Ray Dalio on the Future of Monetary Policy

[Picasso]

I mean if you keep buying up dollars for 30-50 cents, does it really matter what happens with deleveraging and macro?  I don't like BAC or GM but if you buy up enough of half of book and 7x earnings type stocks it's hard to lose even though macro is a factor.  You just don't want to go balls to the wall long at 2x book or 10x peak earnings, etc.  Macro matters a hell of a lot when you're paying a full price.

 

Respect the macro and market but it's too easy to lose track of why value investing works when all these slick tongued macro guys come out.  Dalio spends an insane amount of time only thinking about these macro issues.... Can any of us say that spending a similar amount of time will get us better investing results?  Just some simple due diligence and respect for the macro will keep you out of a lot of blow ups and hopefully buying up enough cheap assets will show in the result over time.  And you can't rely on Dalio's thoughts either.  He's only recently become a more public speaker on these various issues.  I wouldn't expect him to tell us when the macro suddenly looks great.

[Picasso]

Btw ni-co... there's a "brief" short write up on VIC under torico on IHYG (euro high yield).  I think that is a pretty interesting way to play the view that you have.  Paying out 4% on a short while you wait for the liquidity to dry up could be a really good trade.  It won't make a ton of money but I don't see how one could get terribly hurt on the short either.  For that reason it probably works out well because no one cares enough to put on that trade.  It's faster to put on a sovereign debt trade and get the move you're looking for.  But I don't see how IHYG holds up if you think your views play out in the next few years.

[ni-co]

Btw ni-co... there's a "brief" short write up on VIC under torico on IHYG (euro high yield).  I think that is a pretty interesting way to play the view that you have.  Paying out 4% on a short while you wait for the liquidity to dry up could be a really good trade.  It won't make a ton of money but I don't see how one could get terribly hurt on the short either.  For that reason it probably works out well because no one cares enough to put on that trade.  It's faster to put on a sovereign debt trade and get the move you're looking for.  But I don't see how IHYG holds up if you think your views play out in the next few years.

 

Thanks, Picasso! I'll think about it. There are a lot of things that you can be short if you hold my view (and most of them better than shorting the S&P 500) – I just try to pick the shorts that have a high probability of working out even if my view is wrong plus macro headwinds that are misunderstood by investors (like the Muddy Waters Casino idea I posted here).

 

I don't disagree with your general view regarding 50 cent dollars still working out. I just have a hard time to adequately measure the dollars recently. Maybe the time has come for value investors to go back from Buffett to "full Graham" (or Schloss for that matter).

[JBTC]

Let me take a run at this in a slightly less facetious way.

 

I think you basically have two options:

 

(1) Take everything Ray Dalio says at face value, or

(2) Look between the lines at what he's saying

 

Option (1) has the benefit of being pretty easy. You just listen to him, and you believe what he says. The downside here is that there's no flexibility if you don't like what he says.

 

Option (2) has the benefit of being a bit flexible, but the downside is that it allows for personal biases to come into play. Because then you're sort of un-moored from any anchor to what was actually said.

 

The main problem I'm seeing here is that there is signifiant cognitive dissonance between the following two statements:

• Dalio is not bearish on the stock market
  
• Dalio sees 0% returns for cash, 2% returns for bonds, 4% returns for stocks and increased volatility
  

So people are looking at it and saying that the second bullet point invalidates the first bullet point. Except then you're now in Option (2) picking and choosing between what you want to agree with -- which is fine, so long as everyone involved is clear that this is what is occurring.

 

However, I don't see too many people trying to figure out how both statements could be true, and that's because the first bullet point is disconfirming evidence towards some people's views, and the second bullet point is confirming evidence towards some people's views, and it's easier to dismiss the disconfirming evidence than to try to find a way to integrate both statements.

 

merkhet,

 

First I want to thank you for making the effort to drill down on Dalio's remarks (including body language), and I think it adds much clarity to this discussion.

 

As you have pointed out, people may take different bits out of Dalio's statements, and think they are expressing Dalio's view when they may not be.

 

But you are too kind to Dalio. Aren't his views a bit confusing, and isn't there some kind of contradiction in them?

 

If I say I am not bearish on stocks, but there are asymmetric risks to the downside, you would think I am just a clueless amateur. But Dalio can say those things, puzzling all of you, but remains the awesome macro hero.

 

Can I say all of you are sufficiently intelligent to understand him, if he did have a clear message?

 

In the end, we don't know what he's doing, or not doing. I recall someone mentioned he doesn't change much of his all-weather portfolio. If he is the best macro forecaster and he doesn't change his portfolio based on his views, why do you bother?

 

This is completely a guess - could it be that he doesn't totally trust whatever he says himself?

 

[Graham Osborn]

Did anyone see the WSJ article this morning on the Fed and MP3?  I thought it was interesting that the last/ most extreme proposal was a simultaneous tax hike/ debt monetization.  I was actually impressed by that scenario - no better way to pull the wool over the taxpayer's eyes.

[merkhet]

Merkhet, I get your point. I actually have considered this. This is why I'm long USTs and not short stocks in a meaningful way. The reason I keep hammering on this macro/deleveraging thing is that I think that people in this forum have a huge bias towards just being long stocks – period.  They want to stick with value investing because it has worked for many decades. Maybe that's the right thing to do. What I try to achieve with those macro posts here is to get you guys thinking about the question "What if the next 10-20 years were not resembling the last 80 years?" And what are the fundamental macro biases value investing has to rely on implicitly or explicitly?

 

Fair enough. I'm firmly in the "ignore macro" camp, but I think maybe it doesn't always mean what the "consider macro" camp thinks it means.  Allow me to provide an example.

 

For instance, Picasso mentioned GM, so let's use that as an example. On the one hand, you can take a look at General Motors and say, "Hey, it makes $152 billion in revenues a year and has a 7% EBIT margin on the full year. If it stays that way in perpetuity w/ a little bit of improvement on the EBIT margin, then maybe it's worth 10x earnings." Now, that's one way to go about it and "ignore macro."

 

On the other hand, you can take a look at the exact same numbers, and then you can go one step further and ask the question of "where are we in the auto cycle?" That's an important question when you're assuming that the revenues will stay at $152 billion a year, right? And perhaps if auto sales are going to drop then perhaps you 10x earnings won't be fair value for an auto company. (FWIW, I think we still have almost 9 million units of lost demand/replacement to make up in the U.S., but that's a totally separate discussion.) Now, I would still consider this "ignore macro," but in some sense, you are incorporating macro-type information through the revenue line.

 

But I'm not necessarily trying to think through the implications of negative interest rates in Europe and the transmission mechanism through which that reaches and affects auto sales. Primarily because I don't know that (A) it matters and (B) it is knowable. In general, my sense is that without some form of contagion effect, we don't get (A). And then in trying to figure out whether you'll get a contagion effect, you run into the problem of (B).

[merkhet]

merkhet,

 

First I want to thank you for making the effort to drill down on Dalio's remarks (including body language), and I think it adds much clarity to this discussion.

 

As you have pointed out, people may take different bits out of Dalio's statements, and think they are expressing Dalio's view when they may not be.

 

But you are too kind to Dalio. Aren't his views a bit confusing, and isn't there some kind of contradiction in them?

 

If I say I am not bearish on stocks, but there are asymmetric risks to the downside, you would think I am just a clueless amateur. But Dalio can say those things, puzzling all of you, but remains the awesome macro hero.

 

Can I say all of you are sufficiently intelligent to understand him, if he did have a clear message?

 

In the end, we don't know what he's doing, or not doing. I recall someone mentioned he doesn't change much of his all-weather portfolio. If he is the best macro forecaster and he doesn't change his portfolio based on his views, why do you bother?

 

This is completely a guess - could it be that he doesn't totally trust whatever he says himself?

 

Well, I agree with you. I mean, the point I'm trying to make is that if you adopt Dalio's views as being correct, you sort of have to adopt all of his views? And if you don't adopt all of his views, how do you decide which one is correct and which one is incorrect?

 

For what it's worth, I suspect that his view on how the economic machine works re long debt cycles is probably accurate. But how does that inform how I pick stocks 99% of the time? ¯\_(ツ)_/¯

[Kiltacular]

I mean if you keep buying up dollars for 30-50 cents, does it really matter what happens with deleveraging and macro?  I don't like BAC or GM but if you buy up enough of half of book and 7x earnings type stocks it's hard to lose even though macro is a factor.  You just don't want to go balls to the wall long at 2x book or 10x peak earnings, etc.  Macro matters a hell of a lot when you're paying a full price.

 

Respect the macro and market but it's too easy to lose track of why value investing works when all these slick tongued macro guys come out.  Dalio spends an insane amount of time only thinking about these macro issues.... Can any of us say that spending a similar amount of time will get us better investing results?  Just some simple due diligence and respect for the macro will keep you out of a lot of blow ups and hopefully buying up enough cheap assets will show in the result over time.  And you can't rely on Dalio's thoughts either.  He's only recently become a more public speaker on these various issues.  I wouldn't expect him to tell us when the macro suddenly looks great.

 

+1

 

Find cheap stocks -- cheap blue chips right now: aapl, bac, wfc, axp, ibm, xom, brkb

 

If interest stay low, these will be homeruns (on a blue-chip return scale) 10 years from now.  If interest rates tend back to 4 or 5%, they will only do very well -- 10% to 12% annually averaged for the decade.

 

The macro won't matter in either case.

[petec]

+1

 

Find cheap stocks -- cheap blue chips right now: aapl, bac, wfc, axp, ibm, xom, brkb

 

If interest stay low, these will be homeruns (on a blue-chip return scale) 10 years from now.  If interest rates tend back to 4 or 5%, they will only do very well -- 10% to 12% annually averaged for the decade.

 

The macro won't matter in either case.

 

Are you implying that they will do more than 10-12% compounded if interest rates stay low?

 

If only it were really that easy.

[Jurgis]

+1

 

Find cheap stocks -- cheap blue chips right now: aapl, bac, wfc, axp, ibm, xom, brkb

 

If interest stay low, these will be homeruns (on a blue-chip return scale) 10 years from now.  If interest rates tend back to 4 or 5%, they will only do very well -- 10% to 12% annually averaged for the decade.

 

The macro won't matter in either case.

 

Are you implying that they will do more than 10-12% compounded if interest rates stay low?

 

If only it were really that easy.

 

Why would anyone buy any of these stocks if they did not expect at least 10-12% compounded for long period of time?

So, yeah, I think he's implying this and I would imply it too for the ones that I hold from this list: aapl, bac, brkb

Although I don't hold wfc, axp, ibm, xom, I can see reasonable scenarios where all of them return >10% for coming 10+ years.

[petec]

+1

 

Find cheap stocks -- cheap blue chips right now: aapl, bac, wfc, axp, ibm, xom, brkb

 

If interest stay low, these will be homeruns (on a blue-chip return scale) 10 years from now.  If interest rates tend back to 4 or 5%, they will only do very well -- 10% to 12% annually averaged for the decade.

 

The macro won't matter in either case.

 

Are you implying that they will do more than 10-12% compounded if interest rates stay low?

 

If only it were really that easy.

 

Why would anyone buy any of these stocks if they did not expect at least 10-12% compounded for long period of time?

So, yeah, I think he's implying this and I would imply it too for the ones that I hold from this list: aapl, bac, brkb

Although I don't hold wfc, axp, ibm, xom, I can see reasonable scenarios where all of them return >10% for coming 10+ years.

 

I can see those scenarios too (and own axp, wfc, and brk).  But stock markets have done 7% give or take compounded over the very long run.  So to assume that big, established companies - even very high quality ones - will deliver a 3-5% premium to this against a headwind of rising rates seems pretty punchy to me.  Don't get me wrong, I'll be delighted if it happens.  But it's not my base case.

[A_Hamilton]

+1

 

Find cheap stocks -- cheap blue chips right now: aapl, bac, wfc, axp, ibm, xom, brkb

 

If interest stay low, these will be homeruns (on a blue-chip return scale) 10 years from now.  If interest rates tend back to 4 or 5%, they will only do very well -- 10% to 12% annually averaged for the decade.

 

The macro won't matter in either case.

 

Are you implying that they will do more than 10-12% compounded if interest rates stay low?

 

If only it were really that easy.

 

Why would anyone buy any of these stocks if they did not expect at least 10-12% compounded for long period of time?

So, yeah, I think he's implying this and I would imply it too for the ones that I hold from this list: aapl, bac, brkb

Although I don't hold wfc, axp, ibm, xom, I can see reasonable scenarios where all of them return >10% for coming 10+ years.

 

I can see those scenarios too (and own axp, wfc, and brk).  But stock markets have done 7% give or take compounded over the very long run.  So to assume that big, established companies - even very high quality ones - will deliver a 3-5% premium to this against a headwind of rising rates seems pretty punchy to me.  Don't get me wrong, I'll be delighted if it happens.  But it's not my base case.

 

BAC, WFC, AXP, BRKB are all beneficiaries of rising rates. No headwind there.

 

The problem isn't what if rates "stay low," it is what if rates go lower similar to Europe and Japan. If we see negative rates the banks are going to trade at and be worth meaningful discounts to tangible book value.

[petec]

BAC, WFC, AXP, BRKB are all beneficiaries of rising rates. No headwind there.

 

 

In and of themselves yes, they are.  But a) their stock prices may not be given discount rates and b) the economy as a whole may not be (even assuming rates only rise if things are going well, the impact of rising rates can be negative).  So, I'm not prepared to assume rising rates is net good except perhaps for wfc.

 

Again, I'm not saying these stocks can't compound at 10-12%, just that I refuse to assume that they will.

[ni-co]

I agree with petec. The economy doing well is a concurrent necessity for rates to rise. You can't help the economy by raising rates, on the contrary, you would choke growth by doing that. This is why Dalio is talking about monetary policy losing its effectiveness to the upside only. It remains very effective to the downside, i.e. the Fed could kill the economy immediately if it liked to.

[Graham Osborn]

Merkhet, I get your point. I actually have considered this. This is why I'm long USTs and not short stocks in a meaningful way. The reason I keep hammering on this macro/deleveraging thing is that I think that people in this forum have a huge bias towards just being long stocks – period.  They want to stick with value investing because it has worked for many decades. Maybe that's the right thing to do. What I try to achieve with those macro posts here is to get you guys thinking about the question "What if the next 10-20 years were not resembling the last 80 years?" And what are the fundamental macro biases value investing has to rely on implicitly or explicitly?

 

Fair enough. I'm firmly in the "ignore macro" camp, but I think maybe it doesn't always mean what the "consider macro" camp thinks it means.  Allow me to provide an example.

 

For instance, Picasso mentioned GM, so let's use that as an example. On the one hand, you can take a look at General Motors and say, "Hey, it makes $152 billion in revenues a year and has a 7% EBIT margin on the full year. If it stays that way in perpetuity w/ a little bit of improvement on the EBIT margin, then maybe it's worth 10x earnings." Now, that's one way to go about it and "ignore macro."

 

On the other hand, you can take a look at the exact same numbers, and then you can go one step further and ask the question of "where are we in the auto cycle?" That's an important question when you're assuming that the revenues will stay at $152 billion a year, right? And perhaps if auto sales are going to drop then perhaps you 10x earnings won't be fair value for an auto company. (FWIW, I think we still have almost 9 million units of lost demand/replacement to make up in the U.S., but that's a totally separate discussion.) Now, I would still consider this "ignore macro," but in some sense, you are incorporating macro-type information through the revenue line.

 

But I'm not necessarily trying to think through the implications of negative interest rates in Europe and the transmission mechanism through which that reaches and affects auto sales. Primarily because I don't know that (A) it matters and (B) it is knowable. In general, my sense is that without some form of contagion effect, we don't get (A). And then in trying to figure out whether you'll get a contagion effect, you run into the problem of (B).

 

I guess my way of looking at it is value investing got its start as kind of a shorthand macro where Graham was trying to say "look, this macro stuff is complicated, let's just develop some shorthand rules for helping people buy in the right macro conditions." Value investors forget that a PE of 10 means nothing intrinsically - it's just a number that causes you to think "hey that's a reasonably priced stock." And those normative ratios fluctuate based on the world in which the company lives.  Graham started in the wake of an earthquake, whereas ours is just starting.

 

Another thing is a think Graham-type value investing has formed its own sort of bubble.  By that I mean that the ape-following of Graham's favorite ratios has become so prevalent that companies have figured out ways to manipulate them.  Graham himself was a gifted analyst and didn't let much slip by, but retail investors (and many professionals) tend to take things like P/ B and EV/ EBITDA at face value.  This of course has happened many times before.  The problem is people always think they were smarter than the last wave because they're using "objective" measures of valuation.  Reflexive fundamentals are one reason technical analysis remains useful after all these centuries.

[Graham Osborn]

Given that this thread has moved from the original topic to basically asking whether "value" or "macro" is better, I challenge anyone to define the two terms.  My opinion is value is a subset of macro so they overlap and you won't be able to, but if someone has a clear cut definition it would give some substance to an otherwise circular argument.

[Picasso]

Given that this thread has moved from the original topic to basically asking whether "value" or "macro" is better, I challenge anyone to define the two terms.  My opinion is value is a subset of macro so they overlap and you won't be able to, but if someone has a clear cut definition it would give some substance to an otherwise circular argument.

 

If I devoted 100% of my time on macro, I highly doubt I could use that insight to generate above average, somewhat consistent long-term results.

 

If I devote 95% of my time to finding value (which can take many, many forms), I know that I can generate above average, somewhat consistent long-term results.  The remaining 5% can be spent vaguely monitoring what's going on from a macro perspective. 

 

I personally never bought into the whole "rates are low, they have to go higher" argument.  So I avoided investing in all kinds of rate driven value traps.  Is that macro?  Maybe.  I would probably just say it's common sense that rates are unlikely to move considerably higher under a wide range out potential outcomes.  If that 10% chance of super high rates hits, I'll just take my ass kicking like 99% of everyone out there.  Not the end of the world if I've already earned several multiples on my capital by the time we all take a nice 50% hit.

 

Value is always going to be 10x better than macro.  But there will be stories of the few macro survivors like Burry or Paulson who hit one out of the park while 10,000 others lost a great deal.  But by definition value is about finding something trading for a lot less than it's worth under most potential outcomes.  How can that not be a better approach?  Consistency and "repeatability" is key here and macro doesn't give you that either. 

 

So here's my definition of macro now that I've sort of defined what value is.  Macro investing (mak-roh; adjective): a waste of time.

[Picasso]

I'll quote Munger on this one:

 

This is the third time Warren and I have seen our holdings in Berkshire Hathway go down, top tick to bottom tick, by 50%.  I think it’s in the nature of long term shareholding of the normal vicissitudes, of worldly outcomes, of markets that the long-term holder has his quoted value of his stocks go down by say 50%.  In fact you can argue that if you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.”

 

You just have to deal with it.  Do good work, find good value, and be ready for the macro schlonging that makes the macro guys look great for six months out of every three years.  It's fine to mix in a little bit of your own "macro magic" when you feel strongly about something.  But you'll find, just like I have, that it's a giant waste of time.  Then again you guys are probably a lot smarter than I am and I don't mean that jokingly.  You should just apply that intelligence to finding cheaper stocks the rest of us are too dumb to buy.

[merkhet]

I'll quote Munger on this one:

 

This is the third time Warren and I have seen our holdings in Berkshire Hathway go down, top tick to bottom tick, by 50%.  I think it’s in the nature of long term shareholding of the normal vicissitudes, of worldly outcomes, of markets that the long-term holder has his quoted value of his stocks go down by say 50%.  In fact you can argue that if you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.”

 

You just have to deal with it.  Do good work, find good value, and be ready for the macro schlonging that makes the macro guys look great for six months out of every three years.  It's fine to mix in a little bit of your own "macro magic" when you feel strongly about something.  But you'll find, just like I have, that it's a giant waste of time.  Then again you guys are probably a lot smarter than I am and I don't mean that jokingly.  You should just apply that intelligence to finding cheaper stocks the rest of us are too dumb to buy.

 

+1

[JBTC]

The latest from Dalio on China -

 

"To reiterate, we believe that China is going through the same sort of debt and economic adjustment processes that all countries have gone through at one time or another. These adjustments are healthy and China will come out of them stronger, though it will be weaker while it is going through them. We believe that to characterize China either as not having significant challenges or as facing a terrible situation would be inaccurate. Yet, because many in the media prefer to use more dramatic characterizations, they distort and take our comments out of context."

 

I don't recall he said Europe, the US, or Japan will come out of their problems stronger. Sounds like he's more bullish on China.

 

[Graham Osborn]

Is it just me or does Trump's 1T infrastructure spending plan sound an awful lot like monetization?

[Graham Osborn]

Just wanted to repost this:

 

https://www.linkedin.com/pulse/reflections-trump-presidency-one-week-after-election-ray-dalio?trk=eml-b2_content_ecosystem_digest-hero-22-null&midToken=AQHZPFDtyrSUUw&fromEmail=fromEmail&ut=0x4FnqDgcveDw1

 

Ray's views on a post-Trump world.  If anyone has seen anything more extensive out of Bridgewater please post as well.