September 21, 2012
CNBC EXCLUSIVE: CNBC EXCERPTS: CNBC’S ANDREW ROSS SORKIN SITS DOWN WITH RAYMOND DALIO, BRIDGEWATER ASSOCIATES FOUNDER & CO-CIO TODAY
WHEN: TODAY, FRIDAY, SEPTEMBER 21ST
WHERE: CNBC’S “SQUAWK BOX”
Following are excerpts from the unofficial transcript of a CNBC EXCLUSIVE interview with Raymond Dalio, Bridgewater Associates Founder & Co-CIO. All references must be sourced to CNBC.
WEB | HIGH | CART
DALIO ON EUROPE:
RAY DALIO:So I think in the next couple of years, I think that we're going to have a depression in Southern Europe, and it's going to be a managed depression. I think-- there will be-- a combination of monetary policy, printing a certain amount of money to relieve it. And at the same time, there'll be a deleveraging and restructuring of debt.
Deleveragings-- restructuring of debt and austerity are deflationary and they are negative for growth. Printing of money is inflationary and it's positive for growth. I think we're going to see both because you have to lower the debt-to-income ratio. So you have to have enough stimulation that you raise-- growth rela-- you have to have a higher level of growth--
ANDREW ROSS SORKIN: Right.
RAY DALIO: than you have of interest rates. And so that process will continue and it'll be a ten-to-15-year managed-- depression.
ANDREW ROSS SORKIN: The euro in that-- in that thesis stays together?
RAY DALIO: I think the euro state----is likely to stay the-- together, is likely to stay together, all in-- although in later years, it's more risky. I think the euro is controlled by Southern Europeans, for the most part. It's a vote of the members. And it will be run that way. And that'll help to achieve the balance.
DALIO ON THE US:
RAY DALIO:So if you have a downturn-- there's the possibility that you don't have that right mix and that you could have an unmanaged downturn. I think the odds of that are comparatively low, but I m-- I worry about it because it's-- a significant possibility. I would describe it-- as though-- imagine you're on an airplane that's flying from here to Los Angeles. You're probably going to get there okay.
But if you hit an air pocket-- meaning if the economy goes down-- there's not an easy way to reverse it. Monetary policy is less effective because when you buy a bond from-- a federal reserve, makes a purchase-- that has the effect of giving money to somebody who ha-- won't-- put that money into something like that bond. And that money does not easily go to people who spend it.
And that's a balance between monetary and fiscal policy. And I worry about policymakers getting that balance right. That's a possibility and it's a scary possibility. Other than that, I think the most likely situation is we will fly successfully from here to Los Angeles, essentially. But we have longer risks.
you need a balance between austerity and s-- sometimes debt restructurings and monetization. If you have too much monetization, you're going to have an inflationary problem. You have too little stimulation, monetary policy and fiscal policy, you're going to have a depression. Being in the betting business, I also know when I don't know, you know? I would say that-- there are-- reasonable risks that it will not be managed well.
DALIO ON CHINA:
RAY DALIO: years past, they called in Japan when it was growing strong, they called a recession anything less than 3% growth. And-- China, anything less than 6% growth is a recession. Meaning, it also has-- it causes a lot of-- financial problems. And it's disruptive and it's a problem.
So I think that we are in that vicinity-- something like that. But the fact that they can have 6% growth and think that's depressing and we can have 2% growth and think that that's pretty good is a reflection of the difference in our competitiveness.
DALIO ON GOLD:
RAY DALIO:I think gold should be a part of-- everybody's portfolio to some degree because-- it diversifies the portfolio. It is the alternative money. We have a situation now where-- when you have too much debt-- too much debt leads to printing of money to make it easier to service. So all of those things mean that some portion-- should be in-- in gold. And—
ANDREW ROSS SORKIN: Warren Buffett won't touch gold.
RAY DALIO: Okay. Yeah.
ANDREW ROSS SORKIN: You think he's wrong? Or clearly you must.
RAY DALIO: I think he's making a big mistake, yeah. Gold is my cash. It's an alternative version of cash. So over the long term, it's not the best investment. Over long term, it's-- you know, a little bit better than cash over long term.
It is as-- however on-- when you're having a monetary crisis, when you have a fiat monetary system, and you have the need for money, that is a promise to deliver money. So if you look at each of those devaluations that have taken place, each event, now, wa-- March 1933, President Roosevelt closes the banks and then opens them and says, "You can get your money."
And then they broke the link with gold. And so the history over that period of time is that our money-- can be produced. Gold is somewhat limited. It's ineffective. It's an alternative that should be a part of everybody's portfolio but not in a big way.
DALIO ON THE DOLLAR:
ANDREW ROSS SORKIN: Thinking about cash, when you think about competitiveness, how important is-- currency right now? Meaning in terms of-- the very heavy, the dollar versus the yen,...
RAY DALIO: Currency now in terms of true--
ANDREW ROSS SORKIN: Currency--
RAY DALIO: --each time?
ANDREW ROSS SORKIN: Yeah.
RAY DALIO: So, currency's important. Currency is the means by which you can cut the prices of your goods and services internationally without having a deflation. That's why you have it, right? That's the most important, why we have independent currencies. And so-- becoming competitive, by cutting your prices without having deflation is very important.
But we go through these cycles like in the-- '30s, you know, you have one country devalue another country devalue another… And then they all end up in relationship to another. But they devalue against other things. Gold, commodities, and those kinds of things. So we're going to go through a process in which that's taking place. It's an important-- it's the most effective way of becoming more competitive fast.
ANDREW ROSS SORKIN: Did the Chinese purposely…were they manipulating their currency?
RAY DALIO: Well, now the pressure is on the currency to decline more than it is to increase-- because of capital flows, the nature of the change in capital flows. And so the-- now they're trying to stabilize it by preventing it going down. They prevented it from going up before. So-- the word "manipulation--" you know, I-- that's up-- that's a characterization. You can call it manipulation, you can call it-- stabilizing or controlling, whatever it is, it's intervening.
ANDREW ROSS SORKIN: Dollar overvalued, undervalued?
RAY DALIO: Well, I guess over the-- over the near term, I think that-- it's going to decline. Because as we're alleviating-- there's a short squeeze in dollars. A dollars-- there's a lot of dollars in…debt. It's the world's currency. So that means there's a lot of promises for dollars. That means that people need dollars.
And that-- so when we have the movement that emerging countries and capital flows that way, Europe and the European banks lend dollars. They have a funding problem. So they need dollars. That all creates a str-- a squeeze. But like any market squeeze, once you have the market squeeze that's passed, then it goes down.
And I think we're in the phase of that happening. But it's an ugly…contest. In other words, if you take the del-- okay, do you want the dollar, do you want the euro, or do you want the yen? It's an ugly contest. So I think over a longer period of time, those currencies have their problems. And then we have emerging market currencies. Those currencies are not very well developed. But they have a much more fundamentally strong position. And then we have gold as a currency. So that's the comparison.
DALIO ON INVESTING:
RAY DALIO:I don't get caught up in the moment. I'm-- I don't-- I think so many people are reactive. I think they see things in a very short-term way. They're right up against it. If it didn't happen in your life before-- then you're not paying attention. You don't think it's possible. But almost all important events never happened in your life before.
And-- so I, you know, from my time, you know-- monetary system breakdown, 1971, it never happened before. The oil…didn't happen before. This bank didn't happen before. So I think it's, you know, when I'm looking at it, I think these things sort of keep happening over and over again. And then I have this template. So I and then I have these rules. If this happens, then that's going to happen probably, because it's all happened before.
DALIO ON QE3:
RAY DALIO:No, I thought that was a reasonable plan. I thought that was a good plan.
ANDREW ROSS SORKIN: Is there an historical corollary?
RAY DALIO: Oh yeah. I mean, it's always the case. The-- in other words, the historical corollary is-- always the purchase of Central Bank expanding its balance sheet to buy financial asset. And then depending on the circumstances--
ANDREW ROSS SORKIN: But at this point in the game--
RAY DALIO: Yeah-- just recognize I think that-- recognize that purch-- quantitative easing is the new interest rates, right? So ask yourself when, you know, you-- everybody's used to interest rates. And then they're making a big deal out of quantitative easing like it's-- you know, something that's-- s-- something radically different than-- easing interest rates.
The big difference is, when you ease interest rates, you stimulate private sector credit growth, okay? Private sector credit growth is no better than-- printing money, okay? In either case, you have to ease. So if you have a growth rate that's bad, you now do quantitative easing.
DALIO ON SOCIAL DISRUPTIONS:
RAY DALIO:I don't know whether we're beyond the point of being able to successful manage this. And I worry then about-- social disruption. I worry about-- another leg down in the economies-- causing-- social disruptions. Because deleveragings-- can be very painful, it depends how they're managed.
But when people-- get at each other's throat, the rich and the poor and the left and the right and so on, and you have a basic breakdown,that becomes very threatening. And for example, Hitler came to power in 1933, which was the depth of the Great Depression because of the social tension between the factions. So I think it very much is dependent on how the people work this through together and worry about the social elements.
DALIO ON COMPETITIVENESS:
ANDREW ROSS SORKIN: What's your view of Harvard's latest project on competitiveness and jobs?
RAY DALIO: I think it's fantastic. The work that they're doing in terms of looking at the-- these issues and-- converting a lot of-- conjecture into a statistical analysis so that you can understand-- what matters how much is-- you know, is a very important topic. And-- so I'm-- think it's good--
RAY DALIO: I think that what needs to be done more is-- an understanding of how that competitiveness-- affects future growth. In other words, to what extent is it an indicator of future growth? We've done a lot of work along those lines. And we've had conversations with Harvard Business School. And I think that that can be used as actually policy indicators.
In other words, imagine that you now have-- these indicators-- that show if you change this thing or that thing by this…somehow it will have that effect on growth. I think that that's what's needed to get past the rhetoric, get past the conjecture, get past the politics and the vested interests. And I think we're working toward that with Harvard Business School.