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CNBC Transcript: Ray Dalio, Founder, Bridgewater Associates - Part II

Below is the transcript of a CNBC exclusive interview with Bridgewater Associates founder, Ray Dalio. The interview will play out in CNBC's latest episode of Managing Asia on 23 August 2019, 5.30PM SG/HK (in APAC) and 11.00PM BST time (in EMEA). If you choose to use anything, please attribute to CNBC and Christine Tan.

Christine Tan (C): You've been going to China since 1984 when the country was just opening up. You are the first big hedge fund to really gain access to the Chinese market. You've always been pro-China. You say China is the greatest economic miracle of all times. When you look at China and its pace of reforms, what can you tell us in your personal opinion about the Chinese way of doing things that the rest of the world can learn from?

Ray Dalio (R): Let's be clear, we have to look back and the track record speaks for itself. When I started going since that time, the income has increased by 26 times. The share of world GDP went from 2 percent to 22 percent. The poverty rate: 88 percent of the population was in poverty. Less than 1 percent is in poverty now, and that happened with now - 1.4 billion people. The size of the miracle is quite something. I've been studying Chinese history back to 960, actually 900 but 960 was the Sung Dynasty and I watch the evolution. I would say that there is an approach to life - which has Confucian roots - that has to do with how individuals relate to society and how the society works. That's a whole conversation. But it has to do with knowing what your role is: getting a good education, knowing what your role is and your responsibilities, playing that role well, being organized and so on. It starts with the family -- the family is the unit. If you know how to relate to your role in the family and be a good family member, and you understand that, then that's carried forward to the society as a whole. How does a family operate with other family within a community, and how does that all fit together, and how should individuals be? The idea of a meritocracy: to study hard and to work your way up really was invented pretty much by Confucius in 500 B.C., and carried through. China has through all its history up until about 1800 been the number one or two best strongest economy i.e living standards and so on. Then, around 1800, for various reasons, it collapsed having a lot of things I wish we could discuss but it would be too long to answer your question. So what is Chinese I think and what is the Chinese culture - largely has to do with Confucian roots and how to get things done, and it's more top down. The United States is very much more bottom up. The United States is a country of immigrants coming from all different particular places and all different approaches. It's a bottom up type of system. What you have is the conflict of cultures to some extent between this bottom up type of system and this more top down type of system. Of course, from a Chinese perspective, the Chinese want the government to cooperate with the businesses who want to cooperate and that hierarchy works that way. At the same time, what you're seeing is creativity now, and an entrepreneurship that's taking place. So you're seeing venture capital and great ideas.

C: So China is hungry?

R: Well, China wants to be all that it can be. And so naturally, there's that competition. And then, when you look at it, each has its pros and cons, right? So, like big data that China has in an era of artificial intelligence and free access to big data that produces competitive advantages. Issues like the privacy issue cuts both ways in terms of commerce, so it's got pros and cons. So when you look at this, it's sort of a competition of approaches to life.

C: So, given your deep learnings about China, any advice you would give the Trump administration or future U.S. lawmakers about how to deal with Chinese leadership?

R: I would say that - a tough negotiation in which there is an exchange of things is good. That's appropriate. That's respected -- be a tough negotiator. When you go beyond that, so that there are threats or disrespect and harm that naturally you should expect compensating reactions. What we worry about, and I think it's a reality, is that in this new world of adversely affecting each other economically and hurting each other's business, each tries to think now how can I do the other the maximum harm. And the Chinese are clever at doing that. So you have to think about how to achieve that balance in the best possible way, and emphasize the win-wins rather than the lose loses.

C: So, are you saying there's a lack of respect on both sides right now?

R: No, I wouldn't characterize it as a lack of respect. I would say that there's probably a style difference, and respect wouldn't be the word.

C: What would be the word?

R: Well, maybe the word is decorum... very, very different in style, differences in what is made public. I think there's a lot of respect but there is not a lot of what I would say, proper diplomacy and also not probably enough empathy, and not enough emphasis on the win-win. I think that both parties see the other for what they are.

C: As an investor, you say not investing in China is very risky. Where do you see the opportunities in China?

R: The opportunities are going to come from the two very different types of economies that exist in China. You have the old economies and you have the new economies. You have these state-owned enterprises and economies -- real estate that is now I think over-priced and expensive - the areas that did well in the early part of China rally sort of up until now - that they are more indebted and they're overbuilt and they have to go through restructuring. Those will be the worst areas in China - that old economy. But on the other hand, they could be very good investment areas too. We see that sometimes that restructuring creates opportunities to buy assets or buy investments at attractive prices. So, that's the old area. And then, of course, there's the new area -- which are the inventiveness that we're seeing throughout but also particularly like in Shenzhen - creative entrepreneurial ventures where there's great ideas particularly in artificial intelligence, big data, but it carries on to biotechnology, fintech and all those areas which are those new cutting edge areas that are being released for the creativity. Those are very exciting areas. There's also a lot of money chasing those areas. So, one has to be somewhat careful. I would say the best thing to do, generally speaking for most investors, is to think about how they have that more balanced, all-weather approach so that by taking that balanced portfolio and having that in China, just like there should be a balanced portfolio in other parts, diversification and balance are the most important things in creating a portfolio anywhere. Because what we're having is competition. In many ways, when you look at that competition over years, you don't know who's going to be the winner and if you look at the track record, you've got to have I think a piece there. The world is pretty much underweighted there.

C: Would you be bullish on China still if the Chinese renminbi the Chinese yuan continues to weaken?

R: Again, currency weakness is part of the natural adjustment.

C: So you have no problem with that?

R: I have no problem with currency weakness. I would also say when I look at the health of the economy and the health of the particular businesses that one is investing in or bonds - you know like for example, Chinese bonds offer an attractive interest rate - now as you look at that -- is that more attractive than interest rate and then the currency depreciation? Questions like that are all tactical - those types of things. So what I'm saying is, the currency depreciation is just in part of the adjustment process that takes place because it causes other assets to rise. It causes equities to rise for example, it has that stimulative effect like interest rate declines do.

C: When you look at China and its efforts, you've actually gone out to praise China for cutting its debt. You've actually praised China for opening up its markets. But as China continues to evolve, and I know you're very focused about risk, and you keep saying that all the time, what is the biggest risk you see facing China? What could possibly go wrong?

R: There is a debt economic restructuring that is going on in China, that means that a lot of the parts of the economy have got to be worked through and restructured. Not only the debts but the economy has got to be worked through and restructured. So, the ability to stimulate and to deal with that well is I think China's biggest risk, to happen at the same time as then there's these external conflicts. The external conflicts being in trade. So the trade is a net negative on the economy. Also, you have the technology being a net negative on the economy. Those are net negatives on the economy. They are the things that China has to work through. Over my years, I've been through many economic cycles that have been in the United States. I saw four times that the United States had big debt crises. I've seen them happen all around the world - four major big debt crises. What China has is the ability to coordinate monetary policy and fiscal policy, and it has a level of interest rates and can use quantitative easing if it comes down to it. It has tools for dealing with these things that the rest of the world is largely…

C: So, you're not concerned about a debt crisis in China?

R: No, I'm not concerned about a debt crisis in China in the way that you would mean that there would be lots of debt defaults and it takes it down and all of that. No, I'm not concerned about that because of the ability of monetary policy and fiscal policy and also because of the understanding that exists in China. The economic policy leaders have been through the debt restructurings that happened in the 1990s when Zhu Rongji had to do a lot of debt restructuring. Most of those people who were leading that went through that. So, they have the understanding. Think about the United States' debt crisis or the 2008 financial crisis that happened. They did certain things, and it went away. If they did those certain things earlier, we wouldn't have had that, okay. So now, because they managed to make it go away, because you can print money and you could restructure debts, there's a lot of leeway. I wrote a debt book that looked at the last hundred years - all debt crises, and that's the lesson. They control the money. They control the balance sheet. They control fiscal monetary policy. That means they have a capacity to do that. On the other hand, the economy -- you asked me about the risks to stimulating those older parts of the economy or even, let's say the real estate sector which was such an important part of the Chinese -- that can't continue to grow and operate the way it is. That has implications in terms of slowing the economy, implications of what that means for the investors. Chinese investors have a lot of money in real estate, and they have a lot of money in cash. If that doesn't do as well, that is a risk. So it's up to

those who run economic policy to deal with those challenges well. I'm not saying they're easy challenges but I'm saying, when you look at the world, those are challenges which they have more control over. And then you look at the European challenges and then you look at the United States challenges in terms of that question. We in the United States face very big challenges. Europe faces challenges. Japan faces challenges. I could rattle those off. So when thinking about the portfolio, one has to think about how to create that diversification and that balance.

C: Let's talk about the external situation because the protests we're seeing in Hong Kong has greatly disrupted businesses, transportation and even the airport. How big a threat do you see Hong Kong to the future progress of China?

R: It's gone beyond a demonstration to a revolution in Hong Kong, basically. In other words, I think we're in a situation that's a difficult situation. Demonstrations are for the purpose of protesting something -- an expression of protesting. We're now dealing with the situation of possibly... almost revolutionary -- bring the government down kind of thing -and bring that system down by the people. That's a very difficult situation for Hong Kong.

C: How big a risk is that for China?

R: I think it's a medium-sized risk. Let's say on a scale of one to 10, I think it's three or four in terms of the size risk. It's difficult I imagine. And I'm not a geopolitical expert so but I would imagine it's a difficult situation because it puts China in a difficult position to either have that continue or to intervene. Both of those are difficult choices. Beyond that, I don't know. But just to put it in perspective: Hong Kong is still a small tiny part of what's going on in China. So when I say it's a three or four in terms of affecting the Chinese economy, I don't think it's going to be a big effect on the Chinese economy. It's disruptive. It might have global geopolitical implications that I don't know about that could extend beyond that, but it's a tiny place in a very big vibrant economy.

C: You're here in Singapore. Bridgewater has a more than 20 year relationship with GIC. You and the late founding Prime Minister Lee Kuan Yew were close acquaintances. Where do you see the future of Singapore, a city that's become increasingly vulnerable to global headwinds?

R: It's a refuge. The way I look at it…

C: It's a refuge?

R: Well, what I mean is, it's a unique place where there's respect of law, the culture, the quality of the education. It's a quality place with an economy in the middle of this storm - a storm being the conflicts that we're now talking about, in terms of everything from the trade conflicts and the geopolitical. It has become more expensive, but it is a gem within the region. And so, if you look at the issues that are happening in Hong Kong and where would someone want to be, Singapore is a wonderful place to be. Because of the rule of law, the respect of the system, and at the same time, the orderliness and the development of education, the quality of the education that exists here; the quality of the infrastructure, the quality of the way the government runs the place. It's really unique in terms of the efficiency. And then you look at its economics, to be able to have grown and raised its incomes the way it is and still be such a net saver, it is very effective. So, it's a very effective, well managed capitalist, innovative environment, in a very orderly way within an environment that is turbulent.

C: Singapore has revised down its growth forecast, do you think it can avoid a recession?

R: I think it's on the verge of a recession. The word recession means two quarters of negative growth, that's what people define it. And a lot is made about the zero line like you could be +0.1 percent, and say I'm not in a recession. You could be pointing to -0.1 percent for two quarters, and you'll say that that's in a recession. So, I want to be clear because there are recessions, there are recessions and there are recessions. Some of them are bad, and some of them are not bad.

C: Is it going to be a bad one?

R: I think the important thing is to say that there isn't much growth. There is unlikely to be much growth. The economy will largely probably be flat in this kind of an environment.

C: Let's switch gears a little bit. Under your leadership, Bridgewater Associates - a company you started way back in 1975 in your two bedroom apartment - has now grown to become the world's largest hedge fund managing about $160 billion worth of assets. What drives you? What motivates you?

R: Meaningful work and meaningful relationships, to be on a mission, I think those two things combined - to be on a mission, to be great, excellent, and in that process, to have thoughtful disagreement, the ability to have independent thinking - because to be successful in the markets you have to be an independent thinker and bring in independent thinkers who disagree with you - and to be able to be "radically truthful" and "transparent" in that disagreement so you can get beyond the disagreement and have an idea meritocracy of how to do well. That's my meaningful work, and in the process, to develop meaning relationships. I'm 70 years old now, and now I can reflect back. This is my year of reflection.

C: This is your year of reflection.

R: This is my year of reflection. I can reflect on 70 years. That's why I put out the book of these principles of accumulated over period of time. Then, I'm sitting here and I'm reflecting. The reason I'm here in Singapore, I brought my family to Singapore to meet my old friends of Singapore, because when I look back on those years, the meaningful relationships is the most important thing above all else. So, I love the game. I love the meaningful work of the game: to be excellent and have that passion, and at the same time, it's so important to have meaningful relationships -- to be good with each other and to help each other and then to look back and then hugging each other and saying that was great. Because the real question is: what is life about? What is work about? What is work about? If work is just about the money - there needs to be enough money to take care of your family and to be able to do the basic things and so on, but money has diminishing returns and for me, it's diminishing returns for a long time. For a long time, I've not been working for the money. Money only has the purpose of getting you something -- so, what is it going to get you? A bigger house, and is that what you're working for? So, when you look beyond it, I think you have to ask yourself: what are you working for? What is life about? Because you only have that life and you want to make it the most. So for me, it's the notion of that meaningful work and that meaningful relationship to personally evolve, and to contribute to evolution.

C: Seven years after you founded Bridgewater, you made a wrong bet on the markets. You lost everything financially. You had to lay off everyone in the company, and yet you say it was the best thing that ever happened to you. Why? Was that a life changing moment?

R: Yes. Look, first of all, if you're not pushing the limits like in skiing or something - if you're not pushing the limit - you're not growing. And the thing that I learned the most is humility. I had an audacious-ness. In other words, I want to...

C: You thought you are invincible?

R: In order to be successful in the market, you have to be an independent thinker. That means you have to bet against the consensus and be right, that's very difficult right. So in 1980, I calculated that Americans banks had lent much more to emerging countries than those countries could pay back, and we were going to have a debt crisis. Then, we had the defaults -- debt defaults -- and I thought it was going to bring the economy down -- that was the exact bottom in the stock market, and I was wrong. I had a small company. I think we had eight people or something and I had to let those people go, and I was down to me. I was so broke I had to borrow $4,000 from my dad to help to pay for my family expenses. And that was the best thing that ever happened to me, one of the best things.

I guess, next to my marriage and my kids. One of the best things because it made me think how do I know I'm right, to be able to have an opinion? Now, that changed my approach to life. I wanted to find the smartest people I could who disagreed with me, and to understand their reasoning and to work things through. I learned diversification. The key to my success has been much more on my knowing on how to deal with my not knowing than it's been due to anything I know. Because what we don't know is much greater than what we do know. And so that made the change. So, I started to realize what don't I know and how do I deal with my not knowing well. And it was through that that I learned how to have this thoughtful disagreement to get the better answers and learn well, and how to diversify my bets in a way that it produced my better return to risk ratio. That discovery was the key to Bridgewater's success.

C: I understand you use meditation to reflect on your mistakes and to clear your mind. Now, correct me if I'm wrong, is it true you actually got the inspiration to meditate from the Beatles?

R: Yeah, 1968 - the Beatles. Well I'll tell you at the time, the Beatles were very popular and then, they went to India and they meditated, and then that became very well-known and so exposed. So, I decided... I was in my teens I suppose… I was young, early college and then I went to learn how to do it, and then it was life changing.

C: So, how exactly does meditation allow you to make better decisions? How exactly does it work?

R: It works because it brings you into your subconscious mind and it gives one an equanimity, in other words, a centered-ness, a calm centered-ness in the middle of a storm. It gives one, creativity. The way it works is you have a mantra. This is a word that doesn't mean anything, let's say a popular one might be "OM", and by repeating that in your mind, you leave your thoughts of thinking about this thing or that and you go to that and when you repeat it enough it disappears, and you are now in in your subconscious. In your subconscious state, you're not awake and you're not asleep. And from your subconscious is where a lot of creativity comes by, it's like if you take a hot shower and the ideas come to you, so you get the creativity and you get the equanimity because the things that come at you, there are many things that come at you all the time and how you approach that, it gives you I think to some extent the ability to go above the things and say all those things are coming at me, and then how does the world work? How does reality work? How do I put that in perspective, and how do I navigate that well? That's ability to reflect well and to be above those things that you're operating, so you can navigate them well as a real great thing to have.

C: Did you meditate before this interview?

R: I did meditate in the morning, yeah. I typically meditate in the morning and then in the evening before dinner, usually for about 20 minutes.

C: You're an American billionaire -- founder of the biggest hedge fund. What is Ray Dalio like as the boss? What principles do you live by?

R: I live by the principles that I wrote in the book.

C: What's top on that list?

R: Idea meritocracy -- that you always have the right -- anybody I'm working with always has the right to question anything, the right to the opinion, that you have to have an idea meritocratic relation. And that meaningful work in that meaningful relationship is of paramount importance. I guess that they would describe me as having a lot of tough love. I believe in tough love, meaning we're tough with each other. So, anybody can challenge me on any subject and I will in front of the whole company...

C: So, you accept criticism easily?

R: I love it!

C: You love criticism.

R: Of course.

C: What's the biggest criticism you've received?

R: Whether I'm understanding people well, their perspectives. The reason I love criticism is well, two reasons. First, it's that stress test of like, "Am I right?" We talked about the 1982 situation… '80, '82. OK I really want to stress test, particularly among smart people challenging me, that's the best way of me raising my probability of being right. I want that also because you're thinking that. For you to think your criticism in your mind is not good for either of us. I would rather bring it out. It's not good because you'll be alienated from my mission. Let's resolve those things. Let's have a totally open communication. If you want an organization to be really, really successful, this is the key to Bridgewater success, then you want a real idea meritocracy because the person also on the other side of that idea meritocracy will say the system is fair. How does the best idea win out, okay? So the notion that you're going to have a process in which there's going to be that kind of mutual challenging, so that you say, everybody says I have a fair system so that the best ideas are winning out. That is fair. That makes better relationships. It's also better relationships because all this hidden stuff comes on the table, and now you're looking at what is real and you resolve the misunderstanding. When people keep bad thoughts held in their minds and they don't put them on the table, it's very inefficient, and it's very unproductive.

C: Just to be clear the person who criticized you, he still had his job?

R: All the time. I give more negative feedback for not being criticized, right. But it's logical but it's emotionally difficult for people. To me, it's very unusual that people don't operate that way. In other words, what is wrong with the radical truthfulness? Do you want to keep people having it bottled up inside them? I mean all of that logically doesn't make sense.

C: You're 70 years old. To make sure that Bridgewater survives you, you put in place a partnership model to give employees more stake in the company. How is that coming along? What are you doing about succession planning?

R: Wonderful, wonderful. Yes, you're right. To start something out of a two bedroom apartment and to have the whole arc and be an owner, and then to transition it well, is a real journey. Fortune said, we're the fifth most important company in the United States, not just the biggest hedge fund, but the fifth most important company in the United States. That's something. So, to transition well is really a beautiful thing. And I didn't really know how to do it. I started doing it and then we're in this beautiful situation that I've transitioned leadership to - I'm now an employee, as an investment officer and I am the chairman -- that's my existing world.

C: But as a founder, are you able to completely let go?

R: Oh yes, because it's natural. OK, maybe it's not natural for all people but it's natural for me.

C: You had no problems?

R: It's like your kids. Let's say, you have a 40-year-old child and a child that is 40-year-old son or daughter. What is the greatest joy that you can have? To have them successful without you, to have them successful without you because that's evolution, okay. I'm 70. I'm going to be different at 80. Who knows? You know life expectancy is like 80. So, you have an arc. That's a life arc. And to be in that stage of the arc, it's a joy to see others successful without me.

C: Any advice you would give other businesses, other CEOs, other entrepreneurs on how to build lasting successful businesses?

R: Well, I think the culture is most paramount. I would emphasize culture and then the development of the other people. That's why they should always feel free to challenge you, and to be in that role because you won't develop people if they just follow your instructions because they won't think. So I think that the development of those people to have an idea meritocracy I think is an effective place, puts them on the field and then to help them in terms of their transition I think that's the most important thing. Because the culture like we talked about: like Confucian culture, like the culture here in Singapore. That culture in Singapore - what Lee Kuan Yew did and what you have here today is a fabulous succession, because there's a way of being that is the basis of what exists - the development of talent but also the development to an approach of life that makes people productive, responsible and self-sufficient without you. Lee Kuan Yew is a great example of that. When I went into the role of transitioning, and I called myself "mentor" because my role was that and I was thinking Minister Mentor Lee Kuan Yew doing Minister Mentor. You want to know how to transition well, look at that example. That's a great example.

C: And finally Ray, do you ever think about the legacy you want to leave behind?

R: Legacy - you mean the gifts of things passing along?

C: Yes.

R: Of course. Right now, that's the most important thing.

C: What do you want to leave behind?

R: Well, what I wanted to leave behind it is the principles that helped me. I wrote one of the books – there are two books: Life and work principles which I passed along. I'm done with that, that's everything I know. And then, there's economic and investment principles which I'm writing and then I'll be done with that. But that first book when I was thinking about it, I wanted to pass it along to particularly as I think about my grandkids and then others and I've done that I feel good about that. And then I have to pass along also my wealth. Wealth meaning I want others to develop well and so on because when you leave, you leave with nothing right. And so then you want to make sure that you're passing along all of those things. So when I think of legacy, I think what are those things? The most important things are ways of operating one's principles. I wanted not only to share my particular principles but I wanted to help people think in a principled way and determine their own particular principles that are working well for them, right. If I can help them think in that principled way and know their own principles that they're comfortable with that work in order to deal with reality effectively, I will have done everything all the passing along that I can do.

C: One sentence, what would you want to be remembered for?

R: I don't really care about being remembered. I don't care about being remembered. I care about just in my very small way contributing to a little bit of evolution. And let's put things in perspective, I'm a tiny, tiny part. You know, we're all a little bit like ants carrying crumbs you know in the greater scope of things so. I would say, it's as important for me to direct other people to other people like to direct them to Lee Kuan Yew and to direct them to other wise people so that they can look for principles. If there's a memory -- but I don't I don't need to have that kind of memory -- but it would be to really help others to be the most so contributor to evolution in a small way.

C: Ray, thank you so much for your time, and for talking to me today.

R: Thank you for your time. It was a pleasure.

END

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clarence.chen@cnbc.com

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