Ray Dalio Interview

[Viking]

Timely interview. I find Dalio hard to follow at times and this interview is long at 45 minutes :-) i especially liked his discussion of how he is looking at investing today (about 27:30 minute mark if you are pressed for time). My notes below were put together quickly; hopefully they are generally accurate.

 

- https://www.bloomberg.com/news/videos/2020-04-15/ray-dalio-on-the-economic-impact-of-the-coronavirus-crisis-video

 

Big buckets:

- goods and services - will see deflation

- asset prices: inflation (driven by central bank actions)

- currency - devaluations

 

Next 12 months world GDP will contract 4-5%

Recession will be bigger than 2008; most comparable to 1930-1945.

We will adapt.

 

When central banks open the spigots, historically this usually indicates the bottom is in for stocks

 

2008 the issue was banks.

Issues today go way beyond banks; who do you want to save?

 

Where we go from here?

- helps to look at it in two ways: countries and asset types

- people will be looking for storehold of wealth

- bonds are the clear losers today. Who would hold an instrument that pays zero or even negative interest rate? Currency risk.

- some stocks will win: strong balance sheet and stable income

- globally, there will also be winners and losers. Countries without a ’Fed’ will be losers (EM?)

- other things to watch: civil behavior (income inequality)? Changes in tax rates?

 

Severely different world moving forward:

1.) countries will be more self sufficient: health care; supply chain

2.) climate change

 

When will Bridgewater get back to old normal?

- current situation (working from home) is not a big deal; was contemplated and prepared for many years

- will be very conservative with plan to return; this is a health issue

- virus - history has shown these viruses come in waves

- humans adapt

[TwoCitiesCapital]

Timely interview. I find Dalio hard to follow at times and this interview is long at 45 minutes :-) i especially liked his discussion of how he is looking at investing today (about 27:30 minute mark if you are pressed for time). My notes below were put together quickly; hopefully they are generally accurate.

 

- https://www.bloomberg.com/news/videos/2020-04-15/ray-dalio-on-the-economic-impact-of-the-coronavirus-crisis-video

 

Big buckets:

- goods and services - will see deflation

- asset prices: inflation (driven by central bank actions)

- currency - devaluations

 

Next 12 months world GDP will contract 4-5%

Recession will be bigger than 2008; most comparable to 1930-1945.

We will adapt.

 

When central banks open the spigots, historically this usually indicates the bottom is in for stocks

 

2008 the issue was banks.

Issues today go way beyond banks; who do you want to save?

 

Where we go from here?

- helps to look at it in two ways: countries and asset types

- people will be looking for storehold of wealth

- bonds are the clear losers today. Who would hold an instrument that pays zero or even negative interest rate? Currency risk.

- some stocks will win: strong balance sheet and stable income

- globally, there will also be winners and losers. Countries without a ’Fed’ will be losers (EM?)

- other things to watch: civil behavior (income inequality)? Changes in tax rates?

 

Severely different world moving forward:

1.) countries will be more self sufficient: health care; supply chain

2.) climate change

 

When will Bridgewater get back to old normal?

- current situation (working from home) is not a big deal; was contemplated and prepared for many years

- will be very conservative with plan to return; this is a health issue

- virus - history has shown these viruses come in waves

- humans adapt

 

Very interesting to hear the take of asset inflation with deflation in goods/services. Just trying to figure out how the prices of assets that produce those goods and services reliably rises if revenues/profits are falling.

 

Will have to listen to the whole interview for more clarity I guess.

[spartansaver]

Timely interview. I find Dalio hard to follow at times and this interview is long at 45 minutes :-) i especially liked his discussion of how he is looking at investing today (about 27:30 minute mark if you are pressed for time). My notes below were put together quickly; hopefully they are generally accurate.

 

- https://www.bloomberg.com/news/videos/2020-04-15/ray-dalio-on-the-economic-impact-of-the-coronavirus-crisis-video

 

Big buckets:

- goods and services - will see deflation

- asset prices: inflation (driven by central bank actions)

- currency - devaluations

 

Next 12 months world GDP will contract 4-5%

Recession will be bigger than 2008; most comparable to 1930-1945.

We will adapt.

 

When central banks open the spigots, historically this usually indicates the bottom is in for stocks

 

2008 the issue was banks.

Issues today go way beyond banks; who do you want to save?

 

Where we go from here?

- helps to look at it in two ways: countries and asset types

- people will be looking for storehold of wealth

- bonds are the clear losers today. Who would hold an instrument that pays zero or even negative interest rate? Currency risk.

- some stocks will win: strong balance sheet and stable income

- globally, there will also be winners and losers. Countries without a ’Fed’ will be losers (EM?)

- other things to watch: civil behavior (income inequality)? Changes in tax rates?

 

Severely different world moving forward:

1.) countries will be more self sufficient: health care; supply chain

2.) climate change

 

When will Bridgewater get back to old normal?

- current situation (working from home) is not a big deal; was contemplated and prepared for many years

- will be very conservative with plan to return; this is a health issue

- virus - history has shown these viruses come in waves

- humans adapt

 

Very interesting to hear the take of asset inflation with deflation in goods/services. Just trying to figure out how the prices of assets that produce those goods and services reliably rises if revenues/profits are falling.

 

Will have to listen to the whole interview for more clarity I guess.

 

Because the required rate of return goes down faster, having a greater impact than any lost income.

[TwoCitiesCapital]

Timely interview. I find Dalio hard to follow at times and this interview is long at 45 minutes :-) i especially liked his discussion of how he is looking at investing today (about 27:30 minute mark if you are pressed for time). My notes below were put together quickly; hopefully they are generally accurate.

 

- https://www.bloomberg.com/news/videos/2020-04-15/ray-dalio-on-the-economic-impact-of-the-coronavirus-crisis-video

 

Big buckets:

- goods and services - will see deflation

- asset prices: inflation (driven by central bank actions)

- currency - devaluations

 

Next 12 months world GDP will contract 4-5%

Recession will be bigger than 2008; most comparable to 1930-1945.

We will adapt.

 

When central banks open the spigots, historically this usually indicates the bottom is in for stocks

 

2008 the issue was banks.

Issues today go way beyond banks; who do you want to save?

 

Where we go from here?

- helps to look at it in two ways: countries and asset types

- people will be looking for storehold of wealth

- bonds are the clear losers today. Who would hold an instrument that pays zero or even negative interest rate? Currency risk.

- some stocks will win: strong balance sheet and stable income

- globally, there will also be winners and losers. Countries without a ’Fed’ will be losers (EM?)

- other things to watch: civil behavior (income inequality)? Changes in tax rates?

 

Severely different world moving forward:

1.) countries will be more self sufficient: health care; supply chain

2.) climate change

 

When will Bridgewater get back to old normal?

- current situation (working from home) is not a big deal; was contemplated and prepared for many years

- will be very conservative with plan to return; this is a health issue

- virus - history has shown these viruses come in waves

- humans adapt

 

Very interesting to hear the take of asset inflation with deflation in goods/services. Just trying to figure out how the prices of assets that produce those goods and services reliably rises if revenues/profits are falling.

 

Will have to listen to the whole interview for more clarity I guess.

 

Because the required rate of return goes down faster, having a greater impact than any lost income.

 

Sure, theoretically. But had there ever been a deflationary environment where profits were consistently dropping and asset prices rose?

[spartansaver]

Timely interview. I find Dalio hard to follow at times and this interview is long at 45 minutes :-) i especially liked his discussion of how he is looking at investing today (about 27:30 minute mark if you are pressed for time). My notes below were put together quickly; hopefully they are generally accurate.

 

- https://www.bloomberg.com/news/videos/2020-04-15/ray-dalio-on-the-economic-impact-of-the-coronavirus-crisis-video

 

Big buckets:

- goods and services - will see deflation

- asset prices: inflation (driven by central bank actions)

- currency - devaluations

 

Next 12 months world GDP will contract 4-5%

Recession will be bigger than 2008; most comparable to 1930-1945.

We will adapt.

 

When central banks open the spigots, historically this usually indicates the bottom is in for stocks

 

2008 the issue was banks.

Issues today go way beyond banks; who do you want to save?

 

Where we go from here?

- helps to look at it in two ways: countries and asset types

- people will be looking for storehold of wealth

- bonds are the clear losers today. Who would hold an instrument that pays zero or even negative interest rate? Currency risk.

- some stocks will win: strong balance sheet and stable income

- globally, there will also be winners and losers. Countries without a ’Fed’ will be losers (EM?)

- other things to watch: civil behavior (income inequality)? Changes in tax rates?

 

Severely different world moving forward:

1.) countries will be more self sufficient: health care; supply chain

2.) climate change

 

When will Bridgewater get back to old normal?

- current situation (working from home) is not a big deal; was contemplated and prepared for many years

- will be very conservative with plan to return; this is a health issue

- virus - history has shown these viruses come in waves

- humans adapt

 

Very interesting to hear the take of asset inflation with deflation in goods/services. Just trying to figure out how the prices of assets that produce those goods and services reliably rises if revenues/profits are falling.

 

Will have to listen to the whole interview for more clarity I guess.

 

Because the required rate of return goes down faster, having a greater impact than any lost income.

 

Sure, theoretically. But had there ever been a deflationary environment where profits were consistently dropping and asset prices rose?

 

I'm partly misquoting him. Not all asset prices will rise. The way he made it sound is that very high quality earnings streams that grow will likely get priced more like bonds (at least that was my impression).

[Gregmal]

IDK but to me that makes perfect sense. With 0 as your interest marker on the bond side, what multiples should people be paying for earnings? 10x? If you have 1% 10 yr, a 4-5% mid cycle earnings yield seems pretty reasonable to me. Not that Im buying into it yet, but in theory I dont see how it doesnt make sense. This is part of the reason I just shake my head when people mistakenly take short cuts and just conclude "we cant be trading here, it's where we were in 2019!"... No, its not where we were trading in 2019, when you account for some very important variables....Coronavirus will just make the companies you should be buying in the first place, better and stronger going forward.

[valueinvestor]

IDK but to me that makes perfect sense. With 0 as your interest marker on the bond side, what multiples should people be paying for earnings? 10x? If you have 1% 10 yr, a 4-5% mid cycle earnings yield seems pretty reasonable to me. Not that Im buying into it yet, but in theory I dont see how it doesnt make sense. This is part of the reason I just shake my head when people mistakenly take short cuts and just conclude "we cant be trading here, it's where we were in 2019!"... No, its not where we were trading in 2019, when you account for some very important variables....Coronavirus will just make the companies you should be buying in the first place, better and stronger going forward.

 

Never really understood why people thought it should trade around 2008 either - it’s almost analogous to the short cut of shorting stocks because they are overvalued.

 

I never found Tesla to be a bargain, but I also never found it to be a great short candidate like Einhorn because Elon (like Bezos) knew how to work the capital markets. Where they deliver above expected results, marketed a strategic plan/vision, issued their “overvalued” stock and plowed it into their business to create dominance.

 

It’s  somewhat similar to the economy, where you print new money, fill in the holes, and have asset prices go up (although price of those goods/services produced go down). Ray also made a good point that the stock market is not a true reflection of the economy, hence sometimes there’s lag.

 

Although I was surprised Ray didn’t cover spending, as it’s a crucial step to get asset prices up. Not only that, but to get spending to create a wealth effect. With this pandemic - not sure how that’s going to happen.

 

When earnings multiple go to 25x earnings versus 20x earnings, it’s still not enough to increase asset price when corporate earnings are down 20-30% due to lack of spending. There’s only a handful of stocks that do that such as Amazon, but even then Amazon’s earnings multiple is already higher than that if I remember correctly.

 

 

[elliott]

When central banks open the spigots, historically this usually indicates the bottom is in for stocks

 

I am not sure I followed Dalio when he mentions that he is not surprised stocks are now rising (as is summarized in the first post, Dalio says bottoms are made when the central banks start acting), yet later (or in another interview?) he says that you really have to know which stocks you are holding, as if, buying the market is not going to work.

 

Does he mean most stocks will go down again, contradicting his earlier point about the bottom?

[buffetteer1984]

Completely agree with this.  Too many media pundits are quick to state average p/e during times of stress was xyz therefore now it should be the same.  Value is a moving variable by retained earnings but also interest rates.  At no time in the past has rates ever been this low for this long with the amount of stimulus being pumped into the markets.  Another variable people seem to forget is the companies that constitute the markets.  In 2008, 25% were financials, and ALL their earnings for financials went to zero most took forever to recover those earnings ergo the stocks lagged.  If we look at the nov lows and then the march lows in 2008/09, the nasdaq never made a new low simply cause people realized the tech companies would survive.  S&P got dragged down further due to the banks.  Now, 25% is basically in the fang stocks and all those companies have no issue getting through this time and will likely thrive post pandemic just on survival of the fittest.  So unless people think the fang companies will have a permanent impairment of 50% on their earnings it doesn't make sense for markets to go down 50% and that markets are rising 

 

IDK but to me that makes perfect sense. With 0 as your interest marker on the bond side, what multiples should people be paying for earnings? 10x? If you have 1% 10 yr, a 4-5% mid cycle earnings yield seems pretty reasonable to me. Not that Im buying into it yet, but in theory I dont see how it doesnt make sense. This is part of the reason I just shake my head when people mistakenly take short cuts and just conclude "we cant be trading here, it's where we were in 2019!"... No, its not where we were trading in 2019, when you account for some very important variables....Coronavirus will just make the companies you should be buying in the first place, better and stronger going forward.

[TwoCitiesCapital]

Plenty off studies have been done to show interest rates have roughly zero correlation with stock multiples and what matters is inflation. Inflation of 0-2% supports the highest multiples. Anything above or below that sees equity multiples dropping fairly dramatically regardless of what interest rates and the economy are doing.

 

When you have stocks trading at 21x earnings in an environment of low rates and low inflation, you've got the goldilocks scenario. It literally doesn't get better. Any divergence one direction, or the other, drops the multiple pretty dramatically - at least historically.

 

If you believe this is a V-shaped recovery, then you should be concerned about inflation b/c that stimulus isn't going to sit as excess reserves on bank balance sheets like it did in 2008. It's going directly to consumers and businesses to circulate and it will be inflationary if it circulates.

 

If you don't believe this is a V-shaped recovery, then you should be concerned because there is the very real threat of disinflationary pressures dropping inflation out of the sweet spot - or at the very least the market concerns of that happening.

 

This is what happens when stocks get so damn expensive - you're left with mostly negative options on forward looking returns regardless of the direction the economy takes.

[Viking]

Plenty off studies have been done to show interest rates have roughly zero correlation with stock multiples and what matters is inflation. Inflation of 0-2% supports the highest multiples. Anything above or below that sees equity multiples dropping fairly dramatically regardless of what interest rates and the economy are doing.

 

When you have stocks trading at 21x earnings in an environment of low rates and low inflation, you've got the goldilocks scenario. It literally doesn't get better. Any divergence one direction, or the other, drops the multiple pretty dramatically - at least historically.

 

If you believe this is a V-shaped recovery, then you should be concerned about inflation b/c that stimulus isn't going to sit as excess reserves on bank balance sheets like it did in 2008. It's going directly to consumers and businesses to circulate and it will be inflationary if it circulates.

 

If you don't believe this is a V-shaped recovery, then you should be concerned because there is the very real threat of disinflationary pressures dropping inflation out of the sweet spot - or at the very least the market concerns of that happening.

 

This is what happens when stocks get so damn expensive - you're left with mostly negative options on forward looking returns regardless of the direction the economy takes.

 

Great post! Well explained. Lots to think about :-)

 

Where 10 year Treasury bond yields go in the US in the next year will be important. Will they follow Japan and Germany into negative territory?

[bskptkl]

This stuck with me:

“This period, like the 1930-45 period, is a period in which I think you’d be pretty crazy to hold bonds,” Dalio said Wednesday on the Bloomberg Invest Talks webcast. “If you’re holding a bond that gives you no interest rate, or a negative interest rate, and they’re producing a lot of currency and you’re going to receive that, why would you hold that bond?”

 

The bond market is much bigger than the stock market. Will the natural bondholders just continue to buy bonds? If not bonds, what then? 

 

Dalio suggests companies with stable incomes and strong balance sheets will prosper.

 

In this context, what's the right PE for those kind of equities? 10-20 sounds fine, even if a lot of the E may be missing this year...

 

[TwoCitiesCapital]

This stuck with me:

“This period, like the 1930-45 period, is a period in which I think you’d be pretty crazy to hold bonds,” Dalio said Wednesday on the Bloomberg Invest Talks webcast. “If you’re holding a bond that gives you no interest rate, or a negative interest rate, and they’re producing a lot of currency and you’re going to receive that, why would you hold that bond?”

 

The bond market is much bigger than the stock market. Will the natural bondholders just continue to buy bonds? If not bonds, what then? 

 

Dalio suggests companies with stable incomes and strong balance sheets will prosper.

 

In this context, what's the right PE for those kind of equities? 10-20 sounds fine, even if a lot of the E may be missing this year...

 

My guess? If it's like every other inflationary circumstance then you look at real assets like gold, real estate, commodities, etc. Some will go to equities, but that's not the only alternative.

 

Also, bond markets may bigger than equity markets now, but where does that value go if interest rates are at something like 6%. Trillions of dollars in paper wealth disappear - they don't just "flow" to another asset class. If interest rates gap higher overnight, that money just disappears. It doesn't go anywhere. Consider what happened in 2011 where places like Spain, Italy, Greece etc saw their borrowing costs double in 2-weeks. Wasn't enough time for the bulk of capital to escape and so a lot of paper wealth just disappears.

[Liberty]

https://www.wsj.com/articles/bridgewater-associates-lays-off-several-dozen-employees-11595610244

 

“ Bridgewater’s Pure Alpha was down 13.6% for the yr through June, wiping five years of returns. Now come the layoffs”

[sleepydragon]

https://www.wsj.com/articles/bridgewater-associates-lays-off-several-dozen-employees-11595610244

 

“ Bridgewater’s Pure Alpha was down 13.6% for the yr through June, wiping five years of returns. Now come the layoffs”

 

Bridgewater is the only place in the world where you can still experience what the Chinese Culture Resolution is like.  Lol

 

Ray Dalio is likely a true believer of communism.

He is a very good person, but I suspect Bridgewater will not last without him as leader.

Now China and Russian are withdrawing money from Bridgewater (maybe this is rumor), which is not helping.

 

 

[Krapdivad]

3/19/21 interview with Bloomberg

 

Getting some clarity from Ray Dalio on what’s going on with the stimulus checks and interest rates.

 

The central government has the ability to collect taxes, sell bonds, and spend money on goods and services (like unemployment and stimulus)

 

The central bank (aka the fed) has the ability to print new money and buy financial assets (like bonds and stocks)

 

When the central bank uses printed money to buy government bonds for the central government to spend, it’s called monetization. According to Dalio, this activity of creating a lot more debt and then monetizing it is indicative of a late stage in the long term debt cycle.

 

During the pandemic, people were desperate for money and spending decreased. In order to make up for the decrease in the economy, the central government provided stimulus by selling a lot of bonds.

 

Currently you can’t get a great return if you buy these bonds (if you factor inflation your returns would be negative).

This unattractive deal results in less buying demand (by Americans and foreigners), so the price of bonds goes down, and raises their interest rates.

 

The dilemma: The fed can either 1) allow interest rates to rise (which hurts stock valuations and eventually the economy) or 2) try to hold down the interest rates by buying bonds with printed money. But when they print money, they accelerate the devaluation the dollar and raise monetary inflation pressures.

 

Meanwhile people seeing the value of their bonds fall (as bond prices fall), feel the pressure to sell bonds at the same time the government is selling. This creates the danger we’re in as interest rates keep rising because of the increasing pressure to sell bonds.

 

Allegedly this is an inevitable situation that happens at the end of the long term debt cycle and the life cycle of a world power. It may signal the transition of the old to the new world order (aka China).

 

Dalio is predicting higher interest rates towards the end of the year as growth and inflation become stronger. He says the important signal that things are going downhill will be when the fed proceeds to buy bonds when the economy and inflation are strong.

 

He describes the effects of monetary inflation, which reduces your cash spending power by about 2% s year.

 

TL:DR 
Cash is trash and interest rates will continue to rise, and America is in decline.

[changegonnacome]

3/19/21 interview with Bloomberg

 

Getting some clarity from Ray Dalio on what’s going on with the stimulus checks and interest rates.

 

The central government has the ability to collect taxes, sell bonds, and spend money on goods and services (like unemployment and stimulus)

 

The central bank (aka the fed) has the ability to print new money and buy financial assets (like bonds and stocks)

 

When the central bank uses printed money to buy government bonds for the central government to spend, it’s called monetization. According to Dalio, this activity of creating a lot more debt and then monetizing it is indicative of a late stage in the long term debt cycle.

 

During the pandemic, people were desperate for money and spending decreased. In order to make up for the decrease in the economy, the central government provided stimulus by selling a lot of bonds.

 

Currently you can’t get a great return if you buy these bonds (if you factor inflation your returns would be negative).

This unattractive deal results in less buying demand (by Americans and foreigners), so the price of bonds goes down, and raises their interest rates.

 

The dilemma: The fed can either 1) allow interest rates to rise (which hurts stock valuations and eventually the economy) or 2) try to hold down the interest rates by buying bonds with printed money. But when they print money, they accelerate the devaluation the dollar and raise monetary inflation pressures.

 

Meanwhile people seeing the value of their bonds fall (as bond prices fall), feel the pressure to sell bonds at the same time the government is selling. This creates the danger we’re in as interest rates keep rising because of the increasing pressure to sell bonds.

 

Allegedly this is an inevitable situation that happens at the end of the long term debt cycle and the life cycle of a world power. It may signal the transition of the old to the new world order (aka China).

 

Dalio is predicting higher interest rates towards the end of the year as growth and inflation become stronger. He says the important signal that things are going downhill will be when the fed proceeds to buy bonds when the economy and inflation are strong.

 

He describes the effects of monetary inflation, which reduces your cash spending power by about 2% s year.

 

TL:DR 
Cash is trash and interest rates will continue to rise, and America is in decline.

 

Excellent summary - watched his interview and am struck by his mental model of macro which is internally consistent the question is whether Ray's model of "How the Economy Works" (& its YouTube video cousin) is in itself correct.

 

Seems to be me that the Fed has to let rates rise such that demand from buyers (especially overseas buyers) equals supply......the problem is the avalanche of bonds hitting the market and what level rates need to rise to bring equilibrium and will that equilibrium level be so high that its hurting the real economy forcing the Fed to get into monetizing treasury debt to keep yields down and beginning monetary inflation. Which will ultimately not be transitory.

 

My only hope is that given rates in Europe / Japan.......US bonds with any positive carry (minus currency hedge costs) will be attractive instruments to hold and thus will catch a bid. Think you saw David Tepper recently highlight that Japan became a net buyer of US bonds in the last couple of months for that very reason.

[SharperDingaan]

Couple of thoughts - particularly around the US.

 

The 'recovery' to date has been K shaped. Not really happening for a great many (minimum wage), for a great many 'middle income' it just isn't worth mom working anymore ('she' cession, less work/pay, lower family income), and some who are doing as well/better than before. Poor people spend, rich ones do not -  seems pretty clear that if pre Covid levels of economic activity are the objective, there is going to have be a national guaranteed minimum income (ie: permanent helicopter money).

 

Per current legislation, municipalities have to balance their books every year; raise tax or cut services. Most would expect a 'temporary' change in the legislation. same as annual income tax is 'temporary'.  Spend more than you take in and you have to borrow - assuming you can, and at a reasonable cost. If you think the market puts up the money - interest rates must rise (crowding out). If you think the fed prints the money - the USD must devalue, ahead of anticipated inflation.

 

The US is not unique, many others are in a similar/worse position. If EVERYONE devalues at the same rate there is no difference in relative FX rates & international competitiveness (carousel effect). Commodities just cost more, most stores of value 'rise' in nominal value terms, but there's GLOBAL inflation. Same quantity of goods consumed, just more nominal fiat chasing it.

 

Obviously, good for hard assets, hard goods, and critical commodities - as Dalio recognizes. The mystery is what happens when stranded assets write-down; obviously not good for the stocks in question, but are accounting rules 'temporarily' changed as well?

 

We live in interesting times. 

 

SD