Ray Dalio – Inflation Is Coming, Do This Now!

Speaker 1: Well, pandemics come along occasionally, but anything that’s important, say the three most important circumstances that existed before we had the downturn, which was caused by a pandemic, but any downturn would have produced the same results.

The three most important things that are happening in the world now are that we’re at the end late in a long term debt cycle in which central banks cannot control monetary policy the same way they can’t lower interest rates. They can’t get money to a lot of people who need the money in the traditional way. So just like in 1929 to 1932, there was a debt crisis that came as a result of an excessive amount of debt in the boom years. And then when you have that in 1932, we had zero interest rates. And when they had when they hit zero interest rates in 30 to like in 2008, central bank prints money and buys financial assets. And so what happens in these cycles is that normally central banks can stimulate the economy by lowering interest rates. But when you hit zero interest rates, that doesn’t work. So the last time it hits zero interest rates was 1932. And what they did in 1932 was the same thing they did in 2008, and that is that the central banks prints a lot of money and buys government bonds. And so we’re doing that now. The important thing to know about this crisis and that had happened in the 1930s is that in order to get the checks that we’re needing, you know, a lot of people, a lot of companies need checks. Now, where will those those checks come from? So they’ll be checks from the government with the type of support we’re going to receive is two types of support.

Where’s this all this money come from so that the government, when they say I’m going to pay more for unemployment insurance or I’m going to give you a loan for a small business or so on, they wear that. They get the money from well, they either tax it, but if they tax it, that’s bad. So the government, they can borrow it. That’s what a deficit is. The government runs a deficit. And then the question is, who’s going to borrow it when everybody’s financially strapped? And the Federal Reserve says they have the power to print money and they will say, I will borrow it and I will lend you the money. So the Federal Reserve is lending the money and it is also lending others the money. The important thing to know is that all that we think about money is not limited in any way. Like there’s a certain amount of money out there. It’s all make believe, it’s all digital. So they could change the digits and then they can create money. Now, that’s an important consideration because if they can create money so easily, how do we know it’s going to be a value when they’re creating a lot of it? That’s one of the considerations that are being faced today. But the main thing to know about this stepping back for the big picture is that every individual, every company and every government has a certain amount of money that comes in in the form of income, a certain amount of expenses and then a certain amount of savings. So you do individually and every all your listeners do. And it works the same way for everyone so that if their income falls and then less to be less than their expenditures, they’re in trouble unless they have a good savings and then they go to the savings.

So all around the world, there are lots of entities that are in trouble in that way. So the government, the two parts of the government, the U.S. government to parts want to give checks to people. Now, it’s difficult to decide who gets it, who doesn’t get it. But if they don’t give checks to people or to companies, those will go bankrupt because they may not have enough savings. J. Crew went bankrupt, just went bankrupt, and you’ll see others go bankrupt because they don’t have enough. And so when they go bankrupt, and that’s a whole other process, so. In order to prevent that, they have to give money and so they print money. We call it print. There’s not even paper much. It’s digitally create money and then that comes in the form of loans. So what we’re going through is the same process as happened in the nineteen thirty to 1945 period. So as I was saying, there are three important things. That is one. The second is large wealth gap. Third is that we have a rising power in the form of China are emerging to compete or challenge the United States leadership. So when you have these three things together, it’s it’s a challenging mix. And then it’s happened repeatedly. Less effective monetary and credit system makes it they have to print a lot of money, can threaten the value of money. Second, when you have a large wealth gap and you have an economic downturn. People are more inclined to have conflict. So how that’s dealt with, we’re going to reconsider how we’re going to that wealth will be divided and that’ll change taxes and relationships. And then the third is we’re no longer in a world order where the United States is the only dominant power. These three things existed in the most important things existed. And then we had the downturn in terms in terms of the virus. So you could think of the virus like being a tsunami that came. And if it went and if we had not no more of it, it still would have left a lot of economic damage. So you in all different ways. So the economic damage has to be understood and dealt with.

Speaker 2: But for the average person who doesn’t understand a lot of this, like when you look at this historical perspective, I find a certain level of comfort in that because of the notion of another one of these. Right. So we’ve seen this before. Maybe we haven’t in our lifetime, but historically people have. So what can the average person take away from that? They don’t have bonds. They don’t think like that. They may not even understand what their 401k is or they may not even have a 401k. So how do they navigate this? Is it just head down, do your best to weather the storm, or is there actually something that they can learn from the historical perspective and move on now to make this easier for them?

Speaker 1: It’s the same for every individual, same for every company saying if you understand this, then you understand there. Well, there are three things. The first is look at your income, your expenses and your savings and then do a stress test so that you get yourself secure if you were to lose your income or if the income were to fall beyond a certain level and you play that out, maybe that means you go get unemployment insurance or whatever. How long can you live in an acceptable lifestyle and do you have a savings that is adequate for that? OK, so what you do is you calculate if I lived in a simpler lifestyle and I had this amount of earnings, how many months, how many months or years could I live acceptably?

Speaker 3: So I want to break this down very quickly and simply to make sure you all get what Dalio is talking about. OK, so what’s happening currently? As you well know, we are facing tough times when it comes to the economy. Both companies and people are struggling. People have lost their jobs. A lot of businesses are getting less revenue and expenses still have to be paid. This means both groups have recently needed a lot of money. That’s where the government steps in and says, no worries, we’re going to give out stimulus checks and other types of money to make sure that you guys are OK. But the question is, where does this money come from? It comes from the Fed who prints a lot of money. And by Prince, I mean, it’s all digitally done. But what happens when you print a lot of money while it causes inflation? You can’t expect to put so much more money in the system and expect the currency to be worth the same as it was before. So the question becomes, how do we prepare for this particular environments as well? As Dalio pointed out, it comes down to three simple things income, expenses and savings. What can we do with income while we try and maximize it and securites? We do this by obtaining more skills and working hard expenses. While that’s obvious, we just try and minimize those. Instead of buying Starbucks, make your coffee at home instead of avocado on toast, maybe peanut butter, you get the point. Lastly, savings. What do we do with that? Well, Dalio always recommends a bit of gold, five to 10 percent of the portfolio. A gold is known as a great stock market hedge and often moves higher as economic conditions get worse. Also, Bonds Dalio is a big fan of them. You know, if you own government ones that also known as risk free, another thing is diversifying across countries. Dalio owns a couple of ETFs that own stocks around the world. This way you’re spreading your risk and businesses across the globe. That’s a smart strategy and the last thing we can mention is commodities.

There’s something else you might want to spread your portfolio and then needed in this world, and they’ll be needed no matter what economic condition. So I do hope that helped you guys. I hope that clarified things well, because it’s so important that we prepare now. Well, we can.

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