Ray Dalio’s Exceptional Insight!

One of my favourite investors is Ray Dalio. I had reproduced his recent interview with Bloomberg in words as follows. Hope it helps in your investment decision. 
Recap of Ray Dalio Economic Machine
Productivity Matters in the Long Run
– What you earn is what you get to spend.
Short term debt cycle – aka business
cycle 5-8 years allows us to spend more than what we earn over a short period
of time, but when you pay back, you have to spend less
Long term debt cycle – 50-75 years
(1930s and 2008) i.e. when you have too much debt relative to income that you
cannot service anymore and when rate of interest goes to zero, there cannot be
stimulation anymore, we run out of usual monetary policy, then you have to go
to monetary policy 2 which is QE. This happens in Great Depression and GFC.
Current Situation – Pushing on a string
QE which means purchase of financial
assets by the central bank and the sellers of those financial assets then buy
other financial assets and cause the price of these assets to increase, which
have the effect of diminishing returns eventually. And when expected returns
are low in relationship to cash, one is almost indifferent. So when you buy
that bond, when the fed put that money in the system, that person is going to
be indifferent. This is called “pushing on a string!”.
Pushing on a string begins in 1935
and are now going in a situation which is somewhat worldwide analogous to that.
We approaching it countries by countries.
Countries analysis
Japan were
the first for couple of decades because they put interest rate at zero and they
are trying to get 2% inflation but it is not working.
Europe is there
also. Across the curve, we have interest rate at zero and likely negative depending
on where and it is certainly not going to work and the purchase of these
financial assets is getting transmitted to currency movement. Then the
effectiveness of raising those financial assets is limited.
In USA there is little more room. She is close to zero interest rate,
and then if you take the spread, the spread are relatively low, little less
than 2% bond yield and equity expected return is approx. 4%, so there are some
spread there, some ability. The issue is asymmetric risk to the downside.
Monetary Policy 3 – putting money directly in the hands of spenders
For upside, tightening is always
going to be effective to raise interest rate. Things are going to slow down
because everybody has lots of debts, so not a problem.
The situation is the risk to the
downside. This is risky. Then you need other forms of stimulation which is monetary
policy 3. This is not QE because money is in financial community and has little
effect anymore. This is towards mainly to put money directly into the hands of
spenders! E.g. print money and hand money to consumers.
And with combination of fiscal and
monetary policy, Fed government run deficit where central bankers can monetize
it by lending the money. Continuum one i.e. “Helicopter Money” process of
putting money into people legally to spend it and it can bypass the financial
market.  
History happens before but just that
it does not happen in our lifetime, so it goes unnoticed.
Next Big Move
Ray Dalio mentioned the next big move will be QE! It is not the 25 basis
points type of hike, which is not the big move he meant. By then, it will be a
serious mistake. Circumstances now have surprised the Fed because they have not
pay attention to the long term debt cycle. Our risk is not inflation and not
overheating of the economy but long term debt cycle.
Asset Prices
It will correct to a point where the
risk premium (or spread) comes back.
Ray Dalio is not
bearish on the stock market!
Expect stock to return 4% which is
long term return and this is a problem for savers e.g. pension fund. It is like
a slow growing cancer, because it will not happen overnight but it means we
will have not enough to fund those return.
Investors have choice of 1) Cash – zero % return 2) Bond – 2% return and 3) Equity
– 4% return.
When assets sell off, it becomes
attractive, and then it draws investor in. The issue is the possibility effect of negative feedback loop that comes from
the ineffectiveness of monetary policy,
so when stocks go down and have
a negative wealth effect, this transmit to negative effects on economy and if
you don’t have the ability to ease, that is worrying. E.g. USA and like Japan.
Investment Strategy
Good strategic asset allocation
This means balance portfolio and not
go to table and bet against active investors like Ray Dalio. It is not easy to
win in the market. Ray Dalio’s Bridgewater fund does not just go systematic
long everything. It can go either way. E.g. in 2008 they return is 10%.
“I am so scare about being wrong, that it helps to
reduce my chances of being wrong and I don’t take bets that I don’t feel good
about and we diversify our portfolio!”
A balanced portfolio is a well-diversified
one. Remember asset class always outperforms cash!
The only exception is during Depression.
Have gold in the portfolio 5-10%
“Prudence is important thing to do!”
Don’t make tactical bets
Don’t compete against the
professional and do not try to move around in the market and you probably are
going to lose. E.g. you have a strategy which is good, and then you change your
mind which is not helpful.
On Oil
Cannot tell
On China
Very similar to the situation that
USA use to go through in the past. The issue is you
cannot have debt cannot rise faster than income.
And this is happening
in China now.
China needs to have a slower rate of
debt and they need to restructure that. USA has 3 major debt restructuring and
done that successfully. It is going to be a different kind of industry. E.g.
steel industry in USA changing into consumption then to digital technology.
China needs to restructure their
economy which is a difficult thing to do, and they also have a balance of
payment issues. (i.e. outflows).
Leadership
Leadership to manage it matters! According
to Ray Dalio’s contact in China, he claimed that China
has very capable people in leadership.
But not the stock market handling
recently. That is not capable. Dalio thinks that China leadership capability is
equal to the best in the world.
Heart Transplant
It is like China is going through a
Heart Transplant! You need to right execution but it is going to be fine in the
long term after the operation but it weakens you. But you will get through it
and be better than before.
Balance of payment issues
It is difficult because money is leaving
the country. China has lots of control because many enterprises are
state-owned-enterprises (SOE). China can open the bond market to have greater
control over it.
Devalue currency
Will China devalue its currency? Ray
Dalio does not know and he said it is too close to call.
Market in general
In general we will have slow growth,
and sees up and down. This presents difficulty for monetary policy. We will see
currency volatility.  
Ray Dalio is not expecting the 2008
type of crisis. Definitely not a big bang type of
crisis in the near term. It will be stagnation and choppy!
In a zero interest rate environment,
when there is a market sell-off, there will be risk premiums, and money will
flow back into the system. They will change from cash to assets and so on a so
forth
He is more concern
about the negative feedback loop.
E.g. stocks decline and dollar
increase and USA becomes less competitive i.e. essentially tightening of
monetary policy. Then how exactly this effect is passed into the economy is the
asymmetrical risk that is of concern.
On Politics and Donald Trump
Ray Dalio mentioned that there is a
part in his youtube “Economic Machine” video that pointed out this. During a
part of the economic cycle, there will be tension between the “haves” and “have
not” and people are frustrated at the government. This is no different in
Spain.
The emotionally charged individual
who may not be well-informed in choosing leaders might select leaders who are
not capable and as emotion themselves. And if that happens and normally prone
to happening, which means a type of leadership that handle the situation can be
worse than a capable and moderate type of leader who understand how the machine
works!
If we have one group fighting
against another, it is bad. If a moderate leader can bring together and work
together, that is good!
Rolf’s Summary
  • Next big move – QE3 or even Monetary
    policy 3 where money is put directly into the hands of spenders. 
  • The biggest concern is asymmetrical
    risks to the downside or negative wealth feedback loop.
  • Not bearish on stock market. Predict
    long term equity expected return of 4%.
  • Strategic over tactical allocation.
    This means have a balanced portfolio and well diversified
  • Have gold in the
    portfolio 5-10% 
  • Always be very prudent. 
  • Cannot forecast oil
  • China is going to be fine in the
    long term. 
  • Bet on consumption and digital technology companies.
  • Slow growth environment and choppy
    market with volatile currency.
  • Do not expect major crisis in the
    near term.
  • Politics and the selection of leader
    matters to the economy.

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4 thoughts on “Ray Dalio’s Exceptional Insight!

  1. Thank you for typing it out 🙂
    I watch Mr Dalio too.

    "Remember asset class always outperforms cash! The only exception is during Depression."

    agree! remember asset class does not always equals equities only.

    "China needs to restructure their economy which is a difficult thing to do, and they also have a balance of payment issues. (i.e. outflows).

    Leadership
    Leadership to manage it matters! According to Ray Dalio’s contact in China, he claimed that China has very capable people in leadership. But not the stock market handling recently. That is not capable. Dalio thinks that China leadership capability is equal to the best in the world.

    Heart Transplant
    It is like China is going through a Heart Transplant! You need to right execution but it is going to be fine in the long term after the operation but it weakens you. But you will get through it and be better than before."

    just talking about this: http://sgbudgetbabe.blogspot.sg/2016/03/how-china-will-affect-singapores-stock.html?showComment=1458487781548#c6516583389311602402

    "Next big move – QE3 or even Monetary policy 3 where money is put directly into the hands of spenders. "

    I'm betting on fiscal policy. Bernie probably may not win but he may have helped putting part of the solution out there – http://www.businessinsider.com/bernie-sanders-spending-plans-would-radically-change-the-us-2015-7?IR=T&r=US&IR=T

    Crumbling infrastructure in America – http://www.cnbc.com/2013/11/21/crisis-in-america-a-crumbling-infrastructure.html

    1. Hi SMK,

      Thanks for the comments and dropping by.

      Yes, agree that asset class is not necessary equities. Over time equity is still one of the best performing asset class, but dictated by what and when we buy though.

      I read your comments on BB blog and indeed not all overcapacity in China will be converted into internal consumption. The inefficiencies have to go. Perhaps this is part and parcel of an overheating economy cooling down.

      As for US, the innovations and technology advancements of businesses will never going to let them down during our lifetime. It is just so vibrant. The drag is going to be politics and government, I think.

  2. You can get a 106 page pdf file titled
    Principles by Ray Dalio on the Bridgewater website. It details his life and management principles.

    1. Hi My2cents,

      Thanks for dropping by and noted your kindness in sharing.

      Ray Dalio is one of my favorite investors as far as macro investing is concern and his views about economy going back more than 100 years.

      Below are other articles I wrote about Ray Dalio last year. There is also a 300 over pages free pdf on his economic principles which I read last year as well.

      🙂

      https://rolfsuey.com/2015/09/ray-dalio-man-behind-economic-machine.html?m=1

      https://rolfsuey.com/2015/11/the-5-stages-of-empire-ray-dalio.html?m=1

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