Notes on Ray Dalio on Global Financial Situation

Ray Dalio addressing the Council on Foreign Relations, interviewed by Maria Bartiromo:

History repeats itself in the cause-effect relationship machine of history, how do deleveragings work?  Thinks of 80-82/Latin American debt crisis when he sees the market today.  Credit cycle described: three positive effects of lower interest rates — lowering debt service costs, items cheaper to buy on credit and increasing net present value of cash flowing assets (which produces wealth which allows more borrowing.)  But debt can’t rise faster than income forever; then de-leveraging happens which is painful.  Depression is the phase of de-leveraging when austerity and debt restructuring happens.   Austerity, write downs, printing of money: two deflationary one inflationary — a balance between them is a beautiful de-leveraging.

Problems with VAR: borrow short lend long fine until volatility changes.

How he sees Europe: different countries so different dynamics between central banks and different fiscal policies.  Facing $2 trillion losses he estimates on the debt that exists (ECB debt?)  Solve this from either Germans & other northern europeans but that will fall short.   Could try austerity and debt write downs, but that’s a depression: a la 1933 Roosevelt.   Or print money.  Does the Euro look different in a year?  50-50 Greece leaves the Euro  in a year.  Classic lost decade similar to Latin America’s.  Big de-leveragings is a test of the character of the people (but social questions are emerging.)  Right now, Japan has total debt to GDP of 500%, Government debt of 275%.

Should we be worried about the debt here then knowing that the buyer (China) could have alternatives?  Dalio hedged this answer.  Can’t have a bad downturn due to social consequences; can’t have another 2008.

Stock market up 4% and major bull market after Nixon took dollar off gold (Dalio was on NYSE Floor in 1971.)  Mexico default 1982 (Dow 777) was the low of the market; market printing 1933 — all bottoms of the stock market.  China accounts for 1/3rd of growth globally since 2008.  More deflation than inflation risk short term, reverse longer term (five years+)

Is Gold a constraint on Fed printing?  Gold is a currency, but not effective for large scale funds.  But he owns gold (got audience laughter.)  Maria asks “how much exposure then as an asset class?”  Ray says you need a strategic asset allocation mix overall…Most people shouldn’t do this.  Cited website (presumably this?  Registration requires) for how to balance risk.  Slow absolute reduction in debt to GDP ratio in the US with positive growth right now and that’s good.  Not worried about imminent explosion in US — look at Japan.

No answer on risks in shooting war in Iran; would not buy oil right now.  “so many positions in so many markets” but no view on oil.  Movement towards reform coming in China but as always there will be tensions.  Will contribute to volatility.   Biggest worry is lack of broad expertise in monetary policy which could make us hit an air pocket.

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