Ray Dalio: Beating the stock market by learning history

  • History inevitably repeats itself
  • If a trend is occurring that you don’t have a good idea of how it will pan out, it is more likely because you have not lived in a time where a similar situation had happened before and less likely because a similar situation had happened before
  • Application of FinTech is to make it possible to leverage on assets that we have like the following:
    • Human Capital
    • Social Capital
    • Real Assets
  • An economy built on talent versus an economy built on natural resources and tourism tends to grow faster
    • Singapore versus Jamaica
      • important to educate local population to ensure they do not become second class citizens in their own country to highly qualified expats
    • Three Kingdoms – Cao Cao versus Yuan Shao
  • Algorithms for decision making
    • Be wary of purely deriving algorithms through data mining and regression analysis.
      • The user of this algorithm will not be able to decipher causation versus correlation
      • The training data available might be missing existing significant events
    • The algorithm should instead be a derivation of your own thought processes. Computers/algorithms should be used to complement human decision making instead of replacing it.
  • An environment of radical transparency is helpful towards supporting idea meritocracy
    • helps match individuals strong in one area with other individuals strong in complementary areas.
    • A real world ensemble decision tree model
  • On China
    • Main challenges the country face
      • Debt restructuring
      • Economic restructuring – the need to shift away from export focused economy to domestic focused economy
      • Develop capital markets
      • Balance of payments
    • Developments to date
      • debt being restructured
      • economic restructuring happening dealing with state owned enterprises. Fast development of cutting edge industries. AI advancements comparable to US
      • capital markets like Hong Kong depth of liquidity is impressive
      • balance of payment is being dealt with effectively due to capable leaders and ability to control via levers unique to a strong central government
      • Strong emphasis on kids education
      • Reinforcing Integrity of law through eliminating corruption

Forum – Ten years after Lehman brother’s bankruptcy: where are we now and what lies ahead

Moderators

  • Michael Hutchison, UC Santa Cruz
  • Darrell Duffie, Stanford University
  • Barry Eichengreen, UC Berkeley
  • Mark Levonian, Promontory Financial Group

next sources of financial risks

  • highlights
    • China’s corporate debt build up
    • FinTech disintermediating traditional bankers and removing central bank fiscal levers

 

  • cyber disintermediation
    • hackers screwing around with bank account records
    • corporate borrowers went away back in 2008. Banks forced to find riskier customers
    • new technologies are taking away a lot of the lending business
    • new technology
      • new payment systems
      • digital currencies – Singapore, Canada and China
    • cloud provider concentration – Fintech everything on cloud
  • US regulation backsliding risk
    • management of federal government
    • stress test rules
    • reduction of 100-200 billion capital in US
      • capital and liquidity
    • liquidity was the main trigger of the melt down
    • Dodd Frank bill
  • sovereign funds risk: Turkey is 3-4X of Greece economy
  • china corporate debt risk as its financial system becomes more integrated with the rest of the world
    • check for excessive short term borrowing
    • plenty of shadow banking in China growing rampantly
  • institutional funds risk
    • banking system is still concentrated in top 5
    • US absorbed 85% of low cost homes through Fanny Mae mortgages
      • quicken is the largest mortgage generator
  • largest banks in the world are all mainly Chinese versus Japanese back 10 years ago
  • 2008 melt down
    • caused by incompetent regulation rather than wrongful act of financial people.
      • Prosecution is setup to go after cases they would likely win
      • complexity of financial system
      • complexity of corporate structure
      • complexity versus usefulness of market actual needs
  • populist risk: under funded pension fund. Because of really low risk rates
  • financial consumers
    • not a priority versus banks
    • Dodd Frank act
    • consumer financial protection bureau
    • growth rate of structured notes?
  • trade war
    • economic consequences was very limited
    • Brexit effect took 4 quarters to show up

 

  • Volatility: is good if is driven by transparency
  • leading indicators of financial crisis
    • credit spreads
    • credit to GDP
    • rapid growth of housing credit signals impending recession
    • contracts imposed on borrowers – reduced conditions are signs of excessive borrowing
    • credit growth
      • Debt to GDP
      • corporate debt growth in China
    • dump truck index – real estate boom
    • number of cranes visible in urban skyline
  • blockchains (mainly used for security keeping)
    • Bank of America mellow – backup in blockchain
    • securities – T+2 in block chain

Book summary: Creative capital

  • During the world depression most funds were invested in ultra conservative funds. This meant limited investment new untried industries
  • World War 2 helped reduce unemployment rate in the US to below 10%. This was driven by Government spending in procurement of war time machines.
  • US Industries like car manufacturing in Detroit were either not willing or had a hard time keeping up with demands. Preferring initially to cater to consumer demands.
  • The Depression was a great opportunity for Doriot as he was hired for many directorship positions to oversee many ailing companies in different industries giving him a very wide and diverse portfolio of experience
  • World War 2 triggered the rise of venture capital in the military which was later spun off into the private sector
  • The breach in paradigm between not seeing human as a fighting machine as the default versus seeing human as a fighting machine that needs to be well equipped was where venture capital first flourished in world war 2