I'm senior portfolio strategist Jim Haskell the corona virus pandemic has accelerated a new paradigm of coordination of monetary and fiscal policy in effect very large budget deficits are being financed by the printing of money by central bank's the goal of this policy which we call monetary policy 3 is simple it's to get money directly into the hands of spenders to avoid an economic depression and the byproduct of this policy is zero or near zero interest rates across the developed world and it is we believe the single most important issue for investors to understand to discuss policy and the ramifications for managing money in this new world i sat down with Bridgewater's founder and co CIO Ray Dalio to get his perspective ray one of the most important dynamics in this new environment is that old ways of easing will not necessarily work interest rates have been around the zero bound for quite a while since the global financial crisis but the policy the central banks use the ease more than a decade ago was just the printing of money to buy financial assets in the aftermath of the pandemic we find ourselves once again dealing with the constraints of traditional monetary policy so my question to you is what will easy look like now that interest rates are already low and central bankers have spent a decade buying assets and pushing down risk premiums what you find in studying history is that depressions are mostly debt and liquidity crisis that are dealt with one way or another through easing of monetary policy which changes over a period of time I described monetary policy one interest rates monetary policy to buy financial assets print money and buy financial assets monetary policy 3 which we are in is the printing of a lot of financial assets by the central bank and then buying government bonds to finance the deficit and getting money in the hands of those who wouldn't have had it through the normal financial system essentially through that coordinate in all history so when we go back to the 1800s and so on there is that and so the alleviation will happen in terms of that kind of ease so when we think interest rates are going to hit zero and that therefore depressions last no they don't last because in one form or another and we're seeing it here today that they will be the printing of money now the value of money may not last or they could be depreciated but in the end they always will ease and you will have then that kind of reflection movement and that kind of change so the hitting of a zero interest rate is not a hitting of a floor on the capacity of central banks to ease and so in that what you're saying is if the nominal interest rates can only go to zero the inflation adjusted interest rates or the real interest rates they can go quite negative and that's what the central banks will try and pursue well it has to be manifest in one of three things happening if you look at the history you've seen it happen time and time again in the same way and it lends itself to three types of assets responding the if that's happened happen in March fifth 1933 Roosevelt makes the announcement about severing the dollar from gold and depreciating it and reflate again to give the banks the money that they have to pay the their depositors the same thing happened August 15 1971 when Nixon got on television and said that he is severing the relationship with gold and printing money and so on the same thing happened in November 2012 with Mario Draghi making the same kind of moves and the same thing happened on April 9th when we had the moves by the US Federal Reserve and the US Congress and Penn Treasury same type of movements happened in 2008 when the Treasury put together in the administration and the Congress put together the tarp program and they went to quantitative easing those are the things that you always see happening including times that I haven't mentioned and when they happen that is what happens at the equivalent of zero interest rates okay it is that kind of movement and that form of easing and that's what we're seeing and so easing does it end and the liquidity squeeze and the debt squeeze is dealt with but it's dealt with through the printing of money that could become manifest in either the real interest rates going down which in the case of with a low level of inflation and zero interest rate must be manifest with an inflation rate rising which eventually happens doesn't usually happen at first or there's the depreciation in relationship to other assets so what you're seeing right now is that reflation becoming manifest in the money that is being purchased by the Federal Reserve and government then going into assets that are equity assets into credit assets and so on and that's the manifestation or you could see it in gold or you could see it in the depreciation one doesn't necessarily know at the time which is going to happen so in 1971 when that happened there was a big decline in real stock prices because inflation accelerated but you do know that that combination of reflation assets will happen in a way that's very similar to the cutting of interest rates when they hit zero investors are used to thinking of cash as a safe asset but in the environment you describe where governments need to print money and finance big deficits in order to stay out of deflationary depression my question to you ray is should investors continue to think of cash as safe I really believe that in this environment most investors will think safe is cash and that's tragic so you can see that one has to think differently from one's habits when one thinks cash is not a safe and - it's a risky investment that stocks and bonds are not the same as they were in the past one has to think of the store hold of wealth concept rather than just equity returns one has to think about balancing differently all of these things that I'm bringing up are not commonly thought about they're not part of the common experience of investing over the past many years in order to understand the lessons of history and even what's more likely to take place one has got to go back to periods that were analogous to this and to study those periods and when we did that over the last 500 years you could see that you don't know if you're going to see the depreciation of the value of money and the store hold of wealth so all of a sudden that changes what you define as risk you used to think cash is a riskless asset cash can be the most risky asset as it depreciates in value and then you start to think about different asset classes and different locations so that's what we're doing when we think of what is the diversified portfolio for an easing that happens at that time that's kind of a reflection portfolio and how do you measure that in relationship to other things because I think the one thing that we could be confident is is that the Federal Reserve and other central banks are not going to let an implosion happen without printing a lot of money I want to ask you a question about holding risky assets you know because we've been through more than a decade of central bank printing and buying those assets after the global financial crisis and you've been talking increasingly about the fact that the forward expected return of assets holding them today and looking out over a decade is essentially around zero maybe very little but that investors will still have to contend with the volatility of owning those risky assets can you flesh out this concept for our listeners well what I mean is we know where interest rates are you know that if you take a ten year bond you know what your return it's got to be on that 10-year mod and if you then do calculations of what is the expected returns of other asset classes start off as you deal with each of those companies that are borrowing and you look at what their interest rate is and then you look at their equity expected return relative to their interest rate based on the present value of the discounted cash flows that all asset classes and that includes private equity it includes venture capital and so on have very low expected returns meaning that if you were to just hold them over the next ten years they're all going to have not nearly enough return and they're gonna be low so that's a fact of life we also know that asset classes are affected by monetary policy so when they lowered the interest rates and did a number of other things in the past that allowed asset prices to rise we know a number of those things won't be able to happen in the future so if we start to take a picture of that we know that in fact you can go to maybe negative returns and it's all happening because it needs to happen from an economic point of view it needs to happen because there's a lot of debt and a lot of liabilities pension liabilities healthcare liabilities insurance company liabilities and so on that are coming at us that can't be funded so they need more returns and so we've been in an environment where there's been a leveraging up of those returns so because all that liquidity has been put in by the central bank because it needed to be stimulative in a no interest rate environment we have all that liquidity looking through all the nooks and crannies of all asset classes driving their prices up relative to their expected returns and therefore their expected returns are going to be low okay so that's a reality then we know that we're gonna have volatility around that you have volatility caused by the sorts of things that we've seen some of those things if you have a downturn in the economy due to the virus a lot of uncertainty about the virus it caught has economic implications and then you have a new world in monetary policy that new world in monetary policy means that no longer is there the allocation of capital in the ways that we were used to it in the old days though it would happen this capitalist system his central banks would put on deposit cash and then bankers would come along and and think about borrowing that cash and lending it to institutions or people that will pay back and that they'll make a positive spread on and the free market made the allocation of those capital much less so today today the markets are driven by central bankers and central governments deciding that they're going to put money in so and how they do that and the reactions are producing and will continue to produce volatility it's very much like the Warriors but that allocation of capital and how that is operating will create volatility we see volatility and so you have to deal with that volatility but that is the the character of the environment so that the environment it's a reality right does anybody disagree that the returns of asset classes will be low from just an expected return point of view and that monetary policy and which is now buy financial assets and so on and print money will be a lever that's going to have an effect on that and so we're going to get volatility and we have a high amount of uncertainty in that environment so that has implications if we agree on that that's a fact of life right can we agree on that that we're going to have low returns in adequate returns generally relative to needs with a lot of volatility around them can we agree that's a fact of life I think it is and then the question is how do you approach it from an investment point of view so let's talk about that the picture you're painting ray is one where the excess returns from assets is going to be very low with a lot of volatility as you just said and you have always said that holding a lot of beta well diversified beta is is important because you can have a high probability of getting risk premiums and therefore generating returns just how the capitalist system works but it sounds like going forward that's that's not so certain and that that that's not likely to work over the next decade or so is that correct well let me let me describe it this way achieving balance which means diversification is more important than ever though it will have a lower return than before so do you want an asset class return or do you want a portfolio of well balanced assets so when I look at that I'm saying let's say if you take a 60/40 stock bond mix or if you take equities or you take any one of those things no no I think the most important thing is to start with diversifying well diversification of asset classes diversification of countries diversification of currencies diversification because I think that the one thing we know is that we don't know a lot and it's not easy to necessarily time it about what is going to happen right so we should be given humility and because the markets are relatively efficient in making those comparisons it's not like one thing is necessarily better than the other as much as we do know that some things are better diversifiers than other things to produce whatever that excess return is that it is as stable as possible and least risky as possible to try to achieve balance so as we look forward what we can say is the excess returns will be lower the premiums are be lower but it still is better to have that diversify portfolio it'll be a lower excess return but it still means more stable because the individual items that make up will all have low returns but the combination of them will make it more stable I want to talk about this point you brought up about any single asset as dangerous because of course most of the world is allocated with a concentration and equity risk so you're basically sounding the alarm that that is in all likelihood a very bad allocation going forward yep that the concentration in any one asset class in any one country in any one anything history has shown is dangerous and it is dangerous now so when I look at it for example what we're seeing is reflation we're seeing the central bank's printing money and buying assets and I do believe that they're going to continue to do that now that then the question is does that become manifest in a way where it drives stock prices up does it drive the value of money down does it drive gold prices up what is the role of inflation index bonds so what I've done just over the last Oh maybe year and a half was to go back through all history you know you're aware of the 500 year study of all of these particular cases and to see literally what that set of choices is in all of that range of choices what you will get is easiness but the lessons of what will happen largely existed prior to 1945 when we began our monetary system what I mean is that we've been living in an environment of ideal conditions which began in 1945 with the formation of the mob the new monetary system and the dollar based monetary system and the restructuring and that's been a great great environment and we have learned certain habits from that environment so ray I'm thinking of now this world that you're describing and I'm thinking about it and breaking down the difference between let's say investors that are trying to hit nominal targets you know let's say defined benefit plans and endowments and foundations that are worried about real word you know real returns because because that's what's going to matter in terms of the things that they can purchase with those returns how do you think about the difference in these types of secular changes between real and nominal returns and the type of investor you are well I think risk is an asset liability mismatch and one has to look at the nature of the liabilities and so what you're describing is one that has a fixed return liability and the other one has a real return liability and so in engineering the portfolio one has to think about what is the immunized portfolio the best way to do it is to think how would I immunize the put that portfolio so for example the immunization of the inflation sensitive portfolio with the risk riskless asset would be inflation index bonds with the same maturity as the nature of the liabilities where the riskless asset for the fixed income would be that fixed income then one deviates from that in a manner that is consistent with those particular objectives and so that produces betas as well as alphas but if you're going to layer on the betas you're going to lay on the betas that are consistent with that liability stream not that which would be counter that liability stream so it's an engineering exercise in where which one keeps in mind for most investors it you know you have to think about real returns but not for all investors because like you say in some cases they've encouraged liability in any case I think the big thing is that almost no investors has enough money relative to their needs it may affect the time horizon but if you looked at the richest investors generally speaking and you looked at what are the revenues what are their expenses and what is their saving every individual every company every country has to go through that exercise and when you look at that exercise can you spend on your liabilities or pay out that amount of money based on the income that's coming in or the way you're going to have to tap that savings pool you can see all around you those that are going to not be able to make it not be able to come close in the period that we have you have to think what does that mean that is going to mean that those will not default you cannot tell most of the people that they won't get their money that is going to mean that a lot of money is going to have to be printed because the obligation is to print though that amount of money to fill those liabilities and so that's the situation that we in most of the world are in as you mentioned you've been researching history and sharing that in the daily observations to build a deep understanding of some of the major secular changes that have played out through time are there any other particular takeaways that you would call out as relevant and connected to today's environment I want to re-emphasize the three that I think are common in history and very relevant today and didn't exist most of our lifetimes but did exist in the nineteen thirty to forty five period and now that's monetary policy interest rates and so on we discussed that and you see it from 1930 to 1945 and that'll represent monetary policy and the constraints and implications of it more than what we're used to the second is the gaps the wealth gap the values gap and the political gap which itself will produce internal conflict if you have those gaps and you have a bad you have the kind of situations that we're seeing you have people at odds and we're going to go into an environment in which we're going to see how do you divide the pie that'll have implications for changes in tax rates corporate tax rates will change individual tax rates will change capital gains tax rates will change and so those will have implications and they're part of that picture and the conflict element will be important and the third is the emergence of powers to challenge the existing world power particularly China and that has there are four types of conflicts going on as a result of that we know of a trade war we know of a technology war history is also shown a geopolitical war conflicts and then also a capital war well so you're starting to see those influences come into play they'll have big economic implications for example it changes supply lines we know very well in very permanent ways it'll change the capital movements it'll have exchange rate impacts it'll have stimulation impacts it can be disruptive to businesses so the three things that I've seen happen over and over again and have profound implications are number one the long term debt cycle and the effectiveness of monetary policy now it works number two the gaps the political economic and wealth gaps and what they fall through up off in the way of redistributions of wealth and the like and then the external gaps in terms of first the economic wars like in the 30s you had ten years of economic wars before you got into a war and I think we're in an environment like that so given those challenges what should investors do to put their portfolios in the strongest possible position well as I said I think the most important things is to know how to diversify well so when I think of investing I want to invest in the competitive con Treece I'm on a multi-country investment I'm one of a multi asset investment I want multi currency investment and I want a store hold of wealth because what happens is wealth is not so much destroyed as shifted you know from one asset class to another you know there's competition of asset classes competition of countries competition of currencies and so on and they move around and so they have to start off diversifying well and then they go to where are the alpha sources and how do I how does one create a well diversified mix of alpha sources so it's the same old story ray you have a long storied career you started trading stocks getting tips when you're a caddy at age 12 showing that first passion you've been through multiple secular changes in crisis's you know my own experience with you is is through the global financial crisis and then this particular one I'm just wondering you know where this ranks and what you've learned through all of the history of your experience in money management that helps you deal with this crisis well I learned I learned a whole bunch of things first of all I learned that the things that surprised me the most were things that vents that hadn't occurred in my lifetime before but happened prior to that and that I needed to understand that that was very helpful all along so to me it's almost like everything is like an upward pointing corkscrew and that there is an evolutionary force forces that takes place and then there are these things that happen over and over and over again right around that almost like cycles that repeat over a period of time in terms of the mechanics so I knew that I really needed to understand those cycles and be able that's one second within the period of those types of cycles that there are paradigm shifts and I learned in other words that they can go on for something like maybe 10 years and that at the ends of those 10 years people extrapolate those paradigm when they're made up typically of forces that are more likely to mean revert rather than to be extrapolated forward and that produces big paradigm shifts so for example from 2008 until 2019 about 11 years that we were in a paradigm and that paradigm was one in which they were quantitative easing and lowering interest rates all across the curve plenty of liquidity company buybacks a favorable environment to capitalism profit margins expand tax cuts corporate tax cuts take place and so on and then those things cannot be extrapolated you're not going to get another round of corporate tax cuts you're not you can't have the interest rate cuts that existed you will not have the buybacks and the magnitudes and so I learned to look for that which is behind it when others are extrapolating it so when I look at history I find more that everything is kind of another one of those it's it's it's different but by and large it's the same and when I study history over periods of time it's almost as though the clothes are changed and the technology changes but almost the personalities and the circumstances they face don't change all that much and so this one looks something like you know 1938 or something in terms of the particulars and I could go back in periods of time and I learned to be humble you know to be fearful always a pleasure spending time with you rate thanks so much thank you Jim my pleasure you