Ray Dalio, founder of Bridgewater Associates, the world’s largest macro hedge fund with AUM $120 billion provided an hour-long interview with CNBC’s Maria Bartiromo. The law of large numbers tells you that it is impossible to manage large AUMs with historical phenomenal returns. Yet, Dalio has defied this logic and has been listed as the top hedge fund by net gains since inception. The interview can be found here: http://www.youtube.com/watch?v=SFaRazMpxcM
Key takeaways:
Deleveraging: There is a point where you cannot raise debt relative to income anymore. Debt is a commitment to deliver money. There is no such thing as velocity of money because demand can be best measured with spending not with quantity of goods (as asserted in traditional economics).
Beautiful deleveraging: Right balance between 1) austerity 2) debt write down 3) printing of money. Instances when it occurred: England after WW2 and U.S. after the Great Depression. Nos. 1 and 2 are deflationary whereas No. 3 is inflationary. You have to be mindful of the social inequality gap in addition to getting the balance right. It is interesting to note that Japan’s total debt to GDP is 500% and government debt to GDP at 270% which far exceeds U.S.
Three positive effects by lowering high interest rates: 1) easier to service debt 2) cheaper to buy on credit 3) present value effect on assets, i.e. asset values rise.
Bubble origination: Debt growth for purchase of financial assets, up to where you can’t service that debt, which is worse than inflation, e.g. 1929, 1989 Japan and 2007 credit bubble.
Europe: There is a 50-50 chance that Greece will leave Europe. Events may play out similar to the Latin American debt crisis (classic lost decade), i.e. early stages of major deleveraging. Some recapitalization of banks, equivalent to IMF-type of deleveraging.
Individual investors: Should have four different types of portfolios given that they don’t have the competitive edge by competing against specialists (alpha is a zero sum game) and they wouldn’t know which of the one of the four scenarios will outperform. There are two main drivers of asset class return, i.e. growth and inflation, since the price of security is a function of growth and inflation. To elaborate further, when there is no inflation and economic uncertainty, there is an inverse relationship between the price of bonds and stocks. When there is inflation and economic uncertainty, there is a positive correlation between the price of bonds and stocks. Read more on risk parity on Bridgewater's website.
Key takeaways:
Deleveraging: There is a point where you cannot raise debt relative to income anymore. Debt is a commitment to deliver money. There is no such thing as velocity of money because demand can be best measured with spending not with quantity of goods (as asserted in traditional economics).
Beautiful deleveraging: Right balance between 1) austerity 2) debt write down 3) printing of money. Instances when it occurred: England after WW2 and U.S. after the Great Depression. Nos. 1 and 2 are deflationary whereas No. 3 is inflationary. You have to be mindful of the social inequality gap in addition to getting the balance right. It is interesting to note that Japan’s total debt to GDP is 500% and government debt to GDP at 270% which far exceeds U.S.
Three positive effects by lowering high interest rates: 1) easier to service debt 2) cheaper to buy on credit 3) present value effect on assets, i.e. asset values rise.
Bubble origination: Debt growth for purchase of financial assets, up to where you can’t service that debt, which is worse than inflation, e.g. 1929, 1989 Japan and 2007 credit bubble.
Europe: There is a 50-50 chance that Greece will leave Europe. Events may play out similar to the Latin American debt crisis (classic lost decade), i.e. early stages of major deleveraging. Some recapitalization of banks, equivalent to IMF-type of deleveraging.
Individual investors: Should have four different types of portfolios given that they don’t have the competitive edge by competing against specialists (alpha is a zero sum game) and they wouldn’t know which of the one of the four scenarios will outperform. There are two main drivers of asset class return, i.e. growth and inflation, since the price of security is a function of growth and inflation. To elaborate further, when there is no inflation and economic uncertainty, there is an inverse relationship between the price of bonds and stocks. When there is inflation and economic uncertainty, there is a positive correlation between the price of bonds and stocks. Read more on risk parity on Bridgewater's website.
