Interest rates will continue rising until brakes are put on the economy: Ray Dalio

So it's a challenge when when you say I think you're probably also return referring to Japan too that what Japan did when they had u a weak economy and deflation is they forced money outside the country to weaken the yen and to buy US treasuries and in the buying of that US treasuries then that supported the treasuries and it weakened their currency and then their central bank also bought a lot of uh JGBs, government bonds. Now there's a pressure to reverse that because they have too weak of a currency. A a lot of ch uh Japanese have lost a lot of money in their bonds because the currency's we been weak and the interest rates been low. So in a desire to weaken th uh reverse those forces, there's a desire to move those that money back. So it's a very difficult job. You know, you can't fight the tide. you can only um yeah I think by and large he's um doing uh as well as can be expected in a difficult situation. Where does this leave the Fed? Because like all global central banks they are facing the dilemma. Do they defend inflation credibility or do they defend growth? What does the path of prudent policy look like? Well, very classically when this happens, you see a rise in real interest rates which we're seeing and then you also see a tightening of central bank and that is the way the the brakes are put on and so you know that we will go through that and what the brakes mean is that it's not as good for growth and so on. We also have um a a lot of selling of debt and equities the capital markets by um the the you know the new u AI and the capital expenditures related to this. So there's a lot of selling beyond the US uh treasury selling there in terms of uh the other bonds. So a break will be put on that. So, and then when we're dealing with credibility, yes, the obvious choice is if you if you don't put the brake on, then you're going to see real interest rates go down and inflation become an issue. And then, so we're in this classic cycle. When you see real rates rise and you see the short end rise and you start to see the yield curve flatten because of that, then you're starting to see the breaks and that's when it starts to have an effect on other markets like the equity market and other markets. >> The equity market seems to be plotting on to new pies and and the equity market seems to be in denial about higher rates, but they have to live and cohabit in a higher for longer environment. >> Yes. The way it works is you can uh um when bonds go down, interest rates go up. >> When stocks go up, future expected returns go down. And you can calculate the relative returns of those because you can look at the present value, expected present value of the cash flows. Of course, there's a lot of uncertainty about their equities and bonds. You know what that is? What's happened is that represented a cusher. In other words, when we started this cycle, the expected returns of equities were much higher than the expected returns of bonds. Because of that change in pricing, that cushion has come down. And so now you're starting to see credit spreads start to widen. You're starting to see that issue enter into it. So, we're in the part of the cycle where interest rates can rise um uh without um sending the equity market down because there's enough earnings growth and there's enough expected return. But with that cushion comes down, then you're coming later into that cycle. So, that's where we are. We know that we haven't yet put the brakes on. Okay. For the reasons that you're saying and the credit spreads are still narrow and they haven't risen much. So therefore the rationing is just beginning. We haven't had any rationing. So we can expect interest rates to rise more I think until you get to the point that that starts to happen. Let's touch on AI and the buildout has been likened to the fourth industrial revolution. However, we are starting to see sudden signs of AI related stress in the credit markets. Oracle's credit default swaps and and you alluded to this, Rey, hit a record. We're seeing a blowout with SpaceX's credit default swaps. Is this a warning sign that the bubble is about to burst? >> Yeah. The the cycle is always the same. Okay. great technologies come along and they're and they need a lot of funding and everybody believes in them because they are miraculous changes. you know, like in the 20s, it was imagine that that it was the first time there was electricity in houses, so there was um lights and refrigeration and the first time there's cars and the first time there's movies and the first time there's radio and the first time there's airplanes that you can go on. So, everyone wants to bet on those new technologies and when those new technologies are formed, they need capital. They need a lot of capital, but it's all very imprecise, you know. Um, if you don't invest all out, you're going to lose the tech war. So, you have to get the capital, right? And then because everybody believes in the technology and doesn't distinguish whether it's a good investment from whether it's a good technology, then people invest a lot and they'll borrow to invest a lot in that. And because it's so imprecise, you end up having uh often the financial problems related to that new technology.