Dalio, Biggest Hedge Fund Manager: "developed world has reached its debt limit"

http://nerdinvest.blogspot.com/2011/10/dalio-biggest-hedge-fund-manager.html

by rajpaul • 15 years ago

84 45 15 years ago

nerdinvest.blogspot.com

dshaw002• 15 years ago

He has a copy of his company's and his own personal management document, Principles, on his hedge fund's site. It's a really good and interesting read.

http://www.bwater.com/Uploads/FileManager/Principles/Bridgew...

trebor4• 15 years ago

Wow, that's the clearest explanation I've heard of how we got into this cycle. Good for Dalio being honest and clear!

mark_l_watson3• 15 years ago

Agreed! I just read the article with his quote (didn't have time to watch the video)and a 1 minute read helped me to understand the problem better.

A bit of a tangent, but: my wife and I have almost never bought on credit (save for cars, even our current house) - preferring to pay cash, and accept a "lesser" life style. I have taken some kidding about this over the years since we live a modest lifestyle, but in recent years some family and friends finally understand our odd viewpoint on earning and spending.

trebor4• 15 years ago

I've managed to survive without debt thus far. I still have a credit card, but always paid in full for everything that I bought on it. Just watching friends and family struggle with debt is enough to keep me far from it.

giardini4• 15 years ago

We've done the same. And now we regret it. Our pension funds and investments have tanked in the various downturns. Well, I guess we can handle that.

Our friends bought million-dollar homes they can't afford and now Obama wants the banks to renegotiate and write their loans down. And those who invested conservatively, like myself, get to bail out the banks and, along with them, my profligate friends.

IOW you and I are the suckers in this game. We can be smug about our "wise" choices, but the way this game is playing out, anyone who tried to be fiscally conservative is a loser, and the winners are the spendthrifts.

I'd like to say more, but I've got to go to the hardware store and buy a pitchfork and some torches while I can still afford them.

JimboOmega3• 15 years ago

The problem he refers to is a classic deflationary scenario. Everybody saves money (to pay off debts, or etc). Money becomes scarcer, since nobody can borrow it (banks are deleveraging as well), and people aren't spending it.

The classic solution is to expand the money supply to get things moving again, which is the point of QE, etc. Creating inflation lessens the value of debt in real terms, too.

Not at all a new thought, in this situation or others. See wiki on debt deflation: http://en.wikipedia.org/wiki/Debt_deflation

jpdoctor3• 15 years ago

> The classic solution is to expand the money supply to get things moving again, which is the point of QE, etc.

Let's see, we've been through 2 rounds of QE. Maybe number 3 will be the charm.

What was that saying about trying the same thing and expecting a different outcome?

kruhft• 15 years ago

Insanity: doing the same thing over and over again and expecting different results. -- Albert Einstein

JimboOmega3• 15 years ago

The implication is that QE has not been sufficient, if we were in a deflationary scenario. But we do seem to have avoided deflation for the most part.

There is a lot more to the economy that is out of the control of monetary policy. Companies and large organizations (Apple is a prime offender, hoarding $70B+) are sitting on a lot of cash. They are unwilling to invest it, spend it, or even to return it as dividends. Instead, they buy large amounts of treasury bonds* (which has pushed yields on them to unheard of lows).

The obvious solution to that, then, would be to use fiscal policy - to spend the money that is being dumped on the treasury at rates well below inflation. The treasury is paying negative interest, in real terms (and for a very brief period, in nominal terms!). If private entities won't spend it, the government should - provided they can step back, and reduce the debt when things get going well again.

Strangely enough, more deficit spending might be the solution to a problem caused by too much deficit spending to begin with.

One other caveat; there can be still more causes to unemployment that are not monetary in nature. Labor markets are notoriously inflexible.

*: I don't mean to imply that Apple literally holds treasury bonds (though they might). Apple might have its money in a bank, and the bank might deposit the money at the fed, or buy treasuries itself, but the net effect is the same; the money sits somewhere, unused, where the government could use it. In fact one suggested solution was to stop paying interest on federal reserve deposits, or even charge a negative interest rate on deposits above a certain threshold.

suking• 15 years ago

Who gets this $ that's being printed non stop? Banks - who in turn don't lend shit? Why not give tax incentives for hiring people or something and help out small businesses.

redwood• 15 years ago

Problem is QE has gone to ensure banks don't go bankrupt but has not increased lending.

jpdoctor3• 15 years ago

Yes, and compare the Swedish solution: Let the banks go bankrupt, then QE. Iceland also did this recently.

It ripped the band-aid off quickly. More pain short term but their economies emerged quickly from the downturn. Too bad our gov't is so captured by the financial interests that such a solution is deemed unviable.

onedognight• 15 years ago

> The problem he refers to is a classic deflationary scenario. Everybody saves money (to pay off debts, or etc). Money becomes scarcer, since nobody can borrow it (banks are deleveraging as well), and people aren't spending it.

This is the propaganda reasoning and you bought it hook line and sinker. If everyone is saving then the banks have plenty of money to lend! That's what people do with their money, they put it in banks. The reason many banks aren't lending is that they made many bad loans and don't want to admit that they can't pay the savers back and they are now afraid to make new ones. Still, there is plenty of money to borrow from other banks. The Fed is giving money away at amazingly low interest rates.

Cushman2• 15 years ago

And whose fault is that, Mr. Hedge Fund Manager?

sliverstorm• 15 years ago

If being a hedge-fund manager means you are responsible for the market crash, does being a computer programmer mean you are responsible for DDoS attacks by Anonymous?

Cushman2• 15 years ago

Programmers in general, no; programmers who spend some of their time working on DDoS tools, so if Anonymous wins they'll have power? Come on.

The idea of a hedge fund, by which I'm meaning an investment portfolio which consistently outperforms the market, is intrinsically insane. It's like a VC trying to diversify their portfolio so that even if Silicon Valley as a whole tumbles into the sea, they'll still make money.

I don't have any philosophical problem with investment, and I think SV venture capital is a great model: You buy a piece of something because you think it will do well. If it doesn't do well, you lose your money. That's what encourages you to only give money to things you think are good ideas.

The entire discipline of investment banking stems from "managing risk"-- the ludicrous idea of "Man, losing money sometimes sucks. Maybe there's a way to stop that from happening." My contention is that the present economic collapse is evidence that, in fact, there is not.

If the "market" -- the whole value of human endeavor -- sucks, your life will suck. This is a consequence of the fact that you are a human. Trying to walk away from that with more of the value than anyone else is insane. And sure, with the right financial tricks you can pull it off, for a while; many people have died rich from doing it. But it's gonna come to a head.

latch• 15 years ago

"I believe that the biggest problem that humanity faces is an ego sensitivity to finding out whether one is right or wrong and identifying what one’s strengths and weaknesses are."

If you want to get better at anything, the first thing you do is acknowledge that you can do better. Having recently left the investment banking world, you might be surprised how many average-at-best developers think they have no room for improvement.

EGO IS DEATH.

billybob2• 15 years ago

TL;DR:

"Imagine you earned $100,000 a year and you didn`t have any debt. You can go to a bank and borrow $10,000 a year. You can spend, therefore, $110 a year. When you spend $110,000 a year, somebody else earns $110,000 and they can go to a bank and there`s a self-reinforcing process in which your debt rises in relationship to your income.

And that goes on for a long time and that goes on for 50 or 75 years through history. We`ve had 50, 75-year cycles and then you reach a point where you can`t anymore get more debt and the process starts to change."

billybob2• 15 years ago

I think this is a very concise way of putting it. This is essentially why I don't think further stimulus or monetary policy tweaking is going to help us.

We have gotten drunk on overspending. Drinking more won't remove the hangover. We just have to sober up and wait.

khafra• 15 years ago

Every time I hear the inebriation metaphor applied to monetary policy, it makes me want a drink.

bermanoid• 15 years ago

... and there's a self-reinforcing process in which your debt rises in relationship to your income.

I haven't had my coffee yet and the world is still looking fuzzy to me, so I'm probably just being dense.

But does this not make sense to anyone else? Why would my income to debt ratio change because I've spent my borrowed money somewhere?

I must be misunderstanding this argument, is he saying that as people spend more we all end up making more, and then we all end up borrowing more on what we've made? That would make sense (though in reality what happens is that most people's incomes stay level and the proceeds are funneled to investors - this is largely the reason that the top 5% fall into a more top-heavy Pareto distribution of wealth whereas everyone else is exponentially distributed, but I digress...), but that still shouldn't increase proportional debt, unless I'm missing a key part of this argument.

giardini4• 15 years ago

"But does this not make sense to anyone else? "

Most of what he says doesn't make sense to me. I think he's a blowhard protecting his job at a hedge fund and trying to drum up business, but what do I know? My prediction: his hedge fund will tank within 120 days.

Every time I've borrowed $10,000 I've paid it back with interest. Apparently in the circles he lives in, nobody pays loans off. That could be a problem.

There are bits of truth in there, e.g., "Europe`s reached its debt limits." , "you reach a point where you can`t anymore[sic] get more debt", "So we`re in a deleveraging". Well, blow me down! What insight! Where do I sign on to be a hedge-fund manager? This guy can be replaced by an 8-ball: http://web.ics.purdue.edu/~ssanty/cgi-bin/eightball.cgi

IMO most of it is horsepuckey PR. "We`ve had 50, 75-year cycles..." - WTF? Kondratiev waves? Hey, buddy, I've got an astrologer who can pick stocks!

rajpaul• 15 years ago

I think he's saying that when you borrow money, it stimulates the economy and increases people's incomes. That allows people to borrow even more money. Which stimulates the economy and increases people's incomes even more. It's a feedback loop and we saw it break in 2008.

An example is people "using their homes as ATMs" during the housing boom. Easy credit drove up the prices of homes, people used the increase in net wroth to take home equity loans, other general debts, or buy investment properties, which in turn drove up the price of homes even more.

digikata• 15 years ago

What is described here, I think is just a symptom of the inability of a primary focus on profits to generate true value, leading to an overly uneven wealth distribution, which in turn leads to an overall economic stallout.

anamax• 15 years ago

What about the person who earned $100k and loaned $10k, leaving them with $90k?

"Fractional reserve" doesn't help here because if I'm spending the borrowed money, it isn't being kept in the bank by either the lender or the borrower.

FD3SA• 15 years ago

"Ok. What`s depressing -- what`s depressing jobs is that the world supply and demand for labor has changed. In other words, there`s a lot more people working as China came on and India came on and they are competitive. There`s a world supply of labor has change -- has increased and technology has had an effect.

So we`re in an interesting era because I think almost and if you think of a person as -- in a machine, an economic machine as being tool, a part of that economic machine the demand for labor has changed in a very profound way. It`s an interesting question. We might enter into a period in which we don`t need people as tools. So what does that mean?"

So he is concerned about the breakdown of the Luddite fallacy. Interesting, considering he has everything to gain from promulgating the guarantee of infinite employment opportunities for average citizens. I believe this is a fair canary in the coal mine for the structural employment nightmare we shall face in the coming decades.

teyc• 15 years ago

I don't think he is correct. Debt can be sustained as long as there are marginal returns to be had. The real problem is that the marginal returns are no longer there because energy prices have been increasing at the same pace. This suggests that energy availability to be the limiting factor.

Once growth is throttled by expensive energy, the debt position of countries, companies and individuals start to look shaky. This is what is happening now. If companies are unable to increase their profitability, then there is less taxes to be collected, which means weaker governments, and a slower economy. This in turn affects an individual's ability to find and keep work, and service their debts.

Dalio, Biggest Hedge Fund Manager: "developed world has reached its debt limit"

Related Stories