Ray Dalio: A Long and Painful Depression - Barron's Interview

Barron's interviews Ray Dalio, chief investment officer of Bridgewater Associates. Listen up: Bridgewater's funds have produced long-term annual returns, net of fees, averaging 15%. In the turmoil of 2008, its Pure Alpha I fund earned 8.7%, while Pure Alpha II delivered 9.4%. This guy knows his stuff.

There's too much in this interview to do it justice with a summary. For those with Barron's subscriptions, I strongly recommend you read the whole thing. For those who can't, here are some of Dalio's key thoughts:

• This is no recession - it's a "D-process." (Dalio wants people to understand it's a process, not a phenomenon.) "Now you can ask yourself, OK, when was the last time bank stocks went down so much? When was the last time the balance sheet of the Federal Reserve, or any central bank, exploded like it has? When was the last time interest rates went to zero, essentially, making monetary policy as we know it ineffective? When was the last time we had deflation?" Essentially, when incomes aren't enough to service unmanageable debt, the reversal process begins.
• GM (GM) is a metaphor for the U.S. One way or another, GM must be restructured so that it is a self-sustaining, economically viable entity that people want to lend to again. So too for America: "We will go through a giant debt-restructuring, because we either have to bring debt-service payments down so they are low relative to incomes... or we are going to have to raise incomes by printing a lot of money." It's the same as all bankruptcies, but when it happens to a country, it's preferable to print money.
• 2008 was the year of price declines. 2009 and 2010 will be the years of bankruptcies and restructurings. It will be a very difficult time that will surprise a lot of people who still think we'll come out of it OK. All the Fed/Treasury have done so far is taken the existing debt and said they will own or guarantee it. They have barely begun to write it down.
• There can be no lending renewal without writedowns. Banks - no matter who owns them - can't viably lend until there are financially sound entities to lend to. Four areas that need to be restructured: mortgage debt; financial sector debt; corporate debt; commercial real estate debt. "The biggest issue is that if you look at the borrowers, you don't want to lend to them."
• Today is very similar to the '30s. "In the bear market from 1929 to the bottom, stocks declined 89%, with six rallies of returns of more than 20% - and most of them produced renewed optimism. But what happened was that the economy continued to weaken with the debt problem."
• Gold, bonds and Japan. "I imagine gold could go up a whole lot and Treasury bonds won't go down a whole lot, at first." The Japanese economy will do horribly, but their problems aren't of the same scale as U.S. issues, and they have surpluses.
• China. It's not likely they'll abandon U.S. debt, but neither are they likely to continue to want to double down.
• Inflation/deflation. A wave of currency devaluations and strong gold will negate deflationary pressures, bringing inflation to a low, positive number. A dollar devaluation is good, bringing pricing in line and offering relief to the debt load. And it almost always triggers a major stock-market rally.
• Stocks. "Buying equities and taking on those risks in late 2009, or more likely 2010, will be a great move because equities will be much cheaper than now. It is going to be a buying opportunity of the century."

Comments

[Moon Kil Woong:]

I don't think we can draw a conclusion to this market as a depression or not yet simply because there are a variety of ways to avoid it. Likewise there are a variety of ways to insure it.

1) Crafting multiple half hearted stimulus plans helps insure a recession.

2) Reforming bank transparency and regulation helps insure future prosperity.

3) Breaking up big banks and re-installing Glass Stegal helps prevent a depression

4) Regulating the type of CDS and CDO derivatives clogging the banks solvency helps correct this downturn.

5) Nationalizing everything and having government own equity in every troubled market segment insures market instability and plunges us towards a depression.

6) Becoming a socialist state insures a depression.

7) Inflating money supply and keeping rates at Zirp prevents any hopes of a decent recovery and when we get one it is likely to come with another asset bubble and/or massive inflation. 0% interest rate policy is good for no one and contributes to a deeper recession if not depression (this is contrary to bonehead economists that think low interest rates are stimulative so no interest must be really good).

8) Further weakening financial accounting rules will make the market even more unstable and people even less likely to lend in the future rather than stimulating credit growth. That is, unless the government keeps insuring everything which is not healthy for the economy since the economy becomes de-facto synthetic like Freddie Mac and Fannie Mae.

9) Making quazi-public companies is an insult to the market and undermines the foundation of capitalism. Thus it doesn't encourage a depression since that is something you get in a capitalist market which the market ceases to be all together with this type of action. China can pretend their publicly traded government run companies are capitalist but it isn't. That's why they can't freely float their currency or allow money to move out of the country without approval.

In the end we are not living in a fatalistic world of pre-determined futures. We have control of what outcome we create if we are smart enough and willing enough to take action.

Feb 09 04:20 AM

[r0364:]

Pay business to rehire the workers that were laid off and add a temporary layoff tax to discourage more layoffs.

Pay business up to 35,000 dollars a year(depending on their wages) to rehire the 3 million workers that have been laid off. That would cost 105 Billion a year and everybody would be working. Add some money for stimulating demand and the economy is restarted except for the banking system. Put a temporary tax on companies that lay off workers and figure a fair way for the government to pay the workers(up to 35,000.00) that companies need to lay off to break even.

Feb 09 09:42 AM

[Seeking Advice:]

This severe recession requires people to spend to move the economy forward since our economy has become 70% consumer driven. However, given the losses individuals (and families) have sustained in their 2 main assets - homes and 401k's - the only responsible action is to save more to try to make up some of the difference. Some lower amount of spending has to result and with that having been 70% of the U.S. economy - that has to drive slower economic growth going forward even after we've eventually come through this debt and solvency crisis.

As far as the stimulus packages, while I and many other non-economists are wary of them, most economists I hear seem to feel that the ones being proposed are still far too small to have the needed impact. I feel it's probably politicallly impossible to do nothing. Doing nothing would probably mean a quicker route to recovery, but a horrendous couple of years for most people to get there. And that's why we'll have a stimulus package passed and if that doesn't prove effective, maybe more to follow.

Feb 09 10:29 AM

[Diego Monta...:]

This simply shifts cost structure burdens on firms and sectors, which leads to more bankruptcies. Individual firms can't print money to bail themselves out of such burdens. Are you short HYG ?


On Feb 09 12:18 AM r0364 wrote:

> Pay business to rehire the workers that were laid off and add a temporary
> layoff tax to discourage more layoffs.
>
> Pay business up to 35,000 dollars a year(depending on their wages)
> to rehire the 3 million workers that have been laid off. That would
> cost 105 Billion a year and everybody would be working. Add some
> money for stimulating demand and the economy is restarted except
> for the banking system. Put a temporary tax on companies that lay
> off workers and figure a fair way for the government to pay the workers
> that companies need to lay off.

Feb 09 10:53 AM

[kelm:]

One of the hallmarks of this crisis has been the number of really smart folks who enter the market and buy at key points proclaiming that this is the opportunity of the century. They have all been too early so far. At some point someone will be right. Dalio's comments on devaluing the dollar sparking a rally are worth remembering. 100% inflation rates will drive up stocks as well.

Feb 09 11:52 AM

[HEYJOSE01915:]

IMO our problems began with the repeal of the Glass- Steagall Act in 1999. Is it too late to go back to the concepts of Glass Steagall now ?- read this blog-- -- www.slate.com/toolbar....

-The commercial banks primary responsibility was to provide short or close to short term credit to all aspects of our capitalistic system. Investment banking was the vehicle for aiding and abetting long term capital formation. Today's mish mash is a mostly a result of the faulty and greedy approach of the old "commercial" banks in the home grounds of the old investment banks. A completely different approach to risk-taking. The result is the toxic assets. The govt's approach on how to handle them short of nationalizing the banks [ if only for a temporary period] is the subject of our current solution to the financial crisis However this is only half of the solution.[TARP etc]

The other half involves restoring confidence of the "investor" class in the securities market. "according to data from Bloomberg and the Fed the total value of U.S. cash holdings, bank deposits , and money market funds exceeds $8.84 trillion. This amounts to 74% of the entire market cap of U.S. securities and the highest ratio since 1990. The treasury secretary must do a complete overhaul of the investment financial practices including the role or lack of role of the S.E.C.
The "untouchable" hedge funds usurped many of the roles of sensible investment banking and go unregulated with no transparency. Unless Geithner is strong enough and willing enough to include the the hedge funds in his plan for financial reorganization, we will have a hard and long road ahead of us. When investor class confidence is restored, and the consumer class sees a return to values in his 401's and mutual funds, then and only then will his confidence return and he becomes a player in an economic recovery.

In summary a two pronged approach to economic recovery requires a disposition of the "toxic" assets problem even though some interested parties will be hurt[ including the U.S. taxpayer] and a thorough overhaul of our financial investment practices and regulations.

The American private enterprise system has to pay the price now for too much credit and leverage in the consumer arena, the Govt. arena, and most importantly the financial arena including the mortgage banking area.

Feb 09 11:58 AM

[Gdub53:]

Abolish Federal Reserve. End the fractional reserve banking system. Abolish the IRS. Don't you people get it? The more money printed by this private banking cartel the more interest they collect. Don't you people realize that all the income tax does is pay this cartel their interest for the money that's created out of thin air? What a scam. More money = more interest. Google video..."The Moneymasters".

Feb 09 01:16 PM

[raytayzmd:]

..."Listen up: Bridgewater's funds have produced long-term annual returns, net of fees, averaging 15%. In the turmoil of 2008, its Pure Alpha I fund earned 8.7%, while Pure Alpha II delivered 9.4%. This guy knows his stuff."...and where can I confirm this information?...here's a link to Bridgewater's newsletter from 9/19/08:

www.bwater.com/Uploads...

...I didn't have time to review everything but i certainly wasn't impressed by their "Conclusions"...and "This guy knows his stuff."???...about what -- investing money?...so that somehow translates into an economic crystal ball?...I don't think so...and you're a "SA Editor"??...ohhhh -- that explains it.

Feb 09 02:32 PM

[Diego Monta...:]

A cautionary tale of ‘pen name’ moral hazard:

My initial response to r0364’s post was a bit reactionary, probably due to his final comment. Yet this topic really did not call for my smug response … in the future I will leave such ‘Shmoot-Schumer’
comments to the media folks like Larry Kudlow who are paid to entertain.

On further thought, why not pay businesses to rehire those for whom 35k is a significant chunk of their compensation. Funding these workers would definitely be more helpful than bailing out a bunch of ‘GS wanna be deal makers’ at AIG who are more to blame for the current situation than those targeted for r0364’s proposal. If r0364’s proposal provides a temporary relief to firms struggling with variable costs exceeding revenues then it may make sense; although this is not a simple issue with simple policy responses. I recall a smart person from Fidelity, from Germany, who talked about a steel mill in his hometown
that was sold to the Chinese who came, dis-assembled the German steel factory and re-constructed it in China. The Fidelity person said if the plant had remained , in two years time it would have returned to profitability and would have helped the community from which it was yanked.

So yes, this proposal of r0364’s involves lots of potentially distorting forces ; for example, it favors businesses with low fixed costs and high variable costs, but it is not as heinous as I thought it was initially.

Helping workers keep their jobs while making sure baffoons like those at AIG ( and Conseco for that matter …. talk about a regulatory failure ! ) does not seem so bizarre.

On Feb 09 10:53 AM Diego Montalbon, raconteur wrote:

> This simply shifts cost structure burdens on firms and sectors, which
> leads to more bankruptcies. Individual firms can't print money to
> bail themselves out of such burdens. Are you short HYG ?

Feb 09 02:46 PM

[CJJ:]

Do we all forget what high oil prices did to the economy. Why would anyone remember that? We only remember what occurred 70 years ago.

Feb 09 05:43 PM

[User 354007:]

Ray's annual letter to clients where he describes the root causes of the financial market crisis and what differentiated investors who made money from those who lost money last year.

www.scribd.com/doc/114...

Feb 09 06:05 PM

[investor88:]

Ray Dalio CIO of Bridgewater Associates has given realistic comments which are similar of those of Taleb and RGEmonitor's Roubini. Basically we are in deep recession/depression and the recovery phase may resemble Japan.

At some point there will be a real bull but not in the near term nor probably for another few years.

Feb 09 06:07 PM

[Mattwoi:]

Pleeze!! The economy is toast but like the Phoenix will arise from the ashes,mabe. Or mabe not. Would you keep loaning your brother-in-law money everytime he awakes from a spending binge with a depressing headache?The US treasury couldn't get a single bid on their 30 year IOU's today so I guess that Uncle Cho ain't lending Uncle Sam any greenbacks today. What if the same thing happened tomorrow and the next day and the next?I guess Uncle S. will have to give UncleC. the shirt off his back as well as his car keys as collateral. Oh I forgot, Uncle S. doesn't manufacture clothing or autos anymore. Mabe Owe Bama will come up with a plan to get Uncle Sams spending party rolling again !

Feb 09 07:39 PM

[Daniel Herkes:]

The economy is in such turmoil that the eventual bottom is still not in sight. We are in a hiatus caused by the new administration trying to grapple with a dynamic changing situation. They may not be able to correct anything in the long run with the stimulus package, but that will not prevent them from trying. I suspect folks want them to just do something!

Even after the direction of the plan becomes apparent, the effect on the economy will not be clear. The disbursal of funds will take a year or so to make their way to main street. The distressed consumers live there, not on Wall street. I do hope the plan works, but this looks suspiciously like a depression right now.

Feb 10 04:25 AM

[yank:]

Jose:
You are correct about the disastrous decision to abolish Glass-Stegall. The "brain surgeons" in Washington (Sen. Gramm was one) decided there was no need for a "firewall" between commercial banks, insurers, and investment banks. Let them sell everything! The result has been a web of complex, opaque investment products that no one understands, no one can properly value, and no one can easily dispose of now that they are worthless. This is not a normal "business cycle" recession as the idiots on CNBC are prone to suggest. Instead we are faced easily with another 5-8 years of stagnant incomes, inflationary material prices, and low economic growth. Stimulus packages will not produce the millions of jobs we need right now. And "protectionist" policies of caving in to union pressures will also be disastrous as the likely result of "buying American" will be a vicious downward spiral of a global trade war. The bankers have completely mucked up everything. And Tim Geithner's "fingerprints" are all over the Lehman Bros fiasco and other Treasury/Fed Reserve misteps. We are so screwed.

Yank


On Feb 09 11:58 AM Heyjose01915 wrote:

> IMO our problems began with the repeal of the Glass- Steagall Act
> in 1999. Is it too late to go back to the concepts of Glass Steagall
> now ?- read this blog-- -- www.slate.com/toolbar....;id=2200148
>
>
> -The commercial banks primary responsibility was to provide short
> or close to short term credit to all aspects of our capitalistic
> system. Investment banking was the vehicle for aiding and abetting
> long term capital formation. Today's mish mash is a mostly a result
> of the faulty and greedy approach of the old "commercial" banks in
> the home grounds of the old investment banks. A completely different
> approach to risk-taking. The result is the toxic assets. The govt's
> approach on how to handle them short of nationalizing the banks [
> if only for a temporary period] is the subject of our current solution
> to the financial crisis However this is only half of the solution.[TARP
> etc]
>
> The other half involves restoring confidence of the "investor" class
> in the securities market. "according to data from Bloomberg and the
> Fed the total value of U.S. cash holdings, bank deposits , and money
> market funds exceeds $8.84 trillion. This amounts to 74% of the entire
> market cap of U.S. securities and the highest ratio since 1990. The
> treasury secretary must do a complete overhaul of the investment
> financial practices including the role or lack of role of the S.E.C.
>
> The "untouchable" hedge funds usurped many of the roles of sensible
> investment banking and go unregulated with no transparency. Unless
> Geithner is strong enough and willing enough to include the the hedge
> funds in his plan for financial reorganization, we will have a hard
> and long road ahead of us. When investor class confidence is restored,
> and the consumer class sees a return to values in his 401's and mutual
> funds, then and only then will his confidence return and he becomes
> a player in an economic recovery.
>
> In summary a two pronged approach to economic recovery requires a
> disposition of the "toxic" assets problem even though some interested
> parties will be hurt[ including the U.S. taxpayer] and a thorough
> overhaul of our financial investment practices and regulations.<br/>...
>
> The American private enterprise system has to pay the price now for
> too much credit and leverage in the consumer arena, the Govt. arena,
> and most importantly the financial arena including the mortgage banking
> area.

Feb 10 09:33 AM

[Teutonic Kn...:]

Just would like to add my 2 cents to yank's above. Yes, right now it is scary. When we look back from a year or two from now, the so-called Stimulus package being passed would perhaps look like a blurb on the radar screen of the collapsing financial world around us.

The lingering fear surrounds the big banks. The governments (including those around the world) probably have a little more insight into how bad things really are) and they are clueless as to how to fix it, but won't come clean. It leaves the public guessing as to what they (the banks and the governments alike) have up their sleeves next. The worst that will happen is that we all wake up one morning in the next two to three months and 0800 A.M. we are told on TV and on the web that BAC and C had been nationalized and being merged into one. Then the panic really starts. I think the U.S. government is better to come out to say it that these two banks are insolvent and they are being nationalized NOW. In this way the public would have more confidence and at least know where we stand. As it is Tim Geithner's "Plan" is being viewed as a decoy to buy time, and that is bad.

Hope things will work out somehow. Obama has all the good intentions, but as green as he is, the situation is new to everyone. Let us hope that I am wrong.

Feb 10 04:03 PM

[Shaggieman:]

Seems like Obama could order the reinstatement of the uptick rule and No naked shorting and those alone would rally the stock market.

Dalio's article is amusing but IMO differs from our situation.

1) The household debt service curve is got to be a percentage of the total monetary base and the fact that so much liquidity is entering is not being considered. Wages have more room to rise as companies like XOM and MSFT are sitting on loads of cash.

2) During the depression the monetary base was contracting with the collapse of the banks. I don't see that happening this time around, not with FDIC.

3) Resurrect AIG, LEH and some of the others by buying up there bad assets and watch how fast the financials snap back.

Feb 10 05:00 PM

[Thomas J. G...:]

Did everyone see that graph in the Barron's article? It was Household Debt Service. I assume they had it in there because Dalio thought it was important. I guess they were saying that Household Debt Service being at 13/14% was a big deal. Going from 5% to 13% over 60 years is going to break the country? And what about other debts like mortgages, which are much larger percentage wise. I think some of the debt deleveraging arguments are valid but focusing on Household Debt Service seems too narrow.

Feb 10 05:24 PM

[Jason Rines...:]

I have seen that Marvin here and other financial sites. And you have seen mine saying the exact same thing for a year+. Human nature creates the business cycle which has replicate effects measured over 500 years. I do believe we are near an era that will change to some degree but don't expect the PTB to relinquish there profitable, non competetive model without a fight.


On Feb 08 06:46 PM MarvinMBA wrote:

> I've been saying the D word for a long time...the world finally agrees
> with my views. I've got no comment on this commentary except belive
> it...Marvin MBA

Feb 10 05:58 PM

[Jason Rines...:]

Your not wrong.


On Feb 10 04:03 PM Teutonic Knight wrote:

> Just would like to add my 2 cents to yank's above. Yes, right now
> it is scary. When we look back from a year or two from now, the so-called
> Stimulus package being passed would perhaps look like a blurb on
> the radar screen of the collapsing financial world around us.
>
> The lingering fear surrounds the big banks. The governments (including
> those around the world) probably have a little more insight into
> how bad things really are) and they are clueless as to how to fix
> it, but won't come clean. It leaves the public guessing as to what
> they (the banks and the governments alike) have up their sleeves
> next. The worst that will happen is that we all wake up one morning
> in the next two to three months and 0800 A.M. we are told on TV and
> on the web that BAC and C had been nationalized and being merged
> into one. Then the panic really starts. I think the U.S. government
> is better to come out to say it that these two banks are insolvent
> and they are being nationalized NOW. In this way the public would
> have more confidence and at least know where we stand. As it is Tim
> Geithner's "Plan" is being viewed as a decoy to buy time, and that
> is bad.
>
> Hope things will work out somehow. Obama has all the good intentions,
> but as green as he is, the situation is new to everyone. Let us hope
> that I am wrong.

Feb 10 06:00 PM