Friday, July 20, 2012

Ray Dalio - Bridgewater 2012 Q2 Letter to Investors

Ray Dalio, one of the few macro mavens worth listening to, recently came out with his 2012 Q2 letter to investors. 

On an interconnected global economy:
"The breadth of this slowdown creates a dangerous dynamic because, given the inter-connectedness of economies and capital flows, one country's decline tends to reinforce another's, making a self-reinforcing global decline more likely and a reversal more difficult to produce."  

If China is truly slowing down it's important to think about how this affects the price of commodities and similar inputs to the Chinese economy.  How will that affect export countries of those goods?

On Stocks:
"The recent deterioration in global financial conditions and growth rates will certainly be a headwind to top-line revenue growth, but companies still retain plenty of ability to protect their operating margins and profitability by keeping labor costs down (given labor market slack and labor market competition from emerging markets). Yet the markets are currently pricing in the worst real earnings growth rate in a 100 years. To further exemplify, the dividend yield of US non-financial corporations is higher than the yield on US Government notes, something that has only happened once in the past 50 years, during the peak of the 2008 credit crisis. And this is now occurring in an environment in which companies have abundant liquidity to cover their dividends."

I interpret that as a positive sign for stocks and their relative cheapness, especially large-cap companies with diversified geographic footprints and pricing power.  As far as labor costs goes, many companies have resorted to keeping people on as 'freelance' or 'independent contractors'.  This keeps the employer's cost down, because typically that arrangement does not provide benefits.  Since so many companies have wrung out excess costs in their models because they had to in this environment to stay profitable, it is unlikely that they would reinstate the benefits and extra employer costs anytime soon.  I'm not saying that's a good thing for quality of life, but from a business standpoint it makes sense.  So many folks are happy just to be employed at all, that they don't feel they are in a position to push back too much right now to reclaim those benefits.


The only certain thing right now is uncertainty, and uncertainty is not the friend of the market or businesses, but it can provide opportunities.  Political uncertainty in America looms large, the European debt crisis continues to persist (investor/news fatigue), both of which contributes to uncertainty for managers which inhibits rapid employment growth, which keeps consumer purse strings tight, which leads to slower grow for corporations and producers.  

It's such a complex world with so many moving parts, it's nearly impossible to time markets and guess the future.  I do think that being aware of the macro environment has a place in one's investment decisions, but it should not be the sole foundation of those decisions.