WEBVTT

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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

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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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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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and a normal condition is for reasons i

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won't digress into

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to have cash have a lower return than

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bonds that have to have a lower return

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from equities

00:11:20.639 --> 00:11:24.319
having to do with how the system works

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basically central banks put cash on

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deposit and people with better ideas

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have to make a profit to that they use

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that money to create

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these other uh the level of economic

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activity and

00:11:34.240 --> 00:11:37.919
have to have higher returns and when

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that's not the case the way they tighten

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it

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is that there are two levers so now

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there are two levers monetary policy

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and fiscal policy right monetary policy

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then

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is the means by which the brakes and the

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gas are put on

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and the brakes and the gas being put on

00:11:56.240 --> 00:12:00.720
become reflected

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in each of these other items so let's

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say

00:12:01.120 --> 00:12:06.000
if debt growth is too high relative to

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income growth and capacity utilization

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is high and strat stretched

00:12:10.159 --> 00:12:15.759
monetary policy will be tightened

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and that tightening of monetary policy

00:12:15.759 --> 00:12:21.120
will change the projected return

00:12:18.399 --> 00:12:23.120
of ec of cash relative to bonds and of

00:12:21.120 --> 00:12:26.240
equities those risk premiums

00:12:23.120 --> 00:12:29.360
and that will slow the economy down

00:12:26.240 --> 00:12:30.399
and that will drive those cycles and

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that's how

00:12:30.399 --> 00:12:35.519
the economy is operating in these

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perpetual motion kind of way

00:12:35.519 --> 00:12:41.919
and if you you could almost picture i

00:12:38.958 --> 00:12:43.199
literally can picture where you are in

00:12:41.919 --> 00:12:45.120
those cycles

00:12:43.200 --> 00:12:47.278
and what is happening and you can

00:12:45.120 --> 00:12:49.919
anticipate what is going to happen

00:12:47.278 --> 00:12:51.600
next from that because it's that petrol

00:12:49.919 --> 00:12:55.679
perpetual motion machine

00:12:51.600 --> 00:12:58.000
so that's my template in a nutshell

00:12:55.679 --> 00:13:00.319
and if you keep thinking like where are

00:12:58.000 --> 00:13:03.200
we now

00:13:00.320 --> 00:13:04.240
then you um you know you can kind of

00:13:03.200 --> 00:13:06.000
think where we are

00:13:04.240 --> 00:13:08.799
okay so i'm just going to show you some

00:13:06.000 --> 00:13:11.919
charts to help to convey the picture

00:13:08.799 --> 00:13:15.679
this is uh real gdp

00:13:11.919 --> 00:13:19.120
going back to 1900. so this is

00:13:15.679 --> 00:13:22.399
that line is productivity right and

00:13:19.120 --> 00:13:24.159
that's an a big inevitable force

00:13:22.399 --> 00:13:26.240
that happens over a period of time even

00:13:24.159 --> 00:13:29.278
the biggest economic

00:13:26.240 --> 00:13:32.399
turbulence you know looks like a bump

00:13:29.278 --> 00:13:33.360
in that that cycle right productivity is

00:13:32.399 --> 00:13:35.759
a big force

00:13:33.360 --> 00:13:38.079
betting on productivity is a big force

00:13:35.759 --> 00:13:40.559
but what happens is that

00:13:38.078 --> 00:13:41.519
cycle as you get later in the long-term

00:13:40.559 --> 00:13:44.399
debt cycle

00:13:41.519 --> 00:13:46.399
that productivity begins to slow because

00:13:44.399 --> 00:13:48.078
there needs to be investment

00:13:46.399 --> 00:13:50.240
and there needs to be other things and

00:13:48.078 --> 00:13:52.879
when you activity

00:13:50.240 --> 00:13:55.079
um when there's prosperity and so on you

00:13:52.879 --> 00:13:58.078
get more productivity it's a self

00:13:55.078 --> 00:13:59.919
reinforcing cycle so these

00:13:58.078 --> 00:14:02.159
charts are just meant to show

00:13:59.919 --> 00:14:05.278
productivity and how it's changing

00:14:02.159 --> 00:14:06.159
over a period of time in the developed

00:14:05.278 --> 00:14:08.320
countries and then

00:14:06.159 --> 00:14:09.198
in china so just to give you a quick

00:14:08.320 --> 00:14:11.440
picture here

00:14:09.198 --> 00:14:12.719
you could see it in varying degrees bend

00:14:11.440 --> 00:14:16.079
over as they are

00:14:12.720 --> 00:14:18.240
later into their longer term debt cycle

00:14:16.078 --> 00:14:19.759
this united states over the last 10

00:14:18.240 --> 00:14:22.240
years versus

00:14:19.759 --> 00:14:24.078
since 1980 and so in each one of those

00:14:22.240 --> 00:14:27.120
cases you could see it declining

00:14:24.078 --> 00:14:28.239
japan which is large later in that debt

00:14:27.120 --> 00:14:29.839
cycle and so on

00:14:28.240 --> 00:14:31.519
basically hardly any growth in

00:14:29.839 --> 00:14:33.680
productivity so so

00:14:31.519 --> 00:14:35.198
okay that's what productivity looks like

00:14:33.679 --> 00:14:37.120
now where are we

00:14:35.198 --> 00:14:38.319
in the short-term debt cycle of the

00:14:37.120 --> 00:14:40.959
business cycle

00:14:38.320 --> 00:14:42.959
this is what the cycle looks like that i

00:14:40.958 --> 00:14:47.039
was describing

00:14:42.958 --> 00:14:50.078
in other words um what happens from the

00:14:47.039 --> 00:14:53.759
capital markets perspective as as

00:14:50.078 --> 00:14:54.799
you um begin to go to higher levels of

00:14:53.759 --> 00:14:57.278
operating rates

00:14:54.799 --> 00:14:59.039
lower levels of unemployment central

00:14:57.278 --> 00:15:02.240
banks begin to tighten

00:14:59.039 --> 00:15:04.559
liquidity starts to tighten then risk

00:15:02.240 --> 00:15:07.039
premiums start to rise okay in this

00:15:04.559 --> 00:15:09.439
cycle we're

00:15:07.039 --> 00:15:11.439
nine years into the cycle unemployment

00:15:09.440 --> 00:15:14.560
rates are comparatively low

00:15:11.440 --> 00:15:15.360
and there's less slack so you know no

00:15:14.559 --> 00:15:17.838
surprise

00:15:15.360 --> 00:15:20.399
central banks tighten monetary policy

00:15:17.839 --> 00:15:23.199
and the way they tighten monetary policy

00:15:20.399 --> 00:15:25.039
is by either raising interest rates or

00:15:23.198 --> 00:15:28.000
lowering the purchases

00:15:25.039 --> 00:15:29.759
of the financial assets that they buy by

00:15:28.000 --> 00:15:32.958
expanding the balance sheet

00:15:29.759 --> 00:15:35.519
so that's where we are in that cycle now

00:15:32.958 --> 00:15:36.958
if you look at how markets behave in

00:15:35.519 --> 00:15:39.600
that part of the cycle

00:15:36.958 --> 00:15:40.000
this is breaking the cycles into three

00:15:39.600 --> 00:15:42.320
parts

00:15:40.000 --> 00:15:44.159
the early phases of the cycle the mid

00:15:42.320 --> 00:15:45.278
phase of the cycle and the late phase of

00:15:44.159 --> 00:15:49.360
the cycle

00:15:45.278 --> 00:15:51.039
and this is across the world

00:15:49.360 --> 00:15:52.959
different countries this is the united

00:15:51.039 --> 00:15:56.078
states this is europe to show how the

00:15:52.958 --> 00:15:59.119
historical so we're in a period of time

00:15:56.078 --> 00:16:00.399
this period of time which is relatively

00:15:59.120 --> 00:16:03.519
late in the cycle

00:16:00.399 --> 00:16:07.039
is also associated with a period of time

00:16:03.519 --> 00:16:10.480
where there is less attractive returns

00:16:07.039 --> 00:16:13.679
greater vulnerability so that's largely

00:16:10.480 --> 00:16:13.680
where we are in the cycle

00:16:14.240 --> 00:16:21.039
interest rates have

00:16:17.278 --> 00:16:22.000
hit their lows in some cases can't go

00:16:21.039 --> 00:16:24.719
lower

00:16:22.000 --> 00:16:27.679
and then we're dealing with the issue of

00:16:24.720 --> 00:16:30.879
quantitative easing

00:16:27.679 --> 00:16:32.638
so taking this back to uh this goes back

00:16:30.879 --> 00:16:35.600
to 1900

00:16:32.639 --> 00:16:36.159
this shows debt in debt to gdp ratio in

00:16:35.600 --> 00:16:38.800
the united

00:16:36.159 --> 00:16:40.078
states and it just shows how the cycle

00:16:38.799 --> 00:16:42.000
that we're going through now

00:16:40.078 --> 00:16:43.359
is very similar to the cycle that we

00:16:42.000 --> 00:16:45.440
went into the 30s

00:16:43.360 --> 00:16:46.399
in other words because of that debt

00:16:45.440 --> 00:16:49.279
crisis

00:16:46.399 --> 00:16:51.198
and interest rates hitting zero you had

00:16:49.278 --> 00:16:53.439
the printing of money this shows the

00:16:51.198 --> 00:16:55.198
central bank's balance sheet the

00:16:53.440 --> 00:16:56.480
monetary base the acceleration of

00:16:55.198 --> 00:16:59.198
printing and money

00:16:56.480 --> 00:17:00.560
same thing happened in the 2008

00:16:59.198 --> 00:17:04.399
financial crisis

00:17:00.559 --> 00:17:05.038
you could see that what happens is you

00:17:04.400 --> 00:17:07.679
have

00:17:05.038 --> 00:17:09.919
the debt crisis you have the hitting of

00:17:07.679 --> 00:17:12.559
zero in interest rates

00:17:09.919 --> 00:17:13.199
they're stuck so they have to print the

00:17:12.558 --> 00:17:16.160
money

00:17:13.199 --> 00:17:17.038
and then we have the reaction very

00:17:16.160 --> 00:17:21.558
similar to

00:17:17.038 --> 00:17:25.359
1932 to 1937 in the economy picks up

00:17:21.558 --> 00:17:26.720
1937 they start to tighten monetary

00:17:25.359 --> 00:17:28.159
policy because they're worried that the

00:17:26.720 --> 00:17:30.400
economy is overheating

00:17:28.160 --> 00:17:31.360
and inflation's going to rise and they

00:17:30.400 --> 00:17:33.038
cause

00:17:31.359 --> 00:17:34.558
a recession that's the first time they

00:17:33.038 --> 00:17:36.720
use the word recession

00:17:34.558 --> 00:17:38.000
recession it was like re-depression they

00:17:36.720 --> 00:17:41.919
used the term recession

00:17:38.000 --> 00:17:45.519
and that was the uh the 1938

00:17:41.919 --> 00:17:48.559
period now um i talked about debt

00:17:45.519 --> 00:17:49.359
but there are also unfunded liabilities

00:17:48.558 --> 00:17:51.519
that we don't call

00:17:49.359 --> 00:17:53.119
debt which would be pension and health

00:17:51.519 --> 00:17:53.839
care liabilities and i just wanted to

00:17:53.119 --> 00:17:56.798
give you

00:17:53.839 --> 00:17:58.959
a picture of what that's like that has

00:17:56.798 --> 00:18:02.400
there's a lot of liabilities

00:17:58.960 --> 00:18:05.679
out there um promises that have to

00:18:02.400 --> 00:18:08.960
be kept and so the liabilities are

00:18:05.679 --> 00:18:11.360
very large um i want you to focus then

00:18:08.960 --> 00:18:12.960
on these the bottom charts before i put

00:18:11.359 --> 00:18:16.558
the top charts in because i

00:18:12.960 --> 00:18:18.960
i want to convey um as it relates to

00:18:16.558 --> 00:18:22.319
both markets and the economy

00:18:18.960 --> 00:18:24.640
the important um the the really

00:18:22.319 --> 00:18:25.918
realizing that we've been really in a

00:18:24.640 --> 00:18:31.759
golden age

00:18:25.919 --> 00:18:31.759
of capitalism in the following sense

00:18:32.000 --> 00:18:36.240
this chart shows how profit margins have

00:18:35.200 --> 00:18:38.480
increased

00:18:36.240 --> 00:18:39.519
in other words uh they've more than

00:18:38.480 --> 00:18:43.038
doubled

00:18:39.519 --> 00:18:45.679
since 2000. means if you didn't have an

00:18:43.038 --> 00:18:47.440
expansion in profit margins you wouldn't

00:18:45.679 --> 00:18:48.559
have you'd have the stock market 40

00:18:47.440 --> 00:18:51.200
percent lower

00:18:48.558 --> 00:18:52.960
you had an expansion in profit margins

00:18:51.200 --> 00:18:55.440
and at the same time you had

00:18:52.960 --> 00:18:56.400
a decrease in the form of employee

00:18:55.440 --> 00:18:59.519
compensation

00:18:56.400 --> 00:19:02.480
and profit margins be largely because

00:18:59.519 --> 00:19:04.240
of a number of factors but technology

00:19:02.480 --> 00:19:06.480
has been replacing people

00:19:04.240 --> 00:19:07.440
and so it's made it more efficient so

00:19:06.480 --> 00:19:10.679
that that was

00:19:07.440 --> 00:19:14.240
an element uh also

00:19:10.679 --> 00:19:15.759
globalization has helped um

00:19:14.240 --> 00:19:17.359
just to show you a couple of charts

00:19:15.759 --> 00:19:22.240
pertaining to this this

00:19:17.359 --> 00:19:25.599
is um number the globalization pressure

00:19:22.240 --> 00:19:28.000
movement and this is um the

00:19:25.599 --> 00:19:28.959
capital movement and these scatter

00:19:28.000 --> 00:19:32.480
diagrams

00:19:28.960 --> 00:19:32.480
show um

00:19:32.798 --> 00:19:36.160
if you go the globalization companies

00:19:35.200 --> 00:19:38.798
that have

00:19:36.160 --> 00:19:40.720
gone global on the margin have improved

00:19:38.798 --> 00:19:44.000
their profit margins more

00:19:40.720 --> 00:19:46.240
and those that are more concentrated

00:19:44.000 --> 00:19:48.160
have improved their profit margins more

00:19:46.240 --> 00:19:50.558
and those with

00:19:48.160 --> 00:19:52.798
who have reduced union membership have

00:19:50.558 --> 00:19:55.759
produced their profit margins more

00:19:52.798 --> 00:19:57.200
and so as a result of that this has

00:19:55.759 --> 00:20:02.558
contributed to

00:19:57.200 --> 00:20:05.038
the growth of um the wealth gap

00:20:02.558 --> 00:20:06.399
and the prof profit gap it's been great

00:20:05.038 --> 00:20:09.279
for companies

00:20:06.400 --> 00:20:11.280
but it has not been good for a certain

00:20:09.279 --> 00:20:12.558
percentage of the population if you look

00:20:11.279 --> 00:20:16.558
at the conditions of

00:20:12.558 --> 00:20:19.519
the bottom 60 percent of the population

00:20:16.558 --> 00:20:20.960
bottom 60 means the majority the

00:20:19.519 --> 00:20:25.038
conditions have

00:20:20.960 --> 00:20:27.679
uh have been bad there has not been

00:20:25.038 --> 00:20:30.158
over the since 1980 any income growth

00:20:27.679 --> 00:20:33.759
real income growth in the united states

00:20:30.159 --> 00:20:37.600
um in a fed survey the

00:20:33.759 --> 00:20:40.960
40 of all americans could not raise 400

00:20:37.599 --> 00:20:45.038
in the event of an emergency

00:20:40.960 --> 00:20:49.120
so there is a gap and with that gap

00:20:45.038 --> 00:20:51.519
um has come this is the wealth gap that

00:20:49.119 --> 00:20:53.439
the top um one-tenth of one percent of

00:20:51.519 --> 00:20:57.038
the population's net worth

00:20:53.440 --> 00:20:58.558
is almost the same as the bottom 90

00:20:57.038 --> 00:21:01.679
percent combined

00:20:58.558 --> 00:21:04.319
and as a result we have populism

00:21:01.679 --> 00:21:04.960
populism of the left and populism of the

00:21:04.319 --> 00:21:08.158
right

00:21:04.960 --> 00:21:09.919
that was a phenomenon that developed

00:21:08.159 --> 00:21:13.520
countries didn't used to have

00:21:09.919 --> 00:21:13.520
and so now it is a

00:21:13.759 --> 00:21:18.400
not only political phenomenon it's an

00:21:16.079 --> 00:21:20.319
economic and market phenomenon

00:21:18.400 --> 00:21:21.840
because as we come to go into the

00:21:20.319 --> 00:21:23.759
political elections

00:21:21.839 --> 00:21:25.519
in the number countries in europe and in

00:21:23.759 --> 00:21:29.599
the united states

00:21:25.519 --> 00:21:32.480
it will be really um a

00:21:29.599 --> 00:21:33.359
a conflict over capitalism versus

00:21:32.480 --> 00:21:36.079
socialism

00:21:33.359 --> 00:21:38.240
or the left and the right and it's going

00:21:36.079 --> 00:21:40.798
to become

00:21:38.240 --> 00:21:41.679
rather extreme in both of those cases

00:21:40.798 --> 00:21:46.000
and

00:21:41.679 --> 00:21:49.120
that has an implication just as the

00:21:46.000 --> 00:21:52.159
these profit margins improved

00:21:49.119 --> 00:21:54.158
and then i and then tax rates

00:21:52.159 --> 00:21:55.919
that's the effective corporate tax rate

00:21:54.159 --> 00:21:56.640
and how the effective corporate tax rate

00:21:55.919 --> 00:21:58.960
isn't

00:21:56.640 --> 00:22:01.280
that's been fantastic so imagine you

00:21:58.960 --> 00:22:04.319
have profit margins increasing

00:22:01.279 --> 00:22:07.279
you have the tax rate going down

00:22:04.319 --> 00:22:08.399
you have cheap money cheap money has

00:22:07.279 --> 00:22:12.000
been used to

00:22:08.400 --> 00:22:14.320
borrow to buy back stock or make mergers

00:22:12.000 --> 00:22:15.440
that's also supportive to stock prices

00:22:14.319 --> 00:22:17.918
and so on

00:22:15.440 --> 00:22:19.440
many of those things will not continue

00:22:17.919 --> 00:22:21.440
we think profit margins will go

00:22:19.440 --> 00:22:23.200
down i think you're at the best of the

00:22:21.440 --> 00:22:26.798
corporate tax rates

00:22:23.200 --> 00:22:30.400
and in terms of the issue in terms of

00:22:26.798 --> 00:22:31.759
the wealth gap so we're entering a newer

00:22:30.400 --> 00:22:34.320
environment

00:22:31.759 --> 00:22:36.158
including an environment which is not

00:22:34.319 --> 00:22:38.240
going to be as conducive to the

00:22:36.159 --> 00:22:39.200
purchasing of financial assets by

00:22:38.240 --> 00:22:42.000
central banks

00:22:39.200 --> 00:22:42.798
and all of that we're going from uh

00:22:42.000 --> 00:22:46.720
headwind

00:22:42.798 --> 00:22:49.279
from tailwinds to headwinds

00:22:46.720 --> 00:22:50.079
and to give you a flavor of what this

00:22:49.279 --> 00:22:52.399
political

00:22:50.079 --> 00:22:54.399
uh situation is like and and the

00:22:52.400 --> 00:22:54.640
polarity and the entrenchedness these

00:22:54.400 --> 00:22:57.038
are

00:22:54.640 --> 00:22:58.320
two charts the first they go back to

00:22:57.038 --> 00:23:00.879
1900.

00:22:58.319 --> 00:23:01.678
the first chart which is the red chart

00:23:00.880 --> 00:23:04.640
shows

00:23:01.679 --> 00:23:05.200
um how conservative the republicans are

00:23:04.640 --> 00:23:07.759
survey

00:23:05.200 --> 00:23:09.679
surveyed economically conservative so

00:23:07.759 --> 00:23:11.038
the they're more conservative than they

00:23:09.679 --> 00:23:14.320
have ever been

00:23:11.038 --> 00:23:14.640
the democrats it shows how liberal they

00:23:14.319 --> 00:23:16.960
are

00:23:14.640 --> 00:23:19.038
in terms of policies and they're more

00:23:16.960 --> 00:23:22.640
liberal than they have ever been

00:23:19.038 --> 00:23:25.919
so the two have not had greater polarity

00:23:22.640 --> 00:23:29.200
than we have today in politics

00:23:25.919 --> 00:23:31.600
and this shows how much is

00:23:29.200 --> 00:23:33.360
the votes cast along party lines in

00:23:31.599 --> 00:23:35.439
other words republicans sticking with

00:23:33.359 --> 00:23:38.879
republicans and democrats sticking with

00:23:35.440 --> 00:23:41.120
democrats and so it shows the entrenched

00:23:38.880 --> 00:23:42.799
conflict that we're having this is in

00:23:41.119 --> 00:23:44.798
the united states

00:23:42.798 --> 00:23:47.519
this is not just a united states

00:23:44.798 --> 00:23:50.480
phenomenon it is a european phenomenon

00:23:47.519 --> 00:23:51.278
as as much we're going to be going into

00:23:50.480 --> 00:23:55.200
elections

00:23:51.278 --> 00:23:57.119
in uh europe and then

00:23:55.200 --> 00:23:58.480
for the european elections and then

00:23:57.119 --> 00:24:00.719
we're also going to have

00:23:58.480 --> 00:24:02.240
changes in politics and there's going to

00:24:00.720 --> 00:24:04.558
be more movement

00:24:02.240 --> 00:24:06.319
to political extremes for example in the

00:24:04.558 --> 00:24:09.918
uk i think it's likely that

00:24:06.319 --> 00:24:12.558
um jeremy corbyn will be um in power

00:24:09.919 --> 00:24:14.640
which will have an effect on capital

00:24:12.558 --> 00:24:18.879
flows

00:24:14.640 --> 00:24:22.880
so we're entering a period of time

00:24:18.880 --> 00:24:25.039
in which we're late rather late in the

00:24:22.880 --> 00:24:28.320
cycle

00:24:25.038 --> 00:24:32.798
central banks have less power than they

00:24:28.319 --> 00:24:36.240
used to to ease

00:24:32.798 --> 00:24:39.119
and we're having this populism

00:24:36.240 --> 00:24:40.400
in an election cycle so that's kind of

00:24:39.119 --> 00:24:43.678
the lay of the land

00:24:40.400 --> 00:24:44.400
if you look at europe uh you can you can

00:24:43.679 --> 00:24:47.840
judge the

00:24:44.400 --> 00:24:50.880
capacity of a country to ease by looking

00:24:47.839 --> 00:24:52.720
at the level of interest rates relative

00:24:50.880 --> 00:24:56.240
to zero

00:24:52.720 --> 00:24:58.240
and the amount of quantitative easing

00:24:56.240 --> 00:25:00.079
that can take place and its marginal

00:24:58.240 --> 00:25:01.440
effects so let's say in the united

00:25:00.079 --> 00:25:03.359
states you go from two and a half

00:25:01.440 --> 00:25:07.840
percent to zero

00:25:03.359 --> 00:25:11.038
and you're done in europe you're at zero

00:25:07.839 --> 00:25:14.079
and in europe there are limitations

00:25:11.038 --> 00:25:16.079
caps at 33 of certain types of debt

00:25:14.079 --> 00:25:17.918
that they have hit that they can't go

00:25:16.079 --> 00:25:19.278
beyond unless there's

00:25:17.919 --> 00:25:21.120
some sort of an agreement and

00:25:19.278 --> 00:25:22.079
politically very difficult to have an

00:25:21.119 --> 00:25:24.239
agreement so in

00:25:22.079 --> 00:25:25.278
in europe is going to be a problem for

00:25:24.240 --> 00:25:27.759
the ecb

00:25:25.278 --> 00:25:29.200
in terms of being able to have uh the

00:25:27.759 --> 00:25:31.919
ability to stimulate

00:25:29.200 --> 00:25:33.038
and japan is in a position somewhat

00:25:31.919 --> 00:25:35.200
similar with these

00:25:33.038 --> 00:25:36.879
negative interest rates slightly

00:25:35.200 --> 00:25:40.240
negative interest rates farther and

00:25:36.880 --> 00:25:43.520
a lesser ability to stimulate

00:25:40.240 --> 00:25:45.519
so that's the lay of the land

00:25:43.519 --> 00:25:47.038
i think in terms of markets and economy

00:25:45.519 --> 00:25:47.440
within the template that i showed you

00:25:47.038 --> 00:25:50.720
for

00:25:47.440 --> 00:25:54.558
to begin with okay um

00:25:50.720 --> 00:25:56.558
in terms of um the rising power

00:25:54.558 --> 00:25:59.599
challenging existing power uh

00:25:56.558 --> 00:26:02.798
china will be an important influence

00:25:59.599 --> 00:26:05.199
in the world that we're operating in

00:26:02.798 --> 00:26:05.839
um for the rest of our lifetimes it'll

00:26:05.200 --> 00:26:08.080
become an

00:26:05.839 --> 00:26:10.240
increasing influence in in that

00:26:08.079 --> 00:26:13.439
globalization and so on

00:26:10.240 --> 00:26:16.798
um so this just shows

00:26:13.440 --> 00:26:19.519
uh where they are in united states and

00:26:16.798 --> 00:26:20.000
china in relative output this is what i

00:26:19.519 --> 00:26:23.359
believe

00:26:20.000 --> 00:26:24.720
that what's likely in terms of equity

00:26:23.359 --> 00:26:27.359
market cap

00:26:24.720 --> 00:26:29.038
and share of debt securities outstanding

00:26:27.359 --> 00:26:32.319
in other words the european

00:26:29.038 --> 00:26:35.278
the chinese markets are big

00:26:32.319 --> 00:26:35.678
and becoming bigger and more liquid and

00:26:35.278 --> 00:26:38.159
more

00:26:35.679 --> 00:26:40.320
effective and they're going to play an

00:26:38.159 --> 00:26:40.960
important role as will the chinese

00:26:40.319 --> 00:26:43.519
economy

00:26:40.960 --> 00:26:44.960
in the environment we're in not only in

00:26:43.519 --> 00:26:47.519
the form of trade

00:26:44.960 --> 00:26:48.000
but also in the form of you know the the

00:26:47.519 --> 00:26:50.240
whole

00:26:48.000 --> 00:26:52.558
geopolitics particularly reflected

00:26:50.240 --> 00:26:53.679
through technology if you look at

00:26:52.558 --> 00:26:56.079
history

00:26:53.679 --> 00:26:56.720
and what caused countries to succeed and

00:26:56.079 --> 00:27:00.558
fail

00:26:56.720 --> 00:27:03.839
it was um particularly led by technology

00:27:00.558 --> 00:27:07.519
so um i've been uh

00:27:03.839 --> 00:27:09.359
over the last several months

00:27:07.519 --> 00:27:12.558
wanting to research the rise and

00:27:09.359 --> 00:27:15.519
declines of world reserve currencies

00:27:12.558 --> 00:27:17.440
and in order to do that i have to watch

00:27:15.519 --> 00:27:18.319
the arc of each one of these reserve

00:27:17.440 --> 00:27:20.080
currencies

00:27:18.319 --> 00:27:22.000
there's the us dollar before that there

00:27:20.079 --> 00:27:23.678
was the british pound before that there

00:27:22.000 --> 00:27:26.398
was the dutch gilder

00:27:23.679 --> 00:27:27.840
and as a result of that i needed to

00:27:26.398 --> 00:27:29.918
understand

00:27:27.839 --> 00:27:30.879
uh a number of things about the

00:27:29.919 --> 00:27:34.000
economies

00:27:30.880 --> 00:27:35.600
that i um that made them reserve

00:27:34.000 --> 00:27:37.359
currency how did they become reserve

00:27:35.599 --> 00:27:39.359
currencies how did they lose their

00:27:37.359 --> 00:27:43.359
reserve currency status

00:27:39.359 --> 00:27:46.558
and that led me to uh watch

00:27:43.359 --> 00:27:47.278
um a number of factors and studying

00:27:46.558 --> 00:27:49.839
those

00:27:47.278 --> 00:27:51.200
um and i i love putting together

00:27:49.839 --> 00:27:54.398
statistics and numbers

00:27:51.200 --> 00:27:57.519
to put together indices so uh

00:27:54.398 --> 00:28:00.479
these are the six main factors

00:27:57.519 --> 00:28:02.079
uh that you can judge a country's power

00:28:00.480 --> 00:28:05.519
by

00:28:02.079 --> 00:28:07.439
you know power's a a vague thing

00:28:05.519 --> 00:28:09.440
you can have economic power you can have

00:28:07.440 --> 00:28:10.640
military power you can have power in

00:28:09.440 --> 00:28:13.919
different ways

00:28:10.640 --> 00:28:16.960
but this is the uh when i

00:28:13.919 --> 00:28:19.038
uh went to each one of these four

00:28:16.960 --> 00:28:20.798
cases here's the dutch cycle here's the

00:28:19.038 --> 00:28:22.398
british cycle here's the u.s cycle

00:28:20.798 --> 00:28:25.519
here's the chinese cycle

00:28:22.398 --> 00:28:29.038
and reflected in these this dynamic

00:28:25.519 --> 00:28:31.038
and uh what you can see this classic

00:28:29.038 --> 00:28:34.319
cycle is first

00:28:31.038 --> 00:28:37.519
it's innovation meaning technology

00:28:34.319 --> 00:28:38.798
education and competitiveness mostly a

00:28:37.519 --> 00:28:41.440
new technology

00:28:38.798 --> 00:28:43.359
and the new technology like the 5g

00:28:41.440 --> 00:28:45.840
technology today

00:28:43.359 --> 00:28:47.918
and the issues pertaining to huawei and

00:28:45.839 --> 00:28:51.519
other technology companies

00:28:47.919 --> 00:28:54.399
if you have technology it works uh both

00:28:51.519 --> 00:28:55.918
economically and militarily and so

00:28:54.398 --> 00:28:57.439
there's always a new technology in the

00:28:55.919 --> 00:28:59.759
case of the dutch

00:28:57.440 --> 00:29:01.840
it was the ability to build ships that

00:28:59.759 --> 00:29:03.839
can go anywhere around the world

00:29:01.839 --> 00:29:05.678
and they took those ships and they put

00:29:03.839 --> 00:29:07.278
and because the

00:29:05.679 --> 00:29:09.120
europeans were experts in fighting

00:29:07.278 --> 00:29:10.960
because they was fought with each other

00:29:09.119 --> 00:29:13.038
they took the guns they put them on the

00:29:10.960 --> 00:29:13.679
ships and they go out to the rest of the

00:29:13.038 --> 00:29:16.158
world

00:29:13.679 --> 00:29:17.038
and they accounted for half of world

00:29:16.159 --> 00:29:19.278
trade

00:29:17.038 --> 00:29:21.038
can you imagine that and when they go

00:29:19.278 --> 00:29:23.599
out there with half of world trade

00:29:21.038 --> 00:29:24.319
they're bringing their money the dutch

00:29:23.599 --> 00:29:27.038
gilder

00:29:24.319 --> 00:29:28.879
okay so they bring the money and when

00:29:27.038 --> 00:29:30.480
they have bring the money it becomes a

00:29:28.880 --> 00:29:32.720
world reserve currency

00:29:30.480 --> 00:29:34.399
and in order to go out in the world they

00:29:32.720 --> 00:29:37.440
have to have a military

00:29:34.398 --> 00:29:37.918
to support that and so these cycles go

00:29:37.440 --> 00:29:40.798
on

00:29:37.919 --> 00:29:42.320
and if you look at that this is the red

00:29:40.798 --> 00:29:44.158
line is china and

00:29:42.319 --> 00:29:46.319
the blue line is in the united states in

00:29:44.159 --> 00:29:49.278
terms of the averages of these things

00:29:46.319 --> 00:29:50.798
and it goes back to 1500 and one of the

00:29:49.278 --> 00:29:54.240
things you could see

00:29:50.798 --> 00:29:56.000
there is the chinese have typically been

00:29:54.240 --> 00:29:58.399
number one or number two although the

00:29:56.000 --> 00:30:00.398
world was a different size then you know

00:29:58.398 --> 00:30:01.359
those were all very far away places we

00:30:00.398 --> 00:30:05.119
now have

00:30:01.359 --> 00:30:07.359
one sort of world so

00:30:05.119 --> 00:30:09.199
that's where that those are the economic

00:30:07.359 --> 00:30:10.079
principles so i think we're late in the

00:30:09.200 --> 00:30:12.558
business cycle

00:30:10.079 --> 00:30:13.678
relatively late um i would say the

00:30:12.558 --> 00:30:15.440
seventh inning

00:30:13.679 --> 00:30:17.360
of the business cycle there is a

00:30:15.440 --> 00:30:18.159
relatively tightening and monetary

00:30:17.359 --> 00:30:21.278
policy

00:30:18.159 --> 00:30:24.320
we have less capacity and we are

00:30:21.278 --> 00:30:27.200
we have greater polarity and we have

00:30:24.319 --> 00:30:28.798
um a situation in which we're going to

00:30:27.200 --> 00:30:31.120
have political issues

00:30:28.798 --> 00:30:32.480
and those political issues will be

00:30:31.119 --> 00:30:35.678
market issues

00:30:32.480 --> 00:30:37.839
because as as we start to think

00:30:35.679 --> 00:30:39.679
will this be a movement to the right or

00:30:37.839 --> 00:30:42.720
a movement to the left

00:30:39.679 --> 00:30:44.880
that will affect capital flows

00:30:42.720 --> 00:30:46.640
so these are my list of investment

00:30:44.880 --> 00:30:49.278
principles

00:30:46.640 --> 00:30:50.799
the template that i look first the

00:30:49.278 --> 00:30:52.480
theoretical

00:30:50.798 --> 00:30:54.240
theoretical value equals the present

00:30:52.480 --> 00:30:56.079
value of future cash flows in other

00:30:54.240 --> 00:30:58.960
words every investment

00:30:56.079 --> 00:31:00.639
is a lump sum payment for a future cash

00:30:58.960 --> 00:31:03.200
flow

00:31:00.640 --> 00:31:06.080
so when we think what is something worth

00:31:03.200 --> 00:31:08.798
we look at those projected cash flows

00:31:06.079 --> 00:31:11.038
and we discount it with an interest rate

00:31:08.798 --> 00:31:13.839
that's the theoretical value

00:31:11.038 --> 00:31:14.558
the actual value that it will trade at

00:31:13.839 --> 00:31:18.000
will

00:31:14.558 --> 00:31:19.678
equal the total amount of spending

00:31:18.000 --> 00:31:22.000
if i calculate total amount of dollars

00:31:19.679 --> 00:31:23.840
spending on something divided by the

00:31:22.000 --> 00:31:26.079
quantity of goods sold

00:31:23.839 --> 00:31:27.038
so i'm always looking at who how much is

00:31:26.079 --> 00:31:28.720
going to be spent

00:31:27.038 --> 00:31:30.158
and what are the motivations of the

00:31:28.720 --> 00:31:32.000
spenders and what are the and

00:31:30.159 --> 00:31:33.919
how much of it is going to be quantity i

00:31:32.000 --> 00:31:35.759
try to estimate

00:31:33.919 --> 00:31:37.919
what the total spending is divided by

00:31:35.759 --> 00:31:41.519
the quantity to estimate the price

00:31:37.919 --> 00:31:44.480
okay number three is that asset classes

00:31:41.519 --> 00:31:45.759
will outperform cash over the long term

00:31:44.480 --> 00:31:49.038
i explained that

00:31:45.759 --> 00:31:51.919
it's required otherwise the gears come

00:31:49.038 --> 00:31:53.278
the economy comes to a halt and that the

00:31:51.919 --> 00:31:56.640
outperformance of

00:31:53.278 --> 00:31:58.798
asset classes over cash that beta

00:31:56.640 --> 00:32:00.720
cannot be very positive for too long

00:31:58.798 --> 00:32:02.720
because if it was it would be easy

00:32:00.720 --> 00:32:04.960
if it was positive you just buy borrow

00:32:02.720 --> 00:32:06.000
cash and you buy the long things and you

00:32:04.960 --> 00:32:09.278
make a lot of money

00:32:06.000 --> 00:32:12.720
it ha comes with big bumps along the way

00:32:09.278 --> 00:32:15.919
and that assets

00:32:12.720 --> 00:32:20.079
are priced to discount future

00:32:15.919 --> 00:32:22.799
expectations most importantly inflation

00:32:20.079 --> 00:32:23.599
growth risk premiums and discount rates

00:32:22.798 --> 00:32:26.558
and i'm going to get

00:32:23.599 --> 00:32:27.519
into that in a minute and then every

00:32:26.558 --> 00:32:29.759
investment

00:32:27.519 --> 00:32:31.440
is a return stream what i mean is every

00:32:29.759 --> 00:32:32.798
day you can market to the market you

00:32:31.440 --> 00:32:35.200
know what it's like

00:32:32.798 --> 00:32:38.480
and so the key is to be able to put

00:32:35.200 --> 00:32:41.278
together portfolios of return streams

00:32:38.480 --> 00:32:43.839
so that they balance well as hashing was

00:32:41.278 --> 00:32:43.839
saying

00:32:44.398 --> 00:32:47.759
i would say whatever success that i've

00:32:46.880 --> 00:32:50.640
had in life

00:32:47.759 --> 00:32:52.879
or that bridgewater has had has to do

00:32:50.640 --> 00:32:53.840
with knowing how to deal with our not

00:32:52.880 --> 00:32:57.200
knowing

00:32:53.839 --> 00:32:58.639
more than anything we know because what

00:32:57.200 --> 00:33:02.640
you don't know

00:32:58.640 --> 00:33:05.919
is a lot and if and you can reduce your

00:33:02.640 --> 00:33:08.559
risk by a lot more than you could reduce

00:33:05.919 --> 00:33:09.519
your return by knowing how to diversify

00:33:08.558 --> 00:33:13.038
well

00:33:09.519 --> 00:33:14.880
so so diversification can reduce risk

00:33:13.038 --> 00:33:18.000
more than it reduces return

00:33:14.880 --> 00:33:20.720
so it improves the return to risk ratios

00:33:18.000 --> 00:33:22.319
and then i say that there i'm sorry if

00:33:20.720 --> 00:33:24.079
i'm getting technical but there are two

00:33:22.319 --> 00:33:26.398
types of return streams

00:33:24.079 --> 00:33:27.759
there is a beta return stream and an

00:33:26.398 --> 00:33:30.319
alpha return stream

00:33:27.759 --> 00:33:32.000
and what i mean by a beta return stream

00:33:30.319 --> 00:33:35.278
is that there is an intrinsic

00:33:32.000 --> 00:33:36.960
reason that that asset class will behave

00:33:35.278 --> 00:33:38.720
in a certain way that you will

00:33:36.960 --> 00:33:40.798
know in other words if growth rises

00:33:38.720 --> 00:33:42.798
faster than discounted

00:33:40.798 --> 00:33:44.639
and interest rates don't rise much you

00:33:42.798 --> 00:33:46.319
know that that stocks are going to go up

00:33:44.640 --> 00:33:49.679
so there is environmental so you can

00:33:46.319 --> 00:33:51.839
structure that alpha is a zero-sum game

00:33:49.679 --> 00:33:53.038
in other words for me to produce alpha i

00:33:51.839 --> 00:33:55.119
have to be uh

00:33:53.038 --> 00:33:56.879
outperform i have to take money away

00:33:55.119 --> 00:34:00.879
from somebody else it's a zero-sum

00:33:56.880 --> 00:34:03.760
game like poker at a poker table so

00:34:00.880 --> 00:34:04.720
so they can be either alphas of betas

00:34:03.759 --> 00:34:07.038
and the key

00:34:04.720 --> 00:34:10.159
to good investing is to create good

00:34:07.038 --> 00:34:13.280
portfolios of good return streams

00:34:10.159 --> 00:34:15.039
and then in order to balance these you

00:34:13.280 --> 00:34:16.879
have to risk balance them

00:34:15.039 --> 00:34:18.079
in other words if somebody might think

00:34:16.878 --> 00:34:20.239
if i put 50

00:34:18.079 --> 00:34:21.839
of my dollars in stocks and 50 percent

00:34:20.239 --> 00:34:24.000
of my dollars in bonds

00:34:21.838 --> 00:34:25.039
that i have my diversification but not

00:34:24.000 --> 00:34:27.039
so because

00:34:25.039 --> 00:34:30.239
the volatility of stocks is greater than

00:34:27.039 --> 00:34:32.320
the twi is twice the volatility of bonds

00:34:30.239 --> 00:34:34.319
and because of that you have to risk

00:34:32.320 --> 00:34:36.639
balance them and

00:34:34.320 --> 00:34:38.000
then the holy grail of investing is to

00:34:36.639 --> 00:34:40.000
find 15 or more

00:34:38.000 --> 00:34:41.440
good uncorrelated return streams i'll

00:34:40.000 --> 00:34:45.519
get into that in a minute

00:34:41.440 --> 00:34:49.039
and then as hashem mentioned then

00:34:45.519 --> 00:34:50.159
systemizing decision rules is is

00:34:49.039 --> 00:34:51.838
critical

00:34:50.159 --> 00:34:54.800
and those rules should be timeless and

00:34:51.838 --> 00:34:57.358
universal what i mean is

00:34:54.800 --> 00:34:58.960
as i said i write down the criteria we

00:34:57.358 --> 00:35:02.000
write down the criteria for

00:34:58.960 --> 00:35:04.559
investing and then we take those

00:35:02.000 --> 00:35:06.079
criteria and we test them through all

00:35:04.559 --> 00:35:09.279
periods of time

00:35:06.079 --> 00:35:11.920
and all countries timeless

00:35:09.280 --> 00:35:13.359
and universal because if something

00:35:11.920 --> 00:35:15.920
happened in one time

00:35:13.358 --> 00:35:16.559
and your process is not working in that

00:35:15.920 --> 00:35:18.079
time

00:35:16.559 --> 00:35:19.759
then it must be that you haven't

00:35:18.079 --> 00:35:21.920
explained the differences

00:35:19.760 --> 00:35:23.280
and so by forcing ourselves to try to

00:35:21.920 --> 00:35:26.480
make those rules

00:35:23.280 --> 00:35:26.960
timeless and universal it then becomes

00:35:26.480 --> 00:35:28.559
the

00:35:26.960 --> 00:35:30.159
you know the the standard that we

00:35:28.559 --> 00:35:31.358
operate by so all the rules that we're

00:35:30.159 --> 00:35:33.358
operating them by are

00:35:31.358 --> 00:35:34.559
timeless and universal i'll just pass

00:35:33.358 --> 00:35:38.078
through some

00:35:34.559 --> 00:35:41.279
charts so this going back to 1975

00:35:38.079 --> 00:35:45.680
think of this as the rolling returns of

00:35:41.280 --> 00:35:48.800
asset classes okay what you can see

00:35:45.679 --> 00:35:51.118
is that all of the asset classes there

00:35:48.800 --> 00:35:52.240
have some times that are good sometimes

00:35:51.119 --> 00:35:54.960
that are bad

00:35:52.239 --> 00:35:56.559
on average they're above zero but they

00:35:54.960 --> 00:35:59.280
all have periods of down

00:35:56.559 --> 00:36:00.480
and inevitably what happens is that

00:35:59.280 --> 00:36:04.079
investors most

00:36:00.480 --> 00:36:07.199
investors love the asset classes

00:36:04.079 --> 00:36:09.680
that did well they

00:36:07.199 --> 00:36:10.399
the biggest mistakes of most investors

00:36:09.679 --> 00:36:12.719
is that they

00:36:10.400 --> 00:36:14.400
think that the investment that did well

00:36:12.719 --> 00:36:16.319
is a good investment

00:36:14.400 --> 00:36:18.320
rather than it's a more expensive

00:36:16.320 --> 00:36:22.240
investment

00:36:18.320 --> 00:36:27.838
and so like so here we we have

00:36:22.239 --> 00:36:27.838
here's eq whoops

00:36:28.400 --> 00:36:33.200
you know here's equities recently done

00:36:30.960 --> 00:36:35.920
well here's commodities

00:36:33.199 --> 00:36:36.719
done very poorly then here but here's

00:36:35.920 --> 00:36:39.200
equities

00:36:36.719 --> 00:36:40.959
right done very poorly in that period of

00:36:39.199 --> 00:36:46.319
time so the key

00:36:40.960 --> 00:36:49.039
as hashim was saying is balance

00:36:46.320 --> 00:36:49.920
how to do that so you can break the

00:36:49.039 --> 00:36:52.719
drivers

00:36:49.920 --> 00:36:53.440
of asset class returns into a few

00:36:52.719 --> 00:36:55.598
categories

00:36:53.440 --> 00:36:57.599
this is true for any asset class and

00:36:55.599 --> 00:37:00.079
it's true for all asset classes

00:36:57.599 --> 00:37:00.800
there are two main things that drive it

00:37:00.079 --> 00:37:04.400
in terms of

00:37:00.800 --> 00:37:06.560
that's inflation and growth and if

00:37:04.400 --> 00:37:08.320
basically if you tell me that

00:37:06.559 --> 00:37:09.279
inflation's going to be higher than

00:37:08.320 --> 00:37:12.400
expected

00:37:09.280 --> 00:37:14.160
and growth be higher than expected um i

00:37:12.400 --> 00:37:16.320
would know what to invest in

00:37:14.159 --> 00:37:18.159
higher than discounted and if it's you

00:37:16.320 --> 00:37:18.720
say it's lower i'll know what to invest

00:37:18.159 --> 00:37:21.679
in and

00:37:18.719 --> 00:37:22.319
most people here would so those become

00:37:21.679 --> 00:37:24.399
the two

00:37:22.320 --> 00:37:26.559
main drivers they can rise or that

00:37:24.400 --> 00:37:29.039
decline

00:37:26.559 --> 00:37:30.159
and then there are discount rates and

00:37:29.039 --> 00:37:32.800
risk premiums

00:37:30.159 --> 00:37:33.358
discount rates mean the inch as i told

00:37:32.800 --> 00:37:35.839
you

00:37:33.358 --> 00:37:36.639
the interest rate affects all asset

00:37:35.838 --> 00:37:38.799
classes

00:37:36.639 --> 00:37:40.159
because the interest rate is the

00:37:38.800 --> 00:37:42.720
discount rate

00:37:40.159 --> 00:37:44.239
that you use to compare the cash flow so

00:37:42.719 --> 00:37:45.759
you raise the interest rate

00:37:44.239 --> 00:37:47.679
and that's negative for all asset

00:37:45.760 --> 00:37:49.599
classes and then you have

00:37:47.679 --> 00:37:50.960
when you strip all that risk premiums

00:37:49.599 --> 00:37:54.400
out and if you

00:37:50.960 --> 00:37:57.760
and that equals the following this shows

00:37:54.400 --> 00:37:59.119
what happened in history in relationship

00:37:57.760 --> 00:38:03.280
to that context

00:37:59.119 --> 00:38:06.559
the top chart shows a growth

00:38:03.280 --> 00:38:09.519
assets relative to uh

00:38:06.559 --> 00:38:10.159
strong and assets that you hold if you

00:38:09.519 --> 00:38:11.838
had a

00:38:10.159 --> 00:38:13.239
falling growth environment assets that

00:38:11.838 --> 00:38:16.159
you'd have a rising fault

00:38:13.239 --> 00:38:18.399
aggregate with inflation then it shows

00:38:16.159 --> 00:38:20.000
what the discount rate is and then it

00:38:18.400 --> 00:38:21.440
shows what the risk premium which was

00:38:20.000 --> 00:38:23.519
the residual of that

00:38:21.440 --> 00:38:25.200
and that's what we have all-weather

00:38:23.519 --> 00:38:27.989
return all-weather return

00:38:25.199 --> 00:38:29.199
it all rather is a

00:38:27.989 --> 00:38:33.118
[Music]

00:38:29.199 --> 00:38:36.159
our optimally diversified portfolio

00:38:33.119 --> 00:38:37.519
okay uh what i'm going to skip this

00:38:36.159 --> 00:38:40.559
chart what it's meant to show

00:38:37.519 --> 00:38:44.800
basically is that how diversification

00:38:40.559 --> 00:38:47.920
can substantially improve your risk

00:38:44.800 --> 00:38:50.240
to return ratio i want to turn

00:38:47.920 --> 00:38:53.440
uh to this chart so this is what i

00:38:50.239 --> 00:38:55.679
believe the holy grail of investing is

00:38:53.440 --> 00:38:57.440
if you can do this you will make a

00:38:55.679 --> 00:39:00.639
fortune

00:38:57.440 --> 00:39:02.320
you'll be very successful and it's

00:39:00.639 --> 00:39:04.799
simple really

00:39:02.320 --> 00:39:07.280
maybe not simple to pull off but simple

00:39:04.800 --> 00:39:07.280
concept

00:39:09.920 --> 00:39:17.760
if you can get 10

00:39:13.679 --> 00:39:23.199
good uncorrelated investments

00:39:17.760 --> 00:39:27.599
five good uncorrelated investments

00:39:23.199 --> 00:39:30.480
15 good uncorrelated investments

00:39:27.599 --> 00:39:31.760
you can substantially improve the return

00:39:30.480 --> 00:39:34.440
to risk ratio

00:39:31.760 --> 00:39:36.000
and this just shows how it works and why

00:39:34.440 --> 00:39:39.119
diversification

00:39:36.000 --> 00:39:41.838
is more important than

00:39:39.119 --> 00:39:43.119
being good even in picking the best

00:39:41.838 --> 00:39:45.279
investments

00:39:43.119 --> 00:39:47.119
and most people think give me the best

00:39:45.280 --> 00:39:49.359
investment and let me put all my money

00:39:47.119 --> 00:39:52.480
in what i think is the best investment

00:39:49.358 --> 00:39:55.358
wrong the best find your best

00:39:52.480 --> 00:39:56.159
10 uncorrelated investments and put your

00:39:55.358 --> 00:39:57.920
money in that

00:39:56.159 --> 00:39:59.679
and you're going to do a lot better and

00:39:57.920 --> 00:40:01.599
this just gives you an example

00:39:59.679 --> 00:40:02.879
so this is the standard deviation let's

00:40:01.599 --> 00:40:06.640
call it the risk

00:40:02.880 --> 00:40:09.358
of 10 percent and just imagine

00:40:06.639 --> 00:40:11.358
i put in an asset i'll use a simple

00:40:09.358 --> 00:40:12.000
example that has 10 percent return and

00:40:11.358 --> 00:40:15.279
10

00:40:12.000 --> 00:40:15.760
standard deviation uh so let's say it's

00:40:15.280 --> 00:40:18.240
10

00:40:15.760 --> 00:40:18.880
return 10 standard deviation and let's

00:40:18.239 --> 00:40:23.039
say i

00:40:18.880 --> 00:40:26.240
put in a second investment that is six

00:40:23.039 --> 00:40:29.279
sixty percent correlated with that

00:40:26.239 --> 00:40:33.279
third fourth

00:40:29.280 --> 00:40:36.319
fifth and sixth and so on this is how my

00:40:33.280 --> 00:40:38.240
risk in my portfolio would change that

00:40:36.318 --> 00:40:39.358
means like if you have a diversified

00:40:38.239 --> 00:40:42.159
portfolio

00:40:39.358 --> 00:40:44.719
of stocks average stock is about 60

00:40:42.159 --> 00:40:47.118
correlated with average other stocks

00:40:44.719 --> 00:40:47.919
and you can put in a hundred you can put

00:40:47.119 --> 00:40:49.599
in a thousand

00:40:47.920 --> 00:40:52.000
and you are not going to materially

00:40:49.599 --> 00:40:54.880
reduce your risk relative to putting

00:40:52.000 --> 00:40:56.480
in you know just five to ten and you

00:40:54.880 --> 00:40:57.280
could see that that'll lower your risk

00:40:56.480 --> 00:41:00.000
by

00:40:57.280 --> 00:41:01.519
10 or 15 percent if you have an

00:41:00.000 --> 00:41:03.599
uncorrelated

00:41:01.519 --> 00:41:04.880
return stream and you can get actually

00:41:03.599 --> 00:41:06.318
better than uncorrelated because you

00:41:04.880 --> 00:41:07.760
could have negatively correlated but

00:41:06.318 --> 00:41:09.838
let's say i put in

00:41:07.760 --> 00:41:11.280
an uncorrelated return stream this is

00:41:09.838 --> 00:41:14.078
how the line goes

00:41:11.280 --> 00:41:16.000
so you could see like at five you've

00:41:14.079 --> 00:41:19.200
more than cut your risk in half

00:41:16.000 --> 00:41:22.400
five uncorrelated return streams if you

00:41:19.199 --> 00:41:23.199
have down to 15 you're going to reduce

00:41:22.400 --> 00:41:25.680
your risk by

00:41:23.199 --> 00:41:28.318
nearly 80 percent that means you've

00:41:25.679 --> 00:41:28.879
improved your return to risk ratio by a

00:41:28.318 --> 00:41:31.599
factor

00:41:28.880 --> 00:41:31.599
of five

00:41:32.318 --> 00:41:35.679
so you can reduce your risk a lot

00:41:34.800 --> 00:41:39.039
without

00:41:35.679 --> 00:41:39.519
reducing your return and that is the key

00:41:39.039 --> 00:41:42.639
to it

00:41:39.519 --> 00:41:45.039
right so when i look at this

00:41:42.639 --> 00:41:47.039
i think that um there are two types of

00:41:45.039 --> 00:41:49.199
assets what's your strategic asset

00:41:47.039 --> 00:41:51.440
allocation mix what is your

00:41:49.199 --> 00:41:52.879
beta in other words what portfolio do

00:41:51.440 --> 00:41:56.000
you normally have

00:41:52.880 --> 00:41:57.440
and in my opinion it should be highly

00:41:56.000 --> 00:41:59.920
diversified

00:41:57.440 --> 00:42:01.679
but with along those lines in terms of

00:41:59.920 --> 00:42:04.800
like half and growth half inflation

00:42:01.679 --> 00:42:06.399
rising or declining and then alphas

00:42:04.800 --> 00:42:08.880
you have to have a lot of different

00:42:06.400 --> 00:42:10.639
alphas like in our case we have

00:42:08.880 --> 00:42:13.039
you know well over 100 different types

00:42:10.639 --> 00:42:15.199
of alphas about 130 different kinds

00:42:13.039 --> 00:42:16.079
of markets actually in terms of trading

00:42:15.199 --> 00:42:20.879
so

00:42:16.079 --> 00:42:25.519
that's it thank you for your patience

00:42:20.880 --> 00:42:25.519
let's have a conversation about it