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Ray Dalio is widely considered one of the greatest living investors. He is the founder of Bridgewater Associates, as well as a master educator through How the Economic Machine Works and his latest book Principles For Navigating Big Debt Crises. What follows are my notes of Dalio’s article The Three Big Issues and the 1930s Analogue.

key forces now

  1. End of the Long-Term Debt Cycle
  2. Large Wealth Gap + Polarized Politics
  3. Rising Power Challenging Existing World Power

1 + 2 + 3 = Bond Blow-Off, Gold Prices⬆ , 1930s Analogue.

  • Long-Term Debt Cycle end near based on:
    • Central Banks losing effectiveness.
    • World’s three major reserve currencies
    • Debt/non-debg obligations greater than income to pay for them (healthcare, pensions)
  • China is rising to challenge the U.S.
  • Bond blow-off will squeeze cash rates the Fed offers banks

dalio’s template

4 Influences on Econ & Markets

  1. Productivity
  2. Short-term debt/business cycle
  3. Long-term debt cycle
  4. Politics (domestic & global)

3 Equilibriums

  1. Debt growth stays within income growth to pay off the debt
  2. The economy is not too hot (high inflation) or too cold (pain and political upheaval)
  3. Cash returns are less than bond returns, which are less than stock returns

2 Government Levers

  1. Monetary policy (direct, instant): interest rate changes, FOMC
  2. Fiscal Policy (lagging, inefficient): taxes, subsidies

what’s happening now

  • See “Key Forces” above
  • Monetary policy: Lowering interest rates doesn’t work at these low rates to stimulate growth
  • Monetary policy: Printing money any buying assets doesn’t work because it’s not producing enough credit.
  • Monetary policy: Large budget deficits and debt monetization is harder to do with dysfunctional, polarized politics (think bank bailouts)
  • “Pushing on a string” = end of central banks influence
  • The purchases of financial assets by central banks helps investors more than everyone else (widens wealth gap)
  • Central banks are turning to long-term interest rate and yield curve controls, just like the 1930s and 1940s.
  • Interest Rate Story
    • 1980-82: Paul Volker raised interest rates extremely high. Also coincided with a blow-off in gold prices.
    • Bull move in gold began in 1971 with the end of Bretton Woods and Nixon taking the U.S. off the gold standard, making USD free floating world reserve currency.
    • Since the bond interest rate peak in 1982, we’re now seeing a mirror-like reversal with a deflationary blow off.
    • Productivity ⬆ ➡  deflation ➡ loose monetary policy ➡ central banks lower interest rates ➡ blow off top in bonds.

For further reading, see 1935-1945 period in Principles For Navigating Big Debt Crises.