May you live in interesting times
1) We live in extremely interesting times. The world order around us is changing quickly and profoundly. The COVID-19 pandemic and the recent Ukraine crisis are just two most talked-about elements of larger transformations that are taking place on our planet.
These transformations are both fascinating and full of risk. Understanding them is therefore the first step to riding the wave without drowning in the stormy sea.
2) Recently, the hedge-fund manager Ray Dalio has published a highly insightful take on the changes that are occurring in the world, as a book and as a Youtube video. From his vantage point as the proverbial Yankee up in capitalist Connecticut, he has suggested a framework that can help understand why great powers rise and fall, and what can be done to stop the decline.
While these ideas are not nearly as humorous as Mark Twain’s novel, they can compete with the ingenuity of its approach. There is no doubt, that Ray Dalio has a point. However, there are also parts of his reasoning that are not quite exact.
What do I mean by that?
3) At the beginning of his book, Ray Dalio suggests that you can’t focus on the details to see the big picture. He is of course right, but also wrong on that account – because the devil is in the detail. And while his model is sound on the whole, there are several aspects of it that deserve a closer look.
As an experienced investor, actually one of the best of his kind, Ray Dalio approaches problems from the economic perspective and tries to elaborate general models that will work under all circumstances. There’s nothing particularly wrong about this approach, but just like any angle it has its limitations.
4) Unlike economic models, history is full of exceptions and irregularity. The sheer amount of actors and factors is so big that it makes any accurate prediction extremely difficult. The comparisons Ray Dalio draws between different historical situations that are similar to our own are striking. But what about the differences?
I’m confident that they are at least as important as the features these situations have in common. If we want to get the right picture, we should pay at least some attention to them.
According to Ray Dalio, there are three big cycles (money and debt; internal order; international order) and eighteen key drivers that explain the rise and fall of great powers.
5) In the following weeks I will have a closer look at these cycles and key drivers. I will stress test them against historical evidence and other perspectives in order to see where Ray Dalio is right and where he is wrong.
History doesn’t repeat itself, but it rhymes. Even though Mark Twain actually never said that, it certainly makes good sense. Given that, it might be worth learning how to rhyme elegantly.
Next week we’ll be starting with the money and debt cycle. In the meantime, you might be interested in taking a look at this.