Ray Dalio

A week ago, we first reported that Bridgewater's Ray Dalio had finally thrown in the towel on his latest iteration of hope in the "Beautiful deleveraging", and realizing that a 3% yield is enough to grind the US economy to a halt, moved from the pro-inflation camp (someone tell David Rosenberg) back to buying bonds (i.e., deflation). This was music to Bill Gross' ears who in his latest letter, in which he notes in addition to everything else that while the Fed has to taper eventually, it doesn't actually ever have to raise rates, and writes: "The objective, Dalio writes, is to achieve a “beautiful deleveraging,” which assumes minimal defaults and an eventual return of investors’ willingness to take risk again. The beautiful deleveraging of course takes place at the expense of private market savers via financially repressed interest rates, but what the heck. Beauty is in the eye of the beholder and if the Fed’s (and Dalio’s) objective is to grow normally again, then there is likely no more beautiful or deleveraging solution than one that is accomplished via abnormally low interest rates for a long, long time." How long one may ask? "the last time the U.S. economy was this highly levered (early 1940s) it took over 25 years of 10-year Treasury rates averaging 3% less than nominal GDP to accomplish a “beautiful deleveraging.” That would place the 10-year Treasury at close to 1% and the policy rate at 25 basis points until sometime around 2035!" In the early 1940s there was also a world war, but the bottom line is clear: lots and lots of central planning for a long time.

Presented without commentary (if confused - wink wink Mario Draghi - Ray Dalio will explain).

Moments ago Mario Draghi's nightmare just got worse following a release by the ECB overnight that loans to the private sector dropped 2 percent from a year earlier. That’s 16th monthly decline and the biggest since the start of the single currency in 1999. "The data shows a depressing picture for the credit market," said Annalisa Piazza, an analyst at Newedge Group in London. "Although the ECB made clear that the ECB cannot do much to boost credit to the corporate sector, we expect the current picture for loans to remain one of the key reasons behind expectations of a prolonged period of accommodation." Translated: all monetary transmission mechanisms in Europe are completely broken, which in turn feeds the feedback loop of the deleveraging depression, leading to even less demand for loans, more deleveraging by banks ad lib.

With yields down for 11 of the last 13 days, 10Y Treasuries are trading at their lowest interest rate since August 13th. The 5Y yield has collapsed 45bps since September 6th when the 10Y briefly broke above the 3.00% Maginot Line. This is the largest absolute decline in interest rates in a 13-day period since the summer of 2011 and the US downgrade... it seems Ray Dalio might be on to something...

The economy is like a machine. At the most fundamental level, Bridgewater's Ray Dalio explains in this excellent video introduction, it is a relatively simple machine. But, he adds, many people don’t understand it – or they don’t agree on how it works – and this has led to a lot of needless economic suffering. The clip and article below shares his simple but practical economic template explaining how he believes it works. As he notes "my description of how the economy works is different from most economists'. It has worked better, allowing me to anticipate the great deleveragings and market changes that most others overlooked." The likely reason for this is because it is more practical. Simply put, Dalio notes, "This different way of looking at the economy and markets has allowed us to understand and anticipate economic booms and busts that others using more traditional approaches have missed."

July 23 - Gold $1335.10 down $1.30 - Silver $20.25 down 25 cents "GET AFTER THEIR ASS!" … A Texas Football Coach GO GATA!

Some time ago when we looked at the the performance of the world's largest and best returning hedge fund, Ray Dalio's Bridgewater, it had some $138 billion in assets. This number subsequently rose by $4 billion to $142 billion a week ago, however one thing remained the same: on a dollar for dollar basis, it is still the best performing and largest hedge fund of the past 20 years, and one which also has a remarkably low standard deviation of returns to boast. This is known to most people. What is less known, however, is that the two funds that comprise the entity known as "Bridgewater" serve two distinct purposes: while the Pure Alpha fund is, as its name implies, a chaser of alpha, or the 'tactical', active return component of an investment, the All Weather fund has a simple "beta isolate and capture" premise, and seeks to generate a modestly better return than the market using a mixture of equity and bonds investments and leverage. Ironically, as we foretold back in 2009, in the age of ZIRP, virtually every "actively managed" hedge fund would soon become not more than a massively levered beta chaser however charging an "alpha" fund's 2 and 20 fee structure. At least Ray Dalio is honest about where the return comes from without hiding behind meaningless concepts and lugubrious econospeak drollery. Courtesy of "The All Weather Story: How Bridgewater created the All Weather investment strategy, the foundation of the "risk parity" movement" everyone else can learn that answer too.

You truly have to be mentally challenged if you follow the gold/silver market action and cannot appreciate something is very amiss, as per the confused Mitsui gold people, as brought to your attention the other day.

Presenting Dave Collum's now ubiquitous and all-encompassing annual review of markets and much, much more. From Baptists, Bankers, and Bootleggers to Capitalism, Corporate Debt, Government Corruption, and the Constitution, Dave provides a one-stop-shop summary of everything relevant this year (and how it will affect next year and beyond).

Bridgewater's Ray Dalio believes four factors drive relative economic growth: competitiveness, indebtedness, culture, and luck. The returns from his machine-like investment process clearly indicate he is on to something as he notes that the most powerful influences of this relative income (and power) are 1) the psychology that drives people’s desires to work, borrow and consume and 2) war (which we measure in the “luck” gauge). Throughout history, Dalio advises these two influences have changed countries’ competitiveness and indebtedness which have caused changes in their relative wealth and power. He goes on to add that since different experiences lead to different psychological biases that lead to different experiences, etc., certain common cause-effect linkages drive the typical cycle of a nation's growth, power and influence - and that countries typically evolve through five stages of that cycle.

Self-sufficiency matters. Bridgewater's Ray Dalio sees this logical concept as consistently an important ingredient for individuals, and even more so for societies as a whole, to become successful. As he notes in a recent missive, "self-sufficiency encourages productivity by tying the ability to spend to the need to produce," adding that is likely not controversial to state that people spend money they earn differently than money they are given (i.e. the connection between working hard and spending is a healthy one). By quantifying 'self-sufficiency' as one of the parts of 'the formula for economic success', Dalio shows that "Societies in which individuals are more responsible for themselves grow more than those in which they are less responsible for themselves." The nine-factor gauge of self-sufficiency provides some interesting insights into those nations most likely to experience above-average growth going-forward and those that are not; as European countries, notably Italy, France, Spain, and Belgium, all ranking at the very bottom on self-sufficiency. Perhaps, in order to encourage growth, these nations must enable their citizens' self-sufficient animal spirits by removing their pacifying nanny-state support?

The ability of reflationary policy to mute the worst risks of debt deflation has been a source of enormous frustration for stock market bears ever since the 2008 collapse. Yes, the initial moderate rally out of the S&P500’s black hole was perhaps not so surprising in 2009. Bombed-out stock markets can always manage some sort of rally. But the ability of the rally to continue through 2010, and then 2011, and now 2012 has been quite vexing and painful for bearish investors. Indeed, the entire post-2008 market phase has now produced an era of consistently poor performance for hedge funds. Recent data, for example, shows that an incredible 90% of hedge funds are underperforming the S&P500 through mid-September. Will the pain continue? If OECD policy makers do in fact lose stock markets as the main transmission mechanism for reflationary policy, then trouble of a very serious nature will make itself known in the biggest way imaginable since the 2008 crisis began.

Imagine if in 2007, Ben Bernanke, Mervyn King, Jean Claude Trichet et al, had actually possessed the analytical foresight to see what was coming, organised a meeting with the world's media and explained how, using their collective wisdom, they would solve the problem.

"There's going to be a massive global crisis, but there's no need to worry. We're just going to print money."

 

"Is that it?"

How would most people have reacted then? We think they would have laughed out loud. Why are so many of us reacting differently now? The nature of markets is that they periodically forget the lessons of history. Confidence in the status quo seems as entrenched now as it was in 2007 but Gold appears to be exhibiting 'Giffen-like' behavior where, instead of falling, demand is rising as prices rise.

Now that the ESM has been officially inaugurated, to much pomp and fanfare out of Europe this morning, many are wondering not so much where the full debt backstop funding of the instrument will come from (it is clear that in a closed-loop Ponzi system, any joint and severally liable instrument will need to get funding from its joint and severally liable members), as much as where the equity "paid-in" capital will originate, since in Europe all but the AAA-rated countries are insolvent, and current recipients of equity-level bailouts from the "core." As a reminder, as part of the ESM's synthetic structure, the 17 member countries have to fund €80 billion of paid-in capital (i.e. equity buffer) which in turn serves as a 11.4% first loss backstop for the remainder of the €620 billion callable capital (we have described the CDO-like nature of the ESM before on many occasions in the past). The irony of a country like Greece precommiting to a €19.7 billion capital call, or Spain to €83.3 billion, or Italy to €125.4 billion, is simply beyond commentary. Obviously by the time the situation gets to the point where the Greek subscription of €20 billion is the marginal European rescue cash, it will be game over. The hope is that it never gets to that point. There is, however, some capital that inevitably has to be funded, which even if nominal, may prove to be a headache for the "subscriber" countries. The payment schedule of that capital "invoicing" has been transformed from the original ESM document, and instead of 5 equal pro rata annual payments has been accelerated to a 40%, 40%, 20% schedule. And more importantly, "The first two instalments (€32 billion) will be paid in within 15 days of ESM inauguration." In other words, October 23 is the deadline by which an already cash-strapped Spain, has to pay-in the 40% of its €9.5 billion, or €3.8 billion, contribution, or else.

Somewhere deep in the bowels of the world’s Western central banks lie vaults holding gargantuan piles of physical gold bars… or at least that’s what they all claim.

Our analysis of the physical gold market shows that central banks have most likely been a massive unreported supplier of physical gold, and strongly implies that their gold reserves are negligible today. If Frank Veneroso’s conclusions were even close to accurate back in 1998 (and we believe they were), when coupled with the 2,300 tonne net change in annual demand we can easily identify above, it can only lead to the conclusion that a large portion of the Western central banks’ stated 23,000 tonnes of gold reserves are merely a paper entry on their balance sheets – completely un-backed by anything tangible other than an IOU from whatever counterparty leased it from them in years past. At this stage of the game, we don’t believe these central banks will be able to get their gold back without extreme difficulty, especially if it turns out the gold has left their countries entirely. We can also only wonder how much gold within the central bank system has been ‘rehypothecated’ in the process, since the central banks in question seem so reluctant to divulge any meaningful details on their reserves in a way that would shed light on the various “swaps” and “loans” they imply to be participating in. We might also suggest that if a proper audit of Western central bank gold reserves was ever launched, as per Ron Paul’s recent proposal to audit the US Federal Reserve, the proverbial cat would be let out of the bag – with explosive implications for the gold price.... We realize that some readers may scoff at any analysis of the gold market that hints at “conspiracy”. We’re not talking about conspiracy here however, we’re talking about stupidity. After all, Western central banks are probably under the impression that the gold they’ve swapped and/or lent out is still legally theirs, which technically it may be. But if what we are proposing turns out to be true, and those reserves are not physically theirs; not physically in their possession… then all bets are off regarding the future of our monetary system.