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Ray Dalio's Q2 Bridgewater Letter Is Out: Here Are The Highlights

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Ray Dalio

Bridgewater, the biggest hedge fund in the world, is out with its second quarter letter (h/t @_peritas).

The firm takes a concerned tone to begin, writing that the world's policymakers are in effect putting the world economy in serious jeopardy:

We estimate that in the past few months global growth has slowed from about 3.3% to 1.9% and that 80% of the world's economies have slowed, including all of the largest. 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. And at this point, while actions have been taken, none of the world's largest economies are stimulating aggressively via either monetary or fiscal policy, further reducing the odds of a reversal.

Here are the highlights from the firm's comments on various asset classes (emphases ours).

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."

On global bonds:

"The fat tail possibility that Europe's deleveraging will become disorderly must be considered a real possibility that would be significantly bullish for bonds. However, markets are now pricing in low growth and continued deleveraging for an extended period of time. This shift from pricing in a normal recovery to a deleveraging makes sense to us; however, what is priced in now suggests a low probability that even in 10 years much progress will have been made."

On oil:

"The backdrop of tight spare capacity, combined with an uncertain Iranian situation (both around the efficacy of sanctions, which went into full effect in July, and the possibility of a more significant disruption), produces upside risks. At current prices, we would still expect demand to be strong enough to produce a gradual tightening of capacity over time, and if OPEC follows its typical pattern of leaning against recent price changes, it will reverse some of its recent supply increases."

On gold:

"Gold is also being supported by secularly increasing demand. Prior to the financial crisis, gold was substantially under-owned relative to financial assets, and despite stepped-up purchases of gold by central banks and sovereign wealth funds, the shift toward greater holdings of the precious metal is still in its early stages…speculative gold positions had been significantly reduced [by the end of the quarter] and as a result are less likely to be a bearish short-term driver going forward."

SEE ALSO: Here's All You Need To Know About China's Fragile $2.2 Trillion Shadow Banking System >

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Ray Dalio's Bridgewater Plans To Build A New $750 Million Headquarters In Stamford And Is Expected To Add 1,000 More Jobs

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Billionaire hedge fund god Ray Dalio, who is considered one of the best hedge fund managers in the world, plans to build a brand new headquarters for Bridgewater Associates in Stamford, Connecticut Gov. Dannel Malloy said in a release. 

The $750 million project, which will be located on the waterfront, should be good news for Wall Streeters looking for a job. 

That's because Dalio has agreed to create up to 1,000 high-level jobs in the next decade in addition to Bridgewater's current headcount of 1,225 employees. 

Here's the governor's release (emphasis ours).  We've also included a statement from Bridgewater on the matter.  

(STAMFORD, CT) – Governor Dannel P. Malloy today announced that Bridgewater Associates, one of the world’s leading hedge funds, intends to build a state-of-the-art corporate headquarters in Stamford.  The $750 million project will be built along the waterfront in the Harbor Point development.  To fully maximize the benefits under the agreement Bridgewater will create up to 1,000 high-level jobs within 10 years and also retain its current workforce of 1,225 employees.
 
The company is the third of Governor Malloy’s “Next Five” program.  To date, eight companies are taking part in the Governor’s signature economic development initiative.
 
“For a long time, our state failed to compete for the kinds of good paying jobs with good benefits that will grow and sustain our economy,” said Governor Malloy.  “Thanks to the ‘Next Five’ program, we are clearly charting a new course.  The jobs we are announcing today have the potential to grow our economy in a profound way because the spin-off effect of these positions will drive growth in other sectors.  To have a company of Bridgewater’s stature make the business decision to invest $750 million in our state and significantly increase its workforce is not only an extraordinary economic ‘win,’ but signals to the rest of the world that Connecticut is strengthening its leadership position in the very competitive financial services sector.”
 
Increasing the number of high-income wage earners in the state positively impacts the economy in many ways.  Their spending creates greater demand for products and services, which ultimately spurs job creation across a wide variety of sectors.
 
Bridgewater manages approximately $130 billion in global investments for a wide array of institutional clients, including corporate and public pension funds, university endowments, charitable foundations and foreign governments and central banks.
 
“We are pleased that the State of Connecticut shares our vision of creating a state of the art and environmentally sustainable office campus, while also restoring this key piece of natural waterfront property in Stamford,” said Greg Jensen, Co-CEO of Bridgewater Associates. “We look forward to transforming this industrial site into a spectacularly beautiful forested campus that will be seamlessly integrated into the natural surroundings. The proposed campus will house all of our employees and be designed to facilitate creativity, collaboration and help reinforce Bridgewater’s distinct culture which has been so instrumental to our success.
 
“Connecticut is great place to do business and we are excited about this partnership with the State, which will allow us to expand and grow our business.”
 
Throughout its 37-year history, Bridgewater has been recognized as a top-performing manager and an industry innovator. In both 2010 and 2011, Bridgewater ranked as the largest and best-performing hedge fund manager in the world.
 
Bridgewater is currently based in Westport, CT where its 1,225 employees are spread among 5 office buildings in and around the town. Construction on the company’s new, approximately 750,000 square foot facility is expected to be completed by 2017, and is subject to customary approvals and additional due diligence on the site. Plans are to reforest the land to create a park-like campus and construct two energy efficient, sustainable buildings that will open towards the water.  Public access will be created by way of an esplanade along the water.
 
State support for the project will come from the Next Five program, which is administered by the Department of Economic and Community Development (DECD).  The assistance includes:
 
  • A $25 million forgivable loan at a rate of 1% for a term of ten years to be used for the construction of the new facility
  • A job training grant of up to $5 million
  • A grant of up to $5 million for the installation of alternative energy systems
  • Up to $80 million in Urban and Industrial Sites Reinvestment Tax Credits.
 
“The intent of the Next Five program is to attract large-scale projects to our state, and this project clearly demonstrates how powerful—and effective—this program can be,” said Catherine Smith, commissioner of DECD. “Bridgewater's capital investment of $750 million is higher than the previous seven projects combined and will result in a one-of-a-kind corporate campus which, like the Silicon Valley headquarters for Google or Apple, is designed to facilitate innovation and support a strong and unique corporate culture.”
 
Here's the statement from Bridgewater: 

“Today Connecticut Governor Malloy announced that Bridgewater is seriously exploring moving its offices to a new corporate headquarters that it would like to build in Stamford. We want to echo Governor Malloy’s comments at his press conference today. While we are excited about the prospect of bringing all of our people together under one roof and, in the process helping to restore the waterfront in Stamford, a lot of work needs to be done to see if a move to the Stamford campus can become a reality. This work includes exploring both approvals from the City of Stamford and its various committees and boards, as well as conducting additional due diligence about a host of cost, design and community related issues. We will continue to work with our team of skilled partners to evaluate and plan the campus and will make our decisions known as we make them.”

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Ray Dalio On The #1 Reason To Own Gold

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Ray Dalio’s latest investment letter updates some of their macro positioning and offers some insights into the bull case for gold.  He writes:

“Gold is primarily an alternative to fiat currency and a storehold of wealth.  The main advantage that gold has over other currencies is that it can’t be printed.  While we have just gone through a period in which the degree of monetary stimulation has ebbed, the ongoing deleveraging means that developed economic will remain highly reliably on continued stimulation for years.  By the end of the quarter, central banks were starting to shift back toward renewed stimulation.  In addition, one of the primary disadvantages of gold relative to fiat currencies, that it doesn’t pay interest, is mitigated by low rates in the current environment.  Real interest rates are likely to remain very low and below real growth rates as a means of combating deleveraging and improving debt sustainability (as described in our “beautiful deleveraging” work).  As such, deleveragings strongly favor shifts from financial assets into gold and other tangible assets.

Gold is also being supported by secularly increasing demand. “

Read more at Hedge Fund Letters.

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Ray Dalio On The Massive Deleveraging And The Dreadful Future Facing Europe

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Ray DalioHedge fund god Ray Dalio, who runs the highly successful Bridgewater Associates, spoke at the Council on Foreign Relations this morning with CNBC anchor Maria Bartiromo.

The discussion covered a gamut of issues with Dalio giving long-winded answers on topics such as the U.S. debt, gold, China and the eurozone crisis, just to name a few. 

When asked about how Europe will play out in the next couple of years, here's what he said:  (emphasis ours)

"It's going to be very similar to most parts of southern European countries as a classic lost decade very similar to the Latin American debt crisis for Latin America.  Means I think we're at the early stage of a major deleveraging in those countries, so that will produce a depression kind of environment.  What I mean by that, we will have, go back to spending.  Spending is a certain amount of money and credit.  There's a limit to how much money. So now we take the credit.  Credit comes from private sector credit.  Private sector credit typically comes through banks.  There will be a bank deleveraging.  There is going to be bank deleveraging.  We are in the early stages of a bank deleveraging.  There will be some recapitalization of the banks, but we are coming into an environment that there will be lots of controls and there will be a deleveraging in the private sector through the banks.  And then in the public sector there will be a deleveraging because there has to be deleveraging in terms that you can't continue to run the deficits.  There will be the equivalent of the IMF type of program.  It will be the equivalent of the Troika.  So we are going to go through, if you look at Latin America type of deleveragings, or different types of deleveragings we've been through.  The Troika will manage those deleveragings, so they will take over the controls of the banking systems.  We are in the early stages of that.  And so the conditions will be very bad for those countries.  The marginal amount that they will be bad it will mingle in with monetary policy, a mix of the deleveraging, debt restructuring and certain amount of monetization.  I think there will be that kind of mix.  The question becomes really a social question, 'How the tolerance for those types of conditions is then dealt with?' If it's dealt with well socially that becomes a test of the character of the people.  We have a capacity to get through these things if we have the capacity to not have such conflict, that itself becomes a terrible things.  I think we are going to have a bad set of economic conditions...." 

Watch the full hour-long interview below: 

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RAY DALIO: There's No Sensible Reason Not To Own Gold

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Ray Dalio

Ray Dalio, one of the most successful hedge fund managers of all time, spoke with CNBC's Maria Bartiromo at the Council on Foreign Relations this morning. 

The hedge fund god made some interesting comments on gold. 

Here's what we've transcribed from his interview. (emphasis ours) 

"Gold is a currency.  Throughout the history, I won't tell you in length, money was like a check in a checkbook and what you would do was get your gold and gold was like a medium.  So gold is one of the currencies-- We have dollars, we have euros, we have yen and we have gold.

And if you get into a situation where there's an alternative in this world, where we're looking at 'What are the alternatives?' and the best alternative becomes clearly one thing, something like gold, there becomes a risk in that.  

Now it doesn't have the capacity.  The capacity of moving money into gold in a large number is a extremely limited.  So the players in this world that I have contact with that move that money really don't view gold as an effective alternative, but it could be a barometer and it is an alternative for smaller amounts of money.  

To this, Bartiromo asked if he owns gold.  

"Oh yeah.  I do.  I think anybody, look let's be clear, that I think anybody who doesn't have...There's no sensible reason not to have some.  If you're going to own a currency, it's not sensible not to own gold.  Now it depends on the amount of gold.  But if you don't own, I don't know 10%, if you don't have that and that depends on the world, then there's no sensible reason other than you don't know history and you don't know the economics of it. 

But, I. Well, I mean cash.  So cash...view it in terms as an alternative form of cash and also view it as a hedge against what other parts of your portfolio are. Because as traditional financial assets, and so and in that context as a diversifier, as a source of that, there should be a piece of that in gold is all I'm saying.

"But anyway, in that notion, what I'm talking about here, in terms of your reflection, that putting aside gold, I don't want to draw an inordinate amount of attention toward gold, but I would want to say in this world of liquidity and the world trying to find out 'What is the place?' in which also think about it for basically you get no interest rate. So the question is, 'Is cash under the bed better than treasuries?'  You could be quite close to cash being under the bed better than treasuries, right?  Because essentially you know you'll get it back if it's under the bed or in a bank and they're not giving you any money on it anyway.

And so when you're looking at an international investor, someone like I don't know a Chinese investor or something, and you say 'I'm going to do this and you're going to give me zero interest rate for that.' We are at one level and the question is 'does there become emerging some clear alternative?' And if there becomes a clear alternative we have to worry about that because that will be the notion of let's say Japan. If we think, in Japan, there's all this Japanese save and they buy their bonds and that can go on for a very long time and it can go on here for a very long time. The question is 'what are the alternatives?' and that is create shifts. 

Watch the full hour long video here: 

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The World's Most Powerful Hedge Fund Manager Tells Investors How They Should Set Up Their Portfolios

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Hedge fund god Ray Dalio, who runs Bridgewater Associates, is widely considered to be the most successful hedge fund manager in the world.

He recently sat down with CNBC's Maria Bartiromo to discuss a variety of topics at the Council on Foreign Relations and he had some advice for the average investor. 

During the hour-long discussion, Bartiromo asked Dalio about portfolio allocation in terms of gold versus equity versus real estate and other asset classes.

Here's his advice that we've transcribed: (emphasis ours) 

First, Dalio explains what you need to think about when setting up a portfolio.  The key here is asset allocation. 

"So I think I'm going to answer it in the following way that I think that is the right way for people to look at it. It's the way I look at it. I think that the first thing is you should have a strategic asset allocation mix that assumes that you don't know what the future is going to hold.  And I think most people should..." 

In other words, if you're thinking of "beating" the market, as though it's a game, you're probably going to lose.

"In other words, let's say, I play the game of betting against others. So it's like I'm going on the poker table and if I'm smarter, and I know how difficult that game is, so very few winners.  And like if I'm not engrossed in it and if we're not engrossed in it, I'd be worrying about it and I do worry about it when I am engrossed in it.  So the average investor and most people should not be playing that game.  They're going to lose at the poker table."

This is why Dalio emphasizes the importance of a balanced portfolio, especially in terms of risk.  

"So what that means, they should have a properly balanced portfolio.  Now the most important thing is that is that they balance... They make a mistake in terms of dollars invested and with a bias with what's done well in the past and they don't realize that risk.  They should balance it in terms of risk.  

"Let's say stocks have twice the volatility, more than twice the volatility, of bonds and when they own a portfolio and structure a portfolio that way they tend to have concentrated risks. And I think what they need to do.  I would recommend reading, read, on the subject of risk parity, read on our website, we have an explanation on how to balance risk, but they key thing is that there are basically four economic environments.  There are two main drivers of asset class returns-- inflation and growth." 

Here simplifies how inflation and growth affect the prices of asset classes based. 

"Assets all price based on, you could look at the pricing of asset classes and calculate what the discounted growth rate is and what the discounted inflation rate is. And what causes assets to move is surprises to that.  So when growth is faster-than-expected, stocks go up.  When growth is slower-than-expected, stocks go down.  When inflation is higher-than-expected, bonds go down.  When inflation is lower-than-expected, bonds go up.  OK. 

Dalio says it's important for the average investor to understand inflation and growth and their effects.  That's why he suggests having four different portfolios to achieve balance.  

"What I'm trying to say is that for the average investor, what I would encourage them to do is to understand that there's inflation and growth. It can go higher and lower and to have four different portfolios essentially that make up your entire portfolio that gets you balanced.  Because in every generation, there is some period of time, there's a ruinous asset class, that will destroy wealth and you don't know which one that will be in your life time. So the best thing you can do is have a portfolio that is immune, that is well diversified.  That is what we call an all-weather portfolio.  That means you don't have a concentration in that asset class that's going to annihilate you and you don't know which one it is...

Again, the reason you should have a balanced portfolio is you don't know what the future holds, says Dalio.  

"Well, I'm saying based on the notion that you don't know which one it is. And therefore,..when you say 'which should it be today?' It should be balanced today like it is in the future and it should have that mix of assets.  And now you get into a whole conversation...But you need to achieve balance..."

Watch the full hour long video below:

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Hedge Fund King Ray Dalio On China, QE3, And The Odds Of A Downturn

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It isn't every day that Ray Dalio opens up to the world and speaks.

Dalio is widely considered the most powerful hedge fund manager in the world.

Perhaps because his secretive Connecticut firm, Bridgewater, is the largest in the world with $130 billion under management.

Also, perhaps, because he does what many money managers are unable to do — navigate the choppy waters of today's market and consistently produce alpha.

So his appearance on CNBC's Squawk Box this morning deserves your rapt attention.

We live blogged it below.

Our favorite quotes:

ON CHINA: "In China anything less than 6% growth is a recession meaning that it also causes financial problems and it's disruptive and it's a problem. So I think that we are in that vicinity... But the fact that they can have 6% growth and think that's depressing and we can have 2% growth and think that that's pretty good is a reflection of the difference in our competitiveness."

ON QE3: "I think it's a reasonable plan."

ON GOING BACK INTO RECESSION: 

"I worry about the policymakers getting (the balance between fiscal and monetary policy) right...."

"Being in the betting business I also know and I don't know....there are reasonable risks that it won't be managed well."

 



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Ray Dalio Succinctly Explained His Investment Thesis—And It's Deep

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Every investor has a philosophy — a lens through which they see the market and the world.

And just as no two investors are created equal, no two investment philosophies are created equal either. 

Ultimately, the proof is in the returns, and as one of the most successful hedge fund managers in the world, Ray Dalio has proven that his philosophy can stand up to even the most volatile market conditions.

This morning on Squawk Box we got a quick bit of serious wisdom as Dalio laid down his investment thesis pretty succinctly: 

"I don't get caught up in the moment. I think so many people are reactive... they see things in a short term way they're right up against it. If it didn't happen in your life before, then you're not paying attention you don't think it's possible. But almost all important events never happen in your life before...Monetary system break down... the oil shock... didn't happen before... when I'm looking at it I think these things that kind of keep happening over and over again...and then I have this template...and these rules if this happens then that's going to happen because it has all happened before."

In case you didn't notice from what he said, Dalio is a little obsessed with history. He has said that he even goes through old newspapers to form his trading ideas — which just goes to show that you can learn about the market in places you would never expect.

Check out more about Dalio's management principles here or check out the liveblog from his interview on Squawk Box here.

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What Ray Dalio Said About The Rise Of Hitler Is His Most Worrisome Observation Yet

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Hedge fund god Ray Dalio was on CNBC this morning, giving a long-ranging interview to Andrew Ross Sorkin.

In it he talked about the dollar, gold, QE3, the European depression and so forth.

But his most worrisome observation was on something that few people really want to discuss, which is the connection between economic weakness and social unrest, and what happens historically when depressions drag.

This is from the partial transcript sent to us by CNBC.

RAY DALIO: I don't know whether we're beyond the point of being able to successfully manage this. And I worry then about—social disruption. I worry about—another leg down in the economies—causing—social disruptions. Because deleveraging—can be very painful, it depends how they're managed.

But when people—get at each other's throat, the rich and the poor and the left and the right and so on, and you have a basic breakdown,that becomes very threatening. And for example, Hitler came to power in 1933, which was the depth of the Great Depression because of the social tension between the factions. So I think it very much is dependent on how the people work this through together and worry about the social elements.

The fact that the Neo-Nazi party is on the rise on Greece does indicate that the connection between the rise of radical elements and depression remains a phenomenon, even in 2012.

In other, richer countries this doesn't seem to be a trend at all, but it's one reason to recognize that dealing with short-term economic crises (like unemployment) is also a good long-term move (if it keeps a functioning system of democracy in check).

And for a refresh on the connection between unemployment and the rise of the Nazis, here's a great chart from SocGen:

nazi vote

Click here to see our full Dalio coverage >

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PRESENTING: The Only Picture You Will Ever See Of Hedge Funder Ray Dalio Wearing Ultra-Short Jean Shorts

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Ray Dalio is the world's most successful macro investor. He's a brilliant thinker on economics and markets.

And in case you had any doubt about how awesome he is, check out how cool he was in 1976.

A source sends us this picture of Ray Dalio in Rio De Janeiro. He's the one on the far left wearing ultra-short jean shorts and carrying a big ol' camera.

We don't know who the guy in the middle is, but we're told the guy on the right is none other than Bill Murphy, the founder of GATA, a group whose mission is to expose the government's long term manipulation of the gold market.

Bottom line: Ray Dalio has always been a cool guy.

Ray Dalio

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Plans For Bridgewater Associates' New Headquarters Call For a Helipad And A Floating Recreational Barge

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The Stamford Advocate's Elizabeth Kim reports that hedge fund god Ray Dalio's Bridgewater Associates' new headquarters in Stamford, CT will include a helipad, a floating recreational barge and a marina, according to zoning documents.  

According to the report, the $750 million project calls for a five-story, 850,000 square-foot office to be built a 14-acre peninsula on the water. 

The new campus will have enough room for 3,500 people and 3,000 cars will be able to park there.  

What's more is the office building is being designed by Cutler-Anderson, the same architects that designed Bill Gates' home in Medina, Washington. 

SEE ALSO: The World's Most Powerful Hedge Fund Manager Tells Investors How They Should Set Up Their Portfolios >

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RAY DALIO: The US Economy Is Facing A Rare Set Of Circumstances That Will Be Bad For Markets

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At the Dealbook conference, Ray Dalio, Steve Schwarzman and David Rubinstein just wrapped up a panel on investing and markets.

Of particular interest was Ray Dalio, the hedge fund god who has been killing it throughout the crisis.

And so you have to be intrigued that he's bearish.

He's not wildly so (thinks stocks will do better than bonds) but his basic idea is that risk premiums are maxed out, and have to come down. In other words, people have paid up max dollar for all risk assets thanks to the Fed dropping rates to rock bottom. Now that will reverse.

His novel set of circumstances he sees is an economy that faces austerity (due to the Fiscal Cliff, etc.) coupled with a  Fed that's mostly blown its bazooka, and can't get much more juice out of QE (he believes that QE does less and less because the Fed can't push that much that much more money from bonds into riskier assets).

So the novel set of circumstances are:

  • Yields can't go down anymore.
  • Austerity is coming.
  • Economy is running out of steam.
  • QE is losing its efficacy.
  • Rate turn probably finally coming late in 2013.

So there you go: Rates going up, austerity coming, Fed out of bullets. Bad for risk assets.

Below are our notes from the panel

----------------

-- Dalio: The world is still in deleveraging.

-- Dalio: Sounding bearish: Risk premiums are likely to expand.

-- Rubinstein: Likes energy and healthcare.

-- Rubinstein: Likes China. Suggests buying non-European assets off of distressed European banks.

-- Rubinstein: Investing in sub-Saharan banks.

-- Schwarzman: Likes energy. China. Looks like it's turned, though tough to call bottoms.

Questioner: What are you steering clear of?

-- Rubinstein: There are certain countries that we don't invest in: Russia. Also not keen on Russia.

-- Dalio: It all comes down to interest rates. As an investor, all you're doing is putting up a lump-sump payment for a future cash flow.

-- In all deleveraging, you get through them by having an interest rate that's lower than the growth rate.

-- The big question is: When will the term structure of interest rates change? That's the question to be worried about.

-- Dalio: Effects of QE diminishing as we do more rounds.. We're facing austerity. And growth is flagging. This is an unprecedented risk the economy is facing. A slowdown with very little room to maneuver.

-- Dalio: Back up in rates will probably happen in late 2013.

-- Dalio: The yield curve is certainly at the bottom. And so we're squeezed on where they've gotten us in terms of.

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ART CASHIN: Traders Are Blaming Ray Dalio For Yesterday's Afternoon Stock Market Sell-Off

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Stocks surged yesterday after Ben Bernanke announced that the Federal Reserve would assign unemployment rate and inflation rate thresholds to guide monetary policy.

But as Bernanke gave his post-announcement press conference, the rally evaporated, and stocks basically ended flat for the day.

Some pundits were quick to blame the chairman for the sell-off.

Not so fast, says UBS's Art Cashin.

It just so happened that at the same time Bernanke spoke, hedge fund heavyweight Ray Dalio was preaching gloom at the New York Times Dealbook conference.  Cashin says traders think Dalio should share the blame.  From this morning's Cashin's Comments:

The Other Guy– Some traders felt that Mr. Bernanke should not be blamed/credited with all of the equity pullback.  They point to some particularly downbeat comments from hedge fund icon, Ray Dalio.

Speaking at a New York conference, Dalio said that most financial assets were already "fully priced" and many are overvalued.

The next good play may be shorting bonds as rates may rise in late 2013 (what about the Fed and its new targeting?).

When pressed whether there is any asset he might still invest in, he thought there might still be some room in agricultural property in Australia.  Not a very broad selection.  Some felt the Dalio comments contributed to the afternoon evaporation.

Business Insider's Joe Weisenthal was at the conference covering Dalio, who presented a rare set of circumstances that would be bad for markets.  Click here for his notes.

SEE ALSO: CLOCK IS TICKING: Here's The Nightmare-Case Scenario For The Fiscal Cliff >

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RAY DALIO: 2013 Will Be The Transition Year Where Large Amounts Of Cash Flow Into The Markets

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Ray Dalio

Ray Dalio is live on CNBC right now. We are live-blogging below.

Click here for LIVE updates >

Dalio says everything is a transaction – every good, service, or financial asset, someone is buying with money or credit.

Credit is promised to deliver money.

Credit grows a lot faster than money and income, and when that happens, it can't go on for long – at some point, you can't service debt, because it's a promise to deliver money.

Then, there is a deleveraging.

So, there are four things you can do. You can transfer money (e.g. from Germany to Spain). Or, you can write down the debt. But one man's debt is another man's assets.

The third thing you can do is spend less money. And the fourth option is printing money to cover the debt.

Dalio says the bubble was obvious because the debt growth relative to income just couldn't continue.

Dalio says the capacity of lenders to meet borrowing requirements has largely been adjusted. Italy's and Spain's borrowings have collapsed – and with them, the collapse of their economies.

Even still, there was not enough money to service the debt. In Spain, the ECB came in and put in about 450 billion euros worth of money. There was an unbridgeable funding gap. So now we have a situation where the debt funding needs and rollover needs are approximately in line.

Dalio says in Spain, we have a lost decade.

Dalio says there will be a long period of adjustment, and the key question is whether Europe will raise productivity. The fundamental thing Europe needs to do most is make sure the nominal interest rate is below the nominal growth rate, or else the debt will compound faster than the economy grows.

Dalio says Europe came right to the edge of chaos because there was no ECB backstop, but we moved past that point.

Dalio says the question now for markets is how events transpire relative to what the market has discounted.

Dalio says the most common mistake in investing is not looking ahead and considering the transaction – who is going to be the buyer and who is going to be the seller (of a particular asset)?

Dalio says 2013 is likely to be a transition year, where large amounts of cash will move to stock and all sorts of stuff – goods, services, and financial assets. People will spend more with the cash, they will invest in equities and gold – the cash will move.

Dalio says this will make the Federal Reserve's concerns begin to change. It's probably something that won't happen immediately, but later in the year, Dalio thinks we are going to see more of that.

Dalio says the way he looks at any market is to look at who is buying, who is selling, and the motivations behind that.

Dalio says gold is generally something that large buyers would like to accumulate over a very long time, very slowly, and build that diversification. However, gold is a very small market compared to that. Dalio says the behavior of gold makes perfect sense in that light.

Dalio says the most important thing as an investor is to have a good strategic allocation – a balanced, structured portfolio that does well in different environments.

Dalio says there is a certain discounted growth rate in equities and other assets. So, a good portfolio has assets that do well when growth is higher than expected, assets that do well when growth is lower than expected, etc.

Dalio says he has two basic portfolios – the first is an all-weather, strategic allocation mix, which has nothing to do with making "bets."

Dalio says the one thing you can be most confident of is that assets on average will outperform cash.

The second portfolio is the bets – and those are zero-sum. One person wins, another loses.

Dalio says it's very important for investors to know when not to make a bet – because if you come to the poker table, you have to come prepared to beat the reigning champ.

Dalio says everything is a transaction – and politics won't have any effect on prices unless it plays into motivations behind buyers and sellers in transactions.

Dalio says if policy changes, it has to have an effect on productivity to be really significant.

Then, there are times when policy is critical, like Mario Draghi and the ECB's actions in 2012. If you understand the cause and effect, that's what it's all about.

Dalio says if you put 50 percent of your money in stocks and 50 percent in bonds, the problem is that you have 80 percent of your risk in stocks and 20 percent in bonds (due to relative volatilities).

So, in structuring a good portfolio, you have to have comparable risks. If there were a law that said you couldn't leverage, then the return of equities would be a lot like that of bonds.

Dalio says the European economy will be terrible, and gradual restructuring will go on for a while. In the United States, there will be a move out on the risk spectrum. Japan will be awash with liquidity given its recent monetary and fiscal policies.

That concludes Ray Dalio's interview on CNBC.

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Ray Dalio Uses A Perfect Poker Analogy To Explain The Biggest Mistake Investors Make

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Ray Dalio

Ray Dalio was just on CNBC in an interview from Davos.

A good portion of the discussion was devoted to the principles of investing. Dalio explained to CNBC's Andrew Ross Sorkin the biggest mistake investors make:

The question in the markets is how events transpire relative to what is discounted.

Too many investors are reactive decision-makers. If something has gone up, they say, "Ah, that's a good investment." They don't say, "That's more expensive."

And so, that's the most common mistake in investing. You have to look ahead and say, "What is the transaction? What will be determining the buyer and seller?"

Dalio went on to explain the most important thing an investor can do:

I think the important thing here if I'm an investor is that the most important thing you can have is a good strategic asset allocation mix. 

In other words, you're not going to win by trying to get what the next tip is – what's going to be good and what's going to be bad. You're definitely going to lose.

So, what the investor needs to do is have a balanced, structured portfolio – a portfolio that does well in different environments.

When pressed about making bets on different markets – which Sorkin surmised must be how Dalio and his peers are so successful – Dalio said investing was a lot like poker. 

Here is the key takeaway:

The bets are zero-sum, right? In order for you to beat me in the game, it's like poker – it's a zero-sum game.

We have 1500 people who work at Bridgewater. We spend hundreds of millions of dollars on research and so on, we've been doing this for 37 years, and we don't know that we're going to win. In other words, we work that. We have to have diversified bets. We have a lot of diversified bets, and so on.

So, it's very important for most people to know when not to make a bet, because if you're going to come to the poker table, you're going to have to beat me, and you're going to have to beat those who take money.

So, the nature of investing is that a very small percentage of the people take money, essentially, in that poker game, away from other people who don't know when prices go up whether that means it's a good investment or if it's a more expensive investment.

Wise advice – and actually very apt, since poker players should know who's at the table before sitting down. Avoidance is a key skill.

MORE: 13 Poker Lessons Every Investor Needs To Know >

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15 Life Lessons From Top Hedge Fund Managers

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Paul Tudor Jones and Glenn Dubin

The hedge fund industry is full of some of the brightest people in the world who are immensely successful in trading and investing. 

While they can definitely offer some valuable advice about investing, they are also full of bits of wisdom about life in general.    

We've included a round up of life lessons, principles and advice from a few of the brightest fund managers out there. 

Paul Tudor Jones: Shame can be a lifetime companion for which you better prepare yourself."

Backstory: Right after college, PTJ was working for prominent cotton trader Eli Tullis in New Orleans. After a night of partying in New Orleans, he fell asleep at his desk and was fired.  But he earned a lesson from it. 

"Today, I will put my work ethic up against anybody's on Wall Street. Failure will give you a tattoo that will stay with you your whole life, and sometimes it's a really good thing. One other side note, to this day, I've never told my parents that I got fired. I just told them wanted to try something different.  Shame can be a lifetime companion for which you better prepare yourself." 



PTJ: 'Everything happens for a reason.'

"So here is the point: you are going to meet the dragon of failure in your life. You may not get into the school you want or you may get kicked out of the school you are in. You may get your heart broken by the girl of your dreams or God forbid, get into an accident beyond your control. But the point is that everything happens for a reason. At the time it may not be clear. And certainly the pain and the shame are going to be overwhelming and devastating. But just as sure as the sun comes up, there will come time a time on the next day or the next week or the next year, when you will grab that sword and point it at that dragon and tell him, 'Be gone, dragon. Tarry with me and I will cut your head off.  For I must find the destination God and life hold in store for me!'"

Source: Commencement Speech to the Buckley School in 2009



Glenn Dubin: Failure is inevitable

"...you will experience failures both in your personal life and career.  I hope you won’t fail as spectacularly as I did and get rejected on your first 29 job interviews, but some failures in life are inevitable. Work through them and, most importantly, learn from them."

Source: Stony Brook University



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BRIDGEWATER: Italy Could Blow Up The Euro

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Some of the key highlights:

Economic conditions in Italy are as depressed as they've been since the end of WWII, the economy is still contracting, Italy's banks are in terrible shape, private sector lending is very strained, and the ECB's policy is not resolving the problems. As is typical in countries enduring this level of economic pain, the political situation is starting to get pretty chaotic. Bersani, the top vote getter in the recent elections, has been unable to form a government, new elections this year are increasingly likely, and recent polling suggests a dead heat among Bersani, Berlusconi, and the anti-establishment party of Grillo. Surge in support for Grillo creates a risk because it is not entirely clear what he would do if he came to power. He has made a clear promise to put the euro to a vote and generally thinks that the European fiscal and monetary policies have been a bad deal for Italy. Obviously, an attempt to revisit those policies by a country as systemically important as Italy could destabilize things fast, and the risk of a radical outcome is growing. And over the past few months there are indications of that risk getting priced in and putting pressure on Italy, particularly on its banking system. Italian banking spreads are up; there has been a modest pullback in banks' wholesale funding, a modest increase in their ECB borrowing and no bond issuance. So far, the Italian sovereign has not come under as much pressure. Spreads have risen a bit, but issuance has been steady, and the government is so far meeting its needs for the year. However, there are some indications that things are getting tighter for them (a postponed 30 year auction, worse auction technicals, weaker foreign demand). And there isn't much margin for error, as the gross issuance needs are big and steady. And the sovereign is still relying on Italian banks to buy a lot of bonds. 

So there is a risk that if economic conditions continue to be terrible and the political situation gets more extreme, the pressure on the banks will increase, and the sovereigns could start to have trouble (and with the political uncertainty, should the need arise, who would the Troika negotiate with?).

Those who have been following our coverage of the Italian fiasco in recent months will be quite aware of all of Bridgewater's caveats, but here are some of the important drill downs, especially as pertains the still woefully insolvent (and now leaking deposits) banking sector. To wit:

Italian banks increasingly look strained, both outright and relative to Spain. Bank CDS spreads have risen 150 basis points and bank eguity prices have fallen 30% in the past two months, and there are some indications of stress in the bank funding flows. Unlike in Spain, Italian banks have not decreased their reliance on the ECB at all, and in February they actually increased their net ECB funding. At the same time, wholesale funding lines with banks and non-banks are falling, and Italian banks have had substantial bond redemptions that they haven't rolled in February and March. Italian banks are getting liquidity by reducing private sector loans and through a healthy inflow of retail deposits, which is helping them to pay for the wholesale funding that is leaving. Italian banks bought government bonds at a healthy pace in January, but the purchases slowed in February, and they have been selling foreign corporate and bank bonds for the past six months.

Funding costs for the banks have risen about 150 bps over the past few months and have noticeably diverged from sovereign spreads

And the stocks of the big Italian bank have sold off pretty sharply. The stock prices of the three largest Italian banks are down almost 30% since late January.

Italian bank borrowing from the ECB has been increasing. Italian banks have only paid down a modest amount of their 3year LTRO borrowings, and their net reliance on the ECB increased by €11 bn in February (€6bn in new borrowing and a decline of €5bn in deposits). Spanish banks on the other hand have been reducing their ECB reliance at a rapid pace. Italian banks continue to fund 18% of domestic GDP and around 10% of their balance sheets at the ECB

The quality of Italian bank balance sheets has been deteriorating for years. NPLs are still rising and Italy's banking system is on course to see historically bad losses.

And the scariest news for those few who are taking seriously the warning from UniCredit's CEO that deposit confiscations in Italy may well happen, is that NPL are soaring, and are likely orders of magnitude worse than the official data. Just like in Cyprus. 

When we go asset-by-asset through the bank loan books, and look at various deleveraging cycles to gain historical perspective, we think a reasonable estimate is that Italian banks will end up with full cycle losses of 10% on their €1.5trIn of domestic loans, which would be a bit worse than bath the 1993 Spanish recession and similar to the recent US crisis (though the context of the Italian cycle would be that conditions continue to be worse and stimulation continues to be less than the recent US case, but with better quality loans and less leveraging up). 

To summarize the adverse view: 

So that's the situation in Italy: Conditions are depressed and play no small part in the prevailing political uncertainty. Increasing pressures are being placed on an already-stressed banking system. The sovereign is pretty reliant on those banks to buy their bonds, and there are modest signs of those sovereigns also getting pressured. But, there are a few countervailing forces: Growth conditions in Italy will probably stabilize a bit as the big impact of the fiscal austerity fades (but a new round of financial instability cuts the other way). The probability that Grillo actually gets some kind of mandate and then takes a radical path still seems low. The ECB's commitment to do what it takes should for now keep spreads from moving out too much. But the possibility of a dangerous outcome is real and one we're continuing to monitor.

So for all those scrambling to frontrun other lemmings in the global capital reallocation game, be it rushing into U.S. stocks or Italian bonds, be careful: the fact that others are doing it doesn't mean massive losses aren't lurking just around the corner.

Don't worry though, if all the bad news outcomes as forecast do hit, the ECB is prepared. After all, as was made abundantly clear yesterday, it has "No Plan B."

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The 10 Highest Paid Hedge Fund Managers

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david tepper

Institutional Investor's Alpha has released its 12th annual rich list, which ranks the top-earning hedge fund managers for the year. 

According to Institutional Investor's Alpha's analysis, the 25 highest earning hedge fund managers brought in a combined $14.14 billion in 2012. That's the lowest total since 2008.

Fund managers are paid through a compensation structure commonly known as the "2 and 20", which stands for a 2% management fee and a 20% performance fee charge. Those numbers can, however, vary from fund to fund. More specifically, two and twenty means hedge fund manager would charge 2% of total assets under management and 20% of any profits.

The fund managers also likely have their own capital invested in their funds so that would have to be taken into consideration when calculating their take home pay.

David Tepper, the founder of $12 billion-distressed-debt hedge fund Appaloosa Management, made it to the top of the list. There were four fund managers whose take-home pay was over a billion.

Daniel Loeb

Earnings: $380 million

Firm: Third Point LLC

Assets Under Management (AUM):$9.3 billion

2012 Highlights: In 2012, Loeb took on Yahoo!.  In late 2012, he made $500 million profit off of a Greek Government Bond bet, according to the Financial Times. He also dumped his entire Apple stake in the fourth quarter of 2012, according to a securities filing.

Source: Institutional Investor's Alpha



David Shaw

Earnings: $530 million

Firm: D.E. Shaw (He no longer manages the firm's day-to-day operations)

2012 Highlights: D.E. Shaw's $9 billion flagship macro fund, Oculus, posted gains of more than 20% in 2012, according to Institutional Investor's Alpha.

Source: Institutional Investor's Alpha



Leon Cooperman

Earnings: $560 million

Firm: Omega Advisors

AUM:$7 billion

2012 Highlights: In the last quarter of 2012, Cooper dumped his Apple stake and disclosed a new stake in Facebook, according to a securities filing. 

Source: Institutional Investor's Alpha



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Georgetown's Business School Will Now Offer A Meditation Class Inspired By Hedge Fund God Ray Dalio

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ray dalio

It's a well-known fact that hedge fund god Ray Dalio, who runs Bridgewater Associates, loves to meditate. 

In fact, he has attributed the practice to his success as a hedge fund manager. Dalio is one of the world's most successful hedge fund managers. 

It looks like meditation is getting some serious attention in the business community.

Just last week, Georgetown University's McDonough School of Business said it would offer meditation as a class, according to Reuters' James Saft.

Reuters reports: 

At a conference last week in Washington, Dalio expounded on how his practice of meditation has helped his investment performance. Georgetown University, at the same conference, announced it would begin to offer a semester-long class on the discipline at its graduate business school.

Now that sounds like an awesome class. 

Now check out Dalio in this video explaining how meditation "was the biggest ingredient of whatever success I've had." 

Ray Dalio on Meditation from Meditation WCCM on Vimeo.

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Ray Dalio's Awesome New Mega Campus Is Being Stalled By Small-Town Bureaucracy

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Ray Dalio

A classic case of city bureaucracy may stymie Bridgewater Associates' plan to relocate to a new $750 million headquarters in Stamford, Connecticut.

The world's largest hedge fund is planning a move from its Westport home to an 850,000-square-foot center on a 14-acre peninsula in Stamford.

But the Stamford Advocate reports a zoning disagreement over a boatyard between the city and BLT, a local land developer, has hindered negotiations. From the Advocate:

Yet three months later, the license agreement outlining the conditions of BLT's use of city property for the boatyard as well as its infrastructure contributions, is yet to be finalized. Without the critical document, neither the new boatyard nor Bridgewater can move forward in the city approval process. As of last week, there was no indication of any progress in the dialogue between the two sides.

The hold up has sparked conjecture that Bridgewater head Ray Dalio may scrap the plan entirely and stay in Westport, and Stamford may lose out on as many as 2,000 jobs, $16 million in tax revenue, and $50 million in state funding.

Yikes, Stamford!

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