Host:
Earlier this year, legendary investorDaliodeclared that the global order has collapsed. Since he issued that warning, U.S. national debt has surpassed $39 trillion, reaching a record high. We are also at war with Iran, which has already cost at least $25 billion and caused oil prices to soar. Furthermore, the latest forecasts indicate that tariffs are expected to add another $1 trillion to the fiscal deficit over the next 10 years. Overall, the deficit continues to widen, inflation appears to be rising, and the Federal Reserve is forced to remain on hold during this crucial period of transition. Therefore, we wanted to delve deeper into these dynamics, and so we decided to bring back this prominent figure—Dalio. He is a global macro investor, founder of Bridgewater Associates, and a New York Times bestselling author. Host: Dalio, thank you very much for joining us again. I think we should start with your core investment theme, namely the "Greater Cycle," and the five core forces that you have long warned about driving the Greater Cycle. Could you please elaborate for us again: What is a major cycle? And what are the five major forces driving the market? Dalio: Okay, thank you for your question. I believe it's very important to step back from the mundane details of daily life and examine these cycles and orders, so I appreciate you asking this question. The orders we are discussing are composed of five core forces: First, the monetary order; Second, the debt cycle. Third, the internal political and social order of the state; Fourth, the international geopolitical order; Fifth, the international geopolitical order. Natural forces—Throughout history, droughts, floods, and plagues have often caused greater destruction and claimed more lives than wars; this factor cannot be ignored. And fifthly, technology. These five forces operate together and evolve in a cyclical manner. Dalio: Let's start with the first point—the debt cycle. I will describe it in detail, and I hope everyone will seriously consider the reasons behind it. It is precisely based on my understanding of this pattern that I successfully predicted major events such as the 2008 financial crisis and the European debt crisis at the macro level, and thus achieved considerable success. Its operating mechanism is as follows: the credit system acts like a cyclical system, delivering nutrients—purchasing power—to all parts of the economy. If borrowed money is used to increase productivity and generate income, then debt repayment capacity is created. You repay on time, profits grow, and the system is healthy. However, things change once debt and debt repayment expenditures rise consistently relative to income. Debt repayments act like a **"patch" in the cyclical system**, squeezing out normal consumer spending. In other words, after deducting debt repayments from income, the remaining disposable income decreases. This compresses consumption. At the same time, there is also a supply and demand problem. Currently, we have accumulated a large amount of debt—one person's debt is another person's asset. Those who hold these assets expect good returns, but to do so, you must constantly sell more assets. When there is a need for large-scale selling, a supply and demand imbalance occurs. When both of these situations occur simultaneously, it's like large patches piling up in a system, and a crisis ensues. Dalio: The third point is the world order—that is, how nations interact with each other. Throughout history, major conflicts and wars have always existed, and new orders often emerge afterward. For example, in 1945, the United States established a new monetary order and a new world order. It was a multilateral world order, its design drawing to some extent on the American concept of representative democracy, giving rise to the United Nations and various multilateral institutions—can you imagine, including the International Court of Justice, the World Bank, the World Trade Organization, and the World Health Organization—all products of that era? Of course, this system wasn't entirely naive, because simply having voting mechanisms without enforcement is clearly ineffective, and the dominant country wouldn't accept it. This leads to the third point. Today, we have transformed the world order into one similar to that before 1945—a world order where **might makes right**. Fourthly, as I have already mentioned—natural forces. Dalio: Of course, the fifth point is technology, and its impact is equally profound. Technology can greatly improve productivity, and if that productivity can generate income, it can be a huge help. Similarly, the application of artificial intelligence and other technologies can be used for war or other purposes. Dalio: This is the framework of the entire big cycle. When we examine the present, we can see that these forces are operating simultaneously. We should not view any one of them in isolation. For example, if we focus only on the war with Iran, we might overlook a larger context—this conflict, while important, is only one component of a larger confrontation. In other words, different camps have now formed in the world, with profound conflicts and gamesmanship among them. The implications of this are extremely far-reaching. Moderator: This is very helpful because for each force, there are very clear examples to think of. Regarding the first force, the first thing that comes to mind is, as I said, the U.S. national debt has exceeded $39 trillion, a record high. And our fiscal deficit this year, at least in the first half of this fiscal year, has already reached $1.3 trillion. So from a debt perspective, our trajectory is very clear. Regarding domestic order, most people can clearly see the growing polarization between the left and right, and between the rich and the poor. Recently, we've seen some rather disturbing attacks against corporate executives, which I think at least to some extent indicates that social sentiment in the United States is beginning to fracture and disintegrate. On the international level, we have a conflict with Iran, which occurred after the Davos Forum—a forum where most leaders gathered and said what you've been predicting for years: the world order we know is crumbling, and the era of globalization is coming to an end. Even proponents of globalization have directly admitted that yes, this era is ending. So my understanding is: a major cycle is underway, and what you've been talking about is actually happening. For me, the question then becomes: where are we in this major cycle? What specific stage are we in? What are these events we're seeing in the real world telling us? And what does this mean for investors? Dalio: We are now at a tipping point. I think this tipping point is a particularly dangerous period, specifically between the next two elections—that is, between the 2026 midterm elections and the 2028 presidential election. This is a riskier period, a very dangerous phase. If I look at it from the perspective of monetary order risk, will there be significant changes in our debt repayment issues? You know, we will delve into this issue—who is making big money, who isn't, and how wealth is distributed. Here's a very interesting and important example: We can observe that China has accumulated a large amount of US dollars. So how are these dollars being handled? And what does this mean for our balance of payments? But returning to your question, I would say that in the midterm elections, the Republicans are very likely to lose the House of Representatives, which will lead to serious political conflicts, including impeachment, investigations, and so on. The conflicts will be very intense. I think the monetary situation will become even more worrying. In other words, the supply and demand problem we're talking about is this: the US federal government spends about $7 trillion and receives about $5 trillion, meaning spending exceeds revenue by 40%. The government debt is enormous, and the demand for this debt is declining. The decline in demand isn't just due to normal supply and demand dynamics, but also because we're in a unique global environment—even during wartime, those holding dollar-denominated debt worry about potential sanctions. Imagine if you held these assets and the world's two largest economies were to go into conflict—what would you think? So these shifts are happening. That's one factor. Of course, international conflicts are also at play, and technology is changing at an astonishing pace. So I think that in the next two to three years, like traveling through a time tunnel, we'll be experiencing a period of higher risk, but also a period of tremendous change, which will be particularly difficult to navigate. I think the key is how you navigate it and how you have a fully diversified portfolio. To answer your question, although it might sound a bit convoluted, I believe we are at a tipping point in these issues, and I would say that in about two years, we will face a convergence of even more risks. Host: Yes, my next question is: What does this mean for portfolio management? In the long run, if we see declining demand for US debt while US debt issuance increases, coupled with escalating conflicts globally, these are enormous forces that are difficult to fully comprehend and digest. What does this mean for an investor? Are there any investment philosophies or decisions that can protect yourself from a portfolio perspective? Dalio: I think the most important thing for most people is not to try to time the market. Many people don't succeed at that. They might get excited about the outbreak of war or other events and then make hasty decisions. Yes, the most important thing is to have a fully diversified, well-structured portfolio and to pay attention to the relationships between the various assets within the portfolio. For example, as a tentative suggestion, I would ask: How much gold do you have in your portfolio? Not too much, not too little, but gold is an effective diversification tool that can hedge against other assets in your portfolio. Because when things go wrong, whether due to debt problems or geopolitical conflicts, gold tends to perform well. Don't try to time the market for gold; instead, recognize that it is essentially a currency. It is not only a long-term currency, but today it is the second-largest reserve currency held by central banks—first the US dollar, second gold, third the euro, and fourth the Japanese yen. It is recommended to allocate approximately 5% to 15% of your portfolio to gold, which can help diversify risk across other parts. I also remain vigilant about debt issues. You should understand that cash—which many consider the safest investment—is actually the most certain investment to lose money most of the time because of its low rate of return. And during periods of stagflation, cash is especially a poor investment. We are currently in a stagflation-like environment, or rather, an environment full of uncertainty, which brings many challenges. Therefore, I think the most important thing is to learn how to diversify. This also includes investing outside the United States, not just within the US. This may seem difficult to many people because there is a lot of capital currently highly concentrated in certain areas, such as technology, especially artificial intelligence. Some might think, "Okay, if I diversify, I'll miss out on these opportunities." But despite this, diversification is still very important. Because I think many people make a mistake: they think that as long as a technology is going to be revolutionary, it's worth betting on. Historically, many new technologies have indeed been revolutionary, that's undeniable. But such periods are often accompanied by bubbles—because people want to bet on a technology and buy related stocks regardless of price. Therefore, building a well-balanced portfolio—what I call an "all-weather portfolio"—I think is the most important thing people can do. Host: There's so much more to discuss, but we'll have to leave that for next time. Ray Dalio, founder of Bridgewater Associates and a New York Times bestselling author, Ray, thank you so much for returning to our program "The Housing Market." We're always happy to have you here. Dalio: It's my pleasure. Host: Yesterday, many of the world's most valuable companies reported strong earnings, but investors didn't seem too impressed. Microsoft exceeded expectations in both revenue and profit, with revenue increasing by 18% year-over-year, but its stock price fell 2% in after-hours trading. Amazon also exceeded expectations, with its cloud business growing stronger than anticipated, but its stock price fell about 1% in after-hours trading. Meta delivered a stellar quarterly report, with revenue surging 33% year-over-year, but its stock price fell nearly 7% in after-hours trading due to higher-than-expected capital expenditures and disappointing user growth. Google was an exception—its revenue exceeded expectations, with cloud sales surpassing $20 billion, and its stock price rose more than 6% in after-hours trading. So there's a lot to analyze here. We're now connected with Gil Luria, Head of Technology Research at DA Davidson. Gil, it's great to see you again, we have a lot to discuss. I mean, what really strikes me are these numbers, especially the growth figures, they're truly breathtaking. Google's cloud revenue grew by 63%, Microsoft Azure revenue grew by 40%, these are insane numbers. But judging from after-hours trading, investors don't seem so excited. What do you think of these earnings reports and the market's current reaction? Gil Luria: Oh, so this is the "curse of high expectations". Microsoft is growing a $100 billion business at 40%; Amazon is growing a $140 billion business at 27%; and Google is growing an $80 billion business at 63%. These growth rates are truly incredible. And here's something very important—they all achieved this with higher profit margins than before. This dispels our previous concerns: Oh, AI isn't a good business because large investments and depreciation will depress profit margins? No, they've all managed this growth exceptionally well, accelerating growth while simultaneously increasing profit margins. This is crucial for the concept of Return on Investment (ROI)—if these companies can accelerate growth while maintaining the same profit margins, it means their investments in AI are paying off. But going back to your point, Google is the star today because it's performing far better than any other company, not just in Google Cloud—its advertising revenue is accelerating, and its search business is growing at 19%. This is a massive business, and it's still growing rapidly. It's catching up with Meta. If Meta's advertising growth rate used to be twice that of Google, now the two are converging. Google has also started talking about selling TPU chips. This was a bold idea we started discussing about a year ago, and now Google is actually doing it. Their chips are so good that there's demand for them in the external market. So Google is the star of the show today, making the other companies seem less impressive by comparison. Host: I mean, it feels like you just have to bet on these companies. Looking back, we've worried about many things—the massive construction of AI infrastructure, capital expenditures, and whether they'll see a return on investment. But now it seems we've reached a point where the ROI is there, these businesses are growing at an astonishing rate, and you simply have to bet on these companies. This makes me even more confused by the after-hours sell-offs, which I think might change during daytime trading or for the rest of the week. My question is simple—at this stage, how can you not bet on big tech companies? Gil Luria: Yes, absolutely. First, let's group Microsoft, Amazon, and Google together. They are all reaping excellent returns from capital expenditures and are likely to continue increasing them—Google has explicitly stated that it will. So, this is one category. Meta, however, is different. It doesn't actually sell its data center capacity; it uses it entirely for internal purposes. One reason investors disliked Meta's earnings report is that Meta is increasing capital expenditures without demonstrating a corresponding revenue acceleration. So, Meta is increasing capital expenditures without achieving revenue acceleration, while Google, Microsoft, and Amazon have made their reasons for expanding capital expenditures much clearer. But back to your more macro-level question—yes, large tech companies are the first to capture all the value. First, although no earnings reports were released today, chip companies—Nvidia, Broadcom, AMD, Intel, Micron—are capturing a significant amount of value. Then there are the major AI computing providers—Microsoft, Amazon, Google—who provide computing power to everyone, not just OpenAI and Anthropic. Any company wanting to build its own AI is using the computing power of one of these three companies in one way or another. So yes, the returns there are real, and that's very clear. And today, market expectations for Microsoft and Amazon were already very high, and they haven't quite lived up to them. Meta is a bit different—its performance itself isn't outstanding, and it's increasing capital expenditures. Host: When our war with Iran broke out, many tech stocks fell—basically the entire market fell, but tech companies took a lot of the brunt. Then they started to rebound, seemingly because investors realized the conflict might not be important to these companies. This was the first time we saw the actual impact of that period. It turned out to be completely unrelated. Is there any connection between the Iran war and its broader impact on the global economy, and Big Tech companies? Or are Big Tech companies completely isolated and independent? Gil Luria: They are indeed very isolated. Oil is not an input factor for these companies. Their risk exposure is only second-order effect—if the global economy slows down, then Meta and Google's advertising sales will slow down, Amazon's retail business will slow down, and some of Microsoft's businesses will also slow down. But this conflict has no direct impact on these companies. The core driver of their growth, far exceeding all other factors, is the increasing demand for AI computing power. And this has almost nothing to do with the Middle East conflict. So they are essentially isolated—unless there is a significant deterioration in the overall economy, which doesn't seem likely at present. Host: From a valuation perspective, Dave, is there any company among these that stands out? Do these financial reports provide us with any details or references on how to view valuations? Gil Luria: Yes, Microsoft really stands out. I mean, Google, and when the market opens tomorrow, Amazon, their forward P/E ratios are all in the twenties or even thirties, while Microsoft's forward P/E ratio is still in the twenties. Although their overall growth rates are similar, all at high levels of over ten percent, Microsoft hasn't received the market recognition it deserves. Part of the reason is that Microsoft has a software business, and people are very pessimistic about software, as you've discussed many times on the show. There are also concerns about capital expenditures. But from a valuation perspective, Google and Amazon's P/E ratios are relatively high, while Microsoft's P/E ratio is still low, which is why I prefer Microsoft. Meta's price-to-earnings ratio is also low, but similarly, investors are less willing to accept its lack of discipline in spending, especially at this point in time. Host: What's your take on Microsoft's capital expenditures actually falling short of expectations? Does Microsoft seem to be reducing its investment, or at least shrinking its AI investments compared to Meta, or is this interpretation incorrect? Gil Luria: This is more likely related to the current bottlenecks encountered in building data centers. Competition for resources is very fierce right now. Last week we heard Intel say they had to salvage some CPUs from the scrap heap to meet market demand. We've seen memory prices quadruple in a year, and we're seeing all sorts of bottlenecks, like transformers, power supply, and advanced packaging. There are also various obstacles; some states have adopted a "don't build in my backyard" attitude, saying they don't want data centers and won't approve them, and all these companies are facing this problem to varying degrees. For Microsoft, this ultimately just slows down the pace of data center construction. But given the scale and growth of demand, this is more likely to simply postpone those data center projects to the next few quarters, rather than cutting capital expenditures at the policy level. Host: Okay, this has been an important week. Gillaria is a technology researcher at DA Davidson. Gill, thank you for your time.
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