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bottom line interpretation of the "quote of the day," below: in the current environment, equities are dangerous to your wealth. the statement below is saying that real equity prices won't reach new heights until 2020 or later.
re: equity performance in deleveraging cycles
ray dalio, bridgewater capital
"Though it takes about a decade to return the economy to its former peak levels, it typically
takes over 20 years for real stock prices to reach former highs, because equity risk premiums take a very
long time to reach pre-deleveraging lows. "
btw, this doesn't deny the possibility of bear market rallies. from the same source:
"in the Great Depression there were six big rallies in the stock
market (of between 21% and 48%) in a bear market that totaled 89%, with all of these rallies triggered
by these sorts of increasingly strong dosages of government actions which were intended to reduce the
fundamental imbalance."
quotes are from dalio's "template for understanding" - a concise overview of how the economy and financial markets work: cycles, leverage, liquidity, currencies and so on.
http://www.bwater.com/Uploads/FileMa...erstanding.pdf
[if you're interested, you might also like to look at his quick slide presentation, at
http://www.bwater.com/Uploads/FileMa...tation.pdf.pdf ]
another key passage for our unfolding situation:
"currency declines are typically acceptable to governments
because a weaker currency is stimulative for growth and helps to negate deflationary pressures.
Additionally, when deflation is a problem, currency devaluations are desirable because they help to
negate it.
"Debtor, current account deficit countries are especially vulnerable to capital withdrawals and currency
weakness as foreign investors also tend to flee due to both currency weakness and an environment
inhospitable to good returns on capital. However, this is less true for countries that have a great amount
of debt denominated in their own currencies (like the United States now and in the Great Depression) as
these debts create a demand for these currencies. Since debt is a promise to deliver money that one
doesn’t have, this is essentially a short squeeze which ends when a) the shorts are fully squeezed (i.e.,
the debts are defaulted on) and/or b) enough money is created to alleviate the squeeze, and/or c) the
debt service requirements are reduced in some other way (e.g., forbearance).
"The risk at this stage of the process is that the currency weakness and the increased supply of money
will lead to short-term credit (even government short-term credit) becoming undesirable, causing the
buying of inflation hedge assets and capital flight rather than credit creation. For foreign investors,
receiving an interest rate that is near 0% and having the foreign currency that their deposits are
denominated in decline produces a negative return; so this set of circumstances makes holding credit,
even government short-term credit, undesirable. Similarly, for domestic investors, this set of
circumstances makes foreign currency deposits more desirable. If and when this happens, investors
accelerate their selling of financial assets, especially debt assets, to get cash in order to use this cash to
buy other currencies or inflation hedge assets such as gold. They also seek to borrow cash in that local
currency. Once again, that puts the central bank in the position of having to choose between increasing
the supply of money to accommodate this demand for it or allowing money and credit to tighten and
real interest rates to rise. At such times, sometimes governments seek to curtail this movement by
establishing foreign exchange controls and/or prohibit gold ownership. Also, sometimes price and wage
controls are put into place. Such moves typically create economic distortions rather than alleviated
problems. "
re: equity performance in deleveraging cycles
ray dalio, bridgewater capital
"Though it takes about a decade to return the economy to its former peak levels, it typically
takes over 20 years for real stock prices to reach former highs, because equity risk premiums take a very
long time to reach pre-deleveraging lows. "
btw, this doesn't deny the possibility of bear market rallies. from the same source:
"in the Great Depression there were six big rallies in the stock
market (of between 21% and 48%) in a bear market that totaled 89%, with all of these rallies triggered
by these sorts of increasingly strong dosages of government actions which were intended to reduce the
fundamental imbalance."
quotes are from dalio's "template for understanding" - a concise overview of how the economy and financial markets work: cycles, leverage, liquidity, currencies and so on.
http://www.bwater.com/Uploads/FileMa...erstanding.pdf
[if you're interested, you might also like to look at his quick slide presentation, at
http://www.bwater.com/Uploads/FileMa...tation.pdf.pdf ]
another key passage for our unfolding situation:
"currency declines are typically acceptable to governments
because a weaker currency is stimulative for growth and helps to negate deflationary pressures.
Additionally, when deflation is a problem, currency devaluations are desirable because they help to
negate it.
"Debtor, current account deficit countries are especially vulnerable to capital withdrawals and currency
weakness as foreign investors also tend to flee due to both currency weakness and an environment
inhospitable to good returns on capital. However, this is less true for countries that have a great amount
of debt denominated in their own currencies (like the United States now and in the Great Depression) as
these debts create a demand for these currencies. Since debt is a promise to deliver money that one
doesn’t have, this is essentially a short squeeze which ends when a) the shorts are fully squeezed (i.e.,
the debts are defaulted on) and/or b) enough money is created to alleviate the squeeze, and/or c) the
debt service requirements are reduced in some other way (e.g., forbearance).
"The risk at this stage of the process is that the currency weakness and the increased supply of money
will lead to short-term credit (even government short-term credit) becoming undesirable, causing the
buying of inflation hedge assets and capital flight rather than credit creation. For foreign investors,
receiving an interest rate that is near 0% and having the foreign currency that their deposits are
denominated in decline produces a negative return; so this set of circumstances makes holding credit,
even government short-term credit, undesirable. Similarly, for domestic investors, this set of
circumstances makes foreign currency deposits more desirable. If and when this happens, investors
accelerate their selling of financial assets, especially debt assets, to get cash in order to use this cash to
buy other currencies or inflation hedge assets such as gold. They also seek to borrow cash in that local
currency. Once again, that puts the central bank in the position of having to choose between increasing
the supply of money to accommodate this demand for it or allowing money and credit to tighten and
real interest rates to rise. At such times, sometimes governments seek to curtail this movement by
establishing foreign exchange controls and/or prohibit gold ownership. Also, sometimes price and wage
controls are put into place. Such moves typically create economic distortions rather than alleviated
problems. "
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