In the spirit of living an Always Be Learning life (read Chapter 4 in “The Entrepreneurs Essentials”, which is available for free online at Medium), TED Connect has been a terrific series during this very challenging global crisis due to the rapid spread of COVID-19. On Wednesday, TED interviewed Ray Dalio and it didn’t disappoint. I went to school on this like I would if my best professor in finance was presenting while I was at The Wharton School. What follows are my notes from his talk.
Ray is worth $18b and may be the greatest macro thinker in the financial world.
There are four major factors that have driven the world economy, our lifestyle, and wealth for the past 1,000 years:
1. Productivity - people learning, inventing, and doing things well. Productivity grows by 1-3% per year and isn’t volatile because knowledge isn’t volatile.
2. Short-term debt cycles (8-10 year cycles).
3. Long-term debt cycles (50-75 year cycles, the last of which began in 1945 post WWII with the new American world order running things). 70% of money in the global economy is running on US dollars.
4. Politics - how you deal with each other (internal and external) - how do you deal with the wealth gap, the values gap, the common mission, or do you fight over wealth? That is what revolutions have been about in history. Hitler came to power over that gap. [My note: the Civil War was about that fight too.] There are always stress tests that come along and COVID-19 is one of those. There is enough wealth to go around but how do you deal with those within and outside of the “ring of support” (e.g., outside of the US dollar). We will have to reconsider “who has what” (e.g., education).
Comparison to the Great Depression:
- It will take a long time for the market to reach its previous highs.
- This is not just a Recession - it is a breakdown of how we deal with money and credit.
Tools to help with the recovery:
- You’ll continue to see the printing of money, which will probably last for another 2-3 years.
- Creativity (human inventiveness, adaptability, and this is the greatest power).
He referenced a study of real GDP over the past 500 years. In it, you don’t see these Depressions on that line. They are a blip on it, because the greatest force is the force of adaption as we work well together.
There will be a new world order out of this and this period will pass. We will come back into a restructured environment and it is healthy, in a way, and a stress test of forms.
Global markets are off 25 to 40-50% depending on what currency you manage. They have been $20 trillion of losses globally. If you don’t have money and you don’t have credit, your business can fail. So the question is, “Who gets what check?” We’ll have a giant restructuring of the IOUs. For example, hospitals could go broke but we need them.
Even if COVID-19 never came back again, there will be those that are broke as a result of this. Supply chains will change and our definition of self-sufficiency. We are not going back to the way it was.
This is bigger than what happened in 2008. Banks were over-leveraged then, and you had to pick which banks you wanted to stay alive vs. go broke. This is more complex because it is not just the banks but so many small businesses and other organizations. And it is a bigger crisis because interest rates were already so low (a less effective monetary policy). Have to buy the debt of the govt. and they have to get production power to those who need it in various countries around the world.
Two types of company winners in this environment:
1. Stable companies, like Campbell’s. “The stuff we are always going to need.”
2. The innovators who have strong balance sheets - they will be great winners. New inventions and great creativity really matter.
Algorithmic discussion. How we deal with credit - you have to go back to the 1930s for a comparison - have existed all through time. But technology evolves and the capacity to think has been radically enhanced by computers. You can’t just apply machine learning to the market, though. You have to have a real understanding of cause and effect relationships.
It is harder to make money in the market than get a gold medal in the Olympics. You wouldn’t think of competing in the Olympics but yet many think they can play the game of the market well. So, diversify well (e.g., here is the free chapter in my book on angel investing). Everyone thinks what has done well lately is the best investment (my take: our Apple stock buy a few weeks ago where I thought we were at the "bottom" and then we were down for awhile, but we are slightly up now) and what has done worse lately is the worst investment (my take: our Boeing stock buy at $96, where we are significantly up now). Cash is a seductive investment - it taxes you and your buying power by 2% per year (my take: he is referring to inflation here), and therefore is almost always the worst investment. Do you have a little bit of gold, for diversification purposes? Do you have something outside of the monetary system, in case it breaks down (my take: Nassim Taleb’s fund, which is up 4,144% year-to-date)? Bottomline lessons: diversify well, be humble, don’t market time, and be conscious of the dangers of cash.
His LinkedIn series on the changing world order referenced (my take: I need to read that, have you?).
We cannot, and should not, retreat from globalization and global commerce. How do we behave when one country’s opportunities are another country’s vulnerabilities? Who will we help and what will that mean? The reality is that a lot of those vulnerable countries will not be helped. Over the last 500 years, there have been 16 countries where there have been a rivalry of empires and in 12 of those cases there have been wars. But his dream is that the best of the best can work together for the greater common good. But, unfortunately, it is getting fragmented (both within and depend countries).
Deglobalization started to happen before the current Administration. He’s been going to China for many years and the Chinese are helping with things that are needed in this crisis, but that is politically challenging to even say because “we are getting so fragmented”. It is almost dangerous to say, “Thank you.” In this environment it is about “who is evil?” and the rise of Demonization.
What is our American dream? We are almost not even talking about that. The New World Order was created in 1945 post WWII. There was an environment of equal opportunity then and a clear American dream. There was a harmony in going through it together. This is expected in his read of history, following major wars this is what happens. But today children in poor neighborhoods just don’t have an equal opportunity. If you go back 100 years, you’ll see that any system tends to work for those that control the system. Our current system becomes self-perpetuating because the wealthy are better educated. Today those in the top 40% spend, on average, five times more on their children’s education than those in the bottom 60%. He’s a capitalist and believes in the system but there comes a time where we need reforms. We need people to be psychologically and physically productive. And now we are restructuring it - there has been a tremendous transfer of wealth in the COVID-19 response that is a big force. And we will come out of it and talk about how do that restructuring over the next 2-3 years. The big question is, “Will we do that in a civil way?” Education is an incredible investment if done well. It will produce a much better economic/productivity outcome if done well. He is a bit pessimistic that we’ll get there (he’s 60/40 on that) but this is our real “stress test”.
The heroes are the people on the frontlines (e.g., the “working class” - my take: this especially makes me think of the nurses on the front lines). But it takes everyone to help allocate resources. He’s personally giving 60,000 computers to poor students so they can learn and help level the playing field. He wants to thank people for stepping up during this time. In the Great Generation (post WWII), character really mattered and there are many giving back during this time.
There are levels of basics: education and healthcare, as examples. And you cannot fall below because it costs society a lot in the form of crimes and incarcerations (e.g., costs $40-120k/year/per person in the US and if you can get them into a job instead then they become a contributor back to society).
Chris Anderson referenced Jack Dorsey’s recent massive philanthropic contribution. Ray Dalio’s call to action for others in that position, “It isn’t nearly enough.” (my take: this reminds me of Henry Crown’s call-to-action in my Fellowship). Successful people (people who have really benefited from the system and also have gotten lucky) have to step up and do more.
How many people really don’t have a side? He’s addressing polarization - based on what you decide to tune into in the news. You are perceived to be weak throughout history if you don't “pick a side”. My take: This makes it difficult on me as an Independent, but I am deeply wired for independent thinking (it is in my entrepreneurial roots and I inherited that from my parents as well). The key is that you need to bring in both sides and have “open and thoughtful disagreement”, and that isn’t easy in this world. The key question is, “Will you fight for it?” If someone punches back but what you are saying is true, but controversial, will you actually punch back? That is what defines you (my take: this reminds me of Mitt Romney’s defining moment recently in the impeachment trial).
Conclusion: This is a defining moment for the world, and we will get through it. But we will be restructured as a result in defining ways.
Keep tuning into TED Connect, and here is a really informative interview of Bill Gates on COVID-19