Ray Dalio is on a mission to share insights gained over 40 years at the helm of the vastly successful Brightwater Associates. After the financial crisis, Dalio published an excellent article on the workings of the economy. In 2017, he expanded on his previously published philosophy in a book called Principles (as per this summary). More recently he published a free downloadable book called A Template for Understanding Big Debt Crises, available here.
I have a copy of Principles but I must admit I have yet to finish reading it (on my to do list!). I have read the first section of the latest Big Debt Crises book and would highly recommend it. The second section of the book has detailed case studies (the US 2007-11, the US 1928-37, and Germany 1918-24) and the third section is a compendium of 48 other case studies.
Two graphs below from the Big Debt Crises book are worth reproducing, reflecting key factors behind our economy today.
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Dalio is an astute student of history. He recently commented that “the biggest mistake that most people make is to judge what will be good by what has been good lately”.
Amen to that.
Posted in Economics
Tagged Big Debt Crises, Brightwater Associates, deleveraging, economic machine, financial uncertainty, income inequality, leverage, Principles, Ray Dalio, Template for Understanding Big Debt Crises, uncertainty, US debt % GDP, US Net Wealth
This year’s Davos gathering is likely to be dominated by Donald Trump’s presence. I look forward to seeing him barge past other political and industry leaders to get his prime photo opportunity. As US equity markets continue to make all time highs in an unrelentingly fashion, it is scary to see the melt-up market been cheered on by the vivacious talking heads.
Ahead of Davos, the latest World Economic Forum report on global risks was released today. 59% of the contributors to the annual global risks survey point to an increase in risks in 2018, with environmental and cybersecurity risks continuing their trend of growing prominence, as can be seen below.
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Undoubtedly, environmental risks are the biggest generational challenge we face and it is hard to argue with the statement that “we have been pushing our planet to the brink and the damage is becoming increasingly clear“. That said, what is also striking about these assessments (and its important to remember that they are not predictions) is how the economic risks (light blue squares) have, in the opinion of the contributors, receded as top risks in recent years. The report does state that although the “headline economic indicators suggest the world is finally getting back on track after the global crisis that erupted 10 years ago” there is “continuing underlying concerns”. Amongst these concerns, the report highlights “potentially unsustainable asset prices, with the world now eight years into a bull run; elevated indebtedness, particularly in China; and continuing strains in the global financial system”.
A short article in the report entitled “Cognitive Bias and Risk Management” by Michele Wucker caught my attention. The article included the following:
Risk management starts with identifying and estimating the probability and impact of a given threat. We can then decide whether a risk falls within our tolerance limits and how to react to reduce the risk or at least our exposure to it. Time and again, however, individuals and organizations stumble during this process—for example, failing to respond to obvious but neglected high-impact “grey rhino” risks while scrambling to identify “black swan” events that, by definition, are not predictable.
One of the most pervasive cognitive blinders is the availability bias, which leads decision-makers to rely on examples and evidence that come immediately to mind. This draws people’s attention to emotionally salient events ahead of objectively more likely and impactful events.
I do wonder about cognitive blinders and grey rhinos for the year ahead.
Posted in General
Tagged black swan, Chinese economy, climate change, CO2 emissions, Cognitive Bias, cyber crime, cyber terrorism, cybersecurity risk, Davos 2018, disruptive technology, economic slowdown, elevated indebtedness, environmental risk, extreme weather, global financial system, global risks, global risks survey, global trends, globalization, grey rhino risks, income inequality, meltup market, Michele Wucker, nationalism, Paris Agreement, technological change, unsustainable asset prices, US equity markets, World Economic Forum