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Monday, September 5. 2011
Ray Dalio, the quiet, reclusive, distinctly unflashy, and jazz- and opera-loving founder of The world’s richest and strangest hedge fund:
"Another difficult period"? What about now? He is usually right about things, it would seem. He is telling us that he is betting on that.
The New Yorker has a detailed profile of Dalio (whence the photo). An interesting fellow indeed.
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Jim Rogers has predicted this too. So has Ron Paul. So have a number of writers on ZeroHedge. It's nothing new.
The problem is, nobody is listening. There is a distinct belief, amongst those who control the system, that printing money will create the illusion of wealth (can you say Mississippi Bubble?), and somehow stave off the ultimate disaster.
I wonder if it would be fair to say that Dalio is Mao, his "Principles" are Mao's "Little Red Book" and his "honest" approach akin to ChiCom "self confession".
Sure as hell sounds like it.
I think Dalio is intriguing. All traders have principles which guide them. Tom, if you haven't read "Reminiscences of a Stock Operator", I highly recommend it. It is the fictionalized account of the life of Jesse Livermore.
His rules were part of what led to today's world of stock charting...and eventually to the computer programs which guide traders on a daily basis.
There is a problem with all the computer models, though. If everyone does the same thing, nobody makes any money. The KEY to a market is having people doing slightly different things, focusing on different values, possibly even opposite values.
Markets are win/win. The concept that "one man's trash is another man's treasure" plays out in this fashion:
A stock which is declining in value does not mean that those who hold it lose value, thus leading to complete degradation of the market. Short sellers make money in this environment. Short sellers cannot "force" the market down (as some people think - though there is one situation where they can and it's supposed to be regulated but usually isn't), they merely make money by betting against the move of the market, like a craps player putting his money on the "Don't Pass" line (most people put money on the "Pass" line). Short sellers, in a market decline, provide a bottom - they set the bottom of the market by reinvesting their money and helping the market recover.
When the government bans short selling (as it has in the mistaken attempt to stop a falling market), it eliminates the baseline bottom. There will be nobody to stop the market when it hits the bottom because there will ONLY be losers.
As a result, the much maligned stock operators play a beneficial and important role in helping the market find equilibrium and balance, while providing much needed liquidity.
Dalio is a very smart man, and I respect what he's accomplished.
The "issue" I have with him has nothing to do with him, personally, but with the system, which has placed a greater value on finance as a tool for making money than on creating usable capital for productivity. Markets have always been designed to make money, but they've primarily acted as a means of providing capital to increase productivity of business and fuel new ideas. Today, finance exists for the purpose of finance and little else. It's a self-interested market without a clear relationship to the economy, and this is because (entirely because of) government intervention and the creation of the state capitalist system.
Dalio is doing what any smart person should try to do - benefit from the system which exists. People complain that "the market failed". Hardly - the government failed the market and people like Dalio are merely doing what they do, much like a vulture feeding on the carrion by the side of the road. He sees things, and seeks to profit from it. We need people like him in the system.
What we don't need is the government gaming the system, which just makes Dalio's job all the easier.
Rick, good comment, i agree with most of what you say although i'd like to see Dalio extrapolate on this comment:. “You have to be accurate,” he says. “Otherwise, you are going to pay. Alpha is zero sum. In order to earn more than the market return, you have to take money from somebody else."
Read more http://www.newyorker.com/reporting/2011/07/25/110725fa_fact_cassidy#ixzz1X7ynKruE
Alpha is, basically (assuming you don' t know) the pool of money in the market at any given moment of time. So, as you trade, at that moment, there is "growth" which can produce a win/win arrangement - only a winner and loser. It is the net result of that transaction which produces Beta - the ability of a market to grow (or shrink).
So he is absolutely correct, and it is precisely why so many hedge fund workers are poker players. Poker is the ultimate Alpha game. Everyone in the game has a limit on not only each hand - but for the entire match.
Other games, where you play against the house, have a built in Beta (the house's bank), rather than an alpha at risk. Poker is pure Alpha - a winner and other losers.
nice reply ... a little condescending but worth my while to read it anyway. If alpha is zero-sum game, beta is the crumbs, and Dalio is not contributing.
I like Ray. Philosophically, if he is so inclined, i m challenging his statement as such .. how do you fit that into a categorical imperative? Is what i m asking.
I see reminders of the impending collapse daily. Big and little. Today we awoke to discover that the morning paper just shrunk the physical size of its pages and print by 1/3 (size of the pages, not the number, which has also steadily been going down over the last year). Actually seems appropriate for them to do it on Labor Day. a sort of tribute to socialism. (Last month they raised prices. Then last week they shut off non-paying access to their internet pages without also buying a print subscription, which probably alone cost them a good percentage of their remaining readers.)
The headline on the front page was that the Post Office may be going out of business by the end of the year.
I went to make eggs for my wife for breakfast and discovered that the egg producer has stopped feeding its chickens whatever it feeds them to get their eggs and yolks hard. So half of the eggs pretty much fell apart in my hands as I went to break them into pan.
Won't talk about how food prices for a lot of things have doubled in our local market. The government has now conveniently taken energy and food costs out of the computation of CPI so you won't realize what the real inflation rate is.
Of course, none of this has to do with the "markets." Our present economic situation is entirely created by the government. We used to laugh and look down at "third world" countries. But now we have the same folks running ours.
Happy Socialist Labor Day.
He overlooks the obvious solution:
Hyperinflate the U.S. dollar and we Americans and the various levels of government will be able to pay off our debts with pocked change.
Yup. And you'll be impoverished. But that's OK, as long as the government debt is paid.
By the way, that's exactly what they are doing - and Dalio mentioned this when he discussed the need for the US to print money in huge amounts in order to keep the economy out of a classic Depression.
As I point out to people who ask "where's the inflation?" - we are in a DEFLATIONARY environment. Prices SHOULD be falling. But they are still rising, however moderately. This means we are in a DE FACTO inflationary environment. It's an illusion, created by the government, to help people FEEL richer when in fact they are not. It will get out of control.
As Dalio noted, the price of gold is equivalent to ALL CURRENCY active in the global market DIVIDED by available gold. I did that calculation, and you know what the value of gold should be? $6,000.
It's trading at $1,900.
Ron Paul is right.