Ray Dalio, founder, co-CIO and Co-Chairman of Bridgewater Associates, the world’s largest and most successful hedge fund as well as the author of The New York Times #1 Bestseller Principles, will be releasing a new book next month to commemorate the 2008 financial crisis.
[dalio]
Q2 hedge fund letters, conference, scoops etc
A Template for Understanding Big Debt Crises, publicly details for the first time ever Ray Dalio’s and Bridgewater’s in-depth study of how debt crises have operated throughout history, which allowed them to anticipate and successfully navigate the financial crisis ten years ago. As you may recall, during the crisis Bridgewater was one of the few financial institutions whose economic models did not fail.
Ray and Bridgewater believe that most everything that happens in the world operates like a machine and can be understood in terms of fundamental cause-effect relationships that repeat themselves over and over throughout history. However, because big debt crises only occur once every 75-100 years, they are usually viewed as a rare phenomenon as opposed to repeating events. It is because of this disconnect that Dalio and Bridgewater feel it is necessary to publicly share their template for understanding debt crises in the hopes of reducing the chances of big debt crises happening and helping them be better managed in the future.
Ray Dalio’s excellent study provides an innovative way of thinking about debt crises and the policy response.”
– Ben Bernanke, Former Chairman of the Federal Reserve
“Ray Dalio’s book is must reading for anyone who aspires to prevent or manage through the next financial crisis.”
– Larry Summers, Former U.S. Treasury Secretary
“A terrific piece of work from one of the world’s top investors who has devoted his life to understanding markets and demonstrated that understanding by navigating the 2008 financial crisis well.”
– Hank Paulson, Former U.S. Treasury Secretary
“An outstanding history of financial crises, including the devastating crisis of 2008, with very valuable framework for understanding why the engine of the financial system occasionally breaks down, and what types of policy actions by central banks and governments are necessary to resolve systemic financial crises. This should serve as a play book for future policy makers, with practical guidance about what to do and what not to do.”
– Tim Geithner, Former U.S. Treasury Secretary
Ten years ago, a financial crisis shook the world. Few saw it coming and fewer were prepared to deal with its repercussions. On the eve of the anniversary of the 2008 financial crisis, Ray Dalio, one of the world’s most successful investors and entrepreneurs, will reveal his and his firm Bridgewater Associates’ extensive research on debt crises in a new book, A Template for Understanding Big Debt Crises. To be released on September 10th, 2018, the book will detail Dalio’s in-depth study of how debt crises have operated throughout history, which allowed him and Bridgewater Associates to anticipate and successfully navigate the financial crisis ten years ago.
Dalio is the founder, co-Chief Investment Officer and co-Chairman of Bridgewater Associates, which he founded in 1975 out of his two-bedroom apartment in New York and has since grown into the largest hedge fund in the world and the fifth most important private company in the U.S., according to Fortune. Dalio has a unique way of studying and understanding the world, which allows him to see economic events differently than the consensus and foresee coming developments that are often under-recognized and overlooked.
As explained in his New York Times #1 Bestseller Principles: Life & Work, one of Dalio’s core beliefs is that most everything happens over and over again through time, so that by studying the patterns, one can understand the cause-effect relationships behind them and develop principles for dealing with them well. In this three-part research series, he does that for big debt crises and shares his template in the hopes of reducing the chances of big debt crises happening and helping them be better managed in the future.
“At this stage in my life I want to pass along the principles that helped me and can help others,” said Ray Dalio, founder, co-Chief Investment Officer and co-Chairman of Bridgewater Associates, and author of Principles: Life & Work. “Since debt crises cause some of the worst human suffering, passing along this template for understanding and dealing with them on the 10th anniversary of the 2008 financial crisis seemed like an appropriate thing to do.”
The book comes in three parts:
- The Archetypal Big Debt Cycle – Dalio’s and Bridgewater Associates’ outline of the major components of debt crises and how they operate
- Three Detailed Case Studies – In-depth experiences of debt crises throughout history including the 2008 financial crisis, the Great Depression and the 1920s crisis in Weimar Germany
- Compendium of 48 Cases – A compendium of charts and computer-generated text summaries showing how the template applies to several dozen other historical debt crises
The book will be available online on September 10th, 2018. Interested readers will have the choice between a free PDF version and a Kindle version, available through Amazon, for $14.99. A print version of the book will be available in mid-October for $50.00.
For more information on book and how to preorder it, please visit Principles.com.
About the Author:
Ray Dalio is the founder, co-Chief Investment Officer and co-Chairman of Bridgewater Associates, a global asset manager and leader in institutional portfolio management as well as the largest hedge fund in the world. Under Dalio’s guidance, Bridgewater Associates has developed a distinctive culture, an idea-meritocracy that produces meaningful work and meaningful relationships through radical truth and radical transparency that is the foundation of the firm’s success. Since starting Bridgewater Associates out of his two-bedroom apartment in New York in 1975, Dalio has grown the firm into the largest hedge fund in the world, the fifth most important private company in the U.S. according to Fortune and has led it to make more money for clients than any other hedge fund since its inception, according to LCH Investments. For his innovative work as well as being a valued advisor to many global policy makers, Dalio has also been called the “Steve Jobs of Investing” by ai-CIO Magazine and Wired Magazine, and has been named one of TIME Magazine’s 100 Most Influential People. Over the past three decades, Dalio wrote down his decision-making criteria and has recently passed along his principles and tools through his book, Principles: Life & Work, a New York Times #1 Bestseller and Amazon #1 Business Book of 2017.
About Bridgewater Associates:
Bridgewater Associates is a global leader in institutional portfolio management with more than $160 billion in assets under management. Bridgewater Associates is known for being an industry-leading innovator, having been the first firm to manage currency overlay strategies, the first global inflation bond manager, one of the first managers to separate alpha from beta and offer products based on each, and was the first to advise the U.S. government on the creation of Treasury Inflation-Protected Securities. Located in Westport, CT., Bridgewater Associates manages portfolios for a wide array of institutional clients globally, including public and corporate pension funds, foreign governments and central banks, and university endowments and charitable foundations.
About the Book:
Title: A Template for Understanding Big Debt Crises
Author: Ray Dalio
Publisher: Bridgewater Associates
Publication Date: September 10th, 2018
Excerpts from A Template for Understanding Big Debt Crises:
“I am writing this on the tenth anniversary of the 2008 financial crisis in order to bring the perspective of an investor who navigated through that crisis well because I had developed a template for understanding how all debt crises work. I am sharing that template here in the hope of reducing the likelihood of future debt crises and helping them be better managed. As an investor, my perspective is different from that of most economists and policymakers because I bet on economic changes via the markets that reflect them, which forces me to focus on the relative values and flows that drive the movements of capital which in turn drive these cycles. In the process of trying to navigate them, I’ve found there is nothing like the pain of being wrong or the pleasure of being right as a global macro investor to provide the practical lessons about economics unavailable in textbooks.
After repeatedly being bit by events that I never encountered before, I was driven to go beyond my experiences to examine all the big economic and market movements in history, and to do that in a way that would make them virtual experiences – i.e. so that they would unfold to me as though I was experiencing them in real time so that I would have to place my market bets as though I only knew what happened up until then. I did that by studying historical cases chronologically and in great detail, as though I was experiencing them day by day and month by month. That gave me a much broader and deeper perspective than if had limited my perspective to my own direct experiences. In real time, I experienced the erosion and eventual breakdown of the global monetary system (“Bretton Woods”) in 1966-1971, the inflation bubble of the 1970s and its bursting in 1978-82, the Latin American inflationary depression of the 1980s, the Japanese bubble of the late 1980s and its bursting in 1988-1991, the global debt bubbles that led to the “tech bubble” bursting in 2000 and the Great Deleveraging of 2008, and many more; virtually I experienced the collapse of the Roman Empire in the 5th century, the U.S. States debt restructuring in 1789, Germany’s Weimar Republic in the 1920s, the global Great Depression and War that engulfed many countries in the 1930-45 period, and many more. ”
– Introduction
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“Managing debt crises is all about spreading out the pain of the bad debts and this can almost always be done well. The biggest risks are typically not from the debts themselves, but from the failure of policy makers to do the right things due to a lack of knowledge and/or lack of authority.”
– Part 1: The Archetypical Big Debt Cycle
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“Why Do Debt Crises Come in Cycles? I find that whenever I start talking about cycles, particularly big, long-term cycles, people’s eyebrows go up; the reactions I elicit are similar to those I’d expect if I were talking about astrology. For that reason, I want to emphasize that I am talking about nothing more than logically-driven series of events that recur in patterns. In a market-based economy, expansions and contractions in credit drive economic cycles, which occur for perfectly logical reasons. Though the patterns are similar, the sequences are neither pre-destined to repeat in exactly the same ways nor to take exactly the same amount of time.
To put these complicated matters into very simple terms, you create a cycle virtually anytime you borrow money. Buying something you can’t afford means spending more than you make. You’re not just borrowing from your lender; you are borrowing from your future self. Essentially, you are creating a time in the future in which you will need to spend less than you make so you can pay it back. The pattern of borrowing, spending more than you make, and then having to spend less than you make very quickly resembles a cycle. This is as true for a national economy as it is for an individual. Borrowing money sets a mechanical, predictable series of events into motion.
If you understand the game of Monopoly®, you can pretty well understand how credit cycles work on the level of a whole economy. Early in the game, people have a lot of cash and only a few properties, so it pays to convert your cash into property. As the game progresses and players acquire more and more houses and hotels, more and more cash is needed to pay the rents that are charged when you land on a property that has a lot of them. Some players are forced to sell their property at discounted prices to raise that cash. So early in the game, “property is king” and later in the game, “cash is king.” Those who play the game best understand how to hold the right mix of property and cash as the game progresses.
Now, let’s imagine how this Monopoly® game would work if we allowed the bank to make loans and take deposits. Players would be able to borrow money to buy property and, rather than holding their cash idly, they would deposit it at the bank to earn interest, which in turn would provide the bank with more money to lend. Let’s also imagine that players in this game could buy and sell properties from each other on credit (i.e., by promising to pay back the money with interest at a later date). If Monopoly® were played this way, it would provide an almost perfect model for the way our economy operates. The amount of debt-financed spending on hotels would quickly grow to multiples of the amount of money in existence. Down the road, the debtors who hold those hotels will become short on the cash they need to pay their rents and service their debt. The bank will also get into trouble as their depositors’ rising need for cash will cause them to withdraw it, even as more and more debtors are falling behind on their payments. If nothing is done to intervene, both banks and debtors will go broke and the economy will contract. Over time, as these cycles of expansion and contraction occur repeatedly, the conditions are created for a big long-term debt crisis.”
– Part 1: The Archetypical Big Debt Cycle
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“The urgent need for flexible authority is a classic challenge for policymakers in the midst of crises. The system that is designed to ensure stability during normal times is often poorly suited to crisis scenarios in which immediate, aggressive action is required.
The Treasury and the Fed hit against this challenge with Bear Stearns. So, the Fed turned to the plans it sketched out in late 2007, exercising its section 13(3) powers – which hadn’t been used since the Great Depression – to arrest what Bernanke would later call a ‘self-feeding (downward) liquidity spiral.’ It announced a $200 billion new program, the Term Securities Lending Facility (TSLF), through which it would allow financial institutions, including major brokerage firms, to borrow cash or treasuries by using risky assets, including nongovernment mortgage-backed securities, as collateral. Markets applauded the injection of liquidity, with stocks posting their largest daily gain (about 4 percent) in over five years.
Despite the announcement of the TSLF, the run on Bear continued. In just four days (March 10-March 14) Bear Stearns saw an $18 billion cash buffer disappear as its customers quickly began withdrawing funds. Treasury Secretary Paulson feared the brokerage could collapse within 24 hours as soon he heard it was facing such a run on liquidity. This was because Bear had been making loans of up to 60 days while remaining almost completely reliant on overnight funding. By Thursday, March 14, those fears were confirmed. Lenders in the repo market refused even to accept Treasury Securities as collateral when making overnight loans to Bear Stearns.
Paulson, Geithner, and Bernanke agreed that another loan from the Fed wasn’t going to help Bear Stearns. It needed more equity – an investor to fill the hole created by all the losses. At this point, the Treasury didn’t have the authority to be that the investor. So, the Treasury looked for a private sector solution, seeking out another, healthier institution to acquire Bear. To buy time, the Fed promised on March 14 to extend Bear Stearns ‘secured funding… as necessary, for an initial period of 28 days’… The rescue and aggressive injection of liquidity had the desired effect. Stocks rallied and remarkably ended the month flat… Although the markets rebounded, Paulson, Bernanke, and Geithner worried because they saw that, without a buyer, they didn’t have the authority to prevent the bankruptcy of an investment bank in the midst of a panic, and they immediately began to worry about Lehman.”
– Part 2: Three Iconic Big Debt Cycles | US Debt Crisis and Adjustment: 2007-2011
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“It was the tightening that popped the bubble. It happened as follows: The first signs of trouble appeared in March 1929. News that the Federal Reserve Board in Washington was meeting daily, but not releasing details of the meetings, sparked rumors on Wall Street that a clampdown on speculative debt was coming. After two weeks of modest declines and reports of an unusual Saturday meeting of the Reserve Board, on March 25 and then again on March 26, the stock market broke sharply lower. The Dow fell 4.4 percent and the rate on call loans reached 20 percent, as panic gripped the market. Trading volumes reached record levels. A wave of margin calls on small leveraged investors resulted in forced selling that exacerbated the decline. After the Federal Reserve Board chose not to act, City Bank president Charley Mitchell (who was also a director of the New York Fed) announced that his bank stood ready to lend $25 million to the market. This calmed the market, rates fell, and stocks rebounded. Stocks resumed their gains, but this foreshadowed the vulnerability of stocks to tightening in the credit market.
While growth had moderated somewhat, the economy remained strong through the middle of 1929. The June Federal Reserve Bulletin showed that industrial production and factory employment remained at all-time highs through April, and that measures of construction had rebounded sharply after falling through the first quarter.
After another short-lived selloff in May, the rally accelerated and the bubble reached the blow off phase. Stocks rose 10.7 percent in June, 5.7 percent in July, and 10.1 percent in August. This rally was supported by accelerating leverage, as household margin debt rose by more than $1.2 billion over the same three months.
Money continued to tighten. On August 8, the Federal Reserve Board raised its discount rate to 6 percent, as it became clear that macro prudential measures had failed to slow speculative lending. At the same time, concerns about the high stock prices and interest rates caused brokers to tighten their terms in the call loan market and raise margin requirements. After dropping them as low as 10 percent the previous year, margin requirements at most brokers rose to 45 to 50 percent.
The stock market peaked on September 3 when the Dow closed at 381 – a level that it wouldn’t reach again for over 25 years.
Stocks started to decline in September and early October as a series of bad news stories eroded investor confidence…Together, by mid-October, these events contributed to a 10 percent sell-off in the markets from their highs. The view among investors and columnists in the major papers was largely that the worst was over and the recent volatility had been good for the market… Then the bottom of the market fell out.”
– Part 2: Three Iconic Big Debt Cycles | US Debt Crisis and Adjustment of 1928-1937
