WHEN: Today, Tuesday, September 13th
WHERE: CNBC's "Squawk on the Street"
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Ray Dalio, Bridgewater Associates Founder, Chairman and Co-Chief Investment Officer and former United States Secretary of the Treasury Timothy Geithner live from the CNBC Institutional Investor Delivering Alpha conference in New York City on Tuesday, September 13th.
Following are links to the video of the interview on CNBC.com: http://video.cnbc.com/gallery/?video=3000550709, http://video.cnbc.com/gallery/?video=3000550711 and http://video.cnbc.com/gallery/?video=3000550721.
Mandatory credit: CNBC Institutional Investor Delivering Alpha conference.
TYLER MATHISEN:I want to introduce our next panelist. And that would be Timothy Geithner, the 75th U.S. Treasury Secretary. I never introduced a treasury secretary before. I probably -- I don't think I've ever even been in the room with a treasury secretary before. And it spoke to me on what an honor it is to be in the company of folks like you and the guests like we have all day today.
But we're very delighted to welcome the treasury secretary back. We appreciate his time. We appreciate the fact that he really kicked it off. He was our first guest at the very first Delivering Alpha.
And, today, he will be joined onstage by one of the most interesting individuals in the entire investment industry: Ray Dalio of Bridgewater. He is not only a brilliant investor, but, as you certainly know, he runs his operation in a certain way that has produced amazing results over the decades. He is full of ideas and full of provocative thought.
And to conduct the interview, a guy who really is a provocative individual. He's a Renaissance man. He is a columnist for the "New York Times." He writes screenplays. He is the man behind an HBO hit -- I hope I got that right. I hope it's on HBO. A hit television program. If I got it wrong, I'm embarrassed. But I'm not embarrassed to introduce my friend, Andrew Ross Sorkin, and your panelists.
ANDREW SORKIN: Thank you.
ANDREW SORKIN: Thank you, everybody. It is showtime.
[Laughter]
ANDREW SORKIN: But we are thrilled to have Ray Dalio here, and the former treasury secretary, Timothy Geithner. It's a privilege for us to spend the next half hour together, really trying to understand where the economy is right now, not just here in the United States, but globally. And that's where I want to start the conversation, which is this:
The last two conversations that have taken place on this stage this morning thus far, invariably, the question, I think, underlying both of those conversations is, what is a realistic economic growth rate here in the United States? We can talk about the rest of the world in just a moment. But I just wanted to start there. I know that you think -- both of you think about this issue pretty much all day every day.
What do you think is a real number for us to base all these investments upon?
>> I'll give you a number that's, you know, about 1 1/2 to 2%, something probably closer to 1 1/2 to 2%. But I think that the answer to the question is really, Why? There's only so much you can squeeze out of a debt cycle. And we're there globally. So when you can't lower interest rates anymore, we know that the power of having the effect on asset prices going up because interest rates go down. In other words, they have a present value effect that causes interest rates to -- lower interest rates cause asset prices. And we're reaching that limit.
The inability to produce stimulation by lowering interest rates that makes debt service payments lower and causes spending is at a limit. The wealth gap is part of that limit. So you can't lower interest rates more materially. Maybe they go the other way. And you also are at a limit in quantitative easing, because the spreads are limited. In other words, the way quantitative easing works is that somebody comes in and buys an asset. The Central Bank, they buy a bond, they sell that bond. They want to buy something else. It causes all the assets to go up.
So, globally, those forces that we're behind are no longer behind us. This is the -- so the real question, I think, that people should think of is are we at the end of a long-term debt cycle. I think that Japan is one step ahead of Europe. And Europe is one step or two steps ahead of the United States. And the United States is probably two steps ahead of China in terms of a limited ability to produce stimulation, to produce that kind of growth. So everybody will have a lower growth rate than we're used to.
>> Tim, do you have any more optimistic view on what that number could ultimately be?
TIMOTHY GEITHNER: I think when I left the New York Fed, like, ages ago -- it feels like decades ago -- I think that Fed economists then thought the U.S. economy was at 2 1/4% potential growth economy, long-term potential growth. And I would say most economists today are probably in a raised range. You have to recognize that demographics and slower productivity growth are just big, powerful, secular trends apart from the things Ray was focusing on too. And that just brings a lot of gravity to what's possible in these economies.
It's like a world where people -- you know, people say it's a world of diminished expectations, slow growth, low return. I think the scarier things are really about politics, about the scary erosion of the pragmatic center in politics, diminished capacity to make sensible economic choices, one thing governments really have to do, and the erosion in the Keynesian arsenal or the erosion in the policy tools available to help offset the effects of a next recession, a minor shock. Those two things are very consequential, very damaging, very scary things.
If all we faced was a world where demographics were going to produce somewhat slower growth, but it was more stable, durable, that would be fine. But those two other things make it a little more perilous.
>> You brought up politics, so I'll just ask this question. Donald Trump has said that 4% is attainable. Blue sky with me. Given the numbers that you just presented, what would you have to do or what could you do from a policy perspective to get there?
>> You know, I think people have this sense that our system can't deliver anything meaningful. But, you know, if you want to take a more hopeful view of the world, we're operating so far short of the frontier what's possible in terms of sensible policy, that it's possible, if you had a little bit better -- we discovered the capacity for more pragmatic government, you could see some improvement in both the rate of (inaudible) over time and how those outcomes are distributed.
But it's hard to overcome those deeper secular forces and the consequences of coming out of a long-term debt cycle and secular pressures on demographics.
So you can be optimistic that, you know, by getting closer to the frontier that we know would work, we could get better outcomes, but they're not going to dramatically increase the rate at which we can grow over long periods of time.
>> Yeah, I think that there are two forces basically that you have to think about as productivity or debt and money cycles. So you are either going to get it because you make some big changes in productivity -- I mean, we can play around with how that might exist, but you're not going to have the debt cycles. You're going to have a big money cycle. The money cycle is really a question then for investors who are holding money.
In other words, the central banks necessarily have to make it really bad for savers.
>> Which they are doing.
>> Which they are doing.
>> Very well.
>> In order to make it better for debtors.
And so we're in a situation where everybody, they want to drive you out of cash. They want to drive you out of bonds and -- by making it so terrible. We have experienced not the bad returns of that yet because investors look at the price move as well as the carry. And we go through these cycles where the carry gives all the attention and then you're squeezing a little bit of carry out of it. And the price is not against you.
That's a dangerous situation because the carry can be disappeared in a price move of a day. And when that starts to happen, we have a risk --
>> But what's the tipping point for that? And then how do you, if you're an investor in this audience or elsewhere, position yourself for that, recognizing that we've been talking about this particular issue for now many years?
RAY DALIO: Oh, think if you extrapolate, do pro forma financial statements for five years forward and start to look at what that would mean in terms of monetary policy and also what it means for cash flows.
So if you take the ECB's policy and you say that that has to go on for five years, as you start to get even months into it, they can't buy the same stuff. They have to then continue to buy different things. Now start to think of the implications of that. Or take Japan. And you think, well, what can they buy and what can they do?
They are starting to buy things that are going to be riskier assets and there's greater monetization. I think that, as a result of that, investors, holders of assets, particularly financial assets, will start to think about alternatives. And those alternatives, when that happens, will probably have, you know, a profound effect on the nature of the market action. In other words, kind of the end to the cycle that we've been through.
>> You said to me when we were talking backstage -- and I hope I can -- the historical parallel is 1935-1945. That's where we are now?
RAY DALIO: Yeah. Well, you want to find an analogous period that you look to. But the 1929 period was a bubble, just like 2008. And we had a classic monetary policy -- we had a classic depression 1929-1932. From then, you had the monetization, quantitative easing, essentially monetization, producing of money to make up that gap. And you have the reactions after that. Then you bring interest rates down to close to zero.
So now we have a situation where there's no interest rates hardly and that asset prices have enjoyed the liquidity effect. And so there is no period in time -- it would be the most recent period in time globally that is most analogous to the situation we're in.
>> All right. I want to get to the Fed, but I just have one policy question for you, a bank policy question. We talked about Wells Fargo and other things this morning here.
When you think about all of the regulations that have been placed on top of the financial system -- Wall Street, capital requirements, leverage ratios -- what do you think that's done to the growth rate?
>> I think the financial system by most measures is dramatically more stable today because the strength of the capital cushions in the system are just dramatically thicker. And that's a valuable investment in trying to reduce the risks of further trauma from the system.
And think it's -- although there's a lot of muck and bad design in the regulation that came after the crisis, you know, the pendulum tends to kind of -- I don't know how to describe it, but, yeah, it's a messy muck of stuff. But I think it's hard to make the argument, even though it would be nice to clean that up, make it a little bit more intelligent design in some ways.
It's hard to make the argument outside some important pockets of the economy that it's had a meaningful negative effect on how fast we're growing. Again, I think one of the great strengths of us is if you are a company in the United States today, if you've got an idea, it's just a great place to try to raise capital.
And the diversity of ways people can finance things in this place is a great strength. That, I think, is better today than it was. There are some exceptions, though. I mean, if you're self-employed and relatively moderate income, it's much harder to get a mortgage. And that has some effect. And if you're small businesses in some areas, it's tough postcrisis. But I don't think that's principally the result of the undesirable features of some of the reforms. Some of it is in there, but it's not that dramatic.
>> Ray, I want to talk Fed with you. This is Mr. Volkert. He says that you have, quote, a bigger staff and produced more relevant statistics than the Federal Reserve does.
So what is it that you know that the Fed might be missing?
RAY DALIO: In my humble opinion, I think that the Fed is putting too much emphasis on the business cycle and not enough on the long-term debt cycle. And I don't think they may be paying enough attention to how markets react relative to what's discounted in the curve.
So we have about 50 basis points of typing over the next three years priced into the curve. That affects all asset prices, because all asset prices are affected by interest rates. It's the discount rate for the present value of the future cash flows.
So if there's a change in those interest rates relative to discount, not only does that affect the bond market, it affects the equity market. That has a wealth effect. And when I say they don't know, I think the Fed has different views. And some people have different views. So I wouldn't want to characterize it as a whole.
But I also think they are paying attention to some of those things. But it's a risky thing to discount -- to raise interest rates more than is discounted in the curve particularly -- the duration of assets is lengthened. As interest rates go down, there's a mechanical --
>> So when Jamie Dimon says to raise interest rates, you think that's wrong?
RAY DALIO: That's right. I think that that's wrong. At this stage, the risks are so asymmetric.
Like, there's no doubt that you can slow the world economy, the U.S. economy. Tightening will work. Okay? And when we look at the inflation pressures, you know, this is a global thing. And you look at the demographics. All of those things means that the risks are so much more on the downside.
If you have a downturn -- like Tim was saying, if you have a downturn and you don't have the power, we've never been in a world together that's been like this. You know?
>> Yes, it's a dramatically different world. We all got used to a world before the crisis, where modest shock was met with massive capacity to ease. Recessions became shorter and shallower, more contained. I don't think there's any precedent for the world we're in today. You know, we're an expansionist, pretty old. It doesn't look that old, but it's old in years.
And, you know, we're in a world where stuff -- bad things happen.
>> But the danger is that we're out of ammo at this point. And that if you don't raise rates, you are really out of ammo.
>> But the idea that you should raise rates to replenish the arsenal and slow the economy, that's a weird argument to make. I think that it's true to say that central banks in developed markets are much closer to the frontier of what's possible than I think any of us have ever seen.
But it's not true -- and I think Ray would say -- it's not true that the major governments are completely out of ammunition. Certainly the United States, certainly China, certainly parts of Europe have a range of things they could do. But still, in aggregate, they are less, and it's a weaker arsenal, a weaker thing than was available to us in almost any previous period that any of us have seen or read about.
>> I think 1935 was the year that the term "pushing on a string" was invented. We are, in varying degrees, closer to pushing on a string. Japan is pushing on a string. Europe is quite close to pushing on a string. The United States is closer to pushing on a string. China is a little bit farther away. Wouldn't you agree?
>> Yeah. And I think there are some slightly offsetting things which are good, which is that, because the financial system has more capital, it's less likely to amplify a negative shock. And a given dose of monetary policy, fiscal policy will have more power than in a system that is weaker and more fragile. That's a good, offsetting thing.
Also, it's also true that the basic framework of many emerging markets is a much more resilient, less fragile, than it was before. That's good too in some sense. But still, the fact that for most of the major developed economies, governments are so close to the frontier of what they can do, is a dangerous and scary thing.
>> But here's the policy question: Isn't there an argument to be made that by keeping interest rates as low as they have been, they have effectively allowed Congress to not do its job? That by forcing the issue, you would force real measures to take place that actually might improve the economy on a more long-term basis?
>> You mean because you inflict more pain? I mean, how does that forcing happen?
>> Because it effectively becomes a prod. If the government -- if the Fed is going to have lower interest rates and take on the employment issue as its job, any senator and congressperson doesn't have to.
>> I leave the politics to Tim.
TIMOTHY GEITHNER: I don't do politics.
[Laughter]
TIMOTHY GEITHNER: But I think that -- to be fair, I think if you asked the members of Congress what stands in the way of them finding some way to legislate things that would be good for the economy, they wouldn't say the Fed's doing so much we feel no need to do anything. Their problem is they can't agree on things that make sense. They're just too far apart. Their center is eroded.
>> On that topic, though, do you think it's worse than it was when you left Washington?
TIMOTHY GEITHNER: I don't know. When I was in that job, people used to come see me and say, gee, politics are terrible. And I would say, it's so much worse than you think.
[Laughter]
TIMOTHY GEITHNER: I think today I kind of want to think it's better than it looks. So I would like to think that as an American. You know, I would like to be optimistic. I'd like to think it's a little better. Can't be quite as bad as it looks. You know, there are principled, good, smart, capable people there who would like -- who would really like to rediscover the capacity to do things. And maybe -- you know, we're a very strong, resilient country. We'll figure our way to that point again. So I'm hoping that it's better than it looks.
>> To the extent that Brexit has a global impact -- and let's see if it does. I'm curious what you think its implications are politically, not just for the UK but for Europe, for China -- by the way, for our own politics, if you think that it matters. Do you think about these things not just from a market perspective but from a political policy perspective?
>> Yeah. Again, I think that populism, the wealth gap, the middle class, all of that, the nationalism, the impatience is a global phenomenon. And, again, it's very similar to, like, the late 1930s. And that concerns me, yeah.
>> And then as an investor, what do you do about it?
>> Well, that's a complicated question, right? I mean, you diversify. I mean, you have a whole bunch of uncorrelated diversified bets. And then you also understand it as best you can.
>> But you look at Europe and you say the European Union won't be the European Union a decade from now as a function of what just took place?
>> That's a time frame that is beyond me. I couldn't answer that question. You know, you just try to stay six months or six days ahead of what's happening. You know? I mean, there's always issues. Like there's the Italian referendum and there's this, and there's always a drama. And that's what makes the game so great. You know? Like, who knows?
>> You have a view on this? You've watched it.
>> Well, it's hard to see what they end up negotiating in the wake of the referendum.
>> Are you surprised the numbers have not been as bad as we thought?
>> Well, I think it's hard to judge the impact now. But I think for Europe the question is, does the dynamics and the fear associated and the risks associated with Brexit and what's happening in the politics of the continent, does that induce a bit more action by the governments of Europe, things that would help hold it together? Meaning does the fear of the more negative outcome that Brexit helps frame, does that induce a little bit better policy, and does it help them take less risks?
I think that would be a good, positive thing. But who knows? It's pretty hard to tell whether that's going to happen. And I think the significant factor will depend mostly not on what happens in the U.K., and really not on what happens, the outcomes they ultimately negotiate, but what does it do to the incentive of the governing parties in Europe to try to do the things they need to do still to try to make the economy more better and to try to make the whole European Union more viable?
>> Are you a long-term bull?
>> A bull? No. I think I would just say --
>> A bull that the European Union is still the European Union in any meaningful time frame from now.
>> Yeah, I would say that's a probable outcome.
You know, I watched them as they were looking in the abyss over and over again in that period after our crisis. And each time, they chose, they sort of looked at the alternative and said, "Looks terrible. Let's see if we can keep it together." I suspect that judgment will prevail.
>> As we're flying around the global real quick, China. Both of you have expressed concerns about China over the years. Where are you now on China?
>> There are short-term concerns like business cycle concerns, four of them.
And then I just want to say that the leadership in China is much more capable than is imagined. Okay. Here are the four concerns:
They have to go through a debt restructure, they have to go through an economic restructuring, they have to restructure their capital markets, and they have to keep an eye on the balance of payments. Those are the four risks.
Those are the things that we've all had to do. The United States has essentially had four major debt crises. You know, we couldn't pay our debts in 1979. And I won't rattle them all off.
We restructured our economy in lots of ways. I remember when we were sad that the steel industry went, and then we made those adjustments. In terms of balance payment issues, there are all of those issues. The important thing is how they are dealing with it.
And if you really get to know the economic leaders and understand something of their capabilities -- which Tim has done, of course, very well, and I've done some too -- you'd have to say they're highly capable people. And if you look at the programs they've put together. My God, I could give you a list of the programs. It's so incredibly impressive what they've put together.
So this is manageable. This is a debt which is not in a foreign currency. I mean, the key thing is if you've got a debt in a foreign currency, you're in deep trouble. You have a debt in a domestic currency, you can manage it and pass it through. I'm not saying it's not challenging, but the idea that it's going to blow up and all of that I think is a very exaggerated notion. It has to be well managed. And I think it's well managed.
And then when you take a longer look, like some of the innovations and the changes that they're making for the productivity of the longer run, it's going to be important. You know, their bad growth rate is probably going to be twice our good growth rate in a sense. So you take a look at where they're going to be. It's a positive outlook.
>> You have a positive outlook too? I remember when you were in that seat as the treasury secretary. You had made some comments about some concerns.
>> Yeah, I mean, China is -- if you talk to them, you'll see this. You can't be more worried about these risks than they are. And I think they have an exceptionally good feel for the complexity of the risk they face as they manage through this very dangerous, messy transition they're going through. And it's going to be messy. It sort of has to be messy in some ways, because they're trying to let the market play a greater role and they're trying to introduce the possibility of defaults, and they want to have some broader restructuring of the economy, they want to reallocate economic activity. That, in some ways, has to be a messy process. And there's other things that are going to slow the economy.
But they have degrees of freedom that are the envy of the world in how they do this, because they have high savings rates, no meaningful debt in other peoples' currencies. They have still a relatively closed capital account, very, very unlikely they lose control of the exchange rate. And they've got a financial system that is, you know, fundamentally dominated by the state and dominated by banks. And that's a system that's easier to stabilize and recapitalize and break runs than, you know, for example, just to take a negative example, the system we faced in 2007.
So they have enviable degrees of freedom. And they are a remarkably talented, experienced group of people, having benefited a lot not in just what they've been through. You know, they did a massive recapitalization of their system -- what? -- 15 years ago or so? Yeah. And they're doing one now too, making some progress on that.
But they got to watch all the mistakes and judgments other countries made and try to take the best of that in that period of time. So it will be a challenging thing. As I said, it has to be messy in some ways. But they have lots of tools to manage this without going through a major crisis that will be deeply damaging, not just to them but to the rest of the world.
>> Ray, industry question for you and Tim. By the way, now that you are a capitalist, you can participate in this as well.
$22.5 billion in terms of money flows have come into your firm recently. In an environment where the hedge fund business writ large has struggled across the board, as you look out at the business over the next couple of years, what do you see happening? People like Dan Loeb have talked about a washout in this business. Where does it go?
>> I think that the market environment will be always exciting. And the question is whether you're adding value or not. I think, most importantly, whether you're going to add value in a bad time.
In other words, everybody's long. You know, everybody's almost leveraged long. Right? That's an exposure.
So I think that it depends how you play the game. And there will be opportunities. And the important thing is whether you also make money in the good times and the bad times when others --
>> Could Ray Dalio start Bridgewater today, though?
>> Oh, yeah. I think it was not long, 2007, the world -- 2008, had a bust. We made 14 1/2 percent in 2008 when most people didn't. Our average returns were -- the opportunities of volatility are there. There's a cross-current right now that's going on, right? The cross-current is the pushing of liquidity and all that liquidity causing asset prices to rise and so on.
And then there's the low future asset prices and the volatility that lies ahead for the reasons that we're talking about. So we're in the middle of that cross-current right there. The currents are going to change. And so I think that there's -- you know, if there's mooring, then we're in trouble.
>> We have just a couple of minutes. And I do want to ask you one question about culture at Bridgewater, only because it's come up in the headlines repeatedly. And I want to ask you about this: FBI Director James Comey worked at Bridgewater. He was your general counsel. And when he left, he wrote something I thought was fascinating.
He said, "I love the idea of our culture of transparency and truth." And he went on to say, "The logic-based relentless pursuit of excellence is inconsistent with a time of joy that animates me."
And I thought that was so interesting because it sort of captured both sides of this. What do you think it is that's so misunderstood about the culture at Bridgewater?
>> Well, let me describe the Bridgewater culture in one sentence.
It is have an idea meritocracy which pursues meaningful work and meaningful relationships through radical truth and radical transparency. So by meaningful work, like, are you in a mission together?
And the meaningful relationships is, can we be totally truthful with each other? Like, I don't think you're so good at that, or you might be wrong, or you've made mistakes? And can we have that kind of conversation in a radically truthful way?
And radical transparency, like, we tape everything for everybody to see so that there's no spin. Okay? Can you operate in an environment like that so that nothing is hidden, because, that way, you'll have a real idea meritocracy because you won't have an information imbalance?
This is an unusual culture. Because we've sort of kind of kept it behind the scenes in a sense, it's largely misunderstood. Some people absolutely hate it and some people could never work anywhere else. So that's by and large what it's like.
>> Fair enough. We're running out of time. Final question for both of you.
If it's Thanksgiving and you're invited to dinner at what could be President Trump's house for dinner, what would you tell him?
RAY DALIO: I'll let Tim go first.
[Laughter]
TIMOTHY GEITHNER: I think I'm going to take refuge in my usual place, which is to not comment on the choices of our successors. That's a refuge I like.
I guess I would say -- I would just try to make a virtue of something that I think Ray helped define. It would be a good thing for us to value as a country, which is, you want people to be able to take some time and try to look at the long arc of challenge ahead of us and try to think about strategy to help better position to deal with those things and try to take that long view so that, as you go into the politics and the messy, ugly, terrible politics that constrain those choices, you've got to view at least an idea of what we need to be trying to do for the economy long term.
And, you know, as a country, in history, we were really excellent at the really important moments of doing that. And that's really the most important thing. And I think what -- that ability to sort of go deeper and try to understand the forces shaping the quality of opportunity people have in this country and how we can better address those, what the government does, that takes a lot of care and thought.
And it has to be done in that quiet moment where you can push the politics away. And whoever is in any of those jobs, you want them to -- I don't know if that's Comey's joy, there may not be that much joy in it -- but they should try to figure out a way to find that space to think about that early before they get overwhelmed by the constraints.
>> Tim's advice, I think, is good advice.
Calm down and make sure you understand how the economic machine works. You know, be open-minded. I think what scares Tim and I the most about the populism is that that's extremism. We don't want extremism. We don't want to rush. We want to be able to understand that things are complicated.
>> I thought your answer might be to meditate.
I want to thank both of these gentlemen for a great conversation. Ray Dalio and Timothy Geithner. Thank you.
[Applause]
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