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Nobody was better prepared for sion, and the only reason that 1,674 43,240
NE
the global market crash than people really don’t understand 1,098 PA
IL OH 13,327
clients of Ray Dalio’s BridgewaterNV this process is because it hap- 18,616
IN 9,048
UT CO
Associates and subscribers to its 2,166 pens 1,143rarely. Everybody
4,901 should, KS MO
3,290
WV
DC
1,449
1,717
Daily Observations. Dalio, CA the at this point, try to understand 3,557 KY
1,540
502
VA
Palo Alto 39,176 8,222
chief investment
18,069officer and all- the depression process by read- M
TN NC 7,
around guiding light of the global ing about the Great Depression or OK
1,350 AR
2,488 5,456
AZ NM
money-management company he the Latin
5,313 American
1,024 debt crisis or
813
GA
SC
Riverside 2,181
founded more than23,915 30 years ago, the Japanese experience so that MS
679
AL
1,772
5,652
funds and endowments. recession dynamic. It is very clear Matthew Furman for Barron’s
to me that we are in a D-process.
Western:
No wonder.64,427 The Westport, Conn.- Southwestern: 18,538 Midwestern:
al Reserve 75,127
eases monetary policyEastern: 1
based firm, Colorado,
Alaska, California, whose Hawaii, analyses of Why are you hesitant to empha- and produces anIowa,
Arizona, Louisiana, Mississippi, New Mexico, Alabama, llinois, Indiana, Kansas,
expansion. WeConnectic
Idaho, Montana, Nevada, Oregon, Utah, Oklahoma, Texas. Kentucky, Michigan, Minnesota, Mississippi, Florida, Ge
world markets
Washington, Wyoming. focus on credit and size either the words depres- Missouri, can make it more
Nebraska, complicated,
New York (Buffalo), NorthbutMassachu
currencies, has produced long- sion or deflation? Why call it a Dakota, that Ohio,
is a Pennsylvania
basic simple (Erie, description
Harrisburg, New York,
term annual returns, net of fees, D-process? Pittsburgh,
of whatWilkes-Barre),
recessions South
areDakota,
and whatRhode Isla
Geographic Distribution represented in Tennessee, Wisconsin. Virginia, W
averaging 15%.
ABC Statement. (May In the
26, 2008 issue) turmoil of we have experienced through the
2008, Bridgewater’s Pure Alpha 1 Both of those words have conno- post-World War II period. What
fund gained
© 2008 Dow 8.7%Inc.net
Jones & Company, of Reserved.
All Rights fees and tations associated with them that you also need is a comparable
revisedun-
December 29, 2008
Pure Alpha 2 delivered 9.4%. can confuse the fact that it is a derstanding of what a D-process
process that people should try to is and why it is different.
Here’s what’s on his mind now. understand.
You have made the point that
Barron’s: I can’t think of anyone You can describe a recession as an only by understanding the pro-
who was earlier in describing economic retraction which occurs cess can you combat the prob-
the deleveraging and deflation- when the Federal Reserve tight- lem. Are you confident that we
ary process that has been hap- ens monetary policy normally to are doing what’s essential to
pening around the world. fight inflation. The cycle contin- combat deflation and a depres-
ues until the economy weakens sion?
Dalio: Let’s call it a “D-process,” enough to bring down the infla-
which is different than a reces- tion rate, at which time the Feder-
The D-process is a disease of sorts Basically what happens is that The process of bankruptcy or re-
that is going to run its course. after a period of time, econo- structuring is necessary to its via-
mies go through a long-term bility. One way or another, Gener-
When I first started seeing the D- debt cycle—a dynamic that is al Motors has to be restructured
process and describing it, it was self-reinforcing, in which peo- so that it is a self-sustaining, eco-
before it actually started to play ple finance their spending by nomically viable entity that peo-
out this way. But now you can ask borrowing and debts rise rela- ple want to lend to again.
yourself, OK, when was the last tive to incomes and, more accu-
time bank stocks went down so rately, debt-service payments This has happened in Latin Amer-
much? When was the last time rise relative to incomes. At cy- ica regularly. Emerging countries
the balance sheet of the Federal cle peaks, assets are bought on default, and then restructure. It is
Reserve, or any central bank, ex- leverage at high-enough prices an essential process to get them
ploded like it has? When was the that the cash f lows they pro- economically healthy.
last time interest rates went to duce aren’t adequate to service
zero, essentially, making mone- the debt. The incomes aren’t We will go through a giant debt-
tary policy as we know it ineffec- adequate to service the debt. restructuring, because we either
tive? When was the last time we Then begins the reversal pro- have to bring debt-service pay-
had deflation? cess, and that becomes self-re- ments down so they are low rela-
inforcing, too. In the simplest tive to incomes—the cash flows
The answers to those questions sense, the country reaches the that are being produced to service
all point to times other than the point when it needs a debt re- them—or we are going to have to
U.S. post-World War II experi- structuring. General Motors raise incomes by printing a lot of
ence. This was the dynamic that is a metaphor for the United money.
occurred in Japan in the ‘90s, States.
that occurred in Latin America in It isn’t complicated. It is the same
the ‘80s, and that occurred in the As goes GM, so goes the nation? as all bankruptcies, but when it
Great Depression in the ‘30s. happens pervasively to a country,
and the country has a lot of for-
eign debt denominated in its own
The Top of a Cycle currency, it is preferable to print
Debt service is at its highest since the Great Depression, Dalio says, so restructuring is needed. money and devalue.
Household Debt Service (as % of Disposable Income) Isn’t the process of restructuring
Total Debt Service Interest Payments Principal Payments
15% under way in households and at
corporations?