We Study Billionaires - The Investor’s Podcast Network - TIP224: Billionaire Ray Dalio's Book - Big Debt Crises (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. On today's show, we cover billionaire investor Ray Dalio's new book, Big Debt Crisis. For people not familiar with Ray, he's one of the most accomplished financial investors of our generation, managing the largest hedge fund in the world with over $125 billion in assets under management. Recently, Ray published his new book that teaches the readers his construct for understanding economic credit cycles. And on today's show, Stig and I are going to conduct an overview of his book. And we'll talk about the more interesting things that we learn.

Starting point is 00:00:30 by going through it. So without further delay, here's our review of Mr. Dallio's new book, Big Debt Crisis. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. All right, how's everyone doing out there? Welcome to the Investors podcast. I'm your host, Preston, Pish and, as always, I'm accompanied by my co-host, Stig Broderson. Like we said in the introduction, we're really excited to be covering Ray's new book, Big Debt Crisis. I can tell you one thing, if you're in finance and you don't have this book, you might want to go out and get it because this is a masterpiece of macroeconomics as far as I'm concerned. So what Stig and I are

Starting point is 00:01:23 going to do is we're going to talk about the overall layout of the book, kind of our general thoughts. And then what we're going to do is we're going to plow into a lot of the main content. And I would tell you if you're new to finance or you're just starting business school or something like that, I would probably tell you that it's probably a hard read for you. This is more of like a master's or doctorate level read. I would tell you to go out there and watch Ray's video. It's called How the Economic Machine Works. We'll have a link to that in the show notes. I also want people to know that Ray has put this book out there completely for free on a PDF. We'll have a link to that in the show notes. And we'll also reference some page number. So if you're listening to this and you're kind of flipping through the book or you have the PDF open on your computer, you'll be able to go to the exact spot that we're talking about and you'll kind of understand the context. And if you want to read more from that spot, you'll be able to do that. With that said, just go ahead and start talking about the first book. When I got this in the mail, I was kind of surprised because it wasn't what I expected. It came in like this case. And then there

Starting point is 00:02:25 was three books inside of the case. I really like how he did this because the first book called part one. It talks about the archetypal big debt crisis. And what it does is there's no case study in here. He's just talking in terms of a template. This is what debt crises can look like. He breaks them into two different crises. You have a deflationary depression and you also have an inflationary depression. And he talks about all the different phases of both of those. and then he also provides an awesome introduction and kind of his thought process of how he constructed this stuff before he gets into those two different types. We're going to talk about that in much more depth.

Starting point is 00:03:04 The second book that you basically pull out of this case is part two, and this is detailed case studies. In this section, he has three main case studies that go into a lot of depth, 185 pages just covering these three scenarios. And the three scenarios are the German hyperinflation from 1918 to 1924. The second one is the Great Depression Time Period from 1928 to 1937. And then the last one in this second book is the U.S. debt crisis from 2007 through 2011. Then the third book, which is 219 pages, this is 48 case studies of various inflationary depressions

Starting point is 00:03:50 and deflationary depressions throughout the last 100 years. I know we're really propping this up, but I think once you get your hands on it, you'll absolutely understand what we're getting at. So let's go ahead and dive into the first book. And Stig, you had some notes that you wanted to talk about at the introduction of this first book that I think are valuable for people to hear. So take it away. What I really like about his book is how good he is at categorizing. This is stage one. This is stage two, stage three. and we'll go through those stages afterwards. I think that's extremely valuable compared to some of the oil materials that you see out there, which is more like, we can't really know.

Starting point is 00:04:27 It's just too complicated, too many factors at play. I think Reddell just look through that and say, this is the template. What I like Stiggin, and if you read principles, you'll kind of understand what I'm saying here. Ray is almost like a programmer in the way that he describes things. A lot of people will write a novel and it kind of jumps around in space and time. and then you've got to try to piece it together. But Ray writes this book as if it's like he's writing a line of code. And how ordered, everything is so ordered.

Starting point is 00:04:59 And it makes sense. And it's just so well, I mean, he must have edited it 100 times in order to whittle it down and construct it in a manner that is just so synthesized. And I think that's probably one of the reasons I like reading his material so much is because it just makes sense the way that he organizes it. Just in terms of the framework, just something I'd like to point. out before we go through the cycles, is that debt is not a problem per se, because you will hear us talking about credit. You'll hear us talk a lot about debt throughout this book. It's not a

Starting point is 00:05:30 problem per se. The problem is more that if you obtain so much credit and you can't repay it, that's really the problem. He's really shooting at policymakers here because it's too easy as a policymaker to be too loose with the credit and focus at the near-term rewards faster growth to justify this. So he's more aiming at if we change the political system, if we include a more long-term perspective, we can, if not avoid those crises in the future, then we can reduce the impact of them. So what I'm going to do is I'm going to describe the two different, you got the deflationary and you got the inflationary depressions that he talks about here in the book. So the first one, the deflationary depression.

Starting point is 00:06:13 And to give people some context, Ray would describe the 2008 crisis as a deflationary depression. This is how he describes it in the book. He says, policymakers respond to the initial economic contraction by lowering interest rates. But when the interest rates reach about 0%, that lever is no longer an effective way to stimulate the economy. Debt restructuring and austerity dominate. In this phase, debt burdens rise because incomes fall faster than restructuring. The last thing that he really hits on, he says deflationary depressions typically occur in countries where most of the unsustainable debt was financed domestically in local currency,

Starting point is 00:06:48 just like what we saw in the U.S. So that eventual debt burst produces force selling and defaults, but not a currency or a balance of payments problem. Now, when he describes the inflationary depression, the key difference that he typically talks about between these two is whether the country has their own currency or the country's dependent on foreign currencies. This is how he describes the inflationary depression. He says classically occur in countries that are relying on foreign capital flows, and so have built up significant amounts of debt denominated in foreign currency that can't be monetized.

Starting point is 00:07:21 When there's foreign capital flow slow, credit creation turns into credit contraction and an inflationary deleveraging, capital withdrawal dries up lending and liquidity at the same time that currency declines produce inflation. Think of a country that's heavily reliant on capital inflows coming into that country, and then when that reverses, that's whenever you typically. have these inflationary depressions. Now, what's really fascinating, I found an interview within the last month that Ray just recently had, and I'm going to end up playing that for you guys to show you what he thinks is in store for the United States specifically in this next cycle. What I find really fascinating is, based on what I just read to you, you would think that the only kind of cycle we could have here in the U.S. would be the deflationary cycle. But after listening to this, It's a little bit different than what you think.

Starting point is 00:08:13 And so just for a little bit of context, what Ray was asked here, he says, you know, the last, the 2008, 2008, 2009 was really bad. What do you expect in this coming cycle? What might that look like? And this is how he responded. Oh, I don't think that it's going to be as sharp and severe like that. I think it's more going to grind on all of these obligations will be a problem to be funded. and I think it'll be more back there of a dollar crisis than it would be a debt crisis. And I think it'll be more of a political and social crisis.

Starting point is 00:08:47 We have to sell a lot of treasury bonds. We as Americans will not be able to buy all of those treasury bonds. And if interest rates rise too much, the way it usually works is that constricts credit. We borrow less. And that creates a weakness in the economy. So instead, because we'll sell to foreigners, from a foreign point, perspective, when they look at it, they care not about inflation. They care about currency depreciation when they look at the interest rate. So if a currency goes down, the bonds become cheaper. I think the

Starting point is 00:09:18 Federal Reserve at that point will have to print more money to make up for the deficit. That'll cause a depreciation in the value of the dollar. You easily can have a 30% depreciation in the dollar through that period of time. So whenever I heard this, I was somewhat blown away that he would say that the dollar could depreciate by such a large figure. Now, he doesn't say what it would depreciate against. I'm assuming, Stig, I'm kind of curious if this is how you take it. I would think that he's saying it's a 30% decline compared to gold or other commodities

Starting point is 00:09:54 that are like a basket of commodities that he would be saying that. Because I don't know how the dollar could depreciate that much against other currencies. I wish that that would be a follow-up question, but that wasn't asked. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is.

Starting point is 00:10:27 From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year. bringing together activists, technologists, journalists, investors, and builders from all over the world, many of them operating on the front lines of history. This is where you hear firsthand stories from people using Bitcoin to survive currency collapse, using AI to expose human rights abuses, and building technology under censorship and authoritarian pressures. These aren't abstract ideas. These are tools real people are using right now. You'll be in the room with about 2,000 extraordinary individuals, dissidents, founders, philanthropists, policymakers, the kind of people you don't just listen to but end up having dinner with. Over three days, you'll experience

Starting point is 00:11:11 powerful mainstage talks, hands-on workshops on freedom tech, and financial sovereignty, immersive art installations, and conversations that continue long after the sessions end. And it's all happening in Oslo in June. If this sounds like your kind of room, well, you're in luck because you can attend in person. Standard and patron passes are available at Osloof Freedom Forum.com with patron passes offering deep access, private events, and small group time with the speakers. The Oslo Freedom Forum isn't just a conference, it's a place where ideas meet reality and where the future is being built by people living it. If you run a business, you've probably had the same thought lately. How do we make AI useful

Starting point is 00:11:54 in the real world? Because the upside is huge, but guessing you, your way into it is a risky move. With NetSuite by Oracle, you can put AI to work today. NetSuite is the number one AI cloud ERP, trusted by over 43,000 businesses. It pulls your financials, inventory, commerce, HR, and CRM into one unified system. And that connected data is what makes your AI smarter. It can automate routine work, surface actionable insights, and help you cut costs while making fast AI-powered decisions with confidence. And now, with the NetSuite AI connector, you can use the AI of your choice to connect directly to your real business data. This isn't some add-on, it's AI built into the system that runs your

Starting point is 00:12:37 business. And whether your company does millions or even hundreds of millions, NetSuite helps you stay ahead. If your revenues are at least in the seven figures, get their free business guide, demystifying AI at netsuite.com slash study. The guide is free to you at netseweet.com slash study. NetSuite.com slash study. When I started my own side business, it suddenly felt like I had to become 10 different people overnight wearing many different hats. Starting something from scratch can feel exciting, but also incredibly overwhelming and

Starting point is 00:13:12 lonely. That's why having the right tools matters. For millions of businesses, that tool is Shopify. Shopify is the commerce platform behind millions of businesses around the world and 10% of all e-commerce in the U.S. from brands just getting started to household names. It gives you everything you need in one place, from inventory to payments to analytics. So you're not juggling a bunch of different platforms. You can build a beautiful online store with hundreds of ready-to-use templates,

Starting point is 00:13:41 and Shopify is packed with helpful AI tools that write product descriptions and even enhance your product photography. Plus, if you ever get stuck, they've got award-winning 24-7 customer support. Start your business today with the industry's best business partner, Shopify, and start hearing sign up for your $1 per month trial today at Shopify.com slash WSB. Go to Shopify.com slash WSB. That's Shopify. com slash WSB.

Starting point is 00:14:15 All right. Back to the show. It would be natural to say, you know, basket of other currencies. You know, there's an index where you can go in and track how the U.S. performs again the basket of other currencies. But reading Ray's book and knowing how Ray looks at the world of finance, I would be highly surprised if he wasn't comparing that to gold commodities or perhaps a combination of hard assets. Now, whenever I heard this, I immediately kind of flipped through his book to try to understand it because what I found so confusing about that statement,

Starting point is 00:14:47 which was just recently made, was it really kind of goes against one of the main themes that he talks about where the inflationary depressions are typically when a country doesn't have control of their own currency. But he says that it classically occurs and that it's not kind of full proof that that's the scenario that plays out. And so in the first book on page 40, if you guys have your PDF or your hard copy there, if you go to page 40, the very last paragraph that says this, can reserve currency countries that don't have significant foreign currency debt have inflationary depressions. And then the next sentence says, while they are much less likely to have inflationary

Starting point is 00:15:27 contractions that are as severe, they can have inflationary depressions, though they emerge more slowly and later in the de-leveraging process after a sustained and repeated overuse of stimulation to reverse deflationary depressions. So what I find fascinating is, so 2008, he describes as a deflationary depression that we use a significant amount of quantitative easing, which would be this stimulation that he's talking about in this paragraph. And so what I think he's getting at is once you've swapped a significant amount of that credit for dollars that were printed through quantitative easing, and then you've put that into the hands of the people that were holding the assets, the bonds, and even over in Japan, I would

Starting point is 00:16:12 argue that they're doing it with equities. When that swap occurs, you kind of get to a point where you're pushing on a string and you get into this situation where maybe the currency is the next thing that has to devalue. And it seems like that's how Ray's describing this next potential cycle. Without going into all that too much, because I think this gets very technical. But I found that sound by extremely interesting. And something that I had not heard him say anywhere else, we will have a link to that entire discussion in the show notes. So if people want to go and listen to a lot more, there's a lot more discussion that took place than what we We just played for you. You can learn about what causes the phases of the inflationary debt cycle,

Starting point is 00:16:52 which the great part about the book is Ray goes through all five phases of the depressionary and also the inflationary cycle. Something that I think is really important for people to understand is so on page 58, Ray gets into what is called hyperinflation. And what I find fascinating about this. And I think because people who are hearing this might immediately correlate inflationary depression with hyperinflation. And I would tell you that the way Ray describes it in the book is that they are very different events. Hyperinflation is a much more one-off kind of event that is typically characteristic of a smaller country that is heavily, heavily reliant on outside forces and outside capital and policymakers that don't necessarily understand what

Starting point is 00:17:43 they're doing that are printing and printing and printing and all that money just keeps flying out of the country. Just so you understand, the first book kind of splits those two different depressions, the inflation and the deflation one. Instead of talking about the inflation one, which there's five phases, we're going to cover the deflationary one, which has seven phases. We're just going to quickly go through this. Stig's going to outline it for you so you kind get an idea of the level of detail and kind of the way that Ray categorizes each one of these phases. So Stig, go ahead and take it away. Yeah, and those two cycles do have a lot in common.

Starting point is 00:18:20 It's not as different as it may sound. The reason why we wanted to talk about the deflation of the debt cycle, that's because I think that's easier to relate to. Most of us can remember what happened in the cycle from 2007 to 2011, and it's the same template here. So later in the episode, we're going to talk more about this. specific case studies, but this is the general template of what we're looking at. In the first part of the cycle, we have what Ray simply calls the early part of the cycle. And it's the

Starting point is 00:18:49 early part because debt is not growing faster than income. This is a really vital point. We would like income to grow and debt is very efficient in doing that, but we don't want it to outgrow income. That's not going to be good. Then whenever you enter the second stage, which is now that you might enter the bubble. And what's happening there is that you have a self-reinforcing fact because with that rising income comes rising net worth, asset value arise again, and the same is the borough's capacity to borrow.

Starting point is 00:19:22 You can even argue that the bull markets are initially justified because the low interest rate make investment assets such as stocks, real estate, more attractive as they go up. And generally, you could say that economic conditions also improve, which would leave to economic growth and higher corporate profits. Another thing that's very interesting here is that it increases the confidence with the population that this is ongoing prosperity. So it really supports the levering up process.

Starting point is 00:19:54 The issue here in this second phase, which is he calls the bubble, is that as new speculators and lenders into the market and the confidence increases, credit to the market. standards also fall. And this is a bit odd because you would suspect the opposite. You would suspect things that go well, companies are making money. They should hold on now. Banks should just allow everyone to borrow. That's exactly what's happening here. In the third phase, which Redela calls the top, that's when you ever see central banks start tightening and interest rates rise. And you might to some extent say that that is what you're seeing right now with the US economy. As a result of all this, you also see the yield curve is being flat or even starts to invert, which is a very

Starting point is 00:20:39 interesting thing, something you are seeing right now. It's stick. I just want to describe the people what that means, because we say that a lot on the show, and I don't know that people, you know, every listener would fully understand what that means when we say the bond yield curve inverts. And all it means is if you were looking at a chart and you look on the X axis of the chart, that would be the duration of a bond. So a very short, the federal funds rate is like, you know, what's the rate for lending for tomorrow? And then the next one would be what's the rate for a three-month bond.

Starting point is 00:21:15 Then you go to a six-month and then you clear out the 30 years on the far right. When you think about it intuitively, if I'm going to borrow money that's that I've got to pay back in 30 years, I would want a much higher interest rate than something that I'm just borrowing overnight or in a very short duration of three months. When the bond yield curve inverts, what actually happens is you're paying a higher interest rate for a three-month bond than you are for a 30-year bond. And in your mind, there's absolutely no way that can make sense. But this happens. This happens, you know, at the top of credit cycles, you will see that the short duration bonds actually have a higher yield to pay back than long-duration bonds.

Starting point is 00:21:55 And Preston, would you argue that we are now in what Radalia would call the third phase, the top? You know, giving how he describes it in the book? I think so, but it's really hard to say, but I would say so. And I think hearing him talk about he thinks that things are going to be bad in two years from now. You know, a lot of that timing kind of aligns to seeing a top right now. The fact that you're seeing the bond yield curve start to invert in certain areas, I think demonstrates some of that. You're seeing a lot of volatility in the equity market.

Starting point is 00:22:26 You're seeing the lowest unemployment we've had in, I don't know, 25, 30 years. or something crazy like that. So I think all those things kind of lead to the idea that, yeah, you're seeing a top right now. Interesting. So the fourth phase, that's called the depression phase. And whenever Redalio talks about depression, he refers to a severe economic contraction phase. This is the phase where you see last resort financial support and guarantees. You kind of have ejected capital into a systemically important institutions.

Starting point is 00:22:57 And you might even nationalize some of them. Contrary to popular beliefs, this deleveraging dynamic is not driven by psychology. It's more driven by the supply and demand and the relationship between credit money, goods, and service. Typically, the way the country's response to this is that they do that with deep austerity. But the issue about deep austerity is that it does not bring debt and income back into balance because whenever spending is cut, income is also cut. So it takes a lot of awful spending cuts to make a significant reduction that again won't be sufficient. That is definitely a recipe of what not to do.

Starting point is 00:23:40 The fifth state he's looking into is what he called the beautiful deleveraging. It is beautiful whenever there's enough stimulation, meaning printing money, to offset those deflationary forces like austerity default. You have to make up for the money that's now gone from the system. The logical question to ask here is, will this not cause inflation? If we just keep on printing money, that should create inflation, right? That is what we learn. But what Ray really gets at here is to think about that a dollar spent is a dollar spent.

Starting point is 00:24:16 That doesn't matter if it's printing money or if it's earned in this situation. So you just need to fill the gap. Rather, the trick is not to print too much money. We'll get to that whenever we're talking about what happened in Germany after the First World War. But in this case, it's really just all about printing that gap and then not do it too much. And then for the final two stages of the cycle, which he refers to as pushing on a string and normalization, that is when eventually the system gets back to normal through the recovery in economic activity. But it does take a long time. did a lot of research based on the past cycles, and he found that on average it takes six years

Starting point is 00:24:59 for real economic activity to reach its former peak level. It takes even longer with the stock market. So the stock market, it typically takes 10 years on average because it takes a very long time for investors to become comfortable taking the risk of holding equities again. Going through those six, seven cycles, you might already have an idea of why Preston and I think we are in the third, the top, the phase of the cycle. By reading the book, you can see how that is his template for how he sees cycles. And then for the remainder of the two other books, he kind of put those case studies into those templates, which to me is a very good way of illustrating with real life examples. Where are we and how can we recognize that as

Starting point is 00:25:41 investors? And perhaps as policymakers, if that is your position, to avoid that in the future. So what's great about the book is what Stig just went through was for the deflationary. He goes in the detail of all seven of those phases. So if you want to know kind of where you might be at in one of those phases, you can read and kind of look for those indicators. At this point, what we're going to do is we're going to transition over to the second book and just kind of lightly cover some of these ideas. And like I told you earlier, it was the German debt crisis, the Great Depression,

Starting point is 00:26:12 and then the 2008 crisis in this book. And so much of what happened in Germany was really a result of how the war reparations from the First World War and how Germany was really kind of set up for failure right out of the gate with the way that the reparations were going to have to be repaid and the amount that was going to have to be repaid pretty much laid the foundation for this event to occur. Stig, I'm curious if you have any more detail kind of point out or the big piece that you kind of took away from the key. case study. One of the things that I took away was what it really means to be printing money. Germany definitely took that to a very different extent than what we've seen. And this was all sparked by Germany taking up a lot of foreign debt. They actually wanted to take on debt in the German mark, but no one wanted to lend the money. Perhaps that should tell them something that it's a bad sign. But the German plan really was that if they won the war, the mark would appreciate that.

Starting point is 00:27:14 making the debt burdens more manageable. And of course, the losing countries would then be forced to pay for the German foreign and domestic debt in the war reparations. As we all know, that didn't happen. And they had to pay back the debt in foreign currencies, so in sterling and US dollars. And they had this idea that they had to print more and more money so they could pay back the debt. Obviously, what happens is if you just keep on printing money and just think the sky's the limit, you will also depreciate your own currency compared to other currencies. So whenever the hyperinflation began in 1922, we saw close to a 10,000 percent inflation rate. And it just went wild. At the end of 1924, they had hyperinflation at a one million percent.

Starting point is 00:28:06 Think about that, inflation of a million percent a year. Clearly, that wasn't good. I think one of the interesting things that really took away from this, aside from the good stories, if you can put it like that, because we don't really hear about a million percent inflation in the financial world. Well, they did five different things in terms of getting out of hyperinflation. And one of them, and one of the most important ones, was to pick the currency. They issued a new currency, the rent and mark, and it was backed by gold-denominated assets and packed to the dollar. That was one of the most important steps to get out of hyperinflation and to build trust again in the financial system.

Starting point is 00:28:42 it's worth of currency. Also, it's a very interesting segue into the Great Depression, where it was actually for the U.S. to go off the gold standard, brought them out of the depression. So I just think that this discussion about the gold standard is very interesting how it can be the solution, but also the problem for economies. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC 2 or running an enterprise GRC program, VANTA keeps you

Starting point is 00:29:30 secure and keeps your deals moving. Instead of chasing spreadsheets and screenshots, VANTA gives you continuous automation across more than 35 security and privacy frameworks. Companies like RANTA, Ramp and Ryder spend 82% less time on audits with Vantta. That's not just faster compliance, it's more time for growth. If I were running a startup or scaling a team today, this is exactly the type of platform I'd want in place. Get started at vanta.com slash billionaires. That's vanta.com slash billionaires.

Starting point is 00:30:04 Ever wanted to explore the world of online trading, but haven't dared try? The futures market is more active now than ever before. and Plus 500 futures is the perfect place to start. Plus 500 gives you access to a wide range of instruments, the S&P 500, NASDAQ, Bitcoin, gas, and much more. Explore equity indices, energy, metals, 4X, crypto, and beyond. With a simple and intuitive platform, you can trade from anywhere, right from your phone. Deposit with a minimum of $100 and experience the fast, accessible futures trading you've been waiting for.

Starting point is 00:30:41 See a trading opportunity. You'll be able to trade it in just two clicks once your account is open. Not sure if you're ready, not a problem. Plus 500 gives you an unlimited, risk-free demo account with charts and analytic tools for you to practice on. With over 20 years of experience, Plus 500 is your gateway to the markets. Visit Plus500.com to learn more. Trading in futures involves risk of loss and is not suitable for everyone. Not all applicants will qualify. Plus 500, it's trading with a plus. Billion dollar investors don't

Starting point is 00:31:17 typically park their cash in high yield savings accounts. Instead, they often use one of the premier passive income strategies for institutional investors, private credit. Now, the same passive income strategy is available to investors of all sizes thanks to the Fundrise income fund, which has more than $600 million invested and a 7.97% distribution rate. With traditional savings yields falling, it's no wonder private credit has grown to be a trillion dollar asset class in the last few years. Visit fundrise.com slash WSB to invest in the Fundrise income fund in just minutes. The fund's total return in 2025 was 8% and the average annual total return since inception is 7.8%. Past performance does not guarantee future results, current distribution rate as of 1231, 2025.

Starting point is 00:32:09 Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income funds prospectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. You know, what's fascinating is Ray also provides a lot of framework for a good way to handle

Starting point is 00:32:32 the crisis and a bad way to handle the crisis. And it's such a useful tool for policymakers in any country to kind of look at what his guidance is based on all the research that he's done through all these case studies where he's seen policymakers that have handled something really well versus how they've handled something really poorly. And the way that he lays it out in the book, he literally lays the good framework right next to the bad framework to kind of give people an idea of how things should be handled, which is quite incredible. Moving on to the second case study in the second book, which was the Great Depression, one of the key takeaways that I had, because Ray lays this out like month by month practically, from 1927, I think he starts at, let me see here, it was around 1927, not 1928 up through 1937. He lays out the play by play of everything that went down. And what I found fascinating was particularly the time frame from 1927.

Starting point is 00:33:32 29, right up until the middle of 1932, because this downturn in the stock market particularly just kept grinding on. Like, if you think about how long that plays out from the summer of 29 into the summer of 32, that is a very long period of time. Like, that is three years of downturn. And when we think back to the 2008 time frame, it just kept grinding from like 2007 to 2009. that felt like that was just happening forever. So I couldn't imagine going through another year of that. And I think the thing that I also find really amazing, he has a chart on page 71 of the second book. And on this page, he shows how when I initially had the 50% downturn in 1929, the market actually had a 48% resurgence. And so any person who was experiencing this, probably, you know, if you're a market participant and you see a 50% downturn, and then you're, you you see the market recover it, 48%, you're like, okay, well, that bout of terribleness is over. Let's get back in, only to find that it dropped another 40%. And then it had another rise of 16.

Starting point is 00:34:44 And then it went down like another 40 or 50%. There was, let me count them. One, two, three, four, five, six, seven. It went through these phases seven different times where a person who's participating in the market would have thought, okay, this thing has to be over. let me reenter only to get clobbered once again. And I think that he has something in here that he wrote that says, if you think that going through this would have been easy to identify where the bottom was, I can assure you that that was definitely not the case because this thing was just, it just

Starting point is 00:35:15 devoured all the market participants until there was just total capitulation and no one wanted to touch it. I really find that quite interesting and very representative of what it's like to be a market participant in something that feels like it's over when, in fact, it might not be. Yeah, you know, it's hard to read the label from inside the box. I can't imagine how it would be like being a participant in the market back then. It's interesting how he outlines what happens in 27 and 28. You saw the stock market nearly doubled in that time frame. And he talks about how stocks were sold at extremely high multiples. Stocks were valued as much as 30 times earnings, which is actually what the US stock market is value at right now. What he's also getting at

Starting point is 00:36:00 is that doing the face of the bubble, the more prices went up, the more credit standards were lowered. What is very interesting is that in 1928, the Fed started to tighten the monetary policy. You saw the rates go up from 1.5% to 5% or a very brief period of time. Just one year later in August 2019, the raised rates again. If we look specifically at the stock market, because it peaked in September 1929, that was when Dow Jones closed at 381. It should take over 25 years before it would reach that level once again. One of the issues that they had was that they couldn't just print money. That is the solution Redalue provides for a more modern context, but at the time they couldn't do that because it was tied to gold.

Starting point is 00:36:53 And they couldn't just keep printing money because then it would allow the population to redeem their money for gold, which they didn't have. So the policymakers at the time were working with the limited toolkit. And it was not before they broke the link with gold that really happened. And with the policies that you saw coming out in 1933 with Roosevelt, that's really whenever you see the U.S., I wouldn't say coming out of their session. That's probably using that prematurely. but they were slowly working them out of it. And one of the key things was really to leave the gold standard. Referring to the discussion before what happened in Germany in the 20s was really interesting

Starting point is 00:37:33 because in Germany they needed to peg it to the gold standard, whereas the U.S. needed to leave the gold standard to get out of the recession. I want to highlight one other thing that I liked whenever I was going through these case studies. He broke the book into a right rail, almost like a web page, how you have a rail on the side. And in that rail, he has, I'm just looking at page 87 here. He has one, two, three, four, five, six, seven, eight, eight news headlines in that rail that encompass, you know, various points of time that match up with the main body of the text that he's talking about to give a person a qualitative feel for the headlines that were in the newspaper throughout the entire duration of the boom to the

Starting point is 00:38:19 bust to the recovery of what it looks like. And I'll tell you, I was just reading each one of these headlines. And to me, it really gave me a good sense of what it would look like as you were going through it. I think this was such a great way of keeping the person in that moment as you're kind of reading it. Just another attribute that just adds to the way that you're going through this and trying to experience the bubble as if you were going through it at that moment in time. I really like that. So let's go ahead and jump to the last one, which was the 2007 through 2011, more recent crisis. In this, there's a lot more detail. And I think that most of that is because of just the availability of data that he was able to use and kind of go through. He goes into great detail

Starting point is 00:39:06 talking about all the mortgage lending, the CDOs, the mortgage back security stuff. I mean, it's just, it's quite extensive. Lots of charts going through the inflation that it heard through that period of time. So you kind of understand that, what the unemployment numbers look like. Again, all the headlines are on the side. But of all of that stuff, I found one thing very noteworthy that I want to talk to you guys about. So in here, Ray publishes a letter that he wrote to clients and also policymakers. And the date on this is July 26, 2007. This is what Ray wrote to his clients. Now, just to frame this, the 26th of July 2007, was probably within 30 days of the top of the stock market. It might have been within like 15 days of the top of the stock market

Starting point is 00:40:00 in 2007. The title of this is, is this the big one? And this is how it reads. You know our view about the crazy lending and leveraging practices going on, creating a pervasive fragility in the financial system lending us to believe that interest rates will rise until there is a cracking of the financial system. There's a lot more. I'm skipping through it, but then he writes, a few months ago, we undertook an extensive study to see which market players held which positions, especially via the derivatives market. And we concluded that no one has a clue. That is because one can only vaguely examine these exposures one level deep. He's talking about his severe concern for the market conditions. Only a couple weeks later on August 10th, he writes another one, another letter to his

Starting point is 00:40:45 clients and policymakers, and this one's titled, This is the big one. And the letter reads, by that, we mean that this is the financial market unraveling that we've been expecting deeper in the letter. He writes, we have a game plan developed over many years that we have confidence in because we plan for times like this. And I mean, realize this is the top of the market. Like he is literally at the top of the stock market and he's writing these things. Anyway, so he goes through this letter and he's saying, there is going to be a financial crisis, a very bad financial crisis. And he wrote the letter at the very top of the market. He includes us in the book. And it is just fascinating to kind of read and see the foresight that he had at that moment in time is just mind-blowing. Stig, I'm curious to

Starting point is 00:41:29 here's one of your key takeaways for the 2008 crisis from the case study in the book. I think one of my key takeaways was how much credit standards would lower through this bubble. As we talked about before in this episode, you would typically expect that they should tighten the credit standard as the good times are rolling on, but the opposite happens. Greed kicks in. At the time, you saw a lot of self-reinforcing expectations that were drawing in new borrowers and lenders, for that matter, who did not want to miss out of the action. You had cases where you could borrow more than 100% of the value of your house because you expected it to go up in price or value as you would probably be looking at it. You have the bottom quintile, so the bottom 20%,

Starting point is 00:42:15 they increased their debt more than anyone else through this time period. And this was a group who did not diversify into other asset classes who had their net worth tied to that home and to that continuing to go up. Hopefully that's a lesson learned. I don't know if it is, I do not think that the credit standards are as low today. As a side note, I would also like to say it's interesting how Warren Buffett has placed a huge bet on the American financial system, which kind of surprised me whenever I saw that. And he's usually right, I'm wrong. I do want to say, though, in the bull case, if any, for that bad, critic standards seems to be very different today than back then. One key takeaway is I would like to compare the Great Depression, so from 1928 to 1937 and then to what we saw here in 2008.

Starting point is 00:43:04 One of the big differences is the speed in which the policymakers made the crucial step to make an ejection of capital into the system. Already November 25 in 2008, you saw the Federal Reserve and Treasury announced in 800 billion in lending and asset purchase, and you saw the first quantitative easing program kick in. And that really filled that gap in the credit that were so desperately needed, which you didn't see during the Great Depression. All right. So that's going to conclude our summary of this book. This is really technical stuff. And I know that if you're listening to it, it might be difficult to fully understand everything that we're trying to cover here. I would strongly encourage you to get the hard copy on Amazon because if it looks anything like my book, it's tabbed, it's highlighted. I just have notes all through this thing. It's just, a lot easier for me to read than on a computer screen. That's just my personal preference. The outline of the book is very easy to follow. And it's really great for referencing. If you're like, oh, I want to read this section over again. It's so easy to find the way that he has it laid out.

Starting point is 00:44:09 Big fans, we didn't even cover the third book, which was the 48 case studies. And it's a treasure trove of examples of not just in the U.S. but all over the world where these debt crises have played out. You really couldn't get a better treasure trove of information as far as I'm concerned. So that concludes our summary of big debt crisis by Ray Dalio. All right, guys. That was all the press down I had for this week's episode of the ambassadors podcast. We see each other again next week. Thanks for listening to TIP. To access the show notes, courses or forums, go to theinvestorspodcast.com. To get your questions played on the show, go to asktheinvestors.com and win a free subscription to any of our courses on TIP Academy. This show is for

Starting point is 00:44:53 entertainment purposes only. Before making investment decisions, consult a professional. This show is copyrighted by the TIP network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP224: Billionaire Ray Dalio's Book - Big Debt Crises (Business Podcast)

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.