Ray Dalio on reforming capitalism

This Ray Dalio piece on the problems and solutions for modern capitalism is an important piece of insight. It builds on his work on inequality and populism.

It is important as (1) he is a billionaire with considerable weight and clout

(2) it highlights the problems of both growing the (economic) pie and splitting the pie fairly

(Me: He omits natural/environmental capital in his primary analysis as a weakness)

(3) he observes social democratic/socialism ideas are better at (or at least focused on) pie splitting but free market type ideas have been better at (or at least focused on) pie growing

He pulls this together with a few other observations (amongst others) that

• the left and right have never been further apart since the 1930s - they are entrenched and polarised

• Technology (and other forces of capitalism) is continuing to disproportionately benefit the “haves”/rich ie owners of capital, automation will continue to displace workers

• The US and China are at loggerheads with unknown outcomes

He has strong focus on the education inequality in the US amongst other insightful data (particularly on the bottom 60% and other data on the poor) and some insightful data on food poverty

(The childhood poverty rate in the US is now 17.5% and has not meaningfully improved for decades. In the US in 2017, around 17% of children lived in food-insecure homes where at least one family member was unable to acquire adequate food due to insufficient money or other resources.Unicef reports that the US is worse than average in the percent of children living in a food-insecure household (with the US faring worse than Poland, Greece, and Chile).

He then draws the important insight that it is systems problem:

“Contrary to what populists of the left and populists of the right are saying, these unacceptable outcomes aren’t due to either a) evil rich people doing bad things to poor people or b) lazy poor people and bureaucratic inefficiencies, as much as they are due to how the capitalist system is now working.”

He sketches out some solutions to work on including:

-i  Leadership from the top

-ii  Bipartisan working groups (ie left and right together)

-iii Co-ordination of fiscal and monetary policy together

-iv Clear metrics for success and accountability

-v  Redistribution of resources that will improve both the well-beings and the productivities of the vast majority of people.

And within that a focus on good “double bottom line outcomes”

Ie outcomes that have good economic return and good social return

(for instance education fits that well)

(Again he misses out environment unfortunately, although many double bottom line ideas could be triple bottom line as well)

He proposes:

Create private-public partnerships (including governments, philanthropists, and companies) that would jointly vet and invest in double bottom line projects that would be judged on the basis of their social and economic performance results relative to clear metrics. That would both increase the funding for and the quality of projects because people who have to put their own money on the line would be responsible for them.

Raise money in ways that both improve conditions and improve the economy’s productivity by taking into consideration the all-in costs for the society (e.g., I’d tax pollution and various causes of bad health that have sizable economic costs for the society).

Raise more from the top via taxes that would be engineered to not have disruptive effects on productivity and that would be earmarked to help those in the middle and the bottom primarily in ways that also improve the economy’s overall level of productivity, so that the spending on these programs is largely paid for by the cost savings and income improvements that they create. Having said that, I also believe that the society has to establish minimum standards of healthcare and education that are provided to those who are unable to take care of themselves.

While you can argue about the diagnosis and cause of the problem, the data is insightful, and the solutions are food for thought.

Unfortunately, I am fairly pessimistic about most of those solutions given what I can see about the politics of the UK and US (and others) although some countries may fare better (eg New Zealand which I feel is working on i and iv)

But there are elements of v. I can see working although this may only come through if our leaders can take a longer view and whole-view lens (for instance, increasing educational and social resources in areas of poverty brings long term returns but is short term costly and painful; carbon taxes are hard to fall progressively on society)).

And in theory there’s no reason why i - iv couldn’t happen but it would take a moment or time of social cohesion and cultural change to get there. We don’t have that. But it could happen as I talk about in my performance-lecture Thinking Bigly.

Full Essay by Dalio here:

https://www.economicprinciples.org/Why-and-How-Capitalism-Needs-To-Be-Reformed/

A blog on his populism work:

https://www.thendobetter.com/investing/2019/1/5/ray-dalio-on-cycles-populism-trade-wars

https://www.thendobetter.com/investing/2017/8/21/divides

Ray Dalio on cycles, populism, trade wars.

Ray Dalio, in a recent blog and book, gives a clear explanation of his views on the long-term and short-term debt cycles. He explains why asset markets may often fall, when the current underlying economy might be (and very often is) strong.He also explains causes for the rise of populism, why the china-US trade war is fits the historical pattern of when one country rises to challenge a dominant power and the problems of the bottom 60% in the US. (blog links end)

A very good collection of thought provocations.

“The short-term debt cycle lasts about 5-10 years, depending on how long it takes the economy to go from having a lot of slack to not having much, which depends on how much slack it starts off with and how fast demand grows.  In the cycle that we are now in, the expansion has been long because it started from a very depressed level (because the 2008 downturn was so deep) and because growth in demand has been relatively slow (because of the debt crisis hangover, because of the growing wealth gap and spending of those with a lot of wealth having a lower propensity to spend than those with little wealth, and because of other structural reasons).  When slack is reduced and credit-financed spending growth is faster than capacity growth early in the cycle, that leads to price increases until the rate of growth in spending is curtailed by central banks tightening credit, which happens late in the “late-cycle” phase of the short-term debt cycle (where we are now). At that time, demand is strong, capacity is limited, and profit growth is strong. Also at that time, the strong demand for credit, rising prices/inflation, and eventually central banks’ tightenings of monetary policy to put the brakes on growth and inflation, causes stock and other asset prices to fall. They fall because all investment assets are priced as the present value of their future cash flows and interest rates are the discount rate used to calculate present values, so higher interest rates lower these assets’ present values.  Also, tighter monetary policy slows prospective earnings growth, which makes most investment assets worth less. For these reasons, it is common to see strong economies being accompanied by falling stock and other asset prices, which is curious to people who wonder why stocks go down when the economic and profit growth is strong (because they don’t understand how this dynamic works). That is where we now are in this short-term debt cycle.”

My blog on Dalio’s populism work

https://www.thendobetter.com/investing/2017/8/21/divides

Dalio’s populism analysis

https://www.bridgewater.com/resources/bwam102317.pdf

Dalio On cycles and current state of world:

https://www.linkedin.com/pulse/help-put-recent-economic-market-moves-perspective-ray-dalio/

My blog including Howard Marks work  (Marks, Dalio and Hyman Minksy have similar observations but are worth reading together)

https://www.thendobetter.com/investing/2018/10/25/cycles-economic-market-debt

On Minsky:

https://www.thendobetter.com/investing/2017/8/9/a-correct-economist

Cycles, economic, market, debt...

Where are we in this up-leg part of this cycle? Two recent books address how investors - and other interested parties - can look at the world and approximately place where we are in a cycle and have a view on what has gone before which impacts what happens now in the future. It chimes with an earlier post on Hyman Minsky, who constructed a model of a cycle that uses human psychology (see link end).

Ray Dalio recently wrote Principles (see links end) and is now giving away a book on his understanding of the debt cycle. Dalio is convincing on why debt cycles will always occur (and like Howard Marks and Minsky) explains the human psychology behind why this might be the case.

Howard Marks, who writes a widely read investment letter for his money management firm, has recently published his work focusing on the economic and market cycle (but touches on the debt and other cycles too - he makes the point that they are inter-related).

Both are very valuable for investors giving practical thoughts on how to assess cycles, but for those simply interested in what are powerful trends and forces that have shown patterns through out human history, it will also give insights into why we have booms and busts - and why we will continue to have them.

Both books are recommended.

As to the state of the world now? Both Dalio and Marks sound notes of caution in recent months. I will note Marks recent Memoo

“I’m absolutely not saying people shouldn’t invest today, or shouldn’t invest in debt.  Oaktree’s mantra recently has been, and continues to be, “move forward, but with caution.”  The outlook is not so bad, and asset prices are not so high, that one should be in cash or near-cash.  The penalty in terms of likely opportunity cost is just too great to justify being out of the markets.

But for me, the import of all the above is that investors should favor strategies, managers and approaches that emphasize limiting losses in declines above ensuring full participation in gains.  You simply can’t have it both ways. 

Just about everything in the investment world can be done either aggressively or defensively.  In my view, market conditions make this a time for caution.”

And

“In memos and presentations over the last 14 months, I’ve made reference to some specific aspects of the investment environment.  These have included:

• the FAANG companies (Facebook, Amazon, Apple, Netflix and Google/Alphabet), whose stock prices incorporated lofty expectations for future growth;

• corporate credit, where the amounts outstanding were increasing, debt ratios were rising, covenants were disappearing, and yield spreads were shrinking;

• emerging market debt, where yields were below those on U.S. high yield bonds for only the third time in history;

• SoftBank, which was organizing a $100 billion fund for technology investment;

• private equity, which was able to raise more capital than at any other time in history; and

• cryptocurrencies led by Bitcoin, which appreciated by 1,400% in 2017.

I didn’t cite these things to criticize them or to blow the whistle on something amiss.  Rather I did so because phenomena like these tell me the market is being driven by:

• optimism,

• trust in the future,

• faith in investments and investment managers,

• a low level of skepticism, and

• risk tolerance, not risk aversion.

In short, attributes like these don’t make for a positive climate for returns and safety.  Assuming you have the requisite capital and nerve, the big and relatively easy money in investing is made when prices are low, pessimism is widespread and investors are fleeing from risk.  The above factors tell me this is not such a time.”

And here’s Dalio on Debt:

“To summarize some of the key points found in the book:

1. All big debt cycles go through six stages, which I describe and explain how to navigate:.

• The Early Part of the Cycle

• The Bubble

• The Top

• The Depression

• The Beautiful Deleveraging

• Pushing on a String/Normalization

2. Getting the balance right between having too much debt (that causes debt crises) and too little debt (which causes suboptimal development) is never done perfectly. Cycles always swing from having too little debt relative to the opportunities to having too much and back to having too little and back to having too much. These swings are exacerbated because people tend to remember what happened to them more recently rather than what happened a long time ago. As a result, it is pretty much inevitable that the system will face a big debt crisis every 15 years or so. 

3. There are two major types of debt crises—deflationary and inflationary—with the inflationary ones typically occurring in countries that have significant debt dominated in foreign currency. The template explains how both types transpire. 

4. Most debt crises can be well-managed if 1) the debts denominated in one’s own currency and 2) the policy makers both know how to handle the crisis and have the authority to do so. As I write in the book: “Managing debt crises is all about spreading out the pain of the bad debts, and this can almost always be done well if one’s debts are in one’s own currency. The biggest risks are typically not from the debts themselves, but from the failure of policy makers to do the right things due to a lack of knowledge and/or lack of authority.”

Both Marks and Dalio are billionaires, who have been investing over decades. Their thoughts are worth reading.

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Hyman Minksy - "We fat all creatures else to fat us, and we fat ourselves for maggots. " Hamlet, Shakespeare.

Are we headed for another Minsky moment? Minsky describes how a boom or periods of stability by their nature and human nature cause increased risk taking (for yield and return) which becomes excessive risk taking which leads to bust.

Ray Dalio - thoughts on populism. His book on debt available here.

The Amazon Link to Mark’s book is here.

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The current Arts blog, cross-over, the current Investing blog.  Cross fertilise, some thoughts on autism.  Discover what the last arts/business mingle was all about (sign up for invites to the next event in the list below).

My Op-Ed in the Financial Times  (My Financial Times opinion article) about asking long-term questions surrounding sustainability and ESG.

Current highlights:

A thought on how to die well and Mortality

Some writing tips and thoughts from Zadie Smith

How to live a life, well lived. Thoughts from a dying man. On play and playing games.

A provoking read on how to raise a feminist child.

Some popular posts:  the commencement address;  by NassimTaleb (Black Swan author, risk management philosopher),  Neil Gaiman on making wonderful, fabulous, brilliant mistakes;  JK Rowling on the benefits of failure.  Charlie Munger on always inverting;  Sheryl Sandberg on grief, resilience and gratitude.

Buy my play, Yellow Gentlemen, (amazon link) - all profits to charity

Principles. Ray Dalio.

Ray Dalio - Principles:“...you, like me, probably don’t know everything you need to know and would be wise to embrace that fact. If you can think for yourself while being open-minded in a clearheaded way to find out what is best for you to do, and if you can summon up the courage to do it, you will make the most of your life. If you can’t do that, you should reflect on why that is, because that’s most likely your greatest impediment to getting more of what you want out of life. That brings me to my first principle:

• Think for yourself to decide

1) what you want,

2) what is true, and

3) what you should do to achieve #1 in light of #2 . . . . . .

and do that with humility and open-mindedness so that you consider the best thinking available to you.

The principles you choose can be anything you want them to be as long as they are authentic—i.e., as long as they reflect your true character and values.

Think for yourself!

1) What do you want?

2) What is true?

3) What are you going to do about it?

Ray Dalio (wiki) should be listened to, in my view, whether you agree with him or not. He is in the top 100 richest people in world. Dalio has pledged half that wealth to the Bill Gates foundation. He has a coherent and thought provoking personal philosophy  that Dalio also applies to his hedge fund, Bridgewater, one of the largest and most successful in the world (which works under this culture: “an idea meritocracy that strives to achieve meaningful work and meaningful relationships through radical transparency.”) He uses these principles in life and in his business. Originally available in short form on the Bwater website, it is now out in longer book form.  (part 2 on investing and economics out some time in the future).

Dalio himself advocates developing your own principles rather than absorbing another’s completely whole. Thus this provides a fascinating take in the mould of “investor-philosopher” (thus joining Warren Buffet, Charlie Munger, Howard Marks, Peter Lynch, perhaps Seth Klarman, perhaps Nassim Taleb in this mould).

I noticed Dalio on mistakes sounds like Neil Gaiman's view on mistakes, one written by a story teller (I take a look at Gaiman's commencement address extolling mistakes in an earlier post) and the other written by an "investor-philosopher"; and also chimes with JK Rowling on the benefits of failure.

It also offers interesting reflections on his “mistakes” and experiences.

I highlight a few that struck me:

On consensus thinking “...everybody thinks the same thing—such as what a sure bet the Nifty 50 is—it is almost certainly reflected in the price, and betting on it is probably going to be a mistake.”

On losing money on a pork belly trade “It was a very tactile experience . . . [and] it taught me the importance of risk controls, because I never wanted to experience that pain again. It enhanced my fear of being wrong and taught me to make sure that no single bet, or even multiple bets, could cause me to lose more than an acceptable amount. In trading you have to be defensive and aggressive at the same time. If you are not aggressive, you are not going to make money, and if you are not defensive, you are not going to keep money. I believe that anyone who has made money in trading has had to experience horrendous pain at some point. Trading is like working with electricity; you can get an electric shock. With that pork belly trade and other trades, I felt the electric shock and the fear that comes with it.”

On expectations “I lost money until I figured out what was going wrong and how to deal with it. I gradually learned that prices reflect people’s expectations, so they go up when actual results are better than expected and they go down when they are worse than expected. And most people tend to be biased by their recent experiences.”

On learning from history “I learned that everything that was going on—the currency breaking its link to gold and devaluing, the stock market soaring in response—had happened before, and that logical cause-effect relationships made those developments inevitable. My failure to anticipate this, I realized, was due to my being surprised by something that hadn’t happened in my lifetime, though it had happened many times before. The message that reality was conveying to me was “You better make sense of what happened to other people in other times and other places because if you don’t you won’t know if these things can happen to you and, if they do, you won’t know how to deal with them.” “

On learning that there is always risk and uncertainty: “I vividly remember one “can’t lose” bet that personally cost me about $ 100,000. That was most of my net worth at the time. More painful still, it hurt my clients too. The most painful lesson that was repeatedly hammered home is that you can never be sure of anything”

If you’d like a provocative read of an investment philosophy of our times check out his book - UK link to amazon kindle version here  http://amzn.to/2wN4Oy4

A previous post on Dalio and risk and populism here. Video interview post book launch (Sep 2017) below.

Cross fertilise. Read about the autistic mind here and ideas on the arts here. On investing try a thought on stock valuations.