Page 44 - Ray Dalio - Principles

people, not something thoughtful people took seriously. But I had
studied debt and depressions back to 1800, done my calculations,
and was confident that the debt crisis led by emerging countries was
coming. I had to share my thinking with my clients. Because my
views were so controversial I asked others to track my reasoning and
point out to me where it was bad. No one could find any flaws in my
logic, though they were all reluctant to endorse my conclusion.

Because I believed that the choice was between accelerating
inflation and deflationary depression, I was holding both gold
(which performs well in accelerating inflation) and bonds (which
perform well in deflationary depressions). Up until that point, gold
and bonds had moved in opposite directions, depending on whether
inflation expectations rose or fell. Holding those positions seemed
much safer than holding alternatives like cash, which would lose
value in an inflation environment, or stocks, which would crash in a
depression.

At first, the markets went against me. But my experience with
silver and other trades had taught me that I had a chronic problem
with timing, so I believed I was just early and what I was expecting
would happen soon. That didn’t take long to happen. By the fall of
1981, the tight Fed policies were having a devastating effect, my
bond bets were beginning to pay off, and my kooky views were
starting to look right on. In February 1982, the Fed temporarily
added liquidity to avoid a cash crunch. In June, as the scramble for
liquidity intensified, the Fed responded by printing money,
increasing liquidity to its highest level since Paul Volcker’s
appointment. But it still wasn’t enough.

THE GREATEST WHIPSAW EVER

In August 1982, Mexico defaulted on its debt. By then, it was clear
to most everyone that a number of other countries were about to
follow. This was a huge deal, because U.S. banks had lent about 250
percent of their capital to other countries just as at risk as Mexico.
Business loan activity in the U.S. ground to a halt.

Because I was one of the few people who had seen these things
coming, I started to get a lot of attention. Congress was holding
hearings on the crisis and invited me to testify; in November I was
the featured guest on Wall $treet Week with Louis Rukeyser, the
must-watch show for anyone in the markets. In both appearances, I