The Breakdown - Ray Dalio and Big-Picture Power Shifts

Episode Date: October 8, 2022

This episode is sponsored by Nexo.io, Circle and FTX US.   On this edition of the “Weekly Recap,” NLW looks at a slew of Federal Reserve comments indicating that no pivot on interest rates is on the horizon. He also reads a set of Ray Dalio threads as the famous hedge funder transitions away from his firm. - Nexo Pro allows you to trade on the spot and futures markets with a 50% discount on fees. You always get the best possible prices from all the available liquidity sources and can earn interest or borrow funds as you wait for your next trade. Get started today on pro.nexo.io. - FTX US is the safe, regulated way to buy Bitcoin, ETH, SOL and other digital assets. Trade crypto with up to 85% lower fees than top competitors and trade ETH and SOL NFTs with no gas fees and subsidized gas on withdrawals. Sign up at FTX.US today. - I.D.E.A.S. 2022 by CoinDesk facilitates capital flow and market growth by connecting the digital economy with traditional finance through the presenter’s mainstage, capital allocation meeting rooms and sponsor expo floor. Use code BREAKDOWN20 for 20% off the General Pass. Learn more and register at coindesk.com/ideas. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsors today is “The Now” by Aaron Sprinkle and “The Life We Had” by Moments. Image credit: Kimberly White/Getty Images for TechCrunch, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io, Circle, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Saturday, October 8th, and that means it's time for the weekly recap. Before we dive in, a quick note, there are two ways to listen to the breakdown. You can hear us on the CoinDesk Podcast Network feed, which comes out every afternoon and features other great shows alongside the breakdown, or you can listen on the breakdown-only feed, which comes out a few hours later in the evening.

Wherever you listen, I would so appreciate it if you would take the time to leave a rating or a review. It makes a huge difference. Also a disclosure, as always. In addition to them being a sponsor of the show, I also work with FTX. And finally, I want to tell you about CoinDesk's new event, the investing in digital enterprises and asset summit or ideas. Ideas is designed to facilitate capital flow and market growth by connecting the digital economy

with traditional finance. Join CoinDesk October 18th and 19th in New York City for a 360-degree investment experience where you can source and invest in the next big deal in digital assets. Use code breakdown 20 for 20% off a general pass and register today at coinest.com slash ideas. So let's actually recap this week, shall we? When it comes to markets, the beginning of the week saw some serious excitement. We even had the nerve to ask if we were in store for another October. Bitcoin hit 20,000 for the first time in three weeks. Stocks had two back-to-back bonkers rally days in a row.

But many out there had the feeling that it might not really be based on, well, much of anything. Instead, it seemed like it was part of a narrative mini cycle that we've seen over and over for the last few months. That cycle is step one. Markets get excited about the idea of a Fed pivot. The reason could be anything. It could be rumors of decreasing inflation. It could be doveish interpretations of Fed statements. It could also be sheer, utter boredom. Whatever the case, the result is the same. First, a teeny tiny little bear market rally, and then step two, the Fed says, hey guys, stop getting

ahead of yourselves and dispatches a slew of officials to slap markets into line. Usually after that, there's some new piece of data that surfaces that totally reinforces the point the Fed was making, which leads us to step four, market depression sets in again and the cycle starts anew. That is basically exactly what we saw this week. After all of that optimism and excitement at the beginning, a set of Fed speakers were trotted out to disavow us of our hopeful spirits. Joe Wisenthal, the host at Oddlots on Bloomberg, shared the headline, Kashkari, we're quite a ways away from a pause in rate hikes and added, this is what you get for piling back into stocks this week. So on Thursday, Minneapolis Fed President

Neil Kashkari spoke directly to the prospect of a Fed pivot anytime soon. He said, We have more work to do. Until I see some evidence that underlying inflation has solidly peaked and is hopefully headed back down, I'm not ready to declare a pause. I think we're quite a ways away from a pause. At one time viewed among the most doveish members of the FOMC, Kashkari has turned decidedly hawkish in recent months. When addressing the downturn in financial markets, he reiterated the lack of concern at the Fed. Quote, I fully expect that there are going to be some losses and there are going to be some failures around the global economy as we transition to a higher interest rate environment, and that's the nature of capitalism. The theme of

America-centric policymaking came up as well, along with the lack of willingness to return to the bailout economics of last decade. We need to keep our eyes open for risks that could be destabilizing for the American economy as a whole. But to me, the bar to actually shifting our stance on policy is very high. It should not be up to the Federal Reserve or the American taxpayer to bail people out. The bottom line is that Kashkari still sees inflation as the primary concern, regardless of cracks beginning to appear in the financial system. Quote, commodity prices move up and down, but underlying inflation, like wages and services, tends to be stickier. We're not seeing any evidence yet that those things are moving in the right direction. Now, one of the interesting things about our moment in time is that these aren't just statements that you read about, but you can actually go debate Neil Kashgari on Twitter.

Scott Wapner, a host at CNBC, said, honest question for Neil Keshkari. How is there, quote, almost no evidence that inflation has peaked when it seems there is actually plenty across several different areas of the whole picture? Keshkari responded, Scott, it sounds like you were responding to Twitter coverage of what I said rather than what I actually said. I was talking about underlying inflation, not headline inflation. Ross Gerber, the CEO of Gerber Kawasaki Wealth and Investment Management, said, Neil, what happened to you?

You seem hell bent on making a name for yourself as the guy who ruined the American economy. How do you not see evidence? Neil Keshkari wasn't the only Fed official to speak this week. Providing a slightly more, call it measured take, was Fed Governor Christopher Waller, who spoke at the University of Kentucky on Thursday. He said, the focus on monetary policy needs to be fighting inflation. We have tools in place to address any financial stability concerns and should not be looking to monetary policy for this purpose. He reiterated that the pivot isn't coming soon. I anticipate additional rate hikes into early next year, and I will be watching the data carefully to decide the appropriate pace of tightening.

Some of the most interesting comments were about Waller's belief that market stability was intact, and that current market conditions do not require the Fed to slow down. Quote, I've read some speculation recently that financial stability concerns could possibly lead the FOMC to slow rate increases or halt them earlier than expected. Let me be clear that this is not something I'm considering or believed to be a very likely development. While there has been some increasing volatility and liquidity strains in financial markets lately, overall, I believe markets are operating effectively, functioning in the Treasury, equity, and commodity markets remains orderly. Waller mentioned the additional tools at the Fed's disposal

compared to those available in 2007, pointing to the Fed's international swap lines and the standing repo facility. Quote, these facilities are capable of responding to strains that may put upward pressure on money market rates, but I think it is likely that their mere existence has been a stabilizing force. Finally, newly appointed Fed Governor Lisa Cook added her voice to the chorus at her first public appearance. She stated that U.S. inflation, quote, remained stubbornly and unacceptably high, and data over the past few months show that inflationary pressures remain broad-based. To cook, this necessitates further tightening to be sure the inflation rate begins falling. She also referenced the title of former Fed Chairman Paul Volker's biography title,

keeping at it, and what is quickly becoming a new Fed motto. Quote, inflation must come down and we will keep at it until the job is done. Although lowering inflation will bring some pain, a failure to restore price stability would make a much harder and much more painful to restore it in the future. When all was said and done, the weekend didn't close that much more Octobery than it had opened. Jim Bianco wrote, recall on Monday, Tuesday, the S&P 500 ripped higher by 5.7%. Its best two-day advance since April 2020. As I write on Friday morning, the S&P 500 has retraced more than 61.8% of that gain.

So, unfortunately, October seemed more likely at the beginning of the week. But hey, it's only the 8th. We have lots of time left. Want to keep more profits when trading? Get the best possible prices and trade with 50% lower fees on Nexo Pro. The new Spot and Futures trading platform uses aggregated liquidity of over 3,000 order books collected from multiple sources. Utilizing the complete Nexo Suite allows you to earn interest and borrow funds as you wait for the next trade setup. Visit pro.nexo.io.

That's p.ro.n.exo.io and sign up today. The breakdown is sponsored by FTX US. FtX US is the safe, regulated way to buy and sell Bitcoin and other digital assets, with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S. FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCX, you pay no gas fees. Download the FTX app today and use referral code breakdown to support the show.

For the second half of this weekly recap, I want to hone in on Ray Dalio. This week it was announced that he is fully transitioning out of Bridgewater, the hedge fund that made him famous. And so in recognition of that, we're going to read a few of his recent threads. Before that, by way of background, Ray Dalio was a pioneer of quantitative strategy. He launched his firm Bridgewater Associates in 1975, beginning with the focus on advising corporate clients on currency and interest rate risks. It was relaunched as a hedge fund in 1990. Bridgewater became known for its use of computer analysis and developed a strong reputation in macro investing. It launched its flagship All-Weather Fund in 1996, which pioneered the risk parity approach to investing.

In that approach, uncorrelated and anti-correlated assets like stocks and bonds could produce a strategy which could make strong returns during all market conditions. The firm was notorious for refusing to grow beyond its capacity to post strong returns, closing its books to new clients in 2000. The strong returns were legendary, with the firm posting an average return of 11.5% annually across 28 years, and doing particularly well in 2007. According to Barron's quote, nobody was better prepared for the global market crash. In recent years, Dalia has become as well known for his writing and speaking as for his investing. During 2020, he loudly declared that cash is trash, as the Fed's money printers were up to speed. He announced that he was supporting an

allocation to Bitcoin in January 2021. He has been early and outspoken about China's rise to power throughout the last decade, and in November of last year, he published principles for dealing with the changing world order, why nations succeed and fail. The book laid out Dahlio's theory for how nations rise and fall in the global power structure and centered around the transition between global reserve currencies over the centuries. So in recognition of this changing of the guard at Bridgewater, which I think hardly will mean Dahlio is going away as a public presence, in fact, it could mean that he's going to be even more present. Let's read a few of his recent threads. We're going to start with what makes a country healthy. As a global macro investor for over

50 years, I've spent a lot of time studying what makes countries healthy and unhealthy, and observing how the decisions made by policymakers impact the trajectories of their countries. I like to quantitatively measure those forces so I can build systems for making decisions better. For that reason, I converted my learnings into measures and models that show each country's strengths and weaknesses, or what I call their powers. I measure 18 different types of powers and 18 different indices, which are all made up of many indicators. These power indices measure the strengths of influences such as education, innovation, and technology development, the civility of the people, economic output, reserve currency status, military, and many others. They in turn are combined

into one overall reading of each country's power. Because they are quantitatively measured, one can see the relative strength of countries in all of these dimensions, and can see whether the country is strengthening or weakening in these several ways. Now, obviously, this little mini thread is just a teaser for something else, but I think that it shows a couple things about Dalio right now. The first is where his interests lie, and it's clearly on big picture power shifts, for lack of a better phrase. He's honed in on the geopolitical, and to the extent that economics are a part of that, it's subservient to the larger structural questions of power in the world today. Second, he is clearly applying this sort of econometric approach that he had in his investing

to thinking about those power shifts. And while I think that necessarily means that there will be lots to argue about in terms of how he particularly defines things, for example, civility of the people, I have no idea what that means, but it raises all sorts of red flags for me just on spec. But the point is that these are really interesting things and specific things to debate that get outside of the normal political discourse. Next, let's read a thread where he hones in on one of those things that makes a country healthy, in this case, education. On June 13th, Dahlia wrote, To be great, countries must have strong education, which is not just teaching knowledge and skills, but also strong character, civility, and work ethic. These are typically taught in the

family, schools, and religious institutions. That provides a healthy respect for rules and laws, order within society, low corruption, and enables them to unite behind a common purpose and work well together. As they do this, they increasingly shift from producing basic products to innovating and inventing new technologies. For example, the Dutch rose to defeat the Habsburg Empire and become superbly educated. They became so inventive that they came up with a quarter of all major inventions in the world, the most important of which was the invention of ships that could travel around the world to collect great riches, and the invention of capitalism, as we know it today, to finance those voyages. They, like all leading empires, enhanced their thinking by being

open to the best thinking in the world. As a result, the people in the country become more productive and more competitive in world markets, which shows up in their growing economic output and rising share of world trade. So again, here you're getting a little insight into how he thinks, and boy, is this man suited for Twitter. The historian to me wants to fight instantly about the extent to which he is describing the invention of capitalism as we know it to the Dutch, but the point is that, again, you see here this systemic thinking and applying the lessons of the past to the present. Next, a little vignette from June 16th on the U.S. running out of money. In 1971, when I was a young clerk on the floor of the New York Stock Exchange, the United

States ran out of money and defaulted on its debts. That's right, the U.S. ran out of money. How? Well, back then, gold was the money used in transactions between countries. Paper money, like the dollar, was like checks in a checkbook in that it had no value other than it could be exchanged for gold, which was the real money. At the time, the United States was spending a lot more money than it was earning by writing a lot more of these paper money checks than it had gold in the bank to exchange for them.

As people turned these checks into the bank for gold money, the amount of gold in the U.S. started to dwindle. It soon became obvious that the U.S. couldn't keep its promises for all existing paper money, so people holding dollars rushed to exchange them before the gold ran out. Now, this is obviously territory that is well-trodden for Bitcoiners out there, but it also gives a historical sense of where Dahlio is coming from. One of the biggest moments for Bikwiners in Dahlio was when he wrote his piece what I really think of Bitcoin. He published it in January of 2021, and the reason he wanted to write it was that he felt like those who were interested and excited about Bitcoin were taking his words in one way, while people

who were against it were taking it a different way. And so he wanted to just state it for the record in a definitive form. He writes, I believe Bitcoin is one hell of an invention, to have invented a new type of money via a system that is programmed into a computer and that has worked for around 10 years and is rapidly gaining popularity as both a type of money and a storehold of wealth is an amazing accomplishment. That, like creating the existing credit-based monetary system, is of course a type of alchemy, i.e. making money out of little or nothing. Delia goes on to talk about how, quote,

there aren't many alternative gold-like assets at this time of rising need for them, because of all the debt and money creations that are underway and will happen in the future. Because of what is going on in the world, besides there being a growing need for money or storehold of wealth assets that are limited in supply, there is also a growing need for assets that can be privately held. Because there aren't many of these gold-like storehold of wealth assets that can be held in privacy, and because the sizes of their markets are relatively small, there exists the possibility that Bitcoin and its competitors can fill that growing need. It seems to me that Bitcoin has succeeded in crossing the line from being a highly speculative

idea that could well not be around in short order, to probably being around and probably having some value in the future. Now, for Dahlia, the biggest question was around the government. quote, starting with the formation of the first central bank, the Bank of England in 1694, for good logical reasons, governments wanted control over money, and they protected their abilities to have the only monies and credit within their borders. When I, A, put myself in the shoes of government officials, B, see their actions, and C, hear what they say, it's hard for me to imagine that they would allow Bitcoin or gold to be an obviously better choice than the money and credit that they are producing.

I suspect that Bitcoin's biggest risk is being successful, because if it's successful, the government will try to kill it, and they have a lot of power to succeed. Right now, we are in the middle of debates and discourses around how governments are actually finally going to deal with Bitcoin and other crypto assets. Knock on wood, right now, we seem to be not in the direction of killing it, although there are a lot of ways to make it very, very different and more difficult than it is today. Whatever happens on that front, though, I think all of these perspectives show why so many people listen to what Dahlio has to say. And I think selfishly for us, the fact that he's

moving away from his day-to-day role investing, and presumably more towards a role of public intellectual, is probably pretty exciting. For now, I want to say thanks again to my sponsors, nexus.io, Circle, and FTX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.