Ray Dalio, a brilliant hedge fund manager, is a serious thinker who I deeply respect. Unlike PR machines such as Warren Buffett who try to appeal to the masses, Dalio actually voices his own thoughts and shows the public how the mind of a deep thinker really works. Recently on CNBC, Dalio explained his views on the world.
“Europe’s Going to Be In Big Trouble”
Southern Europe will be restructuring its debt towards more acceptable debt-to-income ratios; in short, a deleveraging. Deleveragings can be painful if not managed properly. The way to offset the negative real growth that comes from deleveraging is to print money: monetary policy. In a sense, the deleveraging is a depression, which the Europeans will want to offset by printing money, because inflation is positive for growth. The countries must stimulate enough via monetary policy so that growth exceeds interest rates. This deleveraging will last anywhere between 10 to 15 years.
Unlike what many believe, the Euro is not about to collapse anytime soon. It’ll stay together, because at the moment it’s controlled by the votes of the member nations, of which the PIGS control a big part.
“The U.S. Situation Is Tricky, But Manageable”
In order to properly recover, we need a right mix of monetary and fiscal policy. A wrong mix will lead to too much monetary policy, which doesn’t actually put money into the hands of consumers. The biggest worry here is that the politicians won’t get the mix right, although this risk doesn’t exceed 50%.
This is a really tricky situation, because too much stimulus from monetary and fiscal policy will lead to inflation, which will further wound the economy, but too little stimulus leads to a depression.
“China Needs Strong Growth”
The entire Chinese economic machine is geared towards high growth – anything less than 6% a year leads to financial problems, such as banking, lending, etc.
On a side note, the fact that China believes 6% growth per year is a “recession” while the U.S. is happy with 2% growth shows the difference in competitiveness.
“Own Some Gold”
Gold is an alternative to cash. The central banks are printing money to ease their debt pressures, which are still ballooning in countries such as the U.S. Gold is a nice alternative to cash, although it isn’t exactly a long term “investment”. The nice thing about gold is that, unlike cash, it can’t be produced off the printing machines.
Deep Thoughts On Currencies
By cutting the value of currencies, countries are able to quickly increase the competitiveness of their goods/services. However, this is problematic in a “fallacy of composition” scenario, in which all the countries devalue one after another, hoping to make their own exports more competitive.
On a side note, China is “manipulating” their currency. That’s just a word American PR uses to attack China (hell, American politicians manipulate the stock market themselves). Because capital is flowing out, the Chinese government is trying to prevent the Yuan from going down, whereas before they were trying to prevent it from going up.
The U.S. dollar, in the long term, is on the rise. Everyone needs dollars: those who lent money to the U.S. government. At the moment, the U.S. dollar is the least worst of the big three: the Euro, the dollar, and the Yen. So obviously people are going to want dollars.
“How To Invest”
So many people get caught in the “this never happened before! What am I going to do!” Truth is, a lot of things didn’t happen before. The Great Depression didn’t happen before, the Crash of ’87 didn’t happen before. The proper way of investing is to create a template. “If this happens, I’ll do this this this. If that happens, I’ll do that that that” etc.