Article Reviews, Macroeconomics, Trading

Ray Dalio at DealBook Conference: Interest Rates Could Turn in Late 2013

Watched a video where Ray Dalio (founder of Bridgewater Associates), David Rubenstein (co-founder of The Carlyle Group), Stephen Schwarzman (co-founder of Blackstone Group) participated in a panel discussion at New York Times’ DealBook “Opportunities For Tomorrow” conference. The conference took place on December 12, 2012.

Below are some notes I took from the discussion.

Ray Dalio (founder of Bridgewater Associates)

  • Biggest opportunity would be in shorting bond markets around the world
    • We are in a global de-leveraging, which has necessarily created quantitative easing and zero interest rates. With zero interest rates, the liquidity and risk premiums are virtually eliminated, and we have negative real interest rates. There has to be a negative real interest rate for us to service our excessive amount of debt.
    • In all de-leveragings, the one thing that’s always been true is that you get through them because you have an interest rate that is lower than the nominal growth rate of the economy otherwise the debt-to-GDP ratio will rise.
    • Hence we have largely fully priced assets at a time when we have less of an ability to ease monetary policy, and we also face fiscal risks (both U.S. and Europe).
    • The character of 2013 will be where you will see the risk premiums being squeezed a bit more [i.e. risk premiums go lower still].
    • The next big move in the market will be when the liquidity moves. Those risk premiums are likely to expand and are generally negative for asset classes as a whole.
    • The biggest opportunity will be – and it isn’t imminent – shorting bond markets around the world as the term structure of interest rates backs up.
  • Effect of QE has largely diminished
    • The marginal effect of QE is diminishing. The central bank purchases a bond of some form, and the seller of that bond takes that money in and buys something similar, and as a result that permeates through the society.
    • The first wave of QE was to reduce our liquidity problem, and it was very powerful. The second, had a lesser effect but was still powerful because it added liquidity and had a wealth effect. We are now in situation where the marginal impact of another QE will be very little.
    • At the same time there is fiscal weakness. We have not in our lifetimes ever experienced the case in which there is downturn in the economy and there was an inability in the central bank to ease monetary policy.
  • When interest rates will turn
    • The risk of the interest rates turning will increase as the year progresses, looking around late 2013.
  • How to position portfolio (other than shorting bonds)
    • There may still be upside in Australian agricultural properties as their risk premiums have not been fully squeezed.
    • Gold has a place in the portfolio.
    • If Dalio is long-based, equities will probably do better than bonds. Emerging market currencies will do well. The squeeze is largely over in emerging market currencies and emerging markets in general. Emerging market equities will do better than bonds.
  • Fiscal cliff
    • The fiscal cliff deal can take ~3.5% out of the economy, where the core GDP growth rate is around 2% or a little less. We are going to have a negative growth at a time when we are not going to have a normal monetary policy.

David Rubenstein (co-founder of The Carlyle Group)

  • Interest rates will remain low in 2013, financing will be pretty attractive, and you will see much more private equity deals in the U.S.
  • Attractive countries and sectors
    • Carbon-related energy sector will be attractive with a lot of infrastructure build and exploration & production.
    • Healthcare industry will be attractive due to the Obama legislation, more money inflows, and spending by baby boomers who are aging.
    • Bullish on China, 7% GDP growth is still attractive.
    • Europe is the largest emerging market in the world. Best to buy assets outside of Europe, at distressed levels from European banks.
  • Russia is difficult for Western private equity investors to make money. Very few things to buy Mexico for private equity investors.

Stephen Schwarzman (co-founder of Blackstone Group)

  • Attractive countries and sectors
    • Real estate is a great asset class, have spent $2bn buying homes one at a time.
    • Commercial real estate is growing at 2% because there is no new supply.
    • Basel III makes it difficult for banks to re-finance properties, so if you can buy that debt and convert that into properties at a yield that makes sense, there are tons of things to do, both in the U.S. and Europe. We are the largest buyer of distressed real estate paper in Europe. We are buying some warehouses at 10% and if you put some leverage into it, you are getting 18-19%.
    • We are the 2nd largest non-Indian owner of real estate, the yields are ~11% paid by U.S. tenants in dollars. If you add leverage to that, it is close to 20+%.
    • China looks like it has turned from its bottom, doesn’t look like it will go through a hard landing.
  • How to position portfolio
    • If interest rates go up ~3%, you will have $400bn a year punched into the budget, and that is going to happen. You will get some offset from tax increases due to the growing economy but that is small. So when interest rates rise, it will be a big deal.
    • You should move out of junk bonds and move into high-levered bank debt which is floating instead of fixed.
    • There will be a logical drag on the U.S. economy even if they get a fiscal deal done.
  • Large inflows still coming into private equity
    • Pension funds in the U.S. need around 7.75% – 8% returns to pay their beneficiaries. A lot of people went into liquid short-term instruments due to the financial and European crisis, such that you can get huge premiums in illiquid instruments with very high levels of safety. We are seeing very large inflows in all our asset classes as a result of that.




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