From Dalio’s book:
After repeatedly being bit by events I never encountered before, I was driven to go beyond my own personal experiences to examine all the big economic and market movements in history, and to do that in a way that would make them virtual experiences—i.e., so that they would show up to me as though I was experiencing them in real time. That way I would have to place my market bets as if I only knew what happened up until that moment. I did that by studying historical cases chronologically and in great detail, experiencing them day by day and month by month. This gave me a much broader and deeper perspective than if I had limited my perspective to my own direct experiences. Through my own experience, I went through the erosion and eventual breakdown of the global monetary system (“Bretton Woods”) in 1966–1971, the inflation bubble of the 1970s and its bursting in 1978–82, the Latin American inflationary depression of the 1980s, the Japanese bubble of the late 1980s and its bursting in 1988–1991, the global debt bubbles that led to the “tech bubble” bursting in 2000, and the Great Deleveraging of 2008. And through studying history, I experienced the collapse of the Roman Empire in the fifth century, the United States debt restructuring in 1789, Germany’s Weimar Republic in the 1920s, the global Great Depression and war that engulfed many countries in the 1930–45 period, and many other crises.
My curiosity and need to know how these things work in order to survive them in the future drove me to try to understand the cause-effect relationships behind them. I found that by examining many cases of each type of economic phenomenon (e.g., business cycles, deleveragings) and plotting the averages of each, I could better visualize and examine the cause-effect relationships of each type. That led me to create templates or archetypal models of each type—e.g., the archetypal business cycle, the archetypal big debt cycle, the archetypal deflationary deleveraging, the archetypal inflationary deleveraging, etc. Then, by noting the differences of each case within a type (e.g., each business cycle in relation to the archetypal business cycle), I could see what caused the differences. By stitching these templates together, I gained a simplified yet deep understanding of all these cases. Rather than seeing lots of individual things happening, I saw fewer things happening over and over again, like an experienced doctor who sees each case of a certain type of disease unfolding as “another one of those.”
I did the research and developed this template with the help of many great partners at Bridgewater Associates. This template allowed us to prepare better for storms that had never happened to us before, just as one who studies 100-year floods or plagues can more easily see them coming and be better prepared. We used our understanding to build computer decision-making systems that laid out in detail exactly how we’d react to virtually every possible occurrence. This approach helped us enormously. For example, eight years before the financial crisis of 2008, we built a “depression gauge” that was programmed to respond to the developments of 2007–2008, which had not occurred since 1929–32. This allowed us to do very well when most everyone else did badly.
There are short-term business cycles (most of us know these) and there are long-term business cycles (few of us know these). All cycles involve credit (borrowing) and knowing where we are in each of the cycles can clue us in how we might better position our investment bets.
https://www.principles.com/big-debt-crises/
No comments:
Post a Comment