Ray Dalio on the Future of Monetary Policy

[ni-co]

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

 

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

[randomep]

 

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

 

Ya the media is doing what it does best, sell papers or airtime. The hot topic now is pessimism. But like Buffett says we have more economic activity than ever. When there is economic activity there is money to be made.  So the question to ask is who is making the money?

 

1. the majority of employees? definitely not, wages are stagnant, unemployment is high in much of the world

2. large investors? well as we can see, lots of people that we think are superinvestors aren't doing well lately

3. highly profesional workers? yes, looks like banks, doctors, tech people are getting high salaries

4. retail investors? not really, this is the herd and this is a bad time to be in the herd

5. insider shareholders or owners of privately held companies? possibly, I see a lot of that in the world

 

 

So most of us CoBF folks are 4. and possibly 3, so we can make money if we aren't with the herd, macro is for the politicians and eoncomists and the big investors......

 

 

[ni-co]

"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.

 

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 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.

 

The instrument of choice is levered long-term treasuries (as long as people have faith in central banks and trust in money).

 

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.

 

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.

[ni-co]

 

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.

 

Dalio says that you'll first get the one (deflation) then the other (inflation).

[Cardboard]

Sure, every investment carries its share of uncertainty. However, I see an enormous difference between buying long dated treasuries with the whole intent of making money on their movement vs income and someone who is participating in a liquidation event with a 30 to 50% gap to value closing rapidly.

 

There are also investment out there where the sum of the parts, calculated honestly with no speculation, is double the current share price. If a catalyst is in place, then I don't think it matters much if inflation goes to 2% or minus 2% in 12 months.

 

So timeframe and certainty can be two very important factors determining the difference between investing and speculating (betting).

 

Cardboard

[SharperDingaan]

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.

 

We were thinking of someone saving up 100K as a down payment on a house, where the funds are invested with intent to grow the payment as much as possible. The intended take-away was that they would make more (& with less risk) if they either 1) put the $ in a GIC & diligently added their moonlight earnings, or 2) if they chose to invest - withdrew any exceptional return they made, & paid off debts with it (the take $ off the table argument). The funds themselves are for a house purchase - not to live off.

 

Interestingly .. the 500K is not far off the case for boomers who involuntarily got packaged early. Many will continue to work at lower pay - if only for the health & social benefits; but like their kids - they are really relying on inheritance as their margin of safety.

 

At best it'll go 3 generations.

 

SD

 

[ni-co]

Sure, every investment carries its share of uncertainty. However, I see an enormous difference between buying long dated treasuries with the whole intent of making money on their movement vs income and someone who is participating in a liquidation event with a 30 to 50% gap to value closing rapidly.

 

There are also investment out there where the sum of the parts, calculated honestly with no speculation, is double the current share price. If a catalyst is in place, then I don't think it matters much if inflation goes to 2% or minus 2% in 12 months.

 

So timeframe and certainty can be two very important factors determining the difference between investing and speculating (betting).

 

Cardboard

 

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.

[prevalou]

Maybe there is a tendency to give up on value investing after 10 years of underperformance and embrace macro investing because there are big down moves in the market. Macro gains favor in a bear market (most of it at the bottom) while stock picking doen't interest anymore. At the top, it is the contrary : Nobody has interest in Fairfax.

[Graham Osborn]

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).

 

Another great and fundamental point.  Jim Rogers used to say a secular trend was the way to get rich.  When Buffett buys a moat stock, he's making s secular bet IMO - that an entire sector environment and interest rate regime will support operational/ multiple expansion.  Oil was a great secular bet in the early 2000s as the tech bubble deflated.  The recent bear market in commodities was another.  The tech bubble in the 90s in the US.  The credit bubble in China.  Farmland in the US after the last housing bubble burst.  Private tech offerings over the same interval.  QE2 and its effect on just about any equity since the financial crisis.  As a value investor I would have missed many of these waves because either (1) the asset class was outside my staples (2) the value metrics weren't "classic" at the start of the trend (2) value conservatism would have forced me to sell early rather than letting the mania play out fully.

 

JMO1 - people who hold a portfolio of mostly Fortune 500 companies right now that they bought 3+ years ago are macro investors and not value investors.  If you look past the adjusted debt and EBITDA metrics only a handful of these are values or were then.  OTOH, QE was a great reason to buy if you could get in when valuations were still conservative.  There's nothing wrong with making money that way unless you don't realize what you're doing is macro - if you don't, you'll believe you have a margin of safety to the downside when in fact you don't.

 

JMO2 - I don't believe that value criteria for the margin of safety are absolute protection either - as my recent performance in microcap defense stocks vividly demostrates.  The rulebooks upon which Graham and young Buffett built their careers were premised on "low" markets.  In "mid" markets Buffett started losing money on value traps like Berkshire and stared drinking the Munger Kool-Aid.  So I really believe macro and value are a bit like the Relativity and Newtonianism - one is just a special case of the other.  I consider Graham one of the fathers of macro.

[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.

 

Even more interesting: WW2 started in 1939.  I can picture Trump with a toothbrush :)

[vinod1]

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.

 

Our views are so far apart that discussion would likely not yield much.

 

If you could, I would love to hear more about why your investment philosophy has changed and what influenced that.

 

Thanks for bringing William White to my attention. I spent quite some time reading up many of his writings over the last one week. My views are pretty much in alignment with him which is not a surprise since he seems to be influenced by some of the economists I like as well.

 

Vinod

[vinod1]

@ 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 ;)

 

petec,

 

I think our views are much closer that I thought.

 

I do think current environment of high valuations, leverage and the many central bank interventions point to an environment of elevated risks.

 

The way I would approach this is by incorporating it into my valuations. So to take BAC for example, in my baseline scenario, I have factored in a long period of likely very low rates (the average length of financial repression is around 22 years and we are in year 8). So that leads to a low estimate of IV. But as long as I can get it at a discount that I am comfortable with to my estimate of IV, I am going to buy it. Also I am not going to hold a business (unless it is of exceptional quality) if IV starts getting close to 85% to 90%. Other than that I am trying to tune macro out.

 

On profit margins, I got lucky because the financial crisis caused market to go down. It did not go down due to mean reversion of profit margins. So I was right for the wrong reasons. So it was a mistake on my part and if not for luck, it would have been a major mistake that could have cost be very dearly. That again happened in 2011. If not for the banking crisis, I would have very low allocation to stocks. So again a major mistake. In investing, doing the same thing again and again, we can get different results. :)

 

Thanks

 

Vinod

[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

 

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.

 

I cannot do justice in anything less than a 20 page missive. So I would urge to read Philosophical Economics blog. Especially the posts about profit margins and Shiller PE.

 

I do not think investors got burnt in 70s or any other period by following value investing. Superinvestors of Graham and Doodsville article by Buffett gives at least a few people who did well.

 

Vinod

[Graham Osborn]

 

I cannot do justice in anything less than a 20 page missive. So I would urge to read Philosophical Economics blog. Especially the posts about profit margins and Shiller PE.

 

I do not think investors got burnt in 70s or any other period by following value investing. Superinvestors of Graham and Doodsville article by Buffett gives at least a few people who did well.

 

Vinod

 

Re: Schiller PE

 

I think every reader on this thread knows it's an abominable measure of valuation.  Nevertheless it is one of the few data points we have going back 100 years, and it provides an apples to apples comparison between cycles.  Not perfect, but far from useless.

 

Re: Graham and Doddsville

 

For 74, Schloss was off 6%, Buffett had recently liquidated (macro dunce that he is), Tweedy Browne was up 1.4%, Sequoia was off 16%, Munger was off 32%.  These are OK but not great.  Burry made 100%+ in the last bear market.  Most macro guys lost money, but that's not the point.  The strategies cited in the paper were highly heterogeneous as well.  The point is you are going to need something other than long stock picking to come out ahead in a bear market.

 

Now, most pure stock pickers will respond that the market rebounded quickly after every bear market so that it made sense to average down.  They notice the strategy seems to be working less well each time with the post-2000 and post-2007 bear markets, but it's not clear yet that this represents a breakdown of the strategy (I'm referring to long-only stock picking as a strategy - most of the Graham-and-Doddsville stars were not rigid Grahammitees except maybe Schloss).  To understand whether the dip-buying approach should still work, we need to ask whether the TR time period referenced in the paper and the present are comparable.  Between 1970-80 US GDP nearly tripled whereas in the past 10 years it has grown ~50%.  LT rates were coming off 6%+ then vs 0% now.  So the present environment looks very different from Graham-and-Doddsville.  And even there, the 70s were brutal.

[ni-co]

@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.

[JBTC]

@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 though 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 will be great opportunities to buy great companies to (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. And I also think that there are going to be ample opportunities to buy them much cheaper than they are now and with a much improved understanding of how the future might look like.

 

Do any of you know how Ray Dalio actually invests?

 

What are the his positions? How often he makes changes? How many strategies he runs?

 

Is there a Dalio 13/F?

 

 

[ni-co]

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). 

[JBTC]

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).

 

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?

 

 

[ni-co]

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).

 

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. 

[JBTC]

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).

 

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.

 

I haven't, and that's why I was asking.

 

Honestly, most of this 80-year debt cycle talk is just over my head. But I am open minded and willing to listen.

 

Generally, I much prefer to look at what fund managers do instead of what they say.

 

I think many of us would have a much better idea of what Dailo is preaching, if we knew what his current positions are.

 

 

[ni-co]

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.

[TwoCitiesCapital]

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).

 

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.

 

I haven't, and that's why I was asking.

 

Honestly, most of this 80-year debt cycle talk is just over my head. But I am open minded and willing to listen.

 

Generally, I much prefer to look at what fund managers do instead of what they say.

 

I think many of us would have a much better idea of what Dailo is preaching, if we knew what his current positions are.

 

You wont' know what his positions are. A large majority of the macro bets are done via futures, currencies, and swaps. He doesn't have to disclose any of those.

[frommi]

In the all weather approach Dalio`s fund is basically long everything, bonds, stocks, commodities based on past risk (volatility) so that every asset class is weighted on risk parity. Its similar to a permanent portfolio asset allocation (25% gold, 25% stocks, 25% long term bonds and 25% cash). Its simply based on the fact that in our current monetary system the monetary base is increased nearly every year and this lifts all asset prices in the long run.

 

Ni-co isn`t it smarter to just bet on a rising dollar, instead of betting on the possible secondary effects like lower interest rates or falling stock prices?

 

At least in 2015 you had plenty of time to be prepared for the fall in stock prices, because you already knew the dollar has risen in April/May, so the fall of stock prices in the summer was like shooting fish in a barrel.

But this year and especially next quarter we get earnings that are not depressed by the currency, at least if the dollar doesn`t rise dramatically next month. So its possible that the bull resumes now and kicks the bears around until they give up before we start the real crash. Lower interest rates in january were the result of fear not the result of deflation, at least when you believe the last CPI data from friday.

[petec]

 

On profit margins, I got lucky because the financial crisis caused market to go down. It did not go down due to mean reversion of profit margins. So I was right for the wrong reasons. So it was a mistake on my part and if not for luck, it would have been a major mistake that could have cost be very dearly. That again happened in 2011. If not for the banking crisis, I would have very low allocation to stocks. So again a major mistake. In investing, doing the same thing again and again, we can get different results. :)

 

 

I would argue that falling profits (and therefore falling margins) had a LOT to do with the sell-off in stocks in 2008/9.  That was, in fact, mean reversion.  The fact that it didn't *last* was down to huge stimulus.  And if people had correctly diagnosed the original high margins (as being caused by too-low interest rates) then they would also have predicted that, with huge stimulus, margins would bounce back to new highs after the crisis.  Point being, there's macro and there's the policy response to macro and you have to look at both together.  But I believe you were right to worry about aggregate margins and that they will eventually mean revert.  I try to stick with market sectors where margins are not above long run norms.

[petec]

 

Honestly, most of this 80-year debt cycle talk is just over my head.

 

Me too, if it is described as an 80-year cycle and that is used for timing purposes.  But the idea that debt drags forward demand, and the idea that when you have a huge acceleration in debt big chunks of that money will be wasted, and all the consequences of those two things including that GDP will be overstated during such a period, seem absolutely crucial to me.