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Bridgewater - Economic Principles

2017 Bridgewater Associates, LP. By receiving or reviewing this Bridgewater Daily Observations , you agree that this material is confidential intellectual property of Bridgewater Associates, LP and that you will not directly or indirectly copy, modify, recast, publish or redistribute this material and the information therein, in whole or in part, or otherwise make any commercial use of this material without Bridgewater s prior written consent. All rights reserved. 1 Bridgewater Daily Observations 10/23/2017 Bridgewater Daily Observations October 23, 2017 2017 Bridgewater Associates, LP(203) 226-3030 Ray DalioSteven Kryger Brandon Rowley Neil Hannan Our Biggest Economic , Social, and Political Issue The Two Economies: The Top 40% and the bottom 60% To understand what s going on in the economy, it is a serious mistake to look at average statistics.

The Two Economies: The Top 40% and the Bottom 60% To understand what’s going on in “the economy,” it is a serious mistake to look at average statistics. This is ... Since 1980, median household real incomes have been about flat, and the average household in the top 40% earns four times more than the average household in the bottom 60%. While

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Transcription of Bridgewater - Economic Principles

1 2017 Bridgewater Associates, LP. By receiving or reviewing this Bridgewater Daily Observations , you agree that this material is confidential intellectual property of Bridgewater Associates, LP and that you will not directly or indirectly copy, modify, recast, publish or redistribute this material and the information therein, in whole or in part, or otherwise make any commercial use of this material without Bridgewater s prior written consent. All rights reserved. 1 Bridgewater Daily Observations 10/23/2017 Bridgewater Daily Observations October 23, 2017 2017 Bridgewater Associates, LP(203) 226-3030 Ray DalioSteven Kryger Brandon Rowley Neil Hannan Our Biggest Economic , Social, and Political Issue The Two Economies: The Top 40% and the bottom 60% To understand what s going on in the economy, it is a serious mistake to look at average statistics.

2 This is because the wealth and income skews are so great that average statistics no longer reflect the conditions of the average man. For example, as shown in the chart below, the wealth of the top one-tenth of 1% of the population is about equal to that of the bottom 90% of the population, which is the same sort of wealth gap that existed during the 1935-40 period. To give you a sense of what the picture below the averages looks like, we broke the economy into two economies that of the top 40% and that of the bottom 60%.1 We then observed how conditions of the majority of Americans (the bottom 60%) are different from the conditions of those of the top 40%, as well as different from the picture conveyed by the average statistics.

3 We focused especially on the bottom 60% because that s where the majority of Americans are and because the picture of this economy is not apparent to most people in the top 40%. 1 While in our analytical work we look at Economic statistics much more granularly (often in quintiles to divide into different groups, which gives us a much richer picture than is conveyed in these top 40% and bottom 60% groups), showing more groups and greater granularity would have created greater length and confusion. Still, I encourage you to look at the economy more granularly than shown here. 0%5%10%15%20%25%30%35%40%190019101920193 0194019501960197019801990200020102020US Net Wealth SharesBottom 90%Top of PopulistsEmergence of Populism2 Bridgewater Daily Observations 10/23/2017 The bottom 60% Compared with the Top 40% and the Average We will start off looking at income and the Economic picture and then turn to some related lifestyle and political differences.

4 There has been no growth in earned income, and income and wealth gaps have grown and are enormous. Since 1980, median household real incomes have been about flat , and the average household in the top 40% earns four times more than the average household in the bottom 60%. While they ve experienced some growth recently, real incomes have been flat to down slightly for the average household in the bottom 60% since 1980 (while they have been up for the top 40%). Those in the top 40% now have on average 10 times as much wealth as those in the bottom 60%. That is up from six times as much in 1980. Only about a third of the bottom 60% saves any of its income (in cash or financial assets).

5 As a result, according to a recent Federal Reserve study, most people in this group would struggle to raise $400 in an emergency. The rates of income and wealth changes of the middle class have been worse than those changes in any of the other groups, once you account for the social safety net and taxes. The charts below show income, adding in the impact of taxes, tax credits, benefits, and transfers (including non-monetary government transfers like Medicaid and employer health insurance). Unlike the picture of real earned incomes shown earlier, all the quintiles had seen some growth until 2008. This was primarily driven by increases in transfers, benefits, and social programs (especially medical benefits).

6 It also lights up some differences within the bottom 60%. Note that while the conditions of those in the bottom quintile of society are $30K$50K$70K$90K$110K$130K$150K$170K8085 909500051015 All 35-64-Year-OldsBottom 60% EarnersTop 40% Earners$0K$400K$800K$1,200K$1,600K808590 9500051015 Average Household Net Wealth by Income Percentile (Real 2016 USD)TotalBottom 60%Top 40%0%10%20%30%40%50%60%Top 40%TotalBottom 60%% of Families Who Report Spending at Least Their Income( , Don't Save)Average Household Income (Real 2016 USD) 3 Bridgewater Daily Observations 10/23/2017 terrible, and worse than those of the middle class by most measures ( , income, health, death rates, incarceration rates, etc.)

7 , the rate of change in these conditions has been worse for the middle class. More specifically, the middle class has experienced less post-tax and transfer income growth than the bottom quintile since 1980 (see chart on the right), partially because government support to the bottom has provided more of a cushion though in both cases, income growth has been very low. The middle class has been especially hard-hit by manufacturing jobs declining about 30% since 1997, which is shown in the below chart. Those in the top 40% have benefited disproportionately from changes in asset values relative to those in the bottom 60%, because of their asset and liability mix.

8 The balance sheets of these two groups, shown below, are sharply different. Though the bottom 60% has a small amount of savings, only a quarter of it is in cash or financial assets; the majority is in much less liquid forms of wealth, like cars, real estate, and business equity. For the bottom , debt is skewed toward more expensive student, auto, and credit card debt. 80%100%120%140%160%8085909500051015 Real Household Income After Taxes and Transfers (Indexed to 1980)TotalBottom 60%Top 40%80%90%100%110%120%130%808590950005101 5 Real Household Income After Taxes and Transfers (Indexed to 1980) bottom 20%20-40%40-60%11,00012,00013,00014,0001 5,00016,00017,00018,00019,00020,00019801 9851990199520002005201020152020 Manufacturing Employment (Thousands)

9 4 Bridgewater Daily Observations 10/23/2017 The increasing disparity in financial conditions is a major cause of the slowing of growth, because those in lower income/wealth groups have higher propensities to spend than those in higher income/wealth groups. Said differently, if you give rich people more money, they probably won t spend much of it, whereas if you give poorer people more money, they will probably spend more of it, each motivated by the extent of their unmet needs and Retirement savings for the bottom 60% are not even close to adequate and aren t much improved as the economy and markets have recovered.

10 Only about a third of families in the bottom 60% have retirement savings accounts , pensions, 401(k)s which average less than $20,000. Further, as we do projections of pension finance, it appears unlikely that pension retirement benefits will be fully met. Death rates are rising and mental and physical health is deteriorating for those in the bottom 60%. For those in the bottom 60%, premature deaths are up by about 20% since 2000. The biggest contributors to that change are an increase in deaths by drugs/poisoning (up two times since 2000) and an increase in suicides (up over 50% since 2000). The odds of premature death for those in the bottom 60% between the ages of 35 and 64 are more than two times higher, compared to those in the top 40%.


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