Ray Dalio's Warning For The Economic Crisis, U.S. Recession & World War 3 Odds In 2024

you've said that the US is in stage five and to give everybody an idea stage six is basically revolution war it's the the violent restructuring of the economy and whether we're in the seventh inning of stage five or the third inning I don't know but the fact that we're in stage five which is obviously where there's massive internal conflict which Rings way too true um and the massive disparities which you did a really cool graph in your video where you show income inequality and that gap between the lines you filled in with resentment and so

you have growing resentment you get populace on the left and the right you get internal conflict people fighting and then you get a potential external power looking at you going they're weakened by their internal conflict and that historically is when a rising power makes its move yeah so I think there three things three big forces to keep your eye on and when you see them in their cycle then it's clear first are you earning more than you are spending and do you want people to look at this at an individual level or at a country

level well you can it both I want them to look at it as the country but the country is nothing more than the aggregate of the people and so um when you look at those three forces I want to make sure that they're clear and you could align them up and you could see where you are is the country earning more than it's spending and building savings or is it spending more than it is earning and creating debt because one man's debts are another man's assets and when somebody is holding those assets and they're producing

a lot more of that money in debt they go down in value money goes down in value as they produce it to produce that buying power and then that gets people um bad returns bad in it produces a higher amount of inflation and it produces bad returns for holding debt or B so in other words cash or bonds and then people get out of cash and bonds and that produces Rising interest rates while there's Rising inflation and that produces stag flate so I want them to get the mechanics of that because that's happening now you

could see it this is not controversial we are producing a lot of debt we're spending a lot more than we're earning and as a result they're printing a lot of money and the printing of a lot of money creates a lot of inflation and with that inflation then nobody wants to you know cash is trash you don't want to hold cash um and you get out of that and that causes rates to rise and that's one of those three factors so you can see it happening and you could also see the cycle of it as

shown in the book the second force that is dealing with is the internal conflict Force how you are with each other are you operating cohesively common Mission and moving in the right direction the system working or or are you at each other's throats um uh is the system threatened because history shown when the causes that people are behind are more important to them than the system the system is in Jeopardy and that is a risky situation it's a risky situation because it produces or disorder and it can produce a form of Civil War and at

those times when you have that you see greater and greater polarity in politics it shows up at greater and greater populism of the left and populism of the right and populists uh want to fight for their side they're not moderates moderates want to work together to try to find a compromise that's best for the whole populists um appeal to their Crowd by saying I am fighting for you and they will fight each other and that fight can be at the threat of the system so in history for example we saw four democracies in the 1930s

choose to become dictatorships as one side fights to the other because they become so disorderly and we have a system right now that you could see that it is possible in elections that one side neither side might accept losing and so the system becomes in Jeopardy and you see that the moderates leave the system they you can't be moderate you have to pick a side and fight and so you see this in the French Revolution were moderates in the early part of it that recognizing that there were problems and and wanting to work together the

moderates got guility the the the polarity began the same was true in the Russian Revolution the same was true in the Chinese Revolution the Cuban Revolution and so on those polarity gets greater and greater as there's a greater intensity to fight and that is the internal peace and so you could see where we are in that internal peace right now we see um that uh moderates are dropping out of uh choosing not to run for reelection and you're seeing in the primary system that the fight is who's over most extreme in representing that and you're

seeing this greater polarity and you see it reflected in many statistics the um something like 10 or 15% I forgot if it's 10% of the Democrats or if it's 10% of the Republicans I don't remember versus f um 15% wish the members of the other party would die they don't want them to measure their uh they don't want them to marry their uh children I mean there is a great polarity and you're seeing that um lead to changes in where people live they're moving to different areas not just because of tax reasons but because of

differences in values and so that kind of you can see it today happening these things but you also can see the Arc of them in the book because that it measures statistics it shows these things happening so when you have a a financial problems and you have this kind of polarity and you have a bad time you have a lot of fighting internally so imagine where we are in the economic cycle we're in the part of the economic cycle where they have given the government has given a lot of money and credit to people they've

put put it out well no surprise that's leading to a lot of inflation okay inflation takes buying power away from people and it also means that then there's going to be higher interest rates and that's going to squeeze people and so that makes that wealth Gap and that wealth issue uh more difficult so th that's the second force and the third force is the rise of a great power the geopolitical force that's going on that we're seeing today with China and Russia and so on and how that's changing because when the country when the power

of a country diminishes okay when we get weaker financially or how we are with each other and so on there are greater vulnerabilities and there's always the competitive power that learns how to become stronger and competition always happens there's the establishment and then there's the new compet comptition and as they get stronger they get stronger in all ways militarily and commercially and so on and that's the dynamic that we're seeing yeah so we've got Taiwan looming in the the sort of political background you said many times in the book that that's a an indicator that

you'd really be looking at if there was a a fourth Skirmish over Taiwan that you would get increasingly worried we definitely need to talk about inflation in a minute because I want to know what people should be doing in that environment but first like the and I don't know if people are like me but the thing that got me to stop and really start paying attention to this was how far into stage five we are that was the thing that compelled me that I have to slow down I really have to look at this because

I actually don't like thinking about money despite my long-standing pursuit of success that's really been about something else for me money has been a byproduct of that um and that's in the book and I don't know if your number has changed but in the book you say that you give a 30% chance of the US falling into Civil War I think in the next five to 10 years and that uh a major conflict with China at 35% in the next 10 years and you said look it's a guess but you lay out a lot of

data before you say that it's just a guess so it's obviously a very well-informed guess one do those numbers roughly hold for you still and if they do how do we pump the brakes on this um I I would say those numbers probably are a little bit higher now I would say I was afraid you'd say that things are progressing a little bit quicker um the do you mind ballparking me if if we're not at 30 are we 31 are we 40 yeah let's let's say um let's say 35 to 40% um on on each

let's say and who and I'm not I'm not being precise but the events that happened in the Ukraine um and that is is U bringing all this up development internationally up um at a little bit quicker Pace it's the same Dynamic there is there are two sides and there'll be neutral countries just like in the war there was the allies and the Axis powers and then there be neutral countries and so that part is developing um the the US uh conflict part is probably progressing a little bit quicker um so I mean the let's say

the odds of that um on the on the youu um on the world order um the developments in the Ukraine maybe I should put those in perspective would you like me to do that pleas absolutely um okay um there is a a very close relation ship a common objective of the Russians and the Chinese so um there is a um a competition in the world and there's a dominant world power which um is perceived as being overly controlling so the Chinese believe that the policy of containment of the United States um in other words just

right Within their borders that there isn't a region uh that's suitable for them um much the same ways uh the United States there's always a geographic region that is an area of influence uh the United States in the area uh like the Cuban Missile Crisis um Cuba um when there's a threatening power um in Cuba we reacted to that those that kind of geopol itics um they believe that the United States is sort of containing them and they are growing in power so that there's that dynamic in Russia uh has the same kind of view

and so that there's a common let's call it enemy uh comp competitor and there are five types of Wars uh there's a trade War there's a technology War there's a geopolitical influence War there is a capital war and then there's a military shooting War um and we are in the first four of those Wars um in uh in this competition um with China or with Russia with China well we're not in a shooting war with China we are in um a shooting war of sorts in Russ with Russia and the Ukraine we're providing arms and

so they're shooting and so there's a military war going on and uh and we're in it in our way so we're at those particular uh spots um and the capital War um is sanctions we hear the notion of sanctions and what that means is they're economic and the way they work is to shut off um to produce economic Pain by either um not letting them get at their money or um not letting them get to Goods that they can import and these have happened through time um in Japan that was what set us up for

uh the bombing of Pearl Harbor because the United States cut off Japan's oil supp supply was in the process of doing that and also confiscated its uh bonds much the same way is happening now and that put them into a corner that led them to um bomb Pearl Harbor and then we went to a military war so that's where we are now and that also is risky because it threatens the value of the dollar because um the right right now debt is dollars any currency the way you hold it is you hold it in the

form of debt you don't hold it just in paper and um uh because it there's a rising inflation and because there's a lot of printing of money and because there's also a greater fear on a number of countries that they too could be sanctioned there is a selling of dollar denominated debt so you're seeing that the bond market is going down and interest started escalating recently yeah that's right and so there is that that Dynamic that's going on the capital Wars um are the ones that accelerate immediately before um the uh the military Wars usually

the coffers are empty they're printing a lot of money and then they're trying to use uh economics as a weapon so we're we're in that part of the cycle now um in terms of how this will transpire I think there are um there are three big questions that we're going to learn about or get answers to pretty quickly um the first is does uh Putin and Russia uh win or lose um I'll describe win as um what he wanted at the outset which is when for Russia would be to have um um the Ukraine H

um be some not non-threatening position such as a neutrality a guaranteed neutrality and for Russia to have control over Eastern provinces and for Russia not to be um economically devastated um instead to be maybe have it something like a 10 or 12% decline in GDP and for Putin to be in power if those four things happen then the cost of his actions will have been worth the uh what was obtained from that and that would be viewed as a win um it would be then also a loss from the Western countries the world is looking

at the power of American sanctions um because American sanctions are the greatest power the United States has if it was a military power it the world has uh come to the position that a number of countries have had um an equal ability to do harm to the United States militarily as the United States was have have to do to them and so we don't have a dominant military power anymore but we do have a uh dominant um sanctions power so if we're still ahead of China um in the United States ability to influence have economic

sanctions is much ahead because it controls the world's Reserve currency that's a biggest asset but in weaponizing the dollar um it is leading those to get around and not want to hold dollars because they get worried that they're going to be confiscated so so we will see if that do [Music] um sanctions power we'll see how powerful it is if it isn't very powerful that's going to be a problem um because others will perceive our weakness well and they'll also realize then um uh then you only have military power I mean think about this way

if this war is not a difficult War for the United States and Europe for the most important that it produces higher oil oil prices and the like but um while Russia is throwing in military we are throwing in sanctions and these sanctions don't cause LI cost lives um it's not a military war uh so we're fighting it with sanctions and they're fighting it with um with military if you didn't have that how would you fight this war it would be a much more difficult situation and the third thing that we're seeing is how the world

is lining up the world is lining up uh which you know there are in Wars typically a axis and ex uh and allied powers and you could see by the actions that are taken by as to which are lining up um who voted in favor of what at the United Nations who is allowing what rules uh who was trading with the other party who um Russ actually put out a list um who are friendly and adversarial countries um you'll see at the next G20 meeting uh who will be in favor of Russia attending that meeting

and who will be in favor of it not attending and that's making clear how the sides are lining up so you're seeing those sides line up and all sides are in preparation for war okay so all right we've got that escalating things are moving faster um between us and China than we thought escalating tensions here in the US um inflation is one thing I want to really touch on so what do you do in an inflationary environment as somebody who's not I don't consider myself a Savvy investor and so I always wanted I used to

joke with my money manager I want to be as close to my money buried in the backyard as possible and uh obviously for inflation reasons I have since learned that that is a terrible strategy um but what do you do well first thing is you realize that uh holding cash and dead assets is a bad thing so a lot of um money uh is in cash because people think that cash is the safest investment but they are measuring that in the amount of money that they get nominal returns and they say it doesn't wiggle much

but think about it um it's lost as of the most recent statistics 8 and a half% over the last um inflation is 8 and a half% and they receive virtually no interest rate in cash and so there was an 85% loss of buying power as a result of inflation and so psychology should change and is in the process of changing to realize that you have to think in terms of buying power not the number of dollars you have and you have to think um how much uh are your is your buying power and so the

worst thing is to be in cash like I say cash is trash and to be into and to be out of the bonds um the next thing is to have a diversified portfolio of assets um the diversification um means um some assets that are um uh inflation hedge prone for example you're better off to own an inflation index bonds than a regular Bond um what makes something an inflation index like what what are the nature is that going to be gold and precious metals tangible things like what are the things that are resistant to inflation

um yes and inflation index bonds because their returns are tied to inflation interesting I don't I don't understand that well enough to know what how one would do that is that worth going into I don't know what the punch line is going to be yeah um I think the punch line is if you take a look at it uh it's it's simple it's uh like a regular Bond except um its payments are linked to the inflation so they compensate you for inflation so the is this a Government Bond yeah Government Bond okay and there are

some tax advantages to them too so look into them okay and why don't people just flood into that well I'm I think it's it's one type of asset the flooding into any one thing is a is an issue but the but moving from the nominal Bonds in which the government just says I'll give you this amount of money and it has the unbel UN unbelievable and unlimited ability to print the money it gives you um it would favor inflation index bonds um and it can be other assets uh you know some people would say something

in terms of cryptocurrencies or it might be um th those other assets um I think what's your take on crypto so crypto is a huge part of my portfolio I think you'd be mortified to see uh just how much so but yeah what are your thoughts on crypto um I think I think that too much PE people pay too much attention to one uh at at the extreme of the other you know um that either somebody's all crypto um or they're all gold or they're all something and I uh I believe that that's a challenge

I think that um uh crypto like gold is not a productivity earning asset and it can be controlled by governments uh in lots of ways it's been outlawed in a number of places and it also can be monitored the Privacy um element is not uh secure from governments doing monitoring and and so um and the size of crypto is about the size of um Microsoft you know it's all crypto combined and so to um be overly concentrated in it in my opinion is a mistake um but to have some of it uh is a good

is a good thing so the question is always uh what amount of it so that's um you know I have a little bit about it I'd probably shock you about how little I have You' shock me about how much how much you have uh but having some of it um so the um and other things I would say is that geographic location is important in other words not just all in us and US dollar assets um I would say that the three things that that again I'm looking at if I go down countries is first

um are they earning more than they're spending do they have a good income statement in balance sheet this is going to be very important in the period ahead ahead because the amount of credit that's going to be available to bridge the gap between spending and earning uh cash flows and so on is going to be quite narrower so a lot of companies even that were able to raise cash um and not have good cash flow because of maybe growth expectations in the future we'll find it more difficult that'll be true for individuals it'll be true

for um countries so is it does it have a good income statement and balance sheet will be important the second is um places how are they working with each other is there civil civility or is there Civil War on the brink of Civil War because countries where they work well together they're productive are going to have a real competitive Advantage orderly places safe places to be um are what are countries on the rise in that so obviously I I'm shocked to say this out loud but the US would be in a bad place in terms

of that um what are places that have great stability there well um there are Parts in the United States that are wor better than Parts other parts of the United States meaning like local government bonds or something like that well I'm I'm out talking about the uh like where you want to be and then that'll be but yes the it could be bonds it could be places I'm talking now the places the um uh for example we just had the shooting in New York City um on the subway and and New York City is becoming

more dangerous Chicago is becoming more dangerous places Chic San Francisco's becoming more dangerous um you're seeing people leave some places for other places um you're seeing them leave I don't know to Texan Texas is Austin or uh to Florida and so on so there are differences in um in within the United States and differences from the United States you mean people need to think about picking up and moving and actually going and being in a different place yeah and those are also the better places economically because when when um people do leave and they do

that uh those who leave um are higher income and higher taxpayers and as a result there's more of a hollowing out that takes place in that which creates an economic problem as well as you know a lifestyle problem so I think you're going to see greater differentiation in places which affects where you want to be and where people um who can afford to be there want to be and also affects what their economies and markets are like and that's so then the United States um so um yeah and the third element is um so um

are they financially strong in other words income more than expenses and good balance sheet are they civil with each other so they're working together rather than hurting each other and number three is are they um um in a position where they're likely to be in a war or are they likely to be out of a war um you you know you don't want to be in a war so and those places investing wise history is shown um do worse because they have to spend more money there's more uh problems more pain that's being exchange neutral

countries in Wars uh do very well as it turns out uh so elements of diversification so it's a long- winded answer to your question but I would not want to be in debt or cash and and those instruments I would want to diversify well with a bias toward uh inflation protected assets and I would want to uh diversify between locations countries uh um in terms of the investment based on the criteria I've just mentioned if you like that clip check out the full powerful episode here and I'll see you there