The Collapse That Will Change A Generation - Ray Dalio's Warning For 2025 & World War 3 Odds

You 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 populists 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 are 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 it Do you want people to look at this at an individual level or at a country level? Well, you can have both. I want them to look at it as the country, but the country's nothing more than the aggregate of the people. Mhm. 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 and 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 bond 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 stagflation. 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 on is the system threatened? Because history's 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 disorder. And it can produces 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 inside 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 they you can't be moderate. You have to pick a side and fight. And so, you see this in the French Revolution. There were moderates in the early part of it that recognizing that there were problems and and wanting to work together. The moderates got guillotine. 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 um moderates are dropping out of uh choosing not to run for re-election. 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 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 uh 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 more difficult. So though 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 what? 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 competition. 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. So, 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's 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 5 to 10 years and that uh a major conflict with China at 35% in the next 10 years. And you said, "Look, it's just 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 I would say that 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. The Do you mind ballparking me if it if we're not at 30, are we 31? Are we 40? Yeah, 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 bringing all this 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 would be neutral countries. And so that part is developing. Um 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 U on the world order um the developments in the Ukraine maybe I should put those in perspective. You like me to do that? Please, absolutely. Um Okay. Um There is a a very close relationship 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 way as the United States, there's always a geographic region as an area of influence. Uh the United States in the area 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 geopolitics 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 compa- 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 in this competition. With China or with Russia? With China. Well, we're not in a shooting war with China. We are in a shooting war of sorts in with Russia and the Ukraine. We're providing arms, and so they're shooting, and so there's a military war going on. And I and we're in it in our way. So, we're at those particular 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 cur 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 as 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 now right now debt is dollars. A- 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 is 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, in terms of how this will transpire, I think there are there are three big questions that we're going to learn about get answers to pretty quickly. Um the first is does Putin and Russia win or lose? Um I'll describe win as what he wanted at the outset, which is win for Russia would be to have the Ukraine be some non-threatening position such as a neutrality guaranteed neutrality. And for Russia to have control over Eastern provinces. And for Russia not to be 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 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's the world has come to the position that a number of countries have had 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 dominant sanctions power. So if ahead of China? Um the United States in the ability to influence have economic sanctions is much ahead because it controls the world's reserve currency. That's our 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 dollar sanctions power, we'll see how powerful it is. If it isn't very powerful, that's going to be a problem. Um because Because others will perceive our weakness. Well, and they'll also realize then um um 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 prices and the like. But um while Russia is throwing in military we are throwing in sanctions. And these sanctions don't cause cost lives. Um it's not a military war. Uh so we're fighting it with sanctions and they're fighting it with 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 which you know, there are in wars typically acts axis and next 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 who is trading with the other party. Who got Um Russia 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. Hm. 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 1/2% over the last um inflation is 8 and 1/2% and they receive virtually no interest rate in cash and so there was an 8 and 1/2% 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 uh 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 natures? Are 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 punchline is going to be. Yeah. Um I think the punchline is if you take a look at it, uh it's it's simple. It's uh like a regular bond except its payments are linked to the inflation. So, they compensate you for inflation. So, that is this a government bond? Yeah, government bond. Okay. And there are some tax advantages to them, too. So, look into them. Okay. 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 unb- unbelievable and unlimited ability to print the money it gives you, um it would favor inflation-indexed bonds. Um and it can be other assets. You know, some people would say something in terms of cryptocurrencies or might be those other assets. Um I think on crypto? So, crypto is a huge part of my portfolio. I think you'd be mortified to see just how much so, but yeah, what are your thoughts on crypto? Um I think I think that too much people pay too much attention to one at at the extreme of the other, you know? That either somebody's all crypto or they're all gold or they're all something. And I I believe that that's a challenge. I think that crypto, like gold, is not a productivity-earning asset and it can be controlled by governments in lots of ways. It's been outlawed in a number of places and it also can be monitored. The privacy element is not secure from governments doing monitoring and and the size of crypto is about the size of Microsoft. You know, it's all crypto combined and so to be overly concentrated in it in my opinion is a mistake. But to have some of it is a good is a good thing. So the question is always what amount of it. So that's 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 but having some of it. So the and other things I would say is that geographical location is important. In other words, not just the wall in US and US dollar not assets. I would say that the three things that that again I'm looking at if I go down countries is first are they earning more than they're spending? Do they have a good income statement and balance sheet? This is going to be very important in the period of head ahead because the amount of credit that's going to be available to bridge the gap between spending and earning cash flows and so on is going to be a quite narrower. So a lot of companies even that were able to raise cash and not have good cash flow because of maybe growth expectations in the future will find it more difficult. That'll be true for individuals. It'll be true for 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 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 work better than parts other parts of the United States. Meaning like local government bonds or something like that? Well, I'm I'm now 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's becoming more dangerous. Chicago's becoming more dangerous. Places Chica- 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 in within the United States and differences from the United States to 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, um, 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 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 you know, and the third element is um so 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 they're likely to be out of a war? You know, you don't want to be in a war. So, and those places investing wise, history has shown um do worse because they have to spend more money, there's more problems, more pain that's being exchanged. Neutral countries in wars 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 inflation-protected assets. And I would want to diversify between locations, countries 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.