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Ray Dalio explains the concept of a beautiful deleveraging and why the U.S. is in one, but the...

Ray Dalio explains the concept of a beautiful deleveraging and why the U.S. is in one, but the EU, not so much. He expects the ECB will ultimately print money and produce another big rally, "but this is a tougher time to be very confident about that scenario." An "uncivilized" man, Dalio remains a fan of gold, recommending most have 10% of their assets in the metal.
Comments (34)
  • bbro
    , contributor
    Comments (9319) | Send Message
     
    Ray Dalio is one of the best....
    19 May 2012, 08:35 AM Reply Like
  • Rupert Nicholson
    , contributor
    Comments (340) | Send Message
     
    I've known him my entire life. He's an incredible man, one of a kind
    19 May 2012, 08:39 AM Reply Like
  • neobliviscar
    , contributor
    Comments (161) | Send Message
     
    Never had the chance to know him. He's certainly out of my weight class. Looking at some of the NYC Pension funds, I must believe they are with him to a degree. The correlation between his returns and their impressive returns seems high. ~~~~

     

    His employee(s) that are in our fund practice the, "#1 Rule, Don't talk about Dalio Fight Club". If the articles on him are to be believed, he has a concept of ~the Machine~ much more evolved than my own. The desire to understand is so much greater than the $ that he is one of two funds to which I'd be tempted to leave our fund and work for him had I the chance. Whether he is a Cult of Personality or not, I always seem to be thinking what he is uttering. That means he is at least 0.5 steps ahead. It is daunting to be the small guy in his shadow, near but never really ahead of him. I think our returns have only exceeded his twice, and never enough to make up for how much he eclipses us in other years.

     

    As Dalio and Soros say, I think they print. I was expecting it mid to later this year. I only wish I could ask Dalio how he is best hedging the risk the EU manages to successfully stew a Lehman Fail. Hedging for tail risk has had some leaks in currencies and commodities this time. I've been catching silver in the downswoon and am up to our max hold of 7.5%. Love to go to 10%.
    19 May 2012, 10:12 PM Reply Like
  • dividend_growth
    , contributor
    Comments (2878) | Send Message
     
    10% in gold is hardly barbaric.
    19 May 2012, 09:54 AM Reply Like
  • Matt Cilderman
    , contributor
    Comments (440) | Send Message
     
    Dividend_growth,
    Check out my article about how much dividend growth investors and "Gold Bugs" have in common.
    http://seekingalpha.co...
    19 May 2012, 06:37 PM Reply Like
  • CautiousInvestor
    , contributor
    Comments (3017) | Send Message
     
    With equities collapsing largely in response to the shredding fabric of the EMU, gold bounced sharply amid flat commodity prices that had fallen hard in prior sessions. Buyers of the precious metal expect yet another attempt to save the irretrievably broken EMU at the cost permanently damaging the euro and completely eliminating its role as a semi reserve currency.
    19 May 2012, 10:31 AM Reply Like
  • Tom Armistead
    , contributor
    Comments (5219) | Send Message
     
    Very regretably the linked story sits behind a paywall.

     

    The concept of a beautiful deleveraging seems credible. The US consumer has reduced his DSR and FOR to levels consistent with a robust expansion. US corporations are sitting on piles of cash. US Banks were recapitalized by the Geithner maneuver, and are in the process of being further strengthened by increased capital requirements.

     

    The US has a source of cheap and abundant energy in natural gas, and more oil than we thought we had, as has been found in North Dakota.

     

    So, with three out of four sectors deleveraged, and interest rates on the Federal debt at historic lows, the USG can resolve its own issues with the assistance of increased tax revenue from a strengthening economy.

     

    There are folks in Washington who embrace an ideology that could easily turn a walk in the part into death march. They'll get their shot at doing that in due course - the "fiscal cliff". Assuming calmer heads prevail, and appropriate compromises are made, a fine result is possible.
    19 May 2012, 10:45 AM Reply Like
  • Robin Heiderscheit
    , contributor
    Comments (1784) | Send Message
     
    Tom always like your opinions and you are right that cheap, abundant fuel is a major long run positive for the U.S. Will it be enough to offset obesity, a declining education system, and rapid aging? Not so sure about that.

     

    As to RD's point on deleveraging, the private sector debt has been moved to the government sector. Net net, not sure that accomplished much other than socializing the huge losses of certain entities and groups.
    19 May 2012, 11:44 AM Reply Like
  • Tom Armistead
    , contributor
    Comments (5219) | Send Message
     
    Robin,

     

    Glad you enjoy my comments. On debt making its way from various sectors onto the government that is the way the situation normally plays out. There is a good report at mckinsey.com on debt and deleveraging, updated as of Jan 2012, well worth reading, a 64 page pdf.

     

    In one way we did well in that the banks have for the most part been recapitalized from the private sector, with government money as a bridge.

     

    It's too bad but the government seems to soak up debt in a crisis, just the facts of life. Geithner has done some work increasing the average maturity of US debt under favorable rates, more could be done. A credible 7-10 year plan to get US fiscal policy on a sustainable path would be nice, instead of kicking the can down the road again.
    19 May 2012, 12:01 PM Reply Like
  • Uncle Pie
    , contributor
    Comments (2675) | Send Message
     
    re: story sits behind a paywall: not just any paywall, but a Rupert Murdoch paywall!
    19 May 2012, 12:42 PM Reply Like
  • Angel Martin
    , contributor
    Comments (1291) | Send Message
     
    a longer essay by Dalio on deleveraging is available here

     

    http://bit.ly/Ih4Iiu
    19 May 2012, 12:47 PM Reply Like
  • Tom Armistead
    , contributor
    Comments (5219) | Send Message
     
    Thanks, it's a good read...
    19 May 2012, 01:03 PM Reply Like
  • untrusting investor
    , contributor
    Comments (9923) | Send Message
     
    AM,
    Yes, that was a very good article by Dalio.
    19 May 2012, 01:19 PM Reply Like
  • anonymous#12
    , contributor
    Comments (552) | Send Message
     
    Ray Dalio has a good take on macro concerns.

     

    Adding to Tom, those folks think that somehow self-flagellation is going to make us stronger.

     

    The Republican House voted to cut Food Stamps funds to protect the Military from the already agreed cuts in last debt ceiling debacle. That is repulsive, disgusting and immoral. Link: http://buswk.co/Ko5Jny

     

    I thought they wanted to reduce the deficit....
    19 May 2012, 02:19 PM Reply Like
  • Matt Cilderman
    , contributor
    Comments (440) | Send Message
     
    Robin,

     

    I would argue that, while the education system is not perfect, it is not declining. What is declining is America's desire to be educated.

     

    Matt
    19 May 2012, 02:35 PM Reply Like
  • SanDiegoNonSurfer
    , contributor
    Comments (2567) | Send Message
     
    "I thought they wanted to reduce the deficit...."

     

    The Republican controlled House just passed a gargantuan spending bill -- all on outdated war technologies that the Pentagon doesn't even want. Their rationale? Jobs. In other words, the House Republicans want to rev up deficit spending to produce jobs. But only jobs in the "defense" industry. Everyone else can go take a flying leap.

     

    There's an interesting little rider in this House bill, btw. It would give the government broad authority to propagandize its own citizenry. Currently, it's only allowed to do a propaganda blitz on foreign nations as part of our military strategy. This little rider would allow the same thing to be done to U.S. voters. Apparently the Tea Party is on a mission to turn D.C. into the Kremlin.
    19 May 2012, 06:19 PM Reply Like
  • rasanders22
    , contributor
    Comments (529) | Send Message
     
    I don't think that's completely true. College enrollment is up showing people want to learn, however people aren't enrolling in the harder engineering and science programs which is what our country needs to drive innovation. Instead we graduate people the 1000's with degrees in philosophy and psychology, Ancient Mid-evil literature, Asian Women's studies (I had a friend that went to school for that, she was not Asian). People want to learn, they just don't want to, or aren't interested in the harder degree programs.

     

    I went to a graduate degree seminar a couple months ago at ASU where I am going for a BS in electrical engineering. The professor giving the presentation said that they have room for about 900 new students each semester(in the EE field only). They had 1800 applicants. Out of the 900 selected, about 70% were from other countries coming here on student visa's. It makes me a little angry that if I have good enough grades to go for a masters degree, I might not be able to because the school chooses someone from a foreign country ahead of me. If you ask me, a American student with a 3.1 GPA should beat out a foreign student with a 3.5 GPA.
    19 May 2012, 06:45 PM Reply Like
  • bdarken
    , contributor
    Comments (417) | Send Message
     
    I disagree.

     

    Go to an open house for a charter school in an urban area. You will see Americans lined up three-deep to be sure that
    their children get an education.

     

    Evidence to support my belief can be found watching the Academy Award winning film "Waiting for Superman." After it breaks your heart, it will infuriate you.
    19 May 2012, 07:44 PM Reply Like
  • Matt Cilderman
    , contributor
    Comments (440) | Send Message
     
    College enrollment is up because so many people are out of work.

     

    For a number of other american teens, they still think they can waste $40,000 getting drunk and someone will hand them a job when they get out. One of the worst things about the credit bubble of the last 20 years is that it made our nation fat, and lazy. They need a "deleveraging" of the mind, a reality check back to what hard work looks like.

     

    BTW. I am not lumping you in with my generalization and i wish you success in your future!
    19 May 2012, 07:53 PM Reply Like
  • rasanders22
    , contributor
    Comments (529) | Send Message
     
    You are right about the teens partying it up at college. Some take education more seriously than others though. I am also surprised at the number of students coming out of high school already having taken calculus 1. Some even have taken calc 2. Our high schools might be turning out a lot of really lazy, dumb dumb people but they are also turning out smart, driven, capable graduates too. It just seems the gap between the two groups is widening.

     

    Im 34, married with 2 kids. The college kids don't want to party with me and if they did, I don't think my wife would like that very much.
    19 May 2012, 10:16 PM Reply Like
  • neobliviscar
    , contributor
    Comments (161) | Send Message
     
    Nice read from Mr. Armistead. Year 3 of watching the deleveraging ride the rails and thinking Geithner deserves more credit than he has gotten. Hoping it clears the end of the tunnel in the next few years.
    19 May 2012, 10:36 PM Reply Like
  • David Urban
    , contributor
    Comments (1036) | Send Message
     
    Maybe at the state and local level but we are far from deleveraging at the federal level.

     

    Will not disagree with him on gold.
    19 May 2012, 11:22 AM Reply Like
  • dividend_growth
    , contributor
    Comments (2878) | Send Message
     
    Obesity is the biggest threat facing the US now.
    19 May 2012, 01:02 PM Reply Like
  • WMARKW
    , contributor
    Comments (10250) | Send Message
     
    Dividend....I'm "overweight" on "MCD" and "underweight" on "WFM". (you may have to think about that one :)
    18 Jul 2012, 05:29 PM Reply Like
  • Eighthman
    , contributor
    Comments (212) | Send Message
     
    I don't understand his concept at all: consumers deleverage while the US government vastly expands debt. The two things are not separated, they are deeply linked.

     

    We had a worldwide crash in some measure because "experts" failed to notice strong correlations between markets and asset classes. Has anything been learned?
    19 May 2012, 01:05 PM Reply Like
  • Tom Armistead
    , contributor
    Comments (5219) | Send Message
     
    What has been learned:

     

    What works is the government takes on the debts of the other sectors in the process of avoiding a deflationary deleveraging cycle. Then, when the economy has recovered, the government reduces its debt to an appropriate level over an extended period of time, 7 to 10 years, perhaps.

     

    What doesn't work is austerity, deflation, and debt reduction in all sectors at once. It causes Depressions, as the US experienced in the 1930's. Doug Short did a study of the Greek Stock market vs. the Dow Jones from the Depression era, it was the same thing, down 90%. The latest victim.

     

    During the Depression, the US passed legislation establishing a regulatory regime intended to prevent an occurence. That worked as intended, until it was dismantled in a process that started in the early 1980's and extended as far as 2008.

     

    What has not been learned is that prudential regulation of banks is necessary to prevent the banker's greed from causing hardhip for all.
    19 May 2012, 01:48 PM Reply Like
  • Larry Rothman
    , contributor
    Comments (14) | Send Message
     
    OK, I get and agree that RD is brilliant++ and that 10% of my portfolio should be in Gold. Now, what about the other 90%?
    Bonds, equities no good, cash will be eaten alive either by QE or deflation, so where do we go???
    19 May 2012, 03:12 PM Reply Like
  • bdarken
    , contributor
    Comments (417) | Send Message
     
    Real estate. Rental and agricultural.
    19 May 2012, 07:48 PM Reply Like
  • neobliviscar
    , contributor
    Comments (161) | Send Message
     
    Yes. As much as I hate to agree, that is how the math works. Which, of course, is exactly the RE stability certain cliques in government hope to achieve. Some investors and business individuals are using this time to really accumulate RE holdings in a way they haven't done since the early 90s.
    20 May 2012, 12:48 PM Reply Like
  • Venerability
    , contributor
    Comments (3048) | Send Message
     
    If even SA allows comical digs at Charlie Munger, it means that particular bugaboo is gone.

     

    Let's hope this gets some worldwide headlines, because it should mean another leg up for Gold and Gold Stocks in the week ahead.

     

    I think a modest World Growth Agenda WILL be announced, however, much faster than the Uber-Bears would like.

     

    Once again - everyone needs to think about this - is it mind-bogglingly dangerous if the London Olympics are held with Europe on the boil with rioting.

     

    And if Austerity via Currency goes much further, THAT could mean another round of rioting in the Middle East and Africa. The Naira at all-time lows against Emperor Dollah! Dollah! Dollah! is literally THE formula for another breakout of terror in the Nigerian Delta. And if you thought the cutoff of Libyan Oil was bad, any cutoff of Nigerian Oil is twice as bad.

     

    This is the time of year South African workers get restive, too - which always leads to NUM activity.

     

    And I don't think anyone really wants more chaos in Latin America - which also tends to be highly correlated with a Dollar that overwhelms everyone else's currency.

     

    It's just lucky for the world the Indian population is so well-behaved. But a too-weak Rupee is still perhaps the most dangerous phenomenon of all.
    19 May 2012, 04:15 PM Reply Like
  • Tricky
    , contributor
    Comments (1583) | Send Message
     
    The Dallio study is indeed very interesting and a worthy contribution to the international conversation on how to de-leverage. It is a particularly helpful reminder that there is a massive difference vs. moderate/high inflation and hyperinflation.

     

    Two weaknesses in the paper: 1) doesn't delve into how to avoid tipping into hyperinflation when trying to achieve moderate/high inflation and 2) what happened to the debt holders/savers in these "beautiful deflations"? The paper displays the same prejudices as the Fed (and history books) which only talk about "the economy" without discussing what happened to the debt holders/savers.
    19 May 2012, 05:00 PM Reply Like
  • Eighthman
    , contributor
    Comments (212) | Send Message
     
    So, the government bails everyone out, saves the economy and then manifests a self discipline across a decade to reduce debt - "after the economy recovers" - amidst worsening demographics.

     

    Does anyone really believe this?
    19 May 2012, 05:22 PM Reply Like
  • Tricky
    , contributor
    Comments (1583) | Send Message
     
    Indeed, one particular issue going forward is that many countries will be facing a pension tsunami of (probably) historically unprecedented proportions. It may be far more difficult to walk that balance between moderate/high inflation and hyperinflation.
    19 May 2012, 05:47 PM Reply Like
  • Eighthman
    , contributor
    Comments (212) | Send Message
     
    Paying down deficits and/or debt in good years is straight out of the Keynes playbook. Is there any hard evidence that this actually happens?

     

    We have the most heavily medicated population in history in regard to anti-depressants and psychoactive drugs. Polls say one in seven believes the world will end soon. Where's the discipline to guide long term economic health?
    20 May 2012, 08:47 AM Reply Like
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