#418 Ray Dalio on the Risky Period for Investors, Bubble Warnings, and a Coming Debt Squeeze

Bitcoin

Across the shows: 3 speakers in other episodes, 1 bullish and 2 bearish calls, past 30 days

• Ray Dalio · Dalio Family OfficeBearish

  Bitcoin is not a great asset; he holds about 1% only as a diversifier and does not recommend it.

  Dalio says he has held about 1% of his portfolio in Bitcoin for a long time, but he does not think it will be a great asset. He holds it to diversify his gold position and as alternative money. He is not a supporter for two reasons: governments can influence whether people can own it, so it is not a fully private asset and can be watched, and there are concerns about whether it can be broken, which he thinks AI makes more of a risk. He says he would not recommend it.

  “I've always had for a long time about 1% of my portfolio in [Bitcoin], not because I... I've never thought it will be a great asset.”at 25:24

US Treasuries & yields

• Ray Dalio · Dalio Family Office

  Inflation-indexed bonds offer about 3% real yield, attractive as cash returns stay low.

  Dalio wants inflation hedges alongside equities, including some gold and some inflation-indexed bonds. He finds leveraged inflation-index bonds an interesting mix because cash returns will be relatively low. He notes inflation-index bonds currently have a real yield of about 3%, which he calls pretty good. He expects inflation pressures to carry that real return forward.

  “I wanna have inflation hedge assets. So to some extent gold, to some extent inflation index bonds. I think leveraged inflation index bonds is an interesting mix because the returns of cash will be relatively low.”at 29:15

• Ray Dalio · Dalio Family Office

  Dalio is negative on bonds, effectively short debt, because supply outstrips demand and yields are rising.

  Dalio says the supply of debt is large relative to demand. Government borrowing is high, and AI capital expenditure is also driving large capital and debt raises. Foreign demand is weakening, with China and Japan pulling back and foreigners holding about a third of US debt. This supply-demand imbalance is what he sees driving bond yields up. He says he has been negative on bonds and has been short debt relative to his other positions, and he argues debt assets are vulnerable to rising rates and to a future devaluation of money.

  “And so that's why when I think of bonds, why I've been negative on bonds, I think that was so be essentially short debt relative to these other positions.”at 30:21

US global standing & alliances

• Ray Dalio · Dalio Family Office

  The post-war multilateral order has ended, replaced by power-based rule that brings more conflict.

  Dalio describes the US-led multilateral order that followed World War Two, with the United Nations, a world court, the WTO and the WHO, where decisions were made by votes. He says that is over. The world now runs on power, where whoever has power enforces what they want. As a result, he says there is more conflict, and he counts geopolitical breakdown as one of the five forces that are already moving in a disadvantageous direction.

  “So now what we have is no longer that type of order, multilateral. You have a power based. In other words, who has what amount of power and what you want, and you enforce the power. And as a result, there's greater conflict.”at 6:29

US deficit & government debt

• Ray Dalio · Dalio Family Office

  US debt is building a squeeze that could become a debt crisis within about two years.

  Dalio says the US federal government spends about $7 trillion a year and takes in about $5 trillion, so it must sell roughly $2 trillion of debt annually, and interest costs are growing. He calls this a 'plaque building up' that squeezes out spending. He expects credit to tighten, rates to rise until demand is rationed, and borrowers to be squeezed out first, with markets hit before the economy. He says the timing is uncertain but expects it somewhere in the next two years. Foreign demand is also pulling back: China and Japan are the largest holders and foreigners own about a third of the debt.

  “Yes. I do. It's like somebody who is... You could see it in the numbers. You can see the plaque building up, and you could see this squeeze taking place.”at 13:42

US housing

• Ray Dalio · Dalio Family Office

  Tightening credit will squeeze out mortgage and homeowner borrowers first.

  Dalio's debt-cycle view says tightening credit and rising rates will ration demand. The cost of funds goes up and some borrowers are squeezed out of credit markets. He says homeowners and mortgage borrowers are the most likely to be squeezed out. This is the normal cycle, with the squeeze hitting markets first and then the economy.

  “you can almost say who will be squeezed out, particularly homeowners, mortgages, those kinds of borrowers are most likely to be squeezed out.”at 14:33

US stock market outlook

• Ray Dalio · Dalio Family Office

  Stocks are expensive versus bonds, so expected equity returns are low and vulnerable to rising yields.

  Dalio's argument is that rising bond yields mean higher interest rates, and rising stock prices mean lower expected future returns. Calculating expected returns for equities and bonds, he finds equity excess returns are very low. The cash flows from stocks are less attractive relative to bonds, so the cushion is gone and upward pressure on yields is likely to hurt markets. He expects this to play out after the midterms, somewhere in the next two years, and calls the period through 2028 a risky one. He says his portfolio is still mostly in US assets because the US has the biggest capital markets.

  “And so markets now what's happened is that when bonds have gone down, that means interest rates have gone up, and when stocks have gone up, that means future expected returns have gone down.”at 14:59

US elections & politics

• Ray Dalio · Dalio Family Office

  Democrats likely take the House and possibly the Senate, raising internal conflict and a risky period.

  Dalio expects the midterm elections to give Democrats the House and possibly the Senate. He says this will create more internal conflict that affects everything. He expects a great conflict in the period after the election, including possible impeachment, and that the supply-demand problem for debt will get worse from this election until after the next presidential election. He frames the period from the elections through shortly after as a risky period and warns of greater vulnerability through 2028.

  “you're going to see, the midterm elections. And in those elections, it's likely that, the Democrats will take the house and possibly the senate. And then that's going to create an increased internal conflict”at 16:21

AI bubble & tech valuations

• Ray Dalio · Dalio Family Office

  By his bubble indicators, AI is in a bubble; debt-funded wealth creation sets up a forced selloff.

  Dalio says his bubble definition is not just whether an investment pays off over the long term. Bubbles form around transformative technologies that need large amounts of capital and carry uncertainty, as with the 1920s electricity, cars, radio and aviation. In those cycles, borrowed money fuels the bet, and private valuations can make companies look like huge wealth quickly, for example a $1 billion valuation after raising $50 million. Wealth cannot be spent, so a bubble pops when holders must sell into the market to pay debt or meet something like a wealth tax. He says those conditions are in place now, with AI-related capital raised through debt and wealth still growing faster than the debt.

  “But, yes, we are by those indicators in a bubble.”at 18:43

US dollar

• Ray Dalio · Dalio Family Office

  High debt creates a strong incentive to devalue money, which hurts holders of debt assets.

  Dalio describes debt as promised money, so the value of a debt asset depends on what that money is worth when it arrives. When a country has a lot of debt, it has a desire to devalue money. He says he learned this as a young trader when Nixon ended gold convertibility in 1971 and Roosevelt devalued in 1933. He thinks this devaluation risk makes debt assets poor holdings in the current environment, which supports his preference for gold and inflation hedges.

  “when you have a lot of debt, there is the desire to devalue that.”at 24:11

Gold & precious metals

• Ray Dalio · Dalio Family Office

  Gold is an effective diversifier and hard money; a balanced portfolio should hold about 5-15%.

  Dalio says gold is the asset that is money, or hard money, and an effective diversifier against a portfolio of bonds, stocks and real estate. He argues that when there is a lot of debt, there is a desire to devalue money, which hurts debt assets. In that environment he says gold should be part of a best risk-return portfolio, at about 5-15% of the portfolio. He describes gold as a position he holds and diversifies, and says he has been short debt and holds gold as a hedge against that.

  “is gold. If you were to say, I'm going to have the best risk return, you would inject an element of gold into that. But what amount is appropriate balance would be between [5 and] 15%”at 24:57

Enterprise AI adoption & AI software

• Ray Dalio · Dalio Family Office

  Companies that AI will transform, by lifting sales or cutting costs, are not well priced in.

  Dalio argues that AI will be disruptive, so he is looking for companies that will be transformed by it. These companies will either grow sales or cut costs, and he believes the market does not fully price them in, unlike the big AI spenders, which he sees as overpriced. He says he would track them on revenue, costs and how much they invest in AI to find where the transformation is happening.

  “companies that are going to be transitioned, they'll either increase their sales or they will cut their costs. I don't think... I think that they're not well priced in.”at 26:44

AI infrastructure & data centers

• Ray Dalio · Dalio Family Office

  The hyperscalers and big AI bets are overpriced and expensive.

  Dalio separates the AI beneficiaries from the companies building the AI infrastructure. He calls the super-scalers and other big AI bets overpriced and expensive. This is part of his broader bubble argument, which points to heavy AI capital expenditure financed with debt and valuations that already reflect the expected payoff.

  “I think the super scalers and the other ones, you know, which are you'd say the big AI bets, they're overpriced, they're expensive.”at 26:57

International equities

• Ray Dalio · Dalio Family Office

  Singapore and parts of the Gulf, notably the UAE and its data centers, look interesting; Europe is selective.

  Dalio looks for countries and regions that are making transitions and are either on the wave of innovation or being swept back from it. He points to Singapore and parts of the Middle East as interesting. The UAE is making a lot of progress building data centers. He says Europe has some spots, but he finds it very selective. He still keeps most of his portfolio in the US because it has the biggest capital markets. He also looks at countries with capital surpluses, which he expects to be better off in the adjustment.

  “I think Singapore, I think, parts of The Middle East are very interesting, particularly The UAE is making a lot of progress in making data centers and so on.”at 28:48