Introduction and Panel Setup:

The Greenwich Economic Forum hosts a conversation between two industry legends, Ray Dalio of Bridgewater Associates and Paul Tudor Jones of Tudor Investment Corporation. Paul Tudor Jones serves as the primary speaker for this segment, exploring various topics including macroeconomics, career choices, and the role of Bridgewater in modern economic thought.

Decision Making for the Next Generation:

Paul Tudor Jones talks about the career decisions facing his daughter, Dottie, who will soon graduate with a master’s in data science. He shares his dilemma over whether to guide her into a traditional macro discretionary role, akin to his own, or towards a more quantitatively-focused role given the evolving landscape of the industry.

The Importance of Education in Economics:

Jones emphasizes the need for a strong educational foundation in macroeconomics for anyone entering the hedge fund world. Despite his daughter lacking a background in economics, he recommends she read the entire content available on Bridgewater’s Economic Principles website. Jones contends that the website offers the most comprehensive public education on macroeconomics available.

Impact of Bridgewater on Economics:

Jones likens Bridgewater Associates and its educational resources to the charter school movement, stating that they have revolutionized the way economics is taught and understood. According to him, the company has been extraordinarily successful in making economics comprehensible and relevant, primarily because it comes from practitioners rather than academic theorists.

The Conversation to Come:

Towards the end of the segment, both speakers hint at discussing further pressing issues in economics, with Jones particularly cautious about his remarks since the conversation is going to be publicized on Yahoo Finance.

Overall, the dialogue promises to delve into critical aspects of modern economics and offers valuable insights into the choices facing the next generation of financial professionals.

Donald Trump’s Influence:

Ray Dalio labels Donald Trump as an extremely effective salesman who has shaped the Republican Party’s views on budgetary matters. Jones points out that Trump has successfully convinced the party that a 5% budget deficit, adjusted for current economic conditions, is good governance.

Federal Reserve Policies:

Jones also discusses the Federal Reserve’s stance on maintaining negative real interest rates despite low unemployment, terming it as a “reasonable monetary policy with no consequences” according to the board. He questions this view, alluding to Chairman Powell’s recent comments that deny the existence of any economic bubbles or excesses due to such policies.

Long-term Fiscal Risks:

Jones warns of the long-term implications of current fiscal and monetary policies, particularly the public deficit. He notes that if the U.S. continues at the current rate of deficit spending, it will surpass the threshold that led to Greece’s financial crisis within less than a decade.

Economic Stimulus:

Jones describes the fiscal and monetary environment as “the most stimulative” he has ever seen when adjusted for economic conditions. This, he claims, is the key reason why the stock market is performing so well. He extends this observation to a global context, citing China’s 11% budget deficit and Japan’s 3% as contributing to a “heady economic brew.”

The segment underscores Jones’s concerns about the sustainability of current fiscal and monetary policies, both domestically and globally, while also acknowledging their short-term efficacy in stimulating economic growth.

Wealth Inequality:

Ray Dalio speaks on the current wealth gap, comparing its implications to those of the 1930s. He suggests that the abundance of money at the top does not trickle down, exacerbating income inequality. This situation, he warns, could lead to populism from both the political left and right, which would affect markets and society at large.

Monetary Policy:

Jones outlines the limitations of contemporary monetary policy, which traditionally relied on interest rate cuts to stimulate the economy. He says that once rates hit zero, as in 2008-2009, the central banks resorted to printing money and buying financial assets, thereby inflating the money supply. However, this tactic is reaching its effectiveness threshold, and the markets are saturated with money seeking investment, often in speculative ventures rather than solid earnings.

Corporate Behavior and Low Interest Rates:

With interest rates so low, Jones observes that companies are more inclined to buy back their equity or engage in mergers and acquisitions. This has led to a state where companies can “sell dreams rather than earnings,” making the need for genuine profitability less crucial.

Political Dysfunction:

Jones highlights the dysfunctional relationship between media and politics, which he sees as exacerbating the wealth and political gaps. He claims that this dysfunction makes it almost impossible for political and monetary policies to be effectively coordinated, particularly in the face of an economic downturn.

Global Ineffectiveness:

He extends his critique to the global stage, arguing that Europe and Japan are “dead in the water” when it comes to effective monetary policy. Without the possibility of further stimulation through money printing, he suggests the system won’t work unless there is political coordination, which he deems unlikely.

In summary, Jones raises alarms about the triad of wealth inequality, ineffectual monetary policy, and political discord. He emphasizes that these elements, last seen together in the 1930s, pose significant risks to both markets and society.

Impending Downturn:

Ray Dalio discusses the impending economic downturn, emphasizing that current stimulants like quantitative easing and low interest rates are losing their efficacy. Jones forewarns that if tensions like wealth gaps persist during good economic times, the downturn could exacerbate societal strains.

Changing World Order:

Jones also delves into the shift from a unipolar world to a multipolar one, largely citing the rise of China and other powers. He implies that this global rebalancing could bring conflict in the form of trade wars, technology wars, and geopolitical tussles, which add layers of instability to the world system.

Fiscal and Monetary Limitations:

He notes the limitations of current fiscal and monetary policy. While interest rates are already low, quantitative easing is at its limit, and the country is experiencing record deficits. These deficits will only deepen, especially when you consider unfunded liabilities like pension and healthcare obligations.

Modern Monetary Theory:

Jones brings up the concept of Modern Monetary Theory (MMT), where the government prints more money to handle deficits, an action he describes as a classic last resort in a failing system. However, he criticizes the idea as not being modern at all, pointing out that similar tactics have been used historically when other monetary policies have failed.

The Broken System:

He concludes by stating that the system itself is broken and in dire need of reform. Inequality and lack of access to essential services like education have led to justified complaints from the public. The broken system, according to Jones, needs to not just divide the economic pie more fairly but also make the pie larger through increased productivity.

Modern Monetary Theory and Its Evolution:

Ray Dalio discusses the evolution of the acceptance of Modern Monetary Theory (MMT), comparing it to how societal views on marijuana have changed over time. He mentions that Japan began implementing a form of MMT when it started buying its own government debt, indicating a shift in its wider acceptance.

Implications of Budget Deficits:

Jones expresses concern about the potential for increasing budget deficits in the event of a recession, ranging from 10% to 30%. He uses the current 5% budget deficit in the U.S. to illustrate what normalizing it to a lower level like 2% could mean: a subtraction of roughly 10% from an average family’s income. He warns that these deficits may not be repaid, essentially borrowing from future generations.

Impact of Political Outcomes on Markets:

Jones emphasizes the significant impact of political outcomes on market valuations, citing internal polls about the expected S&P levels under different presidential candidates. He notes that policy changes, such as tax hikes, could lead to economic contraction. Jones stresses that the next president will have a substantial impact on the economy and asset pricing, contrary to the notion that markets are indifferent to who holds the office.

Current Economic Conditions:

Jones states that the current U.S. economic situation, characterized by high budget deficits and stimulative fiscal and monetary policy, has created a form of “U.S. exceptionalism” in asset pricing. He suggests that if the U.S. were to normalize its deficit to European levels, it would likely result in significantly different valuations for both the stock market and the dollar.

By combining these points, Jones presents a complex picture of the evolving economic landscape, where both theoretical shifts and practical policies play crucial roles in market behavior.

Significance of Next Election:

Ray Dalio and the other speaker stress that the next presidential election is going to be extremely significant, especially in terms of its impact on economic policies. They note that the policies of different potential presidents could drastically alter asset prices, corporate taxes, and the overall fiscal landscape.

Populism & Asset Prices:

The conversation delves into the rise of populism, either from the left or the right, as a critical factor influencing asset prices. This political shift is not just confined to America but is a global issue, affecting economics in places like the UK as well.

Capitalism & Social Inequity:

Both speakers are concerned that the current capitalist system is not benefiting the average person. They point to the lack of equitable access to education and the high costs of issues like incarceration as symptoms of an unfair system.

Philanthropy & Social Programs:

They discuss their personal experiences with philanthropy and social programs, indicating that targeted, cost-effective interventions can have a high return on investment. These programs can significantly reduce societal costs in areas such as crime and incarceration.

Polarization & Cooperation:

A key point raised is the growing ideological divide and the absence of cooperative dialogue to solve pressing issues. They express concern that if the divisiveness continues, it could lead to major problems, including a potential revolution.

Capital Flows & Fiscal Health:

The speakers warn that running large budget deficits and not fixing the flaws in capitalism will have implications for capital flows. Capital will go where it is most welcome, and a failure to reform the system could result in an exodus of capital, exacerbating social and economic problems.

Impending Revolution:

The speakers end with a cautionary note that if the flaws in capitalism aren’t addressed, it may lead to a revolution, driving capitalists away and worsening the country’s fiscal and social health.

These points collectively highlight the interconnectedness of politics, economics, and social well-being, emphasizing the need for thoughtful, unified action.

Shift in Corporate Revenue Distribution:

Ray Dalio notes that 50 years ago, 6.5% of corporate revenues went to shareholders, whereas today, the number is 13%. This shift is partially attributed to economic philosophies like Milton Friedman’s view that corporations exist to maximize profits, popularized by figures such as Gordon Gekko.

The Cost of Greed:

Jones argues that the culture of greed has contributed to issues like the opioid crisis, wealth disparity, and social divisiveness in the U.S. The culture of “shareholder primacy” has led to profits increasingly being directed towards the 1%, rather than distributed among employees, communities, and other stakeholders.

Workplace as a Starting Point:

Jones suggests that the workplace is crucial for initiating social change. He notes that 45% of our waking hours are spent at work and highlights that six million employees of public companies in the U.S. live below the poverty line. Jones argues that this is indirectly a tax on society, as these workers are subsidized by the general populace.

Questions for Boards and Shareholders:

Jones calls on board members and shareholders to consider how many employees are not making a living wage compared to CEO pay. He asks whether engaging in practices like share buybacks and paying dividends is fair when employees are struggling to make a living.

Scale of Different Sectors:

In the conversation, it is pointed out that philanthropy alone isn’t sufficient to address these issues. Business, which is 40 times the size of private philanthropy, must also contribute to social well-being.

Bipartisan Cooperation:

Another speaker suggests treating the wealth gap as a national emergency and calls for a non-partisan, knowledgeable committee to address it. The emphasis is on engineering solutions together, learning from on-the-ground practitioners as well as economists.

The conversation ends with a consensus on the need for a multi-sector approach, combining efforts from the private sector, philanthropy, and the federal government to create a more equitable society.