Billionaire hedge fund operator Ray Dalio, founder for Bridgewater Associates LP, says the global financial crisis was easy to anticipate because the numbers showed it was inevitable.
He further says that mathematically and logically there are no painless, easy solutions. Instead, there are only three painful options to resolve the excessive debt burdens in the developed world.
- Japanese style, multi-decade slow deflation
- Debt write-downs and short-term economic crash
- Weekly firefighting to put out each mini-crisis
Video: Ray Dalio Interviewed by Erik Schatzker at the Bloomberg Markets 50 Summit in New York
Best Quotes from Ray Dalio Interview
Principle means a description and understanding of what realty is and how reality works. Reality works in a certain way. There is an economic machine… can we describe how the machines works? We should be able to… given that reality works that way, what is my principle for dealing with reality? A principle means how do I deal with realty to get the outcomes that you want.
If you have 15 or more good, uncorrelated returns streams… you will reduce your risk by 80%.
When approaching investing, there is a certain notion — what do I want? I need to have a certain structure…
If you get 15 good — don’t have to be great — uncorrelated return streams, you’ll improve your return to risk by a factor of 5.
The relationship between bonds and stocks could either be positive or negative correlated if you know what determines the pricing of that asset class. If you come into a time when economic uncertainty and volatility is greater, then they’ll be negatively correlated. If you are in a time where inflation uncertainty and volatility is greater, they’ll be positively correlated. Both of those things are logical if you know how they behave.
Every price of something is a function of a transaction that takes place. That transaction is an exchange between buyers and sellers. The price will be a function of the total amount of buyers divided by the quantity of things exchanged.
There is nothing surprising about the European debt crisis because the payments were due. We could take the payment streams — you know the maturities are going to happen here and there is this quantity.
Banks, when they buy bonds, have limitations. So because they bought a certain amount of bonds over a period of time when they could expand their balance sheet does not mean they can continue to do that. So therefore you could not have that same level of buying. Match that number up to the amount of selling that needs to happen. Is there a gap? It was apparent, should be apparent, if you do the numbers that there would be a gap. How big is the gap? Who’s going to fill the gap?
[To solve the financial crisis...] You can transfer wealth from the rich to the poor, or you can print a certain amount of money, or you can write down the debt.
The history of democracies… when we have economic crisis, there is greater polarity. It becomes less functional, this is very normal. Hitler came to power in 1933 because there was disorder in a democratic system in a depression.
Let’s have a quality conversation on how the economic machine works, how the political machine works… then you can know how to deal with it.
You can’t have an [economic party] again, that’s not how the machine works.
You can continue to do that [borrow money and spend it] for a number of years. If you do that your debt will rise relative to your income. And then you will get to a point where your [income] cannot service the debt. You can alleviate that by lowering interest rates.. then you get to a point where you can’t lower interest rates so you print money and so on.
There is no such thing as velocity of money. You can make credit out of thin air. Credit is a promise to deliver money. It will create GDP.
Just do the numbers. How much of that is going to be money creation or how much restructuring — let’s look at it, make sure the numbers are right. That is going to be a better path than the path that we are on which is like every day is a big surprise.
Interviewer: Why are you so pessimistic on peripheral Europe?
There are two basic paths here. Will that be done well or will that be done poorly? If it is done well, that means peripheral Europe’s party is over and so they are going to have to go through a managed deleveraging very much like Latin America in the 1980’s… or you could have something WORSE. Is it orderly or worse?
The situation is better (in America) because we can print money. That’s a handy thing to have! (audience laughter)
There are debtor developed countries that have reached the end of their long-term debt cycle and have to manage this problem. There are emerging creditor countries, enter China, which are in the opposite position.
Then the central bank will make purchases of long-term Treasuries. That doesn’t mean inflation because you are dealing with a deflationary environment. It is a monetization of debt. Lo and behold we are monetizing debt.
We have to work our way toward equilibrium, meaning that the price at which we are exchanging goods and services at is sensible, that we are going to be competitive, that you have to be productive, you have to earn it.
I constantly know that I don’t know. The main reason I write the daily observations is because I want to know where I am wrong.
If I am doing well, it’s not because of the one, or two things that I picked great. You won’t do well over a long period of time doing that because you’re playing Russian Roulette — the day is going to come when you are going to be wrong. If you do it in a way that you really do have quality diversification and uncorrelated bets and whole bunch of things where you have an edge on, then you playing the role of the casino rather than the gambler in the casino — that’s how you are going to make money.
We expect 15% a year and not to lose money. My good year is because a number of bets have done well.