Ray Dalio on the Future of Monetary Policy

[ni-co]

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]

[Txvestor]

This will not just be a disaster for investors, it will be for the entire economy and civil society eventually if they do it.

It will kill the entire productive sector of the economy, and truly render currencies worthless. If a currency is not an adequate store of value, people will quickly find alternatives and then gov't will find it more and more difficult to govern, and leading to chaos.

Gold does appear to have a role in an investor portfolio if this thpe of asinine economic policy is to be reckoned with.

[TwoCitiesCapital]

This will not just be a disaster for investors, it will be for the entire economy and civil society eventually if they do it.

It will kill the entire productive sector of the economy, and truly render currencies worthless. If a currency is not an adequate store of value, people will quickly find alternatives and then gov't will find it more and more difficult to govern, and leading to chaos.

Gold does appear to have a role in an investor portfolio if this thpe of asinine economic policy is to be reckoned with.

 

To his credit, Dalio does advise that every investor have an allocation to gold. Who knows - which is really better? A deflationary spiral or a hyperinflationary bust?

[Jurgis]

Yet another the sky is falling thread from the perma negative crowd. Why am I not surprised.

[SharperDingaan]

The man does good work, but he’s pushing a 1 string pony.

Monetary policy doesn’t work when interest rates are either very low – or negative; get over it.

 

Most would agree further stimulus is needed; but it makes far more sense to go fiscal vs monetary. Sovereigns, states, provinces, etc. borrowing & reinvesting in economic infrastructure - & hiring Joe Blow construction worker to build it. Sale and leaseback of public assets via P3 partnerships, borrow domestic, pump the interest expense back into the local economy, & suck up the excess cash driving rates down.

 

FDR called it the new deal, to everyone else …. it’s the martial plan

Hated because it will force bond defaults as the better credits crowd out the junk.

 

SD

 

[petec]

Yet another the sky is falling thread from the perma negative crowd. Why am I not surprised.

 

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

[ni-co]

Yet another the sky is falling thread from the perma negative crowd. Why am I not surprised.

 

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)

[ni-co]

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

[Txvestor]

This will not just be a disaster for investors, it will be for the entire economy and civil society eventually if they do it.

It will kill the entire productive sector of the economy, and truly render currencies worthless. If a currency is not an adequate store of value, people will quickly find alternatives and then gov't will find it more and more difficult to govern, and leading to chaos.

Gold does appear to have a role in an investor portfolio if this thpe of asinine economic policy is to be reckoned with.

 

To his credit, Dalio does advise that every investor have an allocation to gold. Who knows - which is really better? A deflationary spiral or a hyperinflationary bust?

 

 

Policy makers want a modestly inflationary environment than either of those two outcomes. I'm just not sure they have the means to get it right. If you've ever lived through a hyperinflationary bust, you realise very quickly that it is very hard on the average person, and on a global scale for the US will lead to at the very least a loss of the role of the USD as global reserve currency. That my friend is an incalculable loss. Atleast deflation will bot result in that. The Federal Reserve is playing with fire.

[petec]

 

+1 (@ Pete: don't forget demographics which is the driver behind everything)

 

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.

[ni-co]

 

+1 (@ Pete: don't forget demographics which is the driver behind everything)

 

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.

[Jurgis]

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.

 

First, let me say that I don't know what is going to happen. We may have some serious instability (lol it's IMO a stupid word for drop or crash), we may not. We may have it this year, in next couple of years or in next 10 years. There is a high likelihood that market(s) will drop over 20%+ sometime in the next 10-15 years, but not because of doom and gloom predictions, but because the probability over that time period is high.

 

I do not have concrete examples how things will be dealt with. The monetary issues are in the hands of central bankers and even though doom and gloomers say they have no solutions, that's just based on their limited view of the future. The same was said in 2008-2009 and later during Euro crisis, etc. Yet things worked out so far. Regarding debt issues, this needs political solutions, which may or may not come. Once again, doom and gloomers believe that no solutions will come. But IMHO it's putting on blinders to any solutions and their possibility. In USA tax reform can solve pretty much all issues and I don't really see monetary issues in US. In Europe, situation is harder because of Euro, so yes, there is more risk that Eurozone won't arrive to a good solution. Yet, I would not give more than ~60% chance that Eurozone will have a huge crisis and crash. In China, like in US the problems are solvable. There might be some market drops while they do it, but there's nothing catastrophic.

 

The problem I see is that doom and gloomers may be kind-of right sometime in the next 10-15 years, but you will be missing all kind of opportunities while you wait for the crash to materialize. Buffett has been preaching inflation for the last 30 years or so. What would have been your return if you listened to this? OK, so maybe Buffett is bad at macro, but how do you know that X, Y, Z aren't too? (To address the topic of this thread: Dalio makes some good arguments. But you have to look at him like you look at Buffett: he talks one thing and invests... well he invests to make money like Buffett does. So don't expect him to be 100% in cash, gold or whatever the current gloom and doom favorite play is.)

 

BTW, I think I see a preconception bias here already when you label the policy "experimental". :) History does not repeat (although it rhymes), so every day is a new day and every policy is "experimental".

 

but stuff that argues why the current global economic setup (debt levels, inequality, slow growth, etc.) is long-term sustainable.

 

Muddle through is a possible future. Long term (not 1-3 years) what happens in China (and perhaps other populous emerging economies - India, etc.) will affect the world enormously. So one positive situation: China grows to be like US in 20th century. The rest of the world has a muddle through growth by supplying/trading-with China/etc, while having so-so internal economies. Inequality and debt can be dealt with in US via tax reform (though, yes, it's tough to do a good tax reform due to a lot of vested interests).

 

BTW, yes, if you ask me about next 10-15 years, there's a high probability that we will go out of the Goldilocks zone of 1-3% inflation sometime during that time. On upside or downside. Might lead to big market drop. I have no clue when and whether it will happen at all. I have somewhat high hope that it would not lead to catastrophe for our way of life, but nothing's certain. Even longer term 20-40 years, I think we have a significant (over 10%) chance that we'll have a serious social disturbance that may impact the whole planet. But again, like Tetlock says in Superforecasting, any predictions that go over 5 years are waste of time and no better than a flock (sic) of chimpanzees. ;)

 

Anyway, I'm probably not going to convince you. Not my point either. Everyone is welcome to follow their own convictions, etc. I probably should not post on these threads. It just sometimes gets under my skin.

 

Take care

[Poor Charlie]

Yet another the sky is falling thread from the perma negative crowd. Why am I not surprised.

 

I find it odd how people on this board are so quick to dismiss any perceived negative data as crazy and the person delivering that data as a "perma-bear."  Maybe it's because things have gone so good for so many for so long.  Maybe it's because of the almost universal cheerleading and government sponsorship of assets prices.  Or maybe it's just the human condition.  Whatever it is the bullishness is indeed willful.

 

[Jurgis]

And bearishness is of course "well justified". LOL.

[Poor Charlie]

And bearishness is of course "well justified". LOL.

 

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.

[TwoCitiesCapital]

And bearishness is of course "well justified". LOL.

 

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.

 

 

[ni-co]

And bearishness is of course "well justified". LOL.

 

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?

[Jurgis]

And bearishness is of course "well justified". LOL.

 

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 fact that something is not "normal" to you does not mean that the result will be the market crash or the end of civilization.

 

When TwoCitiesCapital says

I don't know what will happen

, 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.

[ni-co]

When TwoCitiesCapital says

I don't know what will happen

, 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.

[petec]

Jurgis,

 

Thanks for your well-thought-out response.  We agree more than you might think.

 

Everything I have read in history and economic theory tells me that after 35 years of falling rates and rising leverage the global economy is highly likely to be slow, fragile, and prone to either inflation or deflation depending on policy.  Everything.  I'd also argue that markets starting at the valuation levels of 2015 with the margins of 2015 don't offer a lot of return on a 10 year view.  I fully expect, therefore, a better buying opportunity in the (say) 5 year future.  You make it sound like those just come along.  I don't agree.  They happen because of the starting economics/valuations and I don't see the current starting point as very auspicious.

 

That's got nothing to do with the collapse of civilisation or the long term future of humanity (which I am exceptionally bullish about) or the availability of good investments today (which I must be pretty bullish about since I'm >90% invested, long.

 

P

 

 

[scorpioncapital]

So if inflation will be higher than expected, I read that companies with debt will get a kick (they are leveraged), gold and commodities should also get a kick. Does this mean the simple business with no debt and just cash-flow is actually going to be penalized for being careful? Not to mention savers?

[racemize]

That's got nothing to do with the collapse of civilisation or the long term future of humanity (which I am exceptionally bullish about) or the availability of good investments today (which I must be pretty bullish about since I'm >90% invested, long.

 

P

 

(Emphasis added).  This is what I find confusing.  These threads talk about macro and how bad long term investment prospects might be.  I tend to agree.  But I don't think it is data that is reliable enough to provide conclusions that will make you more money.  And since you are 90% invested and like investments available today, does talking about this give you/us much insight?  Honest question.

 

I follow macro stuff a little bit just because it is fascinating, but if you can't act on it, it does seem like a waste of mental power, no?

 

[physcdisp]

ni-co:  I like the thread because your posts have helped me think a bit differently.  Thank you

[petec]

That's got nothing to do with the collapse of civilisation or the long term future of humanity (which I am exceptionally bullish about) or the availability of good investments today (which I must be pretty bullish about since I'm >90% invested, long.

 

P

 

(Emphasis added).  This is what I find confusing.  These threads talk about macro and how bad long term investment prospects might be.  I tend to agree.  But I don't think it is data that is reliable enough to provide conclusions that will make you more money.  And since you are 90% invested and like investments available today, does talking about this give you/us much insight?  Honest question.

 

I follow macro stuff a little bit just because it is fascinating, but if you can't act on it, it does seem like a waste of mental power, no?

 

Very fair question.  I find it fascinating too, but it also guides my investing.  My investments fall into a few categories:

 

1. Companies I am fairly sure will maintain their real value (even if prices fluctuate) even if we get a truly terrible experience (which isn't what I expect)

 

2. Companies that will do OK in a muddle through scenario, and will excel in a bad one.

 

3. Companies that are so cheap I don't really care about the macro.

 

Equally I actively avoid things that might have some cyclical fluff in their results or valuation (of which there are a lot).

 

I can honestly say that I'd happily own my portfolio through a 1930s or a 1970s scenario, so long as I didn't have to sell in the middle of it - and I have done everything I can to ensure that, too.  In other words, I believe it is 100% possible to be long and still substantially protected from a potentially serious market event.  So far in this minor selloff I've made money (in sterling) and found some good ideas.  If we get a truly serious event then I am sure I will lose money - everyone long will - but I'll preserve a decent amount of wealth and have great opportunities.  I'd expect to come out the other side better off than I am now in real terms.

 

So yes, I think having a macro backdrop view can add huge value (but not a timing one).  (And on that note, 99% of the people who say macro is useless, when you dig into their views, assume that the macro will look largely like it has done for the last 35 years for the next 35, which in itself is a macro view - just not a well-thought-out one!)

 

P

[TwoCitiesCapital]

When TwoCitiesCapital says

I don't know what will happen

, 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.

 

In his defense, I've been quote vocal about my concerns that a crash is likely - but I think poor equity returns are to be had regardless of what happens in the economy. I just don't buy that we've reached fairy land with high margins and high multiples forever, which is what is needed for this level of the market to persists. Especially given the relative value offered by Europe and EM at the moment.

 

Obviously we need a catalyst - I don't know if it's going to be negative interest rates, a policy mistake, the devaluation of yuan/the implosion of China, etc. etc. etc. but in a world where so much seems absolutely absurd, debt levels seemed stretch, growth is marginal at best, and inflation has been in a downward pattern for years, something seems likely to happen to be that catalyst and I do think the impact of that will be a significant decline in equity markets as forward looking growth/profits/margins are re-evaluated.