In 2007, he predicted the end of the US housing boom. In 2008, he forecast the collapse of the banks and the implosion of the credit market, propelling his flagship fund Pure Alpha to gains of almost 10% amid the financial meltdown as most rivals suffered massive losses
. Ray Dalio
, the man who founded and runs the world’s largest hedge fund — the $160-billion Bridgewater Associates —
told Arijit Barman in an interview about his reasons for being bullish on India
and why the dollar’s stature as the world’s reserve currency is on the wane. Edited excerpts:
What is your view of the Indian economy?
We do a computerised study that forecasts which the fastest-growing economies will be based on certain key performance indicators. In my study, India has the best projected next-10-year growth rate, using data for the last 60 years. The structural reforms that have been initiated are great. I’m not talking about politics or ideologies, I’m talking about mechanics. If you change one of those numbers — for example, the ease of hiring, the leverage of corruption, each of those things — you can see the correlation with growth.
There are four things that drive economic growth. The relative cost of an educated person. If you take the same person, same capabilities, and you compare them, those countries which have the lowest cost of an educated person are going to be more competitive than those where those educated people are expensive. India has educated people that are cheap by comparison to the rest of the world. So, that’s one of the important metrics.
“The bigger issue is the disparity of wealth and income and how this stimulus (tax breaks) helps companies and their owners. You pay less tax, you make more profits. But the majority or 80% of the economy gets very little benefit. So, it widens the gap.”
Secondly, the level of indebtedness is important in assessing each country. The overall level of indebtedness in India is low and a competitive advantage. Unlike a country like Russia or China, which have negative population growth, you have positive population growth. And then on the output, if I look at these various factors — the cost of an educated person, labour productivity, working attitudes, etc — India compares favourably. So, let’s look at these very high ratings.
Culture is a big influence. The individual has a sense of self efficiency and work ethic. That’s true for India. India also is very good in innovation and commercialising innovations. The only negative is bureaucracy. That’s the one red thing.
Will rising oil prices be the biggest risk for India in 2018?
No. It isn’t anywhere near your biggest risk, for two reasons. First, oil’s impact as a percentage of GDP has come down a lot and so has oil price volatility because of shale. Because now capacity can come on and off. In the old oil market, you drill a hole and you took it out, and there wasn’t much incremental cost in doing that. So, the capacity of production is relatively fixed. In the new oil market with shale, you can turn it on and turn it off depending on the price. That tends to create limits on the upside of the price. Also, producers are more inclined to hedge on the upside. The price range of oil itself is less and also the price impact of an oil change, as it is a smaller percentage of GDP, is less. So, I don’t think oil is something to pay attention to, but interest rates are far more important than oil.
So, if you had to name the top three risk factors for India in 2018,
interest rates would be No. 1?
Right. The tightening of money around the world including in the US, Europe to some extent and China, will happen. China is also going to have a tightening of monetary policy with its deleveraging.
Is the bull run in Indian equities set to end?
I’m not going to comment on the Indian market. I would say I’m more optimistic about India than any other country. On a relative positioning, it’s very good than this part of the world (Europe).
Given where India is in its growth cycle, would you advise policymakers to adopt a strategy of tax cuts (as in the US) to kickstart private investment?
I wouldn’t presume to answer your question about that in India. But I think the bigger issue is the disparity of wealth and income that exists and how this stimulus helps companies and their owners. You pay less tax, you make more profits. But there is a portion of the economy, the majority or 80% of the economy that gets very little benefit from it. So, it widens the gap and it puts us in the risk of having the tax break, cause a recession. If a recession happens in the US with the rest of the world, that would be terrible now, particularly because of that tension. It’s very simple. If you have rich people and poor people living together and having a common budget, and you have an economic downturn, you’re going to have a lot of conflict.
Today, the unemployment rate is at its low, the financial markets are at its high; liquidity is great and things could not be better… And yet we still have significant social conflicts. If we have these conflicts when times are good, imagine what they will be like when times are bad. That’s why we have populism. We have populism because capitalism is not working too well for the majority of the population. So, if you have a downturn, I’m worried about the political left and right becoming more extreme. I think that’s the bigger risk.
The Chinese have been buying companies all over the world. What does that mean for economies like India, which are services-led?
I think the most important thing is technology. Let’s call it artificial intelligence. And I think that’s a natural strength to India. I think that will be more important not only in the development of products, but in the development of competitiveness. I don’t want to talk too much about India, but I’m looking at the tremendous progress in terms of creating identification for everybody in India and that’s a very exciting progression in terms of technology. I think India’s got a good competitive edge on that. But I would say, when we say services, there are different kinds of services. I would say, as we’re dealing with technology in particular, and you’re making the move toward computers thinking or artificial intelligence, I think India is a force.
Aren’t we looking at further job cuts thanks to such technological progress?
So how do you balance?
It’s the same all over the world.
But isn’t it more acute for a country like India or China? We have a huge young population — jobless growth cannot be sustainable.
I’m saying it’s an issue everywhere. It is what is changing politics. It is why there’s populism.
Yet you seem to be more bullish on emerging markets compared with developed markets in 2018. Why is that?
First of all, their economies generally balanced well — not overly indebted, not late in their economic cycles, etc. They have capacity and they now are developing their own markets within their regions. Before, it used to be that you needed dollars and to get them exported to the US. Now there are markets within the region, you don’t need to export to the US and you don’t need dollars as much. And there’s excess capacity so there can be growth with our rising inflation
and interest rates. All the measures I’m using are better for them. And the assets are cheaper.
Would we then expect more from Bridgewater in 2018-19 vis-à-vis India? You have a very large China fund.
It’s all a function of the liquidity and the accessibility of the market. That’s our issue. When it improves enough, we will be there.
What is the secret of Ray Dalio’s success?
Whenever I would make a decision I would write down my criteria for making it. We then test them and put them into algorithms so the computer can help us because it can process more information, process it faster and process it less emotionally in parallel to my normal decisionmaking. That was very powerful and helpful. I also ran an idea meritocracy in which the best ideas would win using technology. This was the secret formula to my success. I wanted to pass that along my life and work principles so I wrote the book that does that (Principles: Life & Work). I will also do an economic and investment principles, then I will be done.
In your book you talk about transparency and succession planning. That’s one of the biggest challenges that boardrooms in India are grappling with.
I want to focus more on meritocracy, how you can have thoughtful disagreements. That is the thing I want to pass along.
Coming to gold, you’ve been bullish. What’s your thinking?
We are in a time in which it is appropriate to ask what is the world’s reserve currency? The dollar’s role as a reserve currency is declining. It is in anachronism. It’s like the G7. You look at the G7 and you say that’s funny that that’s the power of the world, right? US, Japan, Germany, France, Italy. Imagine that they were not long ago the world powers and countries like China and India weren’t. That’s no longer the case, so the dollar’s role as a reserve is declining as its dominance in the world economy is declining.
You said recently that we’re nearing the end of the bull market cycle.
Just to be clear, I think we’re probably maybe a year or two from the end of the cycle. So, when I say we’re entering the end of the cycle, I want to be clear it’s not now. Let me explain. There’s a certain rate of capacity to produce. And that rate of capacity to produce is a little bit less than 2% a year in the developed countries, like US and Europe. And when you increase the demand by above that, you come to later part of the cycle, in which the growth rate has to slow down.
And you think we have reached or are reaching that point?
Yes, we are at that stage where they have to begin to put on the brakes because it’s growing faster and now we’re going to have a lot of stimulus.
You mean fiscal stimulus?
Yes. The changes in the tax laws will provide both fiscal stimulus and larger budget deficits which means more bonds have to be sold. It also gives companies a lot more cash. Investors have a lot of cash on the side. Banks also have a lot of cash on the side. So, they’re going to put that cash more to work, and you’re getting a stimulus into a capacity constraint. That is the part of the cycle where central banks tighten monetary policies. That is when the risks of recessions rise because central banks never get it perfect. Otherwise, we wouldn’t have cycles and recessions. So, I think we’re going to have this stimulus, which is great. Everyone is going to get excited about that stimulus, and then the central banks will have to tighten.
It’s very difficult to tighten now to get it right. It’s very difficult to get it right because we’re in a situation where there’s a lot of interest rate sensitivity. So, we always have cycles and all I’m saying is that we’re coming into the late innings of this cycle. And I do believe that the central bank, the Fed most importantly, will probably tighten more than is already reflected in the yield
term, and that interest rates will go up. And as rates go up and bonds go down, it begins to have, with a lag, a negative effect on other markets. It has a negative effect on equities. And with a lag, that has a negative effect on economic activity. So, we are in that latter part of the cycle.
What do you think of the US tax cuts?
I think the tax cuts are good but there are two sides to the tax cuts. It creates a fiscal stimulus and it creates a larger deficit which produces more need to sell bonds. The government has to sell more bonds. That is happening at the same time as the Federal Reserve is going to be shrinking its balance sheet, which means selling bonds, and at same time it’s going to be raising interest rates. So, it’s almost like hitting the gas and the brakes at the same time.
CEOs argue that tax cuts will have a multiplier effect across economies.
There is definitely trickledown. There will also be budget deficits. Those budget deficits have to be handled and have to be balanced well. Both exist. So, I think that the stimulus is a good thing, but simultaneously the question should be, how do we make capitalism work well for the majority of the people? There is an issue.
To some extent, it’s the other side of the technology issue. Technology is wonderful in doing things that people ordinarily could do better. So, that’s happening in the industry in the developed world. And then of course it’s a wonderful thing that there’s competition in the world. So, when you look at it, while the gap between the rich and poor within a country has increased, the gap between rich countries and poor countries has narrowed.
I don’t think our risks are as much economic, as they are tied to central banks tightening money and the risk of a downturn. I think the risk of a downturn combined with the social-political is the thing that worries me now the most.
It’s been a decade since the financial meltdown. Should we worry?
I don’t assess the situation to be the same. In 2007, we ran our calculations and could see that a number of important entities could not service their debt. That is not the case now. We don’t see systemic risks now. So, I don’t think there’s going to be a debt crisis that’s going to head our way. I think that what we’re dealing with is a sensitivity to interest rate changes. The economy has an unusually high sensitivity to interest rate changes. I think it’s going to be very difficult for the gas coming from fiscal stimulus and the brakes coming from Fed restraint to be put on the same time when the economy is approaching capacity constraints.