ZHU Min: Good morning everyone, warmly welcome to Tsinghua PBCSF Global Finance Forum. In this session, we are very honored to have Ray Dalio with us to have a conversation on global financial situation, liquidity market, federal policy and few other things.

I don't think Ray really need any introduction. I guess everybody in the auditorium today have read Ray's book. His first book is Principles. It is very, very popular in China. Then he quickly published the second book on big debt crisis. And also he published the third book also very important: the principles for dealing with the changing world order. I think many people read this book very carefully and use his book very often. He is the founder for the Bridgewater which is the largest hedge fund in the world. But most importantly, Ray is a big friend of China. In the past 40 years, I guess Ray has visited China at least more than 100 times. I saw Ray in the past March in the Chinese CDF and also a few weeks ago we met once again in Beijing. So Ray comes to China often and really pay attention on Chinese economy and macro situation and often provide very helpful advises as well. So Ray, thank you very much for taking this invitation this early morning to join us on this very important topic as the people in the audience are really, really excited to listen to you. Thank you once again.

Ray DALIO: It is always a pleasure.

ZHU Min: I think I would like to start with this conversation on the US regional banking sector situation, after Silicon Valley crisis, then it moved to signature banks, the first republicans and a few others. We were both on the podium in the CDF. My views on those issues, I think the Silicon Valley bank, per say, is not a systemic risk, but the nature of Silicon Valley crisis indeed a systemic risk because it's basically the essence management mismatched caused by macro situation, change a long time, easy monetary policy, and strong fed increase interest rate. hard for anybody to adjust balance sheets. Now, I don't know whether you agree with me, but what is the constitute? Do you think the whole regional banking sector is stabilizing? What do you see the wall sort of crisis will pop out? or you see this is still a key of national risk for US banking sector and also for the whole world as well.

Ray DALIO: I think it's important to understand that this is an issue that is a pervasive, big issue that affects way beyond just banks. So it's an issue that affects a lot of banks because a lot of banks bought government bonds. But a lot of other entities bought government bonds. Those are not, just, by the way, US entities buying US government bonds, but they are European entities buying European bonds because of monetary policy. Japanese buying Japanese bonds because of monetary policy. Japanese investors buying government bonds and so on. Because we were in an environment in which short term interest rates were kept extremely low, so that entities could borrow, and those entities could be banks, insurance companies, many entities, pension funds could borrow at a short term interest rate and buy government bonds. So that situation that we're dealing with is a much bigger situation that affects some entities different from other entities.

Now, it affects a number of regional banks. It affects a number of non-regional banks, but it affects insurance companies. It affects a lot. I just want to be clear that what happened is when they bought those government bonds and the finance by short term interest rates, they established a position. Think about it. In Europe and almost in the United States, but in Japan, how could you buy a government bond with a negative interest rate and expect to make money. You know the answer? The answer is by borrowing at an even more negative interest rates to create a positive spread, which central banks provided. And so that was done a lot. Those bonds went down in value. And the cost of funding that borrowing went up a lot, and the world has that kind of a problem. Okay Now, the mechanics of that, what happens? Some of that is marked to market, and some of it isn't marked to market, a lot of it is not marked to market. That means a lot of entities, by the way, central banks, too, have big losses.

If they don't mark them to market, what does that mean? Let's be clear on that. It means that they have a lot of bonds, and they don't want to continue to do that. And that will have an effect on the demand for bonds in the future. First, they will have the financial problems if interest rates stay where they are, under control like that. They will have these losses, but they'll be spread out over a period of time and that would be protected by the systemic putting in a money. In other words, central banks providing more support, and so you'd see balance sheets increase.

But it also means that their demand for these bonds, for government bonds will be much less because they have too much and they have losses in it. That produces a supply demand problem down there, because there will be the need to sell government bonds. If you take United States or in cases of other countries, too, when they have large deficits, they have to sell bonds and to finance those deficits.

Who will buy the bonds? Those buyers of bonds want less that won't be the banks. They will not be the foreign buyers of those bonds. That creates supply demand problem. The next step, if we see this moving forward that way, would be and it would be a signal to everybody that the Fed's balance sheet and central banks’ balance sheets increase again, because there would be more essentially printing of money to buy those bonds.

So I want to make clear that this is not just a regional bank issue. It affects some who have the bad asset liability mismatch, but it doesn't affect those who don't have that that mismatch. The world has gotten leveraged long financial assets. In other words, and it's not just bonds, it's other financial assets, borrow money at cheap rate and buy those financial assets. That's a balance sheet type of problem. It's different from an economic problem. Because, we'll talk about it and I'm sure, if you're looking at the economic problem, the household sectors are not in bad shape. It's a balance sheet problem.

ZHU Min: Ray, you made it very clear. Actually, you divide issue into three sessions. The first issue is a regional banking issues. The second issue is bigger than regional banks, it includes all the banking sector and financial sector. Because as you mentioned in the past, so many financial systems by this zero interest rate as they want. But they also very interesting managing because the situation and people will demand a less bond. So it makes the treasury more difficulty to sell the bonds. Does that mean the bond’s price will be pushed even higher in the short term?

Ray DALIO: And/or the central bank will have to come in and buy more of those bonds.

ZHU Min: To buy again.

Ray DALIO: And yes. That particular dynamic is the problem. When you have a lot of debt, one man's debts or another man's assets. It's so important that central banks have policies that balances, interest rates and the tightness of money, so that interest rates are high enough to compensate for inflation, and pay creditors inadequate return. Otherwise they'll sell the bonds because it that it's too low in relation to inflation and they'll sell the bonds. On the other hand, interest rates can be so high that it becomes difficult for the debtors to pay the debt. So that is the dynamic that we're going on.

We have an important supply demand imbalance. If we had a free market in bonds, and central banks did not buy the bonds in the way that they did. They came in and they bought a lot of bonds because there was not a supply demand balance. They wanted to keep things down and subsidize that produced the environment, we had experienced. They're in a bind. And so right now, it is very difficult to keep interest rates high enough and muddy tight enough that it benefits the creditor at the same time as it doesn't hurt the debtor. and so The one we see this balancing act that was taking place, we see that they have to drive down credit demand. But if you keep that interest rates, let's say a real interest rate at 1 or 1.5%. Then that will produce a very a tighter credit conditions, which will mean slower, much slower growth or no growth. We're settling into an environment in which they're trying to find the equilibrium level with this all these bond losses around, so the bonds, the debt is not good assets.

ZHU Min: This is really new view look about dynamics of the whole process.

Ray DALIO: Sorry for the interruption. This dynamic has its new in our lifetimes, but it's happened repeatedly through history. I just want to say it if there's nothing new about it that government's getting into too much debt and then needing to print that. I can go back now you know to the Qing dynasty, the end of the Qing dynasty, I can go back to repeatedly through history, that dynamic, where there's not enough money, they want to spend more money. And there's no not enough money to spend. What they do is they print that money to spend it. They have too much debt. That dynamic has always occurred repeatedly over and over across countries through really thousands of years.

ZHU Min: This is to go back to your fundamental theories. Everything is mechanical. This is very interesting. Once again, repeat and again and again. I was told by statistics, they just say the banking sector roughly have a 20% of their balances on assets of bonds and a rather 20%, roughly 8% is roughly is held to maturity, and 12% of total is, say, the available for sale. So there's still big chunk. If the demand side stock purchasing bonds, you say, the Fed had to pick money to buy these bonds, as they did before. That means, once again, the Fed run into the quantitative easy monetary policy. I recall just a few days ago, you wrote a paper say the Federal policy hasn’t been effective so far because they haven't controlled information. And growth is also resilience in some way. Now, when Fed change their policy, how much will change the dynamics of market and growth.

Ray DALIO: Throughout history, there are these cycles. and The cycles have 3 types of monetary policy, what I call monetary policy 1,2, and 3. Monetary policy one is when they change interest rates to affect the supply demand and the supply and the demand balance and they create equal. When that doesn't work anymore, because typically you hit a zero interest rate, you can't lower mounted interest rates. There are supply demand imbalance throughout history for as long as existed. There's monetary policy two that I call, which is that central banks print money, and buy bonds to make up for the imbalance of supply and demand to do that. The last time that started in 1933 in the last cycle, and it carried through 1945 at the monetary system. So this happened over and over. so We went to what we call quantitative easing. But the problem with quantitative easing when you're just controlling supply and demand besides it being an imbalance, is that the money that you're buying goes to the holders of the bonds. And the holders of those bonds sell those bonds and they buy other financial assets because their holders of financial assets, and the money does not trickle down or get into the hands of people who need the money. So you go to monetary policy three and the monetary policy three were the third type of monetary policy in these big cycles, is that there are central government, which has the ability to choose, to give money to people or tax money. They have the ability to do that. Works with the central bank to get money into those hands. So for example, when we had the covid problem and then beyond, they need to get the hands, the money, not into the hands of bondholders, which comes from quantitative easing, they need to get the money into the hands of those who needed whether they're those who are losing their jobs, or whether they are states that are on in bad shape and so on. And so that policy is the central bank runs deficits and the central government that monetize as those deficits. That's where we are in that cycle. That long term debt cycle has repeated through history. It's covered in my book, the you know the principles for the changing world order and also for the principles for dealing with a big debt crisis. But that is the dynamic that we're now in.

ZHU Min: But you particularly mention the Fed was on the path of tightening. But now, because the change of demand and supply of the bonds, Feb may run into easing once again. Will that happen?

Ray DALIO: Yes. And in the markets, there are certain things that surprise people. You would say, I wouldn't expect the central bank to start buying bonds again. Most people would say what? Another one of the quantitative easing? (Exactly.) By the way, each quantitative easing by purchases was larger than the one before it, since they began. That is a signal. When you start to see the central bank's balance sheets expand again, that is a signal that when the next phase of that easing dilemma. That's when I would view that signal as if we're dealing with, then controlling inflation, we have to look at what's happened in terms of why is inflation difficult to control? One of the components of inflation. So you break it down.

What happened with the Federal Reserve and other central banks' actions is that those central banks took on the debt and gave the money to people, essentially. Now, the household sector's balance sheets are in relatively good shape, because the government's balance sheet through the central bank and through the central government are in bad shape, that there was a transfer of wealth in terms of that balance sheet that happened that way. As a result of that, and as a result of low unemployment, that the what is causing inflation? What is the reason for inflation? What is the thing that is going up when other things are going down? It is compensation. So if you look at compensation, it is increasing faster than inflation. and It is holding inflation up.

As a result, we have a situation where the household sector's balance sheet is relatively good. And the income growth is relatively good. And therefore, inflation is staying in the vicinity of 4.5%, 5%, you know that that 4~5% kind of vicinity, and it is unlikely to go down. In any satisfactory way, we have a 2% targeted inflation. It's not going to go down that much until that sector is dealt with. That's what's sticking it up. The other thing that's sticking inflation up is the inefficiencies. (Well, that's interesting.) And the inefficiencies that are existing from global supply chain problems that relate to de-globalization, the inefficiencies that come, as now we're in a situation of greater conflict, that means that self-sufficiency is more important than efficiency.

In that environment, we have an environment that a greater level of global inefficiency, combined with relatively high compensation issues that is keeping inflation high.

So the central bank, and particularly the Fed, are in that particular position. So the balance sheets of the household sectors income relatively good. The losses on the on balance sheets are bad. And inflation is sticky. And that will mean that they have to keep in monetary policy relatively high, but that won't ease things. So there will be a supply demand problem.

ZHU Min: Wow, you give a situation of very vivid description. So I think that's the most important thing. You mentioned a few key issues. The first issues, the compensation index is still way high. Everybody knows the most concern of inflation is inflation-wage-spiral. If compensation raise too high, and then we are concerned whether it will cause the wage increase too fast. We saw those little things. I think that's real concern.

Ray DALIO: It is concerned in a political time. Because keep in mind that we're going into elections for 2024 elections. What do you do when you take buying power away from the people? To fight inflation, you have to take buying power away and create a weakening effect and that's coming in a watching period of time when there's a lot of internal conflict, which makes things difficult.

ZHU Min: Yes, this is a very political sensitive issue, I think. You also mentioned another important issue. Not many people talk about that. You talk about the global geopolitical risk, actually, causes everybody produce more capacity, lower productivity, which I heard you mean, it's a circular inflation pressure for the long term. It's important to think together. You just say inflation is sticky and will be sticky, if I hear you correctly, at 4.5 and 5. Now, if inflation was 4.5 and 5, will stay that way. So what about interest rates? And I think Fed is in a very difficult situation.

Ray DALIO: A lot depends on. And yes, the fact for exactly that you're saying. My worry is that it could be worse than that, if there is selling of bonds. In other words, the total supply of bonds is going to equal the new supply that comes from the deficit that has to be financed. Now, if you have a selling of bonds that were since the supply demand balance necessitates the central banks to come in and print more money. If you get that, that would be a very difficult to dangerous situation. That's the thing we have to watch out for the most. That's the risk that lurks out there that I think is not given enough attention.

ZHU Min: Very important point. I think that's the very risk scenarios in the near future, actually. I hear you made a very interesting point, where you say, with inflation sticky between the 4 and 5, Fed don't want to keep interest rates so high. Keep the monetary policy tight. But they can't. Right? Because supply and demand advanced market issues. So that may change all the dynamics. This is a very big issue. But fundamentally how much those things, inflation interest rates policy, what impact on economic growth? What do you see the growth for US and for the world in the next, say, 12 months?

Ray DALIO: I believe monetary policy has to be stay up here, which means that you're going to have something approaching 1% real interest rates. Think along those lines, maybe not quite that, but in that the vicinity. Then that's going to bring down growth to something in the vicinity, I would expect, between 0 and 1%. In other words, I think a new equilibrium. What is equilibrium? Equilibrium will be at a real interest rate of the vicinity of 1%. And if you have a 1% real interest rate, you're probably going to have something like dip sand movements above it, but a relatively sluggish growth rate. That's if it all stays orderly. If it could become disorderly. So 1 percentage, 0-1% real growth, and zero, 1% real interest rate, and if the bonds supply demand picture is kept relatively orderly if it gets disorderly, the more you have a supply demand problem, the worse that tradeoff between inflation and growth will be.

ZHU Min: That's a very important point, Ray. If you think about inflation is sticky between the 4 to 5, the real interest rates will be 0~1%. so The growth will drop out roughly to 0~1%. so This is a stagnation, is it?

Ray DALIO: Yes. I think stagnation is a relatively almost opportunistic scenario. We are also having a technology revolution. We can't talk above every everything without also bringing that in. As I mentioned, there are five main forces that we have to look at throughout history. I studied this, and I saw that there are five main forces. The three big forces that drew my attention to study, back the last 500 years in the book, was the levels of debt and monetary creation that we're talking about. The second was the level of internal conflicts between the rich and the poor on because the wealth gaps have become the largest. So the second is the political internal political conflicts, that are very much related to wealth gaps, rich and poor and so on. The third is the geopolitical. In other words, how the world works? Is it going to be efficient? Are we going to have conflicts? How will that work? And then when I studied history of over the 500 years. And I also studied the dynasty going back to the Qing dynasty, 221 BC. I also saw that acts of nature, droughts, flaws in pandemics have actually toppled more civilizations and empires, than anything else. So we cannot ignore acts of nature. So that's a big force. And then number five is man's learning and development of technologies. Over a period of time, that is what raised living standards. The others produce cycles. And we have three steps cycles and so on around evolutionary rise in living standards that comes from productivity being able to do things more efficiently. And that's manifest in particularly in technology.

When I look at what the world looks like, I'm looking at all five of those, I'm checking them off. That money one is problematic in the way I just described. The internal conflict one is very problematic, and it relates to this the politics and economics. The international geopolitical one is problematic because of the inefficiencies, what conflict might be like. The acts nature's one is not is problematic because things are not to improve. In fact, if we're looking at, we're going into an El Nino period in weather. That means that you could have more weather disruptions in the period of head. That's not a good thing. That's all the united problem. The first four of those influences are problematic, are worrisome. Particularly one that come together. Number five is technology. We are right now having a technology revolution that is through artificial Intelligence and so on, that we've ever had before. It's certainly going to be a societal disruptor. We're going to come into a period that'll be disruptive. Whether that's positively disruptive or negatively disruptive has to be seen. Time will tell.

However, the risk is not the technology. The risk is the people's using of the technology, artificial Intelligence. For example, if it's used to fight with each other and be bad with each other. It will be a terrible influence. If it's used to raise productivity and so on, it could be a very big positive influence. That's how I look at these five big factors that I think that you have to look at those five forces in order to understand the picture.

I think in the next 2 years, you're going to see a very disorderly environment, in a sense. Because there we have the debt issue we which will also weaken growth and so on, at the time that there's a political year, at the time that there is great international conflict. At the time, maybe you have weather, maybe you don't like I can't be a predictor, but El Nino, and then we certainly know that the technology implications of AI over this period of time are certainly going to be disruptive. They're going to change things in important shocking ways. So I think over the next 2 years or 3 years, you're going to see very big changes.

ZHU Min: Wow. Those are very big forecasting. In your five main drive chances, the cycle and history. Fours are very problematic, as you mentioned, are so they are great. The technology is not all clear at this moments, right? I think this is also very important point. Obviously, we'll talk about Chat GPT. We talk about the GPT. Well Outline just a big testimony in front of the US senator is just saying, if GPT goes wrong, it can go quite wrong against he implied, in your way, if it's used to fight to each other, it can really destructive in a wrong way. I think that's also another concern.

But in short term, do you see those GPT of things? Because it seems to me GPT passed the tooling tests and the GPT is moving into the AGI, which is the general Intelligence now, which is a good thing, but also with the potential risk. But do you see this Chat GPT or GPT, log Bloomberg GPT, fundamentally change financial sector or change the company like your runs, like Bridgewater.

Ray DALIO: Yes, in important ways, it'll change everything in important ways. I'll start with Bridgewater my company of a period of time. My whole approach to investing in almost everything is to not just make decisions, but to pause and think one of my criteria for making the decisions to write those down and convert those to algorithms. We've been doing this for 25 years and to use, the to build a system that thinks and communicates it actually rights and communicates and makes decisions like one would create a computer chess game and then play chess next to it. And that dynamic has its process that is extremely prop fabulous. It's why we've been successful. And now along lines, now, as we come into, let's call it this generative allied type of environment, that this new type of intelligence. Every dimension will be of almost everybody will be working with this, to deal with almost all decision making in a very big way. So certainly, for our decision making, I personally and beyond that, are dealing with. How do I measure that? I'll be talking to it because we have so many principles. I have so many principles written that now and they come quite specific that you took those things and put them together with this capacity. And I'll be having chats with this, and I'll be making instructions in that way. But each will be doing it in their own way. This change is a radical change.

I've seen very complex computer programs being analyzed by this technology and finding out where are the mistakes in the programming and they'll find it in the programming and respond quickly. That's an example. So this is going to have a very, very big impact, not just in financial markets, but it'll have a very, very big impact in everything.

The thing that I think it's exciting about it, is that unlike a lot of AI, which did not convey understanding, it was just data mining. You take things that happened in the past, and you put it into a computer, and it analyzes the patterns of the past, and it gives you actions. But it doesn't tell you the logic behind it. So if the future is different from the past, you're in trouble. Because you can't understand. This is not like that. This the technology you can get into why?  And you can communicate with it, why does that make sense? You don't just get answers, you get understanding. That is going to be a tremendously powerful influence, I think, in every dimension of our lives.

ZHU Min: But how much will impact particularly on the financial market. I mean I can tell the GPT logic behind the whole thing is a very much likely you run your company, right? You understand the criteria and you weren't disappointed before you make a decision. And the machine does the play trainings and then have a reasoning move forward. Does that makeup market a much more competitive? And does that mean the margin for the market would be much thinner in the future?

Ray DALIO: First, we're going to have great volatility. The reason we're going to have great volatility is that this disruptive technology will be applied to many different businesses, many different areas. But let's say businesses will take. That means every business almost can have revolutionary changes in ways that we really don't understand. The old world of how decision making was made is going to be move beyond. Those who will harness the best and use it the best will have great competitive advantages and now yet undiscovered are ways. And so that will change companies, it will change their financial conditions. They're going to be much more disruptive new companies and technology is based on this. Just think about how open AI itself came into existence. All of a sudden this thing hit us. And now everybody's operating this way.

The implications on almost all businesses will be similar to that, very big changes. So very big uncertainties, greater amounts of volatility, and those who will know how to use it well, in any domain, we'll be at a tremendous competitive advantage relative to those who don't know how to use it well. So it's like, if you were to say, inside military, if you know how to use it well, you're going to be a tremendous advantage than if you don't know how to use it well. That's the same in all the domains, and that'll be the same in the markets. And of course the markets are the pricing of all domains, the pricing, if any industry, everything is all in the markets. And so the markets themselves will reflect that. And then the approaching of the markets, how you use it to deal with the markets will be affected by it.

ZHU Min: This is a fascinating view on the machine, on GPT, on the very much it depends on how well you use the machine in the direction, in the way, in the skill, how to use machine. And overall, because the impact the whole industry will have a lot of volatility. Wow This is a really a very interesting view on the Chat GPT on today's artificial intelligence. I think it is a problem at the time for us to you want to add anything?

Ray DALIO: Well I think that it's almost got like going into a time warp or something would in in the years ahead. The next 2 to 5 years ahead, we're going to go from one reality into a very different reality. For all of these reasons. All the five forces. The debt issue, the internal political, the extra geopolitical, the acts of nature, and then the technology changes that are changing how we think and what is coming out of that? That world in 5 years from now is going to be a very different world.

ZHU Min:  I think that you really conclude this conversation very well. If looking for this world, we see all different things. I just mentioned the regional banking crisis, assets liability, mismatch issues, in a long term, quantitative easing monetary policy, strong interest rates hiking, inflation sticking all those issues. But if you see through the hosting, through your land Ray, this is really through your books, three books, you go back to a fundamental, which is five fundamental drive forces who drive the changes, the level of death, the monetary policy, the level of an internal political conflict, the third is geopolitical risk, you just mentioned, and fourth is nature disasters. All those forces are problematic you just mentioned. And also losses not the least technology in two different ways. It can be very helpful, but it can be very harmful. But fundamentally, this is a really fundamental change. New technology will fundamentally change our life or view of the world and the market in in the future You just managing in the next 2 to 3 years or 3 to 5 years. We'll see a very, very different world. Great. This is some really, really fantastic conversation.

Ray DALIO: One more point, if I could make it in conclusion, how all this is handled will above all else depend on how we are with each other. All of these situations are manageable and can be handled.  We can have a higher living standard than we've had throughout most of almost all history. if we can face these challenges in a good way with each other, not to do each other harm, and to instead work on those things together, to deal with them. You could do a debt restructuring in various ways, I won't get into it, I won't go all through it, because we're at the end. But I'm saying it will all come down to how we are with each other.

ZHU Min: Thank you, Ray. Thank you. Give this very important but very lightning points and these sessions. All five challenges can be manager can be handled if we can work together. I think that’s the most important thing. We sure need a multinational design, we need to work together. We need a conversation like we have today. Your last point is really, really important for all of us. And we should keep that one so that we can work together to manage the five challenges you just mentioned. Thank you very much for this is really fascinating conversation, as always, for all those years. Anytime I'm talk to you, I'm excited, I learned and greatly appreciated. Having all the people, all the audience will appreciate your share your wisdom with us in this early morning. Thank you very much.

Ray DALIO: I love our relationship. I appreciate it. Thank you.