Ray Dalio on the Future of Monetary Policy

[Graham Osborn]

William White probably wrote it best about Macro and specifically NOT to think of economy as a machine like Dalio:

 

The fundamental problem is that modern macroeconomics is based upon a false belief: namely, that the workings of the economy can be understood and therefore closely controlled, as though a machine in the competent hands of its operator. A philosopher would say that we have made a profound ontological error. We have failed to realise that what one can know about a system depends upon its very nature. And the nature of our economies is simply too complex to be understood, much less controlled.

 

Consider that the analytical frameworks generally accepted by central banks totally failed to see the crisis coming or, despite concerted and persistent action, the weakness of the subsequent recovery.

 

Actually, given Bridgewater's Pure Alpha performance in 2008 was near +10% while global equities were significantly negative (S&P at -38.5%), I think it's fair to say Dalio's model did predict the crisis and profited from it...

 

I'm also not sure whether White and Dalio are using the same analogy here. Does Dalio really say that the machine "can be closely controlled"? – I always pictured this more as an autonomous machine, though he definitely does say that it can be understood.

 

I think Dalio definitely ascribes to a belief that a certain action that occurs with an economy will have certain predictable outcomes. That doesn't mean he gets those outcomes correct 100% of the time, but what that does mean is that simple higher level truths can be found based on history and logical reasoning.

 

Things like if a country is devaluing their currency, exporters should benefit. Bridgewater's analysis is obviously much deeper than that, BUT that's what he means when he says the economy is like a machine. A general framework would be something like: when some action occurs it has led to some outcome because of a, b, c, and d. Further, a, b, c, and d all still hold true today, therefore we expect a similar outcome. Then Bridgewater bets a small amount on that outcome, either directly or indirectly, in the securities markets.

 

Now, he obviously allows for the option to be wrong because he is very, very heavily diversified in the Pure Alpha funds. If he thought he could predict with 100% accuracy, he'd have the heaviest concentrations in the highest payoff ideas, but that's not really how the fund operates. But he has to be right far more than he is wrong to achieve the results he's achieved.

 

When Dalio says an economy, a company, a person, or whatever is a machine he means it is a causal system (i.e. an impartial observer who knew all the values/ probabilities at a given time point could calculate the values/ probabilities at the next).  In analogy with signal processing, the assumption of causality implies one should be able to characterize cause-effect relationships through experiments/ retrospective analysis.  This doesn't mean thinking participants can have a causal understanding of the future (reflexivity) but only that they can understand that it is causal.  This might enable a participant to build models and that assert that a given initial configuration should PROBABLY produce a given result.  That's why Dalio thinks his 37-38 model might predict the 16-17 result.  Like all great investors he is always very uncertain hence his obsession with the "probability of knowing."

[Graham Osborn]

Just finished re-reading “The New Paradigm for Financial Markets” (Soros G, 2008).

This entire thread is an example of the reflexivity he described.

 

Central bankers pushing in one direction *in the absence of facts* (‘cognitive’ function) against market participants bettering themselves by pushing in the other direction *in the absence of facts* (‘manipulative’ function). The resultant ‘angst’ is reflexivity. The level of ‘angst’ reflects the state of information in the market; the *less facts* the higher the reflexivity.

 

View the cognitive function as a long call, and the manipulative function as a long put; the result is a long straddle on the current market ‘equilibrium’ state. You are anti-fragile, in the words of Taleb.

 

Both the reflexivity of Soros, and the anti-fragility of Taleb, are new additions to theory; they didn’t really exist prior to 2000. More recent practical additions to finance are P2P networking, block chain & smart contracts. * Absence of facts* also means predicting off of out-of-date theory.

 

Take this to the extreme, & it really means a 100% T-Bill portfolio + a 100% portfolio of puts/calls. Arguably, an investor would favour long T-Bills and use the Basel liquidity requirements to drive yields down (all GSIB’s & DSIB’s must hold a risk weighted portion of their capital in unencumbered treasury bills; the more risky they are, or the bigger they get, the more total $ in T-Bills).

 

The risk is that the next round of QE gets funded with a flood of long maturities; excess supply driving down price, raising yield, & restoring the yield curve to normality. The reflexivity we see in the thread.

 

SD

 

Sharper, not sure I'm following your portfolio theory here.  The T-Bills make sense enough, but are you arguing for straddles as the most efficient method for taking advantage of future destabilization?  This seems pretty inefficient to me as your outlay would be substantial and for your trouble you might get stuck in a "suddenly, nothing continued to happen" situation.  I'll be honest, I'm not a big fan of options unless I can buy them way out of the money and feel reasonably convinced the strike will be reached.  Unlike Taleb I don't wait for the swans to show up - I go hunting for them :)

[moore_capital54]

Hi Moore, glad to see you back!

 

If I recall properly, you have been absent from this board since shortly after the March 2013 Cyprus crisis and were moving heavily to cash because you felt most assets were levitating or being inflated by the large money printing or QE. What did you do since then? Sounds like you are now picking bargains in the wreckage that many are now ignoring because they are busy fighting the last war.

 

At least, I can attest that your macro call of moving to cash at that time was near perfect.

 

Cardboard

 

Hi Cardboard. I appreciate the kind words. Actually, we did not escape this recent volatility unscathed even if we were preparing for it. It's very difficult to know exactly when the shoe will drop and as we have seen the past 6-7 days, things can also quickly snap back. Overall, I still maintain decent long exposure and as such (like everyone else) have seen some negative surprises in the portfolio over the last few weeks. That said, the most important factor in our portfolio's performance over the last 2 years was our allocation in gold and USD denominated fixed income securities. Being in Canada, we outperformed our peers on the FX component which has been a great boost.

 

 

[SharperDingaan]

Just finished re-reading “The New Paradigm for Financial Markets” (Soros G, 2008).

This entire thread is an example of the reflexivity he described.

 

Central bankers pushing in one direction *in the absence of facts* (‘cognitive’ function) against market participants bettering themselves by pushing in the other direction *in the absence of facts* (‘manipulative’ function). The resultant ‘angst’ is reflexivity. The level of ‘angst’ reflects the state of information in the market; the *less facts* the higher the reflexivity.

 

View the cognitive function as a long call, and the manipulative function as a long put; the result is a long straddle on the current market ‘equilibrium’ state. You are anti-fragile, in the words of Taleb.

 

Both the reflexivity of Soros, and the anti-fragility of Taleb, are new additions to theory; they didn’t really exist prior to 2000. More recent practical additions to finance are P2P networking, block chain & smart contracts. * Absence of facts* also means predicting off of out-of-date theory.

 

Take this to the extreme, & it really means a 100% T-Bill portfolio + a 100% portfolio of puts/calls. Arguably, an investor would favour long T-Bills and use the Basel liquidity requirements to drive yields down (all GSIB’s & DSIB’s must hold a risk weighted portion of their capital in unencumbered treasury bills; the more risky they are, or the bigger they get, the more total $ in T-Bills).

 

The risk is that the next round of QE gets funded with a flood of long maturities; excess supply driving down price, raising yield, & restoring the yield curve to normality. The reflexivity we see in the thread.

 

SD

 

Sharper, not sure I'm following your portfolio theory here.  The T-Bills make sense enough, but are you arguing for straddles as the most efficient method for taking advantage of future destabilization?  This seems pretty inefficient to me as your outlay would be substantial and for your trouble you might get stuck in a "suddenly, nothing continued to happen" situation.  I'll be honest, I'm not a big fan of options unless I can buy them way out of the money and feel reasonably convinced the strike will be reached.  Unlike Taleb I don't wait for the swans to show up - I go hunting for them :)

 

The long call is central bank intervention. The cost of the call is indirect, and it is spread over all the citizens in the state (ie: nominal); no different to defence spending. The premium for the long put is whatever direct cost the entity has taken on to benefit from a failure in the central bank intervention; often at no cost other than a re-arrangement of existing affairs (ie: long term assets matched against short term liabilities, or CAD liabilities matched against USD assets. No actual premium paid for the term, or FX, mismatches. If intervention fails - CAD short term rates & the $C are likely to fall drastically). Heads I win, tails I win too.

 

Agreed that in capital markets the straddle will come at a net cost; but on main street - it will almost always come with a significant and material net benefit. ie: I studied to become an accountant, & work as a CPA during the day (long call); but I apprenticed as a chef to put myself through school, & moonlight (long put). If I lose my accounting job tomorrow I am still an employed chef (hedge creating the long straddle), but my chefs papers are contributing additional moonlight earnings every week. Could just as easily be a plumber, electrician, educator, uber driver, etc. - versus a chef.

 

To capital markets an option is just a wasting asset (whether or not it is used in a straddle); but in the real (or corporate) world it is very different. Every positive NPV investment in a trade, designation, or technology platform that the individual (or corporate) makes in itself - is an option. Add 2 positive NPV options together, & the straddle will be at a net benefit.

 

We used the put/call terminology so that we could reference the long straddle & tie in directly to Taleb. Actual equivalent execution will differ according to circumstance, setting, and opportunity. The majority of trades folk who moved on to professions, may also not be fully aware that this is what they have actually done - it just felt like the right thing to do.

 

Of course, nothing particularly new.

 

SD

[JBTC]

Helicopter drops might not be far away

 

http://www.ft.com/intl/cms/s/0/9b3c71f8-d97f-11e5-a72f-1e7744c66818.html#axzz4149bn0DL

 

[CorpRaider]

Anyone perked up by this move in the GBP?  Saw something that said as weak against the dollar as it was in like 1985.  I guess I will just buy more EAFE or maybe some EWU.

[Cardboard]

You have got to pay attention to what Moore is saying:

 

"What we will however have is a 1970's style commodity cycle where we get inflation in the things we need and deflation in the things we already own."

 

Is this the beginning?

 

http://www.cnbc.com/2016/02/24/el-nino-sends-sugar-to-biggest-1-day-gain-since-1993.html

 

Cardboard

[Picasso]

Bridgewater’s Ray Dalio Says ‘I’m Not Bearish on Stocks’ (1)

Dalio sees global stocks rising about 4% in the long-term

Hedge fund founder doesn't see another crisis like 2008

 

So is anyone who has been quoting Dalio lately going to quote that as well?

[merkhet]

Bridgewater’s Ray Dalio Says ‘I’m Not Bearish on Stocks’ (1)

Dalio sees global stocks rising about 4% in the long-term

Hedge fund founder doesn't see another crisis like 2008

 

So is anyone who has been quoting Dalio lately going to quote that as well?

 

Why would anyone quote disconfirming evidence? :P

[JBTC]

Bridgewater’s Ray Dalio Says ‘I’m Not Bearish on Stocks’ (1)

Dalio sees global stocks rising about 4% in the long-term

Hedge fund founder doesn't see another crisis like 2008

 

So is anyone who has been quoting Dalio lately going to quote that as well?

 

Interesting.

 

Is he bullish? Seems not.

 

So neither bullish nor bearish. A bit weird for someone who looks serious and pronounces 80-year debt cycles and mentions 1937.

 

The lesson for me always: don't listen to what people say, look at what they do.

 

[original mungerville]

Hi Moore, glad to see you back!

 

If I recall properly, you have been absent from this board since shortly after the March 2013 Cyprus crisis and were moving heavily to cash because you felt most assets were levitating or being inflated by the large money printing or QE. What did you do since then? Sounds like you are now picking bargains in the wreckage that many are now ignoring because they are busy fighting the last war.

 

At least, I can attest that your macro call of moving to cash at that time was near perfect.

 

Cardboard

 

Hi Cardboard. I appreciate the kind words. Actually, we did not escape this recent volatility unscathed even if we were preparing for it. It's very difficult to know exactly when the shoe will drop and as we have seen the past 6-7 days, things can also quickly snap back. Overall, I still maintain decent long exposure and as such (like everyone else) have seen some negative surprises in the portfolio over the last few weeks. That said, the most important factor in our portfolio's performance over the last 2 years was our allocation in gold and USD denominated fixed income securities. Being in Canada, we outperformed our peers on the FX component which has been a great boost.

 

Interesting. My highest conviction exposures are

 

1) long gold / miners / silver,

 

and to a far far lesser extent

 

2) long US dollars, and lastly

3) gorilla shorting stocks (ie moving in and out of a hedged position to a short position in equities, not daily or anything but say every couple months)

 

#1 and #3 have cost me a lot over the past few years, #2 has helped.

 

The jury is still out on whether I will recoup my outsized position in #1. (I am talking about my own portfolio here which fluctuates like a yoyo, whereas the OPM I advise has gained double digits on average every year since 2005, including the last few months due to its US dollar and 15% precious metals exposure - 5% each in gold, silver and miners - large cash position, and hedged equities.)

[ni-co]

Bridgewater’s Ray Dalio Says ‘I’m Not Bearish on Stocks’ (1)

Dalio sees global stocks rising about 4% in the long-term

Hedge fund founder doesn't see another crisis like 2008

 

So is anyone who has been quoting Dalio lately going to quote that as well?

 

Why would anyone quote disconfirming evidence? :P

 

What exactly is this quote "disconfirming"?

 

Here is the full Bloomberg interview btw.

 

[merkhet]

Bridgewater’s Ray Dalio Says ‘I’m Not Bearish on Stocks’ (1)

Dalio sees global stocks rising about 4% in the long-term

Hedge fund founder doesn't see another crisis like 2008

 

So is anyone who has been quoting Dalio lately going to quote that as well?

 

Why would anyone quote disconfirming evidence? :P

 

What exactly is this quote "disconfirming"?

 

Here is the full Bloomberg interview btw.

 

I didn't expect someone to validate my point so quickly, lol.

 

In any case, I suspect some of this comes down to the differential understanding and/or usage of the word "crisis," which garnered some attention in a different thread.

[TwoCitiesCapital]

Bridgewater’s Ray Dalio Says ‘I’m Not Bearish on Stocks’ (1)

Dalio sees global stocks rising about 4% in the long-term

Hedge fund founder doesn't see another crisis like 2008

 

So is anyone who has been quoting Dalio lately going to quote that as well?

 

Why would anyone quote disconfirming evidence? :P

 

What exactly is this quote "disconfirming"?

 

Here is the full Bloomberg interview btw.

 

Thanks for sharing the link.

[giofranchi]

Thanks for sharing the link.

 

+1! Very interesting.

 

Cheers,

 

Gio

[merkhet]

Bridgewater’s Ray Dalio Says ‘I’m Not Bearish on Stocks’ (1)

Dalio sees global stocks rising about 4% in the long-term

Hedge fund founder doesn't see another crisis like 2008

 

So is anyone who has been quoting Dalio lately going to quote that as well?

 

Why would anyone quote disconfirming evidence? :P

 

What exactly is this quote "disconfirming"?

 

Here is the full Bloomberg interview btw.

 

I didn't expect someone to validate my point so quickly, lol.

 

In any case, I suspect some of this comes down to the differential understanding and/or usage of the word "crisis," which garnered some attention in a different thread.

 

It's a slow morning, so I figure why not list out the disconfirming evidence from the 30 minute video:

 

@ 8:05

 

Let me be clear, I'm not bearish on the stock market. //No?// No, I'm not bearish on the stock market.

 

Nonetheless, investors make a choice of assets. And the choices are (1) cash which has [a 0%] return, (2) a bond which has less than 2% return and (3) equities which has a 4% return. So when you look at those assets what happens is as they sell off, it has the effect of drawing us in. The issue that we are dealing with is the possibility of a negative feedback loop... when stocks go down, it has a negative wealth effect, and that has a negative effect on the economy.

 

Later on, Dalio talks about risk premia being low right now, and when there are corrections, the risk premia increase, and liquidity rushes in, which causes choppiness in the markets. However, he specifically rules out the idea that we're talking about "crises."

 

@ 13:56

 

I think China is going through a situation that is very similar to what the United States and other countries have gone through a number of times.

 

They have to have a slower rate of debt, and they have to restructure debts, and they're doing that.

 

They have to restructure their economy, and that's a difficult thing to do. They have a balance of payments challenge... we have had three balance of payments issues.

 

There are good ways to manage these things, and there are bad ways to manage these things. And leadership matters... You have very capable people in leadership. The stock market handling was not capable. Don't mistake the stock market handling for the capability of restructuring their debts and the process they're going through.

 

You're probably going to be fine in the long run, and it's probably going to weaken you [in the short run.]... I think people who have exaggerated it in one way or the other. There are people who have looked at it as a boom, and there are people who have looked at it as a disaster that's going to total collapse of the system, and they're missing what's actually going on.

 

Not to pick on you, ni-co, but since you're the person who responded to the disconfirming evidence question...

 

Yeah. Probably the word "crisis" is overused but I don't really have a better word for it.

 

My overarching hypothesis is that we're still in the 2007 "crisis". The difference is however that the last source of "natural" inflation—China infrastructure spending—has now dried out. Where should regular (not CB induced) inflation now come from? From retiring baby boomers? They have really just begun retiring (the youngest ones are in their early fifties).

 

Re China: I'm getting more and more convinced that China is the biggest bubble we have ever seen. And the fact that a lot of people are arguing so passionately against that and the whole thing about "we are living in the Chinese century" makes me all the more suspicious.

 

To be fair, you say "crisis" is the wrong word, but then what is the right word?

 

@ 20:40

 

In terms of returns, we're going to have a low return environment... Loosely speaking I believe that's the most likely scenario. Very slow growth. Ups and downs.

 

In other words, I'm not expecting something like 2008 because 2008 was a debt crisis. There were lots of debts coming due and they couldn't be paid. This is not like a crisis situation like that way. We're not going to see a big bang crisis kind of thing. There's a dynamic of a relative stagnation. Low returns... chopper markets over a period of time.

 

For what it's worth (to make a long post even longer), I agree with how Ray Dalio and Richard Koo see things. Richard Koo talks about using fiscal stimulus during a balance sheet recession, and Ray Dalio talks about the monetary stimulus machine breaking down and requiring a different mechanism to get stimulus through to the people. They're both talking about the same thing.

 

That said, if you're not buying the general market as a whole, what does it matter? Again, for what it's worth, choppy markets are generally good markets for value investors...

 

And now I've reached my macro limit for the year...

[ni-co]

Thanks for the critical comments, merkhet, which I appreciate. After all, we've learnt that having thoughtful people disagree is the way to go. ;)

 

 

Re China:

 

I don't really have a strong opinion on the very long term perspective for China (i.e. where it will be 10 or 20 years from now). However, count me very skeptical about the argument made by clever people (not Dalio as far as I'm aware) that China will come out fine in the next 3-5 years because it's an autocratic/despotic system and the short- to mid-term situation should therefore be easily manageable. In the end, China is subject to market mechanisms, too, and the leadership is very sensitive to deflationary pressures (especially increasing unemployment).

 

That said, I'm not really sure what Dalio's position on China is. When he is talking about China he's always referring to the very long term and not really answering the question whether he thinks that there is/will be any kind of crisis before reaching utopia. The question he is answering is: Does China have a leadership that is capable to manage whatever will happen in the next few years? I think that Dalio is purposefully answering this – completely different – question and not the far more interesting one: What will this competent Chinese leadership have to "manage"?

 

 

Re Dalio's bullish/bearish stance on stocks:

 

I don't think that 4% long-term (nominal) return on stocks is bullish in light of a 2.7% yield for the 30 year US treasury bond. Either treasuries are far too cheap or stocks are far too expensive – or both. This is what Dalio is saying between the lines when he's talking about small risk premia leading to "increasing volatility". I think that treasuries are way too cheap because the market consensus is far above Dalio's return expectations when it comes to stocks and also economic growth in general.

[merkhet]

Thanks for the critical comments, merkhet, which I appreciate. After all, we've learnt that having thoughtful people disagree is the way to go. ;)

 

I agree! I have a friend who used to work at Bridgewater (employee #40 or something like that), and he said that one of the things he liked best about the place was the culture of thoughtful disagreement.

 

Re China:

 

I don't really have a strong opinion on the very long term perspective for China (i.e. where it will be in 10 or 20 years from now). However, count me very skeptical about the argument made by clever people (not Dalio as far as I'm aware) that China will come out fine in the next 3-5 years because it's an autocracy and the short- to mid-term situation should therefore be better manageable for them. In the end, China is subject to market mechanisms, too, and the leadership is very sensitive to deflationary pressures (especially increasing unemployment).

 

That said, I'm not really sure what Dalio's position on China is. When he is talking about China he's always referring to the very long term and not really answering the question whether he thinks that there is/will be any kind of crisis before reaching utopia. The question he is answering is: Does China have a leadership that is capable to manage whatever will happen in the next few years? I think that Dalio is purposefully answering this – completely different – question.

 

Except Dalio actually says that he thinks that the politburo in China is both very capable and in an advantaged situation whereby they can exercise considerable control. And if you start at 15:12, you can read his body language as he's talking about it. He doesn't look like a person that seems particularly concerned about the short-term, but without asking him the question directly and getting a direct response, it's impossible to tell. However, he does go on to say:

 

I'm not saying it's not a challenging situation. It is a challenging situation. But the tools to manage it, and the capabilities of managing it are excellent. I will say that I get to know different economic leaders around the world, and I would say their capabilities are equal to the best that exist anyway in terms of the things that need to be done (monetary, fiscal policy, restructuring debts).

 

But again, look, we're likely looking at this information with our own biases, right? Dalio analogizes it to heart surgery -- it's going to weaken you in the short-term, but you're going to come out of it alright and you're going to be better than you were before. You might look at "weaken" and think "something short of crisis," and I might look at "weaken" and think slower growth but not recession.

 

Re Dalio's bullish/bearish stance on stocks:

 

I don't think that 4% long-term (nominal) return on stocks is bullish in light of a 2.7% yield for the 30 year US treasury bond. Either treasuries are far too cheap or stocks are far too expensive – or both. This is what Dalio is saying between the lines when he's talking about small risk premia leading to "increasing volatility". I think that treasuries are way too cheap because the market consensus is far above Dalio's return expectations when it comes to stocks and also economic growth in general.

 

I don't think he's bullish about the stock market, but neither is he bearish. (Primarily because he stated as much!) It's a problem if people start to pick and choose amongst which things he's said that they choose to believe... it's sort of like when the Westboro Church decides they're going to follow some aspects of the Bible but not others. (And remember, I have biases too, so it's possible that I'm picking and choosing between the things he's said that I choose to believe!)

 

In any case, my interpretation of his interview is that stock markets are going to have relative stagnation for a while with some increased volatility, and I think that the resulting choppy markets are good for value investors.

[TwoCitiesCapital]

I don't think he's bullish about the stock market, but neither is he bearish. (Primarily because he stated as much!) It's a problem if people start to pick and choose amongst which things he's said that they choose to believe... it's sort of like when the Westboro Church decides they're going to follow some aspects of the Bible but not others. (And remember, I have biases too, so it's possible that I'm picking and choosing between the things he's said that I choose to believe!)

 

In any case, my interpretation of his interview is that stocks markets are going to have relative stagnation for a while with some increased volatility, and I think that the resulting choppy markets are good for value investors.

 

I'll only just add that the caveat that I normally get to when I see this 4% return figure - Dalio didn't predict an equity market crash and doesn't appear to be bullish or bearish at first glance. However, typically, when the stock market has delivered returns like that over the course of the decade, it wasn't a smooth 3-5% per year. Prior examples of low single digit equity returns have resulted from a stock market that went up to extreme levels and crashed back-down.

 

Obviously there is nothing to say that ALWAYS has to be the case for you to get low, single-digit equity returns - but historically, that is how you got them. Dalio may not be bearish on equities simply because he can't yet foresee what causes that crash, but he has to know that it's more likely it will be a large decline in equities and subsequent recovery that brings about that level of return and not a stable 3-5% per year. He even said himself that the falling risk premia lends itself to increased volatility which supports the crash/subsequent recovery theme more than it does the stable returns theme.

 

So even though Dalio may not be bearish on equities, the very fact that he forecasts a 4% nominal returns tells me that he'd probably lean bearish if pressed. He probably is just uncomfortable making that forecast without having a set of evidence supporting outside of simply relying on historical performance.

 

[merkhet]

Except he was pressed!

 

He said he wasn't bearish on the stock market. The interviewer said "No?" in a particularly incredulous way, and he repeated "No, I'm not bearish on the stock market."

 

I'm not sure how much more you can press him. Would you hold him down and slap him across the face until he finally told you his "real feelings"?

 

This entire conversation between me and ni-co has started because I made a claim that people don't like pointing out disconfirming evidence! I feel like that statement is still true?

[merkhet]

Let me take a run at this in a slightly less facetious way.

 

I think you basically have two options:

 

(1) Take everything Ray Dalio says at face value, or

(2) Look between the lines at what he's saying

 

Option (1) has the benefit of being pretty easy. You just listen to him, and you believe what he says. The downside here is that there's no flexibility if you don't like what he says.

 

Option (2) has the benefit of being a bit flexible, but the downside is that it allows for personal biases to come into play. Because then you're sort of un-moored from any anchor to what was actually said.

 

The main problem I'm seeing here is that there is signifiant cognitive dissonance between the following two statements:

• Dalio is not bearish on the stock market
  
• Dalio sees 0% returns for cash, 2% returns for bonds, 4% returns for stocks and increased volatility
  

So people are looking at it and saying that the second bullet point invalidates the first bullet point. Except then you're now in Option (2) picking and choosing between what you want to agree with -- which is fine, so long as everyone involved is clear that this is what is occurring.

 

However, I don't see too many people trying to figure out how both statements could be true, and that's because the first bullet point is disconfirming evidence towards some people's views, and the second bullet point is confirming evidence towards some people's views, and it's easier to dismiss the disconfirming evidence than to try to find a way to integrate both statements.

[Picasso]

Except he was pressed!

 

He said he wasn't bearish on the stock market. The interviewer said "No?" in a particularly incredulous way, and he repeated "No, I'm not bearish on the stock market."

 

I'm not sure how much more you can press him. Would you hold him down and slap him across the face until he finally told you his "real feelings"?

 

This entire conversation between me and ni-co has started because I made a claim that people don't like pointing out disconfirming evidence! I feel like that statement is still true?

 

+1.  We need to waterboard Dalio to get him to tell us how he really feels.

[TwoCitiesCapital]

Except he was pressed!

 

He said he wasn't bearish on the stock market. The interviewer said "No?" in a particularly incredulous way, and he repeated "No, I'm not bearish on the stock market."

 

I'm not sure how much more you can press him. Would you hold him down and slap him across the face until he finally told you his "real feelings"?

 

This entire conversation between me and ni-co has started because I made a claim that people don't like pointing out disconfirming evidence! I feel like that statement is still true?

 

+1.  We need to waterboard Dalio to get him to tell us how he really feels.

 

My statement was trying to explain how both could be true - Dalio isn't bearish because he doesn't see the immediate catalyst for what will drive equity returns down, but could very well realize that the most likely path forward is for a large drop at some point in the future. If you can't time that drop though, and you're not entirely certain it's going to occur, then it's possible to be "neutral" even while recognizing that there is a very real threat. My only point is that Dalio probably isn't going on record that he's bearish unless if he has immediately recognizable catalysts to drive it.

 

By "pressed" I didn't necessarily mean simply ask him the question and then re-iterate it. I mean if you could force him to allocate money for the 7 years without the ability to touch it, you may find that his allocation to U.S. equities would be lower than otherwise thought for someone who wasn't particularly bearish on it. Then again, the bulk of Dalio's wealth is managed by the All Weather Fund so it may be that he wouldn't change the allocation no matter what the outlook....

 

In general though, I do agree with you that people tend to ignore disconfirming evidence. I appreciate you pointing all of this out and I was simply trying to do what you were asking by explaining how both statements could be true.

[merkhet]

My statement was trying to explain how both could be true - Dalio isn't bearish because he doesn't see the immediate catalyst for what will drive equity returns down, but could very well realize that the most likely path forward is for a large drop at some point in the future. If you can't time that drop though, and you're not entirely certain it's going to occur, then it's possible to be "neutral" even while recognizing that there is a very real threat. My only point is that Dalio probably isn't going on record that he's bearish unless if he has immediately recognizable catalysts to drive it.

 

Here's the problem with that statement. I could also say "Dalio isn't bearish because he doesn't see the immediate catalyst for what will drive equity returns up, but could very well realize the most likely path forward is for a large jump at some point in the future."

 

There is no evidentiary basis in what Dalio has said to pick your statement or mine -- other than personal views on the matter. That's my main concern here. The creeping insertion of personal biases once we pick Option (2).

 

Anyway, we may have beaten this horse well beyond dead at this point, and I appreciate that you were trying to integrate the two statements, but I'm just trying to illustrate that in integrating the two statements you might have inserted personal bias into it to make the disconfirming evidence less disconfirming.

[ni-co]

Merkhet, I get your point. I actually have considered this. This is why I'm long USTs and not short stocks in a meaningful way. The reason I keep hammering on this macro/deleveraging thing is that I think that people in this forum have a huge bias towards just being long stocks – period.  They want to stick with value investing because it has worked for many decades. Maybe that's the right thing to do. What I try to achieve with those macro posts here is to get you guys thinking about the question "What if the next 10-20 years were not resembling the last 80 years?" And what are the fundamental macro biases value investing has to rely on implicitly or explicitly?