 Good day, fellow investors. Ray Dalio recently came out with a new book and when an investor, the biggest hedge fund manager in the world, comes out with a new book, there is always a lot to learn. The purpose of his book is to understand the cause and effect relationships that create that crisis and consequently affect financial markets. So if you're an investor, it is crucial to understand how the economic machine works and that is something that we are going to summarize by discussing his book, at least the first 61 pages of it, which is the summary of the summary of what he has done. His studies enabled him to create the archetypal, the typical model for each important situation, the business cycle, the big debt cycle, deflationary deleveraging and inflationary deleveraging. The main point is to differentiate between what's going on in the long-term in the economy, what are the forces driving the economy, what we do, how we do, how politicians behave, how monetary policyholders behave, etc., etc., and differentiate the long-term picture from the short-term noise that you constantly hear on the news. This long-term is difficult to comprehend and therefore the news always will push the short-term, the short-term, the funny story. However, the long-term is key to comprehend what's going on, how to position yourself, how to position your portfolio, and be at an advantage to all the others that just listen to short-term news. The book contains the following four parts, Delio's template for the archetypal big debt cycle, free iconic case studies, U.S. big depression, great recession, and the Weimar Germany inflation, and then another compendium of 48 K studies, inflationary and deflationary. Delio guarantees that if you take the time to read his 61 pages, and my summary is of course not a summary of his summary, but it's more an introduction to the book, a discussion that might lead you to actually read the book, and that's my goal and I hope Ray Delio doesn't mind. So we'll go through the 60 pages, what I find most important, what I find easy to tell with the goal that you read the book. Tomorrow I'll make another video where I read again the 61 pages and I took out 25 investing tips, so 25 tips that we investors can use that I derived by reading a little bit also through the lines from Delio's book. Then later I'll make also an all-weather portfolio video, what am I doing in relation to what he does, will make, he gives us questions about what is a bubble and how to spot the bubble. So there is a question list, I think I'll make that on Friday, go through the question list to see whether we are in a bubble now or not. So let's start with the book. This is what the book contains and what we'll discuss. What is credit, what is debt, how can it be good or bad, debt crisis, why do we have them, how do we solve debt crisis. The typical long-term big debt cycle, big debt cycle, it's the point of the book. The two kinds of depressions, inflationary and deflationary, the classic deflationary debt cycle, the phases, the role of monetary policy, how to spot bubbles are already mentioned, solving the debt crisis, big risk. The big risk coming from the increase in the wealth gap, the wealth poorly managed crisis, free monetary policy solutions and then the classic inflationary debt cycle, similarly to the long-term but countries don't have currency controls. How it happens, how to get out of it, the risk of it, well and poorly managed inflationary cycles and how it can get to hyperinflation. The key to understand is that all these factors move constantly over time so you really have to apply yourself in depth to understand them, to follow them and to position yourself accordingly in relation to the risk reward, what Ray Dalio is constantly doing. With the typical big debt cycle the key is to understand what is credit and what is debt. Credit is the giving of buying power and that is the promise to pay it back. So whenever you buy something on credit you have created credit and debt. Debt debt can be good or bad. If it is good then it is invested, it produces more, it increases the benefit, economic benefits over the long-term and the benefit, economic benefits are higher than the cost of debt. If you have too little debt you are not growing properly, you are cutting yourself short. If you have too much debt at one point in time debt-debt becomes difficult to manage and then you get into trouble. As we are humans, as we are greedy when things go well, we don't look at the risks, we take more and more debt that at some point debt-debt becomes bad debt because you can't invest it in good things anymore and then we have a crisis and those are normal natural cycles through human history. How those crises are managed that eventually always come depends on whether the policy holders have the ability to control the currency or not. If they have the ability to control the currency it mostly leads to deflationary crisis like we had in the last 10 years but if they can't control the currency because of high foreign debt then it leads to inflationary crisis like Turkey, Argentina or 1920s Weimar Germany. So why do we have debt cycles? Well when you take too much debt you grow faster than what your productivity allows you and then at some point you have the cost of debt hinder your growth which leads you into a recession, deleveraging and then again thanks to new debt the growth reaches again the productivity line. However you see the long-term debt cycle and you see the small waves around the long-term cycle that are smaller term recessions. In this video we'll talk about the long-term debt cycle. Of course it's easier to give credit and the faster economic growth is exciting which makes crisis inevitable. To boot all this into very simple terms you can create a cycle virtually anytime you borrow money. Buying something you can't afford means spending more than you make. So you are not just borrowing from your lender you are borrowing from your future self. Essentially you are creating a time in the future in which you will need to spend less than you make so you can pay it back. The pattern of borrowing spending more than you make and then having to spend less than you make very quickly resembles a cycle. This is true for a national economy as it is for an individual. Borrowing money sets a mechanical predictable series of events into motion. And these cycles of spending are always self-reinforcing. When things are good everything looks like it will continue indefinitely and then confidence is very high you are not afraid to take that mortgage you're not afraid to take that car loan you buy more the economy is doing well unemployment is extremely low new money comes to the market new consumption new demand and that makes everything look perfectly. However at some point there is a tipping point that that is reached and nobody is going to prevent that tipping point to be reached because then you don't win political points and inevitably the cycle turns and then we have the same self-reinforcing cycle that was increased demand increased spending leading everything up turning everything down and putting the economy into crisis. The key is that those economies those crisis can be managed and if done well the next point up is higher than the previous point up and the lower next recession is higher than the previous recession and this you have those ups and downs that are well managed. There are four types of levers that policymakers can pull to bring that and that service levels down relative to the income and cash flow levels that are required to service them austerity so you can spend less that defaults and restructurings so you let someone default someone you finance you bail them out the central bank can print money and transfer money directly. The key is to create a beautiful deleveraging so that everything is in balance that nobody is hurt too much and that there is positivity around the economy for the long term and such small term crisis can easily be managed with lowering interest rates and then you have those small debt cycles but those small debt cycles accumulate and sometimes there is a big debt cycle that can be managed but it has to be done properly. So the typical debt cycle can be managed but up to a point in time because interest rates are lowered when possible to make debt services cost smaller what's extremely important to look is the stability of the interest burden as interest rates go lower the debt goes higher but the interest the debt service cost remain flat and that's why interest rates constantly have been going down for the past 40 something years. A depression happens when those interest rates cannot go lower and then we have boost of the big debt cycle that happened in 2008. Back to the short term cycles those happen on average every five years long-term on average every 75 years you can see here everywhere where the red dips below the black line there has been a recession in the US. The last big one was 1930s and the well-managed 2008-2009. Now when that debt cycle reaches its limit it can lead to two types of crisis one is a deflationary crisis and the other is an inflationary crisis. A deflationary crisis happens when a country lowers interest rates to zero but can't lower them more then of course austerity happens you cannot spend more there is not a lot of credit people don't want to invest the negative cycle is spiraling down and defaults restructurings unemployment rate goes up and the country has to balance itself between taking from those who were greedy in the past let's say and giving monetary stimulating the economy in order not to create hyperinflation but to manage the deflationary effects. If a country has a lot of that in the foreign currency and the negative balance of payments then it can lead to a hyperinflationary crisis because the country starts to print money to cover for the lack of confidence in the domestic currency the lack of demand for the domestic currency and then everything spirals in a much much worse crisis so a deflationary crisis is much easier to manage than an inflationary crisis let's begin with a deflationary depression it's key to understand that all these things happen in phases that take a lot of time let's say 12 years of on average from the early part of the cycle to the boom bust and normalization if we look at the cycle we have the early part that is low things are good the Goldilocks part of the cycle then the bubble starts that starts to rise faster than income and this produces strong accelerating assets returns and growth self-reinforcing income spending increases the prices of assets network increases significantly and asset values rise borrowers capacity to borrow so all of those things rise together and that's not sustainable because that growth rates are increasing faster than the incomes that will be required to service them at some point in time however borrowers feel rich they spend more than they can earn and buy assets at high prices with leverage here is one example of how that happens the start of the bubble the bull market equity prices go up so we have a bubble total debt goes up fast and the debt service also in relation to the GDP goes even faster so bubbles are most likely to occur at the tops in the business cycle the balance of payment cycle and long-term debt cycle as a bubble nears its top the economy is most vulnerable but people are feeling the wealthiest and the most bullish now you might think that policy makers that politicians will intervene to constrain that bubble but that usually doesn't happen the opposite is happening now because when you intervene nobody likes you you don't win any points everybody thinks that this economy how it goes when it is in a bubble period it can go on forever like that until it is the opposite that happens and then we have a crisis and then again monetary policy central banks they focus on inflation and growth they don't focus on the growth of debt and that's radios main goal with this book is to introduce focusing is the hope that central bankers will start focusing on the growth of the debt pile and not just on inflation and growth hoping that they can manage it without focusing on the debt pile they will never ever be able to manage inflation and growth they have to manage the debt pile in order to prevent going thing that things go into a bubble but that's again anti-politician so that is here the debate that delio has against monetary policy makers in the meantime not much tightening until rate later in the bubble and then it's too late and then the downturn is self-reinforcing creating another depression delio even shares his view on how to spot bubbles i'll make a special video about that probably on friday during the news when we incorporate what's going on in the world now and check whether it is in a bubble so tune in on friday for that video now to anticipate the debt crisis ray delio says that we have to really focus also on the debt levels of the individual entities in a system because those get lost in the averages housing bubble in 2008 everybody was focused everything looked well in 2007 but the housing market was too leveraged and that led to the crisis so just one entity into the averages and that's what we have to focus on one country one entity here one entity there and then you get into trouble at some point something happens an external shock defaults some entity in that ecosystem goes bust and that starts a chain starts a self-reinforcing downtrend people start losing their jobs they can't pay their debt defaults increase creditors lenders are not willing to lend any more money that easily the economy contracts and then we have a downward spiler more unemployment so less demand for things and everything that was pushing the economy higher is now pushing the economy lower stock prices start to crash down and the key is to understand that okay then in short-term crisis monetary policies simply lower interest rates which stimulates the economy but when interest rates are already close to zero we come to the end of the long-term debt cycle and this is exactly what happened in this decade and in the 1940s when interest rates can get lower than zero anymore than we are facing depression just an example household debt as a percentage of network increases as network goes down because stocks go down asset prices get go down but that remains fixed just to mention on the big risk that daily is seeing the emerging of populism and the net wealth gap the bottom 90 percent of people are having the same wealth as the top 0.1 percent of people in the us when that happened last time we have a populist era similarly across the globe similarly now we have populists in Italy who had them in Greece and that's a big risk that he sees for the stability of the country to summarize the bubbles the tops the depressions everything can be well managed or poorly managed so i really urge you or to pause this video and to read through this how to manage things and how not to manage things or to simply download the pdf to do that what's extremely important to learn from daily is that there are free monetary policy steps that can help in managing those crises the first one is of course lowering interest rates the second one is printing money quantitative easing and the third one is the one that we haven't seen yet but it's called helicopter money so giving money to those that really need the directly in order to support the economy not true quantitative easing that has been the case where they buy assets lift the prices of assets increase the rich become richer and that in that way hope to support the economy when the banks intervene when there is disruption when there are debt restructuring defaults sometimes at some point things get back to normal austerity and these things getting back to normal can last a long time or a shorter time depending on how the crisis is well managed or badly managed for the normalization part it typically takes roughly five to ten years hence the term the last decade for real economic activity to reach its former peak and it typically takes longer around a decade for stock prices to reach former highs so average 119 months for stock prices to reach former highs 10 years GDP six seven years and change in debt to GDP post stimulation is minus 54 percent between minus 29 and minus 70 going to inflationary depressions and currency crisis the key to understand is that the countries that don't have a reserve currency have low foreign exchange reserves have a large foreign debt have a large and increasing budget and current account deficit have negative real interest rates have a history of high inflation negative total return in the currency those are so easily subjective to an inflationary crisis so here is the well managed inflationary crisis the poorly managed inflationary crisis you can read here how policy makers should go about it and how they shouldn't go about it and then the story is always the same some point at some time the currency gets better and things start to go back to what they were before and the new cycle begins however it's important to say that if it really becomes a hyperinflation then investor returns go to zero then unfortunately if you invest that is something that you don't want to see but that's a risk you have to think about when it comes to inflationary depressions so this is the summary a little bit just to give you an idea of what this is about and the key is now to take what delio has found because he has gathered this knowledge from looking at 48 past crisis because in nature in the economies everything works according to a pattern and the key now is to apply that pattern onto what is going on now what is the risk how does the us economy now fit that pattern that he has created and then we know the risk rewards of investing of our actions how much to be hedged what to do and that's something we are going to discuss in the upcoming videos the next video will be about the 25 tips i gained from delio's book then we'll discuss whether the us is in a crisis on friday and then we'll discuss okay where are we now in the cycle what do we have to expect and how to best position ourselves in line to ray delio's or weather portfolio and this video you can expect it somewhere in the weekend if you're looking at this later you can always check the playlist everything will be there thank you for watching looking forward to your comments and i'll see you tomorrow with 25 investing tips from ray delio's book