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

Includes: DIA, EWJ, GLD, QQQ, SPY, TLT
by: SA Eli Hoffmann

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 (NYSE: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."