Ray Dalio on credit and gold

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By Chris Becker

Apart from the battalions of rent-seekers and copycats within the managed fund and hedge fund industry, there are a few “heroes” we follow closely here at MacroBusiness. Hugh Hendry, just for his acerbic wit alone is one, but unfortunately he is on a self-imposed media blackout (but check out his “greatest hits” here).

Another is Ray Dalio of Bridgewater, the world’s largest hedge fund (over $100 billion funds under management). I first became aware of him not due to his investment management style but his now (in?)famous “Principles” – a long and unconventional treatise on corporate culture and how to manage a business, which definitely goes against the grain of modern corporate management style (you can download it and other fantastic documents for free at the Bridgewater website here).

What sets apart Dalio and other managers (and so-called “doomsayer” economists) is their abandonment of the failed economic models that brought about the economic and financial crises around the world, particularly the ignorance of private debt and credit stock/flows and the concepts of credit acceleration and its impact on aggregrate demand. You know, the economy…

Credit Writedowns has linked an hour long interview where Ray Dalio spoke at the Council on Foreign Relations with CNBC anchor Maria Bartiromo; here are the money quotes on Europe:

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It’s going to be very similar to most parts of southern European countries as a classic lost decade very similar to the Latin American debt crisis for Latin America. Means I think we’re at the early stage of a major deleveraging in those countries, so that will produce a depression kind of environment.

What I mean by that, we will have to go back to spending. Spending is a certain amount of money and credit. There’s a limit to how much money. So now we take the credit. Credit comes from private sector credit. Private sector credit typically comes through banks.

There will be a bank deleveraging. There is going to be bank deleveraging. We are in the early stages of a bank deleveraging. There will be some recapitalization of the banks, but we are coming into an environment that there will be lots of controls and there will be a deleveraging in the private sector through the banks.

The Troika will manage those deleveragings, so they will take over the controls of the banking systems. We are in the early stages of that. And so the conditions will be very bad for those countries. The marginal amount that they will be bad it will mingle in with monetary policy, a mix of the deleveraging, debt restructuring and certain amount of monetization.

I think there will be that kind of mix. The question becomes really a social question, ‘How the tolerance for those types of conditions is then dealt with?’ If it’s dealt with well socially that becomes a test of the character of the people. We have a capacity to get through these things if we have the capacity to not have such conflict, that itself becomes a terrible things.

I think we are going to have a bad set of economic conditions….

And his interesting take on gold as an alternative currency, but one with cash like properties (something I’ve noted in my own work about gold as a “Type Zero” asset like cash, i.e a security asset like liquid cash and insurance):

Gold is a currency. Throughout history, I won’t tell you in length, money was like a check in a checkbook and what you would do was get your gold and gold was like a medium. So gold is one of the currencies– We have dollars, we have euros, we have yen and we have gold.

Now it doesn’t have the capacity. The capacity of moving money into gold in a large number is a extremely limited. So the players in this world that I have contact with that move that money really don’t view gold as an effective alternative, but it could be a barometer and it is an alternative for smaller amounts of money.

There’s no sensible reason not to have some. If you’re going to own a currency, it’s not sensible not to own gold. Now it depends on the amount of gold. But if you don’t own, I don’t know 10%, if you don’t have that and that depends on the world, then there’s no sensible reason other than you don’t know history and you don’t know the economics of it.

…view it in terms as an alternative form of cash and also view it as a hedge against what other parts of your portfolio are. Because as traditional financial assets, and so and in that context as a diversifier, as a source of that, there should be a piece of that in gold is all I’m saying.

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Here’s the full interview:

Chris Becker is an investment strategist at Macro Investor, Australia’s leading independent investment newsletter covering stocks, trades, property and fixed interest. A free 21-day trial is available at the site.

You can follow Chris on Twitter.

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