ni-co

This is the more interesting part for me. Granted commodities, have spiked the last few days, but you get an unwind via a bankruptcy of Glencore/Nobel Group the exposure is going to bring someone down with them. I may have underestimated the role those commodity cos play for the European banks. Exposure to the debt of Glencore et al via OTC derivatives could well be the largest fundamental driver behind European banks' share price declines, NIRP and CoCos only adding to it. This would also explain why DB seems to be at the center of this sell-off.

I agree with you on this in so far as this is at least one part of the explanation for the deflationary forces (debt being the other important one, I'm a bit more skeptical when it comes to technology). I don't know whether hyperinflation/stagflation is an inevitable result of all this but it's a great risk. I think Dalio may agree on this, too. He hinted at that in the Davos CNBC interview ("In a couple of years from now we are going to come to a point where we're going to be thinking hard: What is a good reserve currency? What is safe in investing? Is 'safe' cash? In what currency?"). It's certainly good to keep that in mind and watch for any signs of QE eventually working but the deflationary problem has yet to grow larger before the government would implement something like MP3. This is a matter of years. This is why I think that, as an investor, you have to be careful not to jump on the hyperinflation train before it has arrived at the station (a mistake many gold bugs make). Otherwise you might get overrun by the deflation train which arrives there first. It has to get worse with regard to deflation before governments really take the drastic measures that may lead into hyperinflation. Where do you gain your confidence from? Not only do I think you will be proven absolutely wrong on this one because you can't be right on it in the long-term and you didn't specify a time frame. But moreover, saying that bank/insurance equity holders got bailed out in 2007/2008 is flat-out ridiculous. Have you ever looked at this chart (logarithmic scale)? How do you think did this bail-out feel as an equity holder?

Vinod, one quick question about profit margins. I don't have read any arcane papers or similar stuff. What I took from the Napier speech, though, is that the profit margins are a social function – meaning when margins are high people let get companies away with lower tax rates or pay for workers and vice versa. Napier is saying that the high margins are mostly a result of a (historically) very low tax share/GDP ratio and that companies are "severely undertaxed" if you take historical averages as a measure (not as a political statement – to be clear about that). Would you agree with that notion? If that's the case I don't see any chance that they'll stay where they are. At the very least demographics (health care costs, social benefits etc) will take care for that.

And another insightful interview with Russell Napier:

Watch the video on http://economicprinciples.org if you want to get a better understanding of the long term debt cycle. It's largely impossible to track what macro managers are doing when they don't talk about it. I think that Dalio is following his own principles and you can deduct some of his positions from them – but you'd never know for sure.

Is this all there is to know about his positions today? Is he 50% cash of the hundreds of billions he runs? Any idea at all? Have you read it? "50% cash" is meaningless for futures trading. And in which currencies, anyway? This is not a value hedge fund. I haven't even bothered to look whether there are 13Fs because they'd be almost completely meaningless.

There is a very good interview with him in Jack Schwager's Hedge Fund Market Wizards where you get some understanding of Bridgewater's investment process. TwoCitiesCapital mentioned to have worked at Bridgewater (but I can't imagine he'd be allowed to talk about this).

@vinod: When you agree with what William White says we are much more in agreement than you think. It's just that I draw some very different conclusions from what he says. I also think that Pete and I have similar frameworks or at least think about a lot of the same things. Basically, what brought me to macro was what Druckenmiller has been saying for two or three years now: that corporate America is levering up its balance sheet and that you should look at sales growth and not EPS. I had been following Dalio for quite some time at that point and what Druckenmiller said made perfect sense in Dalio's framework. I thought – and I still think – that if Dalio is right value investors are in great danger. That is because in the next slowdown (happening about now) they are going to confuse a secular downturn in the long-term credit cycle (happening since at least 2007) with a short-term downturn in the business cycle. They are going to buy "cheap" stocks without paying attention to the big picture and this is going to be very painful for a lot of them. This is why I'm posting this stuff here. I'm honestly surprised to find quite a few people here more or less agreeing with me or at least considering this. I think value investors are going to look at Buffett go shopping in the downturn like he successfully did in 2008 and so many times before that. But when you think – like I do – that we are talking about a downturn that happenes every 80 years or so nearly everything Buffett has done in his investing career has to be rethought in this light. He has never experienced such a downturn and I don't think he fully gets it; otherwise he'd certainly sell his bank holdings and insurance businesses. To be clear, I think there may be great opportunities to buy great companies, too (like KO, DIS, health and cable cos etc) but you really have to think about how their business models react to long periods of first deflation and then inflation. There is also the risk that they might be state owned by then (which is what's happening in Japan right now). I also think that there are going to be ample opportunities to buy the surviving companies much cheaper than they are now and with a much improved understanding of how their future might look like.

I would say, if anything, my timeframe is even longer in global macro compared to value investing in special situations. That's why I think my timing with January was probably mostly luck. I don't bet on being lucky. You have to get away from your view that macro is somehow this short-term speculation on day-to-day price moves. It is not. There are fundamental drivers in macro which only work in the long term or even very long term but this doesn't mean there are no instruments to invest in them (you have to think about some other things like carry if you want to do this but there are instruments). When Buffett's buying DaVita because of (among other reasons) the demographic development he's acting upon a fundamental macro view. Dalio says that it takes Bridgewater usually 12-18 months to enter or exit a position (not the holding period—just the process of buying/selling!). Even the guys who use shorter term trading to express a fundamental macro view (like eg Druckenmiller/Soros) usually do this with a long-term hypothesis in the back of their heads. What they are doing is comparable to a value investor trading around his position. It looks like short term trading but if you look at the whole picture it's really not. Where I would draw the line is between purely technical traders and fundamental investors. Not to say that the former doesn't work but it's really something very different. But in my opinion there really is such a thing like value in macro, meaning you're essentially looking for mispricings by thinking logically and trying to take out emotions. And, like with value investing, it's far easier to earn above average returns when you're willing to take a longer than average perspective and give it time to work out.

Quite! My answer is: in the future ;) Although, combining www.shadowstats.com with the asset inflation that we have all seen (which is very important even if it is not captured in CPI) I would argue that we have had a LOT more inflation in the last few years than we think we have. And I'm not saying that's a triumph of macroanalysis since I have been a deflationist all that time ;) That is so fundamental. If you look at the cost of bread or gasoline, inflation seems docile. If you look at the fed or corporate balance sheets, mortgages, farmland, commercial/ multifamily RE - wow. Dalio says that you'll first get the one (deflation) then the other (inflation).

Be also aware of the fact that ETNs are essentially unsecured loans to the issuer like it says on the tin ("exchange traded note"). There is no commodity, equity or anything securing it.

I guess I went into too much detail with regards to my portfolio and also a bit into the weeds. Short answer: No, the portfolio wouldn't return meager returns in this case. Like I said, it overwhelmingly consists of – slightly leveraged – 30y treasury bonds. They leveraged treasuries have an enormous positive carry (as long as rates stay low or go lower). Puts and calls are only a small part of my portfolio. Time decay is only one of several reasons why this is the case. I've been using LEAPs in value investing for quite a few years now and I'm aware of this problem. This is not to say that there wouldn't be scenarios in which my portfolio wouldn't have bad returns (of course!). It would perform really badly if global growth came back, and consequently inflation and rates went up. In this scenario, I would lose a substantial amount of money (though it certainly wouldn't kill me). With regard to "betting vs. investing" or similar linguistic battles, this is one of my pet thieves: Yes, I said "betting" but this is exactly what I mean with acting upon risk/reward and probability estimates. This is not like playing roulette. – Or better: what I try to do is playing roulette like a casino would. If you go out and invest your money into BRK you are betting on the share price (and on a whole lot of other things you may or may not be aware of). So let's be intellectually honest here. You can argue with me about the degrees of uncertainty but you can't possibly argue that macro investing is pure chance while value investing is certainty. All investing is betting in the end. I think this whole discussion of speculating/betting vs. investing is a linguistic misunderstanding. The instrument of choice is levered long-term treasuries (as long as people have faith in central banks and trust in money). Yes, maybe. But since I had mostly done special situations before I began with the macro stuff I can tell you that, at least for me, this was/is getting harder every year. Don't overestimate how many people really do global macro investing. This is far more "nichey" than value investing – and the space is huge.

I'm a an avid reader of Richard Koo and Michael Pettis and I agree that they know what they are talking about.

For the interested, here are Burry's old VIC ideas: http://valueinvestorsclub.com/member/michael99/1219

There are some macro guys with excellent track records. Soros, Druckenmiller and Dalio are now the most famous ones, there are also Michael Steinhardt and Julian Robertson. There are some smaller ones, too. Just read Jack Schwager's books – there are a lot of fundamental macro guys in there. E.g. I also would consider Jamie Mai (Cornwall Capital), who was mentioned in another thread and who's in Hedge Fund Market Wizards with an excellent interview, to be a global macro investor. My portfolio is now 95% macro oriented which doesn't mean that I gave up value investing. Macro is just my, well, macro framework and value the micro framework I use for single stocks. I also follow what I'd consider to be the value line of thinking in macro. I'm ~10% net short equities and have been since November or so. This understates a bit how short I am because it's exclusively puts, so there is quite a bit of leverage in it. The rest of my portfolio is basically 30y treasury futures, though I'm not very levered. This means I hold mostly cash. However that's not how I think about it because I look at the nominal amount of the futures and this tells me I mostly own treasuries. I own currencies since everyone has to hold his cash in currencies in some way. I also own some bitcoin and some long-dated CNY and CNH puts (since January 2015 btw. which means I first took quite some pain there). I also own some longer-term crude puts and eurodollar and gold calls. So all in all, I basically own treasuries coupled with small put and call positions. For me, this was a gradual development starting in late 2014. Since the second half of 2015 my portfolio is macro only which means I decided to buy stocks only when I think it fits my macro framework (then however based on value criteria). Today I only own three very small (taken together under 5%) positions in LBTYA, IACI, SHLD (all LEAPS). Apart from LBTYA those are leftovers from my "pure" value days. I don't think it says much (only to show you how I'm positioned) but the year so far has been the best period I have ever had as an investor, January being the best month I have ever had by a huge margin. However, I try not to think in months but in rolling 5 year periods. So I can't say yet whether I make money with this framework or not. I made good money with value before and it basically took me almost two years to come around to this macro idea. However, the things that happened in January and February were exactly the things I bet on which obviously doesn't mean that it couldn't have been pure luck. The good timing was probably largely luck. I went net short equities and really long treasuries when it became clear that the Fed would actually begin to raise rates (my thinking was that this had to be the straw to break the camel's back). So, now I've come clean: I'm Nico and I'm a macroholic.

, he's being much more honest than when he and a bunch of others predict that this will end in 50+% crash, recession/depression, endless deflation (or is it hyperinflation?), etc. I'm going to go with "don't know" too. But I am not going to take macro bets of shorting, currency bets, etc. to attempt to predict the outcome. If that makes me crazy bull, then so be it. I can't remember anybody "predicting" a 50% crash or calling you a "crazy bull" or anything along those lines. You started calling some of us "perma-bears". I don't find that reasonable but I don't mind. Personally, I find these threads quite helpful in trying to find out what's most likely going to happen. I try not to think in categories of "knowing" and "not knowing" because you never know, you know? So, that's hardly helpful. Instead, I try to think in probabilities. What do I think is more probable and what's less probable. Based on that, I make macro bets but that's also the way I invest in single stocks. As a value investor, you can't know things either.

It is normal for a very large percentage of the world’s investors to be paying borrowers to take their money? Is it normal for a major economy to be creating almost 10% of GDP in credit in a single month when their current credits are deteriorating rapidly? Not saying you can’t find good investments but why be so quick to dismiss people who bring up these (and other) important issues as crazy perma-bears (especially Dalio, who isn’t even making a long or short case, just stating the facts)? I'm certainly not a perma-bear, but I'm also not willing to just stick my head in the sand either. The very fact that people are actually looking at negative interest rates in much of Europe and determining that things are "ok" and that maybe the policy should be parroted in the U.S. just seems absolutely absurd to me. I f someone had told you 15 years ago that we would live in a day and age where borrowers would get paid to borrow, you'd feel like you were talking to a crazy person. But today, it apparently makes absolute sense. I don't know what will happen, but I do sometimes feel like a crazy person for worrying about these sorts of things while everyone else seems to think it's all fine. Unsurprisingly, I fully agree. It gets even better when you think about the influence of negative rates on the mathematical models banks use to price their derivatives. Recently I read a blog post by a derivatives trader stating that it took them a while to re-program their tools so that they could feed them with negative probabilities! – Think about that for a second. I'm no math genius but I understand that in mathematics such things may exist; however, using negative probabilities as an assumption in a model that's supposed to work in the real world seems absolutely crazy to me. But what do I know?

Now this we *can* disagree on. Demographics is key but the big, big thing for me is high debt levels and the natural volatility they bring - that is related to demographics, but it is *far* more directly related to central banks having the wrong targets and politicians never wanting a recession. Yes, I partly disagree. I think central banks have far less to do with it than commonly assumed – especially when you look at the long-term (5-7 years+). I wouldn't say that it's always demographics but certainly in the US and Europe post WW2 (don't know enough about Japan but I suspect there as well). Now, that doesn't mean I'd disagree on the huge effect of debt. But I think that the debt piles are a result of demographics and are both, a catalyst for and an amplifier of the fundamental economic developments caused by demographics.

Here it is: https://www.linkedin.com/pulse/what-monetary-policy-3-mp3-look-like-ray-dalio

Jurgis, I'd very much rather not be part of that crowd. However so far no-one has satisfactorily explained to me why record levels of debt and experimental policy *won't* end with some fairly serious instability, whereas several sources have explained quite coherently why they will. I won't ask you to explain but if you have read some really coherent positive arguments (books, articles etc.) then please let me know. I'm not looking for stuff that argues why there won't be a recession tomorrow, but stuff that argues why the current global economic setup (debt levels, inequality, slow growth, etc.) is long-term sustainable. To be clear, this is not a sarcastic post - it's genuine! Cheers Pete +1 (@ Pete: don't forget demographics which is the driver behind everything)

Yeah. Probably the word "crisis" is overused but I don't really have a better word for it. My overarching hypothesis is that we're still in the 2007 "crisis". The difference is however that the last source of "natural" inflation—China infrastructure spending—has now dried out. Where should regular (not CB induced) inflation now come from? From retiring baby boomers? They have really just begun retiring (the youngest ones are in their early fifties). Re China: I'm getting more and more convinced that China is the biggest bubble we have ever seen. And the fact that a lot of people are arguing so passionately against that and the whole thing about "we are living in the Chinese century" makes me all the more suspicious.

Markets are nowhere close to pricing in deflation. We'd see equity markets fall SIGNIFICANTLY more than we have if a deflationary scare was considered to be a credible threat. Further, there are market-based indicators of inflation expectations like TIPS breakevens (the differential between TIPS yields and nominal treasuries). 10-year breakevens in the U.S. are around 1.25%. That literally means the market is pricing in 1.25% in U.S. annual inflation for the next 10 years. That is the lowest since the inception of the TIPS market (if I'm not mistaken), but it's FAR, FAR cry from pricing in actual deflation as I've seen many suggest. For some reason, people seem to think a 15% decline in an equity index and a 50 basis point rally in bond yields suggests the markets have priced in a healthy amount of deflationary fears. In reality, we'd need something on par with 2008 for a deflationary episode to be truly priced in. I think what matters is direction and it's been going south for 40 years. Yes markets aren't pricing it in today but, as you said, once they price it in the game is over. The China debt bubble imploding has more than enough potential to drag the rest of the world into deflation. I also think that a lot of market participants (but not yet the majority) sense this.

QE or negative rates?—Pick your poison. http://www.telegraph.co.uk/finance/economics/12160280/Negative-interest-rates-are-a-gigantic-fiscal-failure.html

http://valuewalkposts.tumblr.com/post/139527315820/ray-dalio-here-is-what-monetary-policy-3-will More QE, negative interest rates and then, finally, a lot of money printing and monetary measures to really make sure inflation kicks in. To me, this sounds like a disaster in the making for investors but Dalio seems to think it's inevitable. [Edit: Here's now the official version: https://www.linkedin.com/pulse/what-monetary-policy-3-mp3-look-like-ray-dalio]

Absolutely crucial to get an idea about what managements are planning and a feeling of how they communicate with shareholders. Though not earnings calls in a strict sense, taped Malone shareholder events are like Warren Buffett's letters to me.