Dalio in Conversation: We Are Currently in an AI Bubble, 1% of Investment Portfolio is Bitcoin

Source: The Diary Of A CEO

Compiled by: Felix, PANews

Ray Dalio, the founder of Bridgewater Associates who predicted the 2008 financial crisis, has transformed his company from a two-bedroom apartment into a giant managing approximately $150 billion in assets. Additionally, Dalio is the author of books such as "Principles," "Principles for Dealing with the Changing World Order," and "How Countries Succeed or Fail."

Recently, Dalio delved into the "big cycle" theory driven by debt accumulation, wealth disparity, and geopolitical turmoil on the podcast "The Diary Of A CEO." He pointed out that the current AI craze exhibits clear bubble characteristics, which historically often precede significant economic turmoil. With heavy government debt and increasing internal social conflicts, the global order is in a phase of declining power transitions, posing severe challenges to traditional countries like the UK and the US.

To protect personal wealth in an uncertain future, Dalio advises investors to hedge through diversified assets like gold, rather than relying solely on cash or single stocks. He emphasizes that maintaining strong adaptability and understanding historical patterns is key to survival and development for both individuals and nations.

PANews has compiled the highlights of the interview.

Host: Have you noticed signs that we are in an AI bubble that could lead to an economic collapse?

Dalio: Yes, there are classic signs of a bubble. This impacts the economy and is detrimental to society, causing everyone to lose money. But there are also other issues at play. As a global macro investor, I am very excited about AI; it will bring revolutionary changes, replacing human bodies and some cognitive logic. However, we also face geopolitical issues, such as China surpassing the US as the largest trading partner for many countries, altering the world order. Furthermore, we are confronted with significant wealth disparity and government funding shortages. When the economy enters a recession, people start attacking each other.

Host: Investor Jeremy Grantham once told me that we are facing an AI bubble and a potential economic collapse. If we look at the data, it aligns with history, and the peak may come soon. He believes this could be the largest investment bubble in US history. What are your thoughts?

Dalio: He is right. A bubble refers to a significant price increase, where companies perform well, followed by a burst that impacts the economy, similar to the bubbles of 1929 or 2000. When revolutionary new technologies emerge, people perceive them as miracles and borrow money to invest, overlooking the actual price of the assets. Many see others becoming wealthy, but paper wealth does not equate to cash; you must sell wealth to obtain cash for consumption. When people need cash to repay debts due to tax changes or rising interest rates, the bubble gets punctured. This leads to price declines, losses for people, forced asset sales to repay debts, reduced demand, lower consumption, and ultimately economic recession and depression.

Host: Suppose I invest $100 in an AI company's stock because I am optimistic about AI. Then I take a loan of $50 from the bank against this $100 paper net worth. If an economic event occurs (like a war), and everyone rushes to sell, my stock drops to $25, but I still owe the bank $50. I must sell quickly, asset prices plummet, and people stop dining out, the bubble bursts, and we enter a recession, right?

Dalio: Absolutely correct. Additionally, there is the supply and demand issue with stocks. In companies that manufacture AI, it is difficult to accurately predict future earnings; you either under-invest and get eliminated by competition or invest heavily but cannot precisely calculate returns. It is common now to spend $50 million, yet the company's valuation reaches $1 billion. You become a billionaire on paper, but that is merely the accounting value of the stock. When the market becomes euphoric and triggers inflation, central banks will hit the brakes and raise interest rates. This means those burdened with debt need to raise more funds to repay. Moreover, when the market craves stocks, there will be a surge in stock issuance. When the cost of debt exceeds equity investment returns, combined with an oversupply of stocks and the need to raise cash, the bubble will burst.

Host: You mentioned the "big cycle" besides the bubble. What is that?

Dalio: It is a big cycle that averages about 80 years in duration; the last time we experienced the start of this new cycle was in 1945. It encompasses several simultaneous dynamic factors: first, internal political conflicts caused by widening wealth disparity (e.g., the divide between left and right); second, governments running massive fiscal deficits without enough money to pay bills; and finally, geopolitical changes (conflicts between nations). If people do not understand this cycle, they will only see daily news and fail to connect these isolated events.

Host: How should ordinary people respond to a potential economic bubble bursting to secure their future? For example, a 30-year-old with only $100 disposable income each month.

Dalio: The most important point is "diversification." People often think that keeping money in cash is the safest option, but in the long run, it is actually the worst investment because inflation will erode its value. Even if you achieve short-term interest rates, considering an annual inflation rate of 3.5% to 4% and the taxes you must pay on earnings, it still yields poor returns. You need a diversified investment portfolio that includes stocks, gold, bonds, real estate, etc. When stocks or bonds decline, assets like gold often perform well. Diversification can reduce your risk without lowering returns. For young people with few assets, your only asset is yourself. You need to figure out how to enhance your skills to earn good income, striving to align your work with your passion, but never forget the element of "money."

Host: Speaking of money, many people are now discussing Bitcoin. What are your thoughts on Bitcoin? How does it compare to gold?

Dalio: About 1% of my investment portfolio is in Bitcoin. It is a hard currency that cannot be printed at will. However, I personally prefer physical gold. Gold cannot be hacked through technology; it is the only financial asset that does not belong to anyone else's liabilities, and it remains the second-largest reserve currency held by major central banks. Digital currencies like Bitcoin may be threatened by quantum computing or monitored and taxed by governments. When governments do not want it, they have the power to do anything. For reasons of transaction privacy and control, central banks will not hold large amounts of Bitcoin.

Host: What impact will AI have on ordinary people's jobs? There is a mainstream view in Silicon Valley that AI will create new jobs we cannot yet predict, and everyone will be fine. They cite the example of tractors and factories replacing manual labor during the Industrial Revolution, believing humans will always find new paths. Do you agree?

Dalio: The viewpoint in Silicon Valley arises because they are the producers of technology, have made a lot of money, and do not want to be attacked. It is an evolutionary process. The Industrial Revolution replaced human physical labor with machines, while AI is now replacing human thinking and reasoning abilities at a higher level. In this process, the biggest beneficiaries are those capitalists who have ideas and can replace workers with capital. The share of income flowing to workers is declining, while the share going to business owners is increasing, further exacerbating wealth disparity. Once human bodies and minds are replaced, what can we sell? Humans possess emotions and intuition, which AI currently lacks. In the foreseeable future, those who can apply exceptional human wisdom in their work and partner with AI will be at the forefront.

Host: In the UK and the US (like New York and Los Angeles), there is intense debate about imposing a "wealth tax" on the rich. Is this a good idea or a bad idea?

Dalio: Operationally, it is a very difficult idea. Because the wealthy must sell their wealth to obtain cash to pay taxes, this could actually become one of the triggers for bursting the bubble. Moreover, it would reduce investment, as wealth is often used for productive capital expenditures. If consumption is merely achieved through wealth transfer without improving overall societal productivity, society will face problems. If the government attempts to enforce this, it may encounter capital flight from the wealthy. To prevent this, the government might modify laws for retroactive taxation or implement strict capital controls. The UK is currently a classic "counterexample," caught in a typical cycle of excessive debt, low productivity, and ongoing internal political conflict. To resolve these issues, society needs a strong "centrist" force for bipartisan cooperation to share the pain and make difficult reforms to enhance productivity for the majority.

Host: You mentioned that the "changing world order" has been cyclical over the past 500 years. When a new recession arrives, will there be a situation where two superpowers coexist, or will there typically be only one dominant power?

Dalio: Before World War I and World War II unified the world into "one world," the world was divided into different regions, each with its own strong powers. However, under the "one world" system, if disagreements arise, they are usually resolved through some form of conflict (cold war or hot war), ultimately determined by power rather than relying on so-called "rules-based order." For the future, I believe the most likely and beneficial outcome is a "more regionalized" world. China, deeply influenced by Confucian thought, aims to be competitive and not cut off from the world, rather than to conquer and control other countries. If both China and the US remain strong, and we can avoid large-scale destructive wars, the world may split into regions like the Americas, China, and the Asia-Pacific, each developing independently.

Host: You mentioned conflict, but the US is currently deeply embroiled in conflict with Iran, seemingly unable to extricate itself. Will this also impact the macro cycle you described?

Dalio: This exposes America's weaknesses. There is now a consensus internationally (especially in Asia) that the US does not actually want to go to war. Because the American public is concerned about rising oil prices and casualties, they hope for a quick resolution to the war, but you cannot win a war that requires long-term occupation and control in this manner. Asian countries are also gradually realizing that the US may retreat, and its military bases may become liabilities. You are witnessing a power transition phenomenon similar to the decline of the British Empire (like during the Suez Crisis). People are realizing that the economic and military power of the US, which once only needed to hint to make other countries comply, is being weakened. Getting involved in the conflict with Iran is a huge mistake that has exposed America's vulnerabilities to the world.

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