Lesson 11.1

How the Economy Works like a Machine

Preston's Thoughts on the Economic Machine (10 FEB 2015)

So the gentleman that made the video is Ray Dalio. Ray is probably one of the most respected leaders in the investment world and his net worth is 16 billion dollars. That video is his take on macro economics. I completely agree with his approach. In fact, Ray personally wrote a 300 page guide to understanding macro-economics as an investor, and it can be found here: Ray Dalio's Notes

I'm posting up to date information on our current economic condition at the following location: Preston's updates on the Current Deleveraging. I highly recommned people pay close attention to this thread.

So here's my point. When you watch Ray's video, you're going to see how the current market conditions are not normal (as of 10 FEB 2015). First, having interest rates at near zero for 8 years is NOT normal. That is a tall tale sign of a 75 year to 100 year deleveraging process. I'm of the opinion that we have made mediocre progress in alleviating the credit crisis from 2008, but I still think there is a lot of deleveraging that still needs to take place. I get the impression that we are probably going to see signs of deflation in the short term (because that's the inherent nature of a deleveraging), but in the long term (within the next 5 years), I really think we'll see inflation. How much, I don't know. But I would not be surprised if similar aspects from the 1970's return.

When you watch Ray's video, you get a real sense of how important it is to monitor the amount of credit in the overall system. More importantly, the amount of credit in the global economy. I really think that the catalyst for the next market crash may not be induced by the US economy. It might be Europe or China (as they have even bigger or growing problems). Since we are dealing with a world economy at this point, the debt to GDP of the world economy is very important to monitor. Since the 2008 crash, the world economy has increased it's global debt by 57 trillion dollars. Here's an amazing report written by McKinsey and Company in February 2015 on this topic: McKinsey World Deleveraging Report

So in short, I'm paying very close attention to the supply of money and credit in the economy. This becomes the key driver because interest rates might not be a good indicator of when the next crash is coming (which is the typical indicator). The other key driver is the overall income growth relative to the overall interest obligation on the growing global debt. The current situation is a total anomaly from your typical business boom bust cycle.

The last thing I want to do is be a fear monger, but I do want to share with you my thought process and how I'm seeing things. I think we are in for an interesting couple years ahead of us. Hopefully Stig and I can help you navigate the rough waters that lie ahead.



Written on 10 February 2015

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