Wall Street Week 04/05/2024

Summary

This episode of Bloomberg Wall Street Week features David Westin discussing current economic and market conditions with insights from investing legend Ray Dalio and Franklin Templeton's Sonal Desai. Dalio reflects on his career, lessons learned from past financial crises, and his views on the 2024 economic outlook, including potential geopolitical risks and the US political landscape. Additionally, the episode explores Argentina's economic reforms under President Javier Milei and addresses rule-breaking in various contexts, from the business world to sports, illustrating the complexities and consequences of challenging established norms.

Takeaways

• 🙌 Ray Dalio reflects on his career's pivotal moment in 1982 following a mistaken prediction about a debt crisis, highlighting the importance of learning from mistakes and diversification.
• 💬 Discussing the potential for internal conflict and political instability in 2024, Dalio emphasizes the importance of bipartisan cooperation to mitigate risks and promote national unity.
• 🔥 Argentina's President Javier Milei implements radical economic reforms aiming for dollarization and fiscal discipline, despite facing challenges such as high inflation and legislative opposition.
• 💸 Larry Summers critiques the Federal Reserve's current monetary policy approach, advocating for a reassessment of the neutral rate and cautioning against premature rate cuts amid inflation concerns.
• 📝 Summers also warns of several global risks, including geopolitical tensions and financial market vulnerabilities, underscoring the complex landscape investors face.
• 🔧 The transcript highlights the balancing act between following rules and strategic rule-breaking, with references to historical, business, and political examples.
• 🔴 Highlighting the importance of rules in various contexts, the script underscores the necessity of rules in sports, politics, and economics for fairness and integrity.
• 📚 The discussion about Bridgewater Associates' succession planning reveals Dalio's focus on a culture of radical transparency and truthfulness, aiming for continuity and growth beyond his tenure.
• 🏀 Sports examples, such as the NCAA women's basketball tournament disparities, illustrate the ongoing challenges and progress in achieving gender parity and fair play.
• 💵 The script addresses the economic outlook and investment strategies in a volatile market, with insights on inflation, interest rates, and the potential impact of geopolitical events on financial markets.

Q & A

What significant event in Ray Dalio's career happened in 1982?

In 1982, Ray Dalio experienced a pivotal moment in his career when he incorrectly predicted a debt crisis that would lead to worldwide economic downturns following the Mexican sovereign debt default. This mistake was financially devastating for him, leading to a moment of humility and learning.

How did Ray Dalio adjust his investment strategy after the failure in 1982?

After his mistake in 1982, Ray Dalio learned about the importance of diversification in investment. He discovered that by having 15 uncorrelated bets, he could eliminate 80% of the risk without reducing his returns, which fundamentally changed how he approached investing.

What are the 'big five forces' Ray Dalio mentions that interact together historically?

Ray Dalio mentions that there are five big forces that historically interact with each other through patterns: economic policies, internal conflicts, external conflicts, technology, and debt cycles. He believes these forces have a pattern of interaction that can be studied for future predictions.

What was Javier Milei's approach to solving Argentina's economic problems when he took office?

Javier Milei's approach involved radically transforming Argentina's economy through measures such as massively slashing government spending, privatizing state-owned businesses, eliminating the central bank, and aiming to replace the Argentine peso with the US dollar to solve inflation issues.

Why does Ray Dalio give a 50/50 chance of civil war in the context of the 2024 political climate?

Ray Dalio considers there to be a 50/50 chance of civil war due to the presence of irreconcilable differences within society, leading to failures in following established rules and increasing extremism. He highlights past incidents like January 6th and disputes over policies as examples of this growing division.

How does Larry Summers critique the Federal Reserve's handling of the neutral interest rate?

Larry Summers criticizes the Federal Reserve for not accurately gauging the neutral interest rate, suggesting it is much higher than the Fed assumes. He believes the Fed's policy is misguided because it overlooks the economy's strength, loose financial conditions, and the impact of high interest rates and inflation.

What did Larry Summers say about the impact of immigration on the US economy?

Larry Summers noted that increased legal immigration has contributed to more labor force growth and supply in the US economy. This, in turn, can be deflationary if immigrants send earnings back home, increasing supply without a corresponding increase in demand.

What concern does Larry Summers express regarding China's economic policies?

Larry Summers expresses concern that China's strategy of building manufacturing capacity to deal with its excess savings over investment could lead to global economic tensions. He warns of potential glut driven by Chinese subsidies and the risk of awakening substantial economic tensions between China and other nations.

How did the NCAA address the disparity in facilities between men's and women's basketball tournaments?

The NCAA faced public outrage and apologized after disparities in facilities between men's and women's basketball tournaments were highlighted, particularly regarding the weight room. They promised future parity for men and women, indicating a move towards addressing such inequalities.

What was the significance of Caitlin Clark breaking the men's all-time scoring record in NCAA basketball?

Caitlin Clark breaking the men's all-time scoring record in NCAA basketball was significant because it highlighted the talents and achievements of women athletes, challenging the NCAA to pay more attention to women's sports and ensure equality and recognition in collegiate athletics.

Outlines

00:00

📈 Bridging Past and Present: Ray Dalio's Evolution

This segment explores Ray Dalio's journey from a young, overconfident investor to a seasoned one, emphasizing the transformative experience following the 1982 Mexican debt crisis. Dalio reflects on his early mistakes, particularly his incorrect predictions regarding the global economic impact of the debt crisis, and how these led to a personal and professional low point. He shares how the experience fostered a philosophy of risk management, diversification, and the principles that laid the foundation for Bridgewater Associates' success. The conversation highlights the importance of embracing failure as a stepping stone to learning and growth in investing.

05:03

🌍 Navigating Uncertainty: Dalio's Analysis for 2024

In this part, Ray Dalio delves into his analysis for the pivotal year of 2024, drawing from historical patterns to underscore the interconnectedness of five major forces shaping our world. He discusses the potential of 2024 to be a definitive year due to geopolitical tensions, internal political conflicts, and economic uncertainties. Dalio's insights reveal a comprehensive outlook on how past trends can inform future expectations, stressing the critical nature of understanding historical cycles to navigate the challenges and opportunities that lie ahead.

10:03

🔮 A Precarious Balance: Political Divides and Economic Strategies

Here, the focus shifts to the pressing concerns of internal conflict and political polarization in the U.S., with Dalio expressing apprehensions about the upcoming elections and the potential for civil unrest. He suggests that reconciling these deep divides requires a bipartisan approach, advocating for a collective effort to enhance productivity and ensure equal opportunities. The dialogue emphasizes the necessity of a united middle ground to mitigate risks and foster stability, reflecting on the broader implications of political discord on economic policies and social harmony.

15:05

💹 Economic Insights: Debt Dynamics and Technological Impact

Dalio discusses the long-term economic implications of rising national debt and the pivotal role of technology in addressing current challenges. He warns of the consequences of unchecked debt accumulation, highlighting the relationship between debt servicing and economic expenditures. Furthermore, Dalio points out the transformative potential of technology as a key force in the new industrial age, while also noting the geopolitical risks associated with technological advancements, particularly the significant role of Taiwan in semiconductor production. This segment underscores the complexity of balancing economic growth with sustainable debt management and technological innovation.

20:05

🔍 Reflecting on a Life in Finance: Dalio's Journey and Outlook

Reflecting on his career, Ray Dalio compares the challenges of starting out in 1982 versus those facing investors in 2024. He philosophizes about the value of life's journey, emphasizing the importance of learning from mistakes and the pursuit of personal and professional growth. Dalio's reflections offer a unique perspective on the resilience and adaptability required in the ever-changing world of finance, advocating for a mindset that welcomes challenges as opportunities for development and success.

25:10

🇦🇷 Argentina's Economic Overhaul: President Milei's Bold Moves

This segment examines Argentina's ambitious economic reforms under President Javier Milei, focusing on his radical approach to addressing the country's longstanding issues with inflation and government spending. Milei's strategy includes significant government cutbacks, privatization efforts, and a controversial proposal to replace the Argentine peso with the U.S. dollar. Despite facing legislative obstacles and ongoing inflation challenges, Milei remains committed to his transformative agenda, aiming to stabilize the economy and attract international support.

30:11

📊 Navigating a Volatile Economy: The Fed's Policy Dilemma

This part delves into the complexities of the U.S. economy's response to the Federal Reserve's monetary policies, highlighted by recent job market data. Larry Summers critiques the Fed's current stance and forecasts, arguing that the neutral interest rate is significantly higher than anticipated. Summers points to various indicators, such as market conditions and the economy's robust performance, to support his argument for a more aggressive policy response to inflationary pressures. The discussion sheds light on the intricate balance between fostering economic growth and managing inflation.

35:14

🌐 Global Tensions and Economic Uncertainty: A Precarious Future

Addressing the multifaceted risks posed by international conflicts and political events, this segment underscores the challenges facing global markets. From the geopolitical strife in Taiwan and the Middle East to the unpredictable outcomes of elections worldwide, the dialogue explores the potential impact on economic stability and investor strategies. The narrative emphasizes the difficulty in managing portfolios amid such uncertainty, advocating for a cautious yet flexible approach to investment in a rapidly changing world.

40:14

🚀 Breaking Rules: From Business to Sports

This concluding segment reflects on the nature of rules, their necessity, and the consequences of breaking them across various domains, including business, politics, and sports. It highlights examples of rule-breaking that have led to both innovation and controversy, from Elon Musk's SEC troubles to Apple's anti-competitive behavior allegations. The discussion extends to the sports world, examining peculiar rules and recent incidents that challenge traditional norms, ultimately questioning the balance between adherence to rules and the pursuit of progress.

Keywords

💡Ray Dalio

Ray Dalio is a prominent investment figure and the founder of Bridgewater Associates, one of the world's largest hedge funds. His experiences and insights are a central theme in the video, focusing on his historical investment decisions and the lessons learned from them. For example, the script discusses Dalio's perspective on the 1982 debt crisis, his approach to investment risk management, and his thoughts on global economic patterns for 2024.

💡Bridgewater Associates

Bridgewater Associates is mentioned as the hedge fund founded by Ray Dalio. It is known for its significant role in the finance industry and for Dalio's investment philosophy of 'radical truth' and 'radical transparency.' The script uses Bridgewater as a backdrop to discuss Dalio's career, the development of his investment strategies, and the fund's success under his and his successors' leadership.

💡1982 Mexican sovereign debt default

The 1982 Mexican sovereign debt default is a pivotal historical event referenced in the video. Ray Dalio highlights it as a significant learning point in his career, illustrating the consequences of global financial interconnectedness and the importance of understanding debt mechanics. Dalio's mistaken prediction related to this event led to profound professional and personal revelations about risk and diversification.

💡succession

Succession in the context of the video refers to Ray Dalio's process of transferring leadership responsibilities at Bridgewater Associates to a new generation of leaders. The script delves into how Dalio prepared his successors, emphasizing the continuity of the company's culture and the importance of maintaining trust and transparency within the team.

💡2024 pivotal year

The year 2024 is discussed as a 'definitive year' with potential significant global shifts, as analyzed by Ray Dalio. The script portrays Dalio's perspective on the convergence of major forces like debt cycles, political tensions, and technological advancements that could define the economic and political landscape. This forward-looking analysis is used to connect historical patterns with future possibilities.

💡diversification

Diversification is a key investment strategy discussed by Ray Dalio. In the video, he reflects on his early career mistakes of not diversifying enough, which led to significant losses during the 1982 debt crisis. He explains how diversification helps mitigate risk without compromising return, using it as a foundational principle in developing Bridgewater's investment approach.

💡risk management

Risk management is a central theme discussed by Ray Dalio in the context of investing. The video explores his approach to managing investment risks, particularly how his early experiences shaped his strategies for balancing potential gains with the possibilities of losses, highlighting the importance of not just aiming for upsides but also protecting against downsides.

💡geopolitical risks

Geopolitical risks are highlighted as significant factors affecting global markets. The script includes discussions by various experts like Neil Ferguson, who comments on the political and economic uncertainties that might influence the year 2024, drawing parallels with historical events to underscore the impact of geopolitical dynamics on financial markets.

💡debt crisis

The term 'debt crisis' is used in the video to refer to various historical and potential future financial upheavals caused by excessive debt levels. Ray Dalio reflects on how previous crises, like the 1982 Mexican debt default, influenced global economies and uses these insights to comment on the current debt trajectories of major economies.

💡Wall Street Week

Wall Street Week is the program format in which the discussions take place. Hosted by David Westin, it features interviews and segments that provide insights into financial markets, featuring prominent figures like Ray Dalio. The program serves as a platform for exploring complex investment strategies and economic forecasts.

Highlights

Ray Dalio reflects on his transformative experience and the lessons learned from the 1982 Mexican debt crisis.

Dalio discusses the importance of diversification in investment to manage risk effectively.

The segment highlights Dalio's journey from a low point in his career to founding Bridgewater Associates and its success.

Ray Dalio talks about the transition and succession planning at Bridgewater, emphasizing the culture of radical transparency.

Dalio shares his analysis for 2024, identifying pivotal forces shaping the global economy and geopolitical landscape.

The conversation touches upon the potential for internal conflict within the United States and the importance of bipartisan cooperation.

Argentina's economic strategy under President Javier Milei, focusing on drastic reforms and the challenge of dollarization.

Larry Summers provides insights into the US job market's surprising strength and its implications for the Federal Reserve's policies.

Summers critiques the concept of a neutral interest rate and argues for its significance in guiding monetary policy.

The discussion includes potential risks and uncertainties facing the global economy, from geopolitical tensions to domestic political dynamics.

Sonanide from Franklin Templeton talks about market volatility and the investor's approach to managing uncertainty.

The program addresses the complexities of rule-breaking in various contexts, from business to politics and sports.

General Douglas MacArthur's perspective on rule-breaking is mentioned as a backdrop to the broader theme.

The episode concludes with a reflection on the NCAA's handling of women's sports, highlighting recent improvements and ongoing challenges.

David Westin wraps up the episode by drawing parallels between different instances of rule-breaking and their consequences across sectors.

Transcripts

The jobs engine continues, Tesla

falters, and Bob Iger gets his way at Disney.

This is Bloomberg Wall Street Week.

I'm David Westin.

But we start with investing legend Ray Dalio,

who has been on Wall Street week several times through the years,

but perhaps never more memorably than back in 1982,

in the wake of the Mexican sovereign debt default.

When they both appeared before Congress and on this program with Marty Zweig

and Louis Rukeyser to take a pretty firm position

on where things were headed.

Chairman Mr.

Mitchell, it's a great pleasure and a great honor to be able to appear

before you an examination with what is going wrong with our economy.

The economy is now flat, teetering on the brink of failure.

You were recently quoted in an article you said, I can say this

with absolute certainty because I know how markets work.

I can say with absolute certainty that if you look at the liquidity base

in the corporations and the world as a whole, that there's such a reduced

level of liquidity that you can't return to an era of stagflation.

And we welcome now Ray Dalio of Bridgewater back to Wall Street.

So great to have you back on.

It's great to see you somewhat younger back in 1982.

But take us back to 1982, because you've talked about that sense

as being a really transformative, a pivotal moment in your life.

Tell us what happened and what happened afterwards.

Quite. Watch me. Was I arrogant?

I look at myself now.

I couldn't have been more arrogant and I couldn't have been more wrong

and painfully wrong.

And so that's why it was a transitional moment for me,

because

I got

so broke

that my dad had to let me $4,000 to pay for my family bills.

So that was my bottom, my big bottom.

And that painful experience made me think,

how do I get all the upside without the downside of risk?

Okay.

So it's the big question that all investors have to deal with.

The amount being knocked out and the bet

that you can lose that can take you out is is your risk.

But how do you get the great upside?

And so then I had to engineer it and

I learned about diversification.

And I learned that if I can have 15 uncorrelated bets,

I can eliminate 80% of my risk without producing my return.

Every looking at this is look a bit look at what Bridgewater ended up

and the extraordinary success you just went through.

So go back to 1982.

You said you should have been more diversified

and you should have had some other points of view.

What is it you got wrong in 1982?

Exactly what was your mistake?

And could there have been somebody come along to say

at that moment where second rate you should think about that?

You haven't thought about that over there?

Yes. So

I had calculated that Mexico

that American banks had lent more money to foreign countries

than they were going to be able to pay back.

And that was going to be a debt default.

Which was true. Which was true.

Mexico defaulted and all these countries afterwards defaulted.

And I said that that debt crisis was going to cause a crisis

all the way around the world because it goes to banks and so on.

And I didn't realize the mechanics of how

the changing of a debt squeeze having a debt squeeze in those countries.

So money would not go to those countries used to go

to those countries and lending them while they were having a squeeze.

We could have a disinflation every boom.

And it produced the eighties.

My point is that these experiences in life,

if you go back and you study history and you see how history repeats,

many things never happened in your lifetime before

and you built up Bridgewater at the same time.

Having studied history, now I'm surmising you knew.

You've got to think about succession at some point.

You can't stay forever.

Now tell us how that's worked and has it succeeded?

Are you satisfied with that succession in Bridgewater?

It's so it's been so great. So I

so I did that and I

have that track record with them bringing them in as you describe.

And and Bob Prince, Greg Jensen and near

other people, all of those people are all part of that mission.

And it was also part of a culture of can we be radical truthfully

and radically transparent? Could we trust each other?

Can we go through all of that?

And so that was all the arc.

And then, of course, you asked, you know, you want to pass it along.

And so then I

with a lot of planning and with the comfort

that these great people I've worked with and I know and those great people

working together can continue to pick up where I left off,

where we left off together, and then go bring it to a higher level beyond me.

And so that's the success.

And so in about 18 months, they I turned it over to them.

They have their it's theirs.

And now I'm a mentor.

And as a mentor, we have the enjoyment,

the great pleasure of being able to brainstorm that way.

But it's theirs they owner.

And so when they I'm confident that they have the qualities

and the terrific elements to be able to bring them up, to have theirs,

that will be hopefully better than ours

because, wow, I think we had an amazing success.

And the success, it's like raising your kids, you know,

the joy that the ones who are older

feel about the next generation and seeing them succeed.

That'll be my mark of my success.

If they succeed, it's my success.

If I if they don't succeed, it's my failure.

But I.

I couldn't have a better group of people and a

greater

simpatico in terms of that element of, you know, where

we're going on the same basic approaches and the same basic culture.

I am delighted to see Reg, you will be guest staying with us

as we apply the lessons he has learned the hard way to what investors face

right now in 2024.

This is Wall Street week on Bloomberg.

This is Wall Street Week.

I'm David West and Ray Dalio Bridgewater and author of at least Principles

and the Changing World order as well as a great deal more has stayed with us.

So Ray let's take what we talked about those hard learned lessons

that you had going back to 1982 even 71 and apply them to today.

You've written a recent post about a pivotal year on the Brink 2024.

Take us through your analysis there.

There were many things that surprised me

in my life

that wouldn't have surprised me if I had studied the history,

because they didn't happen in my lifetime, but they happened many times before.

So I created a need really to when certain things are coming along

that I'm not used to seeing, to then go back

and there are five things that are now the big forces that interact together.

The way those five forces interact

with each other through history has a pattern to it.

And, you know, those interactions.

So when we look at that pattern of what's now happening

and we could look ahead with that in mind, we can see that to to

2024 is a

we are on the brink of a number of things related to that.

I can list those things, but we're on the brink.

And it becomes also somewhat of a definitive year

because of we're going to find out how we are with each other

politically and we're going to find out geopolitically a lot.

A definitive year, but not the only one.

Neil Ferguson of the Hoover Institution, for example, says

that 2024 stands out compared with the last 30 or 40 years,

but not compared to some of what came before.

If you go back maybe to the 1990s, yeah,

that period seemed pretty low risk.

The Soviet Union had collapsed and apart

from trouble in the Balkans with the breakup of Yugoslavia

and some other trouble spots like Somalia, the world

by the standards of the rest of the 20th century, was pretty peaceful.

But if you go back 50 years,

imagine we're back in 1974.

That was a much more dangerous time than we're living through now.

And I speak with some insight as I'm in the midst of writing about

that period as I write the second volume of my biography of Henry Kissinger.

So we have a tendency to judge the present by comparison with the recent past.

But the recent past was an interwar period.

The period between two cold

wars, Cold War, one that ended with the Soviet collapse.

And we didn't really notice Cold War too beginning.

But I think it really began when Xi Jinping came to power in China.

Geopolitical risk is not the only factor that may make 2024 pivotal.

We also have elections around the world, and particularly in the United States,

which raises uncertainty over economic policies, which

Neil Ferguson thinks markets are well equipped to handle.

I think we know that markets try

to adjust for domestic political risk.

We know this because there's been some great work done

in recent

years on the way that in an election year,

investors have a tendency

to make some allowance for policy uncertainty.

And the bigger the difference between the candidates in the United States,

the more uncertainty.

And we've certainly got a pretty big difference this year.

But it's the same difference

that we had back in 2020 between Donald Trump and Joe Biden.

But Ray Dalio is concerned that the election this year may go past

the policy uncertainty.

Investors have dealt with in the past

that given the disagreements, even violent disagreements over the last election,

we may face more fundamental uncertainties about the underlying political system.

And you in your writing so specifically focus on that second force

as maybe the most dominant right now going into 20/24, the potential

for internal conflict.

I mean, you even write that this is, however, is a 5050 chance of civil war

you talk about.

Is that right? 5050?

Well, so let me define the civil war,

that you have a situation where you have irreconcilable differences

so that there becomes a failure to follow the rules.

In other words, let's take January 6th incident.

Okay.

You could see a situation

in which you don't accept losing, don't accept the results.

We are getting more and more not only just in the election,

but even in decision making as the state of Texas deals

with the federal government on issues or we had sanctuary city issues

where there may not be the agreeing on that these irreconcilable

syllable differences, irreconcilable differences, for example,

on children and sexuality and education.

How should that be?

These are not compromise able issues

that greater and greater extremism is an issue.

And so when we come to, let's say, this election period,

how will we get through that and how will we work together

in an effective way, or will it be even so chaotic

and that we keep that we start fighting with each other?

So when I say we're on the brink, I think that it's safe to say

we're accurate to say that some of these questions exist

and we will find out in a year, okay, how well we can be together.

And that will how well will you be together?

Not only the conflict, but how effective can we be?

We're going to find that out over the next year.

What we need, I think, is a strong middle.

We have to be do this together

with a strong middle and a bipartisan, in my opinion,

almost the president of the United States should have a bipartisan cabinet.

In other words, draw the best and bring it together

so that there's a bipartisanship so we're not going to harm each other

and then almost do a manhattan Project

like convention of thinking about how we do an engineering

so that we raise productivity levels in a broad based way

and that we create equal opportunity and strive for equal opportunity.

I think we need to have that sort of thing because those

that polarity that has to do with wealth also has to do.

And values is something that threatens our system.

Once again, Neil Ferguson is more hopeful

that we can avoid the worst of the turmoil we experienced in 2020,

that the Constitution is constructed to deal with what we're seeing

and will once again stand us in good stead.

I am not as pessimistic as those who think

if Donald Trump is reelected, it's the end of the republic.

It's the end of the Constitution because the founders designed

the Constitution very brilliantly with the notion in mind

that somebody like Donald Trump might very well become president one day.

He conceded in the Federalist Papers you can see Alexander Hamilton,

for example, in James Madison, thought that this would likely happen

because they too studied history, they too applied history,

and they saw that

most republics came unstuck because a demagogue would become president.

And so the Constitution is very well designed to make it hard

for somebody who doesn't respect us to overthrow it.

However, the United States comes out of the election this year.

We will have to confront the large and growing deficit, which will mean

breaking the pattern of simply amassing ever greater debt.

There are two constraints to debt.

No, you can't

get deeper and deeper and deeper in debt

and spend without consequences, because when you borrow, you have to pay back.

And then the question is, do you pay back in hard money

or do you pay back in printed cheaper money?

So what you see these two factors.

First is the debt service squeezing

expenditures, because as debt rises

and interest rates rise, debt service

as a percentage of your spending rises

and that squeezes out other types of spending.

So that's a mechanical thing and it works that way.

And where we can see it happening as we project over

the next, you know, five and ten years,

it becomes more and more apparent.

I won't get into all that.

But the second is that as that becomes more apparent

and then the you have a situation

where holders of the debt may not want to hold the debt

because one man's debts or another man's assets

and so if they are holding

debt assets that either they feel cannot be well paid back

or will be monetized, you don't want to hold that.

In addition to the economic cycle, external conflict and internal conflict,

Ray Dalio focuses on the potential of technology

not just to disrupt but to address some of the challenges we face.

Man's inventiveness and new technologies

that they create is of is the fifth force,

and that force is now more powerful than it has really been before.

It's a new industrial age, but even the promise of technology

takes us back to the geopolitical risk Ray Dalio is concerned about,

particularly as Neil Ferguson points out, given the central role of Taiwan

in the production of the chips needed for AI,

the economic implications of what would be the the Taiwan

Semiconductor crisis would be much, much larger

than the economic implications of the Cuban Missile Crisis in 1962.

Now, that was a very dangerous moment in Cold War one,

because it was the closest we came to World War Three.

But what does Cuba export?

That's right, David. Cigars.

Now, some people like cigars, but economically they're much

less important than high end semiconductors are today.

So this would be a kind of Cuban missile crisis with huge geopolitical risk,

but also with huge economic risk.

Even before a shot was fired, the news that there was a Taiwan

crisis would cause, I think, major economic disruption.

You're famous for talking in long

term cycles and short term cycles, and they're very powerful.

And as you say, based on the changing world order,

you go back hundreds of years to show where the patterns are over time.

What is the role of the individual decision maker in that world?

I mean,

we spent a lot of time here at Bloomberg, for example,

focused on the chair of the Federal Reserve, what Jay Powell thinks, what he

where he goes to lunch, you know, what he what he's saying at any given moment.

How much difference can Jay Powell make,

given that long term cycle, that history?

Almost four decades.

You always have to view the individual

within the context of the circumstances they face.

A different type of individual is require

for different types of circumstances in history.

And you always have to look at the long term versus the short term

because over the short term

you're going to have these big swings and so on.

But over the longer term, if a swing goes too far in one direction,

there's going to be the necessity, the compelling obvious necessity

to go in the other direction.

So a good example would be

giving him

the money free when you had a negative real interest rate

for bonds of 1.7% and no interest, so free, no interest

at the same time as you had principle only loans,

so so

that you didn't have to pay principals back principal payments.

You basically had free money, created

a an excessive bubble

that then created the basis of the next cycle.

Right. And then tightening the monetary policy.

Right.

Understanding everything that you do about the mechanics,

as you put it, of financial markets as well as debt.

And the way the economy really works.

Go back to 1982.

If you had it to do over again, would you rather be Ray Dalio

starting at 1982 or Ray Dalio was starting out in 2024,

oh 82 before 82?

I think life is this is life.

Life is a journey in which you really don't know anything

you have intrinsic to your nature and you have your pull to something

and you go after it.

And then it's the power of mistakes and learning from mistakes.

I have a principle.

Pain plus reflection equals progress.

It's like a video game.

You have your goals and then you make your mistakes

and then you figure you have your learning and that gives you learning points.

And then you keep going on that.

That journey include in the mistakes would be

is so much better than to have the I got it right.

I know everything right.

And there's no such adventure, no such journey.

No I'd much rather have start out and have that journey where it's been.

Such a pleasure to have you here. Thank you so much for doing this.

Oh, thank you for having me.

Many thanks to Ray Dalio of Bridgewater.

Coming up, we go to Argentina

and hear from President Melaye about his economic plans.

That's next.

On Wall Street week on Bloomberg.

This is Wall Street Week.

I'm David Westin.

After years of economic struggles, Argentina's new president, Javier Milei,

is administering shock therapy than he promised when he campaigned for his job.

Bloomberg International policy and economics correspondent Michael McKee

lays out the issues for us.

Argentina has long been a symbol of economic mismanagement.

A legacy of government overspending has led to recurring

bouts of high inflation and debt defaults.

Javier Milei came to office in December promising a radical transformation.

His plans include massively slashing government spending,

privatizing state owned businesses, eliminating the central bank

and most controversially, replacing the Argentine peso with the US dollar.

The dollar would, he said, solve the inflation problem

because the government couldn't spend more dollars than it has.

But Argentina doesn't have enough dollars in its foreign exchange

holdings to make it work right now.

Adopting it would lead to a deep recession and tie Argentina's

economy to the Federal Reserve.

While the recession may indeed be in the cards,

these plans aren't working out as he'd hoped.

The opposition controlled Argentine legislature has blocked

many of the changes he wants to make.

Inflation remains over 20% a month or almost 300% a year.

So while many cut the pesos value in half, dollarization has been put on hold.

The Milei plan did convince the International Monetary Fund to offer

$4.7 billion in loans to pay its foreign exchange debts.

And the stock market is up 20% since he took office.

Whether Milei's plans can succeed will depend on keeping that optimism going.

Getting the economy going and bringing down inflation.

Enough to build up dollar reserves.

He says he's not giving up on dollarization, but insists his program

needs time until the money stops rolling out in all directions.

David, this week our editor in chief, John Micklethwait, traveled to Buenos Aires

for an in-depth interview with President Milei about what he hopes to accomplish.

So first, you need to reform the financial system,

which is what we are working on.

And in that context, it's not just that the exchange rate is flexible,

but also the money amount never varies.

And as the economy recovers and grows and the money demand increases,

as the amount of pesos will already be a given

indigenously, we'll have a dollarization process

relating to the monetization of by individuals in the economy.

And I know that you are doing this thing

with the floating exchange rate where you've been deprecating

or depreciating the official rate by 2% each month.

And the IMF and various people have said, you know, you must speed up,

you must go quicker.

Will you proceed?

I know you are doing these other things, but will you speed up

that rate of depreciation? No,

no, because it makes no sense

and it makes no sense to do that.

That was Argentine President Milei speaking with Bloomberg

editor in chief John Micklethwait.

Coming up, our special contributor Larry Summers

takes us through the US jobs numbers out on Friday.

This was a hot report that suggested that if anything,

the economy is very.

That's next.

On Wall Street week on Bloomberg.

This is Wall Street Week.

I'm David Westin, and we're joined once again

by a very special contributor here on Wall Street Week.

He is Larry Summers of Harvard. So, Larry, welcome back.

Great to have you here, particularly this week

when we got those jobs numbers, which surprised the upside.

What did you make of them?

This was a hot report.

Jobs above 300,000 upwards, revision,

strong household survey hours

up, payrolls up at nearly a 10% annual

rate.

This was a hot report that suggested that, if anything,

the economy is really accelerating.

This is very different from what lots of people

most people, I think, were expecting and fits the thesis

that the neutral rate is much higher than people supposed

and tight money is much less potent than people supposed.

So let's talk about the neutral rate.

You've said before that the Fed should have

at least some idea, the neutral choice to know whether to stick to or not.

We heard from Chair Powell this week speaking at Stanford,

where he said, yes, we are restrictive in our policy,

and yet he quite explicitly said he doesn't need to worry

about where the neutral rate is for policy going forward.

So all those are very important things, but they're not things

that affect the longer run potential output in the United States.

So honestly, though, so the question of what will be the the,

you know, equilibrium interest rate,

the neutral interest rate going forward doesn't really matter for policy today,

saying we don't need to know what the neutral rate is, is like saying

you should drive your car on field without looking at the speedometer.

It is just a mistake.

You cannot know.

And look, I don't know what the chairman said

in full context, and I want to be fair,

but there's no way to judge

what policy is without knowing

what would be a neutral policy.

My view is that the evidence is overwhelming that the neutral rate

is far higher than the two and a half percent,

2.6% that the Fed talks about.

That evidence comes from four places.

First.

We have high interest rates and we have an economy

that is, if anything, growing faster than its long run

potential, creating jobs as fast

or faster than natural growth in the labor force.

Even allowing for immigration.

Second, we have an economy with financial conditions

that are extremely loose, that are actually looser than they were

before the Fed started the whole tightening process.

If you look at credit spreads, you look at the stock market

suggesting that in the fullness of it all financial conditions

actually haven't been tightened in an appreciable way.

Third, if you look at the market's estimate

of the long run neutral rate,

as formed by looking at longer term forward

interest rates, that neutral rate

is comfortably above 4%.

Fourth, if you look at the fundamental determinants of the neutral rate,

we have big surges in budget deficits that,

if anything, look to get worse, given the political process.

We have big changes in resilience, investment

in green, investment in new investment in

data centers, along with globalization,

which may limit capital inflows into our country.

So whether you look at the fundamentals, you look at market estimates,

you look at financial conditions, or you look at the current strength

of the economy, it seems to me the evidence is overwhelming

that the neutral rate is far higher than the Fed supposes.

And so cutting

rates and hitting the accelerator

in an economy, creating jobs at more

at a pace of more than 3 million jobs

a year, with payrolls growing at rates

consistent with inflation far above

2% with a need to hoard ammunition

because we're not 100% certain we're past

the every financial problem

in the banking system and with potential supply shocks

coming down the road, things could change.

Things are always subject to rapid change.

So I don't want to make a prescription for monetary policy in June.

But on current facts and current trends,

I think it would be a inappropriate act

to cut rates in June,

and it is deeply troubling to me that the Fed

somehow thinks that fidelity to its previous forward

guidance and doctrine it believes some time ago

is a more important thing than trying

to gauge the neutral rate on an ongoing

basis.

There's a lot of talk right now about what we're seeing in the labor market

here, actually is an increase in immigration.

And I'm not necessarily even talking about the people

coming across the southern border illegally.

I'm talking about legal immigration, which has increased rather significantly

under the Biden administration.

How is that affecting your model for economic growth

in the United States?

Look, that has meant

more labor force

growth, which has meant more supply.

To the extent that those immigrants are earning

and increasing the capacity of the economy

and remitting the money back

back to their families, where they came from, it's a supply increase

without a concomitant demand increase and therefore it's deflationary.

But that's what's been baked in

and is going to happen and has been happening.

And so the question for movements in inflation

is, is that trend going to accelerate

or is it going to decelerate over time?

As I look at the attitude

which I find ugly and unattractive

of a potential Trump administration towards immigration,

if I look at the political pressures on the Biden administration,

seems to me much more likely that immigration flows are going to decrease

going forward then that they're going to increase going forward.

And that's just one of the ways in which globalization

may contribute to higher inflation.

One of the things you're known for is the peripheral vision.

The other things you're looking at that may be worrying you.

What other things are worrying you that are out there right now?

David I'm nervous about oil prices

given what's happening in the Middle East

and given the increased possibility

that Iran is going to be drawn

into this conflict,

given that we've got the coming of summer

combined with higher wholesale prices

projected, I think there's a real shot that we will have

gasoline prices back to having a four handle.

And I think the last thing is that if I'm right, I'm not convinced

that duration mismatches in the banking system

have been fully addressed

and the combination of duration

mismatches plus

hot money on the depositor

side, plus problems in commercial real estate

means that we could have some real financial

distress at some point.

Again, I think it's odds off, but it's a risk.

And that's another reason why I think the Fed should be hoarding

its ammunition, not pumping up

bubbles with easy money

at a time of rapid growth and epically loose financial conditions.

Larry, the Treasury secretary, Janet Yellen, is in China

this week talking to them about trade issues.

There's a lot of concern about what people I think The Wall Street

Journal may have coined it actually, the China shock to point out,

because China's built up an awful lot of capacity through a lot of subsidies

and there's a concern about really flooding the markets

with really cheap goods.

How could that affect the global economy and the US economy?

We've talked about this before, David.

Secular stagnation has crossed the Pacific

and China has a chronic excess of savings over investment

and they have to do something about that the right way for them to have dealt with

it was to have stimulated domestic spending.

But that does not fit in, particularly domestic

household consumption, which is long suppressed in China.

But that doesn't fit with Chairman

Xi's ideological predilections.

And so looks like they're trying to do it

by building manufacturing capacity

that runs the risk of everything

glut driven by Chinese subsidies.

And I think that's runs the risk of

reawakening very substantial

economic tensions between China

and the rest of the world.

What they focus on in China

is that this is all smaller in terms of a trade surplus

relative to the Chinese economy than it was at the time of the first China

shock during the during the decade of the naught.

What that misses is that the Chinese economy is much larger

relative to the global economy than it was 15 years ago.

And so a given shock to the Chinese

economy is potentially much bigger

for the global economy.

So I think this is likely to be

substantially disruptive.

My guess is that we're going to see

considerably more protection

than most people are looking for.

And for the medium term, I don't think that's going

to be good for the inflation outlook or good

for efficiency of production in the global economy

or good for harmony

among nations.

And the reports coming out about

China, cyber

challenges, deep fakes, intrusions

into our data systems

hacking are troubling,

and I don't want to rush to judgment because I don't know

exactly what the facts are,

what the what the facts are.

But as I've said to my Chinese friends,

as someone who in general has worked to promote comedy,

who thinks truculence is an attitude,

not a strategy for the United States,

the Chinese often seem like they're

doing their very best to make it

maximally difficult to support

common tea and to reject Cold War type mentalities.

Larry, thank you so much for being here.

It's Larry Summers of Harvard,

our very special contributor here on Wall Street Week.

Coming up, we welcome back.

So now the side of Franklin Templeton to take us through the week in the markets.

That's next on Wall Street, Week on Bloomberg.

This is Wall Street week.

I'm David West.

And equity markets surged on Friday after those strong jobs numbers.

But for the week overall, the S&P 500 was down by just under 1%, ending at 5204.

That is still, though, 100 points over the median estimate of our Bloomberg hours.

The Nasdaq was off 8/10 of a percent.

Bonds sold off throughout the week

with the yield on the ten year up 20 basis points to end at 4.4%.

To take us through this week in the markets we welcome back now.

So now decide Franklin Templeton, CIO for fixed income system now.

Great to have you back with us.

So what should investors take away from this week in the markets?

Well, you know, it's a part of what investors

need to take away is it's going to stay volatile for a while longer.

And that's really clear.

I think bond markets have started absorbing

the fact that the Fed doesn't need to rush in cutting rates.

That's also quite clear.

Having said all of this, next week, we might get good inflation

prints and you might get a 15 basis point rally.

The problem, as I see it, is that the Fed has been very clear,

Jay Powell has been really clear that he would like to be able to cut.

I think if he hadn't been in a position to cut already, he would have cut.

The data has not cooperated.

And so essentially, the there is a little bit of whipsaw action

happening right now in in the bond markets, certainly, and the equity market.

No comment.

No comment.

Let's see what's going on there at all.

Just off to the races.

Well, as you say, whipsaw, whipsaw, call the volatility.

There's a lot of risks out there that are hard to quantify.

We spent a lot of the program actually talking about a variety of risks,

not just economic, but also geopolitical and political.

As an investor, when you put together a portfolio, how do you provide

the sort of risks that we're seeing right now out there?

So, you know, the reality is I couldn't agree more with your earlier guests.

We are, you know, any one of these series of risks.

China and Taiwan,

Russia, Ukraine, the Middle East

and the American elections, of course, and the other elections

we're going to see around the world,

any one of these would have actually been somewhat significant, all of them

together, of course, increases in in terms of the uncertainty,

it increases in it increases the potential impact, no doubt.

The problem is you can't actually manage your portfolio

to one of these risks because how do you actually handicap

any one of these as being likely you just if anything

disastrous happened in the Middle East or with Russia or China?

Clearly, what you'd want to be in is completely or only entirely safe.

Maybe you'd want gold.

I don't know.

Do That's not how you manage your portfolio, right?

So I think for us, what we've done, you know,

David, we we were very short for a long time with U.S.

Treasuries.

We've moved to a neutral position and we are hesitant,

I'd say, to go overly long despite ten years

being where they are right now, in part because the economy is pretty strong.

And I'm not sure that the Fed's going to be able to cut as quickly

as they would like to cut.

So I would tend to agree entirely with Larry.

I've been saying September now for a while as being the right time for the Fed

to start thinking about this.

I also think that the overall number of cuts is not going to be quite as high

as markets would like, leading us to that neutral rate of about 4%.

So so what does it tell us about duration?

I mean, you have cash on the one extreme, you have longer duration on the other.

Where do you go?

Are you moving toward more durations now?

So, you know, what I'd say is what I would advise people to do.

You know, cash has worked incredibly well.

How can how can we how can we deny it?

You know, it's paying really well.

However, it is important to start thinking about increasing that duration.

It's not to get massive returns in fixed income.

That's what I'm calling for.

We are neutral and talking about moving from overnight

and cash towards ultra short and then slowly dipping into low duration

and beginning to move out on that duration spectrum, the Fed will cut.

The one thing I would say, though, is this is not a series of cuts

leading to a multi year rally in yields.

I think we are in a different place.

If you look at where the fiscal deficit is, you look at the fact

that inflation is stickier than any of us would like.

Wages are pretty sticky.

You've got to accept

that fixed income is not going to give you equity like returns.

So now it's so great always to have you with us. Thank you.

That's another side of Franklin Templeton.

Coming up, if rules are meant to be broken,

why is everyone getting in so much trouble for breaking them?

This is Wall Street week on Bloomberg.

Finally, one more thought.

Rules are mostly made to be broken and are too often for the lazy to hide behind.

So said General Douglas MacArthur during the Korean War,

when he was disobeying a direct order from President Truman.

He broke the rules and the president promptly sacked him.

There are times when all of us

have to make tough decisions about following the rules.

I got crosswise of a trial judge very early in my career

when I deliberately ignored his instruction

not to move a controversial document into evidence.

It was the only way to make a record for appeal.

And so I did it anyway.

I remember Judge Barnes, his name was leaning over the bench,

raising his voice and reaming me out for what seemed like forever.

On the way out of the courtroom,

a senior litigation partner from another law firm put his arm around

my shoulders and said, You don't win cases by making friends of judges.

And I certainly didn't.

The business world is full of examples of people either breaking the rules

or coming so close that there's nowhere for them to hide.

Elon Musk notoriously kept

tweeting about Tesla, which got him in trouble with the SEC.

All of these allegations are very pointed.

They're very direct in alleging that he committed

actions that at least an SEC, he feels were

against against regulations and potentially against the law.

Apple has been accused of breaking the rules

against anti-competitive behavior any number of times.

Most recently by the attorney general of the United States.

We allege that Apple has employed a strategy that relies on exclusionary,

anti-competitive conduct that hurts both consumers and developers.

For consumers, that has meant fewer choices, higher prices and fees,

lower quality smartphones, apps and accessories,

and less innovation from Apple and its competitors.

And there are some so-called rules that we observe in the breach

and may be happy doing it.

Like the Taylor rule

that pointed to much higher interest rates than any of us wanted.

The Taylor rule, for example, a guideline that central banks around the world

have used to guide interest rate policy would have suggested

at the outset of this you needed short term interest rates of nine or 10%.

We didn't get there.

Sometimes it seems like General MacArthur had some of our political leaders in mind

when he talked about breaking rules from a certain short term

congressman from Queens who simply made up his qualifications for the job.

It's always, frankly, very sad when a public official that has

that is

responsible for properly stewarding the public trust betrays that trust.

It is absolutely imperative that George Santos resign from his seat.

It is it is extremely important for the integrity of this body to a long time.

New Jersey Senator who stands accused of taking bribes.

The senator and his wife accepted hundreds of thousands of dollars of bribes

in exchange for Senator Menendez using his power and influence to protect

and to enrich those businessmen and to benefit the government of Egypt.

And then there's the arcane world of sports rules.

We couldn't play these games if we didn't have rules to follow.

But does the NFL really need a rule that ties performance payments

at the end of the year to where a player was picked in the draft?

San Francisco 49 year quarterback Brock Purdy probably doesn't think so.

This week we learned that he came on 24th on that bonus list

because as we all know, he was picked dead last his year,

which meant that he already made about $50 million

less last year than his counterpart in the Super Bowl, Patrick Mahomes.

In the world of basketball, we certainly need rules about where we put

that three point line, which somehow got lost in the Portland,

Oregon Arena or several of the NCAA women's basketball games were played

just before game time between Texas and North Carolina State.

The coaches learned that the three point line was closer

to the basket at one end of the court than at the other.

Faced with either playing the game with the wrong lines

or postponing the game, the coaches decided to play on with N.C.

State winning to go on to the Final Four.

It was a real embarrassment for the NCAA, but nothing like what it confronted

three years ago when a player went on social media showing how pathetic

the weight room provided to women

athletes in the tournament was compared to their male counterparts.

Where the men get an extensive facility with weight machines, squat racks

and benches.

The women were given just a single stand of dumbbells, causing a public outrage,

an NCAA apology and promises of future parity for men and women.

This year, women's basketball got a different sort of parity when Iowa

Hawkeye Guard Caitlin Clark passed the men's all time scoring record.

Maybe this time the NCAA will learn its lesson

about paying attention to the women's side of the tournament.

Or then again, it might just need another rule about that.

That does it for this episode of Wall Street Week.

I'm David West and this is Bloomberg. See you next week.