Notes from Ray Dalio on Bloomberg TV: Bridgewater’s Ray Dalio on Economy, Investing, Success

• Productivity is the relationship between earnings & spending
• Short term debt cycle: spend more than earn (payback = spend less)

Monetary Policy Options

• Policy 1: High debt, low interest rates = no more monetary policy
• Policy 2: quantitative easing: assets rise in price, lowering expected returns
• Proposed Policy 3: Put money directly in the hands of spenders (Execution: fiscal or monetary (fiscal deficits (central bank lending)), helicopter money)

Current environment: Pushing on a String (re: Monetary Policy); When monetary policy cannot entice consumers into spending more money or investing in an economy, even if monetary policy is loosened to to put more money into peoples’ hands.

Macro

• Japan: high debt, low interest, massive quantitative easing; inflation is not working
• Europe: interest rates 0, slightly negative; purchases of assets = currency movements
• USA: close to 0 interest rates; spreads are low (2% bond yield, 4% expected return on equity)

Expected Returns

• Cash: 0%
• Bond: 2%
• Equities: 4%

China Options

• Scenario is similar to the recent scenarios in US, then Europe, now China (debt rising faster than income)
• Will need to restructure debt, restructure economy (manufacturing – services – digital), balance of payments / flows
• Mentioned China is like one person having a “heart attack”; will become weakened in the long term but likely unaffected long term

Other China Problems

• Balance of payments: money is leaving country
• Bond market was just opened to foreign investment

Investor Environment

• Low returns
• 0 interest rates
• Slow growth
• Volatile environment (including currency volatility)
• Temporality

o   2008 = debt crisis

o   2016 = relative stagnation, low returns

Volatility: increases risk premias and liquidity

Negative feedback loop: sotcks go down, wealth effect decreases

Rise in value of dollar and decline in stock = tightening monetary policy

Profit margin have expanded, thanks to four key trends:

• Strong commodities prices
• Emerging market cost arbitrage (companies making things more cheaply in emerging markets)
• Demand growth from emerging markets
• Improved corporate efficiency driven by the use of new technology
• (+) the market has rewarded companies that have undertaken mergers and share buybacks, as opposed to companies that have invested internally, further bolstering margins

In other words, profit margins should naturally mean-revert and oscillate. The existence of fat margins should encourage new competitors and pricing cycles that cause those margins to erode; conversely, at the bottom of the cycle, low margins should lead to weaker players exiting the business and giving stronger companies more breathing space. If that cycle doesn’t continue, something strange is taking place.

Link to Article

I recently read a few investor letters from Q2. Notes are below. General takeaways are as follows:

Themes:

• Consider the unequal weighting of indexes (see: Murray Stahl)
• Enthusiasm with housing sector and REIT / MLP spinoffs due to low tax rate environment; see: Sears (Seritage Growth Properties, product of REIT spinoff)
• REITs and infrastructure investments (warehousing, logistics, containers) will play significant roles in China / Brazil. Oversold due to recessionary environment; could pose an investing opportunity for key players in space (Global Logistics Properties, China; Santos Brazil)
• India is a sleepy, potentially huge emerging markets investment opportunity (primarily with respect to automotive industry, fewer than 2% of citizens own cars); see: Suzuki
• Increase international exposure (US overweight); many opportunities in Europe, primarily in automotive and manufacturing (Rolls Royce)