Bridgewater Associates: The Money Shufflers Vig - September 2004

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Bridgewater Associates: Collection of Writings (1999-2012)

Bridgewater Associates: Collection of Writings (1999-2012)

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  • 1. Bridgewater® Daily Observations September 22, 2004 © 2004 Bridgewater Associates, Inc. (203) 226-3030 Ray Dalio Amit Srivastava United States The Money Shuffler’s Vig: Revised 3/10/2006 The money that’s made from manufacturing stuff is a pittance in comparison to the amount of money made from shuffling money around; 44% of all corporate profits in the U.S. come from the financial sector compared with only 10% from the manufacturing sector (see the chart below). This has flipped. As shown below, in the 1950’s and 1960’s the manufacturing sector’s profits accounted for about 50% of total profits while the financial sectors profits accounted for 15% of the total. Also shown, this flipping has occurred pretty steadily. We see it anecdotally – e.g. by who lives in the big houses in the expensive neighborhoods or who shops at the expensive stores. While in decades past it used to be the captains of industry, now it’s the money shufflers – the folks who handle OPM (other people’s money) and earn their vig off of it. From low to high on the hierarchy, the money shufflers at or near the peak are a) bankers, b) investment bankers and investment managers, and then c) the 2 and 20 crowd (hedge funds, private equity firms, etc.). Now, the notion of one’s child wanting to be a doctor sends chills of fear down parents’ spines, engineers gravitate to plying their craft on money instead of real stuff, and $600/hour lawyers are depressed (to the point of either padding their accounts or working nearly 24/7) in their failed attempts to stop falling further behind. US Profits Breakdown by Major Sector 0% 10% 20% 30% 40% 50% 60% 70% 48 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 Financials Manufacturing This growth in the money shufflers’ profits as a percent of GDP has come partially because a) financial assets and liabilities as a percent of GDP have risen steadily and partially because b) the average money shuffler’s profit per dollar shuffled has gone up (largely because those with the big bucks, particularly institutional investors, have gone from investing in the .25% to .75% fee stuff to investing more in the 2% and 20% stuff). The only thing that has been a slight drag on the otherwise Bridgewater ® Daily Observations is protected by copyright. No part of the Bridgewater ® Daily Observations can be duplicated or redistributed without prior consent from Bridgewater Associates. Copying or redistribution of The Bridgewater ® Daily Observations is in violation of the U.S. Federal copyright law (T 17,U.S. code). 1 Bridgewater ® Daily Observations 09/22/2004
  • 2. rapid growth in the profitability per money shuffler has been the big increase in the number of them. That’s one of the great things about capitalism – it allocates resources so efficiently. So rather than turning out doctors, engineers, teachers, architects, and others who are involved with the old economy, our system has met the increased demand for money shufflers (like me and you) via an increased supply. Will This Continue? Assuming that we still eat, drink, inhabit, and do the whole host of things other than borrow, lend, and invest, this can’t go on forever, at least at the global level. But it can go on for quite awhile, if other countries (e.g. China and India) do our manufacturing for us and have us shuffle their money for them. Since we expect their debts and financial assets as a percent of GDP to continue to grow, and because we believe that the United States is uniquely competitive in the money shuffling business, largely because of cultural reasons (i.e., for the same reasons Northern Italians are great at design – e.g., sports cars, clothes, furniture and food – because they have done it long enough that it’s practically in their blood), we expect the U.S. money shufflers (and other money shufflers as well) to do very well in the fast growth, goods-producing countries like China. To give you a sense of this, the following chart shows the total value of securitized debt as a percent of GDP in five major countries since 1990. While this doesn’t show unsecuritized debt (like unsecuratized bank loans), it conveys an indicative picture. As shown, they have all increased as a percent of GDP and China’s is low (and has plenty of room to grow). 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200% 90 92 94 96 98 00 02 04 US Japan Germany UK China Securitized Debt %GDP In contrast, we think that the longer-term prospects for growth in the home market (the U.S.) are pretty bleak. That is because the rise in debt and financial assets as a percent of GDP was primarily due to interest rates falling (thus causing present values to rise) at the same time that profit growth was relatively good, and it is unlikely that interest rates can keep falling and that profit growth will be as strong. Also, we believe that the 2 and 20 crowd will get a lot more money, primarily at the expense of traditional managers (especially those who manage equities), largely because a) institutional investors need higher returning, uncorrelated investments, b) these vehicles, especially hedge funds and alpha overlays, are better mouse-traps (they allow good managers to do much better, though they also give too much leeway to bad managers) and c) institutional investors are under-weighted to them. While these investments now constitute only a couple of percent of their pies now, we expect that they will be about 10% to 15% in ten years. While many (if not most) hedge fund investments will disappoint (for lots of reasons that would create too much of a digression to explain), the voracious demand for them (and alpha overlays) will increase and keep fees up, especially for those who have demonstrated long-term skills and track records. 2 Bridgewater ® Daily Observations 09/22/2004
  • 3. So, we expect the traditional money shufflers in traditional markets to start to decline while non- traditional ones in the non-traditional places (especially the good ones) to continue to grow. Weekly Sentiment: Below is our updated weekly sentiment. Composite Sentiment Index 53% 4% 50% 38% 17% 22% 55% 42% -7% 27% 28% 0% -100% -50% 0% 50% 100% T-bonds Euro$ Stocks EuroB-PoundS-Franc J-YenC -dollar G old SilverC opper O il This Week Last Week 3-Month High/Low HighOB ModOB Neutral ModOS HighOS Composite Sentiment Index (avg of raw numbers) Market This Week Last Week 3 mth high 3 mth low T-Bonds 67 64 67 48 Euro$ 51 51 58 31 Stocks 63 65 65 42 Euro 65 64 69 45 B-Pound 46 47 70 45 S-Franc 53 55 70 50 J-Yen 52 56 67 50 C-Dollar 70 73 73 51 Gold 66 62 71 49 Silver 44 39 58 37 Copper 61 56 66 43 Oil 66 60 87 52 Bridgewater Daily Observations is prepared by and is the property of Bridgewater Associates, Inc. and is circulated for informational and educational purposes only. There is no consideration given to the specific investment needs, objectives or tolerances of any of the recipients. Recipients should consult their own advisors, including tax advisors, before making any investment decision. This report is not an offer to sell or the solicitation of an offer to buy the securities or other instruments mentioned. Bridgewater research is based primarily upon proprietary analysis of current public information from sources that Bridgewater considers reliable, but it do not assume responsibility for the accuracy of the data. The views expressed herein are solely those of Bridgewater as of the date of this report and are subject to change without notice. The views represent Bridgewater's outright views in these specific markets, but not all markets that Bridgewater trades. Bridgewater may have a significant financial interest in one or more of the positions and/or securities or derivatives discussed. Those responsible for preparing this report receive compensation based upon various factors, including, among other things, the quality of their work and firm revenues. 3 Bridgewater ® Daily Observations 09/22/2004