Notes from Ray Dalio's interview on CNBC

An extremely rare interview with one of the savviest investors out there. Some notes from the interview:

Independent Thinking
Independent thinking and creativity are essential ingredients for making money in the markets. Ego reaction to making mistake is one of the biggest impediments to successful investing. Defends his company's culture.

The Dollar
The dollar is likely to lose its reserve currency status gradually over the next 10 years. The dollar accounts for 2/3 of world's reserves and will probably go to 50% of reserves.  He expects big currency adjustments over the next couple of years (see below).

Emerging Markets
The world is divided between the debtor developed world (US, Europe, Japan - 47% of world GDP) and the booming emerging world (53% of world GDP). They are tied via currency links which leads to inappropriate monetary policies (and bubbles) since interest rates are also linked. He expects a seismic shift (in 2012) since developing will not be able to tolerate accelerated inflation and will have to adjust their currencies upward.

Per Capita income in China is 1/10 of the United States, but that is not borne out by their actual productivity difference. He would diversify into Emerging Market currencies.

US Equities
Relatively cheap and should benefit from currency depreciation. Most currency devaluations are beneficial for equities.

On the other hand, portfolios are concentrated in developed market stock and bonds. Investors should diversify into other assets, such as gold.

Gold
Most sovereign wealth funds and investors are underweight gold. Gold was and is money and should be a part of people's portfolios. Gold is a good store of wealth

The role of the Fed
The Federal Reserve prevented a serious depression.

The Deleveraging Cycle
De-leveraging events are rare. Dalio describes how the process of accumulating debt (leveraging cycle) works and how it eventually results in a bubble (financial assets cannot service debt). Eventually need to sell asset and cut expenses. The government needs to run deficits to make up for this contraction in private spending. That was 2009. 2010 and 2011 are transition years. Slack in the economy allowed increases deficits without inflationary pressures. You need the ability to print money to work your way out of a deleveraging cycle.

Rate of growth going forward will be limited to real income growth of 2% a year since we can't use debt to fuel growth. This will be with us a long time.

Inflation
Dalio expects inflation pressures in 2012. Long-term, there is a serious debt problem and paying down debt with real dollars or restructuring can have extremely ugly social consequences. This is a self-reinforcing negative cycle.

Best path is an orderly spreading out of the problem (aka inflation) -- don't need a high inflation rate for this to happen. This is very likely to be orderly. There are historical precedents for government inflating their way out of debt.

2011 and beyond
Should be a good year for equities. Sweet spot of the cycle. Late 2012 should be more challenging because of currency adjustments and competition with countries with strong economies for commodities. 2013 expects greater tightness of monetary policy and more trade-off between inflation and growth.

States and Munis
He would not hold munis but is not an expert on the area. Not comfortable giving an opinion.