Bridgewater Associates: 4 years into 15-20 of Deleveraging

[Slimprofits]

Ray Dalio's hedge fund. Robert Prince is the co-CIO. Do and EJ and Dalio talk?

http://www.valuewalk.com/2012/01/bri...t-a-long-time/

Mr. Prince describes those economies—the U.S. and Europe, in particular—as “zombies” and says they will remain that way until they work through their mountains of debt.

“What you have is a picture of broken economic systems that are operating on life support,” Mr. Prince says. “We’re in a secular deleveraging that will probably take 15 to 20 years to work through and we’re just four years in.”

In Europe, “the debt crisis is [a] long ways from over,” he says. The economic and financial morass will mean interest rates in the U.S. and Europe will essentially be locked at zero for years.

[ProdigyofZen]

Re: Bridgewater Associates: 4 years into 15-20 of Deleveraging

Ray Dalio has been around a long time. He was one of the main beneficiaries of having a Harvard Education in the mid 70s plus having worked as MD on a commodity desk. He started that fund at 25 years old because of this. This rarely happens in todays world.

Here he is on Charlie Rose. http://www.charlierose.com/view/interview/11957

He is pretty looney though, at least his 100 page principles are. I also hear it is hell working at his fund. It is strange that a fund so large has not produced any other managers who would now run their own fund and I think that is because he keeps everything in his inner circle and the analysts there are key monkeys. Who knows.

[gnk]

Re: Bridgewater Associates: 4 years into 15-20 of Deleveraging

I don't see a long term de-leveraging taking place. I just don't think the system can remain so stable over such a long period of time. The process of de-leveraging is highly unstable - politically, socially, economically, etc... Who still gets to consume what resources and why? Eventually, I see defaults and currency/trade wars resulting in major wars over resources and markets. When that occurs, the debts will mean nothing - there will be no reason to de-leverage.

We reached a point where only a major power can dictate to the rest of the world how the next monetary system will work - that's how it has been done in the past. Will that major power remain the US, or will it be someone else? Or will the world separate into three major zones as EJ thinks - Europe, Asia, and North America? Either way, whether the US re-asserts itself or someone else takes over, or there is a split - it will be an ugly process that will eventually result in a clean slate. I think that even if the world splits into 3 zones, ultimately, two zones will gang up on the third.

I don't see the re-balancing/de-leveraging process resembling anything like a smooth transition. Rather, the process will be extremely destructive and a new system will arise from the ashes of the old.

[Raz]

Re: Bridgewater Associates: 4 years into 15-20 of Deleveraging

I don't see a long term de-leveraging taking place. I just don't think the system can remain so stable over such a long period of time. The process of de-leveraging is highly unstable - politically, socially, economically, etc... Who still gets to consume what resources and why? Eventually, I see defaults and currency/trade wars resulting in major wars over resources and markets. When that occurs, the debts will mean nothing - there will be no reason to de-leverage.

We reached a point where only a major power can dictate to the rest of the world how the next monetary system will work - that's how it has been done in the past. Will that major power remain the US, or will it be someone else? Or will the world separate into three major zones as EJ thinks - Europe, Asia, and North America? Either way, whether the US re-asserts itself or someone else takes over, or there is a split - it will be an ugly process that will eventually result in a clean slate. I think that even if the world splits into 3 zones, ultimately, two zones will gang up on the third.

I don't see the re-balancing/de-leveraging process resembling anything like a smooth transition. Rather, the process will be extremely destructive and a new system will arise from the ashes of the old.

+1.

[jk]

Re: Bridgewater Associates: 4 years into 15-20 of Deleveraging

Ray Dalio's hedge fund. Robert Prince is the co-CIO. Do and EJ and Dalio talk?

http://www.valuewalk.com/2012/01/bri...t-a-long-time/

Mr. Prince describes those economies—the U.S. and Europe, in particular—as “zombies” and says they will remain that way until they work through their mountains of debt.

“What you have is a picture of broken economic systems that are operating on life support,” Mr. Prince says. “We’re in a secular deleveraging that will probably take 15 to 20 years to work through and we’re just four years in.”

In Europe, “the debt crisis is [a] long ways from over,” he says. The economic and financial morass will mean interest rates in the U.S. and Europe will essentially be locked at zero for years.

dalio is a smart guy and i always pay attention to anything coming out of his shop. thanks for the post.

[gwynedd1]

Re: Bridgewater Associates: 4 years into 15-20 of Deleveraging

Its been 4 years and nothing to show for it. Credit expansion rested completely on housing for decades. Can't lower interest rates, and you dare not raise them. That is the current system. It could change overnight but its speculative. Its just as likely to go on for a generation. Thrift can leave its stamp on a whole generation. One thing to keep in mind is world wide fiat currencies are very new. What it essentially has been is a real estate backed currency which seems to have quickly saturated Europe, North American, Australia and even China. Japan's yen was the first of its kind and is now a saturated real estate backed currency 20 years going nowhere. Unless governments just print money, what asset is going to be used to guarantee bank loans? land saturation is a double whammy since not only cannot it not support credit, its saturation has left wage to real estate ratios to the point of subsistence wages further depressing the economy. That means the only hope for credit expansion is an incompetent government with and ignorant middle class who does not know the issue from a hole in the head. I am afraid I don't see an end in sight either. Just war I guess.

[davidstvz]

Re: Bridgewater Associates: 4 years into 15-20 of Deleveraging

"The economic and financial morass will mean interest rates in the U.S. and Europe will essentially be locked at zero for years."

Can someone explain what this really means? I remain confused on the subject of "Interest Rates". Does it mean that issuing credit isn't very profitable hence individuals and governments will have a hard time borrowing?

[Milton Kuo]

Re: Bridgewater Associates: 4 years into 15-20 of Deleveraging

"The economic and financial morass will mean interest rates in the U.S. and Europe will essentially be locked at zero for years."

Can someone explain what this really means? I remain confused on the subject of "Interest Rates". Does it mean that issuing credit isn't very profitable hence individuals and governments will have a hard time borrowing?

It means that any highly safe investment (such as savings accounts, certificates of deposit, or U.S. Treasuries) will yield practically no interest. That is, savers have been and will continue to be thrown under the bus.

As for issuing credit not being profitable, it is highly profitable and is now even more profitable thanks to the low rates of interest paid to savers. It's my understanding that this extra profitability is to allow the reckless banks to "earn" their way back to financial health.

[davidstvz]

Re: Bridgewater Associates: 4 years into 15-20 of Deleveraging

Ah... I need to learn more about treasuries. So foreign investors who buy most government bonds (which is what treasuries are?) are interested in the increased safety vs. other investments? I guess in a 0% environment, treasuries and savings accounts are little better than cash (which isn't all that great with the danger of inflation... hence gold). Assuming bonds and treasuries are the same thing, I think I may understand now. Thanks :-)

[jpatter666]

Re: Bridgewater Associates: 4 years into 15-20 of Deleveraging

Ah... I need to learn more about treasuries. So foreign investors who buy most government bonds (which is what treasuries are?) are interested in the increased safety vs. other investments? I guess in a 0% environment, treasuries and savings accounts are little better than cash (which isn't all that great with the danger of inflation... hence gold). Assuming bonds and treasuries are the same thing, I think I may understand now. Thanks :-)

Let's see if I've got this right -- I'm sure someone can come in and correct if wrong.

If it helps, think of cash as the lowest paying government treasuries (indeed, negative if you consider inflation -- that's the price *you* are paying for being super-liquid). The longer-term the bond (6-mo, year, 10-year, 30-year -- read "lockup") usually the higher rate of interest you will be paid on it.

Now you have bought this bond for a specific amount of money X which pays a specific rate of interest Y. X' and Y' may be different for tomorrow's bond so timing can be important, and that's the risk here.

In a deflationary environment (or, ahem, a highly manipulated one), cash is king, so bonds are a very, very good thing. People want them, the demand goes up (especially for the longer-term bonds), so now your bond may sell for X + C because the interest rate for new bonds is dropping (sound familiar?). In which case if I were to buy your bond, my effective interest rate wouldn't be as good as yours because I paid a higher price.

Of course, you might hold the bond through maturity, in which case you've gotten your Y percent. But you might have gotten a lot more if you'd bought when the bonds spiked.

So, basic lesson is you can't just buy bonds and throw them in a safe (well you can, but you could really miss out on some things) -- make sure you know what is going on.

And of course the reverse happens in a inflationary environment.

So, in summary, this is how people can make lots of money on bonds which only pay a few percent. Note: in calm times this is nearly impossible to pull off, it's only in time of uncertainty that you can get these. Do not try unless you really, really know what you are doing!

How'd I do? There are all sorts of additional caveats and gotchas, but thought I'd throw my hat in the ring.

[davidstvz]

Re: Bridgewater Associates: 4 years into 15-20 of Deleveraging

Ok, this is finally starting to make sense. So I'd want to buy new bonds if I saw a long term period of declining interest rates ahead (i.e. rates just hit a spike). So with interest rates at practically 0 now, no one wants to buy new bonds except foreign central banks who want to prop up our currency. I read that many times in EJ's work, but never quite understood it.

So if I acquired any bonds now (not that I plan to), it would be second hand bonds issued years ago with higher interest rates than today's new bonds have. And I would want to do that only if I think the interest rate on that bond will continue to beat inflation (and other investments) for the period I intend to hold the bond for. But we are expecting more QE, cost-push inflation and dollar devaluation so buying bonds right now is tricky business? I guess in a highly inflationary environment, it might be hard to sell my bonds on the second hand market at a reasonable price. Hence, as a late comer I should sit on the gold I already bought and focus on building a cash cushion (since I'm young and don't have one yet).

[jiimbergin]

Re: Bridgewater Associates: 4 years into 15-20 of Deleveraging

Let's see if I've got this right -- I'm sure someone can come in and correct if wrong.

If it helps, think of cash as the lowest paying government treasuries (indeed, negative if you consider inflation -- that's the price *you* are paying for being super-liquid). The longer-term the bond (6-mo, year, 10-year, 30-year -- read "lockup") usually the higher rate of interest you will be paid on it.

Now you have bought this bond for a specific amount of money X which pays a specific rate of interest Y. X' and Y' may be different for tomorrow's bond so timing can be important, and that's the risk here.

In a deflationary environment (or, ahem, a highly manipulated one), cash is king, so bonds are a very, very good thing. People want them, the demand goes up (especially for the longer-term bonds), so now your bond may sell for X + C because the interest rate for new bonds is dropping (sound familiar?). In which case if I were to buy your bond, my effective interest rate wouldn't be as good as yours because I paid a higher price.

Of course, you might hold the bond through maturity, in which case you've gotten your Y percent. But you might have gotten a lot more if you'd bought when the bonds spiked.

So, basic lesson is you can't just buy bonds and throw them in a safe (well you can, but you could really miss out on some things) -- make sure you know what is going on.

And of course the reverse happens in a inflationary environment.

So, in summary, this is how people can make lots of money on bonds which only pay a few percent. Note: in calm times this is nearly impossible to pull off, it's only in time of uncertainty that you can get these. Do not try unless you really, really know what you are doing!

How'd I do? There are all sorts of additional caveats and gotchas, but thought I'd throw my hat in the ring.

You can make money off of bonds in calm times, but only from non US Gov. Bonds. For example you can buy a bond from a company that is in the lower investment classes because you believe it will have its rating increased. If that happens then then the bond value rises, etc. Same thing can happen with munis and foreign gov. bonds.

[jpatter666]

Re: Bridgewater Associates: 4 years into 15-20 of Deleveraging

Ok, this is finally starting to make sense. So I'd want to buy new bonds if I saw a long term period of declining interest rates ahead (i.e. rates just hit a spike). So with interest rates at practically 0 now, no one wants to buy new bonds except foreign central banks who want to prop up our currency. I read that many times in EJ's work, but never quite understood it.

So if I acquired any bonds now (not that I plan to), it would be second hand bonds issued years ago with higher interest rates than today's new bonds have. And I would want to do that only if I think the interest rate on that bond will continue to beat inflation (and other investments) for the period I intend to hold the bond for. But we are expecting more QE, cost-push inflation and dollar devaluation so buying bonds right now is tricky business? I guess in a highly inflationary environment, it might be hard to sell my bonds on the second hand market at a reasonable price. Hence, as a late comer I should sit on the gold I already bought and focus on building a cash cushion (since I'm young and don't have one yet).

Yes, you'd want to buy bonds if you saw declining rates ahead -- not a spike. i.e. EJ's call to buy long-term bonds in 2001 was very smart.

You could buy *new* bonds now at the going rate, or perhaps pay a premium to buy the older bonds which have a higher rate (i.e you want EJ's 30-year 2001 bonds which might pay 5-6% instead of the 1% for a current bond you're going to pay him for them).

Of course, you'd better be right about that deflationary environment continuing or you are going to get executed. Who wants bonds paying 6% when inflation is 15%? Price drops through the floor....

In the end, much comes down to whether we see inflation or deflation -- and how much. On this site, the answer is very clear -- inflation in the end, thought hopefully not hyper-inflation. But there are still sites out there who make persuasive arguments for deflation.

The essence of the deflation argument to me is: bond markets are king, they will eventually bring a printing central bank to heel
The essence of the inflation argument to me is: bond markets be damned -- they don't vote in elections. We have a printing press and we are going to use it.

Then you get the weird "I can't decide what I am" character like Europe and the Euro.....

[davidstvz]

Re: Bridgewater Associates: 4 years into 15-20 of Deleveraging

The essence of the deflation argument to me is: bond markets are king, they will eventually bring a printing central bank to heel
The essence of the inflation argument to me is: bond markets be damned -- they don't vote in elections. We have a printing press and we are going to use it.

That seems to be the gist of this article: http://www.itulip.com/forums/showthr...ellent-article

Unless they've lost control, obviously the powerful people will do whatever screws them over the least. I have a hard time grasping the financial tangle, but with real resources declining (in particular oil), I see a shrinking pie and one way or another the powerful will hang onto as much of it as they can, at growing expense of the under privileged. So whether we see inflation or deflation, I feel like I'm going to get screwed regardless.

[c1ue]

Re: Bridgewater Associates: 4 years into 15-20 of Deleveraging

The essence of the deflation argument to me is: bond markets are king, they will eventually bring a printing central bank to heel
The essence of the inflation argument to me is: bond markets be damned -- they don't vote in elections. We have a printing press and we are going to use it.

Does anyone really talk about the bond vigilantes anymore?

This was such crap - where are the 'bond vigilantes' for the gigantic US fiscal fiasco? Japan? the UK?