The other day, there was an arresting interview online from Davos. It featured a guy called Ray Dalio. This man manages a startling $140 billion and speculates in the markets. He started with $5 million, so evidently he is good at what he does.
While much of the coverage here was on Enda Kenny and what he was saying about how much the rest of the world loves us, the interview with Dalio was, for me, the standout one of the week – notwithstanding, of course, David Cameron’s move earlier that week(- more on that later).
Dalio said something quite straightforward about the state of the world financial system. When asked what he was going to do with his investments this year, he responded that, with so much cash about, he expected much of this money to leave cash deposits and buy “stuff”. He wasn’t so specific on what stuff exactly, but he said he felt that it made sense for people to use their cash, which is now not generating any return, to buy other stuff.
Is this the moment when the stock market and property markets and, frankly, markets for everything that isn’t cash, explode?
Dalio’s view of the world is straightforward. As the central banks of the world keep pumping more and more money into the economy to ensure that the recovery takes hold, the value of cash is plummeting. He is therefore not taking his cash off deposit, because he sees some great investments out there. Rather, he is taking his cash out of his deposit account because he is getting no return on it.
So the price of all assets is rising because a wall of money is pushing them up, not because the prospects of the economy have improved dramatically.
This explains quite a lot. Take for example the Irish bond market. It is rallying at a time when the ability of the economy to generate the growth necessary to validate that rally is not there. This means that the rally in assets is rented, not earned.
The rally is rented, not earned.
Let that sink in.
By this I mean the spike in Irish bond prices is a new bubble based on a huge amount on money looking for a home and finding its way into the Irish bond market. High-yield assets are rallying as investors like Dalio go in search of yield from ‘stuff’.
This implies that the rally in Europe and the sense that the worse of the European bond/debt/credit problem is over – as is being muttered in Brussels – is ludicrous. The bond herd is now buying up peripheral European bonds driven by the free money from the European Central Bank (ECB) rather than any change in the ability of the countries such as Italy, Spain and Ireland actually to service that debt.
We are in a classic six-stage cycle of how a bubble forms, driven yet again by cheap credit. These six stages were outlined by the brilliant US economist Hyman Minsky.
In the first phase, what happens is called displacement. This is when there is a change in policy which materially affects the economy.
This change in Europe occurred over the past 18 months when ECB boss Mario Draghi replaced Jean Claude Trichet and started printing money. He hasn’t stopped since. This is the same policy followed by the Fed. And, in recent days, the Japanese have gone one further and said they will print as much as is necessary to push up the rate of inflation.
The second phase of a Minsky cycle is the gearing phase. This is when the price of assets lurches upwards driven by the change in policy. Once this happens, the banks get involved and financiers like Dalio get on the bandwagon, buying stuff with borrowed money. This causes the boom in assets.
In the next phase, the boom phase, the herd gets involved and buys risky assets, driving the price ever upwards and, as the price goes up, more and more investors get into the asset.
The fourth phase is the euphoria phase when the investors are so ecstatic with the perceived returns on their assets that they forget there was ever a crisis in the first place. Even if they are now buying assets expensively, the very expense can be made legitimate by all sorts of new theories. The fact remains that countries in peripheral Europe haven’t a prayer of paying back money, even as yields fall to almost Germanic levels.
Then we get the fifth phase, which is the distress phase. Here we see canny investors getting out and taking their profits. The herd is still high-fiving each other while the smart ones sell and escape with their swag.
The final sixth phase is the panic phase when the herd realises that the countries in peripheral Europe could actually never pay their debts in the first place because the lifestyle they achieved with the borrowed money was a rented lifestyle, not an earned lifestyle. The herd panics and runs for the door. The house of cards comes tumbling down.
Then we move into what is called the Minsky moment where good assets have to be sold to pay for the losses in a portfolio caused by the fall in the value of bad assets. Because there was leverage, we go into another deleveraging cycle in Europe at higher levels of debt.
Obviously the only coherent way out of this is a default because, when debt can’t be paid, it won’t be.
However, the core of the central bank policy in Europe right now is to avoid this at all costs. Once you take capitalism out of the equation when non-repayment punishes stupid investment, you are in for a long-term cycle of repetitive booms and busts.
As the great British economist John Stuart Mill observed: “Credit busts don’t destroy wealth, they merely reflect the extent to which wealth has already been destroyed by stupid decisions made in the boom.”
When we hear moneymen saying indiscriminately that they are going to buy ‘stuff’, it is a small signal of a Minsky moment likely in the future.
This brings us nicely to David Cameron. Will he get what he wants from Europe? My hunch is that the EU will be convulsed by the ramifications of recurring bond crises in the years ahead. Crises are always met in Europe by more, not less, integration. Against that background, the EU is not likely to open up the prospect of an à la carte EU. Therefore, Cameron might not get what he says he wants.
In such a case, the in/out British referendum is carried by the “out” side. Middle Scotland is then in a conundrum and will move to a more separatist mode, even if the referendum on independence is defeated next year.
The real battle of Britain starts then as Scotland and Wales worry about being welded to English nationalism with no EU escape hatch.
What happens to us? Well, Ireland is like the jockey riding two horses, the British economic horse (our biggest trading/demographic/cultural partner) and the European horse (our political master). As long as the two horses are running in tandem, the jockey can manage.
However, when the two horses dart off in different directions, the jockey’s position becomes terribly uncomfortable.
David McWilliams’ new book The Good Room is out now
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David,
Another one of your ‘watershed’ analyses! Well spotted! And the ‘stuff’ is the peripheral sovereigns’ bonds?
“As the central banks of the world keep pumping more and more money into the economy.” Good article but it leaves me with a question. Can someone briefly clarify the money trail of the above statement, my understanding is that the Central Bank money is lent to Commercial banks who lend it to a clique of big boy operators in the financial market who go on a spending spree and cause boom/hyper inflation? Is the article implying that commerical banks lend/pump the money into the speculator hands of the Ray Dalio’s of this world or do most of the Ray… Read more »
David,
Is the confidence (trick) boost by the Moneymen statement ” we are going to buy stuff” the final push to inflate the bubble to the max?
When in your honest opinion do you envisage the sixth phase occurring?
I ask because the level of calm in Europe is very unsettling indeed.
Hi David, so if we have a pot of spare cash dwindling in the bank and wish to invest can you give advice on an asset(s) that doesn’t require us to be savy investors that know when to get out? is there anywhere safe? only seeking opinions and not commitments obviously, and understand its not
Maybe some of these “investors” in stuff might look more to Africa, India, South America, Mexico etc. where there are still reserves of raw materials and cheap labor. This might siphon off the worst of the pending asset bubble here in the pampered West. For example I am noticing a renewed interest in Tijuana, Mexico by Southern California investors. “TJ” seems to be sponging up some of the local San Diego and Los Angeles property boom cash that historically would have recycled into American ballparks, convention centers and other muni-bond boondoggles. Wouldn’t it be nice if this “wall of cash”… Read more »
sorry….. and understand its not easy to make such recommendations.
The recent announcement by the Bundesbank, that it is to seek the repatriation of Germany’s reserves of physical gold, currently held in New York and Paris, is a highly significant development in the on-going crisis in the financial system. As recently as three months ago, the German Central Bank was trenchantly opposed to such a suggestion and adamant that it was, in fact, of intrinsic importance to Germany that it continued to store physical gold reserves in New York and London that would be immediately available as collateral against dollar or Sterling denominated liquidity. The Bundesbank’s volte-face on this issue… Read more »
A jockey’s neck is as hard as his “””””” ? If the Brits pull out, they may close their labour market to Paddy . That is when our problems will multiply even further. The punt is worth 110 pence versus sterling, expect lots of indigenous manufacturers to get crushed over the coming months. Colm Mc Carthy was right about the stupidity of us joining the euro. Michael Torpey does a nice line in self preservation, he oversaw the disastrous lending @ First Active, jumped ship with a 7 sum pay-off in 2008, moved to Treasury roles @ ILP, NTMA, Dept… Read more »
What stage of the six stages are we in? 3rd or 4th?
The heart of Minsky’s framework is that capitalism is inherently unstable and has self-destructive tendencies.
Contrary to Minsky, the existence of the central bank is what makes modern capitalism unstable. It is this factor alone that is responsible for the current financial instability.
Minsky had no clue actually why these stages.
And Ray Dalio plays with other people’s money and looks like following just simple streategy explained below.
He realized how inflation distort things and used it smartly in his strategy:
http://www.zerohedge.com/news/2013-01-23/return-cash-beta-alpha-inside-look-worlds-biggest-and-most-successful-beta-hedge-fun
Europe is a key trading partner, historically a source of investment (structural funds), something of a lender of last resort when the country is led off the fiscal cliff by a grubby elite, so it has as much as importance as our trading relationship with the UK, a country which seems to have found itself wedged between the issues of Scottish independence and European integration, interesting couple of years ahead which Ireland can benefit from if it plays its cards right, sadly no sign of that on the horizon. I doubt any country has as many things going for it… Read more »
Déjà vu We need to have a neck like jockeys bollocks and default then we can invite the Brits to dine with us on the horse’s meat. If not, it may be soon be time to get skinny latte paper cups and go begging. It is often said that people in the past did know what they where doing and that we have learned so much since then. So it would seem we are enlighten in 2000-2013 and we know what we doing? But what will people in the future say? The money cyclists need to be run down For… Read more »
Creation; did “NOT” know
Fools and money are easily parted; the Irish are the fools; The help is not going to come it is too expensive “A Moral Hazard” the puppy dog look from the government will just receive a head rub from others, they will say why should we bail you after all you are the 20th richest nation in the world, there are people starving elsewhere. But maybe if Enda does another cutesy dodgy roll; Man up Enda! No one asked you to pay the debts of your banks, Enda this is gambling table and no one at is your friend “It’s… Read more »
Interesting article and comments. As Deco has been pointing out on this blog for some time the bond bubble IS already starting to release air. This can be seen in the supposedly “safe” 10 year Treasury bonds in the US. There is a negative real return on these bonds and they are priced as if they are risk free. They aren’t and this will lead to an exodus from these supposed safe havens. Over 80 countries now have negative real interest rates so money in the bank is also a losing proposition. A rise in inflation is now a certainty… Read more »
Well David the circle goes round and round.
Remember the dragons den how many of the dragons had no real money just proped up by a scam system and the apprentice show mister big, the list goes on.
When you sit back and think about it, how near to collapse are we???
Germany is now among Iran, Venezuela & Libya to have formally requested the return of their physical Gold.
The Netherlands has now also requested their Gold back.
No deal on Irish Bank debt.
French Invasion of Mali
U.N to soon authorize military intervention in the Congo.
U.s Special forces arrived in Congo this month along with 3 U.A.Vs [ drones] to “assist” in fighting rebel terrorism.Check out Natural resources of the Congo.
U.K Economy now in triple dip rescission.
As stated before Bond bubble explosion due.
We are being dragged into a global War.
Thanks for the article David,great stuff.
Oh I forgot to mention..
Ireland due for another Bank Bailout & recapitalization..probably end of year or early next year…..but its coming.!
http://namawinelake.wordpress.com/2013/01/28/weve-largely-stopped-borrowing-to-pay-for-services-and-welfare-now-were-borrowing-to-repay-interest-on-debt/
“…. we have now moved to a financial position where the deficit is primarily caused by interest on our massive debt burden”
further contractions in our economy shall cause further downward adjustment of revenues requiring more borrowing to run the State.This years budget is in October.
Property continues to fall in value .Banks continue to withhold lending facilities from Business.
Austerity failing but continuing.
Mortgage arrears growing as well as the threat of repossession. Unemployment growing etc etc etc
The E.U will now listen to Ireland and assist with “debt restructuring” because we hold the Presidency of the E.U for six months …………..!
DICING WITH DEBT An Icelandic journalist was talking last week in the Pat Kenny Show, about Partial Debt Forgiveness in Iceland, Banks, and Bankruptcy Laws. After the collapse of the Icelandic economy, the Icelandic Government, decided that in order to solve the huge economic mess they were in, three things were essential. – The first one, was for the BANKS to take some of the losses. – The second one, was a PARTIAL DEBT FORGIVNESS FOR PROPERTTY LOANS, by which people would have to pay 110% of their property loan at actual market value, and not at the original value… Read more »
I reckon that this is David’s best article of the New Year. In terms of quality and relevance to the overall economy. The central banks are messing about. Europe is awash with cash for spending on assets, but is also in an income crisis. Just look at the PIGIS. There is an income crisis. 20% Spanish unemployment is an income crisis. The markets are out of sync with the real economy. In particular the bond markets in Europe west of the Rhine and south of the alps are indifferent to economic weakness and declining incomes. Wales will stick with England… Read more »
Well David, you are finally zeroing in on a part of the problem. The issuance of unlimited fiat money from central banks. This has been yelled at you loud and clear on the blog for months; do you finally listen. Still no solution proposed which is to remove the source of that money. Close the central banking system and ban fractional reserve banking. Will you address that issue next? Is your central bank education and training getting in the way of clear thinking? Has your education clouded your mind? Can you see through the fog yet David. Here is my… Read more »
Ray Dalio
Net Worth
$10 B As of September 2012
Founder & Co-Chief Investment Officer, Bridgewater Associates
Age: 63
Source of Wealth: hedge funds, self-made
Residence: Greenwich, CT
Country of Citizenship: United States
Education: Master of Business Administration, Harvard University; Bachelor of Arts / Science, Long Island University
Marital Status: Married
Children: 4
http://www.lemetropolecafe.com/Pfv1.cfm?pfvID=10357&SearchParam=Ray Dalio
Here is another article concerning Ray Dalio.
http://www.prudentbear.com/index.php/creditbubblebulletinview?art_id=10752
From archives Lemetropolecafe Dalio and where to invest Just last month, a man named one of the 100 most influential people by Time Magazine, Ray Dalio, is also on the gold band wagon. Dalio is also Not a long time gold bug. I recently wrote a post about what he is advising that said, “Now, a modern day version of JP Morgan is telling the world, ‘Gold is a currency.’ That’s what $120 billion hedge fund manager Ray Dalio said recently about the yellow metal. Dalio, founder of Bridgewater Associates, doesn’t give many interviews. So, I find it very telling… Read more »
10/3 Eric Sprott & David Baker – Do Western Central Banks Have Any Gold Left??? Notwithstanding the recent conversions of PIMCO’s Bill Gross, Bridegwater’s Ray Dalio and Ned Davis Research to gold, we realize that many mainstream institutional investors still continue to struggle with the topic. We also realize that some readers may scoff at any analysis of the gold market that hints at “conspiracy”. We’re not talking about conspiracy here however, we’re talking about stupidity. After all, Western central banks are probably under the impression that the gold they’ve swapped and/or lent out is still legally theirs, which technically… Read more »
Currency Wars + Trade Wars = World War..
Iraq,Afghanistan,Iran,Syria,Yemen,Congo,Mali, Somali,
Bahrain,Lebanon,Palestine,Nigeria, Pakistan…….Turkey,
Amerika has 35,000 troops stationed around the World.The Biggest U.S Embassy in the World is under construction in Iraq.
Amerika has 737 bases around the World
2013 US Defense Budget $633 Billion Dollars
http://www.youtube.com/watch?v=DVxyGxEcMqQ&feature=player_embedded
Occupy the Central Banks–Daniel Hannon
http://www.zerohedge.com/news/2013-01-26/daniel-hannan-destroys-3-unquestionable-myths-our-crisis
Europe’s (unresolved) experience with its debt crisis provides an insightful window into the future. Austerity measures in Ireland, Portugal, Spain and Greece have caused tremendous pain to their citizens (25% unemployment rates) and wreaked havoc in their economies (double digit retail sales declines).
http://www.sprott.com/markets-at-a-glance/ignoring-the-obvious/
As regards Britain and the EU, they are having an identity crisis, their influence in europe is diminishing as europe has spread eastwards. Germany is now the biggest economy and has become more influential in europe and the woorld since 1990 whereas Britains influence has diminished. In the forbes list of the worlds most influential people in 2012 Angela Merkel was third whereas David Cameron was at 12, Mario Draghi and Mario Monti also scored higher in influence. Another factor which people there dont like is the open door immigration within the EU
http://www.zerohedge.com/contributed/2013-01-25/british-economy-worse-during-great-depression
The Greater Depression grinds on
http://www.zerohedge.com/contributed/2013-01-25/british-economy-worse-during-great-depression
http://www.jsmineset.com/2013/01/26/the-why-of-gold-at-and-above-3500/print/
We were always a gold backed currency.
Wonder where our gold is?
http://www.silverdoctors.com/gold-bank-run-accelerating-now-the-swiss-want-their-gold-back-all-1040-tons-of-it/#more-20424
http://www.internationalman.com/global-perspectives/the-disappearing-gold
Where is your gold and is it safe
Iceland Wins Case Against Inter-Alpha Bank Bailout Jan 28 (EIRNS)–The tiny nation of Iceland has scored a victory against the Anglo-Dutch financial oligarchy. Headlines are leading with words like “unexpected” and “surprise” in describing the ruling, by the Luxembourg-based European Free Trade Association (EFTA), affirming Iceland’s decision to defend its sovereignty by not bailing out British and Dutch banksters (“bondholders”) after the 2008 bankruptcy of IceSave bonds. IceSave was an online bank designed by the Inter-Alpha banks to facilitate the financial bubble through “savings” bonds paying 6%, and further connected to the bubble network through branches in the island of… Read more »
It seems everyone is willing to discuss jockeys running 2 horses (bets on now !), and Cameron’s ploy. What really is causing a fuss is none of this, rather : ECB Stirred Up by Bank Separation Debate Jan. 28 (EIRNS)–The European Central Bank has now also jumped into the widening debate on bank separation. “An impact assessment needs to be carried out as a matter of priority,” the ECB said in an e mailed statement this morning today. “The proposals which the Liikanen Group have made, may have a significantly different impact across the EU, given differences in the structure… Read more »
Tyrie Calls for Electrifying the Ringfence Jan. 28 (EIRNS)–In an oped in today’s Financial Times, Andrew Tyrie, British Conservative MP and chairman of the parliamentary commission on banking standards, calls for “electrifying” the ringfence in the proposal for banking reform that the government of Prime Minister David Cameron is issuing. Tyrie writes, “The ringfence must be ‘electrified’ if it is to stand a better chance of success. In other words, if the banks test the ringfence too much they will get a shock. We therefore recommended a reserve power for full separation, an approach approved” by Sir John Vickers who… Read more »
A reminder that all is not well with the galloping LIBOR banks as they round the last turn to a banking union… (taking late call bets now…) Nine German Banks Investigated in Libor Case Jan. 28 (EIRNS)–As reported by the {Sueddeutsche Zeitung} and other news dailies this morning, the German financial market watchdog BaFin is not only investigating Deutsche Bank and Portigon (the bank that replaced the carved-up former N.R.W. state landesbank WestLB), but also seven other institutions: Landesbank Berlin, BayernLB, LBBW, Commerzbank, DZ Bank, Helaba and NordLB have been targets of initial investigations. Two of the latter ones have… Read more »
I have a good friend who is high up in one of the big investment banks . Their take on the ‘ Global Financial Crisis ‘ is and I quote ” It was caused by poor people who could not afford their mortgages ” I actually thought that they were joking . What was shocking but not really surprising was that their was a sense of no lessons having been learned . I was talking to a friend who was trying to convince me and my wife that we should buy a house in the California as a ‘ investment… Read more »
When the main page in “Marketwatch” issues a warning, then we know even the mainstream is covering it’s options on the possibility of a crisis.
http://www.marketwatch.com/story/critical-warning-no-7-banks-crash-economy-again-2013-01-29
The essential point made by Paul Farrell, is that Wall Street has not learned any lessons. Full marks then to Helicopter Ben for bailing them out, and for ensuring that the chancer element is protected from their own recklessness and bad judgement. It makes a repeat almost inevitable. Just a matter of when will this happen.
” What is viewed as “underinvestment” in stocks is actually a symptom of a rise in the gross indebtedness of the global economy, enabled and encouraged by quantitative easing of central banks, which have been successful in suppressing all apparent costs of that releveraging. ”
A Must Read!
http://www.hussmanfunds.com/wmc/wmc130128.htm
It’s weird, for all this “wall of money”, there is absolutely fúck all of it that I can see, making its way down into the real economy in this country. Isn’t this what money is actually for in the primary sense?!? Isn’t it meant to allow us to trade products and services?!? Isn’t it meant to allow the mechanic, who isn’t a farmer, earn a crust through fixing cars, and pay for his bread and his meat using money, that he has earned via his/her trade? In the same way, isn’t it meant to allow the farmer, who can’t fix… Read more »
Spot on – A dyfunctional country that still expects to extract more revenue from an ever dwindling economic base.
BTW the black market economy is a global issue.
A scary future if this article is to be believed.
http://www.freakonomics.com/2011/11/01/the-black-market-is-the-second-largest-economy-in-the-world/
But just look at immigration rates (and pps number issuances)into Ireland, a country that is supposedly bankrupt with near record youth unemployment. What Gives ?
Make no mistake about it and I’m not being alarmist here, but unless we rapidly start standing up in this country and stopping the destruction of our domestic economy by way of the insane FF policies of austerity, we are completely and utterly goosed as a nation. The cost of running the state is too high, 1 billion Euro a month more than we are taking in by way of revenue, and this is 4 years into a recession. That might sound like a complete contradiction, in that I am disagreeing with austerity but advocating cuts in public sector pay,… Read more »
Posters,
Article reads on bubble economics and its logistics.
One other fact on bubbles absent from article of course is that bubble are engineered to transfer wealth into the pockets of the insiders.