Thoughts from Ray Dalio: What coronavirus means for the global economy
How bad is the current situation & how worried should we be? (link)
- A tsunami hit us. We have to think about the income impacts & balance sheets (who has what savings)
- There is the production of money & credit. US dollar money & credit + Euro money & credit
- The world lives on about 70% US dollars so the European banks are smaller
- The US is printing money (debt) for its people and the Europeans & other rich countries will get their version of that money. But we’re in a new world similar to 1930-1945. The rest of the world will have gaps that need to be filled.
- A lot of the world will not get that money so there will be a big gap between which entities get and those that don’t.
- There will be a big collaboration as to how we’ll deal with paying the debt bill.
- We are in a new world. Its most similar to the 1930-1945 period. This is a stress test. History shows there’s always a revolution at this time – sometimes peaceful but it’s a wealth shift that needs to take place.
There are four (4) things (a pattern) that drive our economy, lifestyle & wealth (link)
- Most powerful is productivity. It grows slowly 1-2-3%/year & is very stable (because knowledge is not volatile)
- The short term debt cycle – Recessions, expansions, booms, etc. & lasts ~8-10 years
- The long term det cycle – ~once every 50-75 years where we begin a new type of money and credit.
- That began in 1945 as a new “American” world order at the end of World War II with the Bretton Woods monetary system that wiped out the old money. 70% of money & credit in the economy is still running on US dollars.
- Politics – how we deal with each other.
- Internal politics – how we deal with the wealth gap, values gap & common vision. Do we have a common mission? Do we have an “American dream” to pursue together or will we fight over wealth and have a revolution? In 1933 Franklin D. Roosevelt produced The New Deal to change policies & shift taxes.
- External politics – between countries.
- When rising power challenges existing power, there is competition and risk of war. The defining moment will be if we cooperate or fight with each other.
- This is a stress test
- If you’re outside the ring of support of the US dollar, what do you do?
- If you’re within the ring of [US] support, how will the bill be divided? How do we reconsider who has what?
Are we headed into a global depression? (link)
- In 1929-1932
- There was a 10% fall in the economy.
- Double-digit unemployment rate.
- Interest rates hit 0.
- In 1933, they printed a lot of money & government came out with the same programs we’re having now
- That money caused [a market] expansion from that point
- How long for the stock market to exceed its previous highs? a long time.
- Yes. This is not a recession we’re headed into a global depression as a breakdown of money & credit.
Four levers to recovery after a depression. How should we balance these tools right now? (link)
- Cutting spending (aka austerity)
- Debt restructuring or forgiveness
- Redistribution of wealth through taxes potentially
- Printing of money (quantitative easing)
Likely to be a combination of printing money & redistribution over a couple years followed by a rebuilding. 500 years of real GDP shows a line where depressions aren’t visible over a long period of time. The greatest force is human inventiveness & adaptability if people can work well together.
- We’re just dealing with money and credit (it’s just accounting)
Thinking of this as a “depression” is stronger than what the market seems to believe (link)
- Markets are off 25% – 45%. Emerging markets are being hit harder. We’re seeing something like 20 trillion dollars of losses. If you don’t have money or credit, your business can fail.
- We’ll have a giant restructuring of debt (IOUs)
- Hospitals can go broke because of the cost of this epidemic (but we need them).
- We need to go through entity by entity to understand impacts, and then decide who will pay.
- The supply lines will change
- What will self-sufficiency mean in the future? Do we have enough of this & that?
- We will restructure our economy and financial system. We will not go back to the way it was.
Do you see systemic risks to the financial industry as greater than what happened in 2008? (link)
- This is bigger & more complex than 2008.
- It’s not just banks it’s all the small businesses.
- it’s a bigger crisis.
- We have less effective monetary police because interest rates have reached their limit.
- Central bank buying the normal central financial assets won’t work.
- The central bank has to buy the debt of the government. The government (or many governments) have to be effective in getting buying power & production to those in need around the world.
What kinds of industry, organizations, companies have the best prospects of thriving going forward? (link)
- There are two (2) types:
- The Stable “meat & potatoes” kind of un-leveraged companies – The “Campbell’s soup” equivalent companies that people will always use.
- The Innovators & entrepreneurs – with strong balance sheets will be great winners. New inventions, new creativity, new adaptations. “Like Marko as example”
The state of the Market doesn’t always correlate with what’s going on in the economy. The market and its players have changed so much (more algorithms & passive investing).
How do you think financial robo-advisors & algorithms will impact recovery of the market over the next few years? (link)
- To understand the basic fundamentals of money, credit, crisis, who has what income, expenses, balance sheet, & how do we deal with money & credit; we have to go back to 1930s to understand fundamentals of what a bank & associated process is. They’ve existed all through time.
- Technology changes, evolves & has radically enhanced capacity over the human mind.
- Are algorithmic traders ok?
- Are they based on / do they have understanding and are they successfully betting on a cause-and-effect relationship? That’s the only way to make money.
- Machine learning won’t work on the market. There are two (2) ways to build an algorithm & 1 requires understanding of the cause-and-effect relationship.
- Specify the instruction to the computer and have it follow that.
- The computer generates the algorithm from reviewing a lot of data & asking what would the computer have done? The problem with this is you can’t always get enough data in your sample size (we don’t have the data from the 1930’s)
How passive investors approach this market? (link)
- Investors must understand they won’t be able to play the zero-sum game well (how to move in and out of things).
- It’s more difficult than a gold medal in the Olympics. You don’t think about competing in the Olympics but you think you can compete in the market.
- The Individual investor needs to know how to diversify well in a balanced way. (asset classes, countries, currencies).
- The greatest mistake of all investors is to think “what has done well lately is a better investment” instead of “it’s expensive” & “what has done worse lately is a worse investment” & get me out of it instead of thinking “it’s cheap now”.
- Understand that the total amount of wealth in the world doesn’t change, when one thing goes up another thing goes down.
- Cash is almost always the worst investment because it taxes you 2% each year.
- Think unconventionally (link). Do you have a little bit of gold do you have a little bit of something else (#bitcoin), in case this monetary system breaks down?
- Investors should diversify well, be humble, don’t time the market and be conscious of the danger of cash.
What do you think about the retreat from globalization? (link)
- We certainly will retreat from globalization & it will certainly make things very hard.
- Who will write cheques to countries that will be outside of their domain? (there are large numbers of these)
- A lot of those people won’t be helped. How will they behave with each other?
- Are one countries vulnerabilities another country’s opportunities?
- Over the last 500 years, there’s been 16 countries with rivalry of one empire challenging another. 12 of those cases were wars because we don’t have a global legal system. Power is the currency.
- When you dispute “who gets what?”, it becomes a complicated question.
- A lot of those people won’t be helped. How will they behave with each other?
- Globalization is dying because we’re in an interconnected, fragmented world. Can I depend on someone else to give me what I need and to not take advantage of me? Not anymore, within countries and between countries.
Productivity is important. If we’re all focused on productivity together, we’ll do better. (link)
- Yes was true and is very true today. At the same time, history teaches the mechanics, the issues & challenges of this.
- Our “de-globalization” separation began before the coronavirus isolation of the US vs the rest of the world. It happened for reasons.
- Everything is dependent on the behavior of those that have hands on the levers of power.
- The Chinese are helping in many ways with this crisis. This is politically challenging to say because our world is so fragmented, it’s almost dangerous to say thank you.
The issue of capitalism. Does capitalism need to be reformed? (link)
- Do we want the outcomes that the system is producing? What is our American dream?
- In 1945 there was an environment of equal opportunity and a harmony doing the “American dream” together.
- We have children in schools that need to share resources. The idea that the for profit system can accomplish everything is not right because resource allocation goes to those that have resources.
- Throughout all history, any system works for those that tend to control the system.
- In our system, those in the top 40% spend 5x as much money on their children’s education than those in the bottom 60%. So it becomes self-perpetuating.
- Ray believes in capitalism, and that it’s possible to increase the size of the pie and divide it well. But there comes a time where we need restructuring reforms that must create productivity (vs. just giving money away).
- There’s been a tremendous transfer of wealth through the [quantitative easing] production of borrowed money. Over the next couple years will be talks of how we will do the restructuring, hopefully in a civil way.
- Education is a great investment but States think of it as a budget item and penny pinch on education.
- Ray is 60%/40% pessimistic that we’ll be good enough with each other to pass this stress test.
Do you think the current crisis is showing that low pay or unskilled workers are what hold countries together even more so than banks and hedge funds? (link)
- Can we build an economy that raises their interests higher?
- The heroes are those kinds of people but it takes everyone & the efficient allocation of resources.
- Philanthropists & those that control a lot of resources can help, but they’re not nearly doing enough.
- There is a level of basics (education, healthcare, etc.) that you cannot fall below. Otherwise, there is no opportunity and the cost of crime & incarceration goes from $40k – $120k/year. If you get them into a job, you can save a lot of money.
- Everyone is on one side or the other side. The idea of being able to see both sides throughout history is perceived as being weak or a threat. China as example has given countless respirators & masks, but thanking them is politically challenging and risks being called a China lover or “on the other side”.
- Ray wants to promote open thoughtful disagreement to try to get at the right answer and have collectiveness. Are people ready to fight for this and risk looking weak?
This could be a multi-year recession depression and more than ever we need to be in this together.
In conclusion (link)
- This is a defining moment. We will get through it fine. We will be restructured in important ways.
- This is a crisis that the whole world is going through together.
Mentions in the talk: