Dalio Confirms GOP Tax Plan "Good For Business", Bad For Democratic States

Confirming what many have suggested, the billionaire founder of the world"s largest hedge fund, warns in his latest letter to watch out for the effects of tax reform on migration, the fiscal conditions of affected states and cities, and an increased polarity in America.

Birdgewater"s Ray Dalio writes (via LinkedIn),

While we have talked a lot about the effects of growing wealth and opportunity disparities in America, we haven’t talked enough about the tax migration that is taking place because of growing differences in state and local tax rates. This tax migration issue is especially important to focus on now because of the expected elimination (under the new tax legislation) of the deductibility of state and local taxes (SALT) against federal income taxes.

The dynamic that I’m referring to is the inevitable and self-reinforcing process in which those high SALT locations that a) have big disparities in income and fiscal shortfalls and b) can neither cut their financial supports to the “have-nots” (because their conditions are already unacceptably low) nor raise taxes on the “haves” (because they will move due to tax rates) suffer from tax migration.

Of course, those low SALT locations with the opposite circumstances benefit from this migration.

The dynamic works as follows. As state and local tax rates and debts rise because there are shortfalls that can’t be narrowed, it is financially smart for high income taxpayers to escape these taxes and debt burdens by moving to lower tax and less indebted locations, so they do. As they do, property values decline, further raising the costs of staying in the high SALT location. In other words, the financial cost of being in one of those high tax locations equals the tax rate difference plus the property value decline, which can be substantial. Also, the reduced population of higher income and higher spending folks leads to reduced spending in these locations, which further depresses the high SALT economies. Also, the fiscal conditions of these locations suffer. Because both the remaining high income and low income folks are increasingly stressed and tend to blame the other, tensions rise, which makes these environments even more inhospitable, which further contributes to high income earners’ emigration. Realizing this, other locations increasingly appeal to the “haves” by offering tax incentives and creating environments in which they are more comfortable living with other “haves.” For these reasons, this “hollowing out” dynamic is self-reinforcing. Of course, the reverse is true in states that attack these rich tax migrants. This dynamic causes even greater polarity. Because the rich and the poor typically have different values, which are also reflected in different laws and different politics, it probably will make the polarity greater and conflicts even more intractable.

It appears to us that the expected new tax law that eliminates the state and local deductions against one’s federal income taxes will significantly contribute to this dynamic. Consider the fact that this change in SALT deductibility is one of the largest increased sources of revenue in the tax bill, accounting for nearly $1 trillion in new taxes over the next 10 years. In other words, it is expected that those people who stay in high tax states will pay nearly $1 trillion more to stay there. Of course, these changed rates will prompt more people in high SALT locations to consider moving. To the extent they do move, it would increasingly lead to more prosperous states that are occupied by, and cater to, more rich people and more depressed states that are occupied by, and cater to, more poor people, and increased polarity between them.

While we are talking about the tax migration, we see such location cost arbitrage motivated migrations happen all the time, so we should be well acquainted with them. For example, in New York City we saw migration from the Upper East Side to Downtown and then to Brooklyn brought about by cost arbitrages. Every area in the world has this sort of cost and desirability motivated migration going on constantly. Cost differences drive migrations that change the characters and costs of neighborhoods and happen in self-reinforcing ways until the cost differences change to make the newly hot neighborhoods expensive and other areas relatively cheap, so the immigration shifts to emigration.

Estimating the Impact of Cutting the SALT Deductions

We played around with the numbers to get a feel for the directions and the impacts of this, and we show our scratch pad estimates below. We will first show our very rough estimates of the impact of ending deductibility on state tax revenues and migration patterns. 

First, to summarize, we estimate that:

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  Ending SALT deductibility will result in a sizable increase in the effective tax rate faced by high earners in high tax states (3-5% for most making over $500,000), notable outbound migration of high income filers (we estimate 1-2.5% will leave for most states we looked at), and a hit to state tax revenues (around 1%). In our opinion, these numbers understate the impacts, especially for the highest taxpayers (who pay the most taxes), because it is the nominal level of dollars of increased taxes that matters more than percentages, and we don’t fully account for all the second- and third-order consequences previously mentioned. In terms of economic impact, we estimate that it is the present value of all future year tax differences (and other costs such as declining real estate values) that is the best gauge of the cost of staying, and these are very big numbers. As I just noted, the effects on property values and living conditions are not properly considered in our estimates. Already, without the SALT deductibility changes, some higher SALT states are experiencing notable outbound migration (shown further below), which is straining tax revenues and risks the strengthening of a downward spiral where states adjust by cutting spending/raising taxes, which encourages even more people to leave.

  
  


• 
  

  Still, the table below conveys a rough picture of where the vulnerabilities lie. It shows a) the existing marginal tax rate, b) the effective tax rate with the deduction, c) the effective increase in the tax rate due to the elimination of the deduction, d) that increase relative to the US average and e) relative to states they are likely to emigrate to (e.g., their neighbors), f) the estimated medium-term size of the migration as a percent of the high earning population,* g) the estimated number of high earners leaving, h) the lost tax revenue to the state, and i) that lost tax revenue relative to the total tax revenue of the state. To be clear, these are VERY IMPRECISE ESTIMATES. 

  
  

We looked at a number of factors to come up with our rough estimates, so we will show you some. 

While the previous table looks at the impact of migration on state budgets, below we show a simpler cut: our rough estimates of how relative incomes between states will change when people in high tax states get a greater tax increase than people in low tax states. The chart on the left shows the absolute levels in real per capita earnings by state versus the national average before and after the tax change. These numbers are adjusted by what the Bureau of Economic Analysis believes about relative price levels between states (trying to get at some measure of competitiveness). The chart on the right shows the net shift that occurs with the tax change. As you can see, states with both higher than average incomes and higher than average taxes (especially New York, Connecticut, New Jersey, and California) are most vulnerable by this measure.

The vulnerability of a state to tax emigration is also affected by tax revenue being concentrated in the hands of those high income earners who are most affected by the changes. This concentration is shown below for the states with the highest income taxes. 

For these states, the high earning taxpayers are a very small proportion of the population—from 0.5% of households in Vermont to 1.7% in DC and Connecticut. That means that it would take only a tiny percentage of the population to move to have a devastating effect on the state’s finances. Clearly, all of these states are very vulnerable.

The next two tables show the states where people have been leaving fastest from and going fastest to, and a number of influences on these movements, such as economic conditions and the tax burden. 

As you can see, everything points toward states like New York, Connecticut, New Jersey, California, and Illinois being the most vulnerable, and states like Florida, Texas, Nevada, Washington, and Arizona benefiting the most from this shift.

Our look at these states’ finances and their muni bond markets will follow in the next few days. 

P.S.

As for the effects of the budget changes, below we show where the money is expected to come from and where it is expected to go.

So, our big picture perspective is that, on the margin, the tax law changes are going to be significant and bad for high SALT locations and good for low SALT locations, and are going to be good for businesses and business owners (and hopefully those who the money trickles down to), so those businesses in low SALT states will get a double whammy benefit.

Ray Dalio Warns Of "Significant" Bond Market Risk

Casting his vote in the ongoing debate of which is a bigger bubble, bonds or stocks, Bridgewater"s billionaire founder Ray Dalio, who has continued his whirlwind of media appearances in recent years, said that he sees a "significant amount of risk in the bond market" envisioning a growing risk to stability as the U.S. moves toward a bigger deficit and the Federal Reserve unwinds its balance sheet. He is, of course, referring to this projection by the CBO of the US debt over the next 30 years which, sadly, remains quite unsustainable especially in a rising rate environment and in which central banks no longer monetize deficits (which is precisely why the Fed will promptly resume QE after a brief cool off period).

Addressing this, Dalio said that "tightenings become progressively more concerning because as you move along they’re more and more difficult to get perfect." Speaking to Bloomberg radio, Dalio also warned that "as we’re progressing, we’re entering a period of greater risk in the nature of the market."

Meanwhile, confirming what anyone who has seen the fund"s 13F knows, Dalio said that Bridgewater has been long equities, but didn’t provide more details on how the world’s biggest hedge fund is trading the market. He also said he doesn’t think the Fed can continue the pace at which it has begun to unwind its $4.5 trillion balance sheet. Dalio also said he expects the U.S. budget deficit to increase to 1.5% of GDP, growing the supply of debt at the same time the central bank is offloading bonds.

“I think they’ll be cautious in this but when you’re caught in this part of the cycle it’s very delicate,” he said.

As we have discussed previously, with total federal debt over $20.4 trillion, rising interest rates will increasingly redirect a growing portion of US tax revenues to covering interest expense; the question is at what point will this become prohibitively high, and detract from other critical spending programs.

Jim Rogers Tells ETF-Holders "The Next Bear Will Be Horrendous"

Legendary investor Jim Rogers, who in 1973 founded the Quantum Funds, a prominent family of hedge funds, with then-unknown Hungarian-born financier named George Soros, joined RealVision’s Steve Diggle for a wide-ranging interview where the legendary financier, who moved to Singapore in 2007 with his family because he wanted his children to be immersed in Asian culture, discusses his views on gold, bitcoin, and what makes a good investor – along with his belief that a major correction in financial markets is about to begin.

The interview, which was filmed two weeks ago in Singapore, begins with a discussion of a theme in finance that’s been at the forefront of discussions about the market outlook. Many investors believe that, with volatility at record lows and valuations at record highs, a major shock is imminent. However, these same investors have been burned by uncooperative markets, as an expected selloff has yet to materialize.

Rogers said he stumbled into his first job on Wall Street, but ended up falling in love with it because it allowed him to “follow the world and know about things.”

He added that, over his investing career, Roger"s has learned that he has a tendency for his calls to be early. So now when he makes an investment decision, he waits six months before buying.

SD: How do you know the difference between being early and being wrong? Because -

JR: You teach me that, OK? I"d like to know. I"m still trying to learn.

SD: I really don"t know, either. I mean, one of the things that has confounded, I think, all of us in this most recent unprecedented rally - I mean, it"s not unprecedented in history, but the sort of things that have gone up and the level of volatility we"ve had that"s been unprecedented. The only period that I can compare it to are the late 90s, where just everything in a certain area went up. Now it was almost-- at least in the States, it"s almost everything across the board. And there have been plenty of people who"ve wanted to short the FANGs, to short some of the tech stocks, to short some of these very expensive blue chips. And they"ve been very badly punched.

And then even in the face of very good mutual fund investors, people with tremendous track records like Grantham Mayo, who have moved to a higher cash position - they"ve seen massive reductions, because their own investors don"t seem inclined to stick around and see how it plays out. So both on a personal and professional level, being early seems to be incredibly painful and destructive to your business.

JR: Sure can.

SD: So if you"ve got a conviction, do you wait for a change in momentum? Do you use moving averages, which is something that I know people have been used, and I"ve used something myself, which is to wait until the 5 and 20-day diverge, and that gives you a signal that momentum"s coming out of a trade? Or do you just need to size it to a degree which you can be persistent?

JR: Well, I usually - since I know I"m always early, I make a decision and then wait, and just make myself wait a month, six months, whatever it happens to be. And I"m still too early. I"m still too early nearly always, because I make the decision too soon, I realize. So maybe I better start making the decision later in life. Sometimes, you just have to throw in the towel. Especially on the short side, you have no choice. If they"re just racing against you all the time, you can sit there and meet the margin calls all day long, but one of the old adages is, never beat a margin call, which you may have heard from old-time traders. If you"ve got a margin call, just don"t meet it, because that means something is very seriously wrong.

SD: Right, that"s your stop loss.

JR: Yeah, well, stop losses are usually before a margin call comes. But I want to go back to something you said. You"re not as experienced as I am, obviously, because you"re not as old as I am, is what I"m saying. But I remember in the early 70s, there was something called the Nifty 50, and they were 50 stocks that everybody - the JP Morgan bought everyday. Didn"t matter. Avon, Xerox, IBM - they were stocks that always were eternal growth stocks.

And they just kept - we would short them, and they just kept going up. They never stopped. Polaroid-- that was another. And they just never stopped going up. Everything else stopped going up but those Nifty 50, which would be something like the FANGs today, or maybe in the late 90s, some of the other kinds of stocks. So this has happened before in market history. They eventually crack, there"s no question.

And to today, if you look at the S&P 500, for instance, in the US, I think there are only 40 or 45 stocks that are above their 50-day moving average, to use technician"s kind of talk. Everything else is in a downtrend. And yet the market is making all-time highs.

SD: And so there"s a lack of breadth in the market.

JR: Definitely that lack of breadth. What is that - over 90% of the stocks are in downtrends. 10% are in uptrends, but they"re big companies. And since the S&P is capitalization weighted, those 50 stocks, 40 stocks, whatever it is, dragged the average to all-time highs.

Diggles" questions soon veered toward the subject of what makes a good investor. Some believe, Diggle says, that to have conviction, you need to know more than 98% of people who follow a stock.

Rogers said he was never a very disciplined investor, so it’s difficult for him to say how one develops skills like timing and good judgment.

Knowing more than your rivals is a major advantage, he says. But there’s something to be said for judgment that just can’t be taught.

SD: So what was different about your analysis? Had you gone deeper into this company? Because one of the things that you"ve said on a number of occasions, and I think it"s very impactful, is if you want to have conviction, you have to know more than not just 90% of the people, but 98% of the people who follow the stock. Is it that you"ve gone deeper? You"ve read the annual report, you"ve looked at what would now be the 14k. Or was it that you"d seen something with a greater level of skepticism or objectivity which other people had missed?

JR: Well, it"s both. If read the annual report, you"ve done more than 90% of investors. If you read the notes to the annual report, you"ve done more than nearly everybody, including the CEO of the company. So it is certainly knowing more than other people. But then it takes more than that. You also have to know more, but then you have to figure out what does it mean? Just because you know more, you have to then analyze it.

If 100 people go into a room and hear a presentation, Steve, they"ll all come out - most of them will come out with the same view. Seven or eight of those people will come out and say, aha, what this really means is it"s going down the tubes, or whatever you come out with. Or seven or eight will come out and say, this is the best thing since sliced bread.

They will realize. They will analyze it and understand it better than the others. It"s judgment. I don"t know how to teach judgment. I wish I knew how to teach judgment. Facts are wonderful. Knowing more than everybody else is a big, big, big leg up. But then judgment - how you get judgment? And that"s certainly what I didn"t have. I certainly didn"t have timing. Not that I do now, but I have a little better judgment than I used to, and a little better timing than I used to, because I learned to wait.

SD: So your prescription to be an above average investor, to go back to my original question, is be independent-minded, do your work. Don"t try and perfect the timing, but if you develop a high enough level of conviction around it, see it through.

JR: Yeah, that"s what I always do. And sometimes, I get it right. But I"ve certainly made plenty of mistakes in my life.

With stock and bond valuations hopelessly inflated, Rogers says investors hoping to lock in the highest risk-adjusted returns should consider buying gold coins. Barring that, gold futures are the next best market. Rogers says trading gold futures is a great strategy for traders because it’s a market where speculators have easy access to leverage.

Furthermore, investors who have time to conduct the due diligence should consider investing in a gold mine – but it needs to be the right gold mine.

SD: Going back to gold, so gold coins -

JR: Gold coins are the best way. And you should have physical possession of some gold coins. After that, gold futures are the best way if you want to make money and you"re a good trader. Gold futures, that"s where you can get the most leverage of any, unless you can find the right gold mine. But there are hundreds of gold mines. If you"re smart enough and have the time to find the right two or three gold mines, then, yeah, then you"ll make huge amounts of money in the right to - but, you know, there are hundreds of gold mines.

The conversation soon turned to a discussion of the ETF space, a market about which Rogers has many reservations.

SD: And investors do seem to be becoming more short-term, despite the fact that everything we know tells us that finding good people and backing them for the long-term is the most successful thing you can do. Investors seem to be becoming more and more influenced by very short-term records. And that"s one of the things that"s savaging the mutual fund industry right now. One of the things that I wanted to touch on is this ETF phenomena. I mean, it"s probably the equivalent of the Nifty Fifty of the day, which is buy everything in its weight, don"t do any research. Don"t take any views. Don"t even take a view on a manager let alone a stock, but just own a basket. And a lot of people feel great disquiet about this. I think your commodity index has a few ETFs on it, does it? So perhaps you"re not the guy to ask if you"re in the ETF industry.

JR: No, no, no, I certainly see what"s happening in ETFs. I mean I pay enough attention to know what"s going on. First of all, ETFs are very efficient, very easy, very simple. There"s no question about that.

Therein lies part of the problem, of course, with ETFs is that they are easy, simple, et cetera and that makes it easy for somebody to say oh, I want to buy Germany, buy the German ETF, and don"t even look to see what"s in the German ETF or whether it"s a good ETF to own. And maybe it should be a terrible ETF, but nobody looks anymore.

So there are excesses developing in the ETF business.

There"s no question about that. But don"t worry Steve, we"re going to have a bear market. And when we have the bear market, a lot of people are going to find that, oh my God, I own an ETF and they collapsed. It went down more than anything else. And the reason it will go down more than anything else is because that"s what everybody owns.

And it is this bear market that looms over the market that Rogers is most fearful of as the level of debt that has built across the globe makes a disaster inevitable...

JR: Steve, in America as you know, we"ve had bear markets every few years.

SD: We used to.

JR: Well done. And Janet Yellen will tell you we"re never going to have a bear market again because she"s smarter than we are, she"s smarter than the markets, and the central bank has things under control now. She publicly stated this. Do not worry. We will not have financial calamities again. Head of the central bank in America has said that out loud officially, Mrs. Yellen-- yeah, Mrs. Yellen.

I happen to have a different view. Now if you believe the American central bank, you shouldn"t be talking to me at all. But we"ve had, we used to have bear markets every several years. We always, always since the beginning of the republic. In my view we will have them again.

And the next one is going to be horrendous, the worst-- you came in the business in "86. It will be the worst in your lifetime, in your financial experience.

And the reason, in 2008 we had a bear market because of too much debt, staggering amounts of debt. Steve, since 2008 the debt has gone through the roof. Every country in the world talks about austerity. Nobody has reduced their debt in the last few years.

Everybody has increased their debt in the last few years. And so the next time we have a bear market, it"s going to be horrendous because of this.

Even China-- in 2008, the Chinese had a lot of money saved for a rainy day. It started raining in Singapore. They had a lot of money saved for a rainy day. It started raining.

They started spending and helped save the world. But even China has a lot of debt now.

Like his fellow hedge-fund luminary Ray Dalio, Jim Rogers is a cryptocurrency skeptic. However, his outlook is somewhat more nuanced. While Rogers says he doesn’t know enough about the market to have a view on which coins might prosper and which might die on the vine, he suggested that people shouldn’t assume that bitcoin will dominate the market forever.

After all, Rogers says, most people have never heard of the company that invented the automobile – it disappeared long ago, he said. There once were hundreds of companies manufacturing cars around the world. Now, he says, there are only 25.

SD: Well, there"s been plenty of commentary on cryptocurrencies or cybercurrencies on RealVision and in the mainstream. We"re trading them. it"s an extraordinary financial experiment. If you"re a libertarian, I guess you mind find it inspiring that this has happened with absolutely no regulation. But where do we go with these things? Are you a true believer?

JR: Well, Steve--

SD: Are you an enormous skeptic?

JR: I don"t own one, nor am I short one. So I am neutral in that sense. I do know that there are over 2,000 now in just a few years. And anything that booms like that usually has a reason - there"s reason for skepticism. You do know that some of them are already zero.

I think the Wall Street Journal had an article yesterday maybe that 30% of the ones that have been launched in the last year or two are at zero because they have not traded. Now, there are some that have been skyrocketing. They"ve gone up 30 or 40, 100 times. So if you own the ones that have gone up 30 times, you think these are wonderful. If you own the ones that have gone to zero - or some have already gone bankrupt.

Somebody offered me a lot of them recently. And while I was doing my homework, it turned out to be a sham, a fraud. Fortunately, I was doing my homework so I never got around to taking them.

There"s no question that the world has money problems. There"s no question that all of our lives are being changed by the internet. My kids will never go to a bank when they"re adults. My kids will never go to a post office.

They may rarely go to a doctor when they"re adults. And so money"s going to change on the internet too.

Which one? I don"t know. You"ve heard of IBM in the computer business? IBM did not invent computers. The company that invented computers you never heard of, likewise with automobiles. I mean, there were hundreds of automobile companies 100 years ago. There are only 25 now.

Rogers, who chafes at being called a contrarian, says one sure-fire strategy for strong investing returns is investing in assets that are "hated" by the broader investing community, for example his Russian-stock investments are making all time highs, he said.

SD: I want to turn to a few specific sectors now rather than the general outlook of the world. It"s clear that you"re very concerned about that, though not so concerned that you want to actually be fighting it with aggressive shorts right now. One thing that you"ve spoken about in the past and one thing that we are exposed to is agriculture. It"s an area that"s generating quite a lot of comment. But from our experience, very few people have actually done anything about it. Very few pension funds, very few individuals have exposure to it. It"s hard to get through the stock market. There are very few agriculture companies, certainly on land-owning companies. You can get exposure through the food industry. But you became very positive about the agriculture a while ago. Where are you know on that?

JR: I"m extremely bullish on agriculture. That hasn"t made me any money yet. Well it has a little bit because one of my largest shareholdings - a large - well, it"s not one of my largest, but I am a director of a Russian fertilizer company which is making all-time highs or near all-time highs, which is pretty astonishing given that it"s Russia and everybody hates Russia, as you well know. In fact I"m startled that all of my Russian stocks making all-time highs.

And this is a hated market. So it"s something I have learned. If you buy something that"s hated, chances are you"re going to make a lot of money down the road.

In one of his last questions, Diggle pointed out that Rogers, who began working on Wall Street during the first half of the twentieth century, has often expressed a disdain for young people working in finance.

Diggle says he first noticed this about Rogers while reading a piece he wrote for Barron’s Magazine in the late 1980s.

Rogers says he doesn’t trust young people for one simple reason: They’re often cocky. But the Darwinian nature of Wall Street quickly separates the wheat from the chaff, making those who survive far more tolerable.

SD: I think you have something against guys in their 20s because the first time I became aware of you as an investor was a Barron"s article written in the summer of 1987, and it"s a very impressive article. I was very young on Wall Street. And there was this guy, Jim Rogers, and they said, what do are you bearish on, Jim? And you said, the world. There are all these 20-something guys that are thinking that they deserve six figures just because they work on Wall Street and they know how to buy stocks. And three, four months later, you turned out to be absolutely right.

But as a 20-something at the time, I thought you were being very unfair on 20-something guys. Now that I"m 53, I share your view of these 20-year-old guys. You"ve got to stay away from them.

JR: Well, but see, you made it. You survived. You"re a 26-year-old or 20-year-old who made it and survived, and so it"s OK. Many of them don"t and don"t know why. They make a lot of money. They don"t know why they made money.

So they don"t know why they lose money. They don"t know what happened.

You, at least, something happened. You"re still here. You still have a job. You"re still in the investment world.

SD: I"m self-employed like you.

JR: Right.

Rogers has recently been vocal about his bearish outlook on the markets. In an interview during the summer, he claimed that the largest financial crisis of his lifetime is still to come.

Why Gold's Rally to $1299.70 Today May End Ugly Tomorrow

Pray for Rain?

• Gold has profit taking above


• There is a gap  below that "needs to be tested" for increased likelihood of a sustainable rally.


• Short term the market is overbought, and Friday"s buyers  are  out of the money already

via Soren K Group posted originally on Marketslant.com

Ideally, over the next 3-5 days: we wanted to see Gold fill the Comex gap underneath, and in the process shaking out some weak longs and luring some shorts to pile in. First touching the $1285 area, close with a positive settlement on a lower day. Then we could see a nice  orderly rally out of a bull flag. But so far that is not the case. Instead we have more buying at the top end of a range that has earmarkings of Friday"s behavior.

The sellers right here are commercials and large funds taking profits. And the sellers" stops to buy back are much higher (if they exist at all), than the stop-losses placed underneath from this headline-chasing momentum fund buying. Can we continue  higher despite our "perfect" scenario. Sure. Guys like Ray Dalio are showing no signs of back-tracking on their "risk-off" stances. But we are not buying here. We want the hot money to short Gold, not get long. And guys like Dalio are longer term traders with deeper pockets and more apt to tell us they"ve changed their risk-off and sold their Gold after the fact.

George Gero describes Gold nicely without judgment before the open:

Today gold is steady ahead of  summit of bankers including Chair Yellen, ECB Draghi and many more all of which may keep market watchers with one eye on headlines. Keep the other eye on open interest, more new longs.. Gold over 508,734 as we mentioned Friday on cnbc, copper 329335, silver 191783,and gold options on futures 1,144,348, all these indicate asset allocations returning to metals again. Stocks iffy and more political, geo political headlines await as we look for more 1300 area to come.

Gold is higher today, and that for us is unhealthy. It is the increase in OI that worries us. It is the momentum funds looking for more $1300 and buying based on headlines of:

 $1300 GOLD YAYYYYY! BUY IT NOW  BECAUSE YOU WONT GET A CHANCE TO EVER AGAIN that scare us. Friday"s rally brought new longs. Activity and info confirmed for us asset allocators bidding, but momentum funds chasing the price.

And based on that day"s close, some of them finished out of the money. If we do not close higher today, they may bail given their gnat-like tolerance in metals. Traders with a 6 month horizon may find themselves annoyed by the funds with a 6 minute horizon right here, right now.

We fear the supernova spike/reversal right here and feel the market is much more likely to extend higher on a more sustainable basis if it consolidates a bit here and takes out some weak longs. We prefer the market establish a base here. Higher now without closing above Friday"s high means the likelihood of  a significant sell off in 3 days increases. That fear would ratchet up  MORE if we took out Friday"s  high today but closed lower than the day"s VWAP 

via Vince Lanci:

The question is, do you want a $10 rally today, or a $35 rally over the next 3 weeks?  Its a matter of perspective and time frame. But less upside volatility now means more upside later. Better someone sell it in the hole this week than momentum funds trample each other getting in today.

The caveat as Michael Moor noted to us today is "Longs should not want to trade below $1282.90 intraday."

This is consistent with our Bull flag hopes. A break below that would almost certainly negate a flag formation and thus bullish sentiment.

Gold for December delivery is trading $1297.00 as we write  this, up $5.40 on the day

SPOT GOLD 1 MINUTE CHART

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Real time interactive charts HERE

There is a gap on Comex charts between $1286.20 and $1283.50. The smackdown was expected on first penetration of $1300. The market may linger between the gap and recent highs  for 3 to 5 days creating a bull flag base for a higher push. Our opinion is that unless Gold penetrates $1314 rallies should be sold to book profits during this time. 

Alternatively, shorting rallies this week might be a good intraday play to capture swings as the market gyrates  between the gap and new high. Separately, and not necessarily at odds with our analysis, Michael Moor would prefer the gap be tested sooner rather than later in his summary below

We can see bitcoin profits being taken while hot money is buying Gold with that same manic ajax-snorting expectation of profits. And we do not like  it. 

As long as the market is between $1284 and $1306, we see rallies as a sale, and selloffs as a buy for the next 3 days. Sell it now if  you are booking profits. Then hope it breaks $1314 and buy back in.-  Soren K.

Moor Analytics

emphasis ours- Soren K.

Analysis written by Michael Moor 

Gold (Z) 8/18/17

On a macro basis:   The maintained gap higher on 7/18 left a medium term bullish reversal intact below that warned of higher trade for days.  We have seen $67.8 of this so far from (Q) into (Z) with a roughly $7 spread differential.  The solid penetration above 12417-21 warned of solid short covering in the days/weeks ahead, with a good likelihood of a run back up toward 12980 (+).  We have seen $63.8 of this so far, taking out 12980 on 8/11.

On a shorter-term basis:   The maintained gap higher yesterday left the short term bullish reversal warned about below, which warned of decent higher trade. We have seen $11.5 of this before backing off the high.  Decent intra-day trade below 12829 will negate this definitively.  Although this has not been negated, I warned to be out of longs for the time being if we broke back below the 12978-88 and 12954-60 areas, below which I would look for decent profit taking to come in—we have seen $6.3 of this so far.  If we leave a maintained gap lower intact above on Monday, this will leave a short term bearish reversal intact that will warn of decent lower trade, likely for days.  Decent trade below 12801 (+ 1 tic (10 cents) per/hour starting at 6:00pm Sunday) will project this downward $28 minimum, $34 (+) maximum based off a ‘well formed’ formation; but if we break below here decently and back above decently, look for decent short covering to come in.—likely back toward 12980 (+).   

All inquiries for Moor Analytic"s Professional research in the Gold and Energy markets please use contact info below

Ray Dalio's Gravest Warning Yet: "I Am Tactically Reducing Risk... This Is Broadly Similar To 1937"

Two weeks after Ray Dalio warned in his latest letter to Bridgewater clients that the right trade in the current environment is to buy gold in case "things go badly", the head of the world"s biggest hedge fund is out with his gravest warning yet, saying that he is "concerned about growing internal and external conflict leading to impaired government efficiency." In his LinkedIn post, he writes that he "continues to closely watch how conflict is being handled a guide, and I’m not encouraged.”

Echoing a similar warning issued just days ago from perhaps the most prominent name in all of finance, Lord Jacob Rothschild, the head of the world"s biggest hedge fund says that “conflicts have now intensified to the point that fighting to the death is probably more likely than reconciliation" and in a stark comparison to the days prior to World War II, observes that "politics will probably play a greater role in affecting markets than we have experienced any time before in our lifetimes but in a manner that is broadly similar to 1937."

Basically, Ray Dalio just compared the current political environment to the days just prior to the outbreak of World War II. That is probably not a coincidence.

His full LinkedIn note:

I believe that a) most realities happen over and over again in slightly different forms, b) good principles are effective ways of dealing with one"s realities, and c) politics will probably play a greater role in affecting markets than we have experienced any time before in our lifetimes but in a manner that is broadly similar to 1937.

I"m essentially an economic mechanic who focuses on how reality works by studying the cause:effect relations and how they played out in history to help me bet on what"s likely to occur. For reasons previously explained in "Populism..." it seems to me that we are now economically and socially divided and burdened in ways that are broadly analogous to 1937. During such times conflicts (both internal and external) increase, populism emerges, democracies are threatened and wars can occur. I can"t say how bad this time around will get. I"m watching how conflict is being handled as a guide, and I"m not encouraged.

History has shown that democracies are healthy when the principles that bind people are stronger than those that divide them, when the rule of law governs disputes, and when compromises are made for the good of the whole --- and that democracies are threatened when the principles that divide people are more strongly held than those that bind them and when divided people are more inclined to fight than work to resolve their differences. Conflicts have now intensified to the point that fighting to the death is probably more likely than reconciliation.

Average numbers hide the depths of the divisions. For example, by looking at average figures, one might conclude that the United States economy is doing just fine, yet when one looks at the numbers that comprise those averages, it"s clear that some are doing extraordinarily well and others are doing terribly, with gaps in wealth and income being the greatest since the 1930s.

Largely as a function of these economic differences and differences in the principles that people believe most deeply in, we are seeing large and increasingly firm political differences, which are apparent only by looking below the averages. For example, Donald Trump"s approval rating of 35% is a result of 79% support among Republicans and 7% among Democrats (Gallop). Of those who approve of President Donald Trump, 61% say they can"t think of anything Trump could do that would make them disapprove of his job as President, and 57% who disapprove of Trump say they are never going to change their minds on the President"s job performance (Monmouth). Similarly 40% of those polled (PRRI) would favor Donald Trump’s impeachment, which consists of 72% of Democrats and 7% of Republicans, and most of them won"t change their minds.

In other words, the majority of Americans appear to be strongly and intransigently in disagreement about our leadership and the direction of our country. They appear more inclined to fight for what they believe than to try to figure out how to get beyond their disagreements to work productively based on shared principles.

So, where does that leave us?

While I see no important economic risks on the horizon, I am concerned about growing internal and external conflict leading to impaired government efficiency (e.g. inabilities to pass legislation and set policies) and other conflicts.

I of course hope that the principles that bind us together are stronger than the ones that divide us. I believe that this is a time when it is especially important for us a) to be explicit about what our principles are in order to be clear about what we agree and disagree on, b) to practice the art of thoughtful disagreement, and c) to respect our ways of getting past our disagreements so we can start rowing in the same direction. I believe that how well this is done will have a greater effect on the economy, markets and our overall well-being than classic monetary and fiscal policies, so I continue to closely watch how conflict is handled while tactically reducing our risk to it not being handled well.

Why The World's Billionaire Investors Buy Precious Metals

There are always lessons that can be learned from the “smart money”. Unlike regular investors, Visual Capitalist"s Jeff Desjardins notes that billionaire money managers like Ray Dalio and Stan Druckenmiller are professional investors. They have entire institutional teams at their disposal, dive deep into the nuances and complexities of the market, and spend every waking moment of their lives thinking about how to get more from their investments.

They want to make money – but they also want to execute on strategies that will protect their wealth and build robust portfolios that can withstand any type of macro event.

TURNING TO GOLD

In recent months, some of these elite investors have turned to precious metals like gold as a part of their overall investment strategies.

In the following infographic from Sprott Physical Bullion Trusts, we explain why these investors are adding precious metals to their portfolios, the underlying tactics, and the best quotes each investor has on assessing today’s market.

Why are these billionaires buying precious metals?

Their cited reasons can basically be summed up with six categories: wealth preservation, store of value, inflation hedge, portfolio diversification, future upside, and investment fundamentals.

WHAT BILLIONAIRE INVESTORS ARE DOING

1. Lord Jacob Rothschild

In late summer 2016, Rothschild announced changes to the RIT Partners portfolio because he was worried about very low interest rates, negative yields, and quantitative easing, saying they are part of the “greatest monetary experiment in monetary policy in the history of the world”.

His solution? Buy gold to help preserve wealth, and as a store of value for the future.

2. David Einhorn

Einhorn has a similar assessment. He believes that monetary policy is becoming increasingly adventurous, and that this – along with the policies of the Trump administration – will eventually lead to large amounts of inflation.

In February 2017, he shorted sovereigns, and bought gold.

3. Ray Dalio

Ray Dalio is the founder of the world’s top hedge fund, Bridgewater Associates, but he’s also no stranger to gold.

If you don’t own gold, you know neither history nor economics.

– Ray Dalio, Bridgewater Associates

More recently, in 2016, Dalio is quoted as telling investors to own a well-diversified portfolio that is 5-10% gold.

4. Stanley Druckenmiller

Druckenmiller, some people argue, is the best money manager of all time.

Lately, he’s placed his bets on gold as well, but for different reasons than the above managers. Druckenmiller has always placed big trades with lots of conviction, and in February 2017 he put his money in gold because “no country wants its currency to strengthen”.

Study Finds That Populist Leaders Generate 'Yuge' Equity Rallies Averaging 150% Over 3 Years

Back in mid-January Bridgewater"s Ray Dalio, speaking at the World Economic Forum in Davos, offered up his first thoughts on the populist wave sweeping across the globe (we covered it here).

And, once you"ve recovered from the laughing fit inspired by the irony of a bunch of billionaires sitting around discussing their displeasure with the masses of the world voting to undo their decades of power consolidation, you can continue with the following summary of Dalio"s comments from Bloomberg:

DALIO:  POPULISM MOST IMPORTANT ISSUE GLOBALLY

DALIO: POPULISM IS BY DEFINITION NATIONALIST

DALIO: POPULISM IS POLAR OPPOSITE OF DAVOS

DALIO: POPULISM IS AN EXPRESSION OF `FED-UP-ISM’

DALIO: WE’LL SEE MORE PROTECTIONISM, REVERSAL OF GLOBALISM

DALIO: `NATIONALIZATION, PROVINCIALIZATION MAY TAKE HOLD’

DALIO: GLOBALIZATION HELPED REDUCE WEALTH GAPS INTERNATIONALLY

DALIO: DEREGULATION HAS CONS BUT ALSO PROS; GETS THINGS GOING

DALIO: CAN MIDDLE BE COHESIVE ENOUGH TO CURB EXTREMISM?

DALIO: TECHNOLOGY, GLOBALIZATION CAUSING INCOME DIFFERENCES

DALIO: POPULISM SCARES ME

...suffice it to say that he"s not a big fan of populism.

Therefore, it should probably come as little surprise that, as we noted recently, after initially praising Trump"s policies, Dalio turned sour on the new administration shortly after his trip to Davos...

“Nationalism, protectionism and militarism increase global tensions and the risks of conflict. For these reasons, while we remain open-minded, we are increasingly concerned about the emerging policies of the Trump administration.”

All of which culminated with a new, massive 60-page report from Dalio, entitled "Populism: The Phenomenon", which, in addition to reviewing the history behind historical populist waves around the world, put on full display Dalio"s fears about the economic consequences of a Trump administration.

Populism is not well understood because, over the past several decades, it has been infrequent in emerging countries (e.g., Chávez’s Venezuela, Duterte’s Philippines, etc.) and virtually nonexistent in developed countries.  It is one of those phenomena that comes along in a big way about once a lifetime—like pandemics, depressions, or wars.  The last time that it existed as a major force in the world was in the 1930s, when most countries became populist.  Over the last year, it has again emerged as a major force.

Given the extent of it now, over the next year populism will certainly play a greater role in shaping economic policies.  In fact, we believe that  populism’s role in  shaping economic conditions will probably be more powerful than classic monetary and fiscal policies (as well as a big influence on fiscal policies).  It will also be important in driving international relations.  Exactly how important we can’t yet say.  We will learn a lot more over the next year or so as those populists now in office will signal how classically populist they will be and a number of elections will determine how many more populists enter office.

That said, at least according to Satyen Mehta a money manager at Neon Liberty Capital Management, despite Dalio"s dire warnings, populism has historically resulted in massive and sustained equity rallies that have historically averaged over 150% over three years...a phenomenon that he attributes to populists creating short-term stimulus that supports growth even as the nations’ debt burdens swell.  Per Bloomberg:

If the last two decades of anti-establishment rule are any guide, the world may be on the brink of some monster stock rallies as it takes a turn toward populism.

A look at 10 of the 21st century’s most recognized populist leaders shows that in the three years after their election, local equities soared an average of 155 percent in dollar terms. And the rallies often continued as long as a decade after the vote.

"While conventional wisdom suggests investors should be wary of populist leaders, equity markets were actually much more resilient when their policies turned out to be more benign than initially feared," Mehta said.

Here is a just a small sample of some of the returns reviewed by Mehta after populist leaders took over in various countries around the world.

The pattern of outsize returns for countries run by populists has been seen from Brazil’s Luiz Inacio Lula da Silva to Russia’s Vladimir Putin, as well as in Poland, Egypt and India. Under leaders generally considered leftist, equities have done particularly well, producing 221 percent returns in three years. Right-wing heads of state saw 122 percent gains over the same period, according to data compiled by Bloomberg.

The numbers get a little trickier longer term, but for countries where there’s available data stock investors saw returns of 355 percent in the populist countries over five years and 442 percent 10 years down the road.

Of course, it should be noted that timing is everything and we suspect it was easier for Luiz Inácio Lula da Silva to preside over outsized equity returns in Brazil after taking office in 2003 after the tech bubble pretty much laid waste to equity markets around the world.  Trump, on the other hand, has taken office just as equities are trading at all time highs on pretty much any metric you may want to look at.

5 Head Scratchers

By Chris at www.CapitalistExploits.at

Market dislocations occur when financial markets, operating under stressful conditions, experience large widespread asset mispricing.

Welcome to this week’s edition of “World Out Of Whack” where every Wednesday we take time out of our day to laugh, poke fun at and present to you absurdity in global financial markets in all its glorious insanity.

While we enjoy a good laugh, the truth is that the first step to protecting ourselves from losses is to protect ourselves from ignorance. Think of the “World Out Of Whack” as your double thick armour plated side impact protection system in a financial world littered with drunk drivers.

Selfishly we also know that the biggest (and often the fastest) returns come from asymmetric market moves. But, in order to identify these moves we must first identify where they live.

Occasionally we find opportunities where we can buy (or sell) assets for mere cents on the dollar – because, after all, we are capitalists.

In this week’s edition of the WOW: 5 head scratchers

Today we"re going to blast through a few shards of information that have bloodied my windshield recently... but first some context.

The world is a web, interconnected at multiple levels but in it"s entirety it is one giant capital flow chart. This is why looking at events, trends and prices from multiple angles and with historical context is critical. It means that in order to understand global capital flows and the world at large investors needs to be generalists. Specialisation renders one towards narrow focus by necessity. There is nothing wrong with narrow focus when you need it so long as it can be brought into focus through a broad understanding.

Let"s therefore look at a number of topics.

1: Saudi Arabia Got WHAT??

In what I dearly wish was a delayed April fools joke the United Nations just elected Saudi Arabia to the Woman"s Rights Commission. No isht!

A quick reminder: this is the only country in the world which actually bans women from driving cars while implementing Sharia Law, which - for those among you who haven"t read the intricacies of - permits, among other heinous things, honour killings. Way to go UN!

Question: does this make the UN complicit in crimes against humanity committed by Saudi Arabia"s government? Oh, wait...

Why do I even mention this?

Davos men, the UN, the kleptocrats in Brussels, Washington, and sundry such creatures who muddy the halls of power are slowly losing their grip. This step - electing the fox in to guard the hen house - is a candid, dare I say it, balsy admittance to what we already knew. That they value money more than morals.

Why it"s important is because, in their desperate desire for riches, they just dealt another blow to the establishment"s credibility. Credibility rests on trust, and trust is easily destroyed. What these podium donuts have just done is provided additional kerosene to the anti-establishment fire, which - if they"ve not looked outside their windows - is smouldering around them.

When alternatives for governance are sought, as they are now, it doesn"t require a genius to understand that views and beliefs are translated into how capital gets allocated.

Ask yourself this.. If Davos Man is increasingly shown to be the morally bankrupt sociopath he is, then at what point does faith in Davos Man"s institutions and obligations (sovereign debt, I"m looking at you) get called into question?

2: Risk Party... I Mean Parity

In case you wondered what it was...

"Risk parity (or risk premia parity) is an approach to investment portfolio management which focuses on allocation of risk, usually defined as volatility, rather than allocation of capital."

Simplistically risk parity funds buy assets based on their implied volatility. If company X"s volatility drops, then the models allocate more capital towards company X. By buying more of company X this has the effect of causing volatility to decline further. You get the picture. I"ve written about this before when talking about a bubble in dumb money.

Imagine buying companies not based on their balance sheets, income statements, or any of that boring stuff but purely on how volatile their share prices have been. Imagine... These risk parity funds are completely price insensitive. They don"t even know what they"re buying and will just as happily buy company X if it"s trading at 200x earnings... so long as volatility is low.

Now, I would be remiss in mentioning that artificially low interest rates (thanks central banks) have had the effect of suppressing volatility in markets. These ETFs, coupled with sustained idiotic central bank policies, have created truly epic distortions in the markets.

And, just to prove that stupidity can last for quite some time, below is an updated chart on where things stand with this fun game.

3: Circling Back to the Saudis

I don"t know about you but I find that when I need to understand something a little better it"s often best to let the idea ruminate a little while before revisiting it. This allows it to mulch around in your brain, squeeze out the flatulent useless bits, and present you with what is usually be a better grasp on what really matters.

Sticking with this process, let"s revisit the first topic of this week"s WOW.

Curious minds should be asking the question: why on earth is the UN treating the Saudis like a cross between Mother Theresa and Ghandi?

Call me cynical but I reckon it"s usually always about the money. So the fact that grand master Mohammad Bin Salman Al Saud has decided to list a sliver (5%) of Saudi Aramco may well have a little to do with this.

We know there are problems in the Kingdom. Serious problems.

And no, I"m not referring to the fact their poor citizens are governed by a bunch of psychopaths with medieval beliefs who would still be living in caves if it weren"t for the black stuff under their sandals.

I"m talking about financial concerns around its now infamous decision in November 2014 to abandon its role as the global swing producer and ramp up production (even as global supplies were increasing and prices were collapsing).

Take a look at this:

Now take a look at this:

This is what a pegged currency looks like (Saudi riyal vs. USD).

I"ll let you put two and two together.....

Done?

Ok.

So you"re in a cash crunch, running the biggest budget deficits ever, you have to hold your currency peg which means dipping into your foreign exchange reserves, and you"re fighting a wall of supply from Iran (a topic for another day but you can go listen to my conversations on Iran here and here). What do you do?

You do what anyone would do. You sell stuff.

The "Kingdom" had their first ever bond sale last year and now they"re flogging Aramco to the world. The problem with all of these things is that you"re needing to interact with the rest of the world a tad more and that still requires "legitimacy". A "credible" seat at the UN should help, no?

I wonder how much they paid the bankers for that seat at the UN?

We"ll probably get some insight when we see where Aramco"s shares get listed, and by whom.

4: The Wisdom of Age

Just in case we think we can fathom what the future holds.

How much of what Emma witnessed in her 117 years on this ball of dirt could she have seen coming in her life?

The answer is not likely many things. But... identifying just one of the completely asymmetric changes that took place would have definitely been very, very well worthwhile for Emma. Imagine having had the ability and foresight to have invested in just one of the items Sprezza lists in its early phase... and hung on.

Identifying the trends could have been done but I dare say hanging on is likely the hardest thing for us humans to do.

5: And Lastly But by No Means Least

Did you see the massive rally in the euro?

I"ve a great number of thoughts on this which I share with Insider members this week, including what I think is a wonderful setup. I"d encourage you to join us.

After all, there are just a few days left in April, which means you can gain access to membership at the inaugural price... before the price goes up.

Until next time, have a good weekend.

- Chris

"The biggest mistake investors make is to believe that what happened in the recent past is likely to persist. They assume that something that was a good investment in the recent past is still a good investment. Typically, high past returns simply imply that an asset has become more expensive and is a poorer, not better, investment." — Ray Dalio, Founder, Bridgewater Associates

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Huge Shake Up At World's Largest Hedge Fund: Ray Dalio Steps Down As Co-CEO; Rubinstein Departs

Because our communications often find their way into the media in distorted ways, we wanted to share publicly the below letter we sent to our clients this morning.

As you know, Bridgewater has a unique culture that works exceptionally well in our industry. Because consensus views are built into market prices, in order to beat the markets, we need independent thinkers. These independent thinkers need to have thoughtful disagreements and ways of resolving them. For this reason, our culture is a well-thought-out idea meritocracy. It requires people to be radically truthful and radically transparent with each other. This radical truthfulness and radical transparency includes looking at people’s mistakes, problems, and weaknesses as well as their strengths and talents.  Doing this isn’t always easy, especially at first, but dealing with these mistakes, problems, and weaknesses is what fuels our improvements. Some people love this forthright way of operating and wouldn"t want to work anywhere else, while others dislike it and leave. But nobody doubts that this unique culture is the force behind Bridgewater"s unique success over the last 40 years. 

Consistent with this idea-meritocratic way of operating, Bridgewater is run by a number of capable partners who can assess things independently and work together to come to the best decisions. This partnership model, rather than a single leader model, is why we have co-CEOs to run the business parts of Bridgewater, co-CIOs to run the investment parts, and co-chairmen to make sure the co-CEOs are doing a good job. We also have a team of others in key management roles who thrash things out, back each other up, and reduce key man risk. We are very fortunate to have such a broad and deep team, especially at this time of transition. 

Changes Coming in April

Any organization run by a 60+ year old that says that it isn’t in transition is either naïve or disingenuous. For that reason, when I was about 60 (seven years ago), Bridgewater started its management and equity transition, with a goal of having others replace me. As explained at the time, we allowed for this transition to take up to ten years because we knew that getting things right would take some adjusting of the ways we did things and some trial and error. We have done what we have said we would do, and we have kept you informed. The purpose of this note is to continue doing that.

I am happy to report that my transition out of management will be complete as of April 15th. 

As a reminder, ten months ago I temporarily stepped back into management as interim co-CEO for a one-year stint in order to help transition Greg Jensen’s co-CEO responsibilities. Handling both a co-CEO job and a co-CIO job is tough. For that reason, we decided that Greg would shift his full attention to the co-CIO role. I will be doing the same in April. As I love markets, I’m excited about this change and expect to remain a professional investor at Bridgewater until I die or until those running Bridgewater don’t want me anymore. So Bob Prince (who has been with Bridgewater for 31 years), Greg Jensen (who has been with Bridgewater 21 years), and I (who have been here 42 years) will remain focused on investing as co-CIOs. In addition, Osman Nalbantoglu (who has been at Bridgewater for nine years) continues to run our portfolio implementation and trading/execution areas, and eight of our key investment research associates will step up into senior researcher roles. These 12 people are supported by hundreds of researchers and technologists, giving Bridgewater the strongest investment team the firm has ever had and a deep bench of experienced investment professionals.

I can now permanently transition out of the interim co-CEO role because we now have confidence in the people and processes that will lead Bridgewater’s management without me. David McCormick will be stepping up to join Eileen Murray in the co-CEO role. As you know David, who is currently President, has been at Bridgewater for eight years and has been a critical part of our success. Over the last year, he, Eileen (who has been at Bridgewater for eight years and a co-CEO for four years), and I ran the business part of Bridgewater with Co-CEO Jon Rubinstein, who was new and focused mostly on technology.  We worked together to build-up our governance, management support, and metrics systems in a way that has demonstrated that David and Eileen can run Bridgewater without me as a co-CEO. Most importantly David, Eileen, and the people who support them have a proven understanding of Bridgewater and its unique culture, and they treasure these things.  

Jon Rubinstein will step out of the co-CEO role and will be leaving Bridgewater, though he will remain an advisor.  While over the last ten months Jon has helped build a plan to re-design our core technology platform and has brought in a group of extremely talented executives to build out our technology leadership, we mutually agree that he is not a cultural fit for Bridgewater. As a result, we have put in place a plan for him to transition to an advisor role in April. I really do appreciate Jon’s hard work and contributions.

Carsten Stendevad, the former CEO of the large Danish pension fund ATP, is joining Bridgewater as part of our new “Bridgewater Senior Fellowship Program,” which will bring highly distinguished individuals into Bridgewater for a year to explore what our culture is like and lend their expertise and insights to our organization. We expect a limited number of such special people to join this program in the future. 

And as previously announced, John Megrue joined me as a co-chairman on January 1st. John has been a leader in the private equity industry for over 30 years and is currently chairman of Apax Partners U.S. He brings with him a practical understanding of board governance.  Bridgewater’s oversight board now consists of current executive management members and former senior executives, as well as outsiders, which we believe is the right balance for strong long-term governance.

As always, if you have any questions, please let us know.

Goldman's Top FX Strategist Robin Brooks Is Quitting

On the day for market that can only be described as a blow off top, two things that one would normally anticipate with the Dow above 21,000 and S&P at all time highs, are taking place: first, the departure of the Co-CEO of the world"s largest hedge fund, Ray Dalio, as reported moments ago. Now, in a less high profile if just as unexpected departure, Goldman"s chief FX strategist, Robin Brooks, the replacement to the infamous Thomas Stolper, has also announced he is leaving the company.

This is the email he just sent to clients:

Since I joined in May 2010, Goldman taught be to boil an issue down to its essence, write it up simply and … make a pretty picture that tells the story. That’s basically what I have done these last few years and I have loved every minute of it.

With my time here counting down to the last few days, I leave you with my favorite charts:

(i) what the last few years have taught us is that the trade-weighted Dollar (LHS chart, black line) follows the 2-year interest differential (LHS chart, blue line);

(ii) there is still plenty of upside for the 2-year differential, even if you have a more dovish view than our Fed f/c (middle chart); and

(iii) coming Dollar appreciation will arguably take the Dollar into overvalued territory, but given the outperformance of the US vis-à-vis others (RHS chart), US policy makers will have to accept this as part of a necessary tightening in financial conditions.

I am grateful for everything I have learned and hope to stay in touch.

Considering that this is the bank which over the past 17 years cut the human headcount on its cash equity trading desk from 600 to 2, one woners if Brooks will be replaced by a human or a machine? Stay tuned for the answer.

Larry Fink Turns Bearish: Sees Slowing Economy, "Dark Shadows" In The Market

Speaking at the Yahoo! Finance All Markets Summit on Wednesday, an unexpectedly bearish BlackRock CEO Larry Fink joined the likes of Bill Gross, Jeffrey Gundlach and Ray Dalio who have similarly turned downbeat in recent weeks, and cautioned that the U.S. economy is in the midst of a slowdown and financial markets could see a significant setback, for the same reason the Trumpflation trade has fizzled out in recent months: uncertainty over global trade and the Trump administration"s plan to cut taxes.

"I see a lot of dark shadows," Fink said at the Yahoo event quoted by Reuters. "The markets are probably ahead of themselves."

Fink should know: Blackrock is the world"s biggest asset manager, with control of over $5.1 trillion in assets; he said investors are caught up in the potential for a restructuring of U.S. tax policy, which may not take place until 2018, something we warned about last December. 

In the meantime, "disruptions to trade are a possibility." Trump has called for tax cuts as well as a wide set of changes to trade policy, including a renegotiation of the North American Free Trade Agreement with Canada and Mexico.

He added that "we"re living in a bipolar world right now," and as a result speculated that the benchmark 10-year Treasury yield could fall below 2% or, conversely, rise above 4% ; however he sees a greater probability of rates falling as deflationary risks remain due to technological advances and rising protectionism. Still, he does not see the Fed reversing course course, at least not yet, and expects the Federal Reserve to raise rates in June and possibly again once more in the year.

Fink also said that "in my conversations with CEOs in Europe and CEOs in the United States they may be very bullish about what may come but most business people are not investing today."

As noted above, Fink is the latest major figure to call for a dose of caution after Trump"s election touched off a rally in U.S. stocks. Bond investors Jeffrey Gundlach and Bill Gross are among those who have said the same in recent weeks.

Finally, Fink warned that there could be tension between the Fed"s dollar-boosting policies and those of Trump as a stronger dollar could make it harder to revive export-dependent manufacturers.

In short: after focusing exclusively on the potential upside from the Trump agenda, with every passing day that nothing tangible materializes, the market optimism is fading to the realization that very little, if anything has changed.

Lagarde Urges Wealth Redistribution To Fight Populism

As we scoffed oveernight, who better than a handful of semi, and not so semi, billionaires - perplexed by the populist backlash of the past year - to sit down and discuss among each other how a "squeezed and Angry" middle-class should be fixed. And so it was this morning as IMF Managing Director Christine Lagarde, Italian Finance Minister Pier Carlo Padoan and Founder, Chairman and Co-CIO of Bridgewater Associates, Ray Dalio, espoused on what"s needed to restore growth in the middle class and confidence in the future.

The conclusions of the discussion are as farcical as the entire Davos debacle, as three people completely disconnected from the real world, sat down and provided these "answers"...

As Bloomberg reports, while International Monetary Fund chief Christine Lagarde urged a list of policies from programs to retrain workers to more social spending...

Lagarde said policy makers “really have to think it through and see what can be done” given the feedback from voters who say "No.” Among measures that could be implemented are fiscal and structural reforms, she added.

“But it needs to be granular, it needs to be regional, it needs to be focused on what will people get out of it and it probably means more redistribution than we have in place at the moment,” Lagarde told the panel.

There"s "a crisis of the middle class in advanced economies," Christine Lagarde says https://t.co/72GgBmZQxV #wef17 pic.twitter.com/bBiHRZ3bSz

— Bloomberg TV (@BloombergTV) January 18, 2017

The establishment academics also had plenty of textbook declarations and jabs to make...

“We need to go to a system where we are protecting workers, not jobs, and society will help people retrain or reorient,” Richard Baldwin, professor of international economics at the Graduate Institute of International and Development Studies in Geneva, said in an interview in Davos. “There may just be a need to man up. We have to pay for the social cohesion that we need to keep our societies advancing, and accept that this may be a higher tax burden on people.”

The panel saw former U.S. Treasury Secretary Lawrence Summers attacking Donald Trump saying populism is “invariably counter-productive” for those it claims to help.

“Our President-elect has made four or five phone calls to four or five companies, largely suspending the rule of law, and extorting them into relocating dozens or perhaps even a few hundred jobs into plants in the United States,” Summers said.

Summers’s recipe for dealing with populism twisted Trump’s campaign slogan. “Our broad objective should be to make America greater than ever before,” Summers said. “That’s very different from making it great again.”

He suggested three major steps. First, “public investment on an adequate scale starting from infrastructure” also embracing technology and education; second, “making global integration work for ordinary people” and third, “enabling the dreams of every young American” including education, finding work and home purchasing.

And ironically, the wealthiest of all the panel members was perhaps the clearest...

Hedge Fund billionaire Ray Dalio warned on a panel chaired by Bloomberg Television’s Francine Lacqua that “we may be at a point where globalization is ending, and provincialization and nationalization is taking hold.”

“I want to be loud and clear: populism scares me,” Dalio said. “The No. 1 issue economically as a market participant is how populism manifests itself over the next year or two.”

So, to sum up - a bunch of rich, disconnected elites in Switzerland believe the world"s "middle class" will be better off if policy-makers "man-up" and increase taxes on the "wealthy" in order to redistribute wealth to the masses to "pay for social cohesion." Yeah, that will work... we suspect echoes of "Four more years" will be heard in 2020 if they follow that path.

Full discussion available here.

Live From Davos: Ray Dalio, Christine Lagarde And Larry Summers Discuss How To Fix The "Middle Class Crisis"

How do you know with certainty that Davos has not only jumped the shark, but has become a parody of itself? One answer: when you have a handful of semi, and not so semi, billionaires - perplexed by the populist backlash of the past year - sit down and discuss among each other how a "Squeezed and Angry" middle-class should be fixed.

As Davos puts it, "once the lynchpin of developed economies, it’s now threatened by job losses and stagnant wages, paving the way for the rise of populism. In emerging markets, middle class growth rates are stalling. Have middle class problems been forgotten?" It asks rhetorically "What can be done?"

Apparently the answer is to have three people completely disconnected from the real world, sit down and provide "answers.":

In this session, starting at 0800 GMT, IMF Managing Director Christine Lagarde, Italian Finance Minister Pier Carlo Padoan and Founder, Chairman and Co-CIO of Bridgewater Associates, Ray Dalio, discuss what"s needed to restore growth in the middle class and confidence in the future.

And then they wonder why the annual Davos echo chamber boondoggle has become not only a global farce, but a symbol of everything that is wrong with globalization today...

Watch it live below

Harvard Is 'Billionaire-Making' University

Want to learn about the history of economics, how to code with Ruby on Rails, or the essentials of string theory? It’s all out there for free on the internet, and anyone who has the time or energy can learn it directly from the experts.

The Information Age grants us an unprecedented amount of access to the world’s knowledge – and some thinkers like James Altucher or Peter Thiel see this leading to a path where the role of colleges and universities will continue to diminish.

We share that sentiment. The most recent crop of successful entrepreneurs like Evan Spiegel or Mark Zuckerberg already proves that entrepreneurs can make billions without spending a full four years in the classroom. The forthcoming generation will be even less tied to attending brick-and-mortar institutions.

However, as Visual Capitalist"s Jeff Desjardins notes, there’s one caveat to this line of thought, however, and it coincides with this week’s chart. While one can say that the actual academic value of these institutions may be undermined by access to the digital world, the value of these as places to “rub shoulders” with up-and-comers still remains entrenched.

A BILLIONAIRE MAKING MACHINE

Talk to any successful person in business and they will tell you that developing a strong network is half of the battle. As far as schools go, Harvard is the perfect example of the “network effect” at work.

To date, a total of 35 of the richest 500 people in the world have emerged from the storied halls of Harvard. In fact, more billionaires have graduated from Harvard than all of those hailing from Saudi Arabia and Spain combined.

The total net worth of the top 35 Harvard billionaire graduates? It’s $309 billion – roughly equivalent to the GDP of Hong Kong or Ireland. With alumni like Charlie Munger, Meg Whitman, John Paulson, Steve Ballmer, Paul Singer, Ken Griffin, Ray Dalio, and Michael Bloomberg among the ranks of Harvard graduates, it’s a powerful hub to tap into. Today’s Harvard students and professors take advantage of this prestigious network every day.

Elite universities still serve as filtering mechanisms that only bring in students that are smart, well-connected, or both. Top schools like Stanford or Harvard have acceptance rates less than 6%, and this exclusivity gives graduating students a connected and privileged network from the get-go.

One hundred years from now, will these institutions still have the same track records from the exclusivity factor alone? It remains to be seen, but for now they are still undisputed billionaire making machines until proven otherwise.

World's Largest Hedge Fund Manager Slams Mainstream Media's Fake & Distorted News Epidemic

Ray Dalio, founder of Bridgewater - the world"s largest hedge fund, has "been reflecting for quite a while on the destructive effects that fake and distorted media are having on our society’s well-being," but it appears a recent Wall Street Journal article about his fund - full of intentional distortions, appears to have pushed the billionaire over the edge at just "how destructive and widespread these "fake" and "distorted" agendas are."

Via LinkedIn.com

To me, fake and distorted media are essentially the same problem in different degrees. My own experience, which I will share later in this piece, is just one small case within an epidemic. While Bridgewater will survive this case—and even if we didn"t, the world would be just fine—it is questionable whether the world will be just fine if this fake and distorted media epidemic is not arrested. As Martin Baron, the Washington Post"s Executive Editor, said in reflecting on the problem, "If you have a society where people can"t agree on the basic facts, how do you have a functioning democracy?"

Distorted pictures lead us to make bad decisions. In my opinion, if people don"t correct such inaccuracies and don"t fight against this problem, continued distortions in the media will prevent the public"s accurate understanding of what is happening, which will threaten our society"s well-being. We in the financial community now openly talk about fake or distorted media being used to manipulate market prices to the harm of many, and similar conversations are taking place in most areas.

This is not just a fringe media problem; it is a mainstream media problem. And while it is widely recognized, there is no discussion underway about how to rectify it. The Associated Press said that only 6 percent of Americans surveyed have “a lot of trust” in the media. A recent Gallup study showed that Americans" trust in the media has dropped to an all-time low, with only 32 percent of those surveyed saying that they have either a “fair” or “great deal” of trust in the media. That compares with 55 percent having such confidence in 1999 and 72 percent in 1976. The dramatically decreased trustworthiness has even plagued icons of journalistic trust such as The Wall Street Journal and The New York Times, as sensationalism and commercialism have superseded accuracy and journalistic integrity as primary objectives.‎ Many, if not most, "journalists" are trying to write the story that they want to write and fit the facts to it rather than accumulating facts to accurately report pictures of what is true. To be clear, I am not saying that this is the case for all people in the news media as there are a number of true journalists who do seek to convey accurate information; I’m just saying that they are a rapidly shrinking percentage of the total and the poll numbers reflect that.

The failure to rectify this problem is due to there not being any systemic checks on the news media’s quality. The news media is unique in being the only industry that operates without quality controls or checks on its power. It has so much unchecked power that even the most powerful people and companies are afraid to speak out against it for fear of recrimination. In fact, I presume that I will be widely attacked in the media for what I am saying here. Nonetheless I am compelled to say what many people express privately, which is that 1) the quality of news media is declining in general, 2) those in the news media have an enormous amount of power, 3) the news industry is unique in not having its standards of behavior specified and overseen, and 4) this confluence of realities is dangerous.   

While we all treasure our free press which is the reason that those in this industry are not overseen, the accelerating loss of faith in the media appears to be coming to a head and will probably lead to a backlash. I worry that if the industry doesn"t fix its problems, other forces will cause the pendulum to swing in the opposite direction, which will lead to some of the cherished press freedoms being lost. That too could undermine the public"s ability to know what is true. There is no getting around the fact that we need a responsible news media, and the powers that be need to start talking about how to bring that about. Personally, I hope that prominent media organizations will explore ways of self-regulating the quality of what they are producing, or at least create ratings in the way the Motion Picture Association of America provides its movie ratings. If the industry created a self-regulatory organization that set standards and conveyed assessments of quality as is done in a number of other industries, it would be much better than most of the other alternatives. In any case, it’s not my place to determine how this problem is resolved as much as to speak up about the problem and encourage discussion of it. 

*  *  *

A Case in Point

I have mixed feelings about describing our most recent experience with The Wall Street Journal because many people might misconstrue my doing this as me simply complaining about an article that I didn’t like. While I certainly don’t want to let the inaccuracies about Bridgewater stand, my more pressing motivation is to give you a window into how media is often made because I believe that those of you who haven’t seen it from the inside will find it eye-opening. It probably will be a little bit like watching sausage being made for the first time.

About six weeks before the Wall Street Journal story by Rob Copeland and Bradley Hope came out, we were contacted by Copeland, who was “fact-checking” and seeking information about Bridgewater. Many of the things he was asking about were downright wrong, so we were presented with the choice of either cooperating with him or allowing the incorrect information to go out. Because we’ve had a history of Copeland and Hope writing misleading stories about Bridgewater even when we cooperated with them, we were inclined to not engage with them because we expected that they might again distort whatever we said. Copeland however insisted that they wanted to “reset the relationship” to present an accurate picture of the firm. He offered to enter into an agreement in which we would provide him with information that he didn’t already have in order to give him a fuller picture but only on the condition that he would not use that information unless we mutually agreed that his presentation of it in the article was accurate. We understand that the culture behind our exceptional success over the last 40 years is both unusual and commonly misunderstood, so we decided to enter into that agreement with him. As explained below, he broke the agreement by presenting distorted pictures of what we told him even after he asked us to "fact check" his assertions and we replied in writing that they were inaccurate.

Copeland and Hope allege that Bridgewater is an oppressive environment based on very few conversations—as they put it, on interviews with "more than a dozen past and present Bridgewater employees and others close to the firm.” We have about 1,500 people who work at Bridgewater, most of whom love it rather than feel oppressed, so the picture they gleaned from these dozen people was clearly not representative. Bridgewater obviously could not have been as successful for as long as it has been without a culture that values its employees and fosters excellence; Copeland wasn’t seeking to understand that. We explained to him in writing that "You are painting a one-sided negative picture of the work environment. The problem is that people who are happy with their experience and respecting our rules are not allowed to speak with the media so you end up hearing disproportionately from disgruntled people. It becomes a gross exaggeration and none of the joy of the Bridgewater experience gets represented.” We offered to provide Copeland an extensive list of employees and former employees who could freely speak with him. He did not take us up on that offer.

We also offered to put Copeland in contact with three prominent organizational psychologists and researchers who, out of their own curiosity, had studied our culture in depth and conveyed their highly-regarded analyses in three different books. These researchers were on site at Bridgewater and had access to anyone they wanted to speak with when they did their studies. Copeland and Hope never even walked though Bridgewater speaking to its people, yet they also chose not to speak with these experts. If you are interested in reading a few much more informed assessments of Bridgewater, we suggest that you read An Everyone Culture by Robert Kegan and Lisa Lahey, Originals by Adam Grant, and/or Learn or Die by Edward Hess or read the quotations from these books that are included here.

Copeland asked us about our culture of radical transparency, so we explained the logic behind it. We directed him to Principles, which describes it in depth. We agreed that Bridgewater is a challenging place to work, that the characterization of the firm being like “an intellectual Navy Seals” is apt, and that it isn’t for everyone. We made clear that nobody doubts that our unique culture has worked remarkably well for 40 years, and that no company could produce the results we have without there being deep and meaningful relationships among the people who work there. We tried to explain how the culture works and how it has produced our unique results, and we tried to provide him with facts that substantiated that assertion. For example, in our most recent anonymous annual survey, 89 percent of employees agreed that “running Bridgewater according to the culture and principles is key to Bridgewater’s success” and 94 percent agreed that “the culture helps my personal evolution.” Similarly, 89 percent of our clients said that they were satisfied or very satisfied with Bridgewater, 95 percent said that “Bridgewater’s investment insights are uniquely valuable,” and 95 percent said that “Bridgewater’s personnel are honest and direct with me, even when we disagree.”

We also explained the logic behind radical transparency in conversations and in the following written statement: "If you agree that a real idea-meritocracy is an extremely powerful thing, it should not be a great leap for you to see that giving people the right to see things for themselves is better than forcing them to rely on information that is processed for them by others. Radical transparency forces issues to the surface—most importantly (and most uncomfortably) the problems that people are dealing with and how they’re dealing with them—and it allows the organization to draw on the talents and insights of all of its members to solve them. Eventually, for people who get used to it, living in a culture of radical transparency is more comfortable than living in the fog of not knowing what’s going on. And it is incredibly effective. But, to be clear, like most great things it also has drawbacks. Its biggest drawback is that it is initially very difficult for most people to deal with uncomfortable realities.” Copeland and Hope chose to not use any of that. Rather than seeking to understand how the culture and radical transparency work or referring to such facts in their article, they chose instead to push the story that they wanted to write.

We discussed turnover rates at Bridgewater and showed them the statistics that make clear that in the first year or two turnover is unusually high and in subsequent years it is unusually low. This pattern is a result of Bridgewater’s culture and its having tough and unique standards. The company is not for everyone but for those who it is for, there is nothing like it. The numbers substantiate this—21 percent leave in the first year and another 10 percent leave in the second year, but the turnover rates of those in years three, four, and five are exceptionally low, at only six percent, four percent, and three percent respectively. Copeland and Hope chose to focus only on the relatively high early turnover saying “Bridgewater says about one-fifth of new hires leave. The pressure is such that those who stay are seen crying in bathrooms.” They omitted the longer-term high retention rates and the satisfaction levels behind them.

When Copeland asked about how radical transparency works, he suggested that we were disingenuous because we didn’t pursue it totally. We explained our approach: “Don’t get me wrong: radical transparency isn’t the same as total transparency. It just means much more transparency than is typical. We do keep some things confidential, such as illnesses or deeply personal problems, sensitive details about intellectual property or security issues, the timing of a major trade, and at least for the short term, matters that are likely to be distorted, sensationalized, and harmfully misunderstood if leaked to the press.” And we pointed him to the relevant principles. Copeland and Hope chose to ignore those explanations and write “he decided to let only 10 percent have the full measure of what he calls radical transparency.” After he passed that by us, we replied that "It is incorrect that only 10 percent get radical transparency. Here’s the fact. Everyone can see most everything, but only the top 150 or so people get to see the most sensitive type of stuff which, in most companies would be limited to only the top 5 or 10 people." The authors chose to go with their mischaracterizations, even though doing so was misleading.

Similarly, their representations regarding our “secret project” to systemize our criteria for management decision making were both sensationalistic and misleading. We explained that what we are doing in systemizing management decision making is the same thing we have been doing for 30 years in systemizing our investment decision making, which is to collectively agree on good principles for making decisions and to express them in computer code. This allows us to input the relevant data and for the computer to process it according to our mutually agreed-upon criteria. We explained that we are doing this because we have learned that this principled and systemized decision making process allows us to get above our emotional attachments to our own conclusions and focus instead on deciding what our decision making criteria should be, which ultimately leads to better decisions because computers can process these criteria in much better ways than humans can. For example, by collecting data on people, we can learn what they are like, what jobs they are best suited for, and how they would most effectively work together. People also learn a lot about themselves, which helps them and their personal development. We are collecting and building these criteria collectively, yet the writers chose to characterize all this as being “like trying to make Ray’s brain into a computer” because that fit better with their desire to paint a picture of Bridgewater being a crazy, oppressive place run by a Dr. Frankenstein type character — even though the evidence shows it to be an idea-meritocracy which has, for several decades, succeeded in producing meaningful work, meaningful relationships, and unparalleled results through its radical truthfulness and radical transparency.

Copeland and Hope mischaracterized several other things (e.g., my thinking on Jim Comey, a man whom I admire). In each case, I explained to them that they were mischaracterizing and they chose not to convey anything that didn’t fit with the story they wanted to write. I won’t delve into more examples because we are past the point of diminishing returns.

So there you are. You now have a window into how some media is being made, and you’re left facing the dilemma I described in the first part of this piece. There is no established party to assess the accuracies of what is being said, and you are left to wrestle with questions of what is true based on the scant evidence you have in front of you. I suggest that rather than worry about what’s true about Bridgewater, which probably won’t have an effect on your life, you worry instead about the systemic risks arising from fake and distorted media.