Ray Dalio Interview From Davos: Market Melting Up, Keep Eye on Interest Rates

Bridgewater Associates founder Ray Dalio appeared on CNBC today from the World Economic Forum in Davos to give his thoughts on the economy and markets.  Here's some of the highlights and videos.

- Said the markets are in a 'Goldilocks' period after a beautiful deleveraging as everything is 'pretty good' with a big jolt of stimulation coming from tax laws.  He says we're at the 'later part of the cycle' and there's a lot of cash on the sidelines (banks, corporations, etc).  "We're going to be inundated with cash." 

-  Thinks it might eventually lead to a market blow-off.  Thinks markets will continue to melt up: "If you're holding cash, you're going to feel pretty stupid."  Says last part of the cycle could perhaps last a year.

- Focused on interest rate policy as even a little change there can lead to a bear market.  Dalio says you can't have a significant rise in interest rates without knocking over asset prices. It seems he's saying anything above 4% could potentially get dicey.  Says there's much more interest rate sensitivity than before.

- Also notes that the various bonuses companies are paying out from the tax cuts won't move the needle much on the wealth gap as the middle class has been most impacted by soft income growth.  He's not worried about an immediate downturn, but if there's a good chance there's a downturn in 2-3 years, he's worried about how the difference between rich and poor will affect things.

- On bitcoin, he doesn't know how to value it but thinks it's been a bubble.  Thinks the blockchain technology is useful but doesn't have any other comment.


Embedded below are the videos of Ray Dalio's interview on CNBC:



And if you haven't already, be sure to check out Dalio's new book, Principles.

David Einhorn On Negative Effects Of Low Interest Rates & QE: Buttonwood Gathering

Greenlight Capital's David Einhorn recently spoke at The Economist's Buttonwood Gathering and gave his thoughts on the Federal Reserve's policies and their effects.  Einhorn said that,

"The assumption is that if we want the economy to improve, if we want more jobs, if we want more consumption, what we need are ever easing monetary policy ... 1 jelly donut is a fine thing to have, 35 jelly donuts is not a fine thing to have.  It gets to a point where it's not a question of a diminishing return, but it actually turns out to be a drag ... we're past the point where incremental easing of the Federal policy actually acts as a headwind for the economy and it's actually slowing down our recovery.

Einhorn drilled down the effect of low interest rates on consumers in particular, stating:  "Lower rates drive up the costs of commodities."  He says it doesn't help and it takes income out of people's pockets that they could normally spend otherwise.

Additionally, he says that not being able to earn a return on your savings means that people are now hoarding savings instead of spending because now those people feel they need more for retirement because they're not going to be able to earn as much from those savings.

In addition to Einhorn's talk, he's also expressed similar sentiment in a piece he wrote in the Huffington Post talking about the Fed's "Jelly Donut Policy."

Embedded below is David Einhorn's entire talk from The Buttonwood Gathering (fast forward to minute 56 for his portion):




For further hedge fund commentary from the same Buttonwood event, head to thoughts from Hugh Hendry.

Delivering Alpha Less Than Zero Panel: Lasry, Richards & Fleming

Continuing coverage of CNBC and Institutional Investor's Delivering Alpha Conference, next up is the Less Than Zero Panel featuring Avenue Capital's Marc Lasry, Marathon Asset Management's Bruce Richards, and Morgan Stanley's Gregory Fleming in a talk on the hunt for yield.

If you missed previous posts from the conference, check out a summary of the best ideas panel as well as the global opportunities panel.


Marc Lasry (Avenue Capital):  He argued that 10 year Treasuries will be around 2.5% to 3% in 5 years.  He talked about investing in European debt, saying that you're getting (over)paid for the risk premium.  We've highlighted Lasry on European opportunities recently.  He said that he's buying bank debt in private markets (in Europe), saying that you want to be in regions where "everyone's nervous."  Lasry also argued that 10% plus annual returns are doable if there's a 7-year lockup.


Bruce Richards (Marathon Asset Management):  He said that government bonds = highest risk, lowest return.  He likes structured credit as he thinks the hunt for yield will get insane through 2014 as he made a Hunger Games reference.  He also says that everyone knows inflation is the way out for the US government.  Additionally, he argued he could make 12-14% in high yield.


Gregory Fleming (Morgan Stanley):  He highlighted the retail investor's demand for yield while still having major risk aversion.  It's difficult to combine the two, obviously.  Citing Jim Grant, he also called Treasuries "return free risk."


Sources: Notes from readers, II's blog, @iimag, @ldelevingne, @footnoted, @aarontask


For more from the Delivering Alpha Conference, head to a summary of the best ideas panel (including Leon Cooperman, Jim Chanos and more) as well as the global opportunities panel (featuring Richard Perry).

Doug Grey's Presentation on the Cost of Money: Value Investing Congress

Continuing our coverage, today we're posting up more notes from the Value Investing Congress.  Below are notes and the slideshow presentation from Doug Grey of Saddle Peak Asset Management.  His presentation focused on how current interest rates are distorting things and highlighted PepsiCo (PEP).

PEP: Too cheap? Value investors must now look at the macro picture.  Pepsi is just an example to discuss how the current interest rate picture is distorting things.  Bernanke:  Fed view is the flow (buying and/or selling) that dictates the price or level of interest rates, not the quantity of securities held.

Pepsi cost of money in 2002 was 7%, now cost is 2%.  Value = EPS / (r - g).  With r plummeting 5% there is a significant implication on allocation of capital.  So, interest rates make a significance in these valuation matters.  CFO of Pepsi should be borrowing money to buy stock.  Institutional investors should think about actuarial rate considerations.

Discount rate lowered from 7.75% to 7.5%.  Saddle Peak - straightforward - use leverage (i.e. in the money calls).  Hedge interest rate risk with ETFs and interest rate futures.  "All it takes is guts because no one can tell you when interest rates turn around ... just be what you should be - a patient value investor."  The above notes are courtesy of Kyle Mowery from GrizzlyRock Capital.


Question & Answer Session

Own Pepsi - biased to high quality, growing businesses: American Express (AXP), GM (GM), Caterpillar (CAT), Halliburton (HAL) ~ 12% of his portfolio, and Exxon Mobil (XOM).

Oil drillers like HAL is cheapest way to play natural gas.

Use of options versus equity - they buy long dated in the money calls.  Black Scholes does not accurately price long dated options - rather intrinsic value growth makes these long dated calls very cheap.


Embedded below is Doug Grey's presentation on Pepsi & interest rates:




Be sure to click here for other presentations from the Value Investing Congress.

Jeremy Siegel: 2010 Good For Stocks, Bad For Bonds

Wharton finance professor Jeremy Siegel last month sat down for an interview in the Knowledge @ Wharton newsletter. The talk delves into his view on the markets for 2010 and he believes it will be a good year for equities and a bad year for bonds. He also believes interest rates will go up. Once investors get over their initial fear and realize that such an increase would mean the economy is recovering, Siegel thinks we could see 10% equity returns.

His pessimism on bonds is due to risk premium dissipating, interest rates rising (causing bonds to lose value) and he does not like any long-term bonds in 2010. However, he did like corporate bonds and 'risky corporates' a little bit as well. This is not the first time we've seen this overall stance as Bank of America was out saying to overweight stocks and underweight bonds.

Below you'll find Siegel's thoughts and his market outlook for 2010:



You can download the .pdf here.

Siegel also recently sat down with Bloomberg to talk about the recent pullback in the markets. Here's the video:



Siegel definitely feels stocks are the superior choice to bonds for this year. With that in mind, head to the list of top stocks held by hedge funds for a few ideas (or crowded trades if you look at it that way).
For more outlook and insight regarding the markets for this year, head to the ten investment themes for 2010.