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Where We Are in the Big Cycle of Money, Credit, Debt, and Economic Activity

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  • Where We Are in the Big Cycle of Money, Credit, Debt, and Economic Activity

    Long-time listener, first-time caller.

    I've been following Ray Dalio's musings lately. He presents the 'big picture' of the economy as large and small cycles that have repeated many times throughout history. His latest post (here) discusses how we are late in a larger economic cycle and how the recent and current monetary policies are fueling a concerning economic picture. I try to be cautious but not alarmist and also aware that, while predicting the future is impossible, looking toward the horizon for black clouds is only prudent.

    It looks like a significant inflationary period is on the horizon and he presents a lot of strong evidence for why. Once it gets going, it appears hard to stop and can be self-perpetuating. US currency value is dropping and the outlook for owning debt (bonds) is bleak (backed into a mathematical corner with inflation and the specter of rising interest rates). Are you and/or would you consider adjusting your bond allocations (perish the thought!)? Owning tangible things like real estate seems pretty important to help hold on to any real value. Does "stay the course" really mean that you never consider the macro trends and touch the wheel when you see a brick wall coming?

    Please read the linked post (8-10 min read) so we can discuss his points rather than just responding with your standard bias against allocation adjustments. You know, kinda like journal club?

  • #2
    Like a modern day Nostradamus


    • #3
      You talking about the same Ray Dalio that said the market would crash if Trump were elected? Or are you talking about the Ray Dalio that said we're going into a Great Depression in April 2020? The more stuff one can throw at a wall the more likely something will stick. And eventually these people will get something right but they're typically wrong a lot more than they're right. Ignore the noise.


      • #4
        Originally posted by Craigslist View Post
        Like a modern day Nostradamus
        big Ray Dalio guy


        • #5
          Come on guys, give it a read and *then* comment


          • #6
            He could be right in the overall trajectory of the US financial system, but the timing could still be off. As in we could see instability, but not for another 200 years for example.


            • #7
              Just saying, this is not how Bridgewater invests.
              Would you give your money to Ray Dalio to invest? I for one wouldn’t.


              • #8
                But doesn't it seem like shifting some investment from bonds to RE is probably a good idea while in an inflationary time? Does "stay the course" totally ignore current conditions?


                • #9
                  Originally posted by minervaMD View Post
                  But doesn't it seem like shifting some investment from bonds to RE is probably a good idea while in an inflationary time? Does "stay the course" totally ignore current conditions?
                  RE has already appreciated a huge amount in the last twenty years exactly because investments are forward looking. A lot of inflation has been priced in. This is the typical problem of market timing, if you believe markets are efficient even if imperfectly then they have already incorporated most if not all of what you think you know and future, current prices are thus higher and expected returns lower.

                  And the future is hard to predict. Why, just this week one of our sold 60% of his stocks because a Russian invasion of Ukraine was the easiest call in two years and was going to be good for -5% in stocks. Except.... that's not what happened. Now what?

                  No, I haven't sold any stocks. I own a diversified portfolio about 70% global stocks, 30% bonds/cash, and some real estate. I Don't stress about what might happen to investments, I own my piece of all global business and feel that's the best long term investment.


                  • #10
                    Bond investments are not looking too good going forward. So I tilted my asset allocation a bit more towards shorter term bonds and cash.

                    But stock values are also high and will likely be negatively affected by rising interest rates.

                    I like my real estate investments currently, but buying more is difficult to stomach right now with prices so high. At the same time, the long term, buy and hold rental real estate has rapidly rising rental income, so that should help as inflation rises.

                    My biggest struggle right now is where to invest excess funds. Every option seems so overpriced and risky.


                    • #11
                      He's right. I have no solution. If he is right and it all blows up- your portfolio is not your problem.


                      • #12
                        This is what I am worried about with a Russia-Ukraine war:
                        A 10% rate of inflation would be devastating for the economy. Consumer confidence and spending would decrease just while the fed would be forced to raise interest rates/quantitive easing/whatever it is they do to combat inflation. As interest rates increase, government spending on debt payments would increase causing a further contraction in government spending while increasing the deficit and debt. Over-valued equity prices would probably fall into corrective territory further decreasing spending and contracting the economy as people watched their retirement accounts dwindle. That's what I would predict would happen. Stagflation, if it isn't already happening.

                        I thought that the economy had fallen apart and that the stock market would take years to recover after March/April 2020 so I've been wrong before though. I wonder if those congress people who were in the news selling off their stocks right before the covid drop were able to time their reinvestments right as well. That's the problem with timing the market, you have to be right on the exit and the entrance. With large proportions of total gains and losses occurring in seemingly random days, I think that it is almost impossible. If you just exclude the 10 best and worst days per decade in the market, you end up with wildly different returns. I think that you are much more likely to miss the 10 best days then the 10 worst days as well.


                        • #13
                          Oh I posted that response in the wrong thread, I meant to be commenting on the Russia Ukraine thread. I did attempt to read the above article as well, I found it difficult to read and didn't understand most of it. I'm not sure what he was trying to say we should do, invest in crypto currency to avoid currency risk? Anyways, I don't put a lot of value in most people's predictions about the economy in general. It's too complicated. If government researchers in the fed/SEC/whoever has the most insider information with degrees in macro-economics can't predict the economy, I don't see why investment managers/business moguls think that they can do better. They are only privy to one small part of the economy and most probably do not have any formal training in macro-economics.


                          • #14
                            I find a lot of what Dalio writes doesn’t make much sense to me.
                            He had a great insight into risk parity, long before other HF’s though.

                            I am pretty sure he protects himself in the event of being wrong about macro prognostications.

                            This is a great video he did, fast forward to 5 mins if you’re in a hurry.


                            The book “The man who solved the market” (Zuckerman), goes into where Renaissance was up to in the 90’s. What you are describing is where Renaissance was in the 80’s. I tend to think the world has moved on from that.

                            It’s just incredibly hard to have an edge now. Even in the 90’s, arguably we had no decision making edge. Probably our only edge as physicians is our time horizon and ability to take leverage due to our secure income. Simon’s was asked in the book “The man who solved the market”, where he thought his alpha came from in the 90‘s. My recollection of the book is that his reply was “I really think it was probably dentists (*).”

                            (*) and presumably also doctors, or any high paying professionals, who think they know more, due to their job or education


                            • #15
                              An add- I think its a US centric view- even though it talks about global central banks. The question really is- what happens if the world depends to unpeg from the dollar.