[00:00] uh so uh
[00:04] as sasha mentioned uh it's been uh
[00:07] 25 years that uh
[00:11] that we've been friends and professional
[00:14] colleagues and so
[00:15] uh you know i look in the room and i see
[00:17] these old friends i'm
[00:18] so happy to be here i um
[00:21] he also mentioned uh that
[00:24] uh i'm very systematic meaning
[00:28] i got in a habit of every time i would
[00:31] make a decision
[00:32] to write down the criteria i would use
[00:35] to make that decision
[00:36] we're getting a little echo i think uh
[00:40] and it's not a big room so i don't even
[00:42] know if i need a mic
[00:44] but um so every time i would make a
[00:48] decision i would write down the criteria
[00:50] i used for making those decisions
[00:52] because cause effect everything happens
[00:56] because of a cause
[00:58] and so and the same things happen over
[01:00] and over again
[01:02] and so by taking the time to write them
[01:04] down
[01:05] and then seeing how those criteria would
[01:08] have worked over a period of time i
[01:09] could get perspective
[01:11] and so i wrote down those principles and
[01:13] as hashem mentioned
[01:15] i i wrote a book called principles
[01:19] which has to do which just was a
[01:21] collection of the life and work
[01:23] principles so the culture that we have
[01:25] is very very important it was really the
[01:27] most important thing in terms of
[01:29] whatever success we've had
[01:31] at the same time i wrote down the
[01:34] economic and investment principles
[01:36] so what i thought i would do today is to
[01:39] share with you
[01:40] what i think of my most important
[01:43] economic and investment principles and
[01:45] then
[01:45] look at the world through the
[01:47] perspective of those principles
[01:49] in other words rather than just tell you
[01:51] what i think i want to tell you how it
[01:53] works
[01:54] and then we can apply that mechanics you
[01:57] can decide does it work that way
[02:00] or not so are these principles
[02:03] valuable because if you know the
[02:06] principles
[02:08] it's like it's giving it like a giving
[02:11] man the fish
[02:11] ability to fish rather than to just give
[02:13] the fish i can tell you what i think
[02:16] but if these principles are right then
[02:18] you could apply them yourself
[02:20] to whatever time or circumstances exist
[02:23] so um i broke it down in terms of
[02:26] economic principles
[02:28] and investment principles because
[02:31] the markets follow the economy
[02:35] so in order to understand economics and
[02:38] all the markets you have to
[02:40] understand in order to understand the
[02:43] market you have to understand the
[02:44] economy
[02:45] so i want to describe how
[02:48] i think the economy works i think it's
[02:51] like a ver
[02:51] it's a perpetual motion machine and
[02:55] there are four big forces
[02:58] three important equilibriums and two
[03:00] levers if you get this down i
[03:01] think this basically everything through
[03:03] my eyes
[03:05] is along those lines um over a period of
[03:08] time
[03:09] we raise our living standards because we
[03:11] learn how to do things better
[03:13] we become more efficient that's called
[03:15] productivity
[03:16] output and that
[03:19] is something that evolves over a period
[03:21] of time
[03:24] that is because it evolves it is not
[03:27] something that
[03:28] is a big thing that's we see as a big
[03:30] thing but it's the most important thing
[03:32] over a period of time
[03:34] the big things that we see and feel
[03:37] every day
[03:37] are debt cycles now there's a short-term
[03:40] debt cycle and there's a long-term debt
[03:42] cycle
[03:42] when i say a short-term debt cycle what
[03:45] i mean is
[03:46] what we think of is normally the
[03:48] business cycle
[03:49] right you have a recession you have a
[03:52] weakness in the economy
[03:54] when the rate of economic activity is
[03:56] too low
[03:57] then central banks produce credit
[04:01] and credit is buying power so
[04:05] you produce that credit it makes
[04:07] purchases of goods services and
[04:09] financial assets happen
[04:11] and so the economy picks up that
[04:15] cycle usually lasts seven to ten years
[04:19] as the economy picks up
[04:23] the demand rises relative to the
[04:25] capacity as you get
[04:26] later in the cycle the central bank puts
[04:29] the brakes on it
[04:30] they raise interest rates tighten
[04:32] monetary policy
[04:34] as the uh there's less slack in the
[04:36] economy the unemployment rate is
[04:38] low they put the brakes on it interest
[04:41] rates go up
[04:42] tightness and monetary policy then you
[04:44] have a recession
[04:45] slow up and that's the cycle right and
[04:48] because
[04:49] credit is buying power
[04:53] by providing it it also produces debt
[04:57] and debt means the obligation to pay
[04:59] back
[05:00] and so by its very nature it's cyclical
[05:03] first comes the stimulation then comes
[05:05] the paying back
[05:06] which means when you when you produce
[05:09] credit
[05:09] you can spend more than you earn and
[05:12] when you pay back
[05:13] you have to spend less than you earn and
[05:16] that's the nature of the cycle and i
[05:17] think we're all acquainted with that
[05:18] type of cycle
[05:20] and with that cycle goes market cycles
[05:22] which we'll talk about
[05:24] that's what i mean by the short-term
[05:25] debt cycle
[05:27] there's also a long-term debt cycle
[05:29] which is the
[05:30] accumulation of all of those that those
[05:33] shorter term debt cycles
[05:35] because everybody wants things to go up
[05:40] they want their asset prices the markets
[05:43] to go up
[05:44] they want employment to go up they want
[05:46] everything to go up
[05:47] and for that reason they
[05:51] central banks over a period of time
[05:53] stimulate
[05:54] and they do that by normally
[05:58] lowering interest rates until interest
[06:00] rates hit zero
[06:02] and then when interest rates hit zero
[06:05] they can't do that anymore
[06:07] and then we come to the need to
[06:11] print money and buy financial assets
[06:13] which we call quantitative easing
[06:15] and when they can't do that anymore or
[06:18] there are limitations
[06:19] we come to the end of the long-term debt
[06:21] cycle
[06:23] so there's a short-term debt cycle a
[06:25] long-term debt cycle and productivity
[06:28] now related to all that is
[06:31] politics internal politics and external
[06:34] politics
[06:37] in that normal cycle they're related
[06:41] as we're going to see in terms of that
[06:46] dynamic
[06:48] the period that we're going through 2008
[06:52] and 9
[06:53] there was a debt cycle and interest
[06:56] rates hit zero
[06:58] and that's very similar to 1929 to 32
[07:02] there was a debt crisis and interest
[07:04] rates hit zero
[07:06] and in both of those cases there was the
[07:09] printing of money and the buying of
[07:11] financial assets
[07:12] which caused those financial asset
[07:14] prices to go
[07:15] up and more liquidity in the economy
[07:19] and that particularly benefited
[07:22] those who had financial assets and it
[07:26] contributed
[07:27] to the wealth gap and the
[07:30] income gap as did technology
[07:33] and as a result of that in the 1930s as
[07:37] also happened now politics entered into
[07:40] the picture
[07:41] so as we're seeing in the world right
[07:43] now that issue
[07:45] of wealth gap is causing
[07:50] populism populism of the left and
[07:52] populism of the right
[07:54] and that's having an effect on the
[07:56] markets and having an effect on the
[07:58] economy
[07:59] so we are also seeing a situation
[08:02] very much like the 30s in which
[08:05] uh we're seeing a rising power
[08:09] uh challenging an existing power
[08:13] that's a geopolitical cycle
[08:16] when a rising power in the form of china
[08:19] a challenging and existing power in the
[08:21] form of the united states
[08:23] and if we look at histories and cycles
[08:25] of those periods
[08:28] there's a cycle of
[08:31] conflict and peace normally
[08:34] peace happens after a war because some
[08:37] dominant
[08:38] country wins the war nobody wants to
[08:40] fight
[08:41] the dominant power and you have an
[08:44] extended period of
[08:45] peace until there's then that particular
[08:47] conflict
[08:48] doesn't i'm not saying we're going to
[08:49] have a military conflict or anything
[08:51] like that
[08:51] although you know that
[08:55] always exists as a possibility so these
[08:58] cycles these things have happened um
[09:00] over and over again
[09:02] so politics enters into can affect
[09:06] the the cycles for example um
[09:09] the the shift in the uh united states
[09:13] to be able to create tax cut changes
[09:16] help the corporate tax picture
[09:18] and cause stock prices to rise okay
[09:21] those are the cycles
[09:23] then when i look at what's happening i
[09:26] compare it to three equilibriums
[09:29] and what are these three equilibriums
[09:32] first that debt growth has to be in line
[09:36] with the income growth that's required
[09:39] to service the debt
[09:43] if debt growth is faster than the income
[09:46] growth that's going to service the debt
[09:48] we're going to have an adjustment and
[09:51] so i'm always doing the pro forma what
[09:54] is the ability to service that debt
[09:56] so that's what i'm watching second
[09:59] equilibrium
[10:01] is that the rate of economic activity
[10:04] economic capacity utilization is neither
[10:08] too high nor too low what that means
[10:11] is if you have it pressing up too much
[10:13] over an overheating economy
[10:15] that's going to be the tightening of
[10:17] monetary policy and a correction
[10:19] and if you have it too low so that the
[10:21] economy is depressed
[10:23] and there's a lot of slack that's going
[10:25] to cause an adjustment to bring it up
[10:28] and so i'm always watching where are we
[10:30] relative to that because that's a key
[10:32] driver of the of these cycles and the
[10:35] third
[10:36] is that the projected returns of
[10:39] equities
[10:40] are above the projected returns of bonds
[10:44] which are above the projected returns of
[10:46] cash
[10:47] by appropriate risk premiums in other
[10:49] words the capital markets
[10:52] produce the circulation of buying power
[10:56] in the form of this credit coming around
[10:58] and this relationship of the
[11:02] cash to bond yields to stock yields and
[11:05] asset classes
[11:06] determines how money flows through the
[11:08] economy
[11:10] and a normal condition is for reasons i
[11:13] won't digress into
[11:14] to have cash have a lower return than
[11:17] bonds that have to have a lower return
[11:19] from equities
[11:20] having to do with how the system works
[11:22] basically central banks put cash on
[11:24] deposit and people with better ideas
[11:26] have to make a profit to that they use
[11:29] that money to create
[11:30] these other uh the level of economic
[11:33] activity and
[11:34] have to have higher returns and when
[11:36] that's not the case the way they tighten
[11:37] it
[11:38] is that there are two levers so now
[11:42] there are two levers monetary policy
[11:46] and fiscal policy right monetary policy
[11:49] then
[11:50] is the means by which the brakes and the
[11:52] gas are put on
[11:53] and the brakes and the gas being put on
[11:56] become reflected
[11:57] in each of these other items so let's
[12:00] say
[12:01] if debt growth is too high relative to
[12:03] income growth and capacity utilization
[12:06] is high and strat stretched
[12:10] monetary policy will be tightened
[12:13] and that tightening of monetary policy
[12:15] will change the projected return
[12:18] of ec of cash relative to bonds and of
[12:21] equities those risk premiums
[12:23] and that will slow the economy down
[12:26] and that will drive those cycles and
[12:29] that's how
[12:30] the economy is operating in these
[12:32] perpetual motion kind of way
[12:35] and if you you could almost picture i
[12:38] literally can picture where you are in
[12:41] those cycles
[12:43] and what is happening and you can
[12:45] anticipate what is going to happen
[12:47] next from that because it's that petrol
[12:49] perpetual motion machine
[12:51] so that's my template in a nutshell
[12:55] and if you keep thinking like where are
[12:58] we now
[13:00] then you um you know you can kind of
[13:03] think where we are
[13:04] okay so i'm just going to show you some
[13:06] charts to help to convey the picture
[13:08] this is uh real gdp
[13:11] going back to 1900. so this is
[13:15] that line is productivity right and
[13:19] that's an a big inevitable force
[13:22] that happens over a period of time even
[13:24] the biggest economic
[13:26] turbulence you know looks like a bump
[13:29] in that that cycle right productivity is
[13:32] a big force
[13:33] betting on productivity is a big force
[13:35] but what happens is that
[13:38] cycle as you get later in the long-term
[13:40] debt cycle
[13:41] that productivity begins to slow because
[13:44] there needs to be investment
[13:46] and there needs to be other things and
[13:48] when you activity
[13:50] um when there's prosperity and so on you
[13:52] get more productivity it's a self
[13:55] reinforcing cycle so these
[13:58] charts are just meant to show
[13:59] productivity and how it's changing
[14:02] over a period of time in the developed
[14:05] countries and then
[14:06] in china so just to give you a quick
[14:08] picture here
[14:09] you could see it in varying degrees bend
[14:11] over as they are
[14:12] later into their longer term debt cycle
[14:16] this united states over the last 10
[14:18] years versus
[14:19] since 1980 and so in each one of those
[14:22] cases you could see it declining
[14:24] japan which is large later in that debt
[14:27] cycle and so on
[14:28] basically hardly any growth in
[14:29] productivity so so
[14:31] okay that's what productivity looks like
[14:33] now where are we
[14:35] in the short-term debt cycle of the
[14:37] business cycle
[14:38] this is what the cycle looks like that i
[14:40] was describing
[14:42] in other words um what happens from the
[14:47] capital markets perspective as as
[14:50] you um begin to go to higher levels of
[14:53] operating rates
[14:54] lower levels of unemployment central
[14:57] banks begin to tighten
[14:59] liquidity starts to tighten then risk
[15:02] premiums start to rise okay in this
[15:04] cycle we're
[15:07] nine years into the cycle unemployment
[15:09] rates are comparatively low
[15:11] and there's less slack so you know no
[15:14] surprise
[15:15] central banks tighten monetary policy
[15:17] and the way they tighten monetary policy
[15:20] is by either raising interest rates or
[15:23] lowering the purchases
[15:25] of the financial assets that they buy by
[15:28] expanding the balance sheet
[15:29] so that's where we are in that cycle now
[15:32] if you look at how markets behave in
[15:35] that part of the cycle
[15:36] this is breaking the cycles into three
[15:39] parts
[15:40] the early phases of the cycle the mid
[15:42] phase of the cycle and the late phase of
[15:44] the cycle
[15:45] and this is across the world
[15:49] different countries this is the united
[15:51] states this is europe to show how the
[15:52] historical so we're in a period of time
[15:56] this period of time which is relatively
[15:59] late in the cycle
[16:00] is also associated with a period of time
[16:03] where there is less attractive returns
[16:07] greater vulnerability so that's largely
[16:10] where we are in the cycle
[16:14] interest rates have
[16:17] hit their lows in some cases can't go
[16:21] lower
[16:22] and then we're dealing with the issue of
[16:24] quantitative easing
[16:27] so taking this back to uh this goes back
[16:30] to 1900
[16:32] this shows debt in debt to gdp ratio in
[16:35] the united
[16:36] states and it just shows how the cycle
[16:38] that we're going through now
[16:40] is very similar to the cycle that we
[16:42] went into the 30s
[16:43] in other words because of that debt
[16:45] crisis
[16:46] and interest rates hitting zero you had
[16:49] the printing of money this shows the
[16:51] central bank's balance sheet the
[16:53] monetary base the acceleration of
[16:55] printing and money
[16:56] same thing happened in the 2008
[16:59] financial crisis
[17:00] you could see that what happens is you
[17:04] have
[17:05] the debt crisis you have the hitting of
[17:07] zero in interest rates
[17:09] they're stuck so they have to print the
[17:12] money
[17:13] and then we have the reaction very
[17:16] similar to
[17:17] 1932 to 1937 in the economy picks up
[17:21] 1937 they start to tighten monetary
[17:25] policy because they're worried that the
[17:26] economy is overheating
[17:28] and inflation's going to rise and they
[17:30] cause
[17:31] a recession that's the first time they
[17:33] use the word recession
[17:34] recession it was like re-depression they
[17:36] used the term recession
[17:38] and that was the uh the 1938
[17:41] period now um i talked about debt
[17:45] but there are also unfunded liabilities
[17:48] that we don't call
[17:49] debt which would be pension and health
[17:51] care liabilities and i just wanted to
[17:53] give you
[17:53] a picture of what that's like that has
[17:56] there's a lot of liabilities
[17:58] out there um promises that have to
[18:02] be kept and so the liabilities are
[18:05] very large um i want you to focus then
[18:08] on these the bottom charts before i put
[18:11] the top charts in because i
[18:12] i want to convey um as it relates to
[18:16] both markets and the economy
[18:18] the important um the the really
[18:22] realizing that we've been really in a
[18:24] golden age
[18:25] of capitalism in the following sense
[18:32] this chart shows how profit margins have
[18:35] increased
[18:36] in other words uh they've more than
[18:38] doubled
[18:39] since 2000. means if you didn't have an
[18:43] expansion in profit margins you wouldn't
[18:45] have you'd have the stock market 40
[18:47] percent lower
[18:48] you had an expansion in profit margins
[18:51] and at the same time you had
[18:52] a decrease in the form of employee
[18:55] compensation
[18:56] and profit margins be largely because
[18:59] of a number of factors but technology
[19:02] has been replacing people
[19:04] and so it's made it more efficient so
[19:06] that that was
[19:07] an element uh also
[19:10] globalization has helped um
[19:14] just to show you a couple of charts
[19:15] pertaining to this this
[19:17] is um number the globalization pressure
[19:22] movement and this is um the
[19:25] capital movement and these scatter
[19:28] diagrams
[19:28] show um
[19:32] if you go the globalization companies
[19:35] that have
[19:36] gone global on the margin have improved
[19:38] their profit margins more
[19:40] and those that are more concentrated
[19:44] have improved their profit margins more
[19:46] and those with
[19:48] who have reduced union membership have
[19:50] produced their profit margins more
[19:52] and so as a result of that this has
[19:55] contributed to
[19:57] the growth of um the wealth gap
[20:02] and the prof profit gap it's been great
[20:05] for companies
[20:06] but it has not been good for a certain
[20:09] percentage of the population if you look
[20:11] at the conditions of
[20:12] the bottom 60 percent of the population
[20:16] bottom 60 means the majority the
[20:19] conditions have
[20:20] uh have been bad there has not been
[20:25] over the since 1980 any income growth
[20:27] real income growth in the united states
[20:30] um in a fed survey the
[20:33] 40 of all americans could not raise 400
[20:37] in the event of an emergency
[20:40] so there is a gap and with that gap
[20:45] um has come this is the wealth gap that
[20:49] the top um one-tenth of one percent of
[20:51] the population's net worth
[20:53] is almost the same as the bottom 90
[20:57] percent combined
[20:58] and as a result we have populism
[21:01] populism of the left and populism of the
[21:04] right
[21:04] that was a phenomenon that developed
[21:08] countries didn't used to have
[21:09] and so now it is a
[21:13] not only political phenomenon it's an
[21:16] economic and market phenomenon
[21:18] because as we come to go into the
[21:20] political elections
[21:21] in the number countries in europe and in
[21:23] the united states
[21:25] it will be really um a
[21:29] a conflict over capitalism versus
[21:32] socialism
[21:33] or the left and the right and it's going
[21:36] to become
[21:38] rather extreme in both of those cases
[21:40] and
[21:41] that has an implication just as the
[21:46] these profit margins improved
[21:49] and then i and then tax rates
[21:52] that's the effective corporate tax rate
[21:54] and how the effective corporate tax rate
[21:55] isn't
[21:56] that's been fantastic so imagine you
[21:58] have profit margins increasing
[22:01] you have the tax rate going down
[22:04] you have cheap money cheap money has
[22:07] been used to
[22:08] borrow to buy back stock or make mergers
[22:12] that's also supportive to stock prices
[22:14] and so on
[22:15] many of those things will not continue
[22:17] we think profit margins will go
[22:19] down i think you're at the best of the
[22:21] corporate tax rates
[22:23] and in terms of the issue in terms of
[22:26] the wealth gap so we're entering a newer
[22:30] environment
[22:31] including an environment which is not
[22:34] going to be as conducive to the
[22:36] purchasing of financial assets by
[22:38] central banks
[22:39] and all of that we're going from uh
[22:42] headwind
[22:42] from tailwinds to headwinds
[22:46] and to give you a flavor of what this
[22:49] political
[22:50] uh situation is like and and the
[22:52] polarity and the entrenchedness these
[22:54] are
[22:54] two charts the first they go back to
[22:57] 1900.
[22:58] the first chart which is the red chart
[23:00] shows
[23:01] um how conservative the republicans are
[23:04] survey
[23:05] surveyed economically conservative so
[23:07] the they're more conservative than they
[23:09] have ever been
[23:11] the democrats it shows how liberal they
[23:14] are
[23:14] in terms of policies and they're more
[23:16] liberal than they have ever been
[23:19] so the two have not had greater polarity
[23:22] than we have today in politics
[23:25] and this shows how much is
[23:29] the votes cast along party lines in
[23:31] other words republicans sticking with
[23:33] republicans and democrats sticking with
[23:35] democrats and so it shows the entrenched
[23:38] conflict that we're having this is in
[23:41] the united states
[23:42] this is not just a united states
[23:44] phenomenon it is a european phenomenon
[23:47] as as much we're going to be going into
[23:50] elections
[23:51] in uh europe and then
[23:55] for the european elections and then
[23:57] we're also going to have
[23:58] changes in politics and there's going to
[24:00] be more movement
[24:02] to political extremes for example in the
[24:04] uk i think it's likely that
[24:06] um jeremy corbyn will be um in power
[24:09] which will have an effect on capital
[24:12] flows
[24:14] so we're entering a period of time
[24:18] in which we're late rather late in the
[24:22] cycle
[24:25] central banks have less power than they
[24:28] used to to ease
[24:32] and we're having this populism
[24:36] in an election cycle so that's kind of
[24:39] the lay of the land
[24:40] if you look at europe uh you can you can
[24:43] judge the
[24:44] capacity of a country to ease by looking
[24:47] at the level of interest rates relative
[24:50] to zero
[24:52] and the amount of quantitative easing
[24:56] that can take place and its marginal
[24:58] effects so let's say in the united
[25:00] states you go from two and a half
[25:01] percent to zero
[25:03] and you're done in europe you're at zero
[25:07] and in europe there are limitations
[25:11] caps at 33 of certain types of debt
[25:14] that they have hit that they can't go
[25:16] beyond unless there's
[25:17] some sort of an agreement and
[25:19] politically very difficult to have an
[25:21] agreement so in
[25:22] in europe is going to be a problem for
[25:24] the ecb
[25:25] in terms of being able to have uh the
[25:27] ability to stimulate
[25:29] and japan is in a position somewhat
[25:31] similar with these
[25:33] negative interest rates slightly
[25:35] negative interest rates farther and
[25:36] a lesser ability to stimulate
[25:40] so that's the lay of the land
[25:43] i think in terms of markets and economy
[25:45] within the template that i showed you
[25:47] for
[25:47] to begin with okay um
[25:50] in terms of um the rising power
[25:54] challenging existing power uh
[25:56] china will be an important influence
[25:59] in the world that we're operating in
[26:02] um for the rest of our lifetimes it'll
[26:05] become an
[26:05] increasing influence in in that
[26:08] globalization and so on
[26:10] um so this just shows
[26:13] uh where they are in united states and
[26:16] china in relative output this is what i
[26:19] believe
[26:20] that what's likely in terms of equity
[26:23] market cap
[26:24] and share of debt securities outstanding
[26:27] in other words the european
[26:29] the chinese markets are big
[26:32] and becoming bigger and more liquid and
[26:35] more
[26:35] effective and they're going to play an
[26:38] important role as will the chinese
[26:40] economy
[26:40] in the environment we're in not only in
[26:43] the form of trade
[26:44] but also in the form of you know the the
[26:47] whole
[26:48] geopolitics particularly reflected
[26:50] through technology if you look at
[26:52] history
[26:53] and what caused countries to succeed and
[26:56] fail
[26:56] it was um particularly led by technology
[27:00] so um i've been uh
[27:03] over the last several months
[27:07] wanting to research the rise and
[27:09] declines of world reserve currencies
[27:12] and in order to do that i have to watch
[27:15] the arc of each one of these reserve
[27:17] currencies
[27:18] there's the us dollar before that there
[27:20] was the british pound before that there
[27:22] was the dutch gilder
[27:23] and as a result of that i needed to
[27:26] understand
[27:27] uh a number of things about the
[27:29] economies
[27:30] that i um that made them reserve
[27:34] currency how did they become reserve
[27:35] currencies how did they lose their
[27:37] reserve currency status
[27:39] and that led me to uh watch
[27:43] um a number of factors and studying
[27:46] those
[27:47] um and i i love putting together
[27:49] statistics and numbers
[27:51] to put together indices so uh
[27:54] these are the six main factors
[27:57] uh that you can judge a country's power
[28:00] by
[28:02] you know power's a a vague thing
[28:05] you can have economic power you can have
[28:07] military power you can have power in
[28:09] different ways
[28:10] but this is the uh when i
[28:13] uh went to each one of these four
[28:16] cases here's the dutch cycle here's the
[28:19] british cycle here's the u.s cycle
[28:20] here's the chinese cycle
[28:22] and reflected in these this dynamic
[28:25] and uh what you can see this classic
[28:29] cycle is first
[28:31] it's innovation meaning technology
[28:34] education and competitiveness mostly a
[28:37] new technology
[28:38] and the new technology like the 5g
[28:41] technology today
[28:43] and the issues pertaining to huawei and
[28:45] other technology companies
[28:47] if you have technology it works uh both
[28:51] economically and militarily and so
[28:54] there's always a new technology in the
[28:55] case of the dutch
[28:57] it was the ability to build ships that
[28:59] can go anywhere around the world
[29:01] and they took those ships and they put
[29:03] and because the
[29:05] europeans were experts in fighting
[29:07] because they was fought with each other
[29:09] they took the guns they put them on the
[29:10] ships and they go out to the rest of the
[29:13] world
[29:13] and they accounted for half of world
[29:16] trade
[29:17] can you imagine that and when they go
[29:19] out there with half of world trade
[29:21] they're bringing their money the dutch
[29:23] gilder
[29:24] okay so they bring the money and when
[29:27] they have bring the money it becomes a
[29:28] world reserve currency
[29:30] and in order to go out in the world they
[29:32] have to have a military
[29:34] to support that and so these cycles go
[29:37] on
[29:37] and if you look at that this is the red
[29:40] line is china and
[29:42] the blue line is in the united states in
[29:44] terms of the averages of these things
[29:46] and it goes back to 1500 and one of the
[29:49] things you could see
[29:50] there is the chinese have typically been
[29:54] number one or number two although the
[29:56] world was a different size then you know
[29:58] those were all very far away places we
[30:00] now have
[30:01] one sort of world so
[30:05] that's where that those are the economic
[30:07] principles so i think we're late in the
[30:09] business cycle
[30:10] relatively late um i would say the
[30:12] seventh inning
[30:13] of the business cycle there is a
[30:15] relatively tightening and monetary
[30:17] policy
[30:18] we have less capacity and we are
[30:21] we have greater polarity and we have
[30:24] um a situation in which we're going to
[30:27] have political issues
[30:28] and those political issues will be
[30:31] market issues
[30:32] because as as we start to think
[30:35] will this be a movement to the right or
[30:37] a movement to the left
[30:39] that will affect capital flows
[30:42] so these are my list of investment
[30:44] principles
[30:46] the template that i look first the
[30:49] theoretical
[30:50] theoretical value equals the present
[30:52] value of future cash flows in other
[30:54] words every investment
[30:56] is a lump sum payment for a future cash
[30:58] flow
[31:00] so when we think what is something worth
[31:03] we look at those projected cash flows
[31:06] and we discount it with an interest rate
[31:08] that's the theoretical value
[31:11] the actual value that it will trade at
[31:13] will
[31:14] equal the total amount of spending
[31:18] if i calculate total amount of dollars
[31:19] spending on something divided by the
[31:22] quantity of goods sold
[31:23] so i'm always looking at who how much is
[31:26] going to be spent
[31:27] and what are the motivations of the
[31:28] spenders and what are the and
[31:30] how much of it is going to be quantity i
[31:32] try to estimate
[31:33] what the total spending is divided by
[31:35] the quantity to estimate the price
[31:37] okay number three is that asset classes
[31:41] will outperform cash over the long term
[31:44] i explained that
[31:45] it's required otherwise the gears come
[31:49] the economy comes to a halt and that the
[31:51] outperformance of
[31:53] asset classes over cash that beta
[31:56] cannot be very positive for too long
[31:58] because if it was it would be easy
[32:00] if it was positive you just buy borrow
[32:02] cash and you buy the long things and you
[32:04] make a lot of money
[32:06] it ha comes with big bumps along the way
[32:09] and that assets
[32:12] are priced to discount future
[32:15] expectations most importantly inflation
[32:20] growth risk premiums and discount rates
[32:22] and i'm going to get
[32:23] into that in a minute and then every
[32:26] investment
[32:27] is a return stream what i mean is every
[32:29] day you can market to the market you
[32:31] know what it's like
[32:32] and so the key is to be able to put
[32:35] together portfolios of return streams
[32:38] so that they balance well as hashing was
[32:41] saying
[32:44] i would say whatever success that i've
[32:46] had in life
[32:47] or that bridgewater has had has to do
[32:50] with knowing how to deal with our not
[32:52] knowing
[32:53] more than anything we know because what
[32:57] you don't know
[32:58] is a lot and if and you can reduce your
[33:02] risk by a lot more than you could reduce
[33:05] your return by knowing how to diversify
[33:08] well
[33:09] so so diversification can reduce risk
[33:13] more than it reduces return
[33:14] so it improves the return to risk ratios
[33:18] and then i say that there i'm sorry if
[33:20] i'm getting technical but there are two
[33:22] types of return streams
[33:24] there is a beta return stream and an
[33:26] alpha return stream
[33:27] and what i mean by a beta return stream
[33:30] is that there is an intrinsic
[33:32] reason that that asset class will behave
[33:35] in a certain way that you will
[33:36] know in other words if growth rises
[33:38] faster than discounted
[33:40] and interest rates don't rise much you
[33:42] know that that stocks are going to go up
[33:44] so there is environmental so you can
[33:46] structure that alpha is a zero-sum game
[33:49] in other words for me to produce alpha i
[33:51] have to be uh
[33:53] outperform i have to take money away
[33:55] from somebody else it's a zero-sum
[33:56] game like poker at a poker table so
[34:00] so they can be either alphas of betas
[34:03] and the key
[34:04] to good investing is to create good
[34:07] portfolios of good return streams
[34:10] and then in order to balance these you
[34:13] have to risk balance them
[34:15] in other words if somebody might think
[34:16] if i put 50
[34:18] of my dollars in stocks and 50 percent
[34:20] of my dollars in bonds
[34:21] that i have my diversification but not
[34:24] so because
[34:25] the volatility of stocks is greater than
[34:27] the twi is twice the volatility of bonds
[34:30] and because of that you have to risk
[34:32] balance them and
[34:34] then the holy grail of investing is to
[34:36] find 15 or more
[34:38] good uncorrelated return streams i'll
[34:40] get into that in a minute
[34:41] and then as hashem mentioned then
[34:45] systemizing decision rules is is
[34:49] critical
[34:50] and those rules should be timeless and
[34:51] universal what i mean is
[34:54] as i said i write down the criteria we
[34:57] write down the criteria for
[34:58] investing and then we take those
[35:02] criteria and we test them through all
[35:04] periods of time
[35:06] and all countries timeless
[35:09] and universal because if something
[35:11] happened in one time
[35:13] and your process is not working in that
[35:15] time
[35:16] then it must be that you haven't
[35:18] explained the differences
[35:19] and so by forcing ourselves to try to
[35:21] make those rules
[35:23] timeless and universal it then becomes
[35:26] the
[35:26] you know the the standard that we
[35:28] operate by so all the rules that we're
[35:30] operating them by are
[35:31] timeless and universal i'll just pass
[35:33] through some
[35:34] charts so this going back to 1975
[35:38] think of this as the rolling returns of
[35:41] asset classes okay what you can see
[35:45] is that all of the asset classes there
[35:48] have some times that are good sometimes
[35:51] that are bad
[35:52] on average they're above zero but they
[35:54] all have periods of down
[35:56] and inevitably what happens is that
[35:59] investors most
[36:00] investors love the asset classes
[36:04] that did well they
[36:07] the biggest mistakes of most investors
[36:09] is that they
[36:10] think that the investment that did well
[36:12] is a good investment
[36:14] rather than it's a more expensive
[36:16] investment
[36:18] and so like so here we we have
[36:22] here's eq whoops
[36:28] you know here's equities recently done
[36:30] well here's commodities
[36:33] done very poorly then here but here's
[36:35] equities
[36:36] right done very poorly in that period of
[36:39] time so the key
[36:40] as hashim was saying is balance
[36:46] how to do that so you can break the
[36:49] drivers
[36:49] of asset class returns into a few
[36:52] categories
[36:53] this is true for any asset class and
[36:55] it's true for all asset classes
[36:57] there are two main things that drive it
[37:00] in terms of
[37:00] that's inflation and growth and if
[37:04] basically if you tell me that
[37:06] inflation's going to be higher than
[37:08] expected
[37:09] and growth be higher than expected um i
[37:12] would know what to invest in
[37:14] higher than discounted and if it's you
[37:16] say it's lower i'll know what to invest
[37:18] in and
[37:18] most people here would so those become
[37:21] the two
[37:22] main drivers they can rise or that
[37:24] decline
[37:26] and then there are discount rates and
[37:29] risk premiums
[37:30] discount rates mean the inch as i told
[37:32] you
[37:33] the interest rate affects all asset
[37:35] classes
[37:36] because the interest rate is the
[37:38] discount rate
[37:40] that you use to compare the cash flow so
[37:42] you raise the interest rate
[37:44] and that's negative for all asset
[37:45] classes and then you have
[37:47] when you strip all that risk premiums
[37:49] out and if you
[37:50] and that equals the following this shows
[37:54] what happened in history in relationship
[37:57] to that context
[37:59] the top chart shows a growth
[38:03] assets relative to uh
[38:06] strong and assets that you hold if you
[38:09] had a
[38:10] falling growth environment assets that
[38:11] you'd have a rising fault
[38:13] aggregate with inflation then it shows
[38:16] what the discount rate is and then it
[38:18] shows what the risk premium which was
[38:20] the residual of that
[38:21] and that's what we have all-weather
[38:23] return all-weather return
[38:25] it all rather is a
[38:27] [Music]
[38:29] our optimally diversified portfolio
[38:33] okay uh what i'm going to skip this
[38:36] chart what it's meant to show
[38:37] basically is that how diversification
[38:40] can substantially improve your risk
[38:44] to return ratio i want to turn
[38:47] uh to this chart so this is what i
[38:50] believe the holy grail of investing is
[38:53] if you can do this you will make a
[38:55] fortune
[38:57] you'll be very successful and it's
[39:00] simple really
[39:02] maybe not simple to pull off but simple
[39:04] concept
[39:09] if you can get 10
[39:13] good uncorrelated investments
[39:17] five good uncorrelated investments
[39:23] 15 good uncorrelated investments
[39:27] you can substantially improve the return
[39:30] to risk ratio
[39:31] and this just shows how it works and why
[39:34] diversification
[39:36] is more important than
[39:39] being good even in picking the best
[39:41] investments
[39:43] and most people think give me the best
[39:45] investment and let me put all my money
[39:47] in what i think is the best investment
[39:49] wrong the best find your best
[39:52] 10 uncorrelated investments and put your
[39:55] money in that
[39:56] and you're going to do a lot better and
[39:57] this just gives you an example
[39:59] so this is the standard deviation let's
[40:01] call it the risk
[40:02] of 10 percent and just imagine
[40:06] i put in an asset i'll use a simple
[40:09] example that has 10 percent return and
[40:11] 10
[40:12] standard deviation uh so let's say it's
[40:15] 10
[40:15] return 10 standard deviation and let's
[40:18] say i
[40:18] put in a second investment that is six
[40:23] sixty percent correlated with that
[40:26] third fourth
[40:29] fifth and sixth and so on this is how my
[40:33] risk in my portfolio would change that
[40:36] means like if you have a diversified
[40:38] portfolio
[40:39] of stocks average stock is about 60
[40:42] correlated with average other stocks
[40:44] and you can put in a hundred you can put
[40:47] in a thousand
[40:47] and you are not going to materially
[40:49] reduce your risk relative to putting
[40:52] in you know just five to ten and you
[40:54] could see that that'll lower your risk
[40:56] by
[40:57] 10 or 15 percent if you have an
[41:00] uncorrelated
[41:01] return stream and you can get actually
[41:03] better than uncorrelated because you
[41:04] could have negatively correlated but
[41:06] let's say i put in
[41:07] an uncorrelated return stream this is
[41:09] how the line goes
[41:11] so you could see like at five you've
[41:14] more than cut your risk in half
[41:16] five uncorrelated return streams if you
[41:19] have down to 15 you're going to reduce
[41:22] your risk by
[41:23] nearly 80 percent that means you've
[41:25] improved your return to risk ratio by a
[41:28] factor
[41:28] of five
[41:32] so you can reduce your risk a lot
[41:34] without
[41:35] reducing your return and that is the key
[41:39] to it
[41:39] right so when i look at this
[41:42] i think that um there are two types of
[41:45] assets what's your strategic asset
[41:47] allocation mix what is your
[41:49] beta in other words what portfolio do
[41:51] you normally have
[41:52] and in my opinion it should be highly
[41:56] diversified
[41:57] but with along those lines in terms of
[41:59] like half and growth half inflation
[42:01] rising or declining and then alphas
[42:04] you have to have a lot of different
[42:06] alphas like in our case we have
[42:08] you know well over 100 different types
[42:10] of alphas about 130 different kinds
[42:13] of markets actually in terms of trading
[42:15] so
[42:16] that's it thank you for your patience
[42:20] let's have a conversation about it