which he predicts could be more severe than a recession. Drawing on historical patterns, Dalio believes the cycles of economic and social unrest stem from repetitive themes: excessive debt, internal socio-political conflicts, and global power struggles. These elements intertwine, creating a storm of disruption that only a thorough understanding of history can unravel.

Dalio narrates past scenarios where ignoring financial norms led to crises—rich lessons for today's society. As history shows, unchecked borrowing and economic disparity sow the seeds for larger conflicts, both within and between nations. He highlights the significance of wealth gaps, which exacerbate tensions and often lead to radical political movements, further destabilizing the societal order. The echoes of past financial downturns serve as a cautionary tale in our interconnected world.

For investors and citizens alike, Dalio suggests vigilance and preparation, advocating for diversified and strategically balanced portfolios to weather the volatility. Equally, he stresses the importance of fostering a 'strong middle' in society to bridge divides and avert the extremes of political and social polarization. Through these measures, Dalio believes it's possible to mitigate impending risks and navigate through challenging economic landscapes.

Chapters

• 00:00 - 00:30: Childhood and Early Experiences with the Stock Market The chapter titled 'Childhood and Early Experiences with the Stock Market' delves into the narrator's early ventures into the world of finance. As a child, the narrator engaged in various jobs such as caddying and delivering newspapers. At the young age of 12, the narrator purchased their first stock, motivated by the booming stock market and discussions overheard while caddying. The stock chosen was Northeast Airlines, primarily because it was priced under $5, allowing the narrator to buy more shares with the hope of making more money if the stock's value increased. Despite the company nearing bankruptcy, it was eventually acquired by another company, leading to a tripling in its share price. This early success sparked the narrator's enduring interest in the stock market.
• 00:30 - 01:00: Early Career and Market Lessons In this chapter titled 'Early Career and Market Lessons', the speaker reflects on his early career journey in the market, starting from when he was 12 years old. By the age of 22, in 1971, he was actively following the markets. Between his college graduation and entering graduate school, he clerked at the New York Stock Exchange. During this period, the societal aspirations were high, with ambitions like going to the Moon, eliminating poverty, and achieving equality in the U.S., inspired by the Kennedy era. The narrative captures the blend of personal career growth with the socio-economic ethos of the time.
• 01:00 - 01:30: The Role and Impact of Gold in the Economy The chapter discusses the significant role and impact of gold in the economy, particularly during a period of economic optimism and substantial borrowing. It highlights how gold was considered real money, while paper money represented checks that could be exchanged for gold. However, due to excessive borrowing and writing more checks than the gold reserved by the United States, a crucial economic event unfolded on August 15, 1971. This event, witnessed by the narrator while clerking at the New York Stock Exchange, marked a pivotal moment in the financial landscape.
• 01:30 - 02:00: Lessons from Historical Economic Events The chapter discusses the unforeseen outcomes of President Nixon's decision to end the gold standard. It highlights the speaker's surprise at the stock market reactions, contradicting the expected downturn due to the currency devaluation, an experience new to them at the time.
• 02:00 - 02:30: Patterns of Economic Cycles and World Order The chapter discusses historical patterns of economic cycles and changes in world order, emphasizing the importance of learning from past events. It recounts a specific historical instance paralleling a personal experience, during which an economic announcement made by Roosevelt over the radio in 1933 mirrored a similar event experienced by the author in more recent times. The chapter underlines the value of studying history to gain insights and prepare for unforeseen events.
• 02:30 - 03:00: The Emergence and Impact of Economic Dominance The chapter delves into the occurrence of unprecedented events in current times that, although new to our lifetime, have historical precedents. Understanding these patterns and the cause-and-effect relationships behind them is crucial. The speaker reflects on past mistakes, particularly in 1982 when a miscalculation of foreign debts by American Banks led to a significant debt crisis, specifically mentioning Mexico. This experience underscored the importance of historical awareness in economic forecasting.
• 03:00 - 03:30: Wealth Gaps and Economic Cycles The chapter 'Wealth Gaps and Economic Cycles' discusses economic events and responses similar to those from historical financial crises. It highlights the role of the Federal Reserve's monetary policies during challenging economic times, such as printing money to alleviate financial strain. The narrator reflects on lessons learned from studying the Depression era (1929-32), which provided insights into navigating the 2008 financial crisis successfully. By applying these lessons, the narrator's firm, Bridgewater, managed to profit even when markets were down. This chapter emphasizes the cyclical nature of economics and the importance of learning from past financial events.
• 03:30 - 04:00: Internal and External Conflicts Arising from Economic Shifts The chapter discusses patterns of behavior, emphasizing that current behaviors often mirror historical events. It suggests studying history, learning lessons, and writing them down as a model to understand ongoing situations. The concept of 'order' is introduced as a system that governs operations, with democracy and a constitutional system as examples, which persist until disrupted by a war or a new system. The chapter focuses on how internal and external conflicts arise from shifts in economic conditions, viewing historical precedents as templates for understanding and responding to present challenges.
• 04:00 - 04:30: Historical Patterns of Conflict and War The chapter explores the historical patterns of conflict and war, emphasizing the concept of a world order or system established post-conflict. It explains how wars occur due to clashes between parties with comparable power, and the victor establishes the governing rules. The text cites World War II as the last major event of this nature, where post-war 1945, the United States emerged as a dominant power, possessing 80% of the world's wealth (gold as money then), controlling half of the global economy, and holding significant military strength.
• 04:30 - 05:00: The Importance of Education and Civility The chapter discusses the concept of a world order, particularly focusing on how dominant powers establish international institutions and economic systems. It highlights the historical precedence of powerful countries determining global systems, such as the placement of the United Nations in New York and the IMF and World Bank in Washington DC due to the American influence. The chapter also touches upon historical events like the Treaty of Versailles post-World War I, indicating the pattern of victors setting the global order. Overall, the chapter emphasizes the role of education and understanding of these historical patterns to grasp the concepts of power and civility in international relations.
• 05:00 - 05:30: The Role of Reserve Currencies and World Economics The chapter discusses the impact of reserve currencies and their influence on global economics, outlining how periods of peace and prosperity follow wars, which act as great equalizers. These cycles, which might span over a hundred years or a lifetime, include rebuilding processes that lead to prosperity and peace, as no nation wants to revisit the horrors of war.
• 05:30 - 06:00: The Power Dynamics of Empires and Global Influence This chapter explores the recurring patterns in how empires rise and fall, specifically through the lens of wars and economic prosperity. Key points include the forgetfulness of societies regarding the horrors of war, leading them into new conflicts once the memory fades. Post-war periods often bring peace and financial reforms, fostering prosperity. This prosperity results in certain countries' currencies being accepted as the world's reserve. Historically, cycles saw different empires in power with their currencies—the dollar currently, preceded by the British pound during the British Empire, and before that, the Dutch guilder.
• 06:00 - 06:30: The Importance of Debt Management The chapter discusses the concept of the world's reserve currency and its impact on global economics. It highlights that when a country holds the world's reserve currency, it attracts savings from other countries, providing it the privilege to borrow and print the currency. This privilege leads to increased borrowing, spending, and prosperity, as seen in rising asset prices such as stocks. The chapter emphasizes the importance of managing debt responsibly amidst these privileges.
• 06:30 - 07:00: Internal Political Conflicts and Democracy The chapter discusses the impact of economic prosperity on societal structures, particularly focusing on three main issues: rising debt levels, increased wealth gaps, and the subsequent opportunity gaps. It explains how wealth accumulation is often unevenly distributed, which leads to broader societal disparities. Wealthier individuals can invest more in their children's education, perpetuating cycles of advantage and disadvantage. The chapter underscores the unfair nature of these gaps, emphasizing the challenges they present to democratic principles and equality.
• 07:00 - 07:30: Dynamics Leading to Dictatorships The chapter discusses the dynamics that can lead to dictatorships, focusing on economic factors. As wealth gaps increase and levels of indebtedness rise, competition among nations also increases. The dominant position of a country can lead to the rise of other competitors over time; for instance, countries like China have grown their per capita income and competitiveness significantly. This chapter particularly examines the impact of economic competition and dominance on global politics and the potential for these factors to contribute to the emergence of dictatorship regimes.
• 07:30 - 08:00: International Conflicts and War Types The chapter explores international conflicts and different types of wars throughout history. It begins with the historical rivalry between powers such as the British and Dutch, emphasizing recurring patterns of competition. As the competition gap closes, conflicts arise over governance and internal wealth distribution. These conflicts are exacerbated by increasing debt levels, leading to complex, problematic situations. Governments typically respond in specific ways when faced with high levels of debt.
• 08:00 - 08:30: The Importance of Studying History for Economic Prediction The chapter discusses the historical methods governments have used to generate funds when their coffers are empty, highlighting practices like raising taxes and printing money. The Roman Empire is used as an example, where they diluted gold coins, leading to inflation. This historical perspective is used to draw parallels and insights into modern economic strategies, emphasizing the importance of understanding history for economic prediction.
• 08:30 - 09:00: The Power Shifts Between Global Powers The chapter 'The Power Shifts Between Global Powers' explores the economic and social implications of currency devaluation and wealth inequality. It highlights how these factors contribute to widening opportunity gaps and internal conflicts within nations. The rise of populism on both the left and right is discussed, emphasizing that populists are typically uncompromising and fight for their beliefs, which can lead to greater societal divisions and conflict.
• 09:00 - 09:30: The Impacts of Economic Policies on Global Financial Systems The chapter delves into the cyclical nature of global conflict, often resulting from rising powers challenging the dominant ones. Without a global authority to mediate disputes, these conflicts typically escalate into wars, leading to a recurrent pattern throughout history. The narrative underscores the importance of objectivity in assessing these patterns to ensure accuracy and improvement. Education is highlighted as a crucial starting point, suggesting that educated individuals are better equipped to understand and navigate the complexities of economic policies and their impacts on global financial systems.
• 09:30 - 10:00: The Shifts in Production and Economic Allocation This chapter delves into the two types of education essential for societal and economic progress: the acquisition of knowledge and skills, and the cultivation of civility. It highlights the role of parenting and a solid educational foundation in a productive society, providing a personal narrative of growing up with loving, guiding parents, attending a good public school, and emerging into a world of equal opportunity.
• 10:00 - 10:30: The Current Economic Environment and Inflation The chapter discusses the importance of equal opportunity in a capitalist system, emphasizing that capitalism allows people to receive financial support for good ideas, which can lead to success and realization of the 'American dream'. It highlights the notion that opportunities should be provided broadly to harness talent from various segments of the population, as successful individuals often emerge unpredictably.
• 10:30 - 11:00: Investment Strategies in Times of Economic Uncertainty The chapter discusses how economic prosperity and innovation often stem from a diverse and fair society. It argues that individuals from varied backgrounds contribute significantly to the nation's productivity, which in turn raises income levels and national power. Moreover, when people perceive their society as fair, it drives them to contribute more creatively and productively, fostering a culture of innovation and technological advancement. A nation's share in world trade is also seen as a reflection of these internal dynamics.
• 11:00 - 11:30: The Future of Global Power and Economic Strength This chapter discusses the correlation between a country's dominance in world trade and its status as a global power. It highlights historical examples including the British and American empires. The chapter explains that with dominant trade, a nation typically holds the world's reserve currency and hosts the global financial center, as seen in Amsterdam for the Dutch Empire, London for the British Empire, and New York for the American Empire.
• 11:30 - 12:00: China's Economic Rise and Future Prospects The chapter discusses the essential components needed for a nation to rise as a global power, focusing on economic, military, and total power. It highlights the United States' military presence around the world as an example, mentioning its military bases in 70 countries. The Soviet Union's failure to become a total power, due to its lack of economic strength despite having comparable nuclear capabilities, is contrasted with China's rise as a total power, marked by its significant economic growth and military capabilities.
• 12:00 - 12:30: Strategies for Personal and Financial Well-being The chapter titled 'Strategies for Personal and Financial Well-being' explores the economic balance between spending and earning, highlighting the nuances of maintaining sustainability in personal and global economic practices. It compares the economic powers of China and the United States, noting their similarities and differences in handling economic strategies. A significant emphasis is placed on the dangers of accumulating debt due to overspending and relying on central bank's money printing, which can pose risks if the debt isn't managed or paid back appropriately. Thus, the chapter underscores a basic economic principle: spending should not exceed earnings to avoid unsustainable debt levels.
• 12:30 - 13:00: Historical Cycles and Personal Resilience The chapter 'Historical Cycles and Personal Resilience' discusses the financial dynamics associated with debt. It highlights the concept that one individual's assets could be another's liabilities, emphasizing the repercussions of not providing real returns on borrowed money. When returns are not met, people sell the debt, leading to increased interest rates and intervention from the central bank, which might need to print more money. The chapter delves into the unavoidable nature of repaying borrowed money, posing the question of whether repayment occurs in stable or inflated currency. It draws an analogy between borrowing and the actual goods involved, rather than just perceiving it in monetary terms.

"What's Coming Is WORSE Than A Recession" ‒ Ray Dalio's Last WARNING Transcription

• 00:00 - 00:30 when I was a kid I caddied I delivered newspapers I did a bunch of jobs when I was a kid at age 12 I bought my first stock I was cading the stock market was hot at the time people I CAD for were talking about it first stock I bought was a stock by the name of Northeast Airlines the only criteria I had was that it was selling for less than $5 a share I figured I could buy more shares and if it went up I'd go more money that was dumb but the company was about to go bankrupt another company acquired it it tripled in value and I was hooked on the market so I was served on the markets at
• 00:30 - 01:00 the beginning of 12 and that's my game now fast forward at 22 10 years later so 1971 I was following the markets and between graduating from college and going to graduate school I was clerking on the floor of the New York Stock Exchange and in that intervening period there was a lot of aspirations a lot of desire to go to the Moon to eliminate poverty to make equality in the United States and so on so in that early era when there was Kennedy and that made me
• 01:00 - 01:30 in optimism but during that 10 years the fact is that there was a lot of borrowing of money a lot of deficits back then gold was money and money as we know it was like checks in the checkbook that would go get you the gold you can turn in your paper money for gold but gold was the real money and because the United States had borrowed a lot more money than it had it wrote a lot more checks than it had gold in the bank and so on August 15th 1971 when I was clerking on the floor of the New York Stock Exchange I watched on television
• 01:30 - 02:00 as President Nixon defaulted on the obligation to pay gold for the cash he went on and he said you won't get the gold of course he didn't say it that way he said it in a way where it sounded like there were speculators and so on and he had to do it and so on the floor of the New York Stock Exchange I thought the market was going to go down a lot because after all this is a big crisis and the money as we know it ends and I couldn't have been more wrong it went up a lot and what happened was I never went through a currency devaluation before because in my lifetime there was no currency devaluation so that's the first
• 02:00 - 02:30 time it happened so I went back and I looked in history and I found the exact same thing happened on March 5th 1933 except rather than the television and Nixon it was the radio and Roosevelt and he made the exact same announcement and had the exact same effect and at that time I learned two things two big things I learned that first many things that never happened in my lifetime seemed surprising at the time and that I needed to study things that happened before my lifetime too understand them so when
• 02:30 - 03:00 certain things are happening like right now there are certain things that have never happened in our lifetime before but happened many times in history so in order to understand them I need to understand the patterns and even more than the patterns the cause and effect relationships behind the patterns so that mistake taught me that I needed to understand history and each of the mistakes has taught me I made a big mistake in 1982 and I calculated that American Banks had lent more to foreign countries than those countries way back there was a big debt crisis I anticipated this debt crisis Mexico
• 03:00 - 03:30 defaulting great okay but what happened is the economy and I expected there would be a terrible economic situation and you know what happened the Federal Reserve printed a lot of money and it had the same effect you know you learn the lessons Okay those lessons that I learned let me study the 1929-32 period which allowed me to anticipate the 2008 financial crisis and make a lot of money there where most people lost money and right now what's happening now has let Bridgewater to make a lot of money while the markets
• 03:30 - 04:00 are behaving badly now because the same thing happened in the past so studying history learning the lessons writing them down modeling them there's a template of what is happening there's a story what's in order and order is the system that's operating how do you operate so for example there is a domestic order we have Constitution and democracy and that's a system that operates and that continues on until there's a war and then there's another system Sy that comes and replaces our
• 04:00 - 04:30 system has lasted for a long time there's also a world order in other words a world system and that world system of operating comes after a war why does a war happen because conflicting parties of about equal power have a fight and the dominant power wins and then they get to set the rules and the last time that happened was in 1945 because of the end of World War II so at the end of World War II the United States had 80% of the world's money gold was money then it had half the world's economy it had a dominant military power
• 04:30 - 05:00 and for that reason because it was the dominant power New York is where the United Nations is Washington DC is where the IMF and World Bank they put it there because it was the American World Order the dollar was the world's Reserve currency and that always happens before that at the end of World War I there was the Treaty of veril and the winners of the Treaty of Vera determined how the system was going to work after that and if you go back in history repeatedly there was always a world order and it was always happens this way and it continues okay so how does it work you
• 05:00 - 05:30 end up with that World Order and then you come through a period of peace and prosperity because nobody wants to fight the dominant world power so that there's peace and then in that period of time Wars are go to Great equalizers they reduce wealth differences wealth gaps and so on and then there's a rebuilding process and that produces prosperity and peace also nobody wants to go back into the war everybody remembers how horrible they are before that you know these Cycles typically can take a hundred years let's say they can take Lifetime
• 05:30 - 06:00 and then people forget because they weren't the same people they forget how terrible Wars are after Wars people remember how terrible Wars are and they want peace all of those reasons produces peace and prosperity and there's also a financial reorganization but then that peace and prosperity leads naturally to the country that has that having the world's Reserve currency a reserve currency means it's the currency that's accepted so naturally the dollar is the world's resered currency before that it was the British boundary or the British Empire before that it was the Dutch Gilder it's it's the same pattern and so
• 06:00 - 06:30 there's peace and prosperity with the world's Reserve currency now when you have the world's reserved currency the rest of the world wants to save and they save in that currency and that leads the country who has the world Reserve currency to borrow it gives them what's called the exorbitant privilege of being able to borrow and print the world's currency well that's a good thing to have and then what they do of course is as Prosperity continues and asset prices go up like stocks go up and everything does really well it encourages more borrowing and spending and betting on
• 06:30 - 07:00 prosperity and that begins to have eyes in levels of indebtedness so you see debt levels riseing and the third thing it does is it creates uh greater wealth and values gaps they become greater naturally the wealth that's built up is distributed unevenly and those who make a lot of money then begin to have a larger wealth Gap and that creates also an opportunity Gap if we're lucky enough to have the money we can educate our children well and so on that gives them an unfair advantage in Rel relationship
• 07:00 - 07:30 to others and so this wealth Gap increases at the same time as levels of indebtedness increase and then of course what happens is the competition increases the competition increases because when you win and you have the other Germany or Japan or other countries destroyed after the war and there are no other competitors then it's a dominant position but over with time others learn and begin to build up like China particularly has increased its per capita income and its competitiveness so China is a competitor with the United States but all through that time it was
• 07:30 - 08:00 like the British were competitors with the Dutch and so on so we see that pattern happen over and over as that hour gap Narrows then conflicts about how things should go increase and internally there is a conflict over wealth and wealth gaps and then there's a higher level of indebtedness which makes for a worse set of circumstances and that combination of circumstances leads to more conflict and more problems so traditionally you see that a lot of levels of debt the classic way that you see this is what does a government do
• 08:00 - 08:30 when it doesn't have enough money it's not like they go into the coffers the coffers are empty they have no gold they have not that money so where do they get the money they have to take the money from somebody else that's either through taxes or what they do people get angry when they're taking it away and there's a big fight over it so what they usually do is they print money and through the Roman times back in Roman times they had gold coins they put less gold in the coins they put other bals in the coins and inevitably they print money when they want to spend more and that of course produces is the inflation it
• 08:30 - 09:00 devalues the value of money and you lose buying power and when that happens at the same time there there's a large wealth Gap and opportunity Gap that produces a lot of internal conflict of the sort that we're seeing now you always see populace of the left and populace of the right what's a populist a populist is a person who will fight for their side they are not compromisers okay so you get to the point where there may not be compromise and there's a conflict so you have that populace and that greater extreme of the left and the right you have more internal conflict
• 09:00 - 09:30 and then as you have the rising power challenging the existing power you have the world conflict and then normally that produces a resolution which happens through Wars because there's no world court that you bring your case to and then there's a jury who makes a decision it's typically through conflict you have the next war and you do the same thing over and over again so that by and larges the pattern I need objectivity to be accurate but also by being able to measure those things you could see whether you're improving or not so it's a type of biof feedback it starts with education educated people are more
• 09:30 - 10:00 valuable then there's two types of Education there's education of like what you know and what skills you develop but there's also learning civility learning how to behave with each other to make a productive Society think about parenting think about the importance really what I had was just going back to the basics what I had was parents who love me and were good Gods I went to a public education and it was a good public school and I came out to a world of equal opportunity in which there was an
• 10:00 - 10:30 opportunity to make decisions and make things happen and then live the American dream and really those are the most important fundamentals and you have a system that provides you good and equal opportunity I mean that's basically it capitalism it gives you the opportunity people who say Ah that's a good idea give you money to build it out it's important to do that broadly for the population because you don't know where the talent's going to come from if you look at anybody who's been successful over a period of time you know the forbs 4 100 or something and you look at those
• 10:30 - 11:00 many of those people came from the simplest you never would have guessed where they would come from and so having a broad-based population not only produces a higher level of productivity which raises income and raises power it also means that the individuals themselves have a fairer society and they believe that the society is fairer so these are fundamentals and when you start to see that then you reflected in other things it's reflected in Inventions how many Innovations technology Innovations what share of world trade the country has a number of
• 11:00 - 11:30 the statistics you could see that when the United States was dominant or the British that were dominant they have a high percentage of World Trade and as a result of that they have the world's Reserve currency so you see it reflected in the currency statistics in other words whose transaction they have the world's Financial Center in the Dutch Empire it was Amsterdam in the British Empire it was London in the American Empire it was New York as the world's financial center and so you see it reflected in all of those measures of power you're traveling around the world
• 11:30 - 12:00 you have the trade routes you're operating in your currency you need a military the United States for example has bases in 70 countries now 70 countries so you have to be a military power as a result and all of these Powers support each other as you gain one you get and them also you have to be a total power the Soviet Union was never a total power China is a total power Soviet Union was never a total power because it was never economic power okay it had a military that was comparable in nuclear weapons but but it lost because
• 12:00 - 12:30 it was never an economic power so we have that kind of a situation China now is a comparable economic power so when we look at these measures the United States in some ways is a little bit ahead and some and a little bit behind but there's comparability the three are creations of a lot of debt and the printing of money by the central bank to pay for it a lot okay that's number one you can't spend more than you earn just a basic log of Economics you can't keep spending more than you earn because then what do you do that you create it on debt and debt has to be paid back and
• 12:30 - 13:00 one man's assets or another man's liability so if you've got debt somebody's holding that expecting a real return and when you don't give them a real return like we're not giving them the real return now then they sell the debt and interest rates go up and then the central bank is in a buy because they have to print more money or they have to cril it because the day of paying back comes the only question is whether you pay it back in hard money or deflated money so think about it it's like borrowing when you borrow it's like borrowing stuffff we think of it it's a c number of dollars that you borrow but
• 13:00 - 13:30 think of it that you're borrowing stuff and when you borrow and spend then you can spend more than you earn because you borrow that makes the difference so you spend more than you earn and that means in some point in the future to pay back you have to spend less than you earn and that means quite a change in your spending so debt is not bad if it gets you the resources to produce more than the cost of that debt so think of it as this way if you borrow to have a party you borrow to go to vacation you borrow for consumption there's not going to be
• 13:30 - 14:00 an income earning asset okay so the day will come back and you're going to have to pay that back and that's not good if you borrow to invest in something that's going to produce more than it cost and you're going to have that productivity that was a good move but you will see it because if debt Rises relative to incomes then you know you're not doing that if incomes rise more than the debt okay that's a good thing so those are fundamentals you know and that's how the works so the three things that we just
• 14:00 - 14:30 touched on number one number two is the internal conflict thing when there's a large wealth Gap and values Gap then they become the disenfranchised those who feel you're not taking care of me and that was very classic with the 200000 election of Donald Trump why did Donald Trump get elected because there was a population in the United States a significant population that said this system isn't working for me and I want a fighter okay they don't want a compromiser they want a fighter and so you get populists of the right and
• 14:30 - 15:00 populace of the left who are Fighters and not compromisers and that's an issue for a democracy because a democracy is based on following the rules and compromising but these are win at all cost people and so that begins to build up and we could see the not following rules for example the Supreme Court decisions you could see that states and towns might say we are not following that decision come make me in other words you see Power begin to operate and so that kind of internal conf conflict is very normal at those circumstances
• 15:00 - 15:30 it's very important to understand how that works in the 1930s four democracies chose to become dictatorships because there were conflicts between the left and the right what is fascism you know what is communism that was the same right left conflict and then as a result It produced enough disorder that literally the parliament chose autocratic leaders and what did those autocratic leaders do they fought internally but they got control and then they're inclined to fight externally because these people are Fighters and so that's why it there's a tendency to
• 15:30 - 16:00 produce a war so that's number two that internal conflict this is all measurable I'm describing it in words but in the book you can see the lines and the charts that can show you where you are so internally that's the conflict and number three is externally the conflict when you have two great Powers coming in and you can measure the types of Wars there are five types of Wars there is a trade War there's a technology War there's a geopolitical influence War there is a capital and economic War which is commonly called sanctions okay
• 16:00 - 16:30 that's exist and there's a military war and usually they progress in that order until like when you see big sanctions happening and we will hurt you economically that's sort of a signal that you're at the edge of what could be a military war like in Japan what we did is Japan had this expansion the United States got into conflict it froze Japanese assets in much the same way as we're froing Central Bank assets and Russia that kind of a move limited their oil imports and so that put them in a corner and then that led to poal Harbor so these types of patterns repeat in
• 16:30 - 17:00 that same way so the three are a lot of debt and money creation the large internal fighting between the left and the right populace usually over wealth and values and external conflict over many things trade technology competition and so on that could lead up to a war power when those three things happen together that's a lot of pressure that's a lot of risk and so when I saw those three things happening together and I remember back you know I have to study history if I didn't see many cases of it
• 17:00 - 17:30 I need to study so I needed to go back to see many of these Cycles I need to go back 500 years and I studied dynasties in China since the year 600 to see these Cycles happening and they all happened in the same way so I know where we are it's about 150 years give or take 100 years a real good long one is 250 years a short one is about 50 years they're typically let's say about 150 but it'll vary a lot just like the life cycle I studied history going back to about 1900 and that wasn't good enough the 1900
• 17:30 - 18:00 allowed me to anticipate the 2008 financial crisis and so on but actually to think about the Rises and declines of Reserve currencies and Empires because these Cycles take so long I had to go back 500 years which one thinks of as long but it's not because in those Cycles even there there's a limited number of Cycles the typical life cycles 72 years old or whatever the number is along those lines and you want to study a few of them you want to study as many cases as you can you need to then go
• 18:00 - 18:30 back and see those number of cases but in that 500 year period I studied the 10 top Empires I saw they all had that cycle and then I also studied L and others so it's like a movie that happens over and over again it's almost as though the same story happens over and over again and the only things that change are the clothes that people wear and the Technologies they use I'm practical I have to bet today on what's happening today I have to bet tomorrow on what's happening tomorrow I'm not a his hisian who just likes to read the
• 18:30 - 19:00 stories of History I'm a practical guy who's got a place a bet my performance is measured to three decimal points I have to do practical stuff you have to accept reality if you have a condition diabetes or whatever that is you have to accept that reality I'm 72 years old I've got to accept that reality I've got to deal with that reality okay that means that I'm less likely to have the next 50 years than somebody who's 12 years old right I know those real ities so what I'm trying to do is accurately
• 19:00 - 19:30 show those realities with measures so that people could judge those themselves and then I have a principle which is if you worry you don't have to worry and if you don't worry you need to worry because if you worry about the things that is likely to take place you can prevent it there are things that you can do to make your life better if you worry about them and then take action to deal with them when my parents existed they went through depression and War and they came out and they were all the greatest Generation by Tom broko in my generation
• 19:30 - 20:00 it's leaving them with big debts and a broken down infrastructure and a substantially suboptimal education system do you know that today average education for Americans and testing scores put us in the bottom third of all developed countries and social Mobility rate is one of the worst in the developed world we always thought that there was opportunity and you could change so those things have got to be fixed they can be fixed but the worst thing is let's not fight with each other the key is where're you get the money the key is what you do to invest in the
• 20:00 - 20:30 future to create a better more productive result of people working well together to me I believe that we need a very strong middle you need very strong bipartisanship I think that we have a problem because the two political parties have among them more also extremists and in order to get elected in either party you've got to be fairly extremist and what you need is a strong middle in order to be able to have a mandate and follow that through but in any case how we are with each other is going to be the biggest thing and that's
• 20:30 - 21:00 not only domestically it's internationally let's not go to war okay but Wars typically last a few years let's even be clear about that because that's a very very scary thought and it could be in Modern Warfare will be much more advanced than the last time we had a World War the capacity of humans to destroy each other has never been greater but at the same time if we don't go to that Warfare and you work through then there's a heck of a competition and then the systems will compete and from that compet ition will come productivity and all those things so it all comes
• 21:00 - 21:30 down to how we are with each other we are at a juncture so that's the collective for the individual in the book you talk about you know how to protect oneself in investing you know how do you have resources how do you have enough resources and not only with that enough resources you know how do you make sure that you're protected well and all of that what happens is and you could see it in the French Revolution they call them Revolution but they're Civil Wars the Russian Revolution the Chinese Civil War the Cuban Civil War you know many many many many many many
• 21:30 - 22:00 cases Hitler Europe and fascism and communism and all of those types of things all of those happen when you get to the stage where there's populism and you lose the middle in other words you get those on each side when the causes that they are behind is more important to them than the system the system is in Jeopardy they become Fighters okay that is not a means they don't get together they don't say now how do we make this work for both of us how do we compromise
• 22:00 - 22:30 the middle is perceived as weak and everybody has to choose and like in the French Revolution there was a middle a lot of people said we need change and we need to bring those about in the middle you have to get on one side or the other and you're forced to otherwise you're perceived as weak and so self-reinforcing you know that in certain relationship you can get Beyond talking you can get to the fact that no I'm going to hurt you like the Supreme Court decisions could be in other words I will not obey obey and when you say I
• 22:30 - 23:00 will not obey you're in a power make me kind of situation and that's a dangerous situation now it could be I think we're seeing the movement to different states along those lines because of I want to be with more the people I want to be with have similar values and also will deal with me economically the way I want each makes those choices that causes to some extent a hollowing out when you go from let's say a New York or a California to a Florida to a Texas then you could lose the tax base and then the polarity is more difficult and that process has always taken place and
• 23:00 - 23:30 that's what it looks like and that's what we're operating with now of course at the Civil War there was a dominant power that militarily beat the other power and like all of those things then they were in control and they created a new world order a new domestic order that was the various rules of Commerce and slavery and such things it was because they won the power and it was you know on a per capita basis the worst war we've had and you know so yeah it was a terrible thing and that's how that happens right you know it's been a while
• 23:30 - 24:00 since we've had one of those but we did I think that um nobody knows exactly how they go so what we have is roughly speaking about 30% of the population 25 30% is fairly extreme right by measures in other words would be in favor of overturning the elections and so on maybe not following the rule of law and such things about 15% of the population maybe it's 10 15% is rather extreme left and there's no party for the middle so in that you're getting a creative of who wins the primaries and so on tends to be
• 24:00 - 24:30 fairly extremist because 30% of the population represents the majority of the Republican party right even though they're a lot of moderates what I would believe what I would hope to is that the majority of the Americans if you use my estimates you know somewhere in the vicinity of 35 to 45% of the population might be more extreme but let's call it 35% and 65% is in the middle but they don't have a platform they don't have a leader they don't have everything and so you continue you to get that polarity and now how it moves it is moving very
• 24:30 - 25:00 quickly in a bad way I mean a conflict way so measures like what percentage of each of those parties think that it would be better if members of the other party died one party has 15% and the other party has 10% what percentage of the party says I would not want my child to marry a member of the other party these are significant percentages so you're seeing this movement in that direction how does it work exactly I can't tell you but it is a fact that you know gun rights and the ability to have
• 25:00 - 25:30 guns there are many more guns in America than there are people in terms of that and some of those people will say you know make me or could be I'm not saying how far it goes I don't know anywhere how far it goes I'm just trying to say that this is a problem it is a problem that there's not a strong middle and there's not a strong pulling together I think the president of the United States should be bipartisan I think it would be great if they had a bipartisan cabinet and they brought the people together and that those in the middle had that commonality and then those at the
• 25:30 - 26:00 extremes were the odd ones out like in other conflicts there are sides like they were the Allied and axess powers and maybe they changed where the geography was but starting in 1900 we had a world that was closest to each other that you would have a World War World War I World War II and that means in Europe and the Pacific and so on and so you have that Dynamic now that we're coming quicker together and there are sides there are sides based on a common enemy so in terms of this conflict the United States has a great power which is
• 26:00 - 26:30 declining relative to the other powers there is that emerging conflict so what's happening in Russia and the Ukraine is part of that greater story China is outside of it and now because no one knows how a war is going to transpire one really learns from the actual War there always surprises this is a very interesting observation now and China and others are learning how is this transpiring and we're learning three big things we're in the process of learning these three big things the
• 26:30 - 27:00 first is they've kept it to a conventional War they have intentionally not gone to make it a nuclear or cyber or chemical War that's in a sense good though there is the risk that it could be so the first question that we have is Putin going to win or lose or what would a compromise look like okay Putin winning and Russia winning consists of a few things first get control of the eastern part of the Ukraine second have the Russian economy not collapse but in other words if it had a contraction of
• 27:00 - 27:30 10 or 15% of GDP that's a tolerable contraction and in his View and not of view worth it number three is that he remains in power and number four is that he remains on the world stage such as go to a G20 meeting and now things go on if that happens he wins and the West lose in terms of that game now that's a problem because these things always resolv who's the winner and who's the loser if he doesn't obtain that he probably would escalate that's a scary situation how would he escalate and so
• 27:30 - 28:00 on so it's almost difficult to say is it better that he wins or loses we're going to find out the answer to those questions my own guess is that because they can't make it look like anybody wins or loses that they have an Armistice or what I mean a ceasefire the way they had in Korea and Border Lines and they say that that's just a temporary ceasefire maybe it sticks who knows okay first question does he win or lose and how does that work second question is what are the powers and costs of American sanctions the power is another can you really shut down the Russian
• 28:00 - 28:30 economy can you shut things down so that you have enough of an effect so that you change the outcomes everybody's looking at that the Chinese are looking at that everybody's looking about what are the powers the costs are significant too because what we're doing is politicizing or weaponizing the financial and economic systems so when you politicize it and freeze a country's assets many other countries today are wondering should they hold those Bonds in the United States because if they get sanction so many countries are neutral
• 28:30 - 29:00 or against they could get sanction and that's a risk and that could affect the capital markets and it also produces great inefficiencies which are economically costly because you think okay where are the supply lines look at what's happened and the efficiencies are not there and so that's these sanctions and all of that are very very costly so we'll see we're in the process of seeing that you know so far the sanctions are not shutting down the Russian economy and so on and they're not having a change in policy and it is is a very important question because sanctions are
• 29:00 - 29:30 the United States's only unique power now because the military power and the economic power has become more comparable than it was before so that's important and the third thing we will see and we are seeing is how the sides align and basically into the Allied powers and the access powers in Europe and in Asia and we're seeing that who will support Russia who will deal with Russia so when you look around you can see for example um which ones are neutral with India Brazil Indonesia Mexico Middle Eastern
• 29:30 - 30:00 countries and so on so forth are still dealing with Russia you'll see whether the countries on which side which countries on the other side all countries are increasingly being forced to pick a side and go into Asia in those countries I speak to leaders I speak to most leaders and they're saying you know which side do I pick because I'm increasingly picked to pick a side when you see the president where you see representatives and you see others flying around the world that's basically pick aide and he the consequences the the China situation is very concerning
• 30:00 - 30:30 because as I say Russia is not a comparable power it's relatively economically it's a minor power and you need all of the powers but China is a different story Taiwan could be one of those situations at some point it will find some form of resolution but I would say still the odds are that they won't cross the line for the military but our risks of it are great it's like two giants wrestling with each other six feet from the edge of a cliff you can say okay but you could go over that edge
• 30:30 - 31:00 of the cliff too easily so that's what it looks like to me what got us here is the injection of a lot of debt and money it's a hype in other words you can hype it up think of it as you got somebody who's weak and whatever it is and you give the shot and then that shot of buying power and if the amount of spending increases by more than the amount of production then prices by definition go up and so it was a massive amount of giving away checks and money and people seem surprised that they get
• 31:00 - 31:30 inflation well they're going to spend that not going to increase very much in terms of the production and so what is going to happen the prices are going to go up when people spend more okay and you put on top of that the issue of where we are geopolitically we change the world resources are allocated it used to be primarily that they were allocated on economic and profit basis in other words if it was cheaper to produce something then Capital would go there motivated by a profit and it would
• 31:30 - 32:00 produce it and raise living standards in those places but it would move that profit that production from places that would have a hollowing out like the United States and so on in some types of jobs and we're now in an environment in which resources are allocated by political and ideological concerns or issues in other words we're not going to produce it wherever it's cheapest and also because of worries that we might be in war or that you could be in war every country wants self-sufficient and every country's worried or every
• 32:00 - 32:30 company is also worried that they might be in a place where they are affected by politics think about it the Nikes that you're buying the apples that you're buying 22% of all manufactured goods Imports come from China and just imagine if the world said we're against companies that are producing and operating in China like Russia let's say if that was the case that has an enormous economic effect and companies today are considering okay where do I produce it and it's not always produce
• 32:30 - 33:00 it in the most cost effective place that adds to inflation too and that's our new reality even like who gets the money in the system in 2008 when they had the financial system what the Federal Reserve did is it went in and it bought bonds and when it buys bonds it's buying bonds from those who sell bonds and the bonds go up and then those who are investors then take that money and they buy other Financial assets it does not trickle down to the population it won't get the check to the person that needs to get the check but in this last last time what they did is the government determined who's going to get the checks
• 33:00 - 33:30 because the federal government can determine that so the Federal Reserve buys the debt of that but the checks go where it's directed so the ideological and non-economic forces in a sense but those that are being managed for a greater purpose move that way and that's by the way also very typical of wars in all countries they become a command economy in other words if I just left it to the profit system and people buying what they want to buy it's not going to get the resource allocation of country needs in war and so you're seeing both of those Dynamics taking place in
• 33:30 - 34:00 producing inflation so what does that mean uh there's a paradigm shift a paradigm shift is about a one in 10e shift in the perception of what's likely and what the world is there was a paradigm that was created by a combination of low inflation and also central banks producing free money in other words free money like almost zero interest rate or zero interest rates that means you never have to pay if you borrow the money you don't have an interest payment and that in many cases you had interest ownly loans and you
• 34:00 - 34:30 didn't even have to pay back the principal practically and also with low covenants and the world recalibrated to that kind of an environment okay a paradigm shift is when that changes so Americans thought and many people there was a 40-year bull market in bonds and they think cash is safe and bonds are safe that's what they bought it for okay and they did not realize essentially what they're now realizing what they're realizing is that you can't judge safety in the number of dollars you have you
• 34:30 - 35:00 have to judge it in the amount of buying power you have and so if you lose money to buying power lose buying power because of inflation you need a compensating return so for example with an 8% inflation and a near zero interest rate you just lost 8% of your buying power or almost that amount so then that changes behaviors as that changes behaviors people do not want to keep their money in there I would not keep my money in there as long as interest rates are low in relationship to the inflation
• 35:00 - 35:30 rate and the likely inflation rate you're going to lose buying power so that's why you see money moving it's better to borrow than to lend and moving out of that what that does is it creates a difficulty for the Federal Reserve because not only the amount of bonds that have to be sold are no longer the amount of the deficit you know how many bonds do you have to sell well it's the amount of our deficit we have to sell bonds for that and if there's other selling of bonds because they're not good returns then there has to be more and more selling and then you have the Federal Reserve choosing to sell that
• 35:30 - 36:00 they're going to sell $1.1 trillion a bonds so who's going to buy all these bonds when you look at that that means that there's a big tightening of credit now everybody says okay we need to fight inflation and therefore it's good that they're catching up they were behind it it's almost like there's no cost or inflation is the only thing that people are thinking about the way you fight inflation is taking away buying power from people okay now you're going to borrow less there's going to be less liquidity and so on at the time time that there's more inflation so it's not like fighting inflation is one of those
• 36:00 - 36:30 things ah we fight inflation and that's a good thing and we'll get on with it it means taking away buying power and that causes markets to go down and that causes economies to go down so that's why we're in a period of stagflation Central Bank is going to try to find a middle ground but there's a lot of debt and somebody's got to PID back and you're either going to get paid back in real money or you're going to get paid back in deflated money and because they want to deal with both of those things and try to cover middle course it'll produce stagflation so what that means really for investors is in my opinion
• 36:30 - 37:00 you know don't hold money in those assets that have those kind of low returns and then many of the bubble assets always at the end of a paradigm people who extrapolate what happened over the last 10 years and they're sure it's going to happen in the future like Tech you know tech stocks and well okay no I went through this many times the nifty50 or the dot bubble and so on that doesn't mean that technology companies won't do well or something it's just like.com companies in terms of that you know there's a big crash and those things a company when it gets very
• 37:00 - 37:30 expensive it can still provide a terrible return some of the best companies can provide the worst returns because they get too expensive and so we're going through that kind of a dynamic which again emphasizes to me have a balanced portfolio with a skew toward inflation hedge assets although there will be in the medium in the near term over the next probably year or maybe less but anyway let's call a year or so there'll be a tightening that tightening causes the correct C and downward moves in most assets because
• 37:30 - 38:00 cash becomes a problem you have that correction and then you'll have the Federal Reserve come back in I believe and then print a lot of money and buy more because that's going to be the problem so we're in that part of the cycle you could either maintain a balanced portfolio through that in which case if you're having something like the all- weather portfolio or something which is the All Seasons portfolio that you have that's the type of time when you have the correction but you maintain that type of balance portfolio because you're also seeing that the inflation Hedge asset part of that portfolio does very well although it doesn't compensate
• 38:00 - 38:30 for the whole and you ride through it or you make the Tactical moves that navigate it and I think International diversification is also important now that becomes more complicated but that's kind of it in a nutshell if you have uncorrelated assets and you easily can because when economic conditions shift it shifts returns from one type of asset to another kind of asset when you have uncorrelated or low correlated assets you can dramatically reduce your risk
• 38:30 - 39:00 without reducing your return just to give that as an example the Holy Grail of investing it could be five it could be 10 it could be 15 but you will cut your risk in half or if you get down to 10 or 15 you will cut it by 80% without reducing your returns it's more important to know how to diversify well than it is even know how to pick the best things and one of the problems of the world is that everybody wants up they want up in the stock market they
• 39:00 - 39:30 want up in the real estate market they want up in the economy and that has central banks can produce up by giving it this shot of money and credit they can always produce that up but that up over a period of time has a consequence and that consequence is that there's a lot of debt and that has to be paid back that will be paid back in depreciated money so you don't want to be in that position of like if your port folio is going down a lot in this you know that's
• 39:30 - 40:00 not good to give you an idea if you lose half your money it takes 100% return to get back you lose 50% you need 100% to get back there are people who are in some of these Tech funds they're down 70% this can't be part of the game plan so the issue of being able to reduce risk through diversification which doesn't reduce return in my view never put yourself in a position that you could lose more than 25% you know in like your worst casee situation 25% in a game plan that can be acceptable but if
• 40:00 - 40:30 you go into that and if you look at any single asset in buying power there's no single asset in buying power that hasn't lost 75 or 80% so you need diversification I think for the next number of years I don't know whe that's 5 or 10 years they're going to be more a comparable power than a dominant power and how that period of coexistence goes will be very very important in other words avoiding that and at the end of the day the the strongest will win out and the most important thing is that the
• 40:30 - 41:00 United States becomes the strongest that will determine the biggest outcome but you have to recognize the power of China the number of people is more than four times our size so on average it had per capita income of half of ours then its economy would be twice the size of ours and if it's twice the size that means twice the size of buying power on anything you want to buy whether that's technology or military or something that's a reality since I started to go to China in 1984 and I have gone there
• 41:00 - 41:30 repeatedly and I love the place and I have a lot of respect for the place and the people in various ways and I've gotten to know it very well and I love America let me be clear I've lived the American dream but I'm making the point that I've known it and I've watched it since I started going there in 1984 its per capita income has increased by 27 times life expectancy has increased by 10 years this is a very viable competitor and where we will be 20 years from now now is going to be mostly dependent on first of all are we going
• 41:30 - 42:00 to have a war with each other or are we going to then be able to compete our systems competing and then can we compete effectively I think that the desire to avoid a war that's of Paramount importance then it makes it less important whether they're richer or we're richer or more powerful because there are many people in many countries that are not the most powerful that are living happy productive lives in their own ways and so I think that's the war thing is the most important thing and then we'll be responsible for ourselves
• 42:00 - 42:30 and our outcomes I think it's something like 275 million people who are over 60 or 65 and with of their one child policy it used to be that the young would take care of the old but now you have a very difficult burden because you have two old parents who are now in that situation and even the medical system and so on that's a great burden and then they have you know a lot of issues everything from weather issues and so on so they have a lot of problems we have a lot of problems they have you know a large poor population and underdeveloped
• 42:30 - 43:00 now that's both potential and problems and so it goes back to how do we each deal with our problems very well and that'll really be it first financially be financially strong have a good income and balance sheet income statement and balance sheet think about how many months or years that you could live if you didn't have an income the more Financial Security you have the more maneuverability you have both to protect yourself on the downside of to take advantage of opportunities and to know how to achieve a balanced portfolio this
• 43:00 - 43:30 is very important I think financially and then be with people your community the source of Happiness psychologists have studied that above a basic level income is not a source of Happiness Community is the highest ranked source of Happiness so how you work well with others so I think meaningful work and meaningful relationships to be productive and to also have the joy of those relationships I think is of Paramount importance and then also to realize what the risks are and do you
• 43:30 - 44:00 understand those risks and where are you and where do you live what are those risks like to recognize that the world is domestically and internationally breaking into different ideologies and different economic systems really and that happens state by state as well as around the world and to understand which are the places that are the best for you in those set of circumstances to be aware of those risks and then it's just the fundamentals you know raise kids well and B productive I should say that in most of these cases
• 44:00 - 44:30 even the worst case situations it's okay for most people in most wars most people don't die okay most people don't get injured okay most people don't in most depressions even most people don't get unemployed okay uh they are scary situations but it's not the end of the world for most people it may be meaning cutbacks and so on but you know that's often good because it's okay you don't want to get spoiled you want to be self-sufficient and you can get strong some times so most people can get through these things fine just
• 44:30 - 45:00 understand what it's like and navigate that well the beauty of writing down and thinking through your own principles is that they're real they're yours they're internalized they're reflected on and that gives you a great power