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Bridgewater Takes Grim View of 2012

Rhapsody1447

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Bridgewater Stays Gloomy for 2012 - WSJ.com

Bridgewater Associates has made big money for investors in recent years bystaying bearish on much of the global economy. As the new year rings in, thehedge fund firm has no plans to change that gloomy view.


Robert Prince, co-chief investment officer at Bridgewater, and his managersat the world's biggest hedge fund firm are preparing for at least a decade ofslow growth and high unemployment for the big developed economies. Mr. Princedescribes those economies—the U.S. and Europe, in particular—as"zombies" and says they will remain that way until they work throughtheir mountains of debt.

"What you have is a picture of broken economic systems that areoperating on life support," Mr. Prince says. "We're in a seculardeleveraging that will probably take 15 to 20 years to work through and we'rejust four years in."

In Europe, "the debt crisis is [a] long ways from over," he says.The economic and financial morass will mean interest rates in the U.S. andEurope will essentially be locked at zero for years.

In this bleak environment, Mr. Prince says stocks remain vulnerable to"air pockets" from shocks, such as bad news out of Europe. But forlonger-term investors looking out over the next decade, he says, equities maybe a good buy. There is even money to be made in U.S. Treasurys, despiteinterest rates near record lows, and gold is likely to resume its climb ascentral banks print money to bolster their economies. Mr. Prince says.

The views of Bridgewater are keenly watched by other investors, given thefirm's elevated status in the competitive world of hedge-fund investing.Bridgewater's flagship Pure Alpha Strategy fund is considered one of the topfunds in the world. As of the end of November, it was up 25% since the start ofthe year, according to people familiar with the situation. The average macrofund had lost 3.7%, according to Hedge Fund Research.

Currently, the fund is positioned for higher gold prices, stronger Asianemerging-market currencies and lower yields across high-quality government bondmarkets, Mr. Prince says.

In 2011, it profited from owning gold, but cut back on that position duringthe third quarter. It correctly pivoted from being bearish on U.S. Treasurysearly in the year to positioning for a rally. It also benefited from rallies incore European bond markets and avoided ugly losses sustained by other macrofunds that had bet the euro would fall against the dollar. Instead, it rightlybet that the euro would fall against the Japanese yen.

Founded in 1976 by Ray Dalio, Bridgewater manages $125 billion and has 1,400employees. Mr. Prince, 53 years old, joined in 1986. The firm's clients areinstitutions such as pension funds and endowments, along with foreigngovernments and central banks.

Pure Alpha has been up each year since 2000, and has recorded just threenegative calendar years since 1991. In 2008, the fund returned 9.4% after fees,and after a 2% gain in 2009—its smallest of the decade—Bridgewater posted a44.8% return in 2010.

From its offices by the Saugatuck River in Westport, Conn., Bridgewaterplays much the same field as other so-called macro funds. But it tends to bemore diversified than its competitors, with numerous smaller bets across a hostof currencies, government bonds, stocks and commodities.

In a conference room at Bridgewater's headquarters, where the water from theSaugatuck appeared to almost lap at the glass walls, Mr. Prince paints a grimpicture of the challenges facing the U.S. and European economies.

Recent better-than-expected news on the U.S. economy is unlikely to be thestart of a healthy expansion, he says. The uptick in economic growth has beenfueled by a decline in the savings rate, which, without material income andemployment gains, is unlikely to be sustainable as long-term credit growth alsoremains weak, he says.

The problem for the U.S, says Mr. Prince, is that it is on the wrong side ofa long-term debt cycle.

"We were in a leveraging-up period for 60 years, from the early 1950sto 2008," he says. This debt bubble was self-reinforcing on the way up,and "when it tipped over, it set about a self-reinforcing process on theway down."

As evidence for the long slog facing the U.S economy, he notes that thelevel of leverage, as measured by comparing household income to net worth, isstill higher than it was before 2008.

"The most likely environment is moderate growth with wiggles up anddown and this is one of those wiggles up," he says.

Against this backdrop, the Federal Reserve will need to do more quantitativeeasing—buying of government bonds—but Mr. Prince says the purchases willprobably be sporadic.

Europe, meanwhile, is headed into a potentially deep recession, with policymakers boxed in by an interconnected banking and sovereign-debt crisis.

"You've got insolvent banks supporting insolvent sovereigns andinsolvent sovereigns supporting insolvent banks," he says.

In the U.S., leveraged investors who can borrow money at rates near zerocould find a good deal in Treasurys, Mr. Prince says.

Mr. Prince points to the example of Japanese government bonds. An investorwho was leveraged three-to-one and bought Japan's bonds at a 2.5% yield in themid 1990s would have earned a compound average annual return of 12% a year for15 years, he says.

Meanwhile, gold prices should resume a rally amid continued printing ofmoney by the Fed and other central banks, Mr. Prince says. Those effortseffectively devalue those countries' currencies compared with gold.

Mr. Prince also thinks stocks are attractive from a long-term perspective,especially compared with bonds or cash. Broadly, discounted earnings-growthrates, which reflect the expectations about future earnings implied by currentprices, are negative, he says.

A moribund economic outlook "is pretty priced in right now," hesays. "If we have a long, drawn out deleveraging process withoutsubstantial air pockets, chances are equities are a pretty good bet, ironically."
My favorite guys are out with their forecast for 2012. These wouldn't be the most popular guys at a party. They see continued growth in gold and treasuries and further declines in equities and Europe. Dalio believes strongly in his deleveraging thesis and believes we have a long way to go before we are out of it. I'd love to hear your thoughts, opinions, and rebuttals. I'll follow-up shortly with a more in-depth opinion of my own but I put a lot of faith in what these guys say so I can't see myself disagreeing with anything significant. Bridgewater is the world's largest hedge fund and their Pure Alpha Strategies is one of the best funds in the world. It returned +25% in 2011 while the S&P was flat, the HFRI was -5%, and the MSCI was down.
 

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He's pretty much spot-on as far as I'm concerned. I would tend to disagree that stocks look attractive but otherwise his speculation seems accurate. I would add that it is very likely to see an end to the EU in the near future which will have widespread consequences and, while initially will be helpful to the U.S., will accelerate the deterioration of the Dollar.
 

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How do we know that this Bridgewater isn't another ponzi scheme? Their unsustantiated claim of 18% average growth rate over 20 years of existance sounds mighty suspicious. I hate to accuse anyone of anything with absolutely no reason to suspect that anything is wrong, but it seems like there is some type of money management fund found to be a ponzi scheme just about every week.
 

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imagep said:
How do we know that this Bridgewater isn't another ponzi scheme?
Caveat emptor.
 

Rhapsody1447

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How do we know that this Bridgewater isn't another ponzi scheme? Their unsustantiated claim of 18% average growth rate over 20 years of existance sounds mighty suspicious. I hate to accuse anyone of anything with absolutely no reason to suspect that anything is wrong, but it seems like there is some type of money management fund found to be a ponzi scheme just about every week.
The firm is the largest fund by assets in the world at over $125 billion and manages money for a wide array of institutional clients, including foreign governments and central banks, corporate and public pension funds, university endowments and charitable foundations. They are tightly regulated by various regulatory agencies (SEC, FINRA, etc.) and have their performance results audited regularly. Their returns are not unsubstantiated claims. Of course you can try to claim this doesn't mean they aren't a ponzi scheme but there is absolutely zero evidence pointing to fraud. You can view their All Weather (beta) portfolio online and request information from the SEC if you are curious.
 

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I agree with the deleveraging and slow growth part. I also agree with his views on Treasuries and that stocks on a long-term basis are more attractive than bonds or cash. I don't agree with his notion that gold will continue to move higher, at least in terms of the U.S. dollar. It might in the short run, but longer term it should drop for the simple reason that it's overpriced relative to other assets that the currency can purchase.
 

Rhapsody1447

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I agree with the deleveraging and slow growth part. I also agree with his views on Treasuries and that stocks on a long-term basis are more attractive than bonds or cash. I don't agree with his notion that gold will continue to move higher, at least in terms of the U.S. dollar. It might in the short run, but longer term it should drop for the simple reason that it's overpriced relative to other assets that the currency can purchase.
I hate to rehash the same argument over again but Bridgewater's basis for gold going higher is that central governments will continue to print gobs of money. The unprecedented monetary expansion in response to the deleveraging is what spurred gold in the first place and there is no reason for it to slow down if money keeps getting printed. Of course the other side of the coin makes a good case for staying in cash and getting out of gold. Both of these articles make a lot of sense to me but I'd rather be on Bridgewater's side.
 

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I hate to rehash the same argument over again but Bridgewater's basis for gold going higher is that central governments will continue to print gobs of money.
I understand that, but if they're going to further a thesis that massive debts and an ongoing deleveraging process are going to stifle growth, then they need to go back to their knitting and study Irving Fisher. The Fed can not "print" money. It can add to bank reserves, which can only create money if banks lend against those reserves. If people don't want to borrow or the banks either can't or don't want to lend, then no dollars are "printed." Here are a couple of facts to chew on:

The velocity of money (how fast people borrow and spend it) is still dropping like a stone:



The M1 Money Multiplier is still well below 1.0, which means that for every dollar added to bank reserves, less than one dollar is being "printed." In other words, money is being destroyed faster than banks can "print" it:



It seems a bit incongruous for Bridgewater to argue that the Fed is printing massive amounts of money so go ahead and bet the farm on Treasuries by leveraging yourself up three-to-one. What kind of nut would want to lend money for thirty years at less than three percent per year when the sky will be falling and gold is set to zoom to the moon? It makes no sense, unless the planet is loaded with greater fools who will eventually get their speculative heads handed to them like MF Global did. If you believe Bridgewater's slow-growth deleveraging thesis, there is no fundamental reason to buy gold.
 

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Economics has a rule of 72 about simple compounding interest growths on investments where the principle doubles within the space of time divided by the interest rate into 72 gives the years it will take to double.

Politically there is a redistribution of wealth taking place as always within each society and that is accomplished through taxation as politicians call these taxes investments.

With that being the case lets compare compounding rates of taxes vs regulated business investments managed by those levying taxes.

Now let me use an image that will give 24 points of balance around any specific issue at the center of discussion. Now this image is symbolic of a free floating scale that has 6 points of observation over 8 corners of triangulating the 24 spaces to choose from as a side.

Now the obvious problem when looking at this objective image is that one can only see 12 sides from any one of the 6 points controlling the whole 8 corners where looking out from the center the fourth side is open ended to speculation of anything is possible 8 different ways controlling three sides of an argument being debated.

Point of the example is 6 x 12 = 72 ways of employing self deception. Now pick a side relative to everyone acting the same way defined differently while every body human exists in male and female form every generation the next ancestors arrive replacing the past ancestry specifically as conceived by the compounding effects of how and why now remains here forever while details never stay the same except in rule of law that ignores the self evident of self containment to a self maintaining moment this planet has existed as all the time.

,
,

,


This scale is exponential to any level of physical results to molecular migration within gravitational perpetual moving molecules assembled as 120 estimated elements contained within cellular adaption of contracting results expanding the details coming into focus now as always.

Now here is 16 more sides when expanding the previous image to include ancestry's male and female halves. Notice the growth of the 16 sides added comes between the 4 corners of rotations while the top and bottom stay where they remain relative to all other points existing working the same way.



It is time to show physical results as physical results and metaphysical ideologies as metaphors creating opportunities to create an environment where genders want to play character roles where they have rights to deny the self evident for the greater good intentions of those defining who's who socially in literature and mathematics using symbols of heart, mind, body, and soul as the four rotating corners of 6 points of separating the whole moment into three categories of thought with institutions to symbolizm the importance of maintaining the illusion of being society's child for the greater good of humanity.

The ethics of economics vs the moralities of spirit vs the legalities of political mayhem. Beware what you ask for, because once you have created a false illusion, it may be your own undoing socially and as part of living within the eternity of now's results compounded so far.

Time to really look at this institution for what it really is. It won't be pretty and I guarantee every social identity of humanity will hate me for bring this into focus.

Have a great 2012.
 
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Rhapsody1447

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I understand that, but if they're going to further a thesis that massive debts and an ongoing deleveraging process are going to stifle growth, then they need to go back to their knitting and study Irving Fisher. The Fed can not "print" money. It can add to bank reserves, which can only create money if banks lend against those reserves. If people don't want to borrow or the banks either can't or don't want to lend, then no dollars are "printed." Here are a couple of facts to chew on:
This isn't necessarily true. The Fed can print money by buying assets; namely government securities. Until they sell, those asset purchases result in a direct increase in the money supply.

money supply.jpg

It seems a bit incongruous for Bridgewater to argue that the Fed is printing massive amounts of money so go ahead and bet the farm on Treasuries by leveraging yourself up three-to-one. What kind of nut would want to lend money for thirty years at less than three percent per year when the sky will be falling and gold is set to zoom to the moon?
Um, everyone? Where do you think people go when the sky is falling? They go to the safest asset there is, US Treasuries. Just look at 2011. I should clarify the degree in which the "sky is falling". If we are talking Armageddon then yes, guns and butter. If we are talking 2008, then Treasuries are the go to asset.

It makes no sense, unless the planet is loaded with greater fools who will eventually get their speculative heads handed to them like MF Global did. If you believe Bridgewater's slow-growth deleveraging thesis, there is no fundamental reason to buy gold.
I see the other side of the argument, I really do. The article I linked explains it very well.

So Will It Be Inflation or Deflation?

Dent cites the massive amount of private debt (estimated to be $50-100 trillion or higher) as a large pool of credit that is going to have a significant chunk written down (his debt deflation scenario is similar to Robert Prechter's in this regard, though less extreme).

As this massive amount of bad debt floats away to "money heaven", the forces of deflation will overwhelm any amount of potential government stimulus, Dent believes. Also, with the US citizenry already quite pissed that the last stimulus didn't do much of anything, the Federal government's hands may be increasingly tied by voters calling for austerity measures (or at least, more responsible government spending).

Return of the Bond Vigilantes?

I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.- James Carville, political advisor to President Clinton

Even if Joe Sixpack doesn't rise up, Dent anticipates a far more powerful force will ultimately check the government's ebullient spending - the bond market. During the last wave down, the bond market benefited as a "flight to safety play". Dent doesn't see that repeating next time - instead, he sees concerns over government debt as being a cue for the "bond vigilantes" to ride back onto American soil and enforce some level of fiscal sanity - likely when the next stimulus package is floated out there.

He cites the speed at which the vigilantes can mobilize and drive up the rates on government debt - like the quick spike in Greek interest rates this spring - as an example of how fast spreads can skyrocket.

Overall, his team projecting a potential 2% rise in 10-year yields - which would push the 10-year yield up from 2.5% to 4.5%. Think the housing market is in trouble now? Imagine a 2% bump in mortgage rates!
However, you do have Ben in the Fed seat and Obama in the Oval Office. With Europe falling apart, China slowing down, and political instability in the emerging world, money has to go somewhere. And if 2011 was any guide, that money will come here. As faith in fiat erodes, commodities will outperform.

The slow-growth deleveraging thesis is concurrent with out-performance in gold and treasuries. In his paper explaining the deleveraging cycle, Dalio explicitly mentions it:

After bubbles burst and when deleveragings occur, private debt growth, private sector spending, asset values and net worths decline in a self-reinforcing negative cycle. To compensate, government debt growth, government deficits and central bank “printing” of money typically increase. In this way, their central banks and central governments cut real interest rates and increase nominal GDP growth so that it is comfortably above nominal interest rates in order to ease debt burdens. As a result of these low real interest rates, weak currencies and poor economic conditions, their debt and equity assets are poor performing and increasingly these countries have to compete with less expensive countries that are in the earlier stages of development. Their currencies depreciate and they like it. As an extension of these economic and financial trends, countries in this stage see their power in the world decline.
Bridgewater is hardly "levered up three-to-one". In their beta portfolio, they do lever up low-risk, low-return asset classes and delever high-risk, high-return asset classes that are uncorrelated. This has resulted in outstanding long-term returns with half the volatility of a traditional portfolio.

Instead of your big mac example, why not use the price of gold needed to cover the money supply?

Price of Gold needed.jpgFed Balance Sheet.JPG

You can claim that gold is in a bubble, and it has had quite a spectacular year, but gold is a completely different asset class than it was 15 years ago. I don't personally own any gold, I never have and don't consider myself a goldbug. I am much too fearful of the deflation and economic collapse Harry Dent warns about in his interview. However, he doesn't win the age-long deflation/inflation debate outright. I believe in our current economic system of bailouts and blinded optimism that gold still has a long way to go before this mess is all over.
 

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The firm is the largest fund by assets in the world at over $125 billion and manages money for a wide array of institutional clients, including foreign governments and central banks, corporate and public pension funds, university endowments and charitable foundations. They are tightly regulated by various regulatory agencies (SEC, FINRA, etc.) and have their performance results audited regularly. Their returns are not unsubstantiated claims. Of course you can try to claim this doesn't mean they aren't a ponzi scheme but there is absolutely zero evidence pointing to fraud. You can view their All Weather (beta) portfolio online and request information from the SEC if you are curious.
I wonder if I had asked the same question about Maddoff a few years ago someone would have given me an almost identical answer.
 

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I wonder if I had asked the same question about Maddoff a few years ago someone would have given me an almost identical answer.
With no evidence, you could ask the same question to any fund that outperforms.
 

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The Fed can print money by buying assets; namely government securities. Until they sell, those asset purchases result in a direct increase in the money supply.
No, they don't, or, at least, they haven't up to this point. A member bank or primary dealer sells securities to the Fed and the Fed deposits the money into the bank's reserve account or the primary dealer's clearing account. It does this in order to manage reserve levels. The money doesn't go anywhere until it's lent by the member bank or the clearing bank. "Sales" by dealers are mostly in the form of repurchase agreements in which the Fed takes the securities as collateral in exchange for a short-term loan. By the way. The monetary base includes bank reserves, which, strictly speaking, are not money.

Um, everyone? Where do you think people go when the sky is falling? They go to the safest asset there is, US Treasuries. Just look at 2011. I should clarify the degree in which the "sky is falling". If we are talking Armageddon then yes, guns and butter. If we are talking 2008, then Treasuries are the go to asset.
Last year and the year before that people thought I was nuts for touting Treasuries while supposed bond gurus like Bill Gross were selling or shorting them.

Bridgewater is hardly "levered up three-to-one".
I didn't say it was. But if it's pointing to that strategy with Japanese bonds, presumably it thinks it's a good idea with 10-year yields below 2%.

Instead of your big mac example, why not use the price of gold needed to cover the money supply?
Because Big Macs are universal; a Big Mac in Helsinki is the same as a Big Mac in Los Angeles, so it gives a realistic comparison of the relative value of currencies. Now, asking what gold should be worth if it were needed to cover the money supply is an exercise in nonsense, IMHO, because the amount of economic activity represented by the number of dollars in circulation dwarfs the amount of gold on the planet. For example, what would an iPod be worth if it were a currency? Apple's sold about 300 million iPods, so if it were a currency representing just M1 (at $2 trillion), an iPod should be worth more than six grand, or enough to make a nice down payment on a new car.

You can claim that gold is in a bubble, and it has had quite a spectacular year, but gold is a completely different asset class than it was 15 years ago.
How so? Countries that inflate and don't pay their bills are nothing new. What's changed is there's more demand from China and India and it's easy for everyone from housewives to hedge funds to buy it in the form of an ETF like the GLD. But when you strip away the glitter and the hype gold is still at its core just a commodity. If Indians want to adorn themselves in it, they can be my guest. I think I'd rather buy a nice diamond instead.
 
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