I saw a very interesting interview in Barrons today by Ray Dalio, CIO of Bridgewater Associates, whose Long Term average returns (net of fees) average +15%. Throughout the difficult 2008 their pure Alpha fund returned +8.7%. Basically this is a person who knows what he’s talking about, not a hack from the Daily Mail.

I won’t go into all the details here, but just list some of the takaways I picked up. There is a link at the bottom of this post that will take you to the whole article, which I recommend you read as what’s discussed affects us all.

- We are not in a recession, but a "D-process" - Ask yourself, when was the last time bank stocks went down so much? When was the last time the balance sheet of the Federal Reserve, or any central bank, exploded like it has? When was the last time interest rates went to zero, essentially, making monetary policy as we know it ineffective? When was the last time we had deflation?" Essentially, when incomes aren’t enough to service unmanageable debt, the reversal process begins. Basically what happens is that after a period of time, economies go through a long-term debt cycle. At cycle peaks, assets are bought on leverage at high-enough prices that the cash flows they produce aren’t adequate to service the debt. The incomes aren’t adequate to service the debt. Then begins the reversal process, and that becomes self-reinforcing, too. In the simplest sense, the country reaches the point when it needs a debt restructuring. General Motors is a metaphor for the United States.

- 2008 was the year of price declines; 2009 and 2010 will be the years of bankruptcies and restructurings. Loans will be written down and assets will be sold. It will be a very difficult time. It is going to surprise a lot of people because many people figure it is bad but still expect, as in all past post-World War II periods, we will come out of it OK. All the Fed/Treasury have done so far is taken the existing debt and said they will own or guarantee it. They have barely begun to write it down.

- If you think that restructuring the banks is going to get lending going again and you don’t restructure the other pieces — the mortgage piece, the corporate piece, the real-estate piece — you are wrong, because they need financially sound entities to lend to, and that won’t happen until there are restructurings.

- Buying equities and taking on those risks in late 2009, or more likely 2010, will be a great move because equities will be much cheaper than now. It is going to be a buying opportunity of the century."

As I said these are just some of the points discussed. It’s well worth a read, but be warned it isn’t a feel good story.

http://online.barrons.com/article/SB123396545910358867.html?mod=rss_barrons_interview

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