This page has been archived and commenting is disabled.

"What Does The Fed Know That We Don't" - Bridgewater's Ray Dalio Answers

Tyler Durden's picture




 

In the aftermath of last week's FOMC "dovish hold" disappointment, it is not only the Fed that has seen its credibility crushed; so have plain-vanilla tenured economists and Wall Street strategists. Recall that it was on August 13, one month before last week's FOMC meeting, when 82% of economists said the Fed would hike in September.

Oops.

Post-mortem: more than four out of five economisseds were, as always, wrong. Hardly surprising: after all, when voodoo art pretends to be science, this is precisely the outcome one gets.

But while there is no surprise in everyone being wrong (because quite simply nobody realized that the only thing is what Goldman wants), one question remains: "what does the Fed know that we don't."

Of course, one has to clarify what "we" means, because Zero Hedge readers know precisely what the Fed knows - it knows that a recession is coming if not already here, as we won't tire of showing week after week.

Here are some examples of what the Fed (if less than 20% of economists) "knows":

1) Business Inventories-to-Sales are at recesssion-inducing levels...

 

1a) Sidenote 1 - Wholesale Inventories relative to sales have NEVER been higher

 

1b) Sidenote 2 - here is why that is a problem

2) Industrial Production is rolling over into recession territory

 

2a) Sidenote - as Empire Fed confirmed this morning for August - inventories are collapsing (and along with that Q3 GDP)

 

3) Retail Sales is not supportive of anything but a looming recession...

 

And finally,

4) The last 6 times Auto Assemblies collapsed at this rate, the US was in recession...

 

* * *

But for those who are unable to form an independent though and would rather ignore reality unwinding before their eyes, instead demanding an "authoritative" voice to crush their cognitive bias, here is Ray Dalio, head of the world's biggest hedge fund Bridgewater, who explains what the recent 4% drop of his All Weather risk-parity fund means.

This is what he said: "different risk parity managers structure their portfolios somewhat differently to achieve balance, so we can't comment on them all. But we can show you how this wealth effect has worked by showing you how our diversified portfolio mix (which simply represents a well-diversified portfolio of assets) would have led economic growth, which is shown in the below two charts, one of which goes back to 1950 and the other which goes back to 1915. These charts show how the excess returns (the returns of the portfolio over the return of the cash interest rate) led economic growth relative to potential (i.e., estimated economic capacity)... If a well-diversified mix of assets underperforms cash, there will be a negative wealth effect and negative incentives to invest in economic activity, which will be bad for the economy. The Federal Reserve and other central banks would be well-served to pay attention to this relationship to make sure that this doesn't happen for long and/or happen too severely. The chart speaks for itself.

The chart in question:

And just in case it "does not speak for itself", here is Ice Farm Capital's Michael Green explaining what is says: "The recent weak performance of All Weather would suggest global growth six months from now will be running nearly 2% below its already reduced potential."

In other words, while the rest of the levered-beta 2 and 20 chasers formerly known as "hedge funds" recently accused risk parity of blowing up their August returns (September is not shaping up much better) the biggest risk-parity fund in the world also found a scapegoat: the global economy, which according to Dalio, is the reason for All Weather's dramatic August slump.

But while blaming the amorphous economy is a rather weak argument, Dalio already has a far more tangible scapegoat ready: the Fed itself, who as the Bridgewater letter cautions "would be well-served to pay attention" to the hedge fund's sudden P&L drop. Because as Dalio goes, so goes the economy.

For now, however, the message is far simpler: absent far more easing, what the charts above signal is that the US economy is about to slam head-on into an economic recession... or rather depression, one which some would add, is only inevitable due to some 40 years of Fed easing starting with Greenspan's great moderation, and continuing through three sequential credit-fuelled bubbles which merely delayed the inevitable "mean reversion" moment

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sun, 09/20/2015 - 21:22 | 6573033 OC Sure
OC Sure's picture

But, but, Y? What about Ray? He says the Fed should ease, ease, and ease again!

Do you agree with Ray or not?

Is he your ZH lovebuddy or not?

Sun, 09/20/2015 - 21:29 | 6573058 Yen Cross
Yen Cross's picture

 WTF?

   Did you read my comment?

   Are you looking for attention?

 Home Depot has a special running on 'Strawmen'.

Sun, 09/20/2015 - 21:48 | 6573116 OC Sure
OC Sure's picture

Not really. I figure that you are just like all of the rest of them. Cause, hey, you are like all of the rest of them aren't you?

Ray likes ease. Everyone else likes Ray. You are like all of the rest of them, so you like ease. Right?

Sun, 09/20/2015 - 23:59 | 6573470 FreedomGuy
FreedomGuy's picture

OC, you were that guy on the golf course in Happy Gilmore, weren't you? You know, the one who ran around yelling insults in the background to drive Happy/Adam Sandler crazy...but ignored by the crowd.

Do NOT miss your psych appointment tomorrow. 

Sun, 09/20/2015 - 21:03 | 6572961 Baby Eating Dingo22
Baby Eating Dingo22's picture

Futs are weak

Only option the Fed hasn't used to keep the turd afloat is an emergency rate hike

Sun, 09/20/2015 - 21:12 | 6572996 buzzsaw99
buzzsaw99's picture

dalio = mealy mouthed maggot

fuck him and his horse

Sun, 09/20/2015 - 21:25 | 6573040 OC Sure
OC Sure's picture

 

 

I almost like you for this!

But, knowing your ZH alliance and the piss on my back in this thread, probably not. 

Sun, 09/20/2015 - 21:17 | 6573014 buzzsaw99
buzzsaw99's picture

the fly called you all a bunch of nerds:

http://ibankcoin.com/flyblog/2015/09/19/saturday-cinema-with-le-fly-figh...

i don't know about you guys but i am 100% sure I could kick his ass easily.

Sun, 09/20/2015 - 21:28 | 6573047 Latitude25
Latitude25's picture

First of all world growth and all weather returns are both black on a white background so I have no idea which is which.  Secondly what is presumably a downturn in 2015 appears to be a pretty minimal compared to historical downturns going back to 1915.  Pretty useless charts to me.  Not that the economy is not heading into a major downturn.  Just that these charts don't really paint that picture very well yet.

Sun, 09/20/2015 - 21:46 | 6573109 Kina
Kina's picture

Always keep in mind that The Fed, IS  a banking cartel, composed of bankers.

 

Their interest will always first be the streangth and wealth of their banks.

Sun, 09/20/2015 - 21:48 | 6573117 wisebastard
wisebastard's picture

2+2 does not equal 5

 

Sun, 09/20/2015 - 22:13 | 6573192 OC Sure
OC Sure's picture

Shh...It does now if we told your grandparents that it did.

Sun, 09/20/2015 - 21:54 | 6573130 Sir Edge
Sir Edge's picture

...crickets....

Sun, 09/20/2015 - 22:08 | 6573170 northern vigor
northern vigor's picture

I haven't finished my economic thesis on 0%  interest rates causing stagnation of the economy yet...I probably have to enroll in a Economic University first...But my theory goes like this...

Beause interest rates are 0%, banks  and corporations are hoarding cash assets because the risk of losing capital is more than the return from interest  on investments or loans. If interest rates went up, investors would demand CEOs make thie cash work harder in the economy,  if money had a overhead cost to it.

 

 

Sun, 09/20/2015 - 23:00 | 6573339 newnormaleconomics
newnormaleconomics's picture

It's called a liquidity trap of secular stagnation of a debt-deflationary regime of the Long Wave. 

Banks don't want liabilities in the form of deposits because they have $3 trillion in reserves earning 25 bps from the Fed; they are flush with gov't-guaranteed assets at 0-3% yields; their net margin is below 3% with a flattening yield curve and Baa-10-year yields widening, indicating increasing term risk. 

The working class is barely sustaining subsistence, the professional middle class are past peak earnings, spending, and savings, are retiring and risk averse, and the Millennials have no discretionary income and never will (the "Last Generation").

Peak Oil, population overshoot, resource depletion per capita, "Limits to Growth", and end of growth (EOG) have arrived. Game over. Reset. 

Mon, 09/21/2015 - 01:09 | 6573575 Policraticus
Policraticus's picture

Some how I do not think Shinzo Abe agrees with you.  I on the other hand I think this explains things to a certain degree.  It is not beyond repair, only beyond the will to address it.  I like to think at times I am wrong.  This would be one of those times.

Sun, 09/20/2015 - 22:09 | 6573171 SamEyeAm
SamEyeAm's picture

Oh dear! The fed didn't raise interest rates. This should be good for at least 400 ZH threads.

 

Rate me down! I couldn't give two shits.

Sun, 09/20/2015 - 22:17 | 6573206 holdbuysell
holdbuysell's picture

The Fed knows there are hundreds of trillions in interest rate swaps that would explode upon a raise in interest rates.

NEVER. GONNA. HAPPEN.

Sun, 09/20/2015 - 22:17 | 6573208 mklrnzn
mklrnzn's picture

Govopoly in the 39th Day, We be here...How do you do!

Sun, 09/20/2015 - 22:33 | 6573256 Victory_Garden
Victory_Garden's picture

What we know is they know nothing compared to all that is known by those who know they who know nada are always up to something bad. That is a true known! Just ask, what are those crazy zio-babylonian puppet isreallis up to now? What false flag event will they bring us next, and will it be the usual around 9:00am on a Monday thingy Event to milk the news week to death over and over and over again?

Those crazy zio-babylonians love the occultic dates too! Just take Sept 21 & 22 for example. Jeepers creepers, gives one the jeeves knowing these arsehole rottenchoild zio-puppets are always up to no good.

Heads up everybody. Be on the look out for the evil things that work for the rottenchifs and rickitfellers. They are always instituting their masters agenda of world domination, murder, destruction, and population elimination some how, or another.

Gee Willie, what's on Tee-Vee?

https://www.youtube.com/watch?v=e50uIZCjQqI

Sun, 09/20/2015 - 23:05 | 6573349 Bruce
Bruce's picture

The complete failure of Keynesian economics is what anyone with two brain cells to rub together knows.  The scientific method says test the hypothesis.  Is it valid? If no, then change the hypothesis.  Austrian school economics please...  As intended, central banking has been an unmitigated disaster for everyone but the banks.

The US is on the same trajectory as Japan. 

"There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved." - Ludwig von Mises

“You cannot spend your way out of recession or borrow your way out of debt.” - Daniel Hannan, Member of the European Parliament

"The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks." – Lord Acton

The Typical Male U.S. Worker Earned Less in 2014 Than in 1973

http://blogs.wsj.com/washwire/2015/09/18/the-typical-male-u-s-worker-ear...

More Jobs Haven’t Meant Less Poverty Nearly 47 million Americans are living in poverty.

http://fivethirtyeight.com/datalab/more-jobs-havent-meant-less-poverty/?...

This is not rocket science.  Idiots and maladroits.

 

Mon, 09/21/2015 - 00:02 | 6573481 FreedomGuy
FreedomGuy's picture

Yeah, there are not more jobs. There are just less jobless counted. You can spend in a recession if there are signs of increased demand. However, the Fed cannot stimulate demand. That is their kyrptonite. 

Actual incomes last I checked were still down from the 2007 peak in real dollars, without any inflation adjustments. 

 

I think the Fed and not just the Fed, but elitist governments who have all created Feds and central banks...they do not give up their religion in Keynes easily. It is a very forgiving and powerful religion for them. 

Mon, 09/21/2015 - 05:19 | 6573738 Lucky Leprachaun
Lucky Leprachaun's picture

Not all government spending is Keynesian. Keynes argued that in a deep recession the economy can be so shell-shocked that even low interest rates fail to bring things back. "Skittish lenders decline offering credit to small firms and investors park their money in government bonds."

So not all down to that gentlemanly fudge-packer. 

Mon, 09/21/2015 - 20:45 | 6577032 FreedomGuy
FreedomGuy's picture

Keynes was not totally divorced from reality and the keynesians practice it rather badly. How much counter-cyclical activity do we see? Virtually none because bubbles are fun and politically profitable.

Mon, 09/21/2015 - 00:23 | 6573510 hedgiex
hedgiex's picture

Dalio - what conceit to use his model to explain Fed's inactions ? You pay 2/20 for Spins ? His Algos constructed from these analyses...LOL ?

Mon, 09/21/2015 - 00:55 | 6573554 cheka
cheka's picture

fed know this (which escapes most of the 'experts')

currency wars = total load of crap

see frbny foreign bank bailout list for proot

Mon, 09/21/2015 - 00:59 | 6573560 Clowns on Acid
Clowns on Acid's picture

Ahmmmm... they knew this was going to occur day 1. But day1 they were broke. They are not broke today. Ergo..... I remain unimpressed.

Mon, 09/21/2015 - 02:22 | 6573641 TeethVillage88s
TeethVillage88s's picture

Why no Films, TV Scripts, Comedy acts...

With Alan Greenspan, Ben Bernanke, Janet Yellen, Henry Kissinger, Leonid Brzezinski, the people playing the Grand Chessboard?

Maybe they are the Privileged Class, the Advantaged Class, the Special Class that we can't talk about?

Maybe they are the Elite Ruling Class??

- If you want to know who rules you, just ask who can you not Criticize.

Mon, 09/21/2015 - 03:09 | 6573679 CHX
CHX's picture

Dalio will be fine. a) he does not lose anything personally when his fund under-performs, b) he has to do the fiat pep talk if he wants advertise his fund on the MSM, and c) he/they do own some gold. That's all folks.

Mon, 09/21/2015 - 03:55 | 6573702 Inthemix96
Inthemix96's picture

At this juncture in time, and after having gone over all the relative information, as well as speaking to some of the finest minds mankind can offer, I have come to same conclusion as of those that run this klown show, including the cunts at the Fed.

We are fucked, royally fucked, thanks for that Bernsplinks, Greenspan, and associated cunts.  If rates go up I will eat me recycling bin.

They know that we here on ZH know this, and we know that they know we know this, if you know what I mean.

And we lot most certainly know that this is neither, a recession nor a depression.  This is the worlds greatest ever mother fucking robbery committed against humankind.

And these cunts know we know this.  Eat your fucking peas NSA, GCHQ, cos' you boys is getting it just the same as we are.

Anger directed where its due folks, is all that can be done from this point on.

Utter fucking cunts.

;-)

Mon, 09/21/2015 - 05:28 | 6573742 Magooo
Magooo's picture

Now that 495 of the S&P 500 companies have reported second quarter earnings, something has become abundantly clear: 2015 is going to be a nasty year for corporate revenues.

 

Blended revenue for the S&P 500 companies dropped 3.4% in Q2, according to FactSet. “Blended” because it includes estimates for the five companies that have not yet reported. This follows the first quarter, during which reported revenues also declined. The last time year-over-year revenues declined two quarters in a row was in Q2 and Q3 2009 during the Financial Crisis.

 

And analysts blamed energy companies whose revenues have totally collapsed. But company by company outside the energy sector reported declining, and in some cases plunging revenues, including in Big Tech and financial services.

 

Here is a sample of revenue losers:

 

Caterpillar (-13%), Dow Chemical (-13%), MetLife (-12%), Microsoft (-4%), Intel (-5%), International Paper (-21%), JPMorgan Chase (-3%), Johnson Controls (-11%), Oracle (-5%), PepsiCo (-6%), Pfizer (-7%), Procter & Gamble (-12%), Union Pacific (-10%)….

 

Then there’s former tech darling QUALCOMM (-14%), insurer ALFAC (-9%), and of course IBM, always, at least for longer than anyone can remember, well, for the thirteenth quarter in a row, strong dollar, weak dollar, hot China, cold China, nothing matters…. Its revenues decline through thick and thin, this time -15%.

Then there’s GM (-3.5%). It gets the vast majority of its revenues from its number one market, China, and its number two market, the US. Over that 12-month period through the end of June, the yuan lost less than 1% against the dollar. And GM sells practically nothing in Japan whose currency lost out against the dollar.

 

http://wolfstreet.com/2015/09/07/us-corporate-revenue-recession-spreads-past-dollar-energy/

Mon, 09/21/2015 - 06:30 | 6573778 SirBarksAlot
SirBarksAlot's picture

China's leader is coming for a vaca.  What does a Chinese leader do when he leaves his country for 7 whole days, that he can't do over the phone?  Pick out the assets he wants that were pledged as collateral for bonds, I mean loans? 

According to the Squawk Box, the Fed didn't raise rates because of China.  China is now driving the US economy.  So, maybe they can send some jobs back.

China, China, China.

Mon, 09/21/2015 - 09:37 | 6574166 robertocarlos
robertocarlos's picture

Alaska AND Hawaii?

Mon, 09/21/2015 - 07:29 | 6573864 insanelysane
insanelysane's picture

Tylers,

Get the CNBS feed from 7am to 7:30am Eastern time this morning.  Bullard told the morning crew that Cramer is out of line cheerleading 24x7 for ZIRP.

 

Mon, 09/21/2015 - 10:09 | 6574274 gcjohns1971
gcjohns1971's picture

The Fed knows that each unit of currency is backed by a face-value unit of debt.

But the debt bears interest while the currency does not, and the interest gets paid first. 

The principal gets rolled-over...because after paying interest on the debt-side of the currency there isn't enough currency left to pay the principal.  Hence a default would destroy the ability to pay the debt backing the next unit of currency, and so on, until all the units of currency are destroyed.  Chain-reaction currency implosion.

The Fed knows, then, that no matter what total debt must expand...and if the banks can't lend, or people are too indebted to take more loans, then governments and central banks must do it for them.

Because, the Fed knows that a failure to expand the debt, which allows a corresponding expansion of total currency, currency that allows past debts backing currency to be rolled over without default, will result in a chain reaction of defaults in that debt, and corresponding destruction of the currency it backs.

The rest is just noise.

Do NOT follow this link or you will be banned from the site!