Excellent unadvertised counsel (the ideal sort)
1 July 2009 by Christopher SuleskeI am still processing this read. It’s an interview with Ray Dalio, a well-respected Chief Investment Officer with an excellent track record. More importantly, he pulled out nearly 10% gains last year because he’s been on the watchful end of our economic situation. He appears to know what he’s talking about and his arguments make much sense. While I don’t want to think this truly the case – that we are in the midst of a depression / deflation, I find it hard to argue with his assertions.
The D-process is a disease of sorts that is going to run its course.
When I first started seeing the D-process and describing it, it was before it actually started to play out this way. But now you can ask yourself, OK, when was the last time bank stocks went down so much? When was the last time the balance sheet of the Federal Reserve, or any central bank, exploded like it has? When was the last time interest rates went to zero, essentially, making monetary policy as we know it ineffective? When was the last time we had deflation?
The answers to those questions all point to times other than the U.S. post-World War II experience. This was the dynamic that occurred in Japan in the ’90s, that occurred in Latin America in the ’80s, and that occurred in the Great Depression in the ’30s.
Basically what happens is that after a period of time, economies go through a long-term debt cycle — a dynamic that is self-reinforcing, in which people finance their spending by borrowing and debts rise relative to incomes and, more accurately, debt-service payments rise relative to incomes. At cycle peaks, assets are bought on leverage at high-enough prices that the cash flows they produce aren’t adequate to service the debt. The incomes aren’t adequate to service the debt. Then begins the reversal process, and that becomes self-reinforcing, too. In the simplest sense, the country reaches the point when it needs a debt restructuring. General Motors is a metaphor for the United States.
He goes on to make some vague recommendations for investments over the next 2 years. Well worth your read, I believe.
What I wonder if he is taking into account is the ultra-heavy hand of government this time around. It simply isn’t as it used to be. At least in prior events, we had a largely free market capitalist paradigm in place. The economy would, at first and second glances, seem to be quite different today.