Notes from the conversation between Ray Dalio and Tim Geithner from the 2016 Delivering Alpha Conference. These ARE VERY VERY INFORMAL NOTES

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Are we at long term debt cycle?

Japan is one step ahead of Europe and Europe is ahead of US… in terms of limited ability to produce stimulation

Everyone will have lower growth rate than we’re used to

Ray Dalio
Image source: CNBC Video Screenshot
Ray Dalio

Tim Geithner

Most economists to..

Demographics

People have this sense that our system can deliver anything meaningful… it’s hard to overcome deeper secular forces in terms of coming out of long term debt cycle

Ray Dalio

There are two forces.. You have to think of productivity and… money cycles???.. You’re either going to get big changes maybe from changing productivity… maybe you’d have the money cycle, that’s really question for investors holding money. The central banks have to make it really bad for savers, which they’re doing, in order to make it better for debtors

We are in situation where they want to drive you out of cash out of bonds by making them so terrible. We have experienced not the bad returns of that debt, investors look at the price move as well as the carry ad we go through these cycles where the carry gets all the attention...that’s a dangerous situation, because the carry can be removed in the price move of day.

Do pro forma financial statements for five years forward and see where tat that would mean in terms of monetary policy and cash flows. If you take ECB’s policy and say that has to go on for five years, they can’t buy the same stuff… or take japan well what can they buy.. They’re starting to buy things that are riskier assets in this greater monetization. As a result of that investors, holders of assets, will start to think about alternatives, and those alternatives when that happens will probably have profound effect on the markets, in other words an end to the cycle we’ve been to

The historical parallel is 1935-45

The 1929 period was a bubble just like 2008

We had a classic depression, 1929-32. From then you have a monetization producing of money to make up the gap… then you bring interest rates close to zero. Now we have a situation where there are no interest rates hardly and asset prices have enjoyed the liquidity effect so tit would be the most recent time in history that’s analogous to where we are now.

Ray Dalio

You produce more relevant stats than the fed dowses (according to who??)

In my humble opinion i think the fed is putting too much emphasis on the biz cycle and note enough on the long term debt cycle, i don't think they  may be paying enough attention to how markets react related to whats discounted in the curve...all asset prices are affected by interest rates… so if there’s a change in those interest rates relative to discount not only does that affect debt markets but equity market. That has a wealth effect.. I think the fed has diff views.. It’s a risky thing to raise interest rates more than is discounted in the curve

Doesn't think it’s right to raise interest rates

When look at inflation, demographics, risks are so much more on the downside… if you have  downturn and you don't have that power

Tim Geithner

I don't think there’s any precedent for what we are in today. We are in an expansion that’s pretty old.. And we’re in a world where bad things happen.

Danger is that we’re out of ammo - Sorkin

It’s true to say that central banks in developed markets are much closer to the frontier of what’s possible than any of have ever seen but it’s not true that the major govts are completely out of ammunition, certainly the us and china and parts of Europe have other things they can do. But in-aggregate they are less,... that what was available to other periods

Ray Dalio

In 1935.. We are closer to pushing on a string. Japan is close, Europe is quite close, us is closer to pushing on a string. China is a bit farther away.

Tim Geithner

Because the financial system has more capital

Tbf, if you ask members of congress of what wstnads in a way to legislate things to be good for the economy, they wouldn't see the Feds doing so much they can do anything, their problem is they can’t agree, they’re too far apart.

BREXIT

Ray Dalio

I think that populism the wealth gap the middle class all of that, nationalism.. Is a global phenomenon, and it’s very similar to the late 1930s, and that concerns me.

You diversify, you have a hold bunch of uncorrelated diversified bets, and you also understand it as best as you can.

You try to stay 6 months or 6 days ahead...who knows? 47:00

Ray Dalio

There are short term concerns, business cycle concerns for them, the leadership in china is much more capable than is imagined. Here are the four concerns

They have to go through debt restructuring, economic restructuring, have to restructure their capital markets, and keep eye on balance of payments

Those are things we’ve all had to do.. In us we couldn’t pay our debts in 1971

The important thing is how they’re dealing with hit. And if you really get to know the economic leaders and understand something of their capabilities... you'd have to say that they're highly capable people. My god i can give a list of the programs, it’s so increasingly impressive what they've put together. This is a debt which is not in a foreign currency.. If you have debt in domestic currency you can mange it… I'm not saying it’s not challenging but the idea it’s going to blow up.. It has to be well managed and i think it’s well managed

For the productivity over the longer run it’s going to be important. Their bad growth rate is prob going to be twice our good growth rate… if you look at where they're going to be it’s a positive outlook

Tim Geithner

They have degrees of freedom that are the envy of the world. Very high savings rate, no meaningful debt in other peoples currency… very unlikely that they lose control of the exchange rate and they have a financial system that is predominately dominated by state and the banks and that’s a system that is easier to stabilize and recapitalize… than what we faced in 2007

They are remarkably talented people.

They got to watch all the mistakes that other countries made

It'll be a challenging thing, it has to be messy in some ways  but they have a lots of tools to manage this without going through a major crisis  53:15

Ray Dalio

I think that the market environment will always be exciting and the q is whether you’re adding value or not. I think most importantly whether you’re going to add value in a bad time, in other words everyone is long, almost everyone is leveraged long, that’s an exposure, so i think depends how well you play the game, there will be opportunities …

Could start again today - note quote

Made 14.% in 2008

The opportunities for volatility, there’s a cross current that’s going on right now, pushing of liquidity causing asset prices to rise and so on and then there is the low future asset prices and the vol that lies ahead for the reason we’re talking about , we’re in the middle of the cross current right there and the currents are going to change.. It’s boring than we’re in trouble

Ray Dalio

Idea of meritocracy which pursues meaningful work and meaningful relationships through radical truth and radical transparency.

Some people absolutely hate it and some people couldn't work anywhere else.

Ray Dalio

Calm down make sure you understand how the economic machine works.. What scares Tim and I about the populism is that extremism.. We don't want to brush, we want to be able to understand things are complicated

Some more notes from the official CNBC transcript below

>> You said to me when we were talking backstage -- and I hope I can -- the historical parallel is 1935-1945. That's where we are now?

RAY DALIO: Yeah. Well, you want to find an analogous period that you look to. But the 1929 period was a bubble, just like 2008. And we had a classic monetary policy -- we had a classic depression 1929-1932. From then, you had the monetization, quantitative easing, essentially monetization, producing of money to make up that gap. And you have the reactions after that. Then you bring interest rates down to close to zero.

So now we have a situation where there's no interest rates hardly and that asset prices have enjoyed the liquidity effect. And so there is no period in time -- it would be the most recent period in time globally that is most analogous to the situation we're in.

>> All right. I want to get to the Fed, but I just have one policy question for you, a bank policy question. We talked about Wells Fargo and other things this morning here.

When you think about all of the regulations that have been placed on top of the financial system -- Wall Street, capital requirements, leverage ratios -- what do you think that's done to the growth rate?

>> I think the financial system by most measures is dramatically more stable today because the strength of the capital cushions in the system are just dramatically thicker. And that's a valuable investment in trying to reduce the risks of further trauma from the system.

And think it's -- although there's a lot of muck and bad design in the regulation that came after the crisis, you know, the pendulum tends to kind of -- I don't know how to describe it, but, yeah, it's a messy muck of stuff. But I think it's hard to make the argument, even though it would be nice to clean that up, make it a little bit more intelligent design in some ways.

It's hard to make the argument outside some important pockets of the economy that it's had a meaningful negative effect on how fast we're growing. Again, I think one of the great strengths of us is if you are a company in the United States today, if you've got an idea, it's just a great place to try to raise capital.

And the diversity of ways people can finance things in this place is a great strength. That, I think, is better today than it was. There are some exceptions, though. I mean, if you're self-employed and relatively moderate income, it's much harder to get a mortgage. And that has some effect. And if you're small businesses in some areas, it's tough postcrisis. But I don't think that's principally the result of the undesirable features of some of the reforms. Some of it is in there, but it's not that dramatic.

>> Ray, I want to talk Fed with you. This is Mr. Volkert. He says that you have, quote, a bigger staff and produced more relevant statistics than the Federal Reserve does.

So what is it that you know that the Fed might be missing?

RAY DALIO: In my humble opinion, I think that the Fed is putting too much emphasis on the business cycle and not enough on the long-term debt cycle. And I don't think they may be paying enough attention to how markets react relative to what's discounted in the curve.

So we have about 50 basis points of typing over the next three years priced into the curve. That affects all asset prices, because all asset prices are affected by interest rates. It's the discount rate for the present value of the future cash flows.

So if there's a change in those interest rates relative to discount, not only does that affect the bond market, it affects the equity market. That has a wealth effect. And when I say they don't know, I think the Fed has different views. And some people have different views. So I wouldn't want to characterize it as a whole.

But I also think they are paying attention to some of those things. But it's a risky thing to discount -- to raise interest rates more than is discounted in the curve particularly -- the duration of assets is lengthened. As interest rates go down, there's a mechanical --

>> So when Jamie Dimon says to raise interest rates, you think that's wrong?

RAY DALIO: That's right. I think that that's wrong. At this stage, the risks are so asymmetric.

Like, there's no doubt that you can slow the world economy, the U.S. economy. Tightening will work. Okay? And when we look at the inflation pressures, you know, this is a global thing. And you look at the demographics. All of those things means that the risks are so much more on the downside.

If you have a downturn -- like Tim was saying, if you have a downturn and you don't have the power, we've never been in a world together that's been like this. You know?

>> Yes, it's a dramatically different world. We all got used to a world before the crisis, where modest shock was met with massive capacity to ease. Recessions became shorter and shallower, more contained. I don't think there's any precedent for the world we're in today. You know, we're an expansionist, pretty old. It doesn't look that old, but it's old in years.

And, you know, we're in a world where stuff -- bad things happen.

>> But the danger is that we're out of ammo at this point. And that if you don't raise rates, you are really out of ammo.

>> But the idea that you should raise rates to replenish the arsenal and slow the economy, that's a weird argument to make. I think that it's true to say that central banks in developed markets are much closer to the frontier of what's possible than I think any of us have ever seen.

But it's not true -- and I think Ray would say -- it's not true that the major governments are completely out of ammunition. Certainly the United States, certainly China, certainly parts of Europe have a range of things they could do. But still, in aggregate, they are less, and it's a weaker arsenal, a weaker thing than was available to us in almost any previous period that any of us have seen or read about.

>> I think 1935 was the year that the term "pushing on a string" was invented. We are, in varying degrees, closer to pushing on a string. Japan is pushing on a string. Europe is quite close to pushing on a string. The United States is closer to pushing on a string. China is a little bit farther away. Wouldn't you agree?

>> Yeah. And I think there are some slightly offsetting things which are good, which is that, because the financial system has more capital, it's less likely to amplify a negative shock. And a given dose of monetary policy, fiscal policy will have more power than in a system that is weaker and more fragile. That's a good, offsetting thing.

Also, it's also true that the basic framework of many emerging markets is a much more resilient, less fragile, than it was before. That's good too in some sense. But still, the fact that for most of the major developed economies, governments are so close to the frontier of what they can do, is a dangerous and scary thing.

>> But here's the policy question: Isn't there an argument to be made that by keeping interest rates as low as they have been, they have effectively allowed Congress to not do its job? That by forcing the issue, you would force real measures to take place that actually might improve the economy on a more long-term basis?

>> You mean because you inflict more pain? I mean, how does that forcing happen?

>> Because it effectively becomes a prod. If the government -- if the Fed is going to have lower interest rates and take on the employment issue as its job, any senator and congressperson doesn't have to.

>> I leave the politics to Tim.

TIMOTHY GEITHNER: I don't do politics.

[Laughter]