Great interview in this week’s Barrons with Ray Dalio of Bridgewater. For those who aren’t familiar with Dalio he is the founder of the largest hedge fund in the world with $75B in assets under management. I highly recommend reading the interview in its entirety, but for those just looking for some highlights I’ve done the legwork for you:
On the stock market rally:
“It caused the stock market to retrace about 60% of its decline, and it caused the U.S. economy to retrace 40% of its decline. But it did not produce new financial assets. There has been very little new lending. The stimulus produced very little in the way of economic activity.”
On the bailouts and potential for recession:
“There is a lot of criticism about saving financial institutions and running a big budget deficit, but if the government didn’t do those things we would be in a terrible situation. It will be impossible to stimulate that way in the future because politically it is untenable. That’s a risk because, between now and 2012, the economy will probably go down again, and it will be important for monetary policy and fiscal policy to be able to be stimulative, and for the Federal Reserve to be able to purchase assets again.”
How soon will the recession occur?
“It will probably come sooner than most recessions do. Usually, there is about five years between recessions, but for various reasons related to the size of the debt, the next recession is going to come sooner.”
On the recovery:
“But it is a fragile recovery, and credit growth is not picking up very much, and it goes back to the fact we still have too much debt. We have not reduced our debt burdens in any way significantly. What we’ve done is to largely roll them to the vicinity of 2012 to 2014. Corporate balance sheets are much, much better because they extended the maturities of their debt and slashed expenditures by laying off workers.”
On Europe’s sovereign debt crisis:
“The European situation is a particularly risky one for a number of reasons. One, the size of the debt dwarfs that of any other debt crisis. It dwarfs the Latin American crisis. It dwarfs the Asian Contagion. These are enormous, enormous amounts. A lot of attention is paid to the sovereign debt, but there are also big private-sector debts. It doesn’t make much difference whether it is government or private, there is way too much indebtedness in these countries….”
On the UK:
“The British will happily say, “Thank God we have never joined the euro zone.” The English also have way too much debt, but they have an independent currency and can print money and avert a debt crisis. Debtors with no ability to print money are the ones in trouble.”
How is he playing it all?
“Our portfolio is mostly skewed to Treasury bonds, gold and emerging-market currencies, especially Asian currencies. We also hold commodity assets that are limited in supply and that high-growth emerging countries need. I want to minimize my exposure to the major developed countries’ currencies — the U.S. dollar, the euro, the British pound and the yen — because those countries have a lot of debt, and they are going to need to print more and more money and will have more sluggish growth rates. I prefer the yen to the others.”
“The depreciation of the major currencies and the printing of money will not cause a significant general level of inflation anytime soon. The printing of money will offset the deflation that is coming from the weak demand for goods and services due to weak credit growth. For example, in March of 1933 the U.S. printed a whole lot of money, and that had the effect of converting deflation into modest inflation, but not a high rate of inflation…. My point is, in developed countries there is too much of most things at the moment, and that’s creating a deflationary environment. There is too much manufacturing capacity. There is too much labor. There is too much housing stock. As Europe’s economy weakens and its debt crisis worsens, the printing of money does not mean that it will produce an accelerating inflation because simultaneously there is also less being purchased, and the surpluses are already causing deflationary pressures. That is why, contrary to almost everybody’s belief, I believe the bonds in countries that can print money will be good investments.”
Hmm, that all sounds very familiar….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.