Ray Dalio on the Future of Monetary Policy

[Graham Osborn]

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]

 

Interesting.  The 37-38 period he cites as the phase-aligned "gas in the tank" comparator agrees closely with the Schiller PE phase alignment:

 

https://www.google.com/search?q=pe+of+s%26p&rlz=1C9BKJA_enUS633US633&hl=en-US&prmd=nsiv&source=lnms&tbm=isch&sa=X&ved=0ahUKEwjPp8LCwYLLAhUMNiYKHccxCaUQ_AUICSgD&biw=768&bih=909#imgrc=8SZJAu1T8l-mKM%3A

 

The debt cycle becomes the Kondriatev wave.

[SharperDingaan]

Some additions for the mix.

 

All valuations assume the future will resemble the past in some fashion. Problem is - we haven’t had markets without continuous seriously overt central bank intervention since the crisis started; 10 years ago in 2006. The last ‘norm’ period was also not the 2001-2006 ‘deregulation’ bubble – it was 'maybe' the 1990’s. 20 years ago!

 

Macro analysis is simply an attempt to predict the local economic tide. Where there are many cross-currents, predictive application is obviously very limited; but still rational. I don’t go fishing in a row boat when it is either storming outside – or I can see that it is about to.

 

A win today is to bet against central bank intervention; a bet against stability that forces a different way forward. EU breakup, fiscal over monetary stimulus, mass debt forgiveness, martial plans, etc. The obvious approach is to be anti-fragile (Taleb) – a technique that largely didn’t exist 20 years ago.

 

It means simultaneous risk-on, & risk-off, on the same security – over different time horizons.

Comfort with routine volatility in the +- 35% or more range.

New approaches, techniques.

 

Diametrically opposite the requirements to marketing for OPM.

And the root cause of much of the anxiety.

 

SD

 

[Poor Charlie]

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

 

For me the macro comes down to opportunity cost: will I be able to find better investments (higher returns with less risk) in the future or today?  While others may be able to find good investments today, I'm finding very few that get me excited.  Said differently, my opportunity cost of being invested is pretty low.  I weigh that against the high likelihood of having another panic situation and it's pretty clear to me that I should have some investable cash around.  Maybe it's because I started investing during the crisis, but I find even the off chance of panic and forced selling too irresistible to pass up.  I've been deploying cash more recently but am still well above 50%.

[Graham Osborn]

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]

 

I think Dalio is spot on here with his concept of MP3, but I wish he'd taken it one logical step further.  What is the largest category of discretionary spending (interest payments and mandatory spending are not prostimulatory) in the typical sovereign budget?  Defense.  True, you can monetize by pumping money into public sectors like healthcare (look at what it took HHS to build a nonfunctional website), but that’s still just a spit in the ocean compared with defense.  I think most would agree that a hypothetical war between China and the US would be manna from heaven for the credit ratings of nearly every economy on earth - for now it's mostly an arms race between our navies etc.  As it stands, Russia is the main protagonist.  I think that is why Soros is so bent on Ukraine/ Syria/ Iraq these days.  He says for the first time in many years there are too many altercations for him to follow them all.  So WW3 would be the best MP3 and solution to the international debt crisis/ deflationary spiral/ anemic growth/ commodity bust (by reflexivity most borrower/ debtor nations would be involved).  The US averages 2 existential wars per century.  Maybe Dalio knows this but considers it poor taste to advocate war as a balm for credit ratings - only a Rothschild would do that :)

[vinod1]

Somebody said this, might be Howard Marks. The hardest time to invest is always right now. Put yourself in any moment in the past century. There was always something terrible happening that seemed like it was going to tip us over the edge of the cliff. And every bad time seemed uniquely bad. But I suspect that, outside of a giant meteor hitting the earth, the global economy will survive whatever adversity is thrown at it.

 

If you look at the 20th century, in every decade there is something extraordinarily worrisome (WW I, WW II, Great Depression, Cold War, Vietnam War, Inflation in double digits, etc.), but the markets have moved higher and individual stock picking worked. Even valuations are an unreliable guide as to what the markets are likely to do in the future. Cautious optimists have thus fared much better than pessimists.

 

I think those who are macro concerned about QE, Debt and Deleveraging would likely have had similar concerns in the past and tilted their portfolios likewise to their detriment. Buffett I think would not have had the record that he did, if he let his worries affect his portfolio.

 

From my own experience, I learned to ignore macro.

 

In 2001 I was reading up Shiller, Smithers and Grantham and those concerns have kept me to a low equity level. I had dollar cost averaged over 2001 to 2004 and did reasonable well. So far so good.

 

Then again based on these guys concerns about profit margins and housing bubble, I reduced my allocation significantly from 2006 and by 2008, Q3 I had only around 35% in equities with BRK and FFH being large holdings. So when markets collapsed I invested heavily as that took care of my concerns around profit margins and valuations. 

 

By 2010 markets again rallied and in early 2011 I reduced my investments again due to concerns about valuations and profit margins. But as financials went down in 2011, I invested heavily in them despite my concerns about macro.

 

Looking back I had been dead wrong about my concerns about profit margins. Fortunately the financial crisis bailed me out in 2008. The markets went down due to the financial meltdown and that had nothing to do with my concerns about profit margins.

 

Again the financial stock meltdown bailed me out in 2011. Otherwise I would have missed most of the market gains. If euro crisis and mortgage concerns have not come up, I would have been sitting out the market rise due to concerns about profit margins, etc.

 

Now, I see where Smithers (Tobin Q, executive compensation, etc) and Grantham (profit margins unadjusted for changed in accounting, market structure) got it wrong.

 

I can completely understand why Buffett has said: Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important.

 

Show me an investor who spends time thinking about macro and I will show you a portfolio that underperforms the market.

 

Vinod

 

 

 

 

[jb85]

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]

 

I think Dalio is spot on here with his concept of MP3, but I wish he'd taken it one logical step further.  What is the largest category of discretionary spending (interest payments and mandatory spending are not prostimulatory) in the typical sovereign budget?  Defense.  True, you can monetize by pumping money into public sectors like healthcare (look at what it took HHS to build a nonfunctional website), but that’s still just a spit in the ocean compared with defense.  I think most would agree that a hypothetical war between China and the US would be manna from heaven for the credit ratings of nearly every economy on earth - for now it's mostly an arms race between our navies etc.  As it stands, Russia is the main protagonist.  I think that is why Soros is so bent on Ukraine/ Syria/ Iraq these days.  He says for the first time in many years there are too many altercations for him to follow them all.  So WW3 would be the best MP3 and solution to the international debt crisis/ deflationary spiral/ anemic growth/ commodity bust (by reflexivity most borrower/ debtor nations would be involved).  The US averages 2 existential wars per century.  Maybe Dalio knows this but considers it poor taste to advocate war as a balm for credit ratings - only a Rothschild would do that :)

 

 

why not just print the money and hand it out?...same amount of $ in circulation and you don't have the destruction of real assets that goes along with war.  that said, maybe war is more politically feasible than just handing out money?

[vinod1]

William White had excellent papers that show you why macro is dangerous.

 

He points out that central banking (and by implication macro) is mostly art rather than science. He notes that what is thought of as good policy has changed several times over the last 50 years and often these policies are dramatically different from past policies.

 

So he says we need to be much much less certain about our macro theories. Since they are quite likely to be invalidated after a period of time.

 

There are other problems as well. Take the example of 50 to 75 year debt cycle. Do we really have data to support that? We hardly have 100 to 150 years of good data that is two cycles. Can we really try to form a theory based on something that happened twice and really only in one country? How do you know if the cycle is really ending since the range is 50 to 75 years. If it is only 50 years, it can last 25 more years. So we patiently wait out 25 years to know if that theory works?

 

The current state of macro is such that we just do not know much. Those who think they know, are only fooling themselves.

 

Vinod

[vinod1]

I think marco is a waste of time but it is good to be knowledgeable about it, just so you can spot nonsense when you see it.

 

If anyone is interested here is what I would recommend and no these would not tell you what would happen in the future, just the concerns are not so much that we just have to huddle up in gold and ammo.

 

1. House of Debt

2. Balance sheet recession - Richard Koo

3. The Great Rebalancing - Pettis

4. End the Depression Now

5. Philosophical Economics blog

 

These guys know what they are talking about and importantly with exception of Krugman, are not crusaders trying to hoist a particular view. They let you make up your mind by showing why their point of view is more supported by data than their opposite view.

 

Thanks

 

Vinod

[Graham Osborn]

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

 

Good stuff here.  I'm probably one of the few here (bears and bulls alike) who holds purely shorts (long-dated puts) and cash.  So for better or worse, my money is where my mouth is.  Fundamentally I agree with a lot of the risk factors cited here, but in terms of my trading I just follow the momentum - which is down in the sectors I follow.  I may think macro but I bet value - finding debt-laden businesses at immediate risk of credit downgrades or high EV/ EBITDA plays that have been in a death slide for 6 months or more.  In my experience, I've made the most money when my macro view, the fundamentals of the business, and the technicals lined up.  IMO to pass on that opportunity would be as foolish as going short would have been 5 years ago - the fundamentals were stronger and technicals in most of these same stocks were rock solid.  Just my relatively brainless trader POV..

[Graham Osborn]

Somebody said this, might be Howard Marks. The hardest time to invest is always right now. Put yourself in any moment in the past century. There was always something terrible happening that seemed like it was going to tip us over the edge of the cliff. And every bad time seemed uniquely bad. But I suspect that, outside of a giant meteor hitting the earth, the global economy will survive whatever adversity is thrown at it.

 

If you look at the 20th century, in every decade there is something extraordinarily worrisome (WW I, WW II, Great Depression, Cold War, Vietnam War, Inflation in double digits, etc.), but the markets have moved higher and individual stock picking worked. Even valuations are an unreliable guide as to what the markets are likely to do in the future. Cautious optimists have thus fared much better than pessimists.

 

I think those who are macro concerned about QE, Debt and Deleveraging would likely have had similar concerns in the past and tilted their portfolios likewise to their detriment. Buffett I think would not have had the record that he did, if he let his worries affect his portfolio.

 

From my own experience, I learned to ignore macro.

 

In 2001 I was reading up Shiller, Smithers and Grantham and those concerns have kept me to a low equity level. I had dollar cost averaged over 2001 to 2004 and did reasonable well. So far so good.

 

Then again based on these guys concerns about profit margins and housing bubble, I reduced my allocation significantly from 2006 and by 2008, Q3 I had only around 35% in equities with BRK and FFH being large holdings. So when markets collapsed I invested heavily as that took care of my concerns around profit margins and valuations. 

 

By 2010 markets again rallied and in early 2011 I reduced my investments again due to concerns about valuations and profit margins. But as financials went down in 2011, I invested heavily in them despite my concerns about macro.

 

Looking back I had been dead wrong about my concerns about profit margins. Fortunately the financial crisis bailed me out in 2008. The markets went down due to the financial meltdown and that had nothing to do with my concerns about profit margins.

 

Again the financial stock meltdown bailed me out in 2011. Otherwise I would have missed most of the market gains. If euro crisis and mortgage concerns have not come up, I would have been sitting out the market rise due to concerns about profit margins, etc.

 

Now, I see where Smithers (Tobin Q, executive compensation, etc) and Grantham (profit margins unadjusted for changed in accounting, market structure) got it wrong.

 

I can completely understand why Buffett has said: Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important.

 

Show me an investor who spends time thinking about macro and I will show you a portfolio that underperforms the market.

 

Vinod

 

Hey Vinod, last post of the night for me :) When I first started investing, I wanted to know why I could find so few stocks that fulfilled Graham's requirements.  Then I stumbled across that 100 year Schiller PE diagram which seemed to make more sense than the index charts because it explained where people lost money.  The thing that struck me about that diagram was how high above historic norms the Schiller PE had been the past 40 years.  If that was true, 2 generations of investors had entered the markets with a fundamentally unsustainable picture of equity returns relative to historic averages.  So while you may not agree with my long-term worldview, you can at least understand why I hold it - according to my worldview there should be investors like yourself who view the last 40 years as a sustainable reality where stock-picking without macro insights is safe, whereas Dalio was born in a different reality where said investors had been annihilated by the 70s fallout and commodities was the only game in town.  Given that my worldview explains both I tend to give it more credence, but I am always open to correction.  My main goal for now is to enhance my asset value to be prepared for a day when I too can hopefully ignore macro - although I hope to ride the commodities wave first.

 

FWIW - Soros' annualized returns exceeded Buffett's.

[ni-co]

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.

[petec]

@ Vinod:

 

All previous decades have indeed had something worrisome.  And some of them were terrible for investors.  If you'd gone into the 1970s ignoring macro you'd have got wiped out.  But if you'd gone in thinking, "Nixon's just abandoned the gold standard so there's a decent chance of inflation and I'll use that as an *overlay* on my value-oriented stockpicking" you'd have done great.  The same could be said about most decades - with the great benefit of hindsight.  The question is: is macro predictable in advance?

 

My view is that it makes sense to look at a world that has record debt, record interest rates, record margins, and record valuations and say: I think I'm going to be especially careful today.  If that's macro then I believe in macro.

 

There is a great difference between taking a macro view and knowing what's going to happen.  I don't *know* what's going to happen with any of my stocks, but I do my work and take a view and invest accordingly.  Similarly I don't *know* what's going to happen with macro but I do a lot of reading and thinking and I have come up with some generalised predictions which I have as much confidence in as I do any of my stock picks.  That helps me steer clear of specific risks and has served me very well.  What I do not do is make specific predictions or timing predictions.

 

Even if your macro view is "the world will muddle through the next 100 years much as it has the last 100 years, with ups and downs but generally progressing", that *is* a macro view.  All I am doing is making a much finer study of the same history and seeing if more specific lessons can be taken from it.

 

Macro may be an art, but so is stockpicking.  And what you refer to as changing theory is, in my opinion, changing academic fashion.  The real theories that explain how things work were laid down a long time ago and haven't changed.

 

On profit margins: I still believe that we will eventually find that central bank policy has a lot to do with the current level of margins.  And from what you say, you actually did exactly what I am advocating: you had an overarching concern, that kept you careful when the market was overvalued; but you piled in like a good value investor when things were cheap.  Sounds good to me ;)

[Cardboard]

"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)."

 

This sums up the problem in terms of investing or "betting" based on marco. If the market had just stayed flat for another year, then your returns would have been meager if not negative: you are paying huge premiums with puts.

 

The problem with this Kondratieff winter as advocated by Dalio is that it is nearly un-actionnable. Investing is about laying money now to harvest more in the future. I have yet to find an instrument allowing a long term negative posture with low cost and especially when one advocates for single digit returns, then these costs are highly detrimental.

 

While I agree with demographic and debt being a problem, I also believe that humans have always found solutions to move forward. If there is no other solution than World War III or some massive debt repudiation leading to social chaos, then your best investment is not puts and treasuries but, guns, ammo, bunkers and dry food. 

 

I also believe that if you dig really hard that you will find value and stocks going up in any market. If you manage a billion dollar portfolio that may not be possible but, for the common mortals out on this website, I do believe that the really smart ones (not me) will make multiple times with unknown, special situations than betting on where the wind will blow.

 

Cardboard

 

[Palantir]

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.

 

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.

 

People have been warning us all of hyperinflation from money printing for the past 7 years (!). When is this mythical hyperinflation going to happen?

[SharperDingaan]

"I have yet to find an instrument allowing a long term negative posture with low cost and especially when one advocates for single digit returns, then these costs are highly detrimental.

 

Long LEAP + a discounted treasury/gilt with the same maturity date.

If it matures in the money the treasury proceeds permit physical delivery on maturity date, keeps the cost base at the price of the LEAP, & defers tax. If the security also pays a dividend - you get an ongoing cash yield (assumes ongoing dividends) up in the high teens+. If it doesn't, the return is the bond discount less the cost of the LEAP; you know exactly what this is on the day you enter the trade.

 

Heads - the return could be spectacular.

Tails - the return can be no lower than it was on the day you entered the trade. Don't like? - don't enter.

End point is a portfolio of very low cost bases, & an annual cash yield in the 15-35% range.

In the meantime - the bulk of the capital is sitting in a highly liquid treasury/gilt with very little risk.

 

... pretty much what the poster is doing, & very Taleb (benefits from disruption).

 

SD

 

 

 

[petec]

 

People have been warning us all of hyperinflation from money printing for the past 7 years (!). When is this mythical hyperinflation going to happen?

 

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 ;)

[Graham Osborn]

While I agree with demographic and debt being a problem, I also believe that humans have always found solutions to move forward. If there is no other solution than World War III or some massive debt repudiation leading to social chaos, then your best investment is not puts and treasuries but, guns, ammo, bunkers and dry food. 

 

Cardboard, you are officially my hero, and perhaps more right than you imagine ;)

 

I agree with most of your comments btw.  Reflexivity says that the most true statements are the least actionable.  Graham and macro are both primarily negative arts.  When I use puts, the primary basis is technical - with corroboration from the value and macro pictures.  I like to think of value/ macro as like organism/ environment - you need both to understand the past and make some exclusionary statements about the future.

[Graham Osborn]

 

People have been warning us all of hyperinflation from money printing for the past 7 years (!). When is this mythical hyperinflation going to happen?

 

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.

[petec]

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.

 

 

I agree.  I have started to think of inflation/deflation as being much broader than CPI - more to do with the size of CBank/Ibank/bank balance sheets etc., and asset prices.  And these things do feed into peoples' lives - e.g. it is FAR more expensive for the average person to save for retirement than it has ever been in huge parts of the world today.  That depresses spending and confidence.

 

Separately, I would strongly recommend that people read the shadowstats work.  I have no idea what the right way to calculate inflation is, but I do think it is important to understand that the CPI stats we see today can't be compared to the ones that were produced in the last inflationary period. 

 

I view the last 10-15 years as highly inflationary.

 

 

[SharperDingaan]

A little numbers practicality …….

 

Assume a Jan 01 portfolio valued at 100K. Our investors simple average return (after fees) over the last 5 years has been 7.2% (-10, 12, 30, -6, 10 = 36/5 = 7.2%). Our investor does well at times, does better than the index, better than most funds after fees – but still only averages 7.2%. Top quartile performance.

 

Assume our investor lives in Ontario.

Minimum wage is $11.25/hr. Our investor could also reliably moonlight for nearly as many hours as he/she wants at $30/hour.

 

100K @ 7.2% = 7,200 investment return for the year

7,200/11.25 = 640 hours at minimum wage = 16 weeks at 40 hours/week

7,200/30 = 240 hours at $30/hour = 6 weeks at 40 hours/week

 

If our investor has 100K - he/she would be better served just buying a GIC & moonlighting. Same 7.2K return, with zero risk to capital. If our investor had more invested - he/she would be better off simply buying a property, & moonlighting to pay it off faster.

 

Absent the outlying 30% year (30K) & he/she averages a return of 1.2% - a GIC return. When there is an outlying windfall – the money really needs to be withdrawn and applied elsewhere (education, transport, bills repayment, etc.). Outlying losses need to be toughed out.

 

If our investor has 500K – the portfolio earns an average 36K/year, but it varies between -50K to 150K. To most folks that 50K potential loss is large enough to require that the portfolio be hedged at all times.

 

This is practical ‘macro’ at the portfolio level.

If this is not part of your consideration – you have to be asking yourself why.

 

SD

 

[Cardboard]

IMO, you guys are missing a key point in all of this: baby boomers will never be able to fully retire. This will make a huge difference going forward in terms of needs, consumption, productivity, and all these forecasts.

 

Even the savvy ones with say a million dollar in investable assets will not earn enough income with their investments to keep up their lifestyle and that is a very small percentage of the population. 2% a year is $20,000. Withdraw $20,000 to $30,000 a year to supplement and assume a 30 year lifespan and trouble is easy to see.

 

The only ones who will be able to enjoy retirement as expected will be the ones who have defined benefit plans and many of these have a very high chance of being cut due to too low returns on assets and/or plans being under reserved.

 

They will manifest and cry once money runs out but, who is going to defend them? Their children who are barely making ends met? Indeed, I think that there will be very little pity going around for those who have essentially siphoned our society dry and signed sweet pension deals with our governments and corporations. They will have to continue working and many will have to live with their kids just like in the good old days. Their houses will likely be given to the kids in return to take care of them. And poof! A lot of debt goes away.

 

Cardboard

[petec]

IMO, you guys are missing a key point in all of this: baby boomers will never be able to fully retire. This will make a huge difference going forward in terms of needs, consumption, productivity, and all these forecasts.

 

Even the savvy ones with say a million dollar in investable assets will not earn enough income with their investments to keep up their lifestyle and that is a very small percentage of the population. 2% a year is $20,000. Withdraw $20,000 to $30,000 a year to supplement and assume a 30 year lifespan and trouble is easy to see.

 

The only ones who will be able to enjoy retirement as expected will be the ones who have defined benefit plans and many of these have a very high chance of being cut due to too low returns on assets and/or plans being under reserved.

 

They will manifest and cry once money runs out but, who is going to defend them? Their children who are barely making ends met? Indeed, I think that there will be very little pity going around for those who have essentially siphoned our society dry and signed sweet pension deals with our governments and corporations. They will have to continue working and many will have to live with their kids just like in the good old days. Their houses will likely be given to the kids in return to take care of them. And poof! A lot of debt goes away.

 

Cardboard

 

I'm deeply conscious of this and it's part of what I was trying to get at when I said it has become a LOT harder to save for your future.

 

But I don't see why it makes debt go away?  Or rather, I don't see why the impact on debt is any different to inheriting your parents' property after they died, which is what always used to happen.

 

I also can't quite tell whether you think it's a good thing or a bad thing!

[Cardboard]

I think in some ways it is a good thing.

 

In the past, people did not retire at 55 to live and play until 90. They worked until they could not anymore and the government came up with a program to protect them during that "disability" period if you will with social security. It was a 5 to 10 year retirement period.

 

Society now has to re-adjust away from that Freedom 55 mentality. And I don't think that there is any way around it: can't have people working 30 to 35 years and getting about the same income for another 30 to 35. The ones who will have the toughest pill to swallow are government and public workers. However, when there is no money left, there is no money left to pay.

 

So while health advances provide a longer and healthier life, it has to be paid somehow and can't be borne just by the younger generations: their own cost of living plus pension and healthcare for the boomers. Makes no sense.

 

So if the boomers keep on working, they will reduce that load on society, will produce GDP, spend which will help everyone. I also assume that debt will go down because inheritance will happen quicker via home transfer or other means. Remember that there is always a borrower and a lender for any debt.

 

Cardboard

[petec]

Sure - but house transfer can't eliminate debt, can it?

 

Parent owns house.

Child has debt.

House transfers across: child's balance sheet looks better, parent's looks worse.

 

You can only pay down debt by paying down debt or defaulting on it.

 

And if you pay it down, in aggregate, house prices will fall.

 

EDIT: more generally I look at this the opposite way.  Yes, people will have to work longer than they planned and this will create GDP.  But it will also suppress confidence, as all negative surprises do, and also spending, as people might save more in order to have *some* sort of retirement.  E.g. when your real pension gets smaller (either through renegotiation or simply the suppression of CPI statistics to control federal outlays, which is what is happening) do you spend more or less?

[scorpioncapital]

A little numbers practicality …….

 

 

If our investor has 100K - he/she would be better served just buying a GIC & moonlighting. Same 7.2K return, with zero risk to capital. If our investor had more invested - he/she would be better off simply buying a property, & moonlighting to pay it off faster.

 

 

 

Only problem with this example is try to live on $7200 per year or even $7200 investment + $7200 moonlighting + $7200 regular. That barely covers rent.

 

And if you have 500k, you don't need any of the moonlighting. You can probably live off something like well chosen but slightly distressed bonds. Bottom line: most people will have to work full time or very extra part-time unless they are getting stellar investment returns.