Good morning.
Having made a fortune in hedge funds, Ray Dalio has now turned to the less lucrative business of book writing. His first—Principles—was a success among the CEO crowd, describing among other things his devotion to the management practice of radical candor. This week, book two comes out—A Template for Understanding Big Debt Crises. I’ve read the galleys, and can’t claim it’s a page turner. But it is a systematic and smart analysis of various debt crises in history—48 of them, to be exact—and it helps explain why Dalio’s investments performed so well in the last one.
What about the next crisis? Dalio doesn’t address that in his book. But he did in an interview with me last week. He strongly believes that the “same things happen over and over again,” only in slightly revised form. And so a careful study of history is the best way to predict the future. His study of debt crises leads him to believe the right historical parallel for the next few years is the period from 1935 to 1940—the run-up to World War II.
Dalio argues that the crisis 10 years ago was similar to the 1929-1932 period—both huge in their consequences. He claims both were characterized by interest rates that fell to zero, and both also led to a growing wealth gap and a rise in populism. Moreover in both crises, central banks spent all their ammunition fighting the after effects and so had little left to combat the next downturn.
And what about the war? “If you have populism and you have a downturn, tensions get exacerbated,” he says. He mentions the “Thucydides trap,” which is Graham Allison’s work on why shifting global power dynamics—like the current one between a retreating U.S. and an ascendant China—so often lead to global conflict.
None of this poses an immediate threat, he says. For the moment, the economy seems on track. “As a generalization, we find pockets of places that might be beginning to be a little worrisome,” he says, “but not much.”
But looking two years out, the story starts to change. “If you look at government debt, that’s something we are concerned about, particularly out there two years from now. The amount that will have to be sold to fund the deficit, to fund the Fed’s balance sheet… in addition there is all the non-debt liability—pensions and health care…” That will either lead to a painful spike in interest rates, choking the economy, he believes, or monetization of the debt which could trigger a dollar crisis that rocks the rest of the world. With the central bank disarmed and populism and tribalism rampant, the resulting brew could be toxic.
Is Dalio’s analysis right? Economists may argue with his reading of monetary history. But his general conclusion fits with what I’ve argued for some time: the political ramifications of the last crisis, much like the Great Depression, will last longer and prove more dangerous than the economic and financial consequences.
By the way, Dalio only hinted at this in his interview on CNBC yesterday. You can hear what he had to say here. And you can watch his self-produced video on how he spotted the last debt crisis here.
More news below.
| Alan Murray | |
| @alansmurray | |
| alan.murray@fortune.com |
Top News
JPMorgan Competition
JPMorgan Chase & Co. is to run a competition for cities that want its funding, in order to boost economic growth. JPMorgan intends to address issues such as financial insecurity and neighborhood disinvestment, through public-private partnerships—a scheme it has already tried out in Detroit, Chicago and Washington, D.C. The competition runs until the end of the November, and winners will be announced in the spring. Fortune
Turkey Wealth Fund
Turkey's President Recep Tayyip Erdogan has announced the new chair of the country's sovereign wealth fund: himself. Erdogan has kicked out the fund's entire management team. Finance minister (and Erdogan's son-in-law) Berat Albayrak will also sit on the board. The fund was formed two years ago, but never accomplished much. Erdogan gained expanded executive powers a few months ago, allowing him to exert more influence on economic policy. Bloomberg
EU Law's Limits
It's not just Google that doesn't want EU law to extend beyond the EU's borders—the European Commission, the bloc's executive body, told the EU's top court that it also opposes the idea. The French privacy regulator is arguing that the European "right to be forgotten" should compel Google to scrub certain links from its search results across the globe, not just in the EU. Wall Street Journal
Terrorist Material
At the same time, the European Commission is telling the big tech platforms that they need to remove terrorist propaganda within a mere hour of notification. The Commission has unveiled long-threatened legislation that would hit the likes of Google, Twitter and Facebook with fines of up to 4% of annual revenue (as with the GDPR privacy law) if they don't comply. The risk here is one of overblocking, as it's cheaper for the platforms to turn to automated systems that may not yet have human-like discretion when faced with potentially malicious notifications. Bloomberg
Around the Water Cooler
China and Russia
China and Russia may have traditionally been regional rivals, but they're getting a lot cosier these days. Not only are they conducting massive war games together, but President Xi Jinping now says he wants to see more investment projects with Russia to combat rising protectionism, ahem, elsewhere. Xi: "We have unique geographic benefits. China and Russia are the biggest neighbors, we have solid political ties…Chinese and Russian relationships are at an all-time high level." CNBC
Brexit Diplomacy
In a notable diplomacy failure, the U.K.'s Brexit negotiators were caught out trying to play divide and conquer with individual EU member states. They wrote to the 27 other EU countries, asking for side negotiations on transport in the event of a "no-deal" Brexit. "If there is no deal, there is no trust," lead EU negotiator Michel Barnier reportedly told his British counterpart, Dominic Raab, while chastising him. In short, no deal means no deal. Guardian
Workers Worse Off
A BBC-commissioned study of salaries since the financial crisis shows wages in the U.K. are now 3% lower than they were a decade ago. In the 30-39 age group, the drop has been 7.2%, and for those in their twenties, it's 5%. The over-60s are down a mere 0.7%. If the crisis hadn't happened, and trends from 1998-2008 had continued, wages would have been around 15% higher than they are today. BBC
Fracking Economics
Fortune alum Bethany McLean has a book out on the economics of fracking in the U.S. She reckons the "shale revolution" is overhyped and a house of cards. Why? The industry still isn't making money, the idea of "energy independence" from the Middle East fails to appreciate the reality of a global economy, and the future lies more with renewables than it does with oil anyway. Fortune
This edition of CEO Daily was edited by David Meyer. Find previous editions here, and sign up for other Fortune newsletters here.
