Museletter: A Beautiful Deleveraging
Ray Dalio is an American billionaire investor and hedge fund manager. Dalio is the founder of Bridgewater Associates, the largest hedge fund in the world with US $150 billion in funds under management. Bloomberg currently ranks Dalio as the 60th richest person in the world with a net wealth of US $18.4 billion.
Dalio describes the process of "A Beautiful Deleveraging" in this 30 minute video titled; "How the Economic Machine Works".
Here at Muse Capital, we are seeing our very own beautiful deleveraging occurring within the Australian economy and wanted to share Dalio's insights and his formula for success with our investors. A summary of our thoughts are provided below.
https://www.youtube.com/watch?v=PHe0bXAIuk0
Application for the Australian Economy
Dalio notes that there are three types of deleveraging:
Austerity: Pull in your belt, spend less, and reduce debt.
Debt Restructuring: Creditors get paid less or get paid over a longer time frame or at lower interest rates.
Printing of Money: Typically happens when interest rates are close to zero, because you can't lower interest rates any more.
A beautiful deleveraging balances the three options. In other words, there is a certain amount of all three.
When the mix is done correctly, the results are not too dramatic. It doesn't produce too much deflation or too much depression. There is slow growth, but it is positive slow growth. At the same time, ratios of debt-to-incomes go down. That's a beautiful deleveraging.
Australia over the past two years has been very much in a beautiful deleveraging environment.
In the last week, we have seen the Australian Prudential Regulation Authority (APRA) move to scrap the rule that made lenders assess mortgage customers on their ability to make loan repayments on an interest rate of 7.25%. This loosens a key constraint on individuals borrowing capacity.
The Reserve Bank Governor has strongly indicated that further reductions in interest rates are likely. Most market commentators are factoring in a 25 point rate cut next week, with a subsequent 25 point cut in the proceeding months. Bank lending has certainly factored in these cuts in their long-term lending since the beginning of the year.
Australia's terms of trade are at record levels. Our national productivity is high and unemployment remains low. With a resounding win for the Coalition at the Federal Election, the Australian people have given Scott Morrison a mandate for economic expansionism.
What does this all mean for markets?
If by now you've watched Ray Dalio's film, you will know that the main driver of economic growth is credit availability. Without credit, it is difficult for economies to expand.
As the aftermath of the Banking Royal Commission begins to subside and banks loosen their grip on credit, we are likely to see a sustained period of low but sustainable growth.
For investors, this means that we can continue to operate in a low interest rate environment where credit is cheap and yield spreads are heavily in favour of investors.
Mel Pikos
Managing Director
Muse Capital
mel.pikos@musecapital.com.au