Tag: Ray Dalio

Random notes 3: One Billion Americans, the price of gold, Ray Dalio on macroeconomics, Michael Saylor on bitcoin, and a lot more

Lots of random notes from all the media I’ve consumed over the past week. And here are notes from week 2 and week 1.

First, I recently shared some highlights from an intense book on currency crises, here’s a favorite excerpt:

Although many now-advanced economies have graduated from a history of serial default on sovereign debt or very high inflation, so far graduation from banking crises has proven elusive. In effect, for the advanced economies during 1800–2008, the picture that emerges is one of serial banking crises.

Next, here are some interesting charts I saw on Twitter, starting with a chart on why gold is likely to appreciate (source):

Personally surprised by how little of the US debt is actually owned by Japan and China, despite how much msm talks about it (source):

Onto the random notes!

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Lily Wu, The Crisis of China’s Investment Environment (source)

  • China cos are less profitable than those in US, but more worryingly, gross margins have shrunkg (for example, even as Alibaba has gotten much bigger, its gross margins have declined; one reason is Alibaba entering less and less profitable markets)
  • Another example: GM’s profit in China is $300 USD per car, versus $1K in the US
  • In semiconductors, TSMC has arguably widened its lead over China’s state backed SMIC
  • Chinese companies do well in new / emerging industries, but are most challenged when late to the game, and there are strong global competitors
  • The gov’t recognizes private entrepreneurs and private companies generally perform better
  • There are increasing localization requirements for foreign cos on things like IP transfer, localizing tech and content
  • McDonalds sold its China ops to PE
  • China has world class IP laws, but problem is enforcement, not transparent, and penalties not punitive enough
  • Some similarities to Japan in 80s, but China is 10x larger population, much more unpredictable than Japan
  • Today 75% of HK stock exchange by weighting is China cos! Main reason intl capital goes to HKEX is because denominated in HKD, which is an open currency system and pegged to USD

Some highlights from Matt Iglesias’s new book, One Billion Americans (Kindle)

  • But the United States is not “full.” Many of its iconic cities—including not just famous cases of collapse like Detroit but also Philadelphia and Chicago and dozens of smaller cities like Rochester and Erie—actually have fewer residents than they had decades ago. And virtually all of our thriving cities easily have room to grow and accommodate more people.
  • Right now the United States has about 93 people per square mile. If the aggregate population tripled, then density would too. Many, many countries are far denser than this, including not just city-states like Singapore (more than 20,000 per square mile) or small island nations like Malta (3,913 per square mile) but also poor and arguably “overpopulated” countries like Burundi (1,127 per square mile). Successful developed countries that include a healthy mix of cities, suburbs, and countryside manage to far exceed tripling America’s population density. South Korea has 1,337 people per square mile and Belgium has 976.

And here’s Tyler Cowen podcast chat with Matt. The idea is kinda out there but it’s well reasoned, and inspires me to think bigger.

Ark recently put out an amazing whitepaper on bitcoin. I covered part 1 in the last random notes, and here’s part 2:

Bitcoin As An Investment, Ark whitepaper (source)

  • With little more than a 10-year price history, bitcoin has been the best performing asset of the 21st century. Five years ago, a $10,000 investment in bitcoin would have delivered a 119% compound annual rate of return and would be worth roughly $500,000 today. In fact, during any yearly holding period since inception through September 1, 2020, bitcoin’s return has been positive, significantly so in most cases
  • With daily trading volume of $3 billion, bitcoin’s spot markets are di minimis compared to U.S. equity markets, U.S. bond markets, and global foreign exchange markets. In other words, bitcoin trading is comparable in size to a large cap stock rather than an entire asset class. […] Compared to the “FANG” stocks, bitcoin’s trading volume is higher than that of Netflix and Google but lower than that of Amazon and Facebook, as shown below.
  • We believe that historical growth rates, bitcoin’s daily volume would exceed the volume of the US equity market in fewer than 4 years, and the volume of the US bond market in fewer than 5 years, as shown below.
  • Liquidity as measured by bitcoin-US dollar bid-ask spreads is illuminating. Today, at the largest trading venues globally, spreads can be di minimis at the top exchanges, as low as 0.0001%, as shown below. For comparison, the average US equity bid-ask spread is roughly 0.035%, suggesting that bitcoin often is more liquid than the average publicly traded equity.
  • With hindsight, to construct a portfolio with bitcoin while maximizing the Sharpe Ratio or minimizing volatility at the efficient frontier, an investor would allocate between 0.27% and 6.55% to bitcoin.

Gold expert Marin Katusa on TIP

  • Big fan of Equinox Gold, it’s profitable even at $1100 gold (per oz)
  • 17 rare earths, US used to be big producer, China biggest now, but very hard to buy from China, have it shipped, and have it be good quality
  • Massive stimulus coming after November election
  • Will see $2K+ gold prices soon
  • Gold miners staying disciplined this cycle unlike 2007-2012
  • Japan is MMT case study; covid was excuse for govts do MMT, and it will continue even after covid is gone
  • Barricks (GOLD) is a leader in preaching discipline; it wasn’t Buffett but one of managers that did the research
  • Marin believes people are underpricing geopolitical risk big time re gold miners

Ray Dalio on Bloomberg — among all the financial pundits, Dalio offers perhaps the clearest – yet nuanced – understanding of what’s going on in today’s crazy financial world. But not when it comes to bitcoin. I think he just hasn’t learned enough about it…it’s probably not big enough for him to care (yet).

  • 1. End of the long term debt cycle which started in 1940s
  • 2. Most divided political and wealth inequality
  • 3. Rising global power in China
  • Central Bankers control capital markets now, coordinated with central government. “They’re the market makers”
  • Central Bank balance sheets will explode. They’ll go as far as they need to in order to keep system functioning
  • History shows a perfect track record of doing this
  • Risk premium is driven by amount of liquidity injected, PE ratios going to 40, 50 is no more implausible than zero interest rates
  • Capital markets drive the PE and risk premiums more than the real economy drives the capital markets
  • “You don’t want cash and you don’t want bonds”
  • What is the storehold of wealth? “It’s the reciprocal of the value of money”: Equities, Gold, an alternative currency (eg, mentions China digital currency), “reflation assets”
  • Most analogous period to today is war period of 1930 to 1945 (me: this is similar to Lyn Alden’s writings)
  • US can’t let interest rates rise, because interest payments will rise and asset prices will fall
  • “We’re in a fiat monetary system”
  • Thucydides Trap – in the last 500 years, 16 times a rising power challenged a dominant power, and 12 times there were shooting wars
  • Compared to China, question for US is “how well are we playing the game?”; they’re on other side of chess board, smart, have historical perspective

Why Tokyo, despite significant population growth, has seen far lower increases in housing prices compared to the US:

As FT’s Tokyo bureau chief Robin Harding wrote in the article, the city had 142,417 housing starts in 2014, which was “more than the 83,657 housing permits issued in the state of California (population 38.7m), or the 137,010 houses started in the entire country of England (population 54.3m).” Compare this, also, with the roughly 20,000 new residential units approved annually in New York City, the 23,500 units started in Los Angeles County, and the measly 5,000 homes constructed in 2015 throughout the entire Bay Area

Fascinating book excerpt on how Genghis Khan was able amass so much gold and silver and issue his own paper money:

Let me tell you further that several times a year a fiat goes forth through the towns that all those who have gems and pearls and gold and silver must bring them to the Great Khan’s mint. This they do, and in such abundance that it is past all reckoning; and they are all paid in paper money

Lyn Alden with another clearly argued essay on why fiscal policy will likely drive inflation:

  • So, historically, the difference between a normal short-term deleveraging event and a long-term deleveraging event, is that the long-term version usually includes a significant component of currency devaluation
  • Even an example from 2600 years ago captures today’s situation in an eerily accurate way:
    • In the Athens of 594 B.C., according to Plutarch, ‘the disparity of fortune between the rich and the poor had reached its height, so that the city seemed to be in a dangerous condition, and no other means for freeing it from disturbances seemed possible but despotic power.’ The poor, finding their status worsened with each year- the government in the hands of their masters, and the corrupt courts deciding every issue against them- began to talk of violent revolt. The rich, angry at the challenge to their property, prepared to defend themselves by force. Good sense prevailed; moderate elements secured the election of Solon, a businessman of aristocratic lineage, to the supreme archonship. He devalued the currency, thereby easing the burden of all debtors (although he himself was a creditor); he reduced all personal debts, and ended imprisonment for debt; he cancelled arrears for taxes and mortgage interest, he established a graduated income tax that made the rich pay at a rate twelve times that required of the poor; he reorganized the courts on a more popular basis; he arranged that the sons of those who had died in war for Athens should be brought up and educated at the government’s expense. The rich protested that his measures were outright confiscation; the radicals complained that he had not redivided the land; but within a generation almost all agreed that his reforms had saved Athens from revolution
  • Japan, as the largest creditor nation in the world currently, is the one example out of 52 that has avoided that outcome vs the other 51 examples. Japan didn’t fix their problem; with record debt-to-GDP, they likely just delayed and mitigated it far better than most. Their sovereign debt as a percentage of GDP has continued to increase, pushing the previously-known boundaries on how much debt a sovereign entity can hold
  • It’s like the Titanic hitting an iceberg; once struck, the outcome of sinking became almost inevitable, and yet the ship persisted in a state of being afloat and slowly sinking for quite a while. It became a question of timing, and most importantly, acquiring lifeboats.
  • The economy superficially recovered from those 2009 lows, especially in terms of asset prices, but GDP growth was slow by historical standards throughout the cycle, the labor participation rate among prime age workers never fully recovered to pre-crisis highs.
  • Instead, whether QE is inflationary or not, largely depends on whether it is accompanied by high fiscal spending, since QE’s role in that environment is merely to recapitalize the banking system and monetize those fiscal deficits
  • The long-term structural trend is towards lower inflation or outright deflation, and normally, that would be a good thing. As humanity’s technology progresses and productivity improves, it would be natural for your money to buy more goods and services than it could 5 or 10 years ago, rather than less. However, because we structured our economy around a debt-based system, deflation is viewed by policymakers as the biggest enemy; something to be fought off wherever it shows up, so they seek to counter that inherently deflationary trend with inflationary monetary and fiscal policy
  • If fiscal policymakers realize that the economy is stagnant and banks aren’t lending, they can pass fiscal bills to go around the banks (or through the banks by backstopping loans for them) and get money directly to consumers and businesses, aka “helicopter money”. This could take the form of higher spending, or could take the form of unfunded tax cuts, or both

Michael Saylor goes on the Pomp podcast to explain his decision to invest almost the entirety of Microstrategy’s corporate treasury in bitcoin:

  • Microstrategy (MS) stock went from $330 to 42c after dotcom bubble (!)
  • Would never buy 30yr bond at 2%
  • One of the longest tenured public company CEOs
  • Risk free rate used to be 5%!
  • Asset inflation ~7% but this year it’s more like 25-30%
  • MS business model got better thru covid, reduced cost structure (no travel, no conferences) and customers stuck around (govts, big biz)
  • Limit to how much stock buyback you can do without moving price, would take MS 4 years
  • Hated remote work, but adjusted now
  • Went thru all asset options for investing the $500M:
    • Commercial RE isn’t fairly priced right now, impaired asset
    • FANG tech stocks overpriced now
    • Considered precious metals but bitcoin better
    • Wants something that can be cut in half but also go up 10x
  • All winning cos were tech cos in their time from Nestle to Boeing
  • Looked at defi and other coins but thinks bitcoin’s focus on PoW and SoV and all this energy invested means it’s got best chance
  • “It’s already won”; Believes $100B is this threshold after which you win, if you have a network and a dominant position
  • Vetted bitcoin institutional exchanges, custodians, got to know teams well, then did 1000s or more transactions every day over period of time
  • Confident he didn’t materially move the market, “let the market come to you”
  • “Every CEO had a lot of assumptions shaken this year” from TikTok to remote work to macroeconomy
  • Putting bitcoin in corporate treasury “It’s like the 4 minute mile”. Didn’t think it could be done, now someone has done it and next year dozens will do it
  • A nimble public co takes 6 mos to do what MS did, a rational big public co takes 9-12 mos, expects more to follow late this year and into next
  • “It’s not 10x better than gold, 100-1000x better”
  • 3500 publicly traded cos, $5T in their treasuries
  • “There’s a negative real yield on anything else I can buy”
  • $200T or more of negative real yield on treasuries, precious metals, etc,
    • bitcoin’s upside is not just gold mcap
  • Wonders why Dorsey with $10B between Square and Twitter doesn’t buy $500M?
  • Pomp believes Dorsey has more pressing problems eg dealing with activist investors
  • Amazed at the community ethos

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” – Mises

I learned from Wondery’s Business Wars podcast that when Dominos and Pizza Hut began to offer delivery, there was a legal battle and protracted fight between HQ and franchisees, because franchisees thought it would lower quality of product and cannibalize store sales!

Niall Ferguson and Michael Casey on Laura Shin’s Unchained podcast:

  • Niall Ferguson notes:
    • Son first got him into it, if he had bought bitcoin at that time he’d be retired
    • In developed countries inflation not a problem, only in first decade of existence, problem is actually the opposite (deflation)
    • Monetary policy was often set by merchants in eg Western Europe. State has not always been driving force
    • Bitcoin = option on digital gold for now, eventually will be digital gold
    • US no longer at edge of financial and monetary innovation; leaders have pathology that rejects new innovations like digital currency and ignores China wechat / Alipay
    • KEY: “Present situation is not a steady state”
    • Expectations of US stability and dominance will undergo a step change, and the alternatives are not obvious
    • We are in early stages of pandemic, usually pandemics are 2 year affairs in history
    • Next phase will be how China does with digital currency and digital payment platforms
  • Michael Casey notes:
    • He got into bitcoin because of Argentina, lived there, saw firsthand their history of dysfunction in public finances
    • For him it’s not about scarcity but rather about trust of governance, of transparency

On the importance of focus and presence for productivity and flow:

  • To get things done, you have to do. That’s it. You need sitzfleisch (ZITS–flysh), or “chair glue,” which—as Quartz’s Anne Quito notes—is a German word for the ability to sit through a boring or complex task for a considerable amount of time, however long it takes.
  • Peter Seishin Wohl of the Treetop Zen Center in Oakland, Maine tells a story about watching Soto Zen monks in Japan—who dedicate their lives to cultivating philosophical focus through meditation—cleaning a monastery. They work speedily, practically running as they dust. This demonstrates that slowness isn’t the goal of focus. “Zen has nothing to do with the speed at which we do things and everything to do with the intimacy with which we do things. And by intimacy I mean, not forming a separation between ourselves, our minds, and the activities we’re involved in,” Wohl explains.

Finally, Cass Sunstein on the power of nudge:

A simple intervention is to alter the institution’s default printer setting from “print on a single page” to “print on front and back”. A number of years ago, Rutgers University, in the US state of New Jersey, adopted such a double-sided printing default. In the first three years of the new default, paper consumption was reportedly reduced by well over 55 million sheets, or 44%, the equivalent of 4,650 trees. Similarly impressive results were found at a large university in Sweden.

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That’s it folks. All typos and misrepresentations are 100% mine!

If you want more, here are the last two weeks:
Week 2
Week 1

Til the next one!

Ray Dalio’s Economic Machine: 3 Forces Driving the Economy and 3 Rules of Thumb for Policymakers

First, please watch this 30 minute economics masterclass from one of the great hedge funders, Ray Dalio:

Ray believes there are 3 primary forces driving our global economy:

1. Productivity growth (how much more output can you get with the same or fewer inputs)

2. Short-term debt cycle (lasts 5-8 years)

3. Long-term debt cycle (lasts 75-100 years and is usually quite painful)

In the video’s conclusion, Ray offers 3 rules of thumb for policymakers and economists:

1. Don’t have debt rise faster than income

2. Don’t have income rise faster than productivity

3. Do all that you can to raise your productivity. That’s what matters most

Unfortunately, Ray believes we are at the end of a long-term debt cycle. If he’s right, this would mean many years of economic pain, which could come in forms such as: falling real estate and stock prices; inflation via Central Bank money printing; little-to-no real GDP growth; social disorder; austerity measures in the form of higher taxes and reduced public spending.

IANAE, just studied it in college!

My complete and messy notes below:

3 forces driving economy
1. productivity growth
2. short term debt cycle
3. long term debt cycle

Economy is sum of the transactions that make it up
Money + credit = Total spending
Total spending drives economy

Market = All buyers and sellers making transactions

Biggest buyer and seller is the federal government which is 2 parts:
1. Central Government
2. Central Bank (different because it controls amount of money and credit in economy); performs this function through two means
a. Interest rates
b. Printing money

CREDIT
Most important part of economy and least understood
Largest and most volatile part
Buyers and sellers = transactions
Lenders and borrowers = credit

Any two people can create credit out of thin air
As soon as credit is created, it creates debt
Debt is both an asset and a liability

When a borrower receives credit, they increase spending
Spending drives economy
Credit worthy borrower has a) ability to repay (eg, high income), and b) collateral if he can’t (eg, a house)

CYCLES
Productivity growth = GDP growth over time
Doesn’t fluctuate much..but Debt does

Debt occurs in cycles
Short term cycle = 5-8 years
Long term cycle = 75-100 years

Changes in productivity / GDP growth are usually driven by amount of credit
“Because we borrow, we have cycles”; due to human nature
Borrowing pulls spending forward, borrow from your future self
Any time you borrow, you create a cycle

Money vs Credit
Money is instant settlement of a transaction
Credit is starting a bar tab, a future promise

Most of what we call money is actually credit
Total US credit is 50T
Total US money is 3T

Let’s say you earn 100K, you borrow 10K on credit, now you can spend 110K, so someone is earning 110K, so he can borrow 11K on credit, and so on

Borrowing creates cycles, if it goes up, eventually comes down

Short term debt cycle – 5-8 years
1. Expansion – spending increases, prices rise, this causes inflation
2. Central Bank doesn’t want too much inflation, so it raises interest rates
3. With higher rates, fewer people can borrow, debt payments rise
4. Spending and prices go down, we have a recession
5. Central Bank lowers rates, debt payments reduced, cycle begins again

Over long period of time, debt raises faster than incomes, which causes:

Long term debt cycle – 75-100 years
1. Incomes rising, assets rise, it’s a boom; Debt:income rises (debt burden)
2. Over decades, debt burdens keep rising, debt repayments start rising faster than incomes, and then incomes start to go down, borrowing goes down
3. Cycle reverses itself, long term debt peak

US, Europe, this happened in 2008, Japan in 1989, and US in 1929

Begins DELEVERAGING
Incomes fall
Credit disappears
Asset prices drop
Stock market crashes
Real estate market tanks

But now lowering interest rates doesn’t work, they’re already low, so the stimulus ends
Rates hit 0% in 1930s and 2008

What do you do?
Debt burdens too high, must come down. 4 ways

1. Cut spending, aka “austerity”, this can lead to Depression

2. Reduce debt, this can lead to deflation

3. Central government redistributes wealth, governments raise taxes on rich, social disorder can break out

4. Central Bank prints money (especially when rates are already zero), this is inflationary, uses it to buy financial asset and government bonds
US did this in 1930s and 2008, so did other countries
only helps those who own financial assets
buys bonds, lends money to government, who then distributes to people

These 4 happened in every modern history deleveraging

Depression is when people realize much of their wealth…isn’t really there

Deflationary and Inflationary ways must be balanced

Can be beautiful Deleveraging:
Debts decline relative to income
Real economic growth is positive
Inflation isn’t a problem

Will printing money raise inflation? It won’t if it offsets credit

Printing money can be abused because it’s so easy
Key is to avoid unacceptably high inflation

Takes a decade for “Reflation” / “Lost Decade” of this deleveraging

3 rules of thumb:
1. Don’t have debt rise faster than income
2. Don’t have income rise faster than productivity
3. Do all that you can to raise your productivity, that’s what matters most