Thursday, August 24, 2017

Ray Dalio on the Dangerous Divide?

Jeff Cox of CNBC reports, Ray Dalio: US most divided socially and economically since 1937:
Americans are divided socially and economically in ways that have not been seen since the worst days of the Great Depression and as the world was heading into another global conflict, hedge fund king Ray Dalio said Monday.

In an essay on LinkedIn, the head of Bridgewater Associates compared the current U.S. climate to 1937, as Adolf Hitler rallied Germans ahead of World War II and the U.S. plunged further into the economic abyss that had begun in 1929.

"It seems to me that we are now economically and socially divided and burdened in ways that are broadly analogous to 1937," Dalio wrote. "During such times conflicts [both internal and external] increase, populism emerges, democracies are threatened and wars can occur. I can't say how bad this time around will get. I'm watching how conflict is being handled as a guide, and I'm not encouraged."

The missive comes as U.S. markets appear to have hit a wall, political conflict in Washington has escalated, and thousands are protesting in the streets over historic monuments.

Dalio's view on how it all turns out is not optimistic.

"[D]emocracies are threatened when the principles that divide people are more strongly held than those that bind them and when divided people are more inclined to fight than work to resolve their differences," he said. "Conflicts have now intensified to the point that fighting to the death is probably more likely than reconciliation."

Wall Street had been hoping that President Donald Trump's election would bring with it a new business-friendly era in Washington. Dalio was among those encouraged by the new administration's potential to impact growth, but has since soured on the president.

GDP has risen 1.9 percent this year and is on track to jump 3.8 percent in the third quarter, according to the Atlanta Fed. In addition, the 4.3 percent unemployment rate is the lowest in more than 16 years, and the stock market had hit a series of new records before edging lower recently.

Dalio, though, sees those benefits as skewed, with some doing "extraordinarily well and others are doing terribly, with gaps in wealth and income being the greatest since the 1930s."

He pointed to Gallup polling showing Trump's favorability among Republicans at 79 percent and just 7 percent among Democrats, while 40 percent back the president's impeachment, with sentiment again running along party lines.

"In other words, the majority of Americans appear to be strongly and intransigently in disagreement about our leadership and the direction of our country," Dalio wrote. "They appear more inclined to fight for what they believe than to try to figure out how to get beyond their disagreements to work productively based on shared principles."

Amid the conflicts, Dalio said his firm is "tactically reducing our risk" to the current problems "not being handled well." In a separate LinkedIn post recently, Dalio encouraged investors to buy gold amid global conflict.
Lucinda Shen of Fortune also reports, Ray Dalio Warns Markets: ‘Death Probably More Likely Than Reconciliation’:
President Donald Trump has drawn a rosy picture of the United States economy in recent months, but investor and hedge funder Ray Dalio isn't buying it.

On Monday, Dalio wrote in a LinkedIn post that recent economic figures mask deep divisions in wealth and political leaning. This threatens the balance of the U.S. economy, he added, and it doesn't look like those divides are going away—at least for now. Dalio is the founder of Bridgewater Associates, one of the world's largest hedge funds.

"Conflicts have now intensified to the point that fighting to the death is probably more likely than reconciliation," Dalio wrote. He added how the country manages conflict "will have a greater effect on the economy, markets and our overall well-being than classic monetary and fiscal policies."

As a result, Dalio has positioned his own portfolio in preparation of worsening conflicts, he wrote.

The note comes a week after Trump said that "both sides" were responsible for the violence in Charlottesville, Va. In that incident, a car plowed into counter-protestors at a white supremacist rally, killing one and injuring several others. Several CEOs condemned Trump for failing to hold the "alt-right" responsible in the incident.

That same week, turmoil in the White House resulted in advisor Steve Bannon's departure. And before that, investors were rattled Trump's back-and-forth with North Korea over its nuclear missile testing.

Dalio isn't the only one urging caution when it comes to Washington: The S&P 500 Index has edged down about 1% since the start of August, while gold, a so-called safe haven asset, has risen nearly 1%.
Ray Dalio has been very active on LinkedIn this month, first warning that risks are rising while low risks are discounted and this week warning the principles that divide us might be greater than those that bind us together:
I believe that a) most realities happen over and over again in slightly different forms, b) good principles are effective ways of dealing with one's realities, and c) politics will probably play a greater role in affecting markets than we have experienced any time before in our lifetimes but in a manner that is broadly similar to 1937.

I'm essentially an economic mechanic who focuses on how reality works by studying the cause:effect relations and how they played out in history to help me bet on what's likely to occur. For reasons previously explained in "Populism..." it seems to me that we are now economically and socially divided and burdened in ways that are broadly analogous to 1937. During such times conflicts (both internal and external) increase, populism emerges, democracies are threatened and wars can occur. I can't say how bad this time around will get. I'm watching how conflict is being handled as a guide, and I'm not encouraged.

History has shown that democracies are healthy when the principles that bind people are stronger than those that divide them, when the rule of law governs disputes, and when compromises are made for the good of the whole—and that democracies are threatened when the principles that divide people are more strongly held than those that bind them and when divided people are more inclined to fight than work to resolve their differences. Conflicts have now intensified to the point that fighting to the death is probably more likely than reconciliation.

Average numbers hide the depths of the divisions. For example, by looking at average figures, one might conclude that the United States economy is doing just fine, yet when one looks at the numbers that comprise those averages, it's clear that some are doing extraordinarily well and others are doing terribly, with gaps in wealth and income being the greatest since the 1930s.

Largely as a function of these economic differences and differences in the principles that people believe most deeply in, we are seeing large and increasingly firm political differences, which are apparent only by looking below the averages. For example, Donald Trump's approval rating of 35% is a result of 79% support among Republicans and 7% among Democrats (Gallup). Of those who approve of President Donald Trump, 61% say they can't think of anything Trump could do that would make them disapprove of his job as President, and 57% who disapprove of Trump say they are never going to change their minds on the President's job performance (Monmouth). Similarly 40% of those polled (PRRI) would favor Donald Trump’s impeachment, which consists of 72% of Democrats and 7% of Republicans, and most of them won't change their minds.

In other words, the majority of Americans appear to be strongly and intransigently in disagreement about our leadership and the direction of our country. They appear more inclined to fight for what they believe than to try to figure out how to get beyond their disagreements to work productively based on shared principles.

So, where does that leave us?

While I see no important economic risks on the horizon, I am concerned about growing internal and external conflict leading to impaired government efficiency (e.g. inabilities to pass legislation and set policies) and other conflicts.

I of course hope that the principles that bind us together are stronger than the ones that divide us. I believe that this is a time when it is especially important for us a) to be explicit about what our principles are in order to be clear about what we agree and disagree on, b) to practice the art of thoughtful disagreement, and c) to respect our ways of getting past our disagreements so we can start rowing in the same direction. I believe that how well this is done will have a greater effect on the economy, markets and our overall well-being than classic monetary and fiscal policies, so I continue to closely watch how conflict is handled while tactically reducing our risk to it not being handled well.
So, is Ray Dalio right? Are Americans divided socially and economically in ways that have not been seen since the worst days of the Great Depression?

What do you think, Captain Obvious?


One only has to turn on American television and flick back and forth from CNN to Fox News to see just how divided the country really is. And I hear outrageous comments on both channels, stuff that makes me cringe (they are both so blatantly biased, it's pathetic news coverage).

In fact, last night on CNN during Don Lemon's show (completely biased against Trump), some political commentator said: "Trump might be suffering from dementia." Really? I felt like asking her: "What are your qualifications to make such medical diagnoses based on Trump's speeches?".

Don't get me wrong, Trump is clearly unhinged at times and suffers from severe narcissistic personality disorder, and he manages to piss people off every other day with his tweets and ridiculous comments ("both sides are to blame"...umm, NO!), but to claim he has dementia on a live CNN show is beyond preposterous.

Now, I get it, a lot of Americans hate Trump and everything he represents. I can also tell you that a lot of Americans absolutely loathe Hillary Clinton and what she represents, which is why she lost the elections.

Don't talk to me about the electoral system and popular vote, the bottom line is she lost the elections and it was because a lot of Americans are sick and tired of establishment politics.

The problem is Trump isn't going to heal social divisions and he will exacerbate rising inequality with his tax cuts which will overwhelmingly favor the uber-wealthy.

In my comments on why Alan Greenspan is wrong on bonds and why so many people are baffled my the inflation deflation mystery, I outlined six structural factors that lead me to believe we are headed for a prolonged period of debt deflation:
  1. The global jobs crisis: High structural unemployment, especially youth unemployment, and less and less good paying jobs with benefits.
  2. Demographic time bomb: A rapidly aging population means a lot more older people with little savings spending less.
  3. The global pension crisis: As more and more people retire in poverty, they will spend less to stimulate economic activity. Moreover, the shift out of defined-benefit plans to defined-contribution plans is exacerbating pension poverty and is deflationary. Read more about this in my comments on the $400 trillion pension time bomb and the pension storm cometh. Any way you slice it, the global pension crisis is deflationary and bond friendly.
  4. Excessive private and public debt: Rising government and consumer debt levels are constraining public finances and consumer spending.
  5. Rising inequality: Hedge fund gurus cannot appreciate this because they live in an alternate universe, but widespread and rising inequality is deflationary as it constrains aggregate demand. The pension crisis will exacerbate inequality and keep a lid on inflationary pressures for a very long time.
  6. Technological shifts: Think about Amazon, Uber, Priceline, AI, robotics, and other technological shifts that lower prices and destroy more jobs than they create.
These are the six structural factors I keep referring to when I warn investors to temper their growth forecasts and to prepare for global deflation.

One of them is rising inequality, which is something Ray Dalio alluded to. There are many views on how we can address rising inequality -- better education, higher corporate and personal income taxes for the top 1%, increase wealth and estate taxes, and more subsidies for the poor and working poor -- but these policies are not politically palatable to everyone.

Some people feel that cutting taxes for everyone will magically lift the poor and working poor out of poverty and bridge the great economic divide. Well, we tried that during the Reagan-Bush years and the rich got even richer (the great economist, John Kenneth Galbraith, famously said this about supply-side economics: "If you feed enough oats to the horse, some will pass through to feed the sparrows").

But under Obama, the exact same thing happened, the rich got even richer, which is why so many young people saddled with huge student loans had enough and were openly and passionately campaigning for Bernie Sanders to lead the Democratic party.

I don't want to dwell on this too long, but I agree with BCA's geopolitical strategist, Marko Papic, America is moving to the Left in the decades ahead and Europe will be moving slightly to the Right.

But there will be vehement opposition in America as the country moves to the Left in the decades ahead, and it can potentially disintegrate into a full-blown civil war again. I don't say this lightly, but there are some extreme lunatics on both sides of the political spectrum who have vowed to escalate the violence to reach their political objectives.

Sure, the Nazis and white supremacists at Charlottesville were to blame for the death of an innocent woman, and there weren't "bad people on both sides," only one repugnant side. But make no mistake, there is an increasingly violent anarcho-leftist group in America made up mostly of young people who will use violence and destruction of property to promote and achieve their political objectives.

And it's not just in America. I was watching Greek news last week where I saw thirty young leftist anarchists walk into a drug store in Athens with their black hoodies and masks, stealing food and medication in a matter of minutes as their colleagues stood outside patrolling for the police. It was surreal and highly organized.

"Leo, that would never happen in the States because store owners have guns". So do the bad guys and I assure you, lots of Greeks own guns too but if you see an organized mass doing this, good luck trying to stop them or kill them and risk being killed.

Anyway, back to Ray Dalio and Bridgewater. Yes, he likes gold (GLD) but he also increased his holdings of US long bonds (TLT), which is what I've been recommending everyone to do.

However, unlike Ray Dalio who doesn't see "any important economic risks on the horizon", I see a major risk, global deflation coming to America, clobbering risk assets across public and private markets for a very, very long time.

Stop worrying about when the tech bubble will burst, if my reading on the risks of global deflation spreading to the US is right, we will have a bear market unlike anything we've ever seen in the past, including the Great Depression. That's when the silence of the VIX will be no more and the lambs selling volatility will get slaughtered.

But I will tell you this much, I track stocks very closely, and there is still a party going on out there. This morning I shared a sample of stocks on my watch list with some traders (click on image):


Fun times, right? Sure, if you're Renaissaisance Technologies and other elite hedge funds playing the trading game but if you ask me, the risks aren't worth it at this time.

You will hear a lot of nonsense on CNBC like "the market is anticipating tax cuts" but I'm warning you, the market is NOT anticipating global deflation spreading to the US. Nobody is.

Below, take the time to watch Noam Chomsky's documentary, Requiem for the American Dream (with French subtitles). I don't agree with everything he states but it's important to watch this and think about where the world is heading and why the dangerous divide threatens our democracies.

It's also worth noting public pensions that have been getting squeezed on fees for decades have also contributed to rising inequality, propelling Ray Dalio and other elite hedge-fund and private equity managers to the list of the world's rich and famous.

Dalio and others have no idea how lucky they are to be "first-movers" in the golden age of alpha managers. There is no way someone starting a hedge fund or private equity fund now will ever achieve a fraction of the wealth these gurus managed to amass over the last thirty years (central banks' quantitative easing to mitigate the fallout from financial crisis also helped transfer unprecedented gains to the lords of finance).

Update: My friend, Jonathan Nitzan, professor of political economy at York University, shared this with me after reading this comment:
Dalio, like most other economists and financial analysts, lives in a bifurcated world of economics vs. politics. For him, economics is a machine (he calls himself a mechanic). This machine would have worked just fine (equilibrium) if it were not for the external political shocks that constantly bombard it (distortions). His main claim to fame (other than the money he manages and owns) is to argue that current political shocks are bigger than other analysts believe.

The idea that capital is not an economic category but a political entity to start with, that capitalization discounts not utility but sabotage, and that capitalism is not a mode of production and consumption but a mode of power is something he cannot possibly fathom (for more on this latter perspective, see our 2016 paper "CasP Model of the Stock Market" and the accompanying video here which is embedded below).
I thank Jonathan for sharing his wise insights with my readers. In fact, I would urge Ray Dalio to invite him over to Connecticut to discuss his ideas with Bridgewater's staff (Jonathan formerly worked as an Associate Editor, Emerging Markets at BCA Research and he really knows his stuff).


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