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uh so uh

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as sasha mentioned uh it's been uh

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25 years that uh

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that we've been friends and professional

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colleagues and so

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uh you know i look in the room and i see

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these old friends i'm

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so happy to be here i um

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he also mentioned uh that

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uh i'm very systematic meaning

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i got in a habit of every time i would

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make a decision

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to write down the criteria i would use

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to make that decision

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we're getting a little echo i think uh

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and it's not a big room so i don't even

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know if i need a mic

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but um so every time i would make a

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decision i would write down the criteria

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i used for making those decisions

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because cause effect everything happens

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because of a cause

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and so and the same things happen over

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and over again

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and so by taking the time to write them

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down

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and then seeing how those criteria would

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have worked over a period of time i

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could get perspective

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and so i wrote down those principles and

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as hashem mentioned

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i i wrote a book called principles

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which has to do which just was a

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collection of the life and work

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principles so the culture that we have

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is very very important it was really the

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most important thing in terms of

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whatever success we've had

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at the same time i wrote down the

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economic and investment principles

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so what i thought i would do today is to

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share with you

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what i think of my most important

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economic and investment principles and

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then

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look at the world through the

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perspective of those principles

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in other words rather than just tell you

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what i think i want to tell you how it

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works

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and then we can apply that mechanics you

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can decide does it work that way

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or not so are these principles

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valuable because if you know the

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principles

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it's like it's giving it like a giving

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man the fish

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ability to fish rather than to just give

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the fish i can tell you what i think

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but if these principles are right then

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you could apply them yourself

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to whatever time or circumstances exist

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so um i broke it down in terms of

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economic principles

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and investment principles because

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the markets follow the economy

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so in order to understand economics and

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all the markets you have to

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understand in order to understand the

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market you have to understand the

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economy

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so i want to describe how

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i think the economy works i think it's

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like a ver

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it's a perpetual motion machine and

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there are four big forces

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three important equilibriums and two

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levers if you get this down i

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think this basically everything through

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my eyes

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is along those lines um over a period of

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time

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we raise our living standards because we

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learn how to do things better

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we become more efficient that's called

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productivity

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output and that

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is something that evolves over a period

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of time

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that is because it evolves it is not

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something that

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is a big thing that's we see as a big

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thing but it's the most important thing

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over a period of time

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the big things that we see and feel

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every day

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are debt cycles now there's a short-term

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debt cycle and there's a long-term debt

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cycle

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when i say a short-term debt cycle what

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i mean is

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what we think of is normally the

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business cycle

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right you have a recession you have a

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weakness in the economy

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when the rate of economic activity is

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too low

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then central banks produce credit

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and credit is buying power so

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you produce that credit it makes

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purchases of goods services and

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financial assets happen

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and so the economy picks up that

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cycle usually lasts seven to ten years

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as the economy picks up

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the demand rises relative to the

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capacity as you get

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later in the cycle the central bank puts

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the brakes on it

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they raise interest rates tighten

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monetary policy

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as the uh there's less slack in the

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economy the unemployment rate is

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low they put the brakes on it interest

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rates go up

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tightness and monetary policy then you

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have a recession

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slow up and that's the cycle right and

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because

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credit is buying power

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by providing it it also produces debt

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and debt means the obligation to pay

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back

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and so by its very nature it's cyclical

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first comes the stimulation then comes

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the paying back

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which means when you when you produce

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credit

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you can spend more than you earn and

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when you pay back

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you have to spend less than you earn and

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that's the nature of the cycle and i

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think we're all acquainted with that

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type of cycle

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and with that cycle goes market cycles

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which we'll talk about

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that's what i mean by the short-term

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debt cycle

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there's also a long-term debt cycle

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which is the

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accumulation of all of those that those

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shorter term debt cycles

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because everybody wants things to go up

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they want their asset prices the markets

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to go up

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they want employment to go up they want

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everything to go up

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and for that reason they

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central banks over a period of time

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stimulate

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and they do that by normally

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lowering interest rates until interest

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rates hit zero

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and then when interest rates hit zero

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they can't do that anymore

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and then we come to the need to

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print money and buy financial assets

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which we call quantitative easing

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and when they can't do that anymore or

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there are limitations

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we come to the end of the long-term debt

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cycle

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so there's a short-term debt cycle a

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long-term debt cycle and productivity

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now related to all that is

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politics internal politics and external

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politics

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in that normal cycle they're related

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as we're going to see in terms of that

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dynamic

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the period that we're going through 2008

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and 9

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there was a debt cycle and interest

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rates hit zero

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and that's very similar to 1929 to 32

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there was a debt crisis and interest

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rates hit zero

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and in both of those cases there was the

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printing of money and the buying of

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financial assets

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which caused those financial asset

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prices to go

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up and more liquidity in the economy

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and that particularly benefited

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those who had financial assets and it

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contributed

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to the wealth gap and the

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income gap as did technology

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and as a result of that in the 1930s as

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also happened now politics entered into

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the picture

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so as we're seeing in the world right

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now that issue

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of wealth gap is causing

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populism populism of the left and

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populism of the right

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and that's having an effect on the

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markets and having an effect on the

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economy

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so we are also seeing a situation

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very much like the 30s in which

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uh we're seeing a rising power

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uh challenging an existing power

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that's a geopolitical cycle

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when a rising power in the form of china

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a challenging and existing power in the

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form of the united states

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and if we look at histories and cycles

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of those periods

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there's a cycle of

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conflict and peace normally

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peace happens after a war because some

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dominant

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country wins the war nobody wants to

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fight

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the dominant power and you have an

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extended period of

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peace until there's then that particular

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conflict

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doesn't i'm not saying we're going to

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have a military conflict or anything

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like that

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although you know that

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always exists as a possibility so these

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cycles these things have happened um

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over and over again

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so politics enters into can affect

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the the cycles for example um

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the the shift in the uh united states

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to be able to create tax cut changes

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help the corporate tax picture

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and cause stock prices to rise okay

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those are the cycles

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then when i look at what's happening i

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compare it to three equilibriums

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and what are these three equilibriums

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first that debt growth has to be in line

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with the income growth that's required

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to service the debt

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if debt growth is faster than the income

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growth that's going to service the debt

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we're going to have an adjustment and

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so i'm always doing the pro forma what

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is the ability to service that debt

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so that's what i'm watching second

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equilibrium

257
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is that the rate of economic activity

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economic capacity utilization is neither

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too high nor too low what that means

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is if you have it pressing up too much

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over an overheating economy

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that's going to be the tightening of

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monetary policy and a correction

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and if you have it too low so that the

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economy is depressed

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and there's a lot of slack that's going

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to cause an adjustment to bring it up

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and so i'm always watching where are we

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relative to that because that's a key

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driver of the of these cycles and the

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third

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is that the projected returns of

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equities

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are above the projected returns of bonds

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which are above the projected returns of

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cash

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by appropriate risk premiums in other

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words the capital markets

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00:10:52,720 --> 00:10:58,959
produce the circulation of buying power

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in the form of this credit coming around

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and this relationship of the

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cash to bond yields to stock yields and

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asset classes

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determines how money flows through the

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economy

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00:11:10,078 --> 00:11:14,719
and a normal condition is for reasons i

287
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won't digress into

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to have cash have a lower return than

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00:11:17,919 --> 00:11:20,639
bonds that have to have a lower return

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00:11:19,360 --> 00:11:22,720
from equities

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00:11:20,639 --> 00:11:24,319
having to do with how the system works

292
00:11:22,720 --> 00:11:26,720
basically central banks put cash on

293
00:11:24,320 --> 00:11:29,040
deposit and people with better ideas

294
00:11:26,720 --> 00:11:30,639
have to make a profit to that they use

295
00:11:29,039 --> 00:11:33,519
that money to create

296
00:11:30,639 --> 00:11:34,240
these other uh the level of economic

297
00:11:33,519 --> 00:11:36,078
activity and

298
00:11:34,240 --> 00:11:37,919
have to have higher returns and when

299
00:11:36,078 --> 00:11:38,479
that's not the case the way they tighten

300
00:11:37,919 --> 00:11:42,479
it

301
00:11:38,480 --> 00:11:46,159
is that there are two levers so now

302
00:11:42,480 --> 00:11:49,839
there are two levers monetary policy

303
00:11:46,159 --> 00:11:50,319
and fiscal policy right monetary policy

304
00:11:49,839 --> 00:11:52,320
then

305
00:11:50,320 --> 00:11:53,600
is the means by which the brakes and the

306
00:11:52,320 --> 00:11:56,240
gas are put on

307
00:11:53,600 --> 00:11:57,680
and the brakes and the gas being put on

308
00:11:56,240 --> 00:12:00,720
become reflected

309
00:11:57,679 --> 00:12:01,120
in each of these other items so let's

310
00:12:00,720 --> 00:12:03,278
say

311
00:12:01,120 --> 00:12:06,000
if debt growth is too high relative to

312
00:12:03,278 --> 00:12:10,159
income growth and capacity utilization

313
00:12:06,000 --> 00:12:13,278
is high and strat stretched

314
00:12:10,159 --> 00:12:15,759
monetary policy will be tightened

315
00:12:13,278 --> 00:12:18,399
and that tightening of monetary policy

316
00:12:15,759 --> 00:12:21,120
will change the projected return

317
00:12:18,399 --> 00:12:23,120
of ec of cash relative to bonds and of

318
00:12:21,120 --> 00:12:26,240
equities those risk premiums

319
00:12:23,120 --> 00:12:29,360
and that will slow the economy down

320
00:12:26,240 --> 00:12:30,399
and that will drive those cycles and

321
00:12:29,360 --> 00:12:32,959
that's how

322
00:12:30,399 --> 00:12:35,519
the economy is operating in these

323
00:12:32,958 --> 00:12:38,958
perpetual motion kind of way

324
00:12:35,519 --> 00:12:41,919
and if you you could almost picture i

325
00:12:38,958 --> 00:12:43,199
literally can picture where you are in

326
00:12:41,919 --> 00:12:45,120
those cycles

327
00:12:43,200 --> 00:12:47,278
and what is happening and you can

328
00:12:45,120 --> 00:12:49,919
anticipate what is going to happen

329
00:12:47,278 --> 00:12:51,600
next from that because it's that petrol

330
00:12:49,919 --> 00:12:55,679
perpetual motion machine

331
00:12:51,600 --> 00:12:58,000
so that's my template in a nutshell

332
00:12:55,679 --> 00:13:00,319
and if you keep thinking like where are

333
00:12:58,000 --> 00:13:03,200
we now

334
00:13:00,320 --> 00:13:04,240
then you um you know you can kind of

335
00:13:03,200 --> 00:13:06,000
think where we are

336
00:13:04,240 --> 00:13:08,799
okay so i'm just going to show you some

337
00:13:06,000 --> 00:13:11,919
charts to help to convey the picture

338
00:13:08,799 --> 00:13:15,679
this is uh real gdp

339
00:13:11,919 --> 00:13:19,120
going back to 1900. so this is

340
00:13:15,679 --> 00:13:22,399
that line is productivity right and

341
00:13:19,120 --> 00:13:24,159
that's an a big inevitable force

342
00:13:22,399 --> 00:13:26,240
that happens over a period of time even

343
00:13:24,159 --> 00:13:29,278
the biggest economic

344
00:13:26,240 --> 00:13:32,399
turbulence you know looks like a bump

345
00:13:29,278 --> 00:13:33,360
in that that cycle right productivity is

346
00:13:32,399 --> 00:13:35,759
a big force

347
00:13:33,360 --> 00:13:38,079
betting on productivity is a big force

348
00:13:35,759 --> 00:13:40,559
but what happens is that

349
00:13:38,078 --> 00:13:41,519
cycle as you get later in the long-term

350
00:13:40,559 --> 00:13:44,399
debt cycle

351
00:13:41,519 --> 00:13:46,399
that productivity begins to slow because

352
00:13:44,399 --> 00:13:48,078
there needs to be investment

353
00:13:46,399 --> 00:13:50,240
and there needs to be other things and

354
00:13:48,078 --> 00:13:52,879
when you activity

355
00:13:50,240 --> 00:13:55,079
um when there's prosperity and so on you

356
00:13:52,879 --> 00:13:58,078
get more productivity it's a self

357
00:13:55,078 --> 00:13:59,919
reinforcing cycle so these

358
00:13:58,078 --> 00:14:02,159
charts are just meant to show

359
00:13:59,919 --> 00:14:05,278
productivity and how it's changing

360
00:14:02,159 --> 00:14:06,159
over a period of time in the developed

361
00:14:05,278 --> 00:14:08,320
countries and then

362
00:14:06,159 --> 00:14:09,198
in china so just to give you a quick

363
00:14:08,320 --> 00:14:11,440
picture here

364
00:14:09,198 --> 00:14:12,719
you could see it in varying degrees bend

365
00:14:11,440 --> 00:14:16,079
over as they are

366
00:14:12,720 --> 00:14:18,240
later into their longer term debt cycle

367
00:14:16,078 --> 00:14:19,759
this united states over the last 10

368
00:14:18,240 --> 00:14:22,240
years versus

369
00:14:19,759 --> 00:14:24,078
since 1980 and so in each one of those

370
00:14:22,240 --> 00:14:27,120
cases you could see it declining

371
00:14:24,078 --> 00:14:28,239
japan which is large later in that debt

372
00:14:27,120 --> 00:14:29,839
cycle and so on

373
00:14:28,240 --> 00:14:31,519
basically hardly any growth in

374
00:14:29,839 --> 00:14:33,680
productivity so so

375
00:14:31,519 --> 00:14:35,198
okay that's what productivity looks like

376
00:14:33,679 --> 00:14:37,120
now where are we

377
00:14:35,198 --> 00:14:38,319
in the short-term debt cycle of the

378
00:14:37,120 --> 00:14:40,959
business cycle

379
00:14:38,320 --> 00:14:42,959
this is what the cycle looks like that i

380
00:14:40,958 --> 00:14:47,039
was describing

381
00:14:42,958 --> 00:14:50,078
in other words um what happens from the

382
00:14:47,039 --> 00:14:53,759
capital markets perspective as as

383
00:14:50,078 --> 00:14:54,799
you um begin to go to higher levels of

384
00:14:53,759 --> 00:14:57,278
operating rates

385
00:14:54,799 --> 00:14:59,039
lower levels of unemployment central

386
00:14:57,278 --> 00:15:02,240
banks begin to tighten

387
00:14:59,039 --> 00:15:04,559
liquidity starts to tighten then risk

388
00:15:02,240 --> 00:15:07,039
premiums start to rise okay in this

389
00:15:04,559 --> 00:15:09,439
cycle we're

390
00:15:07,039 --> 00:15:11,439
nine years into the cycle unemployment

391
00:15:09,440 --> 00:15:14,560
rates are comparatively low

392
00:15:11,440 --> 00:15:15,360
and there's less slack so you know no

393
00:15:14,559 --> 00:15:17,838
surprise

394
00:15:15,360 --> 00:15:20,399
central banks tighten monetary policy

395
00:15:17,839 --> 00:15:23,199
and the way they tighten monetary policy

396
00:15:20,399 --> 00:15:25,039
is by either raising interest rates or

397
00:15:23,198 --> 00:15:28,000
lowering the purchases

398
00:15:25,039 --> 00:15:29,759
of the financial assets that they buy by

399
00:15:28,000 --> 00:15:32,958
expanding the balance sheet

400
00:15:29,759 --> 00:15:35,519
so that's where we are in that cycle now

401
00:15:32,958 --> 00:15:36,958
if you look at how markets behave in

402
00:15:35,519 --> 00:15:39,600
that part of the cycle

403
00:15:36,958 --> 00:15:40,000
this is breaking the cycles into three

404
00:15:39,600 --> 00:15:42,320
parts

405
00:15:40,000 --> 00:15:44,159
the early phases of the cycle the mid

406
00:15:42,320 --> 00:15:45,278
phase of the cycle and the late phase of

407
00:15:44,159 --> 00:15:49,360
the cycle

408
00:15:45,278 --> 00:15:51,039
and this is across the world

409
00:15:49,360 --> 00:15:52,959
different countries this is the united

410
00:15:51,039 --> 00:15:56,078
states this is europe to show how the

411
00:15:52,958 --> 00:15:59,119
historical so we're in a period of time

412
00:15:56,078 --> 00:16:00,399
this period of time which is relatively

413
00:15:59,120 --> 00:16:03,519
late in the cycle

414
00:16:00,399 --> 00:16:07,039
is also associated with a period of time

415
00:16:03,519 --> 00:16:10,480
where there is less attractive returns

416
00:16:07,039 --> 00:16:13,679
greater vulnerability so that's largely

417
00:16:10,480 --> 00:16:13,680
where we are in the cycle

418
00:16:14,240 --> 00:16:21,039
interest rates have

419
00:16:17,278 --> 00:16:22,000
hit their lows in some cases can't go

420
00:16:21,039 --> 00:16:24,719
lower

421
00:16:22,000 --> 00:16:27,679
and then we're dealing with the issue of

422
00:16:24,720 --> 00:16:30,879
quantitative easing

423
00:16:27,679 --> 00:16:32,638
so taking this back to uh this goes back

424
00:16:30,879 --> 00:16:35,600
to 1900

425
00:16:32,639 --> 00:16:36,159
this shows debt in debt to gdp ratio in

426
00:16:35,600 --> 00:16:38,800
the united

427
00:16:36,159 --> 00:16:40,078
states and it just shows how the cycle

428
00:16:38,799 --> 00:16:42,000
that we're going through now

429
00:16:40,078 --> 00:16:43,359
is very similar to the cycle that we

430
00:16:42,000 --> 00:16:45,440
went into the 30s

431
00:16:43,360 --> 00:16:46,399
in other words because of that debt

432
00:16:45,440 --> 00:16:49,279
crisis

433
00:16:46,399 --> 00:16:51,198
and interest rates hitting zero you had

434
00:16:49,278 --> 00:16:53,439
the printing of money this shows the

435
00:16:51,198 --> 00:16:55,198
central bank's balance sheet the

436
00:16:53,440 --> 00:16:56,480
monetary base the acceleration of

437
00:16:55,198 --> 00:16:59,198
printing and money

438
00:16:56,480 --> 00:17:00,560
same thing happened in the 2008

439
00:16:59,198 --> 00:17:04,399
financial crisis

440
00:17:00,559 --> 00:17:05,038
you could see that what happens is you

441
00:17:04,400 --> 00:17:07,679
have

442
00:17:05,038 --> 00:17:09,919
the debt crisis you have the hitting of

443
00:17:07,679 --> 00:17:12,559
zero in interest rates

444
00:17:09,919 --> 00:17:13,199
they're stuck so they have to print the

445
00:17:12,558 --> 00:17:16,160
money

446
00:17:13,199 --> 00:17:17,038
and then we have the reaction very

447
00:17:16,160 --> 00:17:21,558
similar to

448
00:17:17,038 --> 00:17:25,359
1932 to 1937 in the economy picks up

449
00:17:21,558 --> 00:17:26,720
1937 they start to tighten monetary

450
00:17:25,359 --> 00:17:28,159
policy because they're worried that the

451
00:17:26,720 --> 00:17:30,400
economy is overheating

452
00:17:28,160 --> 00:17:31,360
and inflation's going to rise and they

453
00:17:30,400 --> 00:17:33,038
cause

454
00:17:31,359 --> 00:17:34,558
a recession that's the first time they

455
00:17:33,038 --> 00:17:36,720
use the word recession

456
00:17:34,558 --> 00:17:38,000
recession it was like re-depression they

457
00:17:36,720 --> 00:17:41,919
used the term recession

458
00:17:38,000 --> 00:17:45,519
and that was the uh the 1938

459
00:17:41,919 --> 00:17:48,559
period now um i talked about debt

460
00:17:45,519 --> 00:17:49,359
but there are also unfunded liabilities

461
00:17:48,558 --> 00:17:51,519
that we don't call

462
00:17:49,359 --> 00:17:53,119
debt which would be pension and health

463
00:17:51,519 --> 00:17:53,839
care liabilities and i just wanted to

464
00:17:53,119 --> 00:17:56,798
give you

465
00:17:53,839 --> 00:17:58,959
a picture of what that's like that has

466
00:17:56,798 --> 00:18:02,400
there's a lot of liabilities

467
00:17:58,960 --> 00:18:05,679
out there um promises that have to

468
00:18:02,400 --> 00:18:08,960
be kept and so the liabilities are

469
00:18:05,679 --> 00:18:11,360
very large um i want you to focus then

470
00:18:08,960 --> 00:18:12,960
on these the bottom charts before i put

471
00:18:11,359 --> 00:18:16,558
the top charts in because i

472
00:18:12,960 --> 00:18:18,960
i want to convey um as it relates to

473
00:18:16,558 --> 00:18:22,319
both markets and the economy

474
00:18:18,960 --> 00:18:24,640
the important um the the really

475
00:18:22,319 --> 00:18:25,918
realizing that we've been really in a

476
00:18:24,640 --> 00:18:31,759
golden age

477
00:18:25,919 --> 00:18:31,759
of capitalism in the following sense

478
00:18:32,000 --> 00:18:36,240
this chart shows how profit margins have

479
00:18:35,200 --> 00:18:38,480
increased

480
00:18:36,240 --> 00:18:39,519
in other words uh they've more than

481
00:18:38,480 --> 00:18:43,038
doubled

482
00:18:39,519 --> 00:18:45,679
since 2000. means if you didn't have an

483
00:18:43,038 --> 00:18:47,440
expansion in profit margins you wouldn't

484
00:18:45,679 --> 00:18:48,559
have you'd have the stock market 40

485
00:18:47,440 --> 00:18:51,200
percent lower

486
00:18:48,558 --> 00:18:52,960
you had an expansion in profit margins

487
00:18:51,200 --> 00:18:55,440
and at the same time you had

488
00:18:52,960 --> 00:18:56,400
a decrease in the form of employee

489
00:18:55,440 --> 00:18:59,519
compensation

490
00:18:56,400 --> 00:19:02,480
and profit margins be largely because

491
00:18:59,519 --> 00:19:04,240
of a number of factors but technology

492
00:19:02,480 --> 00:19:06,480
has been replacing people

493
00:19:04,240 --> 00:19:07,440
and so it's made it more efficient so

494
00:19:06,480 --> 00:19:10,679
that that was

495
00:19:07,440 --> 00:19:14,240
an element uh also

496
00:19:10,679 --> 00:19:15,759
globalization has helped um

497
00:19:14,240 --> 00:19:17,359
just to show you a couple of charts

498
00:19:15,759 --> 00:19:22,240
pertaining to this this

499
00:19:17,359 --> 00:19:25,599
is um number the globalization pressure

500
00:19:22,240 --> 00:19:28,000
movement and this is um the

501
00:19:25,599 --> 00:19:28,959
capital movement and these scatter

502
00:19:28,000 --> 00:19:32,480
diagrams

503
00:19:28,960 --> 00:19:32,480
show um

504
00:19:32,798 --> 00:19:36,160
if you go the globalization companies

505
00:19:35,200 --> 00:19:38,798
that have

506
00:19:36,160 --> 00:19:40,720
gone global on the margin have improved

507
00:19:38,798 --> 00:19:44,000
their profit margins more

508
00:19:40,720 --> 00:19:46,240
and those that are more concentrated

509
00:19:44,000 --> 00:19:48,160
have improved their profit margins more

510
00:19:46,240 --> 00:19:50,558
and those with

511
00:19:48,160 --> 00:19:52,798
who have reduced union membership have

512
00:19:50,558 --> 00:19:55,759
produced their profit margins more

513
00:19:52,798 --> 00:19:57,200
and so as a result of that this has

514
00:19:55,759 --> 00:20:02,558
contributed to

515
00:19:57,200 --> 00:20:05,038
the growth of um the wealth gap

516
00:20:02,558 --> 00:20:06,399
and the prof profit gap it's been great

517
00:20:05,038 --> 00:20:09,279
for companies

518
00:20:06,400 --> 00:20:11,280
but it has not been good for a certain

519
00:20:09,279 --> 00:20:12,558
percentage of the population if you look

520
00:20:11,279 --> 00:20:16,558
at the conditions of

521
00:20:12,558 --> 00:20:19,519
the bottom 60 percent of the population

522
00:20:16,558 --> 00:20:20,960
bottom 60 means the majority the

523
00:20:19,519 --> 00:20:25,038
conditions have

524
00:20:20,960 --> 00:20:27,679
uh have been bad there has not been

525
00:20:25,038 --> 00:20:30,158
over the since 1980 any income growth

526
00:20:27,679 --> 00:20:33,759
real income growth in the united states

527
00:20:30,159 --> 00:20:37,600
um in a fed survey the

528
00:20:33,759 --> 00:20:40,960
40 of all americans could not raise 400

529
00:20:37,599 --> 00:20:45,038
in the event of an emergency

530
00:20:40,960 --> 00:20:49,120
so there is a gap and with that gap

531
00:20:45,038 --> 00:20:51,519
um has come this is the wealth gap that

532
00:20:49,119 --> 00:20:53,439
the top um one-tenth of one percent of

533
00:20:51,519 --> 00:20:57,038
the population's net worth

534
00:20:53,440 --> 00:20:58,558
is almost the same as the bottom 90

535
00:20:57,038 --> 00:21:01,679
percent combined

536
00:20:58,558 --> 00:21:04,319
and as a result we have populism

537
00:21:01,679 --> 00:21:04,960
populism of the left and populism of the

538
00:21:04,319 --> 00:21:08,158
right

539
00:21:04,960 --> 00:21:09,919
that was a phenomenon that developed

540
00:21:08,159 --> 00:21:13,520
countries didn't used to have

541
00:21:09,919 --> 00:21:13,520
and so now it is a

542
00:21:13,759 --> 00:21:18,400
not only political phenomenon it's an

543
00:21:16,079 --> 00:21:20,319
economic and market phenomenon

544
00:21:18,400 --> 00:21:21,840
because as we come to go into the

545
00:21:20,319 --> 00:21:23,759
political elections

546
00:21:21,839 --> 00:21:25,519
in the number countries in europe and in

547
00:21:23,759 --> 00:21:29,599
the united states

548
00:21:25,519 --> 00:21:32,480
it will be really um a

549
00:21:29,599 --> 00:21:33,359
a conflict over capitalism versus

550
00:21:32,480 --> 00:21:36,079
socialism

551
00:21:33,359 --> 00:21:38,240
or the left and the right and it's going

552
00:21:36,079 --> 00:21:40,798
to become

553
00:21:38,240 --> 00:21:41,679
rather extreme in both of those cases

554
00:21:40,798 --> 00:21:46,000
and

555
00:21:41,679 --> 00:21:49,120
that has an implication just as the

556
00:21:46,000 --> 00:21:52,159
these profit margins improved

557
00:21:49,119 --> 00:21:54,158
and then i and then tax rates

558
00:21:52,159 --> 00:21:55,919
that's the effective corporate tax rate

559
00:21:54,159 --> 00:21:56,640
and how the effective corporate tax rate

560
00:21:55,919 --> 00:21:58,960
isn't

561
00:21:56,640 --> 00:22:01,280
that's been fantastic so imagine you

562
00:21:58,960 --> 00:22:04,319
have profit margins increasing

563
00:22:01,279 --> 00:22:07,279
you have the tax rate going down

564
00:22:04,319 --> 00:22:08,399
you have cheap money cheap money has

565
00:22:07,279 --> 00:22:12,000
been used to

566
00:22:08,400 --> 00:22:14,320
borrow to buy back stock or make mergers

567
00:22:12,000 --> 00:22:15,440
that's also supportive to stock prices

568
00:22:14,319 --> 00:22:17,918
and so on

569
00:22:15,440 --> 00:22:19,440
many of those things will not continue

570
00:22:17,919 --> 00:22:21,440
we think profit margins will go

571
00:22:19,440 --> 00:22:23,200
down i think you're at the best of the

572
00:22:21,440 --> 00:22:26,798
corporate tax rates

573
00:22:23,200 --> 00:22:30,400
and in terms of the issue in terms of

574
00:22:26,798 --> 00:22:31,759
the wealth gap so we're entering a newer

575
00:22:30,400 --> 00:22:34,320
environment

576
00:22:31,759 --> 00:22:36,158
including an environment which is not

577
00:22:34,319 --> 00:22:38,240
going to be as conducive to the

578
00:22:36,159 --> 00:22:39,200
purchasing of financial assets by

579
00:22:38,240 --> 00:22:42,000
central banks

580
00:22:39,200 --> 00:22:42,798
and all of that we're going from uh

581
00:22:42,000 --> 00:22:46,720
headwind

582
00:22:42,798 --> 00:22:49,279
from tailwinds to headwinds

583
00:22:46,720 --> 00:22:50,079
and to give you a flavor of what this

584
00:22:49,279 --> 00:22:52,399
political

585
00:22:50,079 --> 00:22:54,399
uh situation is like and and the

586
00:22:52,400 --> 00:22:54,640
polarity and the entrenchedness these

587
00:22:54,400 --> 00:22:57,038
are

588
00:22:54,640 --> 00:22:58,320
two charts the first they go back to

589
00:22:57,038 --> 00:23:00,879
1900.

590
00:22:58,319 --> 00:23:01,678
the first chart which is the red chart

591
00:23:00,880 --> 00:23:04,640
shows

592
00:23:01,679 --> 00:23:05,200
um how conservative the republicans are

593
00:23:04,640 --> 00:23:07,759
survey

594
00:23:05,200 --> 00:23:09,679
surveyed economically conservative so

595
00:23:07,759 --> 00:23:11,038
the they're more conservative than they

596
00:23:09,679 --> 00:23:14,320
have ever been

597
00:23:11,038 --> 00:23:14,640
the democrats it shows how liberal they

598
00:23:14,319 --> 00:23:16,960
are

599
00:23:14,640 --> 00:23:19,038
in terms of policies and they're more

600
00:23:16,960 --> 00:23:22,640
liberal than they have ever been

601
00:23:19,038 --> 00:23:25,919
so the two have not had greater polarity

602
00:23:22,640 --> 00:23:29,200
than we have today in politics

603
00:23:25,919 --> 00:23:31,600
and this shows how much is

604
00:23:29,200 --> 00:23:33,360
the votes cast along party lines in

605
00:23:31,599 --> 00:23:35,439
other words republicans sticking with

606
00:23:33,359 --> 00:23:38,879
republicans and democrats sticking with

607
00:23:35,440 --> 00:23:41,120
democrats and so it shows the entrenched

608
00:23:38,880 --> 00:23:42,799
conflict that we're having this is in

609
00:23:41,119 --> 00:23:44,798
the united states

610
00:23:42,798 --> 00:23:47,519
this is not just a united states

611
00:23:44,798 --> 00:23:50,480
phenomenon it is a european phenomenon

612
00:23:47,519 --> 00:23:51,278
as as much we're going to be going into

613
00:23:50,480 --> 00:23:55,200
elections

614
00:23:51,278 --> 00:23:57,119
in uh europe and then

615
00:23:55,200 --> 00:23:58,480
for the european elections and then

616
00:23:57,119 --> 00:24:00,719
we're also going to have

617
00:23:58,480 --> 00:24:02,240
changes in politics and there's going to

618
00:24:00,720 --> 00:24:04,558
be more movement

619
00:24:02,240 --> 00:24:06,319
to political extremes for example in the

620
00:24:04,558 --> 00:24:09,918
uk i think it's likely that

621
00:24:06,319 --> 00:24:12,558
um jeremy corbyn will be um in power

622
00:24:09,919 --> 00:24:14,640
which will have an effect on capital

623
00:24:12,558 --> 00:24:18,879
flows

624
00:24:14,640 --> 00:24:22,880
so we're entering a period of time

625
00:24:18,880 --> 00:24:25,039
in which we're late rather late in the

626
00:24:22,880 --> 00:24:28,320
cycle

627
00:24:25,038 --> 00:24:32,798
central banks have less power than they

628
00:24:28,319 --> 00:24:36,240
used to to ease

629
00:24:32,798 --> 00:24:39,119
and we're having this populism

630
00:24:36,240 --> 00:24:40,400
in an election cycle so that's kind of

631
00:24:39,119 --> 00:24:43,678
the lay of the land

632
00:24:40,400 --> 00:24:44,400
if you look at europe uh you can you can

633
00:24:43,679 --> 00:24:47,840
judge the

634
00:24:44,400 --> 00:24:50,880
capacity of a country to ease by looking

635
00:24:47,839 --> 00:24:52,720
at the level of interest rates relative

636
00:24:50,880 --> 00:24:56,240
to zero

637
00:24:52,720 --> 00:24:58,240
and the amount of quantitative easing

638
00:24:56,240 --> 00:25:00,079
that can take place and its marginal

639
00:24:58,240 --> 00:25:01,440
effects so let's say in the united

640
00:25:00,079 --> 00:25:03,359
states you go from two and a half

641
00:25:01,440 --> 00:25:07,840
percent to zero

642
00:25:03,359 --> 00:25:11,038
and you're done in europe you're at zero

643
00:25:07,839 --> 00:25:14,079
and in europe there are limitations

644
00:25:11,038 --> 00:25:16,079
caps at 33 of certain types of debt

645
00:25:14,079 --> 00:25:17,918
that they have hit that they can't go

646
00:25:16,079 --> 00:25:19,278
beyond unless there's

647
00:25:17,919 --> 00:25:21,120
some sort of an agreement and

648
00:25:19,278 --> 00:25:22,079
politically very difficult to have an

649
00:25:21,119 --> 00:25:24,239
agreement so in

650
00:25:22,079 --> 00:25:25,278
in europe is going to be a problem for

651
00:25:24,240 --> 00:25:27,759
the ecb

652
00:25:25,278 --> 00:25:29,200
in terms of being able to have uh the

653
00:25:27,759 --> 00:25:31,919
ability to stimulate

654
00:25:29,200 --> 00:25:33,038
and japan is in a position somewhat

655
00:25:31,919 --> 00:25:35,200
similar with these

656
00:25:33,038 --> 00:25:36,879
negative interest rates slightly

657
00:25:35,200 --> 00:25:40,240
negative interest rates farther and

658
00:25:36,880 --> 00:25:43,520
a lesser ability to stimulate

659
00:25:40,240 --> 00:25:45,519
so that's the lay of the land

660
00:25:43,519 --> 00:25:47,038
i think in terms of markets and economy

661
00:25:45,519 --> 00:25:47,440
within the template that i showed you

662
00:25:47,038 --> 00:25:50,720
for

663
00:25:47,440 --> 00:25:54,558
to begin with okay um

664
00:25:50,720 --> 00:25:56,558
in terms of um the rising power

665
00:25:54,558 --> 00:25:59,599
challenging existing power uh

666
00:25:56,558 --> 00:26:02,798
china will be an important influence

667
00:25:59,599 --> 00:26:05,199
in the world that we're operating in

668
00:26:02,798 --> 00:26:05,839
um for the rest of our lifetimes it'll

669
00:26:05,200 --> 00:26:08,080
become an

670
00:26:05,839 --> 00:26:10,240
increasing influence in in that

671
00:26:08,079 --> 00:26:13,439
globalization and so on

672
00:26:10,240 --> 00:26:16,798
um so this just shows

673
00:26:13,440 --> 00:26:19,519
uh where they are in united states and

674
00:26:16,798 --> 00:26:20,000
china in relative output this is what i

675
00:26:19,519 --> 00:26:23,359
believe

676
00:26:20,000 --> 00:26:24,720
that what's likely in terms of equity

677
00:26:23,359 --> 00:26:27,359
market cap

678
00:26:24,720 --> 00:26:29,038
and share of debt securities outstanding

679
00:26:27,359 --> 00:26:32,319
in other words the european

680
00:26:29,038 --> 00:26:35,278
the chinese markets are big

681
00:26:32,319 --> 00:26:35,678
and becoming bigger and more liquid and

682
00:26:35,278 --> 00:26:38,159
more

683
00:26:35,679 --> 00:26:40,320
effective and they're going to play an

684
00:26:38,159 --> 00:26:40,960
important role as will the chinese

685
00:26:40,319 --> 00:26:43,519
economy

686
00:26:40,960 --> 00:26:44,960
in the environment we're in not only in

687
00:26:43,519 --> 00:26:47,519
the form of trade

688
00:26:44,960 --> 00:26:48,000
but also in the form of you know the the

689
00:26:47,519 --> 00:26:50,240
whole

690
00:26:48,000 --> 00:26:52,558
geopolitics particularly reflected

691
00:26:50,240 --> 00:26:53,679
through technology if you look at

692
00:26:52,558 --> 00:26:56,079
history

693
00:26:53,679 --> 00:26:56,720
and what caused countries to succeed and

694
00:26:56,079 --> 00:27:00,558
fail

695
00:26:56,720 --> 00:27:03,839
it was um particularly led by technology

696
00:27:00,558 --> 00:27:07,519
so um i've been uh

697
00:27:03,839 --> 00:27:09,359
over the last several months

698
00:27:07,519 --> 00:27:12,558
wanting to research the rise and

699
00:27:09,359 --> 00:27:15,519
declines of world reserve currencies

700
00:27:12,558 --> 00:27:17,440
and in order to do that i have to watch

701
00:27:15,519 --> 00:27:18,319
the arc of each one of these reserve

702
00:27:17,440 --> 00:27:20,080
currencies

703
00:27:18,319 --> 00:27:22,000
there's the us dollar before that there

704
00:27:20,079 --> 00:27:23,678
was the british pound before that there

705
00:27:22,000 --> 00:27:26,398
was the dutch gilder

706
00:27:23,679 --> 00:27:27,840
and as a result of that i needed to

707
00:27:26,398 --> 00:27:29,918
understand

708
00:27:27,839 --> 00:27:30,879
uh a number of things about the

709
00:27:29,919 --> 00:27:34,000
economies

710
00:27:30,880 --> 00:27:35,600
that i um that made them reserve

711
00:27:34,000 --> 00:27:37,359
currency how did they become reserve

712
00:27:35,599 --> 00:27:39,359
currencies how did they lose their

713
00:27:37,359 --> 00:27:43,359
reserve currency status

714
00:27:39,359 --> 00:27:46,558
and that led me to uh watch

715
00:27:43,359 --> 00:27:47,278
um a number of factors and studying

716
00:27:46,558 --> 00:27:49,839
those

717
00:27:47,278 --> 00:27:51,200
um and i i love putting together

718
00:27:49,839 --> 00:27:54,398
statistics and numbers

719
00:27:51,200 --> 00:27:57,519
to put together indices so uh

720
00:27:54,398 --> 00:28:00,479
these are the six main factors

721
00:27:57,519 --> 00:28:02,079
uh that you can judge a country's power

722
00:28:00,480 --> 00:28:05,519
by

723
00:28:02,079 --> 00:28:07,439
you know power's a a vague thing

724
00:28:05,519 --> 00:28:09,440
you can have economic power you can have

725
00:28:07,440 --> 00:28:10,640
military power you can have power in

726
00:28:09,440 --> 00:28:13,919
different ways

727
00:28:10,640 --> 00:28:16,960
but this is the uh when i

728
00:28:13,919 --> 00:28:19,038
uh went to each one of these four

729
00:28:16,960 --> 00:28:20,798
cases here's the dutch cycle here's the

730
00:28:19,038 --> 00:28:22,398
british cycle here's the u.s cycle

731
00:28:20,798 --> 00:28:25,519
here's the chinese cycle

732
00:28:22,398 --> 00:28:29,038
and reflected in these this dynamic

733
00:28:25,519 --> 00:28:31,038
and uh what you can see this classic

734
00:28:29,038 --> 00:28:34,319
cycle is first

735
00:28:31,038 --> 00:28:37,519
it's innovation meaning technology

736
00:28:34,319 --> 00:28:38,798
education and competitiveness mostly a

737
00:28:37,519 --> 00:28:41,440
new technology

738
00:28:38,798 --> 00:28:43,359
and the new technology like the 5g

739
00:28:41,440 --> 00:28:45,840
technology today

740
00:28:43,359 --> 00:28:47,918
and the issues pertaining to huawei and

741
00:28:45,839 --> 00:28:51,519
other technology companies

742
00:28:47,919 --> 00:28:54,399
if you have technology it works uh both

743
00:28:51,519 --> 00:28:55,918
economically and militarily and so

744
00:28:54,398 --> 00:28:57,439
there's always a new technology in the

745
00:28:55,919 --> 00:28:59,759
case of the dutch

746
00:28:57,440 --> 00:29:01,840
it was the ability to build ships that

747
00:28:59,759 --> 00:29:03,839
can go anywhere around the world

748
00:29:01,839 --> 00:29:05,678
and they took those ships and they put

749
00:29:03,839 --> 00:29:07,278
and because the

750
00:29:05,679 --> 00:29:09,120
europeans were experts in fighting

751
00:29:07,278 --> 00:29:10,960
because they was fought with each other

752
00:29:09,119 --> 00:29:13,038
they took the guns they put them on the

753
00:29:10,960 --> 00:29:13,679
ships and they go out to the rest of the

754
00:29:13,038 --> 00:29:16,158
world

755
00:29:13,679 --> 00:29:17,038
and they accounted for half of world

756
00:29:16,159 --> 00:29:19,278
trade

757
00:29:17,038 --> 00:29:21,038
can you imagine that and when they go

758
00:29:19,278 --> 00:29:23,599
out there with half of world trade

759
00:29:21,038 --> 00:29:24,319
they're bringing their money the dutch

760
00:29:23,599 --> 00:29:27,038
gilder

761
00:29:24,319 --> 00:29:28,879
okay so they bring the money and when

762
00:29:27,038 --> 00:29:30,480
they have bring the money it becomes a

763
00:29:28,880 --> 00:29:32,720
world reserve currency

764
00:29:30,480 --> 00:29:34,399
and in order to go out in the world they

765
00:29:32,720 --> 00:29:37,440
have to have a military

766
00:29:34,398 --> 00:29:37,918
to support that and so these cycles go

767
00:29:37,440 --> 00:29:40,798
on

768
00:29:37,919 --> 00:29:42,320
and if you look at that this is the red

769
00:29:40,798 --> 00:29:44,158
line is china and

770
00:29:42,319 --> 00:29:46,319
the blue line is in the united states in

771
00:29:44,159 --> 00:29:49,278
terms of the averages of these things

772
00:29:46,319 --> 00:29:50,798
and it goes back to 1500 and one of the

773
00:29:49,278 --> 00:29:54,240
things you could see

774
00:29:50,798 --> 00:29:56,000
there is the chinese have typically been

775
00:29:54,240 --> 00:29:58,399
number one or number two although the

776
00:29:56,000 --> 00:30:00,398
world was a different size then you know

777
00:29:58,398 --> 00:30:01,359
those were all very far away places we

778
00:30:00,398 --> 00:30:05,119
now have

779
00:30:01,359 --> 00:30:07,359
one sort of world so

780
00:30:05,119 --> 00:30:09,199
that's where that those are the economic

781
00:30:07,359 --> 00:30:10,079
principles so i think we're late in the

782
00:30:09,200 --> 00:30:12,558
business cycle

783
00:30:10,079 --> 00:30:13,678
relatively late um i would say the

784
00:30:12,558 --> 00:30:15,440
seventh inning

785
00:30:13,679 --> 00:30:17,360
of the business cycle there is a

786
00:30:15,440 --> 00:30:18,159
relatively tightening and monetary

787
00:30:17,359 --> 00:30:21,278
policy

788
00:30:18,159 --> 00:30:24,320
we have less capacity and we are

789
00:30:21,278 --> 00:30:27,200
we have greater polarity and we have

790
00:30:24,319 --> 00:30:28,798
um a situation in which we're going to

791
00:30:27,200 --> 00:30:31,120
have political issues

792
00:30:28,798 --> 00:30:32,480
and those political issues will be

793
00:30:31,119 --> 00:30:35,678
market issues

794
00:30:32,480 --> 00:30:37,839
because as as we start to think

795
00:30:35,679 --> 00:30:39,679
will this be a movement to the right or

796
00:30:37,839 --> 00:30:42,720
a movement to the left

797
00:30:39,679 --> 00:30:44,880
that will affect capital flows

798
00:30:42,720 --> 00:30:46,640
so these are my list of investment

799
00:30:44,880 --> 00:30:49,278
principles

800
00:30:46,640 --> 00:30:50,799
the template that i look first the

801
00:30:49,278 --> 00:30:52,480
theoretical

802
00:30:50,798 --> 00:30:54,240
theoretical value equals the present

803
00:30:52,480 --> 00:30:56,079
value of future cash flows in other

804
00:30:54,240 --> 00:30:58,960
words every investment

805
00:30:56,079 --> 00:31:00,639
is a lump sum payment for a future cash

806
00:30:58,960 --> 00:31:03,200
flow

807
00:31:00,640 --> 00:31:06,080
so when we think what is something worth

808
00:31:03,200 --> 00:31:08,798
we look at those projected cash flows

809
00:31:06,079 --> 00:31:11,038
and we discount it with an interest rate

810
00:31:08,798 --> 00:31:13,839
that's the theoretical value

811
00:31:11,038 --> 00:31:14,558
the actual value that it will trade at

812
00:31:13,839 --> 00:31:18,000
will

813
00:31:14,558 --> 00:31:19,678
equal the total amount of spending

814
00:31:18,000 --> 00:31:22,000
if i calculate total amount of dollars

815
00:31:19,679 --> 00:31:23,840
spending on something divided by the

816
00:31:22,000 --> 00:31:26,079
quantity of goods sold

817
00:31:23,839 --> 00:31:27,038
so i'm always looking at who how much is

818
00:31:26,079 --> 00:31:28,720
going to be spent

819
00:31:27,038 --> 00:31:30,158
and what are the motivations of the

820
00:31:28,720 --> 00:31:32,000
spenders and what are the and

821
00:31:30,159 --> 00:31:33,919
how much of it is going to be quantity i

822
00:31:32,000 --> 00:31:35,759
try to estimate

823
00:31:33,919 --> 00:31:37,919
what the total spending is divided by

824
00:31:35,759 --> 00:31:41,519
the quantity to estimate the price

825
00:31:37,919 --> 00:31:44,480
okay number three is that asset classes

826
00:31:41,519 --> 00:31:45,759
will outperform cash over the long term

827
00:31:44,480 --> 00:31:49,038
i explained that

828
00:31:45,759 --> 00:31:51,919
it's required otherwise the gears come

829
00:31:49,038 --> 00:31:53,278
the economy comes to a halt and that the

830
00:31:51,919 --> 00:31:56,640
outperformance of

831
00:31:53,278 --> 00:31:58,798
asset classes over cash that beta

832
00:31:56,640 --> 00:32:00,720
cannot be very positive for too long

833
00:31:58,798 --> 00:32:02,720
because if it was it would be easy

834
00:32:00,720 --> 00:32:04,960
if it was positive you just buy borrow

835
00:32:02,720 --> 00:32:06,000
cash and you buy the long things and you

836
00:32:04,960 --> 00:32:09,278
make a lot of money

837
00:32:06,000 --> 00:32:12,720
it ha comes with big bumps along the way

838
00:32:09,278 --> 00:32:15,919
and that assets

839
00:32:12,720 --> 00:32:20,079
are priced to discount future

840
00:32:15,919 --> 00:32:22,799
expectations most importantly inflation

841
00:32:20,079 --> 00:32:23,599
growth risk premiums and discount rates

842
00:32:22,798 --> 00:32:26,558
and i'm going to get

843
00:32:23,599 --> 00:32:27,519
into that in a minute and then every

844
00:32:26,558 --> 00:32:29,759
investment

845
00:32:27,519 --> 00:32:31,440
is a return stream what i mean is every

846
00:32:29,759 --> 00:32:32,798
day you can market to the market you

847
00:32:31,440 --> 00:32:35,200
know what it's like

848
00:32:32,798 --> 00:32:38,480
and so the key is to be able to put

849
00:32:35,200 --> 00:32:41,278
together portfolios of return streams

850
00:32:38,480 --> 00:32:43,839
so that they balance well as hashing was

851
00:32:41,278 --> 00:32:43,839
saying

852
00:32:44,398 --> 00:32:47,759
i would say whatever success that i've

853
00:32:46,880 --> 00:32:50,640
had in life

854
00:32:47,759 --> 00:32:52,879
or that bridgewater has had has to do

855
00:32:50,640 --> 00:32:53,840
with knowing how to deal with our not

856
00:32:52,880 --> 00:32:57,200
knowing

857
00:32:53,839 --> 00:32:58,639
more than anything we know because what

858
00:32:57,200 --> 00:33:02,640
you don't know

859
00:32:58,640 --> 00:33:05,919
is a lot and if and you can reduce your

860
00:33:02,640 --> 00:33:08,559
risk by a lot more than you could reduce

861
00:33:05,919 --> 00:33:09,519
your return by knowing how to diversify

862
00:33:08,558 --> 00:33:13,038
well

863
00:33:09,519 --> 00:33:14,880
so so diversification can reduce risk

864
00:33:13,038 --> 00:33:18,000
more than it reduces return

865
00:33:14,880 --> 00:33:20,720
so it improves the return to risk ratios

866
00:33:18,000 --> 00:33:22,319
and then i say that there i'm sorry if

867
00:33:20,720 --> 00:33:24,079
i'm getting technical but there are two

868
00:33:22,319 --> 00:33:26,398
types of return streams

869
00:33:24,079 --> 00:33:27,759
there is a beta return stream and an

870
00:33:26,398 --> 00:33:30,319
alpha return stream

871
00:33:27,759 --> 00:33:32,000
and what i mean by a beta return stream

872
00:33:30,319 --> 00:33:35,278
is that there is an intrinsic

873
00:33:32,000 --> 00:33:36,960
reason that that asset class will behave

874
00:33:35,278 --> 00:33:38,720
in a certain way that you will

875
00:33:36,960 --> 00:33:40,798
know in other words if growth rises

876
00:33:38,720 --> 00:33:42,798
faster than discounted

877
00:33:40,798 --> 00:33:44,639
and interest rates don't rise much you

878
00:33:42,798 --> 00:33:46,319
know that that stocks are going to go up

879
00:33:44,640 --> 00:33:49,679
so there is environmental so you can

880
00:33:46,319 --> 00:33:51,839
structure that alpha is a zero-sum game

881
00:33:49,679 --> 00:33:53,038
in other words for me to produce alpha i

882
00:33:51,839 --> 00:33:55,119
have to be uh

883
00:33:53,038 --> 00:33:56,879
outperform i have to take money away

884
00:33:55,119 --> 00:34:00,879
from somebody else it's a zero-sum

885
00:33:56,880 --> 00:34:03,760
game like poker at a poker table so

886
00:34:00,880 --> 00:34:04,720
so they can be either alphas of betas

887
00:34:03,759 --> 00:34:07,038
and the key

888
00:34:04,720 --> 00:34:10,159
to good investing is to create good

889
00:34:07,038 --> 00:34:13,280
portfolios of good return streams

890
00:34:10,159 --> 00:34:15,039
and then in order to balance these you

891
00:34:13,280 --> 00:34:16,879
have to risk balance them

892
00:34:15,039 --> 00:34:18,079
in other words if somebody might think

893
00:34:16,878 --> 00:34:20,239
if i put 50

894
00:34:18,079 --> 00:34:21,839
of my dollars in stocks and 50 percent

895
00:34:20,239 --> 00:34:24,000
of my dollars in bonds

896
00:34:21,838 --> 00:34:25,039
that i have my diversification but not

897
00:34:24,000 --> 00:34:27,039
so because

898
00:34:25,039 --> 00:34:30,239
the volatility of stocks is greater than

899
00:34:27,039 --> 00:34:32,320
the twi is twice the volatility of bonds

900
00:34:30,239 --> 00:34:34,319
and because of that you have to risk

901
00:34:32,320 --> 00:34:36,639
balance them and

902
00:34:34,320 --> 00:34:38,000
then the holy grail of investing is to

903
00:34:36,639 --> 00:34:40,000
find 15 or more

904
00:34:38,000 --> 00:34:41,440
good uncorrelated return streams i'll

905
00:34:40,000 --> 00:34:45,519
get into that in a minute

906
00:34:41,440 --> 00:34:49,039
and then as hashem mentioned then

907
00:34:45,519 --> 00:34:50,159
systemizing decision rules is is

908
00:34:49,039 --> 00:34:51,838
critical

909
00:34:50,159 --> 00:34:54,800
and those rules should be timeless and

910
00:34:51,838 --> 00:34:57,358
universal what i mean is

911
00:34:54,800 --> 00:34:58,960
as i said i write down the criteria we

912
00:34:57,358 --> 00:35:02,000
write down the criteria for

913
00:34:58,960 --> 00:35:04,559
investing and then we take those

914
00:35:02,000 --> 00:35:06,079
criteria and we test them through all

915
00:35:04,559 --> 00:35:09,279
periods of time

916
00:35:06,079 --> 00:35:11,920
and all countries timeless

917
00:35:09,280 --> 00:35:13,359
and universal because if something

918
00:35:11,920 --> 00:35:15,920
happened in one time

919
00:35:13,358 --> 00:35:16,559
and your process is not working in that

920
00:35:15,920 --> 00:35:18,079
time

921
00:35:16,559 --> 00:35:19,759
then it must be that you haven't

922
00:35:18,079 --> 00:35:21,920
explained the differences

923
00:35:19,760 --> 00:35:23,280
and so by forcing ourselves to try to

924
00:35:21,920 --> 00:35:26,480
make those rules

925
00:35:23,280 --> 00:35:26,960
timeless and universal it then becomes

926
00:35:26,480 --> 00:35:28,559
the

927
00:35:26,960 --> 00:35:30,159
you know the the standard that we

928
00:35:28,559 --> 00:35:31,358
operate by so all the rules that we're

929
00:35:30,159 --> 00:35:33,358
operating them by are

930
00:35:31,358 --> 00:35:34,559
timeless and universal i'll just pass

931
00:35:33,358 --> 00:35:38,078
through some

932
00:35:34,559 --> 00:35:41,279
charts so this going back to 1975

933
00:35:38,079 --> 00:35:45,680
think of this as the rolling returns of

934
00:35:41,280 --> 00:35:48,800
asset classes okay what you can see

935
00:35:45,679 --> 00:35:51,118
is that all of the asset classes there

936
00:35:48,800 --> 00:35:52,240
have some times that are good sometimes

937
00:35:51,119 --> 00:35:54,960
that are bad

938
00:35:52,239 --> 00:35:56,559
on average they're above zero but they

939
00:35:54,960 --> 00:35:59,280
all have periods of down

940
00:35:56,559 --> 00:36:00,480
and inevitably what happens is that

941
00:35:59,280 --> 00:36:04,079
investors most

942
00:36:00,480 --> 00:36:07,199
investors love the asset classes

943
00:36:04,079 --> 00:36:09,680
that did well they

944
00:36:07,199 --> 00:36:10,399
the biggest mistakes of most investors

945
00:36:09,679 --> 00:36:12,719
is that they

946
00:36:10,400 --> 00:36:14,400
think that the investment that did well

947
00:36:12,719 --> 00:36:16,319
is a good investment

948
00:36:14,400 --> 00:36:18,320
rather than it's a more expensive

949
00:36:16,320 --> 00:36:22,240
investment

950
00:36:18,320 --> 00:36:27,838
and so like so here we we have

951
00:36:22,239 --> 00:36:27,838
here's eq whoops

952
00:36:28,400 --> 00:36:33,200
you know here's equities recently done

953
00:36:30,960 --> 00:36:35,920
well here's commodities

954
00:36:33,199 --> 00:36:36,719
done very poorly then here but here's

955
00:36:35,920 --> 00:36:39,200
equities

956
00:36:36,719 --> 00:36:40,959
right done very poorly in that period of

957
00:36:39,199 --> 00:36:46,319
time so the key

958
00:36:40,960 --> 00:36:49,039
as hashim was saying is balance

959
00:36:46,320 --> 00:36:49,920
how to do that so you can break the

960
00:36:49,039 --> 00:36:52,719
drivers

961
00:36:49,920 --> 00:36:53,440
of asset class returns into a few

962
00:36:52,719 --> 00:36:55,598
categories

963
00:36:53,440 --> 00:36:57,599
this is true for any asset class and

964
00:36:55,599 --> 00:37:00,079
it's true for all asset classes

965
00:36:57,599 --> 00:37:00,800
there are two main things that drive it

966
00:37:00,079 --> 00:37:04,400
in terms of

967
00:37:00,800 --> 00:37:06,560
that's inflation and growth and if

968
00:37:04,400 --> 00:37:08,320
basically if you tell me that

969
00:37:06,559 --> 00:37:09,279
inflation's going to be higher than

970
00:37:08,320 --> 00:37:12,400
expected

971
00:37:09,280 --> 00:37:14,160
and growth be higher than expected um i

972
00:37:12,400 --> 00:37:16,320
would know what to invest in

973
00:37:14,159 --> 00:37:18,159
higher than discounted and if it's you

974
00:37:16,320 --> 00:37:18,720
say it's lower i'll know what to invest

975
00:37:18,159 --> 00:37:21,679
in and

976
00:37:18,719 --> 00:37:22,319
most people here would so those become

977
00:37:21,679 --> 00:37:24,399
the two

978
00:37:22,320 --> 00:37:26,559
main drivers they can rise or that

979
00:37:24,400 --> 00:37:29,039
decline

980
00:37:26,559 --> 00:37:30,159
and then there are discount rates and

981
00:37:29,039 --> 00:37:32,800
risk premiums

982
00:37:30,159 --> 00:37:33,358
discount rates mean the inch as i told

983
00:37:32,800 --> 00:37:35,839
you

984
00:37:33,358 --> 00:37:36,639
the interest rate affects all asset

985
00:37:35,838 --> 00:37:38,799
classes

986
00:37:36,639 --> 00:37:40,159
because the interest rate is the

987
00:37:38,800 --> 00:37:42,720
discount rate

988
00:37:40,159 --> 00:37:44,239
that you use to compare the cash flow so

989
00:37:42,719 --> 00:37:45,759
you raise the interest rate

990
00:37:44,239 --> 00:37:47,679
and that's negative for all asset

991
00:37:45,760 --> 00:37:49,599
classes and then you have

992
00:37:47,679 --> 00:37:50,960
when you strip all that risk premiums

993
00:37:49,599 --> 00:37:54,400
out and if you

994
00:37:50,960 --> 00:37:57,760
and that equals the following this shows

995
00:37:54,400 --> 00:37:59,119
what happened in history in relationship

996
00:37:57,760 --> 00:38:03,280
to that context

997
00:37:59,119 --> 00:38:06,559
the top chart shows a growth

998
00:38:03,280 --> 00:38:09,519
assets relative to uh

999
00:38:06,559 --> 00:38:10,159
strong and assets that you hold if you

1000
00:38:09,519 --> 00:38:11,838
had a

1001
00:38:10,159 --> 00:38:13,239
falling growth environment assets that

1002
00:38:11,838 --> 00:38:16,159
you'd have a rising fault

1003
00:38:13,239 --> 00:38:18,399
aggregate with inflation then it shows

1004
00:38:16,159 --> 00:38:20,000
what the discount rate is and then it

1005
00:38:18,400 --> 00:38:21,440
shows what the risk premium which was

1006
00:38:20,000 --> 00:38:23,519
the residual of that

1007
00:38:21,440 --> 00:38:25,200
and that's what we have all-weather

1008
00:38:23,519 --> 00:38:27,989
return all-weather return

1009
00:38:25,199 --> 00:38:29,199
it all rather is a

1010
00:38:27,989 --> 00:38:33,118
[Music]

1011
00:38:29,199 --> 00:38:36,159
our optimally diversified portfolio

1012
00:38:33,119 --> 00:38:37,519
okay uh what i'm going to skip this

1013
00:38:36,159 --> 00:38:40,559
chart what it's meant to show

1014
00:38:37,519 --> 00:38:44,800
basically is that how diversification

1015
00:38:40,559 --> 00:38:47,920
can substantially improve your risk

1016
00:38:44,800 --> 00:38:50,240
to return ratio i want to turn

1017
00:38:47,920 --> 00:38:53,440
uh to this chart so this is what i

1018
00:38:50,239 --> 00:38:55,679
believe the holy grail of investing is

1019
00:38:53,440 --> 00:38:57,440
if you can do this you will make a

1020
00:38:55,679 --> 00:39:00,639
fortune

1021
00:38:57,440 --> 00:39:02,320
you'll be very successful and it's

1022
00:39:00,639 --> 00:39:04,799
simple really

1023
00:39:02,320 --> 00:39:07,280
maybe not simple to pull off but simple

1024
00:39:04,800 --> 00:39:07,280
concept

1025
00:39:09,920 --> 00:39:17,760
if you can get 10

1026
00:39:13,679 --> 00:39:23,199
good uncorrelated investments

1027
00:39:17,760 --> 00:39:27,599
five good uncorrelated investments

1028
00:39:23,199 --> 00:39:30,480
15 good uncorrelated investments

1029
00:39:27,599 --> 00:39:31,760
you can substantially improve the return

1030
00:39:30,480 --> 00:39:34,440
to risk ratio

1031
00:39:31,760 --> 00:39:36,000
and this just shows how it works and why

1032
00:39:34,440 --> 00:39:39,119
diversification

1033
00:39:36,000 --> 00:39:41,838
is more important than

1034
00:39:39,119 --> 00:39:43,119
being good even in picking the best

1035
00:39:41,838 --> 00:39:45,279
investments

1036
00:39:43,119 --> 00:39:47,119
and most people think give me the best

1037
00:39:45,280 --> 00:39:49,359
investment and let me put all my money

1038
00:39:47,119 --> 00:39:52,480
in what i think is the best investment

1039
00:39:49,358 --> 00:39:55,358
wrong the best find your best

1040
00:39:52,480 --> 00:39:56,159
10 uncorrelated investments and put your

1041
00:39:55,358 --> 00:39:57,920
money in that

1042
00:39:56,159 --> 00:39:59,679
and you're going to do a lot better and

1043
00:39:57,920 --> 00:40:01,599
this just gives you an example

1044
00:39:59,679 --> 00:40:02,879
so this is the standard deviation let's

1045
00:40:01,599 --> 00:40:06,640
call it the risk

1046
00:40:02,880 --> 00:40:09,358
of 10 percent and just imagine

1047
00:40:06,639 --> 00:40:11,358
i put in an asset i'll use a simple

1048
00:40:09,358 --> 00:40:12,000
example that has 10 percent return and

1049
00:40:11,358 --> 00:40:15,279
10

1050
00:40:12,000 --> 00:40:15,760
standard deviation uh so let's say it's

1051
00:40:15,280 --> 00:40:18,240
10

1052
00:40:15,760 --> 00:40:18,880
return 10 standard deviation and let's

1053
00:40:18,239 --> 00:40:23,039
say i

1054
00:40:18,880 --> 00:40:26,240
put in a second investment that is six

1055
00:40:23,039 --> 00:40:29,279
sixty percent correlated with that

1056
00:40:26,239 --> 00:40:33,279
third fourth

1057
00:40:29,280 --> 00:40:36,319
fifth and sixth and so on this is how my

1058
00:40:33,280 --> 00:40:38,240
risk in my portfolio would change that

1059
00:40:36,318 --> 00:40:39,358
means like if you have a diversified

1060
00:40:38,239 --> 00:40:42,159
portfolio

1061
00:40:39,358 --> 00:40:44,719
of stocks average stock is about 60

1062
00:40:42,159 --> 00:40:47,118
correlated with average other stocks

1063
00:40:44,719 --> 00:40:47,919
and you can put in a hundred you can put

1064
00:40:47,119 --> 00:40:49,599
in a thousand

1065
00:40:47,920 --> 00:40:52,000
and you are not going to materially

1066
00:40:49,599 --> 00:40:54,880
reduce your risk relative to putting

1067
00:40:52,000 --> 00:40:56,480
in you know just five to ten and you

1068
00:40:54,880 --> 00:40:57,280
could see that that'll lower your risk

1069
00:40:56,480 --> 00:41:00,000
by

1070
00:40:57,280 --> 00:41:01,519
10 or 15 percent if you have an

1071
00:41:00,000 --> 00:41:03,599
uncorrelated

1072
00:41:01,519 --> 00:41:04,880
return stream and you can get actually

1073
00:41:03,599 --> 00:41:06,318
better than uncorrelated because you

1074
00:41:04,880 --> 00:41:07,760
could have negatively correlated but

1075
00:41:06,318 --> 00:41:09,838
let's say i put in

1076
00:41:07,760 --> 00:41:11,280
an uncorrelated return stream this is

1077
00:41:09,838 --> 00:41:14,078
how the line goes

1078
00:41:11,280 --> 00:41:16,000
so you could see like at five you've

1079
00:41:14,079 --> 00:41:19,200
more than cut your risk in half

1080
00:41:16,000 --> 00:41:22,400
five uncorrelated return streams if you

1081
00:41:19,199 --> 00:41:23,199
have down to 15 you're going to reduce

1082
00:41:22,400 --> 00:41:25,680
your risk by

1083
00:41:23,199 --> 00:41:28,318
nearly 80 percent that means you've

1084
00:41:25,679 --> 00:41:28,879
improved your return to risk ratio by a

1085
00:41:28,318 --> 00:41:31,599
factor

1086
00:41:28,880 --> 00:41:31,599
of five

1087
00:41:32,318 --> 00:41:35,679
so you can reduce your risk a lot

1088
00:41:34,800 --> 00:41:39,039
without

1089
00:41:35,679 --> 00:41:39,519
reducing your return and that is the key

1090
00:41:39,039 --> 00:41:42,639
to it

1091
00:41:39,519 --> 00:41:45,039
right so when i look at this

1092
00:41:42,639 --> 00:41:47,039
i think that um there are two types of

1093
00:41:45,039 --> 00:41:49,199
assets what's your strategic asset

1094
00:41:47,039 --> 00:41:51,440
allocation mix what is your

1095
00:41:49,199 --> 00:41:52,879
beta in other words what portfolio do

1096
00:41:51,440 --> 00:41:56,000
you normally have

1097
00:41:52,880 --> 00:41:57,440
and in my opinion it should be highly

1098
00:41:56,000 --> 00:41:59,920
diversified

1099
00:41:57,440 --> 00:42:01,679
but with along those lines in terms of

1100
00:41:59,920 --> 00:42:04,800
like half and growth half inflation

1101
00:42:01,679 --> 00:42:06,399
rising or declining and then alphas

1102
00:42:04,800 --> 00:42:08,880
you have to have a lot of different

1103
00:42:06,400 --> 00:42:10,639
alphas like in our case we have

1104
00:42:08,880 --> 00:42:13,039
you know well over 100 different types

1105
00:42:10,639 --> 00:42:15,199
of alphas about 130 different kinds

1106
00:42:13,039 --> 00:42:16,079
of markets actually in terms of trading

1107
00:42:15,199 --> 00:42:20,879
so

1108
00:42:16,079 --> 00:42:25,519
that's it thank you for your patience

1109
00:42:20,880 --> 00:42:25,519
let's have a conversation about it