Ray Dalio, founder of Bridgewater Associates, is one of the leading investment managers of our generation. Curated Alpha has touched upon him several times in this blog’s short existence (here, here, and here). Given recent market volatility, it may be helpful for readers to review Ray Dalio’s A Template For Understanding What’s Going On, most recently revised on June 30, 2010.
A Template For Understanding What’s Going On provides an excellent overview of the major fundamental concepts of monetary economics. What causes recessions, depressions, and financial crises? How should central banks react? It is worth noting that I believe that our understanding of optimal monetary policy is still evolving and improving through time.
Students of monetary economics should be very familiar with the overall paper, but Dalio contributes to the literature in three significant areas:
(1) Dalio provides a holistic view of the financial crisis, providing the reader with a strong understanding of how everything is connected together. This is often lost in academic finance, which often has a theoretical focus where models or concepts are presented in isolation. Dalio’s colleague Bob Price describes him as “a big-picture thinker connected to a street-smart trader” and this characterization really shows. Dalio’s review takes an applied macroeconomics approach rather than focusing on macroeconomic theory. Taking a holistic view of financial markets is critical for successful trading — not only can it help you identify investing opportunities with greater accuracy, it exposes you to multiple markets. Therefore, you are able to choose which market and which security is best suited to carry out your trading thesis.
(2) Dalio stresses the difference between recessions and deleveragings. Standard economic theory usually identify recessions and depressions by changes in GDP. Dalio, however, presents a classification based on the availability of credit and the ability of the central bank to stimulate the economy using monetary policy.
(3) Dalio presents the idea of “long wave” debt cycles. Dalio himself states that “whenever we start talking about cycles, particularly the long-wave variety, we raise eyebrows and elicit reactions similar to those we’d expect if we were talking about astrology”, but readers should pay close attention to this section as I feel it is a unique and independent idea.
Readers may view the paper here.
- Ray Dalio’s A Template For Understanding
- Ray Dalio’s Principles: To Succeed, Suspend Your Ego And Focus On Your Weaknesses
- How Ray Dalio Built Bridgewater, The World’s Richest and Strangest Hedge Fund
- Klarman: Understanding How Our Brains Work Is One Of The Keys To Successful Investing
- Founder of Largest Hedge Fund: Thoughts On Money