Ray Dalio (Trades, Portfolio) is the founder and chairman of Bridgewater Associates, which is arguably the world's premier hedge fund. He's known for his all-weather strategy as well as his recent book, "Principles." Bridgewater turned a profit for investors every year for the last 18 years.
Dalio was interviewed by another famous investor, David Rubenstein, who is co-founder and co-executive chairman of the Carlyle Group (CG, Financial), on Thursday.
Rubenstein starts off by asking whether Dalio foresees another crisis. Bridgewater navigated the last one expertly. Dalio thinks that back in 2007, it was easy to calculate that there were debts that needed to come due and there wasn’t an adequate amount of funding. Bridgewater logically anticipated that and positioned for it. But it isn’t the same now.
The guru observed that we are looking out at a more gradual squeeze this time. Here he seems to refer to U.S. sovereign debt (but doesn't specifically say so). He does add that with pension liabilities and health care funding, the U.S. has large deficits. (It is not a unique situation to the U.S.)
He further thinks that if the monetary policy can’t be effective anymore (as we are already at its limit given interest rates), there is a problem. What kind of monetary policy will we have? He sees a high likelihood of debt monetization.
Debt monetization happens when the central bank directly finances government operations. When government expenditures exceed revenue through taxes, the central bank is owed by the government. The government can settle this in various ways, but I think what Dalio is concerned about is that it will do so through money creation. This could be one-way money creation through the Federal Resrve would finally result in spending in the real economy (something that never really worked under quantitative easing), but that could also finally trigger inflation.
The guru talks about this in terms of there being a high likelihood that a lot of spending isn't well funded. He doesn't seem sure about the exact direction of future politics, but does believe we are likely to have more polarized policies in the future.
Dalio also discusses the mindset that has made him and his firm successful. He thinks people are often too attached to wrong opinions. If you know how to stress test your opinions, you can learn a lot about raising the probabilities of being right. He advises you to write down your principles. Almost all of your principles can be converted into algorithms.
At Bridgewater, they recruit people on the basis of three things: values, abilities and skills. Values and abilities are the most important, while skills are the least important. Values include things like being on a mission, abilities mean whether you are creative or a big-picture thinker and skills are things like being able to program.
Disclosure: No positions.
Read more here:
- Ray Dalio Believes We Are in a Self-Reinforcing Sag
- 3 Equity Ideas From Bill Gross
- Steve Eisman's Favorite Shorts and Longs
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