April 27, 2015
Ray Dalio An Optimist About China
Ray Dalio who is the founder and manager of the biggest hedge fund in the world, Bridgewater Associates, shared that he likes the Chinese economy long-term for its great potential.
Daily shared during Sunday interview at CNN that:
“I am impressed with the leadership of the the country,” “There’s a lot of potential. Capital has not flowed to all parts of the economy.”
He also stated that he is an optimist when it comes to US productivity even-though the US is the largest debtor in the history of the world and it is a negative.
Read more: http://www.octafinance.com/ray-dalio-likes-chinas-potential-long-term-and-is-optimistic-on-us-productivity/32638/
Ray Dalio is an American businessman and founder of Bridgewater Associates. Bridgewater Associates has since attracted many clients including pension funds and is currently (as of January 2012) the largest hedge fund in the world with nearly $120 billion under management.
October 22, 2014
Fed caution about rate hike right move: Ray Dalio
Bridgewater Associates founder Ray Dalio explains why he agrees with Fed chair Janet Yellen’s decision to wait until the U.S. sees more inflation before raising interest rates.
Ray Dalio head of the world's biggest hedge fund, told CNBC on Wednesday the FED should wait for signs of inflation before it raises interest rates.
Fed Chair Janet Yellen's cautious bearing to winding down easy monetary policy has been the correct approach, the Bridgewater Associates founder on "Squawk Box." Dalio's firm manages $163 billion overall, including nonhedge fund money.
"If I were running monetary policy, I'd wait to see for the whites of the eyes of inflation," he said, because the Fed should not be ahead of market expectations on increasing rates. The first hike is expected in the summer, though some market watchers think it may be earlier.
Looking at the markets, Dalio said, "the prospective return of asset classes, it's very narrow." He predicted expected returns of equities of "only about 4 percent."
Dalio did express optimism about the prospects for the U.S. in the near-term. "I see no real reason for a problem in the United States now other than too tight ... monetary policy. And I don't think you'll get to too tight of monetary policy."
Besides the Fed, Wall Street will be watching the European Central Bank's Thursday meeting, when the ECB is expected to detail its asset-backed purchase program—just as the U.S. central bank gets ready to end its bond-buying this month.
What happens this month or even in the next year are not big worries for Dalio. "My real concern is when the next downturn comes, which probably won't be for another couple of years ... 18 months," he said.
Source: CNBC
Ray Dalio is an American businessman and founder of Bridgewater Associates. Bridgewater Associates has since attracted many clients including pension funds and is currently (as of January 2012) the largest hedge fund in the world with nearly $120 billion under management.
Ray Dalio head of the world's biggest hedge fund, told CNBC on Wednesday the FED should wait for signs of inflation before it raises interest rates.
Fed Chair Janet Yellen's cautious bearing to winding down easy monetary policy has been the correct approach, the Bridgewater Associates founder on "Squawk Box." Dalio's firm manages $163 billion overall, including nonhedge fund money.
"If I were running monetary policy, I'd wait to see for the whites of the eyes of inflation," he said, because the Fed should not be ahead of market expectations on increasing rates. The first hike is expected in the summer, though some market watchers think it may be earlier.
Looking at the markets, Dalio said, "the prospective return of asset classes, it's very narrow." He predicted expected returns of equities of "only about 4 percent."
Dalio did express optimism about the prospects for the U.S. in the near-term. "I see no real reason for a problem in the United States now other than too tight ... monetary policy. And I don't think you'll get to too tight of monetary policy."
Besides the Fed, Wall Street will be watching the European Central Bank's Thursday meeting, when the ECB is expected to detail its asset-backed purchase program—just as the U.S. central bank gets ready to end its bond-buying this month.
What happens this month or even in the next year are not big worries for Dalio. "My real concern is when the next downturn comes, which probably won't be for another couple of years ... 18 months," he said.
Source: CNBC
Ray Dalio is an American businessman and founder of Bridgewater Associates. Bridgewater Associates has since attracted many clients including pension funds and is currently (as of January 2012) the largest hedge fund in the world with nearly $120 billion under management.
January 31, 2014
Ray Dalio -- founder of world's largest hedge fund -- talks his work-life philosophy
Bridgewater Associates founder Ray Dalio sits down the "CBS This Morning" co-host Charlie Rose to discuss his understanding of the way the economy works, as well as his philosophies and how he puts them to work in his company and his life.
Ray Dalio is an American businessman and founder of Bridgewater Associates. Bridgewater Associates has since attracted many clients including pension funds and is currently (as of January 2012) the largest hedge fund in the world with nearly $120 billion under management.
Ray Dalio is an American businessman and founder of Bridgewater Associates. Bridgewater Associates has since attracted many clients including pension funds and is currently (as of January 2012) the largest hedge fund in the world with nearly $120 billion under management.
January 28, 2014
Ray Dalio's Advice for investing In the current market cycle
Ray Dalio is the head of Bridgewater Associates, the world's largest hedge fund with more than $150 billion AUM.
He's known for his deep understanding of market cycles. In 2013, Dalio released a very interesting video how the world's economic and money machine works. It's a machine in which the use of either credit or money and the generation of debt creates different market cycles — recessions, depressions, boom years etc.
So here's today's engineering lesson — some of which he talked about on his panel — it's about the United States, Southern Europe, China and you (the investor).
Ray Dalio said that the US right now is in the middle of a post-recession short term debt cycle where assets will return about 4%. He calls this, "the boring years," and compared it to the economy in 2004 or 2006. We won't boom, we won't bust.
Southern Europe, on the other hand, is still struggling out of a nasty debt bubble — with debt rising faster than income — but unlike the United States, the region couldn't print money to inflate itself out of trouble. No one would fund Southern Europe's debt.
But still, that debt must be rolled over. To do that, Southern Europe's economy will remain depressed for quite a while — a very different position in the cycle from the U.S.
Then there's China, which Dalio said is going through a much-needed tightening of monetary policy. The country's break-neck growth speed is slowing. China’s Q4 GDP number came in at 7.7%. That's a slowdown from the same quarter the year before when the number came in at 7.8%. Economists expect full year growth to come in at its lowest number since 1990 at 7.4%.
China's President, X Jinping, expected this slowing. In fact, instead of slowing, it's more of an attempt at normalization.
The problem is that getting things to normal will be bumpy, if it's achievable at all. As China tries to find balance in its economy the tightening can get too tight — as in, there isn't enough money floating around the economy to keep money flowing freely. Consumers can't do it with their purchasing power alone.
That's when the government steps in and injects money into the system again. It's a tough place to be in because the government doesn't want the economy to freeze, and Dalio believes it's a bubble.
We've already seen that happen this week. On Tuesday the Chinese government injected some cash into the banking system ahead of the Lunar New Year. It's a time of year when businesses pay a lot of Chinese migrant workers their yearly wages, people buy presents for each etc. The entire country needs cash.
While doing this, the government also announced that smaller loans would be written off bank balance sheets. That's not tightening, but it is the country trying to find a balance between keeping money flowing through its economy and not drowning in cheap money as it tries to mature.
And "balance" leads us to what Dalio talked about next — how to build a solid portfolio in our interconnected world. How do you invest in this environment?
China's tightening, the U.S. is growing slowly, Southern Europe's depressed — we're in a world where people want to buy financial assets. It's a hunt for returns. There's a lot of demand for cash.
At the same time, Dalio pointed out, longer term debt and liabilities are eating money.
"If I could say one thing to your investors, it's try to achieve balance," he said.
As an investor you need to diversify your portfolio and understand that in the type of world we're living in, your returns are going to look like this: 1% on cash, 3% on bonds, 4% on equities.
It's a low yield world, and you should plan accordingly.
Read more: http://www.businessinsider.com/ray-dalio-davos-cnbc-2014-1#ixzz2rbAVJudW
Ray Dalio is an American businessman and founder of Bridgewater Associates. Bridgewater Associates has since attracted many clients including pension funds and is currently (as of January 2012) the largest hedge fund in the world with nearly $120 billion under management.
January 27, 2014
Ray Dalio of Bridgewater Associates talks about Deflation, Chronic Depressions and Printing Money at Davos 2014
Published on Jan 24, 2014 Davos 2014 | Ray Dalio Explains Where in the Economic Machine We Currently Are – CNBC Interview
Ray Dalio is an American businessman and founder of Bridgewater Associates. Bridgewater Associates has since attracted many clients including pension funds and is currently (as of January 2012) the largest hedge fund in the world with nearly $120 billion under management.
September 25, 2013
Ray Dalio believes that Japan needs another "big round" of stimulus
Ray Dalio, chairman and CIO of $150+ billion firm Bridgewater Associates, one of the world's largest hedge funds, was speaking at the Japan Society in midtown Manhattan.
"The effects are going to wear off," Dalio said, about prior stimulus measures. BOJ is "going to have to do another big round of purchases," he shared.
In a 30 minutes conversation, Ray Dalio addressed important issues in economies like China and France. He were an optimist about investing in emerging markets, especially in equities, which dropped like a rock this year. According to him emerging markets will not be an "an attractive place" to invest this year "given flows and pricing."
He said emerging markets face "a major balance of payments problem" that will eventually lead to significant problems. It seems that Kyle Bass and other great hedge fund managers share the same view, as some of them expect either India or some other country to go into a crisis mode.
“We are going to have the emerging market crisis," Ray Dalio said during a Q&A period.
India should "prepare for the worst" since it has been one of the biggest beneficiaries of foreign capital flows that are already bypassing emerging market equities, he said.
As for Europe, Dalio said that France is of particular concern to him since "it has not dealt properly with debt to income ratios rising."
Update: There is information that Ray Dalio and Bridgewater Associates went long treasuries yesterday, and even though we don’t know whether its short-term or medium-term trade, it’s worth taking notice as some other prominent managers like Marc Faber also like treasuries short-term and believe they are due for a rebound.
Ray Dalio is an American businessman and founder of Bridgewater Associates. Bridgewater Associates has since attracted many clients including pension funds and is currently (as of January 2012) the largest hedge fund in the world with nearly $120 billion under management.
September 24, 2013
Ray Dalio - How The Economic Machine Works
The economy works like a simple machine.
But many people don't understand it— or they don't agree on how it works — and this has led to a lot of needless economic suffering.
I feel a deep sense of responsibility to share my simple but practical economic template. Though it's unconventional, it has helped me to anticipate and sidestep the global financial crisis, and has worked well for me for over 30 years.
Ray Dalio is an American businessman and founder of Bridgewater Associates. Bridgewater Associates has since attracted many clients including pension funds and is currently (as of January 2012) the largest hedge fund in the world with nearly $120 billion under management.
April 18, 2013
RAY DALIO: There's No Sensible Reason Not To Own Gold
"I think gold should be a portion of every one's portfolio to some degree because it diversifies the portfolio. It is the alternative money." - Ray Dalio
"Gold is a currency. Throughout the 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.
Ray Dalio is an American businessman and founder of Bridgewater Associates. Bridgewater Associates has since attracted many clients including pension funds and is currently (as of January 2012) the largest hedge fund in the world with nearly $120 billion under management.
"Gold is a currency. Throughout the 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.
Ray Dalio is an American businessman and founder of Bridgewater Associates. Bridgewater Associates has since attracted many clients including pension funds and is currently (as of January 2012) the largest hedge fund in the world with nearly $120 billion under management.
March 02, 2013
Ray Dalio Transcript from Davos
“I think the economy works like a machine and I think it’s important to understand how the machine works in order to answer that question. So if there is a transaction, you could pay with money or you can pay with credit. If you have money, that is making up for a contraction in credit. It’s not inflationary because the total amount spent in comparison to the total number of goods sold will determine the price.
So when we’ve added money, we’ve made up for credit and that’s been fine. What’s happened now is that because of all the money that has been added to the system, there is a great deal of liquidity in the world. So there is money in corporations, in households. Liquidity is all over the place, a lot of it. And it has gone there because of monetary policy and it has also gone there seeking safety.
That is changing on the margin. The returns of cash are terrible. So as a result of that, what we have is a lot of money in a place — and it needed to go there to make up for the contraction in credit — but a lot of money that is getting a very bad return. That, in this particular year, in my opinion, will shift. And the complexion of the world will change as that money goes from cash into other things.
Now each region is very different, each set of circumstances. But the landscape will change I think particularly later in the year and beyond as those people who put their money there are receiving this bad return and feel an environment of safety [now] because the imbalances of Europe have largely been rectified. They have been rectified because the amount of borrowing is now consistent with the ability to fund that. And so the tail risks were taken off the table and that less risky environment is going to create that kind of a shift I think.”
Do we see a credit bubble?
“There is a lot of liquidity, but the most fundamental laws of economics is you can’t have debt rise faster than income. You can’t have income rise faster than productivity and the long term growth will be dependent on productivity. And we have these cycles around productivity growth because of debt cycles. We don’t have a credit bubble because of the production of too much credit, but we do have a bubble in liquidity.
There is too much liquidity and so bonds are a poor investment, they will have a poor return. Cash will have an even worse return, that’s assured. And that’s a bubble. Too much money in there. So the cash bubble exists, but we are reaching an equilibrium in terms of the debt growth.”
“I think it is important to understand the adjustment that is happening is not just central banks feel there was a funding gap, the amount of money that can be lent and the amount of money that needed to be borrowed, there was a gap. And the central banks needed to come in and help fill that gap.
What’s happened in the adjustment is that the amount of money that is being lent and borrowed has fallen a lot and with that depressions have historically occurred. So it is important to realize that when we go back to normalcy, normalcy [will not be] like the past. In other words those countries can’t spend the way that they have spent before. Equilibrium means a depressed economy. And what that means is the fundamental law is that we can’t raise debt faster than income from now on. And if we can’t raise debt faster than income we have to have a low debt growth and the issue will come to productivity.
So the shift of the discussion is going to change. The shift of the discussion is now going to change in the economics of how do you become competitive. And so competition will be the discussion and I won’t go on there, but there are clear benchmarks for discussion about productivity and ultimately you can only spend what you produce.
If you use the measures …literally what does it cost to have an educated person in France, the United States and China? Look at those comparisons and the cost of an educated person in these countries is multiples of the cost of an educated person in China and so when it comes down to it, there are going to be very big social questions. It’s going to be values of life. How long is vacation? How much savings? Very much quality of life types of questions. How much will there transfers of wealth? Productivity is going to be the question. There are clear benchmarks of productivity. I won’t go on, but we have a list of those things that correlate with 90 percent correlation with the outcome of the growth rate the next ten years. They are like a health index. If you look at that health index, you can go down that and compare it and those are going to be the drivers. Productivity, because the debt cycle will no longer be the main driver.”
Ray Dalio’s view on currency wars
“I’m not particularly concerned about currency wars. I also think central banks will play a much lesser role going forward. I think the ECB’s balance sheet will gradually taper off. The same thing with the U.S. So I think they will naturally recede. I think that their next move will be, as described, a move from liquidity to the purchases and then we have a shift. So I don’t think that is the issue. I think the shift of the cash, that massive amount of cash will be what will be a game changer…into stocks, into everything. It will mean more purchases of goods and services and financial assets. It will be into equities, it will be into real estate, it will be into gold, it will be into a lot of….just basically everything.”
And his comments about FED
“Again I think it’s important to think of the economy as operating like a machine and everything is a transaction. So the amount of spending is what matters. Now spending can mean money or it can mean credit. If credit is picking up then money can decrease and so spending is the thing that matters. When it picks up, it will be incumbent on the central banks to reduce the amount of money so that the amount of spending is consistent with the productivity growth rate. And so I believe that that can be done as long as there is balance. As long as debt doesn’t rise faster than income, income doesn’t rise faster than productivity, and productivity then grows at a decent pace. That’s what matters.”
“I think it is very difficult to talk about the world as a whole because conditions are very different. I think in the U.S., it’s a transition year. It’s one of those years that will go down in history as one you won’t even remember. It’s a transition in between cycles as we move from one to the other. I think in Europe, what we have achieved is the debt creation has been brought down to a level that is funding and that is a depression-like condition and that will now be an environment in which social pressures and political pressures will be difficult. And the importance there is not to have a pick-up in debt relative to income again and deal with it through productivity. I think in China they are in the other side of the cycle. The other side of the cycle is that debt is rising too fast relative to income and that is something that is the opposite side of the cycle and they will have to deal with it. So I think that those conditions are a landscape. They are transitions for all those countries.”
Regarding Investing
Dalio says the most common mistake in investing is not looking ahead and considering the transaction – who is going to be the buyer and who is going to be the seller (of a particular asset)?
Ray Dalio is an American businessman and founder of Bridgewater Associates. Bridgewater Associates has since attracted many clients including pension funds and is currently (as of January 2012) the largest hedge fund in the world with nearly $120 billion under management.
January 30, 2013
Ray Dalio in Davos
Ray Dalio is an American businessman and founder of Bridgewater Associates. Bridgewater Associates has since attracted many clients including pension funds and is currently (as of January 2012) the largest hedge fund in the world with nearly $120 billion under management.
January 24, 2013
Ray Dalio: "Return = Cash + Beta + Alpha"
An Inside Look At The World's Biggest And Most Successful "Beta" Hedge Fund
The All Weather Story
How Bridgewater associates created the all weather investment strategy, the foundation of the ‘risk parity’ movement
President Richard Nixon sat in the Oval Office staring into a television camera and addressed the nation: “I directed Secretary Connelly to suspend temporarily the convertibility of the dollar into gold.” After 27 years of relative monetary stability, the United States was breaking from the Bretton Woods system of fixed exchange rates that had tied the dollar’s value to gold.
Ray Dalio, fresh out of college, was then a clerk on the New York Stock Exchange. Watching Nixon’s speech in his apartment, he tried to fathom the implications. Paper money derived its value from being a claim on gold. Now those claims wouldn't be honored. The next morning he walked on to the chaotic floor of the NYSE expecting stocks to plummet. Instead the Dow Jones Industrial Average rose almost 4% and gold shot higher in what was later dubbed the “Nixon rally.” Ray had heard Nixon’s announcement but misunderstood its implications.
Ray Dalio is an American businessman and founder of Bridgewater Associates. Bridgewater Associates has since attracted many clients including pension funds and is currently (as of January 2012) the largest hedge fund in the world with nearly $120 billion under management.
The All Weather Story
How Bridgewater associates created the all weather investment strategy, the foundation of the ‘risk parity’ movement
President Richard Nixon sat in the Oval Office staring into a television camera and addressed the nation: “I directed Secretary Connelly to suspend temporarily the convertibility of the dollar into gold.” After 27 years of relative monetary stability, the United States was breaking from the Bretton Woods system of fixed exchange rates that had tied the dollar’s value to gold.
Ray Dalio, fresh out of college, was then a clerk on the New York Stock Exchange. Watching Nixon’s speech in his apartment, he tried to fathom the implications. Paper money derived its value from being a claim on gold. Now those claims wouldn't be honored. The next morning he walked on to the chaotic floor of the NYSE expecting stocks to plummet. Instead the Dow Jones Industrial Average rose almost 4% and gold shot higher in what was later dubbed the “Nixon rally.” Ray had heard Nixon’s announcement but misunderstood its implications.
Ray Dalio is an American businessman and founder of Bridgewater Associates. Bridgewater Associates has since attracted many clients including pension funds and is currently (as of January 2012) the largest hedge fund in the world with nearly $120 billion under management.
December 14, 2012
Bridgewater’s Dalio: Expect Austerity, Rising Interest Rates in 2013
Plus, the Fed is out of bullets.
Speaking at The New York Times DealBook conference, Dalio said austerity is coming due to Washington's inability to solve the fiscal cliff, Business Insider reported.
The Fed, meanwhile, has fired its “bazooka” and its continuing quantitative easing will have little impact.
Yields, already at rock-bottom levels, can't go down any more and will begin rising next year, probably in late 2013, he said, according to Business Insider.
"We're facing austerity. And growth is flagging. This is an unprecedented risk the economy is facing — a slowdown with very little room to maneuver."
Still, Business Insider reported that Dalio predicts stocks will outperform bonds next year.
Dalio agrees with other top investors who believe interest rates will pop a bond bubble and create a moneymaking opportunity when the finally increase, CNNMoney reported.
Source: MoneyNews
Speaking at The New York Times DealBook conference, Dalio said austerity is coming due to Washington's inability to solve the fiscal cliff, Business Insider reported.
The Fed, meanwhile, has fired its “bazooka” and its continuing quantitative easing will have little impact.
Yields, already at rock-bottom levels, can't go down any more and will begin rising next year, probably in late 2013, he said, according to Business Insider.
"We're facing austerity. And growth is flagging. This is an unprecedented risk the economy is facing — a slowdown with very little room to maneuver."
Still, Business Insider reported that Dalio predicts stocks will outperform bonds next year.
Dalio agrees with other top investors who believe interest rates will pop a bond bubble and create a moneymaking opportunity when the finally increase, CNNMoney reported.
Source: MoneyNews
December 10, 2012
Ray Dalio talks about countries with good expected economic growth
In one of his research papers Ray Dalio explains about the cycle of countries and how they develop and reach certain point where growth weakens:
-In the early stages, people know they are poor and thus have limited resources and savings. The economy has reduced debt because they have no insurance.
-In the subsequent stage, the wealth is increasing, but psychology is still the same. They save, work hard, and maneuver cautiously. But investment and exports increase and their assets, like gold and real estate, expand.
-Now comes the part where they realize that they are actually rich. Their per capita income breaks records. The psychology shifts as the generation is replaced by new people who like to spend and enjoy more. Working hours go down, while expenditures on luxuries goes up.
-In the next phase, the economy gets poorer, but the psychology of people and governments does not budge. Debt to earning ratio increases, incomes are high but spending is even higher, payment and government deficit expands. Infrastructure weakens and productive investments lose steam.
-The bubble of being wealthy bursts and deleveraging and austerity measures come in play. They print more money and lower interest rates to help GDP growth. The previously powerful economies now start competing with developing and emerging economies.
Ray Dalio is an American businessman and founder of Bridgewater Associates. Bridgewater Associates has since attracted many clients including pension funds and is currently (as of January 2012) the largest hedge fund in the world with nearly $120 billion under management.
-In the subsequent stage, the wealth is increasing, but psychology is still the same. They save, work hard, and maneuver cautiously. But investment and exports increase and their assets, like gold and real estate, expand.
-Now comes the part where they realize that they are actually rich. Their per capita income breaks records. The psychology shifts as the generation is replaced by new people who like to spend and enjoy more. Working hours go down, while expenditures on luxuries goes up.
-In the next phase, the economy gets poorer, but the psychology of people and governments does not budge. Debt to earning ratio increases, incomes are high but spending is even higher, payment and government deficit expands. Infrastructure weakens and productive investments lose steam.
-The bubble of being wealthy bursts and deleveraging and austerity measures come in play. They print more money and lower interest rates to help GDP growth. The previously powerful economies now start competing with developing and emerging economies.
Ray Dalio is an American businessman and founder of Bridgewater Associates. Bridgewater Associates has since attracted many clients including pension funds and is currently (as of January 2012) the largest hedge fund in the world with nearly $120 billion under management.
October 19, 2012
Ray Dalio – BridgeWater Associates Q2 Letter
The developed world remains mired in the deleveraging phase of the long-term debt cycle. The European deleveraging has been badly managed and is escalating, bringing Europe closer to either a debt implosion or a monetization and currency collapse. The impact of the European deleveraging has spread to the emerging world through diminished capital flows which have weakened their growth rates and undermined their asset prices. In the US, the deleveraging is progressing in a more orderly fashion but continues to weigh on the economy's ability to grow without the monetary support of the Fed. Our studies of deleveragings have proven to be invaluable through this period (let us know if you would like a copy of the expanding library). Because the dynamics of deleveragings are understandable and observable throughout history, one can reasonably assess the nature of their outcomes over time. But because highly-indebted systems that are in deleveragings are also inherently unstable, the timing of discrete events is always highly uncertain (e.g., the shift from austerity to monetization, an exit from the euro, etc.). Through these studies we have continued to refine the indicators we use to measure how the forces of deleveraging are impacting various economies and markets, and we continue to make the relevant adjustments to our investment process that both allow us to anticipate these shifts and to control our risks through the unpredictable twists and turns.
At this point in time Europe is in the most critical stage of the deleveraging process, without a credible plan that will allow a transition from an "ugly" deleveraging, where incomes fall faster than debts decline, to a "beautiful" one, where income grows faster than debts. A transition from an "ugly" to a "beautiful" deleveraging requires an acceptable mix of default, redistribution and monetization. Steps have been taken in this direction, but they remain well short of what is necessary. The range of potential outcomes for Europe and the impacts on the global financial system are wide, so navigating this environment will require flexibility and an understanding of how new policy decisions will affect the path of the deleveraging.
The unresolved European imbalances and the differences in their impacts on each country have produced widening differences in the self-interests of these countries, which have led to political divergences that have magnified the risks. Unlike a year ago, Germany and France no longer stand in solidarity as backstops behind the euro system, but have been divided in their self-interest by divergent financial conditions which are leading to conflicting rather than unified political orientations. France's deteriorating finances and economy have shifted its self-interest toward alliances with "recipient" (lower credit rated) countries like Italy and Spain and away from "contributor" (higher credit rated) countries like Germany and the Netherlands, leaving Germany more isolated as a guarantor of the risks in the euro system and in its views about how to manage the imbalances. Given these shifts in the alliances between contributor and recipient countries we think that the popular assumption that the Germans and the ECB (which requires agreement of the key factions within it) will come through with money to make all of these debts good should not be taken for granted. Said differently, we think that there are good reasons to doubt that European bank and sovereign deleveragings will be prevented from progressing to the next stage in a disorderly way, without a viable Plan B in place. This fat tail event must be considered a significant possibility.
Given the lack of global private sector credit creation, the world's economies remain highly reliant on government support through monetary and fiscal stimulation. Now that the most recent round of global monetary stimulation has ended, world economic growth has slowed and central bankers are in the process of stimulating again. We estimate that in the past few months, global growth has slowed from about 3.3% to 1.9% and that 80% of the world's economies have slowed, including all of the largest. The breadth of this slowdown creates a dangerous dynamic because, given the inter-connectedness of economies and capital flows, one country's decline tends to reinforce another's, making a self-reinforcing global decline more likely and a reversal more difficult to produce. And at this point, while actions have been taken, none of the world's largest economies are stimulating aggressively via either monetary or fiscal policy, further reducing the odds of a reversal.
About half of the global slowdown has been due to slower growth in China. In recent years, China has been the locomotive of world growth and its recent sharp slowdown has had knock-on impacts on numerous countries and markets. China itself now makes up 12% of world GDP and its interactions with the rest of the world add to its impact. China is a large export destination for many countries and is the largest marginal consumer of raw materials in the world, so its slowdown has disproportionately hurt the economies which export to China, and its weaker commodity consumption has hurt the commodity producers. In response to this slowdown, China has begun to ease monetary policy and is contemplating more aggressive fiscal stimulation, but the actions have so far been gradual and have not yet been sufficient to produce a notable economic response.
US conditions have slipped with the rest of the world and the Fed has decided to extend its Twist operation; to end it would have been an inappropriate tightening. Last year's hump in growth has passed as numerous temporary forces have faded, and private sector credit growth remains weak, so growth is converging on the growth of income of around 1.5%. Besides the drag from Europe and the potential for a contagious debt blowup there, numerous US federal programs will expire in the fourth quarter, and given the likely political divisions after the election it will be a challenge for the new Congress to deal with these in a timely manner. Without action, the expiration of these programs represents a fiscal drag on growth of about 2.5%. Given the lack of new aggressive Fed stimulation, the threat from Europe, the simultaneous decline in major country growth rates and the fiscal cliff, the risks to US growth are skewed to the downside.
Over the past 18 months what markets are discounting has changed radically, with a clear bias toward discounting much weaker growth for a longer period of time. This shift is reflected in the rise in credit spreads, fall in bond yields, much lower discounted future earnings growth, flattening of the yield curve, currency moves and shifts in commodity prices. But such price changes simply reflect a transition from the discounting of one set of future economic conditions to the discounting of another set of future economic conditions. After discounting a relatively imminent return to normalcy in early 2011, markets are now pricing in a meaningful deleveraging for an extended period of time, including negative real earnings growth, negative real yields, high defaults and sustained lower levels of commodity prices. This pricing is the midpoint of discounted expectations and each market has an equal probability of outperforming or underperforming. By balancing the portfolio's exposure to discounted growth and inflation, a disappointment in one asset class will be offset by gains in another, without the necessity of predicting which it will be.
Ray Dalio is an American businessman and founder of Bridgewater Associates. Bridgewater Associates has since attracted many clients including pension funds and is currently (as of January 2012) the largest hedge fund in the world with nearly $120 billion under management.
At this point in time Europe is in the most critical stage of the deleveraging process, without a credible plan that will allow a transition from an "ugly" deleveraging, where incomes fall faster than debts decline, to a "beautiful" one, where income grows faster than debts. A transition from an "ugly" to a "beautiful" deleveraging requires an acceptable mix of default, redistribution and monetization. Steps have been taken in this direction, but they remain well short of what is necessary. The range of potential outcomes for Europe and the impacts on the global financial system are wide, so navigating this environment will require flexibility and an understanding of how new policy decisions will affect the path of the deleveraging.
The unresolved European imbalances and the differences in their impacts on each country have produced widening differences in the self-interests of these countries, which have led to political divergences that have magnified the risks. Unlike a year ago, Germany and France no longer stand in solidarity as backstops behind the euro system, but have been divided in their self-interest by divergent financial conditions which are leading to conflicting rather than unified political orientations. France's deteriorating finances and economy have shifted its self-interest toward alliances with "recipient" (lower credit rated) countries like Italy and Spain and away from "contributor" (higher credit rated) countries like Germany and the Netherlands, leaving Germany more isolated as a guarantor of the risks in the euro system and in its views about how to manage the imbalances. Given these shifts in the alliances between contributor and recipient countries we think that the popular assumption that the Germans and the ECB (which requires agreement of the key factions within it) will come through with money to make all of these debts good should not be taken for granted. Said differently, we think that there are good reasons to doubt that European bank and sovereign deleveragings will be prevented from progressing to the next stage in a disorderly way, without a viable Plan B in place. This fat tail event must be considered a significant possibility.
Given the lack of global private sector credit creation, the world's economies remain highly reliant on government support through monetary and fiscal stimulation. Now that the most recent round of global monetary stimulation has ended, world economic growth has slowed and central bankers are in the process of stimulating again. We estimate that in the past few months, global growth has slowed from about 3.3% to 1.9% and that 80% of the world's economies have slowed, including all of the largest. The breadth of this slowdown creates a dangerous dynamic because, given the inter-connectedness of economies and capital flows, one country's decline tends to reinforce another's, making a self-reinforcing global decline more likely and a reversal more difficult to produce. And at this point, while actions have been taken, none of the world's largest economies are stimulating aggressively via either monetary or fiscal policy, further reducing the odds of a reversal.
About half of the global slowdown has been due to slower growth in China. In recent years, China has been the locomotive of world growth and its recent sharp slowdown has had knock-on impacts on numerous countries and markets. China itself now makes up 12% of world GDP and its interactions with the rest of the world add to its impact. China is a large export destination for many countries and is the largest marginal consumer of raw materials in the world, so its slowdown has disproportionately hurt the economies which export to China, and its weaker commodity consumption has hurt the commodity producers. In response to this slowdown, China has begun to ease monetary policy and is contemplating more aggressive fiscal stimulation, but the actions have so far been gradual and have not yet been sufficient to produce a notable economic response.
US conditions have slipped with the rest of the world and the Fed has decided to extend its Twist operation; to end it would have been an inappropriate tightening. Last year's hump in growth has passed as numerous temporary forces have faded, and private sector credit growth remains weak, so growth is converging on the growth of income of around 1.5%. Besides the drag from Europe and the potential for a contagious debt blowup there, numerous US federal programs will expire in the fourth quarter, and given the likely political divisions after the election it will be a challenge for the new Congress to deal with these in a timely manner. Without action, the expiration of these programs represents a fiscal drag on growth of about 2.5%. Given the lack of new aggressive Fed stimulation, the threat from Europe, the simultaneous decline in major country growth rates and the fiscal cliff, the risks to US growth are skewed to the downside.
Over the past 18 months what markets are discounting has changed radically, with a clear bias toward discounting much weaker growth for a longer period of time. This shift is reflected in the rise in credit spreads, fall in bond yields, much lower discounted future earnings growth, flattening of the yield curve, currency moves and shifts in commodity prices. But such price changes simply reflect a transition from the discounting of one set of future economic conditions to the discounting of another set of future economic conditions. After discounting a relatively imminent return to normalcy in early 2011, markets are now pricing in a meaningful deleveraging for an extended period of time, including negative real earnings growth, negative real yields, high defaults and sustained lower levels of commodity prices. This pricing is the midpoint of discounted expectations and each market has an equal probability of outperforming or underperforming. By balancing the portfolio's exposure to discounted growth and inflation, a disappointment in one asset class will be offset by gains in another, without the necessity of predicting which it will be.
Ray Dalio is an American businessman and founder of Bridgewater Associates. Bridgewater Associates has since attracted many clients including pension funds and is currently (as of January 2012) the largest hedge fund in the world with nearly $120 billion under management.
September 22, 2012
Ray Dalio on QE3, Gold, China, Europe, Economy & More
Ray Dalio is an American businessman and founder of Bridgewater Associates. Bridgewater Associates has since attracted many clients including pension funds and is currently (as of January 2012) the largest hedge fund in the world with nearly $120 billion under management.
September 21, 2012
Ray Dalio: Southern Europe is facing 10-15 years controlled depression
Countries in southern Europe face "10 to 15 years controlled depression" which can cause social unrest similar to those that led to the rise of the Nazis in Germany in the 30s of the 20th century, says Ray Dalio, manager largest hedge fund in the world, said on CNBC.
"I think we will see a combination of monetary measures and printing money, which will aim to alleviate depression," said Dalio, founder of Bridgewater Associates, which manages assets of 130 billion dollars.
"At the same time we will see as lower debt levels and debt restructuring ... There will be both, as necessary to relieve the debt burden in order to achieve higher growth than bond yields, "he said.
This process, however, worry whether.
"I fear that another recession could lead to social unrest. Reducing debt levels can be very painful - it all depends on how this process is managed, "he said.
"When people's throats - rich vs. poor, left against right, the situation is very worrying. Hitler came to power in 1933 when the Great Depression reached its bottom. What was it raised tensions between ideological factions and social groups in society, "said Dalio.
The main fund Bridgewater - Pure Alpha - amounted to $ 75 billion in 2011 and reached 25% return after winning 45 percent in 2010 Since its founding in 1975, the fund has brought investors $ 50 billion.
Since the beginning of the year Pure Alpha grew by only 3.1 percent, while EUR 55 billion All Weather Fund, also managed by Dalio, a return of 12.2%. From 1 January 2012 the return on Dow Jones Industrial Average is 11%.
Whether fears that U.S. politicians will agree on the right mix of fiscal and monetary policies will lead to a new recession. "I'm worried about it because the danger is real," he said. He appreciates the U.S. "A" in the Global Competitiveness Index, compiled by Bridgewater Associates.
"We're very competitive, both Europe and Japan. Outperforms most of the emerging markets, "says Dalio. "On the other hand, China, India, Korea and Singapore are more competitive than us," he said.
Ray Dalio is an American businessman and founder of Bridgewater Associates. Bridgewater Associates has since attracted many clients including pension funds and is currently (as of January 2012) the largest hedge fund in the world with nearly $120 billion under management.
September 17, 2012
Bridgewater: Europe Faces Greater Challenge Than the US in 2008
Prior to the G20 Summit that took place in Mexico in June this year, analysts at Ray Dalio’s Bridgewater Associates, made some key observations on how he expects the meeting to play out. The analysis was critical of the role that policy decisions made at these summits play in restoring investor confidence. Policy makers face challenges at these times when deleveraging processes are leading to risk of further slow or negative growth. The analysts of the world’s largest hedge fund, they also note that the fate of Spain was decided a few years ago, but policy makers failed to realize the signs. They still give out empty assurances and seem incapable of planning any significant changes to alleviate the dire consequences.
The European leaders still don’t have a definite Plan B when their present actions, that mostly rely on the fate of the Spainish bailout, and the ECB’s support, will fail to deliver the desired results. The current crisis in Europe differs from the 2007-08 meltdown of the US economy. The major difference is that the US had a focused and united economic interest, while opinions and interests are largely polarized in the Eurozone. Countries like France, Spain, and Italy are not ready to give up fiscal sovereignty, while Germany wants to take part in debt sharing, only when a fiscal union has been achieved. There is a lot of work to be done in Europe, if an actual fiscal and banking union is implemented. Angela Merkel did emphasize on the need for unified policies in the EU Summit that took place in late June 2012. The Brussels summit also agreed on an elaborate bailout plan for Spain.
Bridgewater also comments that the European economy is capable of stonewalling the growth in emerging markets and other developed economies. The observations are true, as China and Japan slowed in the face of the choppy European markets. The most concerned of the group are the US and China, but their ability to provide stimulus is severely strained, as they await impending elections. Dalio comments that if EM countries take part in increasing IMF funds to Europe, it should not be taken as an action purely reflective of their concern for the Euro economy. These economies are looking for a larger voting share in the global lender, and for this reason, the German Chancellor is not excited about these rescue measures. Dalio further adds,
The European leaders still don’t have a definite Plan B when their present actions, that mostly rely on the fate of the Spainish bailout, and the ECB’s support, will fail to deliver the desired results. The current crisis in Europe differs from the 2007-08 meltdown of the US economy. The major difference is that the US had a focused and united economic interest, while opinions and interests are largely polarized in the Eurozone. Countries like France, Spain, and Italy are not ready to give up fiscal sovereignty, while Germany wants to take part in debt sharing, only when a fiscal union has been achieved. There is a lot of work to be done in Europe, if an actual fiscal and banking union is implemented. Angela Merkel did emphasize on the need for unified policies in the EU Summit that took place in late June 2012. The Brussels summit also agreed on an elaborate bailout plan for Spain.
Bridgewater also comments that the European economy is capable of stonewalling the growth in emerging markets and other developed economies. The observations are true, as China and Japan slowed in the face of the choppy European markets. The most concerned of the group are the US and China, but their ability to provide stimulus is severely strained, as they await impending elections. Dalio comments that if EM countries take part in increasing IMF funds to Europe, it should not be taken as an action purely reflective of their concern for the Euro economy. These economies are looking for a larger voting share in the global lender, and for this reason, the German Chancellor is not excited about these rescue measures. Dalio further adds,
- “Policy makers in Europe have a particularly tough road ahead, and “the challenges of the European policy makers much greater than those of American policy makers in 2008.”
Source: ValueWalk
Ray Dalio is an American businessman and founder of Bridgewater Associates. Bridgewater Associates has since attracted many clients including pension funds and is currently (as of January 2012) the largest hedge fund in the world with nearly $120 billion under management.
Ray Dalio is an American businessman and founder of Bridgewater Associates. Bridgewater Associates has since attracted many clients including pension funds and is currently (as of January 2012) the largest hedge fund in the world with nearly $120 billion under management.
September 16, 2012
Ray Dalio recent thoughts
Ray Dalio of Bridgewater hedge fund response to the question 'What keeps you up at night?' is most likely the reason why the ECB and FED went 'unlimited' with QE policy this month.
Points to note:
- Europe crisis has much more trouble to come and will result in a lost decade
- $2 trillion euros of losses to be soaked up by European banks by either write offs or monetary policy
- Age of great returns is over, as there will be no benefit from interest rates falling (as they are already zero)
- De leveraging safely requires the correct balance between austerity, monetary and fiscal policy
- Depressions happen when there is no monetary or fiscal policy
At 9.50, the question is: What keeps you up at night?
Response: We are in a one world economy and the world is slowing. In the past when the world economy sank the response was to lower interest rates. This can't be done now as rates are already at zero, thus there is an air pocket of what policy can be used. IF the world falls into recession, the response will need to be global with the correct mix of prudent monetary and fiscal policy. Ray fear that the response will be be prudent, due to the fact the policy makers will not know how to respond.
Ray Dalio is an American businessman and founder of Bridgewater Associates. Bridgewater Associates has since attracted many clients including pension funds and is currently (as of January 2012) the largest hedge fund in the world with nearly $120 billion under management.
Points to note:
- Europe crisis has much more trouble to come and will result in a lost decade
- $2 trillion euros of losses to be soaked up by European banks by either write offs or monetary policy
- Age of great returns is over, as there will be no benefit from interest rates falling (as they are already zero)
- De leveraging safely requires the correct balance between austerity, monetary and fiscal policy
- Depressions happen when there is no monetary or fiscal policy
At 9.50, the question is: What keeps you up at night?
Response: We are in a one world economy and the world is slowing. In the past when the world economy sank the response was to lower interest rates. This can't be done now as rates are already at zero, thus there is an air pocket of what policy can be used. IF the world falls into recession, the response will need to be global with the correct mix of prudent monetary and fiscal policy. Ray fear that the response will be be prudent, due to the fact the policy makers will not know how to respond.
Ray Dalio is an American businessman and founder of Bridgewater Associates. Bridgewater Associates has since attracted many clients including pension funds and is currently (as of January 2012) the largest hedge fund in the world with nearly $120 billion under management.
September 15, 2012
Bridgewater Associates makes the world's largest hedge fund
The largest investment company in the world, Bridgewater Associates intends to launch a new hedge fund with unprecedented capital of $ 10 billion, says Wall Street Journal.
The amount is a record for similar projects, and starting with such large capital is evidence of recovery of business investment since the crisis in 2008, the newspaper said.
The new fund will be called Pure Alpha Major Markets.
It is assumed that it will be focused on working with the stock exchanges of the most developed economies, such as Germany and the UK. For now, it can belong to only existing investors from Bridgewater.
The company itself was founded in 1975 by entrepreneur Ray Dalio, who graduated from Harvard and deals mainly with macroeconomic investments - such as gold and bonds.
Bridgewater manages assets are currently over $ 100 billion.
The large amount of Bridgewater - the company has 1,200 employees, is very attractive for investors because the fund can provide resources for services that others can not.
Bridgewater analysts regularly produce valuable reports that can not be found elsewhere, points out financial issue.
Ray Dalio is an American businessman and founder of Bridgewater Associates. Bridgewater Associates has since attracted many clients including pension funds and is currently (as of January 2012) the largest hedge fund in the world with nearly $120 billion under management.
The amount is a record for similar projects, and starting with such large capital is evidence of recovery of business investment since the crisis in 2008, the newspaper said.
The new fund will be called Pure Alpha Major Markets.
It is assumed that it will be focused on working with the stock exchanges of the most developed economies, such as Germany and the UK. For now, it can belong to only existing investors from Bridgewater.
The company itself was founded in 1975 by entrepreneur Ray Dalio, who graduated from Harvard and deals mainly with macroeconomic investments - such as gold and bonds.
Bridgewater manages assets are currently over $ 100 billion.
The large amount of Bridgewater - the company has 1,200 employees, is very attractive for investors because the fund can provide resources for services that others can not.
Bridgewater analysts regularly produce valuable reports that can not be found elsewhere, points out financial issue.
Ray Dalio is an American businessman and founder of Bridgewater Associates. Bridgewater Associates has since attracted many clients including pension funds and is currently (as of January 2012) the largest hedge fund in the world with nearly $120 billion under management.
July 30, 2012
Ray Dalio, the man behind Bridgewater Associates comments on Spain
An ELA for Spanish banks would likely be several times the size of those in place for Greece and Ireland, further fracturing the uniformity of central bank standards across the eurozone, and the magnitude of funding coming through the national central banks could accelerate rapidly.
Spanish Banks' Collateral Is Running Out in a Way That Could Force Them Into an ELA
We estimate that the Spanish banking system only has a few hundred billion euros left in eligible collateral. That means that some of the weaker banks are likely already getting close to a point where their collateral is exhausted. (We think this reality is the reason why we are seeing a number of legal changes in Spain that look like an attempt to scrounge up a bit more capital). if Spanish banks run out of ECB collateral, then the Spanish central bank would likely need to turn on its own ELA.The potential magnitude of such an operation would dwarf the nationalized money printing to date.
Spanish balance sheets can probably support about €800 billion of borrowing from the ECB. Between the ECB and privately secured funding, mostly foreign interbank, Spanish banks are already borrowing about €500 billion, and if private secured funding was pulled, this borrowing and related collateral could be shifted to the ECB. So we think about the remaining capacity to borrow as the total collateral borrowing capacity (€800 billion) less what is pledged to both the ECB and private lenders (€500 billion), or about €300 billion. However, this almost certainly overstates Spanish banks' collateral cushion because there are strong banks such as BBVA and Santander that probably have ample capacity and weaker banks that are likely much closer to being tapped out.
The attempt to manage the imbalances among the Euroland economies is an extremely dangerous highwire act, and to the extent that monetary policies diverge to serve individual countries' needs, the further capital flows will likely go in the opposite direction.
The Balkanization of European Central Banking Continues
We think that one of the bigger risks facing the Eurosystem is the continuing division in its central banking system. Wien the euro came into existence, the individual national central banks within Europe became mostly implementers of a common ECB monetary policy. But as the European debt crisis has dragged on, the national central banks have gradually begun to conduct policies that are creating a differentiated monetary policy between core and peripheral countries (as we'll describe below). The more the national central banks create easier policy within weaker parts of the eurozone, the more they stimulate money creation in the weaker parts of Europe that will logically flow to the stronger parts -- which will only put more pressure on the currency union.
The ECB's rejection of Greek government bonds as Eurosystem-eligible collateral is the most recent example of the growing balkanization, as it will require Greek banks to again turn to their national central bank's ELA for funding, an avenue that basically allows them not to adhere to the ECB's borrowing standards. The real looming risk, however, is in Spain. Spanish bank funding needs continue to grow, system-wide ECB-eligible collateral is running low (and anecdotal signs of banks seeking to create new collateral suggest to us that some banks are probably already almost out), and there is a real chance that the Spanish banks could soon need to turn to an ELA of their own.
An ELA for Spanish banks would likely be several times the size of those in place for Greece and Ireland, further fracturing the uniformity of central bank standards across the eurozone, and the magnitude of funding coming through the national central banks could accelerate rapidly.
Recall that, like the Fed, the ECB has a hub and spoke structure, with policy directed by Frankfurt and implemented by the national central banks (NCB's). But unlike the Fed, which has been around for a very long time and is the national central bank of a single, indivisible sovereign, the ECB is still in its infancy and represents a collective of 17 countries with very different risk tolerances, incentives, and historical perspectives. And importantly, these countries are not bound very tightly in a fiscal union. The ECB charter reflects this, providing a reasonable amount of autonomy and authority to individual NCB's, which was not utilized until the debt crisis. This autonomy has recently translated into the increasing use of emergency liquidity facilities (ELAs) and lending against non-standard collateral by the NCB's. And unlike standard ECB repo lending operations, these loans are solely backstopped by the applicable NCB and, if necessary, the domestic government in that country.
This creates a two-tier monetary policy - exactly what Draghi just tried to tell us he is avoiding.
The ECB has taken some steps:
Emergency Liquidity Assistance (ELA's)
NCB's received, under the original construct of the European Central Bank, certain autonomous rights, including the ability to determine their own policies with regard to the provision of domestic liquidity. However, few central banks ever actually operated outside the Eurosystem for more than very limited purposes. This changed with the onset of the sovereign debt crisis. Several NCB's have opened ELA's, which theoretically give them the ability to unilaterally set collateral standards, terms, and haircuts for lending to the domestic banking system. The risks arising from these ELA loans are borne by the NCB's (since these transactions are "outside" the Eurosystem) and backstopped by the domestic government. The ECB has the ability to shut down these facilities with a two-thirds vote of the governing council (and we believe that the ECB is involved in the set-up and maintenance of ELA's), but technically the NCB's do not require the ECB's approval to open an ELA. Our current estimate of ELA's is €180 billion.
Non-standard collateral
In concert with the recent LTRO's, the ECB announced an expansion in eligible collateral for repo operations. The NCB's had to submit for ECB approval the non-standard collateral they would accept. However, even with the ECB's approval, the risk of loans backed by non-standard collateral is borne by the individual NCB's, not the ECB. After the second LTRO, ECB President Draghi said that €53 billion of non-standard collateral had been accepted by the ECB. We don't know if this number has changed since that time. There is potential for this number to go much higher. It should also be noted that once again we saw differentiation across the NCB's. Only seven NCB's submitted plans to allow their banks an expanded pool of eligible collateral. Most core NCB's rejected the opportunity to ease collateral standards (the exceptions being France and Austria).
Ray Dalio is an American businessman and founder of Bridgewater Associates. Bridgewater Associates has since attracted many clients including pension funds and is currently (as of January 2012) the largest hedge fund in the world with nearly $120 billion under management.
Spanish Banks' Collateral Is Running Out in a Way That Could Force Them Into an ELA
We estimate that the Spanish banking system only has a few hundred billion euros left in eligible collateral. That means that some of the weaker banks are likely already getting close to a point where their collateral is exhausted. (We think this reality is the reason why we are seeing a number of legal changes in Spain that look like an attempt to scrounge up a bit more capital). if Spanish banks run out of ECB collateral, then the Spanish central bank would likely need to turn on its own ELA.The potential magnitude of such an operation would dwarf the nationalized money printing to date.
Spanish balance sheets can probably support about €800 billion of borrowing from the ECB. Between the ECB and privately secured funding, mostly foreign interbank, Spanish banks are already borrowing about €500 billion, and if private secured funding was pulled, this borrowing and related collateral could be shifted to the ECB. So we think about the remaining capacity to borrow as the total collateral borrowing capacity (€800 billion) less what is pledged to both the ECB and private lenders (€500 billion), or about €300 billion. However, this almost certainly overstates Spanish banks' collateral cushion because there are strong banks such as BBVA and Santander that probably have ample capacity and weaker banks that are likely much closer to being tapped out.
The attempt to manage the imbalances among the Euroland economies is an extremely dangerous highwire act, and to the extent that monetary policies diverge to serve individual countries' needs, the further capital flows will likely go in the opposite direction.
The Balkanization of European Central Banking Continues
We think that one of the bigger risks facing the Eurosystem is the continuing division in its central banking system. Wien the euro came into existence, the individual national central banks within Europe became mostly implementers of a common ECB monetary policy. But as the European debt crisis has dragged on, the national central banks have gradually begun to conduct policies that are creating a differentiated monetary policy between core and peripheral countries (as we'll describe below). The more the national central banks create easier policy within weaker parts of the eurozone, the more they stimulate money creation in the weaker parts of Europe that will logically flow to the stronger parts -- which will only put more pressure on the currency union.
The ECB's rejection of Greek government bonds as Eurosystem-eligible collateral is the most recent example of the growing balkanization, as it will require Greek banks to again turn to their national central bank's ELA for funding, an avenue that basically allows them not to adhere to the ECB's borrowing standards. The real looming risk, however, is in Spain. Spanish bank funding needs continue to grow, system-wide ECB-eligible collateral is running low (and anecdotal signs of banks seeking to create new collateral suggest to us that some banks are probably already almost out), and there is a real chance that the Spanish banks could soon need to turn to an ELA of their own.
An ELA for Spanish banks would likely be several times the size of those in place for Greece and Ireland, further fracturing the uniformity of central bank standards across the eurozone, and the magnitude of funding coming through the national central banks could accelerate rapidly.
Recall that, like the Fed, the ECB has a hub and spoke structure, with policy directed by Frankfurt and implemented by the national central banks (NCB's). But unlike the Fed, which has been around for a very long time and is the national central bank of a single, indivisible sovereign, the ECB is still in its infancy and represents a collective of 17 countries with very different risk tolerances, incentives, and historical perspectives. And importantly, these countries are not bound very tightly in a fiscal union. The ECB charter reflects this, providing a reasonable amount of autonomy and authority to individual NCB's, which was not utilized until the debt crisis. This autonomy has recently translated into the increasing use of emergency liquidity facilities (ELAs) and lending against non-standard collateral by the NCB's. And unlike standard ECB repo lending operations, these loans are solely backstopped by the applicable NCB and, if necessary, the domestic government in that country.
This creates a two-tier monetary policy - exactly what Draghi just tried to tell us he is avoiding.
The ECB has taken some steps:
Emergency Liquidity Assistance (ELA's)
NCB's received, under the original construct of the European Central Bank, certain autonomous rights, including the ability to determine their own policies with regard to the provision of domestic liquidity. However, few central banks ever actually operated outside the Eurosystem for more than very limited purposes. This changed with the onset of the sovereign debt crisis. Several NCB's have opened ELA's, which theoretically give them the ability to unilaterally set collateral standards, terms, and haircuts for lending to the domestic banking system. The risks arising from these ELA loans are borne by the NCB's (since these transactions are "outside" the Eurosystem) and backstopped by the domestic government. The ECB has the ability to shut down these facilities with a two-thirds vote of the governing council (and we believe that the ECB is involved in the set-up and maintenance of ELA's), but technically the NCB's do not require the ECB's approval to open an ELA. Our current estimate of ELA's is €180 billion.
Non-standard collateral
In concert with the recent LTRO's, the ECB announced an expansion in eligible collateral for repo operations. The NCB's had to submit for ECB approval the non-standard collateral they would accept. However, even with the ECB's approval, the risk of loans backed by non-standard collateral is borne by the individual NCB's, not the ECB. After the second LTRO, ECB President Draghi said that €53 billion of non-standard collateral had been accepted by the ECB. We don't know if this number has changed since that time. There is potential for this number to go much higher. It should also be noted that once again we saw differentiation across the NCB's. Only seven NCB's submitted plans to allow their banks an expanded pool of eligible collateral. Most core NCB's rejected the opportunity to ease collateral standards (the exceptions being France and Austria).
Ray Dalio is an American businessman and founder of Bridgewater Associates. Bridgewater Associates has since attracted many clients including pension funds and is currently (as of January 2012) the largest hedge fund in the world with nearly $120 billion under management.
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