Ray Dalio outlook for finance

[Running_Man]

https://www.linkedin.com/pulse/world-has-gone-mad-system-broken-ray-dalio/?articleId=6597520880811724801#comments-6597520880811724801&trk=public_profile_article_view

His overall points are about exactly the same as my thoughts, the sustainability or unsustainable nature of the markets I am less sure than he is, as Japan showed you can keep this model running for quite a long time, so another decade of this is not out of the question.

When you look at the UBER business model, they lose money on every ride, but the belief is eventually they will put all taxis out of business, get self driving cars and be able to fire all the drivers and make loads of money. A business owned by a friend of mine paid 2.4 million for a building and equipment, borrowed all the money and got into the parts manufacturing business for large industrial companies, from scratch with no experience and 2 engineers - interest rate 3.5% over 10 years. He figured why not hurdle rate is so low and if the business fails all the bank gets is the building and equipment for which he has invested zero. All because he threatened to take all his business to a private hedge fund. It is truly amazing how much money for so little cost is available.

 

[COcheesehead]

https://www.linkedin.com/pulse/world-has-gone-mad-system-broken-ray-dalio/?articleId=6597520880811724801#comments-6597520880811724801&trk=public_profile_article_view

His overall points are about exactly the same as my thoughts, the sustainability or unsustainable nature of the markets I am less sure than he is, as Japan showed you can keep this model running for quite a long time, so another decade of this is not out of the question.

When you look at the UBER business model, they lose money on every ride, but the belief is eventually they will put all taxis out of business, get self driving cars and be able to fire all the drivers and make loads of money. A business owned by a friend of mine paid 2.4 million for a building and equipment, borrowed all the money and got into the parts manufacturing business for large industrial companies, from scratch with no experience and 2 engineers - interest rate 3.5% over 10 years. He figured why not hurdle rate is so low and if the business fails all the bank gets is the building and equipment for which he has invested zero. All because he threatened to take all his business to a private hedge fund. It is truly amazing how much money for so little cost is available.

I bet you your buddy had a personal guarantee for the borrowed funds despite what he told you. He doesn’t just walk from failure.

 

[NW-Bound]

There's something there about a lot of available capital sloshing around, and people run out of ways to invest it in productive ways. Perhaps we have all that we need, in terms of things that can be produced routinely and easily such as oil, food, electronics, etc...

The things that we can use but do not yet have, such as effective cancer drugs, are so out of reach that investors do not want to throw money at it.

How else do European central bankers impose negative interest rates, and people are willing to let their money being taken from them a little bit every month?

 

[COcheesehead]

There's something there about a lot of available capital sloshing around, and people run out of ways to invest it in productive ways. Perhaps we have all that we need, in terms of things that can be produced routinely and easily such as oil, food, electronics, etc...

The things that we can use but do not yet have, such as effective cancer drugs, are so out of reach that investors do not want to throw money at it.

How else do European central bankers impose negative interest rates, and people are willing to let their money being taken from them a little bit every month?

Couple things: I know several people cured of cancer. My wife being one, so not so sure there are no effective cancer drugs.

Negative rates. The bonds actually pay a coupon. So you get paid something to hold. Why would you buy these? Because you think rates will go lower and the bonds will actually appreciate.

 

[NW-Bound]

Yes, there are effective cancer drugs. However, cancer is a multi-faceted disease, and there are always certain percentages of patients who do not respond to the same usual drugs. Researchers are constantly looking for new drugs, but the battle is getting harder and harder to get the last percentages of cases.

About negative interest rates, some European bankers are talking about subtracting some money from people's account balances each month. It's not a bond. It is truly negative interest rate. You put $1000 in your checking or saving account. Next month, it becomes $999. Running_Man recently shared an article about that.

PS. Some of the more effective cancer drugs have been around for a very long time. An example is Fluorouracil, which was patented in 1956. It's still in use as a standard treatment for some cancers. If a standard treatment does not work for a patient, he or she is in for bigger trouble because the cancer is a nasty type, and the treatment is ramped up to more expensive and iffy drugs.

 

[Running_Man]

I bet you your buddy had a personal guarantee for the borrowed funds despite what he told you. He doesn’t just walk from failure.

No, I am reviewing books of their companies in order to provide an outlook for cashflow and covenant protection. It is a corporation and the loan is in the corporation's name. Now there are covenants on the loan and he is not allowed to take any distributions unless he is in a position where the covenants are met and no other loans can be made without the bank's consent and agreement by the lender to be subordinate to the bank, but personally he has no personal obligations.

If they fail at the covenants, the bank will take over the business and it will be a workout situation where the bank raises the interest rate and no distributions can be made until the bank is whole, but only the business is at risk.

Look at Softbank, they are rated junk, just lost billions put forth UBER and WeWork, they are funded with 62 billion in debt at 3.5%.

It is just a fact that companies do not have to be very profitable to hurdle 3.5% interest so you can take some real gambles as the reward is at a level that is astronomic.

The stated goal is to take the 2.4 million, create a business that is creating a million in EBITDA in 5 years and sell the business for 5 million.

 

[Running_Man]

Also for those that like to invest in total world international bond funds, Softbank has 70+ billion in total of loans in Japanese yen representing over 50% of the total Japanese Corporate bond market, and the retail trading corporate bond for 5 years trades with a yield of 1.6% a total of 10 billion of Softbank's corporate debt.

 

[ncbill]

No, I am reviewing books of their companies in order to provide an outlook for cashflow and covenant protection. It is a corporation and the loan is in the corporation's name. Now there are covenants on the loan and he is not allowed to take any distributions unless he is in a position where the covenants are met and no other loans can be made without the bank's consent and agreement by the lender to be subordinate to the bank, but personally he has no personal obligations.

If they fail at the covenants, the bank will take over the business and it will be a workout situation where the bank raises the interest rate and no distributions can be made until the bank is whole, but only the business is at risk.

Look at Softbank, they are rated junk, just lost billions put forth UBER and WeWork, they are funded with 62 billion in debt at 3.5%.

It is just a fact that companies do not have to be very profitable to hurdle 3.5% interest so you can take some real gambles as the reward is at a level that is astronomic.

The stated goal is to take the 2.4 million, create a business that is creating a million in EBITDA in 5 years and sell the business for 5 million.

A great deal if you can get it...I assume he's also paying himself a decent salary?

 

[Big_Hitter]

Negative rates. The bonds actually pay a coupon. So you get paid something to hold. Why would you buy these? Because you think rates will go lower and the bonds will actually appreciate.

but isn't the expected return on a bond with a negative yield, negative?

 

[COcheesehead]

but isn't the expected return on a bond with a negative yield, negative?

Not if rates drop. The value of the bond increases and you can then sell it. If you hold it to maturity, yes, you lose.

 

[COcheesehead]

No, I am reviewing books of their companies in order to provide an outlook for cashflow and covenant protection. It is a corporation and the loan is in the corporation's name. Now there are covenants on the loan and he is not allowed to take any distributions unless he is in a position where the covenants are met and no other loans can be made without the bank's consent and agreement by the lender to be subordinate to the bank, but personally he has no personal obligations.

If they fail at the covenants, the bank will take over the business and it will be a workout situation where the bank raises the interest rate and no distributions can be made until the bank is whole, but only the business is at risk.

Look at Softbank, they are rated junk, just lost billions put forth UBER and WeWork, they are funded with 62 billion in debt at 3.5%.

It is just a fact that companies do not have to be very profitable to hurdle 3.5% interest so you can take some real gambles as the reward is at a level that is astronomic.

The stated goal is to take the 2.4 million, create a business that is creating a million in EBITDA in 5 years and sell the business for 5 million.

I have been involved with financing small corporations. Every one had some personal liability associated with it otherwise you have no skin in the game. If you friend has zero liability at default, he a magician or the bank is stupid.

 

[Big_Hitter]

Not if rates drop. The value of the bond increases and you can then sell it. If you hold it to maturity, yes, you lose.

who "expects" rates to drop - all that is priced into the current yield curve

to me, this is a financial asset that has a negative risk premium - no thanks

 

[Big_Hitter]

If you friend has zero liability at default, he a magician or the bank is stupid.

I hope my bank didn't finance that guy, geez

 

[COcheesehead]

who "expects" rates to drop - all that is priced into the current yield curve

to me, this is a financial asset that has a negative risk premium - no thanks

There are always two sides to a market.

 

[Big_Hitter]

There are always two sides to a market.

possibly but this is an investment where a rational investor is expected to lose money, ceteris paribus

 

[COcheesehead]

possibly but this is an investment where a rational investor is expected to lose money, ceteris paribus

I am certainly not buying them, but I will relate a story about something I did buy.
A couple years back everyone was certain rates were going up. Remember that? I bought a bunch of long bonds that were sure to get killed as rates increased. Guess what, rates went down, a lot. Those bonds appreciated more than stocks over the same time period. I made good money buying and then selling those.
Be careful of what the consensus thinks sometimes.

 

[Lsbcal]

https://www.linkedin.com/pulse/world-has-gone-mad-system-broken-ray-dalio/?articleId=6597520880811724801#comments-6597520880811724801&trk=public_profile_article_view

His overall points are about exactly the same as my thoughts, the sustainability or unsustainable nature of the markets I am less sure than he is, as Japan showed you can keep this model running for quite a long time, so another decade of this is not out of the question.

.....

This (in red) is the problem. Even if this guy is right, it is not actionable. Maybe consider some trend following as none of us knows the timing of what we consider negative happenings.

Bull markets can take a long time to die and need some real economic events to die ... like rising unemployment and negative consumer attitudes.

 

[NW-Bound]

Yes.

Greenspan talked of "irrational exuberance" in Dec 1996. The market did not crash until March 2000.

I am hangin' on for a few more bucks. Heh heh heh...

 

[RenoJay]

No, I am reviewing books of their companies in order to provide an outlook for cashflow and covenant protection. It is a corporation and the loan is in the corporation's name. Now there are covenants on the loan and he is not allowed to take any distributions unless he is in a position where the covenants are met and no other loans can be made without the bank's consent and agreement by the lender to be subordinate to the bank, but personally he has no personal obligations.



If they fail at the covenants, the bank will take over the business and it will be a workout situation where the bank raises the interest rate and no distributions can be made until the bank is whole, but only the business is at risk.



Look at Softbank, they are rated junk, just lost billions put forth UBER and WeWork, they are funded with 62 billion in debt at 3.5%.



It is just a fact that companies do not have to be very profitable to hurdle 3.5% interest so you can take some real gambles as the reward is at a level that is astronomic.



The stated goal is to take the 2.4 million, create a business that is creating a million in EBITDA in 5 years and sell the business for 5 million.

To me that’s just a sign of a bubble. Reminds me of people I knew during the housing bubble who figured “I can borrow 100% of loan value so heads I win, tails the bank loses.” What they lost site of was the underlying value of what they were buying and that, because everyone was using the same logic, asset prices were inflated. This worked only as long as the music kept playing. Then it didn’t and it eventually yielded a bargain bonanza for people sitting on cash. One part of your buddy’s plan he may not have thought through: the customers who are pushing his EBIT to $1mm are likely using credit. The people he wants to sell the biz to eventually for $5mm are likely using credit. It doesn’t take much of a tightening in credit standards to collapse the entire concept. My bet is that eventually the bank will be taking back that building.

 

[GravitySucks]

That's what I thought last year when I moved my main bond holding to a shorter duration fund. Oops, market timing didn't work out on the bond side either.

who "expects" rates to drop - all that is priced into the current yield curve

to me, this is a financial asset that has a negative risk premium - no thanks