WHEN: Today, Thursday, February 2, 2023
WHERE: CNBC's "Squawk Box"
Following is the unofficial transcript of a CNBC exclusive interview with Bridgewater Associates Founder Ray Dalio on CNBC's "Squawk Box" (M-F, 6AM-9AM ET) today, Thursday, February 2nd. Following is a link to video on CNBC.com: https://www.cnbc.com/video/2023/02/02/ray-dalio-cash-position-is-now-relatively-attractive.html.
All references must be sourced to CNBC.
ANDREW ROSS SORKIN: Welcome back to" Squawk Box." We are joined by a very special guest this morning. Ray Dalio is at the table founder of Bridgewater is here. He joins us for an exclusive interview and for the first time since he stepped down as co-CIO this fall. We should talk about that as well but a lot to talk to you about. Nice to see you.
RAY DALIO: Nice to see you.
SORKIN: So help us try to understand what's happened. We always talk about the the economic machine, we've got the Federal Reserve as part of that machine of sorts least trying to assess what that machine is going to do. You saw what Jay Powell said yesterday, I think we're all trying to make sense of where we really are.
DALIO: Okay, well I mean, these things happen over and over again. We're now in the 12th and a half cycle, you know, these cycles, you know how the cycles work, your 12 and a half cycles since 1945. 1945 was the new world order, you know, new monetary system and you know what happens. So, let me take you through it quickly. You provide you get a funky economy, weakness and so on so what we had of course in 2020 with a combination of Covid and then also the move from the right to the left, it was a distribution of wealth. And so how did you do that? Government had to send out a bunch of checks and the Federal Reserve, where did the government get the money from, the Federal Reserve lent it, so we have an imbalance and, of course, that put a lot of money in the system. You've got the demand, you've got the cycle. Classic cycle, right? Stimulation, credit becomes debt, then you have inflation and you have a tightening monetary policy. And so where are we? So we now in a classic spot where we've got a relatively high real interest rate, real interest rates went from minus 175 basis points to plus 175 basis points, right? You've got a cash rate that's relatively high, cash used to be trashy, cash is pretty attractive now. You've got an inverted yield—
SORKIN: And you say cash is now more attractive?
DALIO: Cash.
SORKIN: Cash is trash is what used to say.
DALIO: Yes, crash was trash, negative one and half, 2% real rates, terrible. Now cash is relatively attractive. So it's attractive in relation to bonds. It's actually attractive in relation to stocks. You have the classic movement of course as rates go up and money becomes tight. You lose the parts of the economy, the parts of the market that are the bubble parts that needed the cash flow, right. So you're seeing it reflected in not only, you know, long duration stocks, those that didn't have cash use so you see the tech stocks come down, all of that come down. You see private equity, you see venture capital because they needed cash, all of that comes down. And then so you're seeing a very, very, very, very classic that we've seen these things. We're halfway through a 12 or 13 cycle, right? But what's also happening in that cycle as since 1945, is that we then have the accumulation of a lot of debt and money. Okay, so we deal with things like the debt ceiling, does debt ceiling matter? Does it matter how much debt we have? And then you have a situation where there used to be a free market supply demand, but now you've got the Federal Reserve, who is now taking it, buying it on the balance sheet, so it's not the supply demand. So you've got that dynamic, very, very classically growing. I don't think people are paying enough attention to the big cycle. There are these short-term cycles. Since World War II, they've averaged about seven, six or seven years, plus or minus about three years. That's what we're in a classic one of those, but we keep building up the debt and then there were issues in terms of the the issue of the dollar and what's happening in terms of the world and the value of money.
SORKIN: So you just said we're halfway through the cycle, which means there's another half to go. Which way does that go? You're seeing the cycles up here and you got to go all the way down to here for the cycle to end.
DALIO: Of course, you you know, you put up the you put on the brakes, okay, then you bring things down, okay. Now in this, each one of these cycles, you bring them down a little bit differently. What we're, what we have here is that there was quite a lot of bubbles in this. So you can see which sectors are going down, you can see which stocks are going down right? You see the tech stocks, you see that, you see real estate going down. Residential real estate goes down but doesn't mean that their families are hurt because the household sector is in a better financial position than it ever was because it has received a lot of money and also they're benefiting, you know, we say inflation and you say wages are going up, you'll see their sector they're, they're basically benefiting. So you're seeing this type of contraction, so it's going down and we're having something close to a stag, let's say a stagflation meaning, maybe three and a half and I think you're gonna see inflation come down to this and then because of the way it's calculated, it will go up a bit. And so you see that kind of an, an environment with something close to maybe a 1% growth rate, something like that, right.
SORKIN: Can I just ask you a very baseline question though. Right now, this market, depending on what you think this market is, doesn't, actually believes that inflation is coming down, really coming down.
DALIO: I think that—
SORKIN: And they don't believe Jay Powell to some degree.
DALIO: Well, I don't think they believe, I think what you're referring to is they don't believe what's in the curve. Or another, what's in the curve is a significant easing. What what Jay Powell is saying is steady, believe steady.
SORKIN: You're saying believe steady. You're saying believe what Jay Powell was saying.
DALIO: Right, I think because it's the nature of a yield curve and the discounted thing, the slope of the yield curve, because both markets are trading. So when you have a bond market trading with a short break, then you can get that curve. It's not necessarily because everybody's smartly plots that out. So I don't think I don't think you're gonna see an easing that is built into the curve. So that means that you're going to see, look, I'm not I'm never sure I'm right. But I think you're not going to see an easing that's equivalent to the building, I think believe Jay Powell. There's no good reason. Even if you look at the bond price, let's say bond, bond yields 3.4 3.5. Let's say you had a 2% inflation that still means only a 1.4% real rate, which I don't think so when you look at the bond rate, the bond rate looks like a low rate. Of course, there were big credit spreads on that. But anyway, so I think that you're not going to see the easing. I would say that that's probably the easiest, one of the easiest and safest bets that you're not going to see that happen. I don't know. Maybe I'm wrong, but I don't see. I think, I think you're gonna see a relatively steady rate. That means that that's not built into the curve, that's a, you know, headwind. That's a headwind.
MELISSA LEE: How do you think about trades that take advantage of that discrepancy in view? That that which will be higher if you believe that we will you believe that we will be higher for longer even though the markets do not. The markets are positioned for that latter scenario. So what are the trades that take advantage of that discrepancy? Short tech? Your--
DALIO: Well, the pure play is straight on the yield curve. In other words, you can play the pure play straight on the yield curve. I wouldn't, of course, interest rate changes have impacts on other markets, and so on. But if you look at the relative pricing now of let's say, cash, let's start with cash, and then you go out on the yield curve and you look at that. Cash is relatively attractive in relationship to even to equities, but when I say equities, there's such a range of the type of equities that we're dealing with. And then we're, so if you want the pure play, you're in, you're in that pure play. I think the interesting question has to do with the areas that have cracked and then passing them through the private markets because what's happened in, you know, the public versions of them and now, then if you take the private market venture capital and you got a problem there. You've got the mark to market question. And then a lot of these companies, then they they don't have enough cash. And then if they have another down round, another down round is really a problem for not only them as, as their companies but also for those who are holding them, venture capitals and private equity. So you have a mismatch, you have a basic problem there. So that's hard to figure out exactly how that's going to play out. But that's going to be sort of stagnant thing, but I think that this type of recession is not a bad recession. It's a lot less bad than I thought it would be because of the fact of how it's distributing and shrinking that credit. At the same time though, we have a real issue for the United States debt in the world because we're selling all this, selling all this debt. You know, if you look at wealth, instead of GDP, wealth is a much better indicator of things. GDP is like looking at revenue. How much did you sell. We borrowed a lot of money, okay, and now we're having a problem selling that money around the world. And it's also happening, that this political situation, geopolitical situation is weakening the demand for US bonds.
MICHAEL SANTOLI: Well, we just were talking about, you know, what a previous Fed Chair called the conundrum of lower long-term rates. That means there's a lot of demand for longer term treasuries at the moment anyway. And you know, the Fed balance sheet is down by half a trillion dollars from the peak and here we are not worrying too much about about financing things. Why do you think that's becoming a critical issue?
DALIO: Well, because if you're still looking at the amount of deficits that we're running, right, if you still and that's a current account both both the trade deficit, you still have to sell a lot of bonds to the rest of the world and for a variety of reasons besides that being a lot and it's being monetized. Okay, so who's the other side of the balance sheet? The other side is the balance sheet has been monetization except for just the most recent moment, and that just even chronologically is going to worsen. Then you also have the geopolitical issues which are playing, playing a role. In other words, sanctions have caused a lot of countries to be concerned that they could possibly be sanctioned. And now the the split is there's an internationalization of the renminbi, a lot of trade and capital flows is in renminbi, and China has never chosen to denominate renminbi. You're now seeing that happen, so the amount of if you look at let's say the proportion of not only reserves, but sovereign wealth funds denominated in dollars, it's a lot. That that is tilting in a certain direction. And then if you look at things like, you know, the question is, will we deal with that debt? And what there is the debt ceiling. I mean, everybody believes we'll get through the debt ceiling. But the question is, if you get through the debt ceiling, is that a good thing or is it a bad thing? It's just means a pile of more debt so the supply and demand issue, the supply and demand issue for debt, it's not just an American problem. It's a European problem. It's a Japanese problem, look at the Japanese in terms of yield curve control in the amount of which they're producing that kind of amount of debt, those data assets in my opinion on a longer-term basis are not attractive assets. Cash right now is relatively attractive. But if I was to take it through the cycle, okay, I wouldn't want that data assets just generally speaking.
SORKIN: Let me ask you a separate question, which is, you've talked about China, you just mentioned the renminbi. But when you think about you also talked about what you think is a potential war, frankly, either economic war or physical war between the US and China, either over Taiwan or other things. Where do you think that sits in this calculus of yours?
DALIO: Well, we are, you know, there are five types of wars. There's a trade war, technology war, geopolitical influence war, capital and economic war, and military war. We're in the first four of those wars. And, and you're at the brink, I don't think the brink will go over but we are right at the brink that you could have an economic war with a form of sanctions that would be if it happened really shocking to the to the economy, world economy, much worse than the Russian war. You know, Russian war had implications in a lot of different ways. If you have with China, that would be a problem, and also the issue of Taiwan. I think that the I think that you're at a point right now that both sides are so scared of that, that they're working to set a floor. That's not an improvement in relationships. There's not much prospect of that. But establishing a floor. That's what the last Biden Xi meeting was about. It's why Tony Blinken is going to go over there. It's like, don't go let's not go below that. And I don't think that we probably will go below that. But you can't be sure at the same time I think the economic and competitions and so on are going to be very intense.
SORKIN: Last time we spoke it sounded like you were even more hawk, not hawkish, but worried, more concerned that actually it would escalate into some kind of military situation or that or that, or that China was going to take try to take Taiwan and that was going to sort of—
DALIO: Well, no to be clear, like I put in my book, I think that there are about a 30% chance of a type of civil war and a 30% chance maybe I'd say it now maybe 35% chance over the next 10 years that you can have a military war in, in, in those areas. Those are high numbers. So I've been putting numbers but they're still not the probable things. But what happened was so let me take the sequence. Just before there was the summer and we were looking at the Ukraine, United States was thinking about sanctions on China and how China would operate. And then there was a lot of studying about what would the implications of sanctions be and the implications of sanctions would be economically disastrous. If you wanted to see inflation, it was what came out of Russia would be nothing. So there was a hesitancy and then Pelosi went over there and when Pelosi went over there, that was the bottom in my opinion, that was the bottom of the of the relationship at that moment. China had to do a demonstration, it was, and then since that point, there's this element of of risk. So please don't take it that I'm either unconfident about any of these things. As I said, maybe there's a one in three chance over the next 10 years of those kinds of things depending on how things transpire. And that's a very dangerous thing. The fact that the that I can say that and everybody almost can, is living that is causing big changes in flows. It's causing big changes in what businesses are operating where, businesses are leaving those places. We should talk about the good places. India is benefiting. Indonesia is benefiting, Arabia and UAE is benefiting so you're seeing these other places, you have to see how wealth is shifting, right. Wealth, if you just look at how wealth is shifting, you're seeing big increases in some places and big decreases—
SORKIN: Can I ask if you're Janet Yellen or the White House, what you would do about all about all of this the way you've described it.
DALIO: Well, I think I think the big the biggest issue is that there's more spending, and I would say there probably needs to be more spending than we have income and that's a problem, right? Governments run the same as your household or a business in that with two exceptions. They can print money and they can tax. Right? So then when you spend more than you earn, the question is and they're going to spend more than they're going to earn, where are you gonna get the money from? Are you gonna get it from taxes? And if you get it from taxes, people fight because they don't want to give up their money, or are you going to get it from printing the money? And so how do you achieve that balance because it's do you spend less well it's a tough environment to spend less. You have to spend more on defense, you have to spend more on rebuilding, the green initiative is expensive. I mean, education is expensive, and so on. So, there's a dilemma that she is sitting in that we or we as a country are sitting in. So how do you solve that, that problem? I think that, you know, if you were to, let's say, take the bigger picture, there's a lot of things that you can invest in, invest in that will produce returns. And I think, for example, I don't think we invest nearly as much in in the basic things like great education and making sure that certain areas do not have conditions that are substandard conditions. So, invest in those things that are going to produce productivity. Education is a good, infrastructure is a good thing, other things. But it's, this is part of a cycle, a big cycle that has happened over and over and over again where, you know, your productivity goes down—
SORKIN: In that cycle can I just ask, and there's a there's an op-ed today from Charlie Munger, we always talk to you about crypto and if you saw this op-ed, he effectively said that crypto should be outlawed.
LEE: And he cited communist China as having taken a wise move—
SORKIN: By doing that.
LEE: Yes.
SORKIN: You have been I believe a supporter of Bitcoin or at least curious, crypto curious.
DALIO: Okay.
SORKIN: Where, where, has anything changed for you in—
DALIO: Just, everybody, let me say what I believe crypto, Bitcoin and what I've pretty much always been, I think it's been, you know, quite amazing that for 12 years it's accomplished but I think it has no relation to anything, okay. In other words, it moves and has no relation. It's a tiny thing that gets a disproportionate attention. You know, the value of crypto, of Bitcoin is less than a third of the value of Microsoft stock. You could go into industries, biotech and many other industries are more interesting than Bitcoin. It's not going to be an effective money. It's not an effective store hold of wealth. It's not an effective medium of exchange. But we are in a world in which money as we know it is in jeopardy, right? We are printing too much and it's not just the United States, all the reserve currencies, the euro, what's going on in euro and what's going on in yen. And so in that world, the question is, what is money and how's that going to operate? So when we look at something like China's renminbi, and then you take the digital renminbi, I think you're going to see that become more and more a thing. So when when things start to open up in an evolutionary way, people are going to start to say where is my safe store hold of wealth, and as you have China denominate more of its trade in renminbi then naturally those who are going to hold renminbi, if Saudi Arabia sells oil and renminbi and then buys things from China in renminbi, when they get it they're going to hold more renminbi. It's going to be a higher percentage of their and so I think the question over the next number of years is really what is money, not just as a medium of exchange, but a store hold of wealth.
SORKIN: That sounds like an argument for Bitcoin of sorts.
LEE: Bitcoin or for something—
DALIO Of bitcoins? No, but I think if you want to, if you want a digital currency, you have to do something different. I don't think that the stable coins are good because then you're getting a fiat currency again. I think that what you really would, what would be best is an inflation linked coin. In other words, something where basically you would say okay, this is going to give me buying power because every individual wants, what do they want? They want to secure their buying power, if you want to save. Now if you put it in Bitcoin, it goes like this. Who knows what happens. If you put it into something, the closest thing to that is an inflation index bond and so on. But if you put if you created a coin that says okay, this is buying power that I know I could save in and put my money and over a period of time and then I can transact in anywhere, I think that that would be a good coin. But you, so I think you're going to see probably the development of coins that you haven't seen that probably will be end up being attractive, viable coins. I don't think Bitcoin is it.
LEE: I want to go back to the markets before we let you go. It sounded before like you thought cash is cash is king right now out of all the choices that you could make. Where do you think the stock market is? Do you think that we have priced in what could be, you know, a recession or what is a recession? Did we see the worst of it in October? Where are we right now in terms of valuation—
DALIO: I think, first of all, when we talk about pricing in the recession, I think the first thing you have to do is you've priced in the discount rate. So what has happened the most important thing is you've changed the discount rate. Every investment is a lump sum payment for a future cash flow. And you put in the discount rate so now you moved the discount rate. That discount rate is not going to be materially changing, right. So we're not going to go back to the old discount rate and prices are not going to go back to where they were then you start to have the knock on effect on the economy. I mean, to me, it looks like on on that that you know you have something substandard growth, right, you have that when we call a recession we have I can't tell you, is it 1% growth or something like that, but it's a fairly stagnant growth that is not hurting the household sector as much as you would think in terms of that, so that becomes tolerable for longer, which I think keeps that. So then you'll look at the the markets as a whole the markets as a whole look, they were obviously I would say the interest rate changes were obviously had to come. The impact on the other markets had to come. They have been into the price. So now you are going to have probably a tightening or tighter monetary policy than existed and that's a net negative for the stock market, but not in such a big number, that it's like a big bearish thing. So when I look at the market as a whole I would say okay, well now it seems closer to fairly priced probably still a bit high given that whole picture.
SORKIN: Right. Ray Dalio, we need to thank you. You got to come on back because I want to hear more about your new life post, post co-CIO role, but we're out of time, but thank you for an education this morning.
DALIO: Thank you.