Silver and Gold...Why now

http://www.zerohedge.com/news/2015-02-18/silver-and-gold-why-now

Ray Dalio - articulating a “risk of ruin” and “risk of not coming back” fear that underlies his investing strategy

Quant Guru Ray Dalio Talks Up Risk Of Ruin At Bill Ackman's Stock Picking Summit

Ray Dalio -  articulating a “risk of ruin” and “risk of not coming back” fear that underlies his investing strategy



Highlights from the Harbor Investment Conference.
Around five P.M. in a subterranean auditorium in Midtown Manhattan on Thursday evening there was perhaps the most enthralling three-minute back and forth discussion on discount rates in Wall Street’s history.
Pershing Square Capital Management’s Bill Ackman was in the midst of what he expected to be an interview of Bridgewater Associates Ray Dalio to cap off his highly-followed annual charity event, the Boys & Girls Harbor Investment Conference. Instead, over the course of nearly an hour, the two top performing hedge fund billionaires debated investing philosophies that couldn’t put them further apart in both style and theory.
The face-off between investors who collectively manage nearly $200 billion had everything.

For a charity event, it had red meat for the gossip pages that feed on Bill Ackman’s overbearing way with words to create controversy. It had  Dalio, who’s been in the business since 1975 articulating a “risk of ruin” and “risk of not coming back” fear that underlies his investing strategy to Ackman, who is in the midst of his eleventh year at the helm of Pershing Square after his first fund, Gotham Partners, collapsed.

The session also was a dizzying tug-of-war between Ackman’s activist investing mantra, which relies on Graham and Dodd-like security analysis and a touch of imagination to find unique value in poorly performing companies, and Dalio’s obsession with quantifying relative values across all asset classes and investment products for attractive spreads.

Ackman and Dalio, in many ways, lead the pack in the two styles that are working for the hedge fund industry: shareholder activism and quantitative trading. The conversation gave insight into the strategies and personalities that succeed versus those that fail, and investors might have found a new reason to invest in a home-run hitter like Ackman, or added appeal to Dalio’s obsession with the interplay of risk and return across markets.

“I am short and long practically everything. I don’t have any bias,” Dalio said of his portfolio. He noted the process of writing down decision making criteria and applying it to securities around the globe generates “vast springs of data” from which Bridgewater identifies attractive spreads and uncorrelated bets.
Ackman, by contrast, expressed a strategy that relies on his touch and creativity. “I am much more qualitative… I’m not confident I could look at a data stream and draw a conclusion,” Ackman said. His portfolio is usually concentrated among eight or nine investments, with a successful year only requiring one or two good new ideas.

But the talk also had a surprising relevance to the ordinary investor: How should one prepare for the prospect of rising U.S. interest rates?

While the longer-toothed Dalio is extremely fearful, Ackman is undeterred and poised to make Wall Street’s next bold call in the coming months.

When asked about the current market environment, Dalio said he is worried about so-called tail risks, unexpectedly severe market moves like the 2008 crisis, as the Federal Reserve contemplates a rise in interest rates. With investors chasing ever scanter yields and driving up the price of perceived safe assets like U.S. stocks, bonds and real estate, Dalio said “what I think going forward over the next few years is that the risk of a downside is material.”
Furthermore, Dalio said he believes expectations for corporate profits are running far too high and not accounting for the drag of rising rates. He characterized profit margin expectations as ”unsustainable” and argued asset prices are at risk over the next three years. “I always think about what is the biggest tail risk,” Dalio said before stating Bridgewater is long bond exposure.
Ackman, by contrast, expressed a more benign outlook. Money remains cheap, corporate profits are rising, and the U.S. economy continues to heal from the scars of the Great Recession. He also said that an increasing presence of so-called activist investors is bringing a new accountability to corporate bottom lines, pushing profits relentlessly higher. “I would argue is that margins can go up meaningfully because of the intervention of owners. That is a sort of new factor in the market,” Ackman said.
In an exceedingly academic debate, which kept the attention of a rapt audience even as it stalled for a spell as both Ackman and Dalio struggled to agree on terms like discount rates and risk free rates, their differing perspectives have tremendous relevance.
If Dalio is correct in his view of rising rates and declining profit margins, one of those “risk of ruin” or “risk of not coming back” nightmares he fears, it will have a dramatic negative impact on the work that activists like Ackman undertake.
Currently, the activist model is to bring a private-equity like aggressiveness to corporate balance sheets, freeing up cash that is returned to its rightful owner — the public stockholder. They are also working feverishly to undo conglomerate corporate structures at the top of the S&P 500 Index that were created to insulate businesses from changing market conditions and provide the flexibility to internally fund expansion, research and development and capital expenditure.

Dalio’s forecast of declining profit margins would cast a pall over the standalone, leveraged businesses that activist investors have created in recent years. But he could also be wrong.
Perhaps activism will act like some a new efficiency for U.S. corporations, creating benefits similar to productivity breakthroughs like the assembly line or the computer chip, Dalio acknowledged, pushing stocks higher no matter what Fed chair Janet Yellen does. “You have done fantastically well and you are a very brilliant man. As we think about playing our game, there are many ways to skin a cat,” Dalio said.
In the end, Ackman was the interviewer. But subtly Dalio may have turned the tables and put Pershing’s iconoclastic head in the psychiatrists chair at his own charity event.
Dalio, who acknowledged Bridgewater’s reliance on artificial intelligence and said that 99% of the time his traders don’t interfere with the buy and sell orders that are spit out of their computer models, argued that for all of Ackman’s apparent qualitative brilliance he should adopt a more systematic investing approach.
Part of Bridgewater’s Wall Street lore is a 123-page document of principles that Dalio created in 2011, and he said on Thursday the process of simply writing down rules and testing them over time has been a major piece of his hedge fund’s success. Nothing Ackman articulated in his qualitative strategy, whether it is picking a new CEO or board director, or finding an undiscovered asset hidden inside a conglomerate, Dalio said, couldn’t be modeled.

“If you were to take your criteria and you could just write them down… I could probably show you that even the things that you thought were immeasurable are measurable,” he said.

In a conversation that whipsawed between Dalio’s “risk of ruin” and Ackman’s spark for the possible, a fear of market tumult and an expectation that corporations can yet do more to unlock value for their shareholders, both legendary hedge fund managers were tested.

Dalio was out of place at a stock-picking conference, but brought to Midtown by Ackman’s charitable work. He wound up providing a compelling twist. “This is one of the more interesting conversations I have ever had,” Ackman said

Can central banks go bust?

Can central banks go bust?

Gold and Deflation

While gold is often seen as a hedge against inflation, gold could still rise despite fears of deflation around the world.

That is because governments often respond to deflationary forces in the global economy by weakening their currency for competitive reasons.

Currency weakness or debasement has typically been a good thing for gold.

William Rhind, CEO of World Gold Trust Services, told CNBC 
World Gold Trust Services is the sponsor of the largest gold exchange traded fund, the SPDR Gold Trust.

Bracing for Stagnation by Raghuram Rajan

Bracing for Stagnation by Raghuram Rajan - Project Syndicate

Facts vs. Fears in 2015 Gold Forecasts

Facts vs. Fears in 2015 Gold Forecasts

The next Crisis will be THE CRISIS.... the bond bubble is THE bubble

The next Crisis will be THE CRISIS.

You might have noticed that each successive crisis over the last 15 years has been both larger and involved more senior asset classes.

1.     The 2000 Tech Bubble involved stocks.

2.     The 2007 Housing Bubble involved housing.

3.     This crisis involves Bond… as in ALL bonds.

To give some perspective regarding size here consider that the credit default swap market based on housing that nearly took down the system in 2008 was $45 trillion at its peak in 2007.

In contrast, the global bond market is well over $100 trillion today.

And it’s growing rapidly.

Indeed, US corporates are on track to issue over $1.5 TRILLION in debt this year alone. Not only will this be an all time record… it will be the third consecutive all-time record for corporate debt issuance.

Part of the reason that the bond market has become so enormous is because few entities, particularly sovereign nations, have the cash handy to pay back debt holders when their debts come due.

As a result, many of them are choosing to roll over old debts OR pay them back via the issuance of new debt. The US did precisely this in the last few months issuing over $1 trillion to cover for the payment of old debt that was coming due.

So the bond bubble is not only over $100 trillion in size…it’s actually GROWING on a month-to-month basis.

Reading all of this is no doubt concerning. However, the situation becomes much worse when you consider that over 81% of ALL derivatives trades are based on interest rates (BONDS).

Globally, the interest rates derivative market is an unbelievable $555 TRILLION in size.
These are trades based on interest rates that in turn are based on the bond bubble. Thus, the significance of the bond bubble simply CANNOT be overstated. Banks and other financial entities have literally bet an amount equal to over SIX TIMES GLOBAL GDP on interest rates.

This is why Central Banks are absolutely terrified the moment a sovereign nation comes close to defaulting. Consider that Spain’s bond market is just $1 trillion. But the derivatives trade market based on Spain’s bonds is likely well north of 10X this amount.

With this kind of leverage, even if 4% of the trades are at risk and 10% of those trades go bust, you’ve wiped out the equity at more than a handful of the large EU banks.

In simple terms, the bond bubble is THE bubble. And when it bursts, we will experience THE crisis. In comparison, 2008 will look like a joke.