Yahoo Finance Presents: Bridgewater Associates Founder Ray Dalio

In this episode of Yahoo Finance Presents, correspondent Julia La Roche speaks with Bridgewater Associates Founder Ray Dalio about the current state of the world as well as the 2020 election and U.S. wealth gap.

Video Transcript

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JULIA LA ROCHE: I'm pleased to bring in our next guest, Ray Dalio, the founder of Bridgewater Associates, the world's largest and most profitable hedge fund firm. Ray is also a well-known philanthropist, and an author of multiple books. Ray, it's great to have you with us.

RAY DALIO: So nice to be here.

JULIA LA ROCHE: You wrote the book Principles, and it's a fascinating read. You're talking about radical transparency, thoughtful disagreement-- all these different principles. And we're just having this conversation about, you know, how we are with each other in civility-- bringing back civility. Are you optimistic that we can get there?

RAY DALIO: I'm not optimistic that we can get there, but I do know that we can get there if people are fearful of the consequences of not getting there. I believe that if you study history and you see what civil wars can be like and you realize that you could have a civil war-- don't take it for granted that you don't-- and you see that when people put winning and getting their way above all else so that they will distort truth, that they will cheat rules, and that they will be violent with each other, because that winning is of paramount importance, that the whole suffers greatly and it affects everybody adversely.

So-- but I do think we're in a mindset in which everybody-- not everybody, but I think the greatest problem of our time is people are passionately attached to their opinions, and are not able, as well, to go through the thoughtful disagreement of how to get past those agreement/disagreements and do things well together.

JULIA LA ROCHE: I want to talk about capitalism as well. And I know, Ray, you've done a deep dive on this. You did a study on this not too long ago, and it also ties back to education-- which I know you and your wife are intimately involved in, in the state of Connecticut-- which, if you look at that state, has a wealth gap as well. How would you diagnose the current state of capitalism? Is it broken?

RAY DALIO: Yeah, the piece you're referring to-- which is available on LinkedIn if everybody wants it-- is why and how capitalism needs to be reformed. You know, it's kind of simple. What are your goals, and is the system achieving the goals? And I don't know that we could agree on our goals, but I'd say-- I would say the American dream, as I grew up and really believed in and benefited from, was the idea of equal opportunity.

And in doing that, you would draw upon the greatest percentage of the population so that you would find out where the talents lie everywhere, and also that people would believe the system is fair. And so I believe when I look at that, I think the system is broken. I believe in capitalism, but the nature of capitalism, in various ways, can produce these disparities that has to be dealt with.

So education is a good example. As you point out, my wife and I-- and particularly my wife-- sees kids can have the most basic educational needs pervasively. OK, let me give you the picture in Connecticut. Connecticut is the richest state in the country, and it has the largest wealth gap, and wealth is concentrated in a small percentage of the population relative to the whole.

22% of the high school students in Connecticut are either disengaged or disconnected. Disengaged means that they have an absentee rate which is greater than 25%, and they're failing their classes, or disconnected means they don't-- they don't come to school. They're out of school. They don't know where they are. 22% of high school students.

Those-- what are those high school students going to be like? What kind of citizens are they going to be? Are they going to be net contributors, or are they going to be a net deficit, and is that fair, OK? Education-- we were in a situation where COVID makes clear that they didn't have computers, so we had to-- and the state didn't have the money for buying the computers.

So we-- so we had to buy 60,000 computers for kids who didn't have computers, and they don't have connectivity, OK? But there are so many-- there's poverty. There's-- food is an issue in that kind of environment. So it's not an environment of equal opportunity.

Now, why does that exist? They're not bad people who are producing it, but the profit system is not good enough to be able to allocate resources that way. In other words, not everything's going to be able to be achieved by profit.

For example, profit pursuit is logically-- and for the efficiency of the whole system-- going to replace people and jobs. And so it contributes to the wealth gap. It's smart for a company to have a technology that's going to replace people and jobs, but you get to a smaller and smaller percentage of the population that makes that technology and benefits it, and it produces that wider wealth gap.

So that wider wealth gap also is an unjust system. And what I found is that the top 40%-- because I broke it into quintiles-- top 20, each 20-- and top 40% of the population, on average, spends five times as much money on their children's education than those in the bottom 60%. In other words, the majority of people has this on the elites spending five times as much money on their kids' education.

That elites and-- and-- and-- and the people below are-- want to take good care of their kids. They're not doing a bad thing. But that perpetuates an opportunity gap. So those structural reasons-- not any bad guys, but those structural reasons are leading to a result that I don't think, a, that is either fair, or that we want, because we're not tap-- tapping that talent, and it could lead to a civil war or, you know, some kind of revolution of sorts, so it has to be dealt with.

JULIA LA ROCHE: You have to wonder, too, how the states are faring through the pandemic, too, when you're thinking about just the public education system and funding those things. How do you think that kind of exacerbates the problem, and what should be done? Do we need more government to step in here? Do we need the private sector to step up? Do We need more philanthropists to adopt local public schools? What do you think needs to change?

RAY DALIO: Before I get to the what I think to change, I want to build on your point of what is. And what is is, in a lot of places-- and it's ironic. In the richest states, they have the most debt, and they have the largest wealth gaps.

So this is true not only in Connecticut, New York, New Jersey, Illinois, you know, and a number of places. And that produces a dynamic that is-- everybody sees it's true over time-- you can't raise taxes, because people will leave, and too much of a burden, and you can't lower spending, because it's inhumane for those other people.

And when you have a large debt and you have a large wealth gap and you have a downturn, you have a conflict. You've got a real problem. The United States as a whole has that issue, but the Federal Reserve buys-- bridges the gap by buying the money-- printing the money and buying back that gap, buying that debt.

I think, at the end of the day, the question will have to arise, will they have to do it? How will that question be dealt with? Because it-- at-- you know, at the state level or the local level, because it exemplifies what happens when the debt can't be purchased. And then-- so I think we're in an era of a lot of monetization. Unfortunately, these all reach a point where it's an intolerable crisis, and then extraordinary measures come. And so I think that the path will look something like that.

JULIA LA ROCHE: So what does that mean for my generation? I'm a Millennial. You know, my generation-- I guess we're becoming the parents of today and younger generations. We're going to be the ones that have to really deal with the consequences here. What do you think the world looks like that we ultimately inherit?

RAY DALIO: Well, again, I think you have to be savvy of what that whole cycle is like. That's one of the reasons I wrote that LinkedIn piece. So the changing world order and LinkedIn, if you see it, because otherwise, you'll be surprised by it, I think. But I would say, when you're looking at that, it comes back to the same fundamentals.

Educate your children well. Teach them self-discipline, character, civility-- those things to be strong. Teach them then to be open-minded, to go-- to read history, or to hear from other people. Teach them to be strong.

Those are the things that you can give. And yeah, don't be naive. Don't be blind to think that just the experiences that you've had are all you need. The future will be very different than your past because of the way these things go in cycles.

The funny thing, I think-- most everybody expects the future to be a modified version of the present or what they've recently experienced, and more often than not, it's-- it's more the opposite than similar. If-- in fact, if you take every decade-- the 1920s, the '30s were the opposite. 1930s, the '40s were the opposite-- more opposite than similar. And you take every decade, and it's more opposite than similar. So open the mind to that-- strong character, well-educated. Those are the things, at the end of the day, that will serve you well.

JULIA LA ROCHE: You know, I just want to read something that you wrote, because it really stayed with me. You said, quote, "We are like ants, preoccupied with our jobs of carrying crumbs in our minuscule lifetimes, instead of having broader perspectives of big-picture patterns and cycles, the important and inter-- the important interrelated things driving them, and where we are within the cycles, and what's likely to transpire."

And of course, I think later in the piece you even said that you're even just beginning to put together the crumbs, the picture here, and you don't have all the answers, of course. And no one really does, but I guess, kind of, to round it out here, what do you say-- I guess you were kind of outlining what our world might look like, but if you could narrow it down to one thing, what would be the biggest issue that we need to tackle first?

RAY DALIO: Well, of course, the biggest issue goes back to one's approach to life, what level you want me to answer the question. But the biggest issue is be radically open-minded. You have to make your own decisions, and you have to make them well by taking in well, not by being close-minded-- and-- and having the character to do it. And then going back and understanding histories and-- and how the patterns of histories, and then take in, from the people around you-- the smartest people you know-- the information, and triangulate with them well to make that decision.

That is, I would say, the overarching, at any time-- the most important things anybody could do. As for now, I would say to realize that these changes-- take a global view. Take-- make comparisons of countries. Put things in perspective.

And then if I narrow down to investing-- so I'm getting more specific in answering your question-- it would be first to realize that cash is not a safe investment. It's a very risky investment. And know how to diversify well. And when I mean diversify well, I mean diversify globally-- in countries, in markets, and in currencies.

JULIA LA ROCHE: How about-- do you have a take on digital currencies? This is something a lot of young people talk about. Any view on that?

RAY DALIO: They're-- digital currencies-- let me break them down into two types. There's the type in which it's like a Bitcoin type of currency, that'll be an alternative currency in terms of its supply, demand, and an alternative store hold of wealth. And then there's digital currencies. That means there'll be other types of currencies-- let's say the dollar or the euro or the Chinese renminbi-- that is digitalized.

OK, I think we're going to see a lot more of that second type, but I think that there are three main problems of the first type-- the Bitcoin type-- of-- of that. Theoretically it's good, but the three basic things are a currency has to be an effective medium of exchange, storehold of wealth, and the governments want to control it.

So I, today, can't take my Bit-- Bitcoin, yet, and go buy things easily with it. And as a storehold of wealth, it-- it-- it's so volatile that its volatility based on speculation is so much greater that it's not an effective storehold of wealth, and-- which is also one of the reasons it's a problem to be a transaction vehicle, because if a vendor says I'm going to get paid in Bitcoin and they don't know what that means in terms of their other liabilities, that's a problem.

And then thirdly, governments won't-- and when it becomes material, governments won't allow it-- I mean, they'll outlaw it-- and they'll use whatever teeth they have to enforce that. They would say, OK, you can't transact the Bitcoin. You can't have a Bitcoin.

So then you have to sort of be almost, like, is it a felony, and I'm going to have to be a felon in order to transact? They outlawed gold, you know. What's-- what's wrong with gold? But gold was a storehold of wealth.

And so if I was to say what-- would I prefer Bitcoin to gold? No, I wouldn't prefer Bitcoin to gold. Gold is-- will be the vehicle-- there's either-- that central banks and countries use as an alternative to the regular cash, because each central bank can print cash, but through transaction, through time, when countries dealt with each other, they used gold because they didn't have to worry about being devalued by some country that's going to print the gold. And so it still is our third-largest reserves, if you take central bank reserves. The largest is the dollar. The second largest is euros, and the third largest is gold.

So-- but-- so if I'm dealing with classic currencies, I've really started getting into the storehold the wealth domain. That also includes stocks in that storehold of wealth. But I don't think digital currencies will succeed in the way people hoped they would for those reasons.

JULIA LA ROCHE: Really interesting insights. And of course, you know, I recommend folks read The Changing World Order by you, right? And if you have any book recommendations, feel free to pass those along as well. Thank you so much for your time.

RAY DALIO: Thank you.