Editor's Note: Ray Dalio, the founder of Bridgewater Associates, recently participated in a in-depth interview on the popular business podcast The Diary Of A CEO, discussing his views on the AI bubble, the 80-year long-term debt cycle, and Bitcoin. In the interview, Dalio revealed why we are currently in an AI bubble, outlined three key signs that the bubble is about to burst, and expressed his belief that while capitalists will be the biggest beneficiaries of the AI revolution, individuals with exceptional human intelligence and the ability to collaborate will still excel in the future. The core content of Dalio's interview is compiled below for your enjoyment~
Learning from History, How Was the AI Bubble Created?
What people often refer to as a bubble is a situation where prices rise dramatically, companies perform exceptionally well, and then the bubble bursts, impacting the economy and the markets, leading to a major downturn, like the bubbles in 1929 or the dot-com bubble of 2000.
This occurs because when a revolutionary new technology emerges, this kind of situation happens. During the dot-com bubble, we also had amazing new technologies that everyone was betting on to succeed, so everyone rushed to invest, even taking out loans to invest, but they overlooked the importance of price, and as a result, prices soared, creating a bubble.
Now we are equally excited about AI, and we should be excited because it will bring revolutionary change, and it has indeed. So, everyone is equally eager to invest, but they still overlook the price. This is some kind of similar mechanism hidden in different cycles.
In an economic bubble, people leverage themselves heavily to invest, you will see many people become wealthy, but wealth does not equate to real money because they cannot spend this wealth. And when they have to sell their wealth to get money, it devalues. So, when they need money for some reason, such as tax changes, rising interest rates, or debt repayments, the bubble begins to burst, and the market declines.
The process of wealth accumulation works in reverse when the bubble bursts because when they earn a lot of money, they have high-value assets to mortgage for loans, this compounding effect continues, but when the bubble bursts, this process also works in reverse.
An economic recession usually occurs after a bubble bursts because when people start deleveraging and selling off assets, consumer demand decreases, and spending naturally declines.
For example, during the Great Depression in the United States, the late 1920s was a period of prosperity. Every household was electrified for the first time, refrigerators and lighting entered homes for the first time, cars, planes, radios also became popular for the first time, and everyone believed these technological products had a bright future. However, as people continued to buy assets, stock prices kept rising, and individuals even leveraged to buy stocks, etc. Eventually, corporate profits could not support the corresponding stock prices, triggering a chain reaction that eventually led to the Great Depression.
What I mean is, in these significant trends, people knew very little, and anyone involved in the AI field could not accurately plan. They simply did not know how much income the future would hold, leading to either underinvestment, falling far behind competitors, or massive investment without achieving precision and control. When this happens, problems arise.
Three Major Signs of a Burst Bubble
In the initial stages, the factor that often bursts the bubble is the need for people to sell off some assets to realize gains, which usually results from rising interest rates. It could also be policies like a wealth tax, but overall, it is a tightening of liquidity. This stage often faces inflationary pressures, and central banks worldwide decide to tighten monetary policy. Consequently, as interest rates rise, the return investors can get from holding bonds exceeds what they can get from equity investments.
Furthermore, there is a significant increase in the issuance of stocks. We have always discussed how demand drives up stock prices and how wealth is created, but the market also has a supply side. Companies can issue stocks, and there is almost nothing easier than creating wealth through stock issuance. Nowadays, people can even publicly announce their intention to start a company and take it public, declaring their intention to issue stocks to the target audience. This oversupply of stocks, along with increasing fundraising needs from other companies, ultimately leads to a burst bubble.
Another very typical way to assess the extent of a bubble is to look at the shareholder base of these companies and see if the chips are held by firm investors or shaky retail investors. However, I must emphasize that a bubble is not a black-and-white existence but rather a matter of degree.
A typical feature of shaky chips is the influx of inexperienced retail investors, especially through leverage, either by borrowing to speculate on stocks or by buying leveraged financial products. For example, there are currently leveraged ETFs tracking the stock market, and investors participating in these products are essentially no different from gambling with dice.
All of the above are the main signs that a bubble is about to burst. When the bubble bursts, the market will experience panic, leading to a massive sell-off of assets. At the same time, from the opposite perspective, all assets will become cheaper, and everyone will be able to afford them.
However, in investing, people always like to seize the opportunity, trying to catch the bottom too early, and this behavior often further fuels the bubble. So, what I would like to add is that the future is full of uncertainty, and investors should not try to time the market. Even for experienced investors, accurately predicting the timing of a bubble burst is extremely challenging. Therefore, the best investment approach in the face of a bubble is diversification.
Managing Bubble Bursts Through Diversification
Most people often think that cash deposits are the safest assets. However, in the long run, this is the worst investment because inflation erodes its value.
Apart from the stock market, investors have many other assets to choose from, such as gold, bonds, real estate, and Bitcoin. Each of these assets fluctuates in value for various reasons. Usually, when gold rises, bonds tend to fall, and real estate depreciates, following a certain pattern of change.
Therefore, the best practice is to build a diversified investment portfolio. This not only does not reduce returns but actually lowers risks. Diversification means holding a certain proportion of each asset. Due to different volatilities, investors must know how to balance them. My advice is to start with investing in real assets, and that is gold.
Gold is very interesting because when all assets are performing poorly, gold often does well. It is a very effective diversification tool. Gold cannot be hacked technologically; you can hold it, own it, and it is the only financial asset that is not someone else's liability.
So, for most people, if they want to ensure they have some "hard currency," then gold should account for 5% to 15% of their investment portfolio.
View on Bitcoin
Some investors see Bitcoin as "digital gold," but I prefer to invest in real gold bars rather than Bitcoin.
Bitcoin is just an asset similar to gold and also falls under the category of currency that cannot be printed. However, some technologies could harm it. For example, if quantum computing emerges, and governments can monitor it, then it may be taxed. All digital currencies are somewhat similar in this regard.
Additionally, when a government says, "I don't need Bitcoin," they have the right to dispose of it as they please. And central banks around the world do not hold a large amount of such assets. The reason is that central banks need to secure the privacy of their transactions and keep the transactions firmly in their control. Just look at the situation in Russia, where all their other assets were confiscated/frozen, but no one could touch that gold.
Who Benefits Most from the AI Transformation?
In this AI transformation, only a tiny fraction of the population (less than one percent) possesses cutting-edge technology skills and can apply and accelerate development. For everyone else, especially those in cognitive tasks, there is a risk of being replaced.
We are entering a world where everything is automatable. Human evolution started in the agricultural era, where there was little real innovation. Machines were later invented, replacing human physical labor. People used to work in the fields like oxen, then they were replaced by tractors. We then moved into the industrial era, where innovations such as the printing press allowed for knowledge acquisition. This led to various inventions, marking the beginning of the first industrial revolution, where machines started replacing human physical labor in factories and so on.
Therefore, in my view, it is akin to machines replacing human physical capabilities first, then ascending to higher levels of replacement, moving on to replace computable parts of human thought, and this trend continues to evolve, gradually replacing higher-order thinking and reasoning abilities. This trajectory is part of an ongoing evolutionary process.
The ultimate beneficiaries are those who hold the concept of replacing workers, such as capitalists. For instance, when people shop at a store, the business gains revenue, but a closer look at the share allocated to workers shows a decrease, while the share allocated to the business increases. So we are going through a phase where, on the one hand, the top tier is amassing incredible wealth; on the other hand, the lower tier is under immense pressure.
This is the challenge we are facing. Although the economy seems relatively stable, the difficulty for college graduates to find jobs has significantly increased. For example, fresh graduates require training for entry-level jobs, yet many tasks can now be swiftly accomplished through AI and computerization. With the advancement of robotics, this situation will intensify. The rapid pace of disruptive change we are witnessing is due to the substantial funds flowing into cutting-edge AI models like Anthropic and OpenAI.
However, there is no need to be too pessimistic. Humans still possess emotions and intuition, offering services that AI cannot provide. So, if we want to explore what these "services" are, such as whether robots can offer a good massage at a SPA, and what else remains, people can delve into it. In conclusion, I believe that in the foreseeable future, those with outstanding human intelligence who can collaborate with others will still excel.
About the 80-Year Mega Cycle
I have previously mentioned that the shift in world order tends to happen approximately every 80 years, but this number is not precisely fixed. The cycle has an average fluctuation range, much like human lifespans, where each person's expected lifespan varies.
I will not overly emphasize the length of time; I will focus more on the current situation. In terms of symptoms or relevant indicators, where are we currently in this process? Where will the next important milestone be?
The answer is right around this time period where we currently are.
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