
Dalio, Biggest Hedge Fund Manager: "developed world has reached its debt limit" - rajpaul
http://nerdinvest.blogspot.com/2011/10/dalio-biggest-hedge-fund-manager.html
======
billybob
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."

~~~
bermanoid
_... 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.

~~~
giardini
"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!

~~~
Luc
He's talking about the debt of banks and nations.

"So when we deal with Goldman Sachs or when we deal with banks and when we
deal with Europe I think you can break the world into two parts, there`s the
debtor-developed world which has reached its debt limits and is going through
a deleveraging."

~~~
giardini
Banks and nations, like other entities, are usually required to pay their
debts or they go bankrupt (note the word itself,
<http://www.worldwidewords.org/weirdwords/ww-ban1.htm> ) . Of _course_ they're
leveraged.

The questions are "What does Dalio tell us that we don't already know?" "Of
what use are his explanations?" and most importantly, "Why is this man
appearing on Charlie Rose saying things we already know?"

~~~
spiantino
Just because the answer to the question is logical and unsurprising doesn't
mean it's not the answer to the question.

------
JimboOmega
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>

~~~
jpdoctor
> _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?

~~~
JimboOmega
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.

~~~
jerf
"The implication is that QE has not been sufficient, if we were in a
deflationary scenario."

What would it take to prove to you that QE was a straight-up bad idea? Because
you can _always_ say it wasn't "big enough", that's a null defense. Adopting
that as your first and best defense is cognitively dangerous, and sets off
alarm bells in my head.

~~~
JimboOmega
The goal of monetary policy is to manage inflation. Therefore, if there was
hyperinflation, that would be a clear sign it was failing. It's hard to pick
an exact number - but certainly inflation over 10% annualized would be a sign
that it was not going well.

The CPI is the benchmark of the effectiveness of QE. I prefer the one without
energy and food ("core"), myself, because the question I am concerned with is
"What effect is the size of the money supply having on prices?" (Instead of,
"how scarce has oil become?")

Bear in mind that high(er) inflation with very low nominal interest rates
means you can have a 0 or negative real interest rate - which rather handily
destroys debt, and encourages banks, companies, etc, to make riskier
investments (because the money pile they sit on is steadily losing value).

Is combined fiscal + monetary policy working well? Of course not; there's a
large output gap. The economy is not in good shape. I'm arguing that fiscal,
not monetary, policy is to blame, along with the reluctance of large entities
to deploy their money.

------
latch
"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.

------
dshaw002
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...](http://www.bwater.com/Uploads/FileManager/Principles/Bridgewater-
Associates-Ray-Dalio-Principles.pdf)

------
trebor
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_watson
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.

~~~
giardini
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.

~~~
mark_l_watson
I hear you, but I would still rather have a less expensive paid for house
right now than an expensive home that the government may or may not
artificially reduce the interest payments on.

~~~
giardini
"Reduce the _interest_ "? No, they're going to reduce the _principal_ on
underwater home loans!

~~~
mark_l_watson
Bummer, I didn't know that. That is just plain wrong.

~~~
trebor
From what I understand of it, the program is for folks who've gone upside down
in their mortgage because of inflation and falling real estate value—not
bad/underwater loans.

------
FD3SA
"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
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.

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

~~~
sliverstorm
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?

~~~
Cushman
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.

