Ray Dalio: belief

Transcript context

…Help me put this in the context of finance theory. If I look at the literature on finance, it’s very hard to predict excess returns. We’re not even sure beta predicts excess returns. Firm size, maybe a little. Price to book value, maybe a little. Are you suggesting that the factors you’re citing predict excess returns? If so, why don’t we find that in the research literature? If not, why do we think they have predictive power? Do they predict excess returns? Polarization, credit, rise of China — they don’t seem to, in finance papers. There are so many people who write finance papers, and then there are people who make money in the markets. I can’t speak for those who are writing the finance papers, but I can answer your question in terms of the predictive value of those things, okay? As we deal with the mechanics of debt, or excess returns, there’s always, throughout history, a debtor and a creditor. There’s always, throughout history, the ability to create demand by creating debt and by creating money. Then there become clear preferences for doing one or the other. There are environments like the late 1970s, when Federal Reserve Chairman Paul Volcker tightened money and wanted to make it good to save and bad to borrow and have credit. That set of circumstances was caused, and that action was caused, by things that happened before it. That produced high real interest rates and the like, and that produced the environment that we had, largely, the disinflationary environment that followed. Similarly, the 1960s led to the 1970s. The ’60s had too much debt creation due to war in Vietnam and what we call guns and butter policies. We were spending more than we were earning. That led to the necessity, in 1971, for the Federal Reserve, for the president of the United States to acknowledge that they would no longer be able to pay the dollar claims in gold and to default on the gold claim and to devalue the exchange rate and to devalue the dollar, which led to the 1970s inflation, and so on. There were always, all through history, the dynamic in which there are high real interest rates, and it pays to be a saver for some times. There are times when there are very, very low real interest rates, and the need to create a lot of money and credit, and it pays to have the opposite side of assets positioned in the opposite way. And that’s been true throughout history, and that’s the main driver. I think, when we look forward, we can use those as guides to what’s likely to happen in the way of excess return. It’s, in fact, the way the system works. In other words, investors, borrowers, and lenders look at the relative expected returns of cash, bonds, and other asset classes, and move their money between those things based on the relative pricing. That’s why, for example, when there is a rise in interest rates, a tightening of monetary policy, and short-term interest rates rise relative to short longer-term interest rates — so the yield curve begins to flatten, and so on — that we see that there’s a slowing in the economy and a slowing in capital availability lending — long-term lending. There’s a shift to saving, and as a result, there’s a slowing of the economy. That’s, to me, how the system works. If I look at the macroeconomic literature, it seems to me, even GDP — when we run statistical tests, it’s hard to distinguish that from a random walk with trend. There’s not a lot of obvious mean reversion in the system.…

Stored transcript either side of the excerpt. The highlighted words are the published quote; the surrounding text is unedited source, never generated.