THE US MESS: THIS IS THE END. NO MORE TOOLS IN THE TOLLS KIT

THE US MESS: THIS IS THE END. NO MORE TOOLS IN THE TOLLS KIT

Se agotaron los instrumentos Economicos para la recuperación y nos vamos al abismo. Lo dice Ray Dalio, un especulador financiero que considera que la única salida es transferir el problema a los socios clientes del imperio, entre ellos los países del sur. Tampoco tiene vergüenza en decir que se apropió de los fondos de los pensionistas, entre ellos los maestros, de quienes dice solo logra el 20% de ganancias por especulación.

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This is RAY DALIO the other economic hit-man who talks about the us mess we have.
Thursday October 27, 2011

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CHARLIE ROSE INTERVIEW WITH THE HEAD OF THE WORLD’S BIGGEST HEDGE FUND:

RAY DALIO: "THERE ARE NO MORE TOOLS IN THE TOOL KIT"

http://futurefastforward.com/images/stories/financial/CharlieRoseInterviewWithTheHeadOfTheWorld.pdf
http://www.gurufocus.com/news/149104/charlie-rose-transcript-with-ray-dalio-ceo-of-worlds-biggest-hedge-fund

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THIS IS A VERY REVEALING STORY, HERE SOME EXTRACTS. To get the full transcript open: http://nuevademocracia.xanga.com

In my opinion Charlie Rose miss the point: how financial opportunist or speculators used hedge funds, rating agencies and credit derivatives (debt & credit swaps: DDS & CDS) to create the big mess we are in. Michael Hudson (How a gang of predatory lenders and Wall Street bankers fleeced America & Spawned a Global Crisis) and Mathias Chang (The Mechanics of Derivatives Scam) worked deep on such topics. In order to understand such missed points we need to deal with key concepts. I lay it out here some of them for future debate; those related to the concept that is been used in this interview (de-leverage) as the opposite of leverage. I considered appropriate to copy them from the Barrons Dictionary of Accounting terms.

Hugo Adan, October 28, 2011.

Leverage. Term used in finance and accounting to describe the ability of fixed costs to magnify returns to a firm’s owners.

Operating leverage. A measure of operating risks, refers to the fixed operating costs found in the firm’s income statement.

Financial leverage. A measure of financial risks, refers to financing a portion od the firm’s assets, bearing fixed finances charges in hopes of increasing the return to its owners.

Total leverage. It is a measure of total risks. The way to measure total leverage is to determine how earning per share (EPS) is affected by a change in sales.

Leveraged buyout. I refers the acquisition of one company by another, typically by borrowed funds. Usually, the acquired company’s assets are used as collateral for the loans of the acquiring company. The loans are paid back from the acquired company’s cash flow. Another possible form of leverage occurs when investors borrow from banks, using their own assets as collateral to acquire the other company. Typically, public stakeholders receive an amount in excess of the current market value of their shares.

Hedge transaction. Process of protecting oneself against unfavorable changes in prices. Thus one may enter into an offsetting purchase or sale agreement for the express purpose of balancing out any unfavorable changes in an already consummated agreement due to price fluctuations. Hedge transactions are commonly used to protect positions in: 1. Foreign currency. 2. Commodities; and, 3. Securities.

Other concept of hedge transaction: financing an asset with a liability of similar maturity.

Enjoy this interview. You will know how a multimillionaire person think about the mess they help top create in the US. Hugo Adan, October 28, 2011.

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CHARLIE ROSE: Ray Dalio is here. He is the founder of Bridgewater Associates. He created the investment firm in 1975 out of a two-bedroom apartment in New York City. Today the company managed roughly $125 billion in global investments. Its clients include foreign governments, sovereign banks, central banks and institutional pension funds.

Over the last two years, Bridgewater ranked as the largest and best- performing hedge fund in the world. In 2010, his returns were greater than the profits of Google, Amazon and eBay combined.

I`m very pleased to have Ray Dalio at this table for the first time to talk about a perspective on the global economic scene and a whole range of issues having to do with where we see ourselves and also a look at his own philosophy and what has informed his own opinions and the way he looks at the world. Having said that -- welcome.

CHARLIE ROSE: What is Bridgewater Associates?
RAY DALIO: Its a global macro firm. We assess what the world economy is like and what -- how asset classes will change and we are managing money for pension funds and endowments like you described; the Pennsylvania teachers, those types of pension funds. We`re trying to keep them safe.

CHARLIE ROSE: When you look at the world today, the global economic picture, I read today Goldman Sachs had a disappointing performance. JP Morgan did not do as well as some had hoped it might be. What`s happening with financial firms?

RAY DALIO: I think it’s important to understand that we`re going through a de-leveraging. So we have to understand the big picture is -- there`s a deleveraging. Three big themes: first there`s a deleveraging; secondly we have a problem with monetary and fiscal policies are running out of ammunition; and thirdly we have an issue in terms of people most importantly who are at each other`s throats politically and globally in terms of having a problem resolving those.
Imagine you earned $100,000 a year and you didn`t have any debt. You can go to a bank and borrow $10,000 a year. You can spend, therefore, $110 a year. When you spend $110,000 a year, somebody else earns $110,000 and they can go to a bank and there`s a self-reinforcing process in which your debt rises in relationship to your income.

And that goes on for a long time and that goes on for 50 or 75 years through history. We`ve had 50, 75-year cycles and then you reach a point where you can`t anymore get more debt and the process starts to change. And you can`t leverage up. Traditionally the private sector leverages up, we leveraged up then we got to a point in 2007 where we had a bubble and that same sort of bubble that happened in Japan, same sort of bubble that happened in the Great Depression, meaning we reached our debt limits. Europe`s reached its debt limits.

So then we begin the process in reverse as you can`t spend as much you -- somebody else`s income falls. And that process works in reverse. So we`re in a deleveraging. So I think that this is important globally. That`s what Europe`s in.

So when we deal with Goldman Sachs or when we deal with banks and when we deal with Europe I think you can break the world into two parts, there`s the debtor-developed world which has reached its debt limits and is going through a deleveraging. Then there`s the creditor-emerging world, the countries like China which are competitive and are beginning to have those big surpluses and they`re lending us money. So we have this big imbalance in the world.

You can break the world into two parts. Debtor-developed countries and emerging-creditor countries and they have a big imbalance which is a debt problem. That`s the nature of the beast of what`s going on.

CHARLIE ROSE: And how long would the de-leveraging take place? Ten years?

RAY DALIO: These take place over ten years. The key is to spread it out as much as you can. Make sure that it`s not disorderly.

CHARLIE ROSE: We are doing as they say, kicking the can down the road and not dealing with it. Suppose the super committee does not reach an agreement in terms of its requirement and therefore the mechanism -- the trigger mechanism kicks in? What does your team think about that and what impact will that be?

RAY DALIO: Charlie, I`m meant to be a realistic person and sometimes when there`s concerns it`s difficult to talk about difficult situation. So I want to try and answer your question as honestly as I possibly can but I want to say that I`m very concerned not just of that. I do not believe that we will find a political solution. I think that that would not be -- I`m pessimistic about that.

CHARLIE ROSE: So you have the same opinion that Standard & Poor`s had when they reduced –

RAY DALIO: Essentially.


CHARLIE ROSE: -- America`s credit rating.

RAY DALIO: Essentially. So I think -- and by the way I think it`s very important to understand that the government debt is the terrible challenging issue that we should talk about maybe but also more important is the private sector debt. So, that resolving the public sector debt does not resolve the problem.

That individuals face the same problem meaning that they`re overly indebted and because they`re overly indebted and spend a lot of their consumption through borrowing and they had a -- it was like if you borrow you have a party and everything`s good and you have a prosperity and you -- you have your party, you hire the caterers, they`re employed and everybody`s happy.


We can`t solve the problem easily because we still have too much debt. But we can move forward in being able to make the best of it. We can spread it out, we can keep orderly we have a situation now in which we have a very severe situation, not only because we have a deleveraging going on, but we have a situation in which monetary policy cannot work the way it worked in the past, that fiscal policy will not be stimulative.

CHARLIE ROSE: Some people say that they describe that as there are no more tools in the tool kit.

RAY DALIO: There are no more tools in the tool kit.

CHARLIE ROSE: In terms of fiscal and monitory policy.

RAY DALIO: Yes, so number one is we have a deleveraging. Now that deleveraging means we`re going to have more debt problems. You`re going to see -- no matter what is solved in Europe you will have a deleveraging. Banks will lend less and lending less will mean a contraction. That`s -- that is what I believe is the case, we should talk about whether or not that is the case. Thoughtful people should discuss that.


RAY DALIO: we have this overriding factor that is depressing jobs. So it created jobs in an environment -- and let`s -- so let`s turn to what is depressing jobs.

CHARLIE ROSE: Right. What is?

RAY DALIO: Ok. What`s depressing -- what`s depressing jobs is that the world supply and demand for labor has changed. In other words, there`s a lot more people working as China came on and India came on and they are competitive. There`s a world supply of labor has change -- has increased and technology has had an effect.

So we`re in an interesting era because I think almost in a machine, an economic machine as being tool, a part of that economic machine the demand for labor has changed in a very profound way. We might enter into a period in which we don`t need people as tools. So what does that mean?

CHARLIE ROSE: You have mentioned a couple times the economic machine. Give us a sense of what that means to you. Because my understanding is that`s central to a philosophy you have about the way the economy works.


RAY DALIO: There is a certain machine. It is operated this -- you can raise your debt relative to your income to so far but you can`t raise it more than that. And then when you reach that, that changes.

So the private sector cannot -- We have a debt problem in Europe. You can either transfer the money from one rich country to a poor country --

CHARLIE ROSE: Right, Germany to Greece.
RAY DALIO: You can print the money.
CHARLIE ROSE: You can`t do it.
RAY DALIO: Or ECB could say I`ll find a way to do it, whatever.

CHARLIE ROSE: Let me take this downtown to where there`s an economic protest on Wall Street.
RAY DALIO: Yes.

CHARLIE ROSE: In your sense -- you clearly have read about that and looked at it -- what do you think is at stake there and what do you think they`re saying to us?
RAY DALIO: I think the number one problem is that we`re not having a quality dialogue. So I wish that I could sit down -- (CROSSTALK)

CHARLIE ROSE: -- they had power to influence Washington and they didn`t.
RAY DALIO: Ok, so I think that not only do we have to work ourselves through that, I would say like the question really is also a question that should be dealt -- designated for our legislators, our government. Because if the government makes the rules, people will behind either -- did they break laws or did they not break laws?

This is a -- this is a question of how should behavior be managed?
Like I think I -- I think I did everything right, you know I -- I did well for my customers. My customers are pension funds, teachers. I did well when others didn`t and I`m going to say that they are very grateful.
We have a wonderful relationship, 15-year wonderful relationship. That -- what happens is I happen to earn one-fifth of the profits.

CHARLIE ROSE: You make 20 percent.
RAY DALIO: Ok, I earn 20 percent of the profits. (CROSSTALK)
I pay about one-third in taxes. I pay about one -- I give away about one-third. And I`m -- and that`s what I do and I follow the law. And if I`m doing something that is incorrect, that they think is incorrect I`d like to know that and I would also like to say should those laws -- is that right or wrong.

CHARLIE ROSE: You want the people who work for you to tell you exactly what they believe and to be able to document the fact that it`s not just what they believe but it`s what they have discovered.
And you have to test those ideas in the marketplace of your own firm before you go off and act on those assumptions, correct?
RAY DALIO: Yes.

CHARLIE ROSE: So what is it telling you now if Greece defaults? And that has a contagion ability to leap across the Atlantic and have some influence on the U.S. economy. What is it telling you, you know, about whether China, for example can maintain the level of economic growth it`s had and avoid the kind of social conflicts that might exist in that society.
What does it tell you about emerging nations and what it is that -- what impact they will have on commodity prices and what does it tell you about the future of the dollar as a currency? All of those kinds of issues?

RAY DALIO: You`ve got a bunch of questions.
Ok, I would want to say that there is -- there are two worlds. There`s debtor-developed countries and there`s emerging creditor countries, classically the United States and China.

CHARLIE ROSE: Right.
RAY DALIO: One is a creditor, one a debtor. They are getting we`re still borrowing, we`re still in debt, we`re still -- they`re still earning. Then those two worlds can be broken into two -- those that can print money and those that can`t print money.
So now when I`m giving you the total answer in my remaining minutes, Europe can`t, a lot of it, can`t print money. Therefore it will have to deal with whether there`s a transfer of wealth, there`s a limit to that transfer of wealth.
And so we are going to deal with the question of whether they would print money or get the haircuts. I think they`ll do both.

CHARLIE ROSE: Right.
RAY DALIO: When looking at China, China because they can`t raise interest rates because of their existing monetary policy, is that they can`t control credit growth in the normal ways that we control credit growth. So there`s a credit bubble emerging there and as -- in other words there`s a quality of lending and it`s bypassing the credit system.

And that`s something that the Chinese will need to get a control of because it`s a dangerous thing. And so that creates their risk. If I take then the United States we`re in a position in which there is this deleveraging. Deleveraging is risky so for example banks are leveraged about 12 to 15, 17 times.

CHARLIE ROSE: Right.
RAY DALIO: 15 times is a round number it depends on the bank. They`re leveraged 15-1 and if they go down by one-fifteenth, we have a capital problem and we`re in a deleveraging. Those problems -- bank crisis that have existed every ten years normally we are -- we can have a problem.

We don`t have the ability to have the same effect of monetary policy as we did before because a central bank -- it can buy a bond. It can -- therefore buy the bond. It gives that money to somebody who sold the bond and they were going to buy something like a bond. They`re -- the -- the getting it in the hands of somebody who spends it on cars and houses who really owes probably too much in debt is not an easy thing to do for monetary policy. So monetary policy is not as effective and then we have this social tension.

So we should be able to -- there`s this downward pressure of the deleveraging. We should be able to grow at a rate that`s comparable to our income growth if we are -- if we keep orderly and we -- and we work this through and everything is orderly. That means something between like 1.5 percent or 2 percent we should be growing at maybe about the 2 percent vicinity.

The problem with the 2 percent vicinity is that the employment rate remains the same or can trend higher. That produces social pressures, that produces tension which itself means that you can have a situation analogous to that which is existing in Greece and more social pressure you create the more tension that is existing and emerging in various ways, not just a Wall Street piece. But it`s existing in Spain.

CHARLIE ROSE: Right.
RAY DALIO: So if we can keep orderly and not argue with each other and not do disruptive things and we don`t go down ok and grow at that two percent you know maybe then it will be ok.
If we have disruption and we are not able to have a monetary policy and we can`t have fiscal stimulation and you have a problem of what do you do -- you can`t recapitalize the banks. I mean if you should happen to need to recapitalize the banks you can`t have a TARP program again.

CHARLIE ROSE: Politically not feasible.
RAY DALIO: Politically not feasible.
So you have to have a plan. You need to be thoughtful, I think, how do you create that plan and not only it`s a theoretical thing when I say how do you make a plan because you have to be able to have agreement to implement the plan. You can`t have people at odds.

As I say sometimes to policymakers my job is very -- is much easier than their job. My job is that I just have to pretty much anticipate what`s going to happen and be one step ahead. That`s not an easy job but it`s an easier job than policymakers who have to do that. They have to then find a solution for the bad stuff not happening. That`s not easy to find solutions and then even if they had solutions they have to get that solution through the political system. In which there`s -- there`s -- everybody`s saying that you can`t do that, whatever that is and everybody blaming each other.

CHARLIE ROSE: Are you optimistic or pessimistic?
RAY DALIO: I suppose I`m -- if I was -- I`m concerned. I think it`s a test of us. It`s a test of us in our society. It`s a test of us.

CHARLIE ROSE: On that note thank you for coming.
RAY DALIO: My pleasure, thank you for having me

SOURCE: http://futurefastforward.com/images/stories/financial/CharlieRoseInterviewWithTheHeadOfTheWorld.pdf