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
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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

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