A Deeper Truth: How Ray Dalio Resonates With an Investor in Asia

Continuing from our conversation highlighting the outlook on debt’s role in developing nations in Big Debt Crises —and how our ACD parallels these ideas — I’ve decided to cross paths with Ray Dalio once more to discuss some new insights of truth from his writings. 

These insights have resonated with my personal experience and perspective in investing in Asian markets, and these three ideas are what I’d like to share with you:

1. Debt is Good

Borrowing from one of my favorite character’s infamous lines in Wall Street, Gordon Gekko states: “Greed is good.” So is debt.

In Asia, debt holds a major role in incentivizing economies to grow.

Debt is created as a result of credit generation. Because credit provides spending power to consumers who have the willingness to purchase goods and other assets, its growth is crucial in driving and sustaining economic growth. It also allows businesses to expand their operations when opportunity arises, instead of when they simply have enough capital. 

Apparently, Dalio also had the same idea:

“Clearly, giving the ability to make purchases by providing credit is, in and of itself, a good thing, and not providing the power to buy and do good things can be a bad thing (9).”

The Philippines is a shining example of “debt is good,” as the country managed to lift itself out of a depression in the mid-80s through borrowing and investing new debt into profitable sectors of its economy:

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This leads me to my next point about debt’s nature.

2. Debt Growth Does Not Always Guarantee Returns

Debt growth is a good indicator of where the next stock market boom will be. The expectation of future profits often attracts investors and speculators alike into a country’s stock market, driving its performance sky-high.


However, it is the productivity of debt—how efficiently borrowed money is used—which determines whether economic growth can be sustained and for how long. 

Investing in the right sectors, but at the wrong time when debt productivity has stagnated or declined, will expose your investment to stock market volatility and capital losses.

And what is the Number One Rule of investing according to The Oracle of Omaha? 

Don’t lose money.

This is why I‘ve designed the Asian Capital Development Model to analyze debt productivity in order to highlight the right sectors and stocks, as well as when to invest and exit for members of our Asia Insider premium publication.

(Disocver our Asia 360° portfolio here)

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3. Deleveraging is painful

Dalio’s extensive dive into the deleveraging phase of the debt cycle definitely hit home for me. I have personally experienced the ugly side of debts in Asia, specifically in Vietnam as an expat living in Ho Chi Minh City and starting my venture. Folks, it isn’t a Bali-like-pretty kind of sight…

Compared to established countries, such as my home of Canada, developing countries have much lower standard of livings and few social safety nets, like monthly social security or pensions. 

The pains that these countries suffer are much more intense during recessions. 

In the case of Vietnam in 2012, it was a classic “inflationary deleveraging,” as Dalio calls it. Vietnam’s inflation hit 23% in 2012, the general population was reeling in agony, FDI dried up, constructions around Vietnam’s economic center of Ho Chi Minh City were frozen, and consumer spending dropped to a five-year low. 

This was an eye-opening experience that inspired me to formulate the Asian Capital Development Model, so I would be able to detect upcoming economic growth and contracts in the biggest Asian countries including China, Japan, South Korea, Thailand, Indonesia and Malaysia. 

Conclusion

Conventional economic “wisdom” often fails to understand the role of debt and credit in Asian economies. Even worse, mainstream economics completely neglect how credits affect equity performance, but also how this credit demand fluctuates in cycles.

I believe Dalio has many useful ideas on debt cycles and how they operate, so any serious investors looking to expand their perspective should pick up his book ASAP. 

For myself, having gained first-hand experience by living through both the good and bad side of multiple debt cycles in Asia, I have accumulated insights on not only how debt cycles work but also how to profit from them, aided by our proprietary model, the Asian Capital Development (ACD).

Click here to discover our ACD Model

Peter Pham