The U.S. will not solve these problems by doing what you and I would logically do — raise taxes (i.e. income) and cut expenditures (like less on entitlements and less on the military).<\/p>\n
It will print\u00a0 money — lots of it. This will create serious inflation and much higher interest rates.<\/p>\n
This environment will favor lean companies with strong market positions (i.e. able to raise their prices), well-managed currencies, like the Swiss franc and the Australian dollar and gold.<\/p>\n
How Ray Dalio built the world\u2019s richest and strangest hedge fund: <\/strong>This long piece is worth reading. Tomorrow I’ll list some of the key macro-economic trends as I see them. I bolded several key sections.<\/span> Mastering the Machine<\/strong> by John Cassidy in the July 25, 2011 New Yorker. (Please subscribe to the magazine. Click here<\/strong>.<\/a>)<\/p>\n Ray Dalio has an uncanny ability to anticipate economic trends. Critics say that he runs a cult. Photograph by Platon.<\/em><\/p>\n Ray Dalio, the sixty-one-year-old founder of Bridgewater Associates, the world\u2019s biggest hedge fund, is tall and somewhat gaunt, with an expressive, lined face, gray-blue eyes, and longish gray hair that he parts on the left side. When I met him earlier this year at his office, on the outskirts of Westport, Connecticut, he was wearing an open-necked blue shirt, gray corduroy pants, and black leather boots. He looked a bit like an aging member of a British progressive-rock group. After a few pleasantries, he grabbed a thick briefing book and shepherded me into a large conference room, where his firm was holding what he described as its weekly \u201cWhat\u2019s going on in the world?\u201d meeting.<\/p>\n Of the fifty or so people present, most were clean-cut men in their twenties or thirties. Dalio sat down near the front of the room. A colleague began describing how the European Central Bank had just bought some Greek bonds from investors at a discount to their face value\u2014a move that the speaker described as a possible precursor to an over-all restructuring of Greece\u2019s vast debts. Dalio interrupted him. He said, \u201cHere\u2019s where you are being imprecise,\u201d and then explained at length what a proper debt restructuring would entail, dismissing the E.C.B.\u2019s move as an exercise in \u201ckicking it down the road.\u201d<\/p>\n Dalio is a \u201cmacro\u201d investor, which means that he bets mainly on economic trends, such as changes in exchange rates, inflation, and G.D.P. growth. In search of profitable opportunities, Bridgewater buys and sells more than a hundred different financial instruments around the world\u2014from Japanese bonds to copper futures traded in London to Brazilian currency contracts\u2014which explains why it keeps a close eye on Greece. In 2007, Dalio predicted that the housing-and-lending boom would end badly. Later that year, he warned the Bush Administration that many of the world\u2019s largest banks were on the verge of insolvency. In 2008, a disastrous year for many of Bridgewater\u2019s rivals, the firm\u2019s flagship Pure Alpha fund rose in value by nine and a half per cent after accounting for fees. Last year, the Pure Alpha fund rose forty-five per cent, the highest return of any big hedge fund. This year, it is again doing very well.<\/p>\n The discussion in the conference room moved on to Spain, the United Kingdom, and China, where, during the previous week, the central bank had raised interest rates in an attempt to slow inflation. Dalio said that the Chinese economy was in danger of overheating, and somebody asked how a Chinese slowdown would affect the price of oil and other commodities. Greg Jensen, Bridgewater\u2019s co-chief executive and co-chief investment officer, who is thirty-six, said he thought that even a stuttering China would still grow fast enough to push world commodity prices upward.<\/p>\n Dalio asked for another opinion. From the back of the room, a young man dressed in a black sweatshirt started saying that a Chinese slowdown could have a big effect on global supply and demand. Dalio cut him off: \u201cAre you going to answer me knowledgeably or are you going to give me a guess?\u201d The young man, whom I will call Jack, said he would hazard an educated guess. \u201cDon\u2019t do that,\u201d Dalio said. He went on, \u201cYou have a tendency to do this. . . . We\u2019ve talked about this before.\u201d After an awkward silence, Jack tried to defend himself, saying that he thought he had been asked to give his views. Dalio didn\u2019t let up. Eventually, the young employee said that he would go away and do some careful calculations.<\/p>\n After the meeting, Dalio told me that the exchange had been typical for Bridgewater, where he encourages people to challenge one another\u2019s views, regardless of rank, in what he calls a culture of \u201cradical transparency.\u201d Dalio had no qualms about upbraiding a junior employee in front of me and dozens of his colleagues. When confusions arise, he said, it is important to discuss them openly, even if that involves publicly pointing out people\u2019s mistakes\u2014a process he referred to as \u201cgetting in synch.\u201d He added, \u201cI believe that the biggest problem that humanity faces is an ego sensitivity to finding out whether one is right or wrong and identifying what one\u2019s strengths and weaknesses are.\u201d<\/p>\n Dalio is rich\u2014preposterously rich. Last year alone, he earned between two and three billion dollars, and reached No. 55 on the Forbes 400 list. But what distinguishes him more from other hedge-fund managers is the depth of his economic analysis and the pretensions of his intellectual ambition. He is very keen to be seen as something more than a billionaire trader. Indeed, like his sometime rival George Soros, he appears to aspire to the role of worldly philosopher. In October, 2008, at the height of the financial crisis, he circulated a twenty-page essay immodestly titled \u201cA Template for Understanding What\u2019s Going On,\u201d which said the economy faced not just a common recession but a \u201cdeleveraging\u201d\u2014a period in which people cut back on borrowing and rebuild their savings\u2014the impact of which would be felt for a generation. This line of analysis wasn\u2019t unique to Dalio, but almost three years later, with economic growth stagnating again, it does not seem off the mark.<\/p>\n Many hedge-fund managers stay pinned to their computer screens day and night monitoring movements in the markets. Dalio is different. He spends most of his time trying to figure out how economic and financial events fit together in a coherent framework.<\/strong> \u201cAlmost everything is like a machine,\u201d he told me one day when he was rambling on, as he often does. \u201cNature is a machine. The family is a machine. The life cycle is like a machine.\u201d His constant goal, he said, was to understand how the economic machine works. \u201cAnd then everything else I basically view as just a case at hand. So how does the machine work that you have a financial crisis? How does deleveraging work\u2014what is the nature of that machine? And what is human nature, and how do you raise a community of people to run a business?\u201d<\/p>\n Dalio is serenely convinced that the precepts he relies on in the markets can be applied to other aspects of life, such as career development and management. And he has enough regard for his own views on these subjects to have collected them in print. Before our meeting, he sent me a copy of his \u201cPrinciples,\u201d a hundred-page text that is required reading for Bridgewater\u2019s new hires. It turned out to be partly a self-help book, partly a management manual, and partly a treatise on the principles of natural selection as they apply to business. \u201cI believe that all successful people operate by principles that help them be successful,\u201d a passage on the second page said. The text was organized into three sections: \u201c5 Steps to Personal Evolution,\u201d \u201c10 Steps to Personal Decision-Making,\u201d and \u201cManagement Principles.\u201d The last of the two hundred and seventy-seven management principles was: \u201cConstantly worry about what you are missing. Even if you acknowledge you are a \u2018dumb shit\u2019 and are following the principles and are designing around your weaknesses, understand that you might still be missing things. You will be better and be safer this way.\u201d<\/p>\n Dalio\u2019s philosophy has created a workplace that some call creepy. Last year, Dealbreaker, a Wall Street Web site, picked up a copy of the Principles and made fun of a section in which Dalio appeared to compare Bridgewater to a pack of hyenas feeding on a young wildebeest. In March, AR, a magazine that covers hedge funds, quoted a former colleague of Dalio\u2019s saying, \u201cBridgewater is a cult. It\u2019s isolated, it has a charismatic leader and it has its own dogma.\u201d The authors of the article noted that Dalio\u2019s \u201cemphasis on tearing down an individual\u2019s ego hints at the so-called struggle groups of Maoism,\u201d while his search for \u201chuman perfection devoid of emotion resembles the fantasy world in Ayn Rand\u2019s \u2018The Fountainhead.\u2019\u201d<\/p>\n Dalio doesn\u2019t pretend that Bridgewater is a typical workplace, but he is sensitive to criticism. The recent media attention irked him, because, in his view, it misrepresented and trivialized Bridgewater\u2019s culture, which he insists is central to the firm\u2019s success. \u201cIt is why we made money for our clients during the financial crisis when most others went over the cliff,\u201d<\/strong> he wrote to me in an e-mail. \u201cOur greatest power is that we know that we don\u2019t know and we are open to being wrong and learning.\u201d<\/p>\n After the \u201cWhat\u2019s going on in the world?\u201d meeting, he walked back to his office, an airy but modest-sized corner space that overlooks the Saugatuck River and is lined with pictures of his wife and four sons. He sat down behind his desk and showed me a book he had been reading\u2014\u201cEinstein\u2019s Mistakes: The Human Failings of Genius<\/em>,\u201d by Hans C. Ohanian. \u201cHere was the greatest mind of the twentieth century, and he made lots of mistakes,\u201d Dalio said. In his Principles, Dalio declares that acknowledging errors, studying them, and learning from them is the key to success.<\/strong> He writes, \u201cPain + Reflection = Progress.\u201d Bridgewater puts this equation into action by organizing lengthy assessment sessions, in which employees must discuss their mistakes.<\/p>\n The next item on Dalio\u2019s agenda was a meeting with his two co-chief executives: Jensen and David McCormick, a former senior official in the Treasury Department under George W. Bush. Like virtually all meetings at Bridgewater, this one was taped. Dalio says that the tapes\u2014some audio, some video\u2014provide an objective record of what has been said; they can be used for training purposes, and they allow Bridgewater\u2019s employees to keep up with what is going on at the firm, including his discussions with senior colleagues. \u201cThey get to see all of my mistakes,\u201d Dalio told me. \u201cThey get to see all of my humanity.\u201d<\/p>\n Once a tape recorder had been switched on, Jensen, McCormick, and Dalio discussed the possible promotion of an internal candidate to a senior-management role. McCormick, a soft-spoken forty-five-year-old who studied engineering at West Point, argued that the candidate\u2019s prior experience at a big Wall Street firm indicated that he could probably do the job. Dalio disagreed. An investment bank is a \u201ctotally different world,\u201d he said. But, rather than continue the discussion, he asked one of his assistants to call in the candidate. One rule of radical transparency is that Bridgewater employees refrain from saying behind a person\u2019s back anything that they wouldn\u2019t say to his face.<\/p>\n The man arrived and stood before Dalio\u2019s desk. Dalio explained what the discussion was about and said, \u201cI don\u2019t imagine that you would be a good fit for the job.\u201d The man took a seat, and Dalio and McCormick continued their discussion about his qualifications. The candidate explained his experience on Wall Street and said he thought he could do the job well. Dalio leaned back in his chair, looking skeptical. The employee didn\u2019t get the promotion.<\/p>\n The only child of Italian-American parents, Ray Dalio was born in Jackson Heights, Queens, in 1949. His father was a jazz musician who played the clarinet and saxophone at Manhattan jazz clubs such as the Copacabana; his mother was a homemaker. When Dalio was eight, the family bought a three-bedroom house in Manhasset, and enrolled Ray in the local public school. \u201cI was a bad student,\u201d he recalls. \u201cI have a bad rote memory, and I didn\u2019t like studying.\u201d From the age of twelve, Dalio caddied at the nearby Links Golf Club, whose members included many Wall Street investors. Some of them gave Dalio tips. The first stock he purchased was Northeastern Airlines, which soon received a takeover offer. Its shares tripled. \u201cI figured that this was an easy game,\u201d Dalio said. By the time he started college, at a nearby campus of Long Island University, he had built up a stock portfolio worth several thousand dollars.<\/p>\n After signing up for some finance classes, he discovered that there were some topics he enjoyed studying. Transcendental meditation, which he took up following a trip to India by the Beatles, also helped his work habits. Most mornings before going to the office, he still meditates. Demonstrating his technique, he sat back in his office chair, closed his eyes, and clasped his hands in front of him. \u201cIt\u2019s just a mental exercise in which you are clearing your mind,\u201d he said. \u201cCreativity comes from open-mindedness and centeredness\u2014seeing things in a nonemotionally charged way.\u201d<\/p>\n After graduating, Dalio went to Harvard Business School, where he traded commodities\u2014grains, oil, cotton, and so on\u2014for his own account. Not long after leaving Harvard, he landed at Shearson Hayden Stone, the brokerage firm run by Sanford Weill. Dalio worked in the commodity-futures department, advising cattle ranchers, grain producers, and others on how to hedge risks. (The horns of a longhorn steer, the gift of some California ranchers, are mounted behind his desk.) On New Year\u2019s Eve in 1974, Dalio went out drinking with his departmental boss, got into a disagreement, and slugged him. About the same time, at the annual convention of the California Food & Grain Growers\u2019 Association, he paid an exotic dancer to drop her cloak in front of the crowd. After being fired, he persuaded some of his clients to hire him as a consultant and founded Bridgewater, operating it out of his two-bedroom apartment. He was twenty-six years old.<\/p>\n By the early nineteen-eighties, Dalio had got married, started a family, and moved to Wilton, Connecticut, where he lived and traded out of a converted barn. He also advised businesses on how to manage risk and published an economic newsletter. One of his readers was Bob Prince, a young financial analyst who worked for a bank in Oklahoma, and who is now Bridgewater\u2019s co-chief investment officer. Prince showed one of Dalio\u2019s articles to his boss, David Moffett, who went on to become the chief executive of Freddie Mac. \u201cHe said it was the best thing he had ever read on how the economy works,\u201d Prince recalled. Another of Dalio\u2019s articles that stuck in Prince\u2019s memory was titled \u201cWhat Is a Jeweler?\u201d It described a jeweller as basically an investor with a long position in gold and precious stones. If the market price of these commodities goes up, the jeweller makes money on his stock. If prices fall, he can lose out. To limit the risk, Dalio wrote that jewellers should purchase gold-futures contracts designed to rise in value when the price of gold falls.<\/p>\n In 1985, Dalio persuaded the World Bank\u2019s employee-retirement fund to let Bridgewater manage some of its capital. In 1989, Kodak\u2019s retirement system did the same. At the time, Kodak had most of its money invested in stocks. Dalio\u2019s pitch, which hasn\u2019t changed much over the years, was that by investing in a variety of other markets, such as U.S. and international bonds, and using leverage to bolster its exposure, Bridgewater could match or beat the stock market with less risk.<\/strong> \u201cHe had a new way of thinking,\u201d Rusty Olson, who ran Kodak\u2019s retirement funds for many years, told me. \u201cYou get the same return, but you get a heck of a lot of beneficial diversification, too.\u201d<\/p>\n Hedge funds date to 1949, when Alfred Winslow Jones, a writer at Fortune, opened a private investment firm using sixty thousand dollars he had raised from friends and forty thousand he had saved. To boost his returns, Jones borrowed heavily and bought stocks he liked \u201con margin\u201d\u2014a practice that had been discredited in the late nineteen-twenties. As a \u201chedge\u201d against the market falling, Jones also picked out some stocks he believed to be overvalued and bet against them\u2014a practice known as \u201cselling short.\u201d Jones\u2019s fund regularly beat the Dow, and by the late nineteen-sixties it had attracted many imitators.<\/p>\n Worldwide, there are now some ten thousand hedge funds, which the government regulates only loosely. Together, they have about two trillion dollars under management. <\/strong>Even today, they employ the two basic tools that Jones used\u2014borrowing (\u201cleverage\u201d) and selling short\u2014and they charge their clients hefty fees, as Jones did. On top of a two-per-cent management fee, they deduct twenty per cent of any investment gains they generate. Jones claimed that this remuneration scheme, which is known as \u201ctwo and twenty,\u201d was inspired by the way ancient Phoenician merchants financed their trading expeditions. But the practice is also tax-driven. It allows hedge-fund managers to classify much of their income as capital gains, which are taxed at a far lower rate than regular income. While cops and schoolteachers face a marginal tax rate of twenty-five per cent, hedge-fund managers like Dalio have for years paid fifteen per cent on the lion\u2019s share of their income.<\/strong><\/p>\n Some hedge-fund managers, such as Steven A. Cohen, of S.A.C. Capital, and David Einhorn, of Greenlight Capital, are stock pickers, like Jones. Others, such as James Simons, of Renaissance Technologies, are known as \u201cquants.\u201d They use computers to sift through market data, spot profitable opportunities, and place trades, all with minimal human intervention. As a macro trader, Dalio is working in the tradition of George Soros and Julian Robertson, famous speculators who ranged across markets.<\/strong><\/p>\n Bridgewater has long run two primary investment funds. One, called All Weather, has low charges attached to it and seeks to match the over-all market return, which is known as \u201cbeta,\u201d in whichever market the client chooses. Another, Pure Alpha, which has the standard two-and-twenty charges, aims at beating the market return but also at limiting risk. To investment professionals, \u201calpha\u201d is the return over and above the market return. <\/strong>If in a given year the S. & P. 500 returns fifteen per cent and an equity-fund manager generates a return of twenty per cent, his alpha is five per cent.<\/p>\n Part of Dalio\u2019s innovation has been to build a hedge fund that caters principally to institutional investors rather than to rich individuals. Of the roughly one hundred billion dollars invested in Bridgewater, only a small proportion comes from wealthy families. Almost a third comes from public pension funds, such as the Pennsylvania Public School Employees\u2019 Retirement System; another third comes from corporate pension funds, such as those at Kodak and General Motors; a quarter comes from government-run sovereign wealth funds, such as the Government Investment Corporation of Singapore. \u201cMaking money on a constant basis is the holy grail, and Ray and Bridgewater have done that,\u201d Ng Kok-Song, the chief investment officer of the Singapore fund, told me. \u201cThey are consistently innovating\u2014constantly soul-searching and asking, \u2018Have we got this right?\u2019 \u201d Kok-Song went on, \u201cI am constantly asking myself, \u2018If Bridgewater is doing this, shouldn\u2019t we be doing the same thing?\u2019 \u201d<\/p>\n At some hedge funds, client service is an afterthought. Bridgewater\u2019s investors receive a daily newsletter, monthly performance updates, quarterly reviews, and conference-call briefings from Dalio and other senior executives. <\/strong>\u201cWhen a lot of folks were very, very secretive, Ray could see the value in creating something that was more open, something that was attractive to very large streams of money,\u201d Robert Johnson, a former senior executive at Soros Fund Management, who now runs the Institute for New Economic Thinking, said to me.<\/p>\n Recently, the hedge-fund industry has been shaken by allegations that it exploits inside information. In May, Raj Rajaratnam, the founder of the Galleon Group, was convicted on fourteen counts of conspiracy and securities fraud. Other government investigations are continuing, including one involving S.A.C. Capital. Dalio and Bridgewater don\u2019t appear to be involved. Dalio told me that Bridgewater hasn\u2019t received any subpoenas, adding that he had no reason to believe that the firm was under investigation by any official agency.<\/p>\n Dalio is an outdoorsman and naturalist of the Hemingway school: he likes to go places and kill things. He fishes in Canada, shoots grouse in Scotland, and hunts big game in Africa, with a bow\u2014particularly Cape buffalo, which weigh up to two thousand pounds, are famously ornery, and sometimes gore hunters with their giant horns. Naturally, Dalio sees this as a metaphor for how he invests. \u201cIt\u2019s always a matter of controlling risk,\u201d he explained. \u201cRisky things are not in themselves risky if you understand them and control them. If you do it randomly and you are sloppy about it, it can be very risky.\u201d The key to success, he said, is figuring out \u201cWhere is the edge? And how do I stay the right distance from the edge?\u201d<\/strong><\/p>\n One way he does it is by spreading his bets: at any given time, the Pure Alpha fund typically has in place about thirty or forty different trades.<\/strong> \u201cI\u2019m always trying to figure out my probability of knowing,\u201d Dalio said. \u201cGiven that I\u2019m never sure, I don\u2019t want to have any concentrated bets.\u201d Such thinking runs counter to the conventional wisdom in the hedge-fund industry, which is that the only way to score big is to bet the house. George Soros famously did this in 1992\u2014selling short some ten billion dollars\u2019 worth of sterling. A few years ago, John Paulson wagered hugely against U.S. mortgage bonds and made several billion dollars.<\/p>\n Dalio is a consistent hitter of singles and doubles\u2014the Jos\u00e9 Reyes of Wall Street. Among the bets the Pure Alpha fund placed last year were long positions in Treasury bonds, the Japanese yen, and gold, and short positions in the euro and European sovereign debt. A potential problem with this type of global investing is that these days many markets move in the same direction<\/strong>, which makes it hard to achieve real diversification. Bridgewater\u2019s solution is to place a lot of \u201cspread\u201d bets, purchasing one security it considers undervalued and selling short another one it considers overvalued. For example, it might buy platinum and sell silver, or buy a thirty-year U.K. bond and sell a ten-year bond. The returns from spread bets tend to be uncorrelated with the over-all market.<\/p>\n Other hedge funds have tried to mimic Dalio\u2019s approach, which is sometimes referred to as \u201cportable alpha,\u201d but none have proved as successful. The strategy depends on an ability to outperform the market consistently, which many economists regard as virtually impossible. Dalio somehow seems to manage it.<\/p>\n At the start of the year, Bridgewater turned bearish on U.S. bonds and built up a short position. When the bond market stumbled, this bet (which the firm has since reversed) paid off handsomely, as did wagers on commodities and emerging-market currencies. So far in 2011, while the average hedge fund has struggled to make any money at all, the Pure Alpha fund is up more than ten per cent. <\/strong>The bet against Treasuries gave the lie to a criticism sometimes made of Dalio\u2014that he is basically a bond-market investor, who has benefitted from a twenty-year rally in bonds. \u201cWe have been equally likely to be short bonds or long bonds,\u201d he said. \u201cThe performance of the Pure Alpha fund is not correlated with any asset class or any market. It has done equally well in any environment.\u201d<\/p>\n What accounts for Dalio\u2019s success? His colleague Bob Prince describes him as \u201ca big-picture thinker connected to a street-smart<\/strong>\u201d trader. Many economists start at the top and work down. They look at aggregate statistics\u2014inflation, unemployment, the money supply\u2014and figure out what the numbers mean for particular industries, such as autos or tech. Dalio does things the other way around. In any market that interests him, he identifies the buyers and sellers, estimates how much they are likely to demand and supply, and then looks at whether his findings are already reflected in the market price. If not, there may be money to be made. In the U.S. bond market, Bridgewater scrutinizes the weekly U.S. Treasury auctions to see who is buying\u2014American banks, foreign central banks, mutual funds, pension funds, rival hedge funds\u2014and who isn\u2019t. In the commodities markets, the firm goes through a similar exercise, trying to figure out how much demand is coming from corporations and how much from speculators. \u201cIt all comes down to who is going to buy and who is going to sell and for what reasons,\u201d Dalio explained.<\/strong><\/p>\n To guide its investments, Bridgewater has put together hundreds of \u201cdecision rules.\u201d These are the financial analogue of Dalio\u2019s Principles. He used to write them down and keep them in a ring binder. Today, they are encoded in Bridgewater\u2019s computers. Some of these indicators are very general. One of them says that if inflation-adjusted interest rates decline in a given country, its currency is likely to decline. Others are more specific. One says that, over the long run, the price of gold approximates the total amount of money in circulation divided by the size of the gold stock. If the market price of gold moves a long way from this level, it may indicate a buying or selling opportunity.<\/p>\n In any given market, Bridgewater may have a dozen or more different indicators. However, even when most or all of the indicators are pointing in a certain direction, Dalio doesn\u2019t rely solely on software. Unless he and Jensen and Prince agree that a certain trade makes sense, the firm doesn\u2019t make it. While this inevitably introduces an element of human judgment to the investment process, Dalio insists it is still driven by the rules-based framework he has built up over thirty years. \u201cWhen I\u2019m thinking, \u2018What is going on today?,\u2019 I also need to make the connection to \u2018How does what is happening today fit into our framework for making this decision?\u2019 \u2019\u2019 he said. Ultimately, he says, it is the commitment to systematic analysis and systematic investment that distinguishes Bridgewater from other hedge funds. \u201cI hear a lot of people describing what\u2019s happening today without the proper historical context and without the framework of how the machine works,\u201d he says.<\/p>\n In looking at the economy as a whole, Dalio pays particular attention to the amount of credit that banks and other financial institutions are creating, which he regards as a key factor in over-all spending. This may seem like common sense, but until recently many economists and policymakers didn\u2019t pay much heed to the growth of credit, concentrating instead on the amount of actual money in the economy\u2014notes, coins, bank deposits\u2014which is largely determined by the Federal Reserve. In July, 2007, Dalio and a co-author wrote in Bridgewater\u2019s daily newsletter about \u201ccrazy lending and leveraging practices,\u201d adding, \u201cWe want to avoid or fade this lunacy.\u201d A couple of weeks later, after the subprime-mortgage market froze up, Dalio\u2019s newsletter declared, \u201cThis is the financial market unraveling we have been expecting. . . . This will run through the system with the speed of a hurricane.\u201d<\/p>\n Searching for historical precedents, Bridgewater put together detailed histories of previous credit crises, going back to Weimar Germany. The firm\u2019s researchers also went through the public accounts of nearly all the major financial institutions in the world and constructed estimates of how much money they stood to lose from bad debts. The figure they came up with was eight hundred and thirty-nine billion dollars. Armed with this information, Dalio visited the Treasury Department in December, 2007, and met with some of Treasury Secretary Henry Paulson\u2019s staff. Nobody took much notice of what he said, but he went on to the White House, where he presented his numbers to some senior economic staffers. \u201cRay laid out the argument that the losses he foresaw in the banking system were astronomical,\u201d a former Bush Administration official who attended the White House meeting recalled. \u201cEverybody else was talking about liquidity. Ray was talking about solvency.\u201d<\/p>\n His warnings ignored in Washington, Dalio issued more jeremiads to his clients. \u201cIf the economy goes down, it will not be a typical recession,\u201d his newsletter said in January, 2008. Rather, it would be a disaster in which \u201cthe financial deleveraging causes a financial crisis that causes an economic crisis. . . . This continues until there is a reflation, a currency devaluation and government guarantees of the efficacy of key financial intermediaries.\u201d<\/strong> As the crisis deepened, Dalio continued to assess it far more accurately than many senior policymakers did. When the government allowed Lehman Brothers to collapse, he despaired. \u201cSo, now we sit and wait to see if they have some hidden trick up their sleeves, or if they really are as reckless as they seem,\u201d the newsletter said on September 15, 2008.<\/p>\n Eventually, after the near implosion of the financial system had brought about a deep recession, some policymakers came to respect Dalio\u2019s analysis. \u201cI think the central policy judgment was that there was more risk in doing too little than in doing too much,\u201d Lawrence Summers, who headed the National Economic Council between 2009 and 2010, recalled. \u201cThat was a judgment I reached, and it was a judgment Ray reached.\u201d While Summers was in the White House, he read Bridgewater\u2019s economic newsletter and spoke every few months with Dalio, whom he described to me as \u201can impressively intellectually aggressive guy.\u201d Summers went on, \u201cHe had a fully articulated way of looking at the economy. I\u2019m not sure I would agree with all of it, but it seems to have been a very powerful analytical tool through this particular period.\u201d<\/p>\n And a powerful investment tool, too. Anticipating that the Federal Reserve would be forced to print a lot of money to revive the economy, Bridgewater placed a number of bets that would pay off in such a scenario\u2014for instance, going long Treasury bonds, shorting the dollar, and buying gold and other commodities. <\/strong>These trades helped the Pure Alpha fund make money in 2008, but Dalio\u2019s bearishness cost him in 2009. Despite the Fed\u2019s actions and the Obama Administration\u2019s stimulus package, Dalio predicted that the economic recovery would be weak. When growth rebounded faster than he expected and the Dow rose nineteen per cent, the Pure Alpha fund gained just four per cent. But last year, when G.D.P. growth faltered, the fund made a great deal of money betting on Treasury bonds and other securities that tend to do well in a weak economy.<\/p>\n In April, an article in New York<\/em> ridiculed Dalio\u2019s Principles, saying that they read \u201cas if Ayn Rand and Deepak Chopra had collaborated on a line of fortune cookies.\u201d It also accused him of running Bridgewater like a cult. \u201cI\u2019ve been surprised that there\u2019s been so much controversy about us having such clearly set-out principles, especially since they\u2019re all about being truthful and transparent to do good work and have meaningful relationships,\u201d Dalio wrote to me subsequently. \u201cMost of the people who don\u2019t like us having them haven\u2019t read them\u2014they just assume that us having a lot of principles makes us a cult. That\u2019s O.K. I figure that the people who matter to us will take the time to read them and form their own opinions and those who don\u2019t care enough to read them don\u2019t matter to us.\u201d<\/p>\n Dalio may protest too much. The word \u201ccult\u201d clearly has connotations that don\u2019t apply to an enterprise staffed by highly paid employees who can quit at any moment. But Bridgewater\u2019s headquarters are in the woods, isolated from any other financial institution; Dalio is a strong-willed leader; and the employees do use their own vocabulary\u2014Dalio\u2019s vocabulary. Bob Elliott, a twenty-nine-year-old Harvard graduate who has worked at Bridgewater for six years, told me earnestly, \u201cOnce you understand how the machine works, you have the ability to take that and study and apply it across markets.\u201d It\u2019s also the case that in the time I spent at the firm I saw senior people criticizing subordinates\u2014but not the reverse.<\/p>\n In his Principles, Dalio acknowledged that his firm can seem strange to outsiders and newcomers: \u201cSince Bridgewater\u2019s culture is very different from what is typical in the world at large, people often encounter culture shock when they start here.\u201d In part to minimize this shock, for years Bridgewater recruited young men and women straight out of college. (Harvard, Princeton, and Dartmouth were favorite targets.) But the firm\u2019s in-your-face attitude\u2014and the relentless pressure to perform\u2014takes its toll. \u201cWe get a lot of people who self-select out of that pretty quickly,\u201d Michael Partington, a recruiter at Bridgewater, said to me. Within two years of arriving at Bridgewater, about a quarter of new hires have quit or been let go.<\/p>\n Bridgewater has been expanding rapidly\u2014it now has more than a thousand people on its payroll\u2014and it has brought in a lot of mid-career executives. One day, I drove to Westport and sat in on a management-committee meeting, which had been set up for the purpose of \u201cgetting in synch\u201d with a recent recruit, whom I\u2019ll call Peter and who had come from a big financial firm. All nine members of Bridgewater\u2019s management committee were sitting at a long wooden conference table. Peter, a lean man with fair hair, sat stiffly near the front: he looked like somebody anticipating a root canal. Jensen and McCormick were nominally in charge, but Dalio took over, telling Peter that, during a previous management meeting, he had answered emotionally in response to questioning from Jensen. \u201cThis is a common thing when somebody\u2019s getting probed,\u201d Dalio said. \u201cBecause the amygdala gets stimulated and you have that emotional reaction.\u201d Peter agreed that he had become upset, especially when he sensed he was being accused of misleading his colleagues. \u201cI felt in some sense my integrity was being attacked,\u201d he said. \u201cThat\u2019s when things spiralled out of control.\u201d<\/p>\n Dalio walked to the front of the room, where he wrote on a whiteboard, \u201cFELT,\u201d \u201cINTEGRITY,\u201d and \u201cMISLED.\u201d \u201c?\u2018Felt\u2019 is the key word here . . . and it\u2019s a challenge for people,\u201d he said. After a bit more discussion, he went on, \u201cWhat we\u2019re trying to have is a place where there are no ego barriers, no emotional reactions to mistakes. . . . If we could eliminate all those reactions, we\u2019d learn so much faster.\u201d Another member of the committee, Eileen Murray, intervened to say she assumed that Peter had not encountered this type of conversation at his previous job. He confirmed that he hadn\u2019t. Murray nodded sympathetically. \u201cWhen I first came here, I was like, \u2018What the hell is going on?\u2019 \u201d she said.<\/p>\n Dalio wasn\u2019t finished. He suggested that the problem was that Peter had an idea of how things should be handled, and when the reality turned out to be different he hadn\u2019t been honest with his colleagues. \u201cThe issue is that you are not freely releasing those beliefs,\u201d he said to Peter. \u201cUnlike a lot of companies, where you are meant to sit there and be quiet . . . here we respect your notion that you have a point of view. . . . Your responsibility is to say, \u2018Does it make sense to me?\u2019 And if it doesn\u2019t make sense don\u2019t keep it bottled up.\u201d Dalio went on, \u201cI\u2019m saying, just let it flow, man.\u201d<\/p>\n Peter said he thought it was understandable that somebody new to the firm would react under stress as he had. Still, he added, \u201cIf I had to replay this thing again, I\u2019d be much more open with my thoughts.\u201d<\/p>\n \u201cWhat would you say the duty of a leader is?\u201d Dalio asked him.<\/p>\n Peter replied, \u201cThe duty of a leader, first and foremost, is to be transparent.\u201d<\/p>\n Bridgewater\u2019s decision rules surely contribute to his firm\u2019s success. But Dalio also believes that his management principles play a role. \u201cWhat is a typical organization?\u201d he asked me one day. \u201cA typical organization is one where people are walking around saying, \u2018This is stupid, this doesn\u2019t make sense,\u2019 behind each other\u2019s backs.\u201d In support of his management theories, Dalio has an expert witness. \u201cAbout eighty-five per cent of what\u2019s in the Principles could be documented and supported by research,\u201d Bob Eichinger, an organizational psychologist who has done consulting work for Bridgewater and other large companies, said. Eichinger went on, \u201cIs it a better way to run a company? From a results perspective, probably so. Could a large portion of the working population be comfortable in that environment? Probably not.\u201d<\/p>\n Some senior executives at Bridgewater do relish working there. Eileen Murray, who runs the firm\u2019s accounting and technology systems, is one of them. Before moving to Bridgewater, in 2009, she spent twenty-five years on Wall Street, rising to a senior post at Morgan Stanley. \u201cI wanted to make sure I wasn\u2019t joining some petri dish in Westport, Connecticut, as part of a big experiment,\u201d she said, recalling her initial, lengthy conversations with Dalio. \u201cIf someone\u2019s intention is to make me a better person, I really appreciate that. If people do things because they can, or because they are the boss . . . I don\u2019t react to that well.\u201d Murray said she is now reassured, because \u201cthe intention is to make people better. . . . I have never seen a C.E.O. spend as much time developing his people as Ray.\u201d<\/strong><\/p>\n Another new member of Bridgewater\u2019s management committee is James Comey, the firm\u2019s top lawyer, who served as Deputy Attorney General in the Bush Administration between 2003 and 2005. \u201cMost of my friends think I am having a midlife crisis,\u201d Comey told me in a recent phone conversation, referring to his decision, last year, to leave Lockheed Martin and accept an offer from Dalio. He was tired of corporate politics and craved a setting where people spoke truth to power, but, he said, it took him a while to get used to dealing with Dalio. \u201cWhen Ray sent me an e-mail saying, \u2018I think what you said today doesn\u2019t make sense,\u2019 I tended to think, What does he really mean? Where\u2019s he coming from? And what is my play? Who are my allies? All of the things you think about in the outside world. It took me three months to realize that when Ray says, \u2018I think you are wrong,\u2019 he really means \u2018I think you are wrong.\u2019 He\u2019s not trying to provoke you, or anything else.\u201d<\/p>\n Comey was initially struck by how long it took Bridgewater to make decisions, because of the ceaseless internal debates. \u201cI said, \u2018Lordy, we have to put tops on bottoms. Let\u2019s get something done,\u2019 \u201d Comey recalled. But he added, laughing, \u201cThe mind control is working. I\u2019ve come to believe that all the probing actually reduces inefficiencies over the long run, because it prevents bad decisions from being made.\u201d Comey said of Dalio, \u201cHe\u2019s tough and he\u2019s demanding and sometimes he talks too much, but, God, is he a smart bastard.\u201d<\/p>\n And yet Dalio\u2019s acuity prompts an awkward question: how much of Bridgewater\u2019s success comes not from the way it is organized, or any notion of \u201cradical transparency,\u201d but from the boss\u2019s raw investment abilities? At other hedge funds, it is taken for granted that the firm\u2019s principal asset walks out the door every evening and settles into a chauffeur-driven car. Is Bridgewater really any different? Although the firm trades in more than a hundred markets, it is widely believed that the great bulk of its profit comes from two areas in which Dalio is an expert: the bond and currency markets of major industrial countries. Unlike some other hedge funds, Bridgewater has never made much money in the U.S. stock market, an area where Dalio has less experience. \u201cBridgewater really is Ray,\u201d one former employee told me. \u201cThe key decisions they have made\u2014where they have really made their money\u2014is Ray. Most of what really matters is Ray, with help from Greg and Bob. You could run the firm with forty or fifty people instead of a thousand, and it would be basically the same.\u201d<\/p>\n As long as Dalio remains healthy, the fact that he plays a key role in directing Bridgewater\u2019s investments isn\u2019t an issue. (Based on past experience, it is a big advantage.) But, from a business and marketing perspective, the suggestion that Bridgewater\u2019s success continues to hinge on Dalio is a problematic one. As the former employee explained, \u201cIt\u2019s hard to market that model\u2014one guy and his brilliant track record. If you want to sell your firm to institutional clients, it\u2019s critical to appear to be \u2018rule-driven.\u2019 That takes a lot of smarts. Most people want to take the credit. To say \u2018I just run this machine\u2019 detracts from your own individual brilliance. But that is very smart business.\u201d<\/p>\n Dalio contests this account. He insists that he is but one member of a large team, with Greg Jensen and Bob Prince acting as his co-chief investment officers. He compares the comments of former employees to the carping of ex-spouses. In fact, with the firm prospering, Dalio has been living up to a promise to spend a bit more time away from it, and he has ceded some day-to-day management responsibility to Jensen and McCormick. \u201cI\u2019m stepping back a little: I\u2019m going to a minister\/mentor role,\u201d Dalio said, comparing himself to Lee Kuan Yew, the longtime Prime Minister of Singapore, who relinquished his post in 1990 but even today retains great influence. This month, Dalio is formally giving up his co-C.E.O. title in favor of \u201cMentor.\u201d<\/p>\n The managerial changes and Dalio\u2019s lean appearance have ignited some speculation that he is sick, but he insisted to me that he is fine. He said his weight loss was the result of an \u201cintended weight-loss program,\u201d and he said he has absolutely no intention of giving up his role in directing Bridgewater\u2019s investments. In stepping back from day-to-day management and in bringing in senior people, he said he is seeking to preserve the essence of the firm he built while preparing it for his eventual departure. Bridgewater has grown so large that its two main funds are now closed to new investors. Recently it launched a third fund, which is called Pure Alpha Major Markets.<\/p>\n Last year, Dalio sold about twenty per cent of Bridgewater to some of its employees in a deal financed by several of the firm\u2019s longtime clients, and he told me that ultimately he would like to sell his entire ownership stake to his colleagues. Unlike certain other hedge-fund managers, though, he has no interest in making another fortune by floating his firm on the stock market. \u201cI don\u2019t want Bridgewater to go public or have it controlled by anybody outside the firm,\u201d he said. \u201cI think people who do that tend to mess up the firm.\u201d<\/p>\n Dalio insists that money has never been his main motivation. He lives well, but avoids the conspicuous consumption that some of his rivals indulge in. He and his wife, Barbara, to whom he has been married for thirty-four years, own two houses, one in Greenwich, Connecticut, and one in Greenwich Village, which he sometimes uses on weekends. (They are currently building a new house on the water in Connecticut.) Apart from hunting and exploring remote areas, Dalio\u2019s main hobby is music: jazz, blues, and rock and roll. Recently, he joined a philanthropic campaign started by Bill Gates and Warren Buffett, pledging to give away at least half of his money. (Forbes estimates his net worth at six billion dollars.) He and his wife wrote in a public letter, \u201cWe learned that beyond having enough money to help secure the basics\u2014quality relationships, health, stimulating ideas, etc.\u2014having more money, while nice, wasn\u2019t all that important.\u201d<\/p>\n Not that Dalio makes any apology for his fortune or his profession. An agnostic and a self-described \u201chyperrealist,\u201d he regards it as self-evident that all social systems obey nature\u2019s laws, and that individual participants get rewarded or punished according to how far they operate in harmony with those laws. He views the financial markets as simply another social system, which determines payoffs and punishments in a like manner. \u201cYou have to be accurate,\u201d he says. \u201cOtherwise, 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.\u201d<\/p>\n Dalio is right, but somewhat self-serving. If hedge-fund managers are playing a zero-sum game, what is their social utility? And if, as many critics contend, there isn\u2019t any, how can they justify their vast remuneration? When I put these questions to Dalio, he insisted that, through pension funds, Bridgewater\u2019s investors include teachers and other public-sector workers, and that the firm created more value for its clients last year than Amazon, eBay, and Yahoo combined. However, it is one thing to say that the most successful hedge-fund managers earn the riches they reap. It is quite another to suggest that the entire industry serves a social purpose. But that is Dalio\u2019s contention. \u201cIn aggregate, it really contributes a lot to the efficiency of capital allocation, and capital allocation is very important,\u201d he said.<\/p>\n Like many successful financiers, Dalio justifies capitalism and his place in it as a Darwinian process, in which the over-all logic of the system is sometimes hidden. This is actually what the mention, in his Principles, of hyenas savaging a wildebeest was about. \u201cIs this good or bad?\u201d he wrote. Like \u201cdeath itself, this behavior is integral to the enormously complex and efficient system that has worked for as long as there has been life.\u201d Of course, this view conveniently ignores the argument that hedge funds, through their herd behavior, have contributed to speculative bubbles, in tech stocks, oil, and other commodities. Even some defenders of the industry concede that the problem is real and potentially calamitous. \u201cThere is a basis for the argument that hedge funds add economic value,\u201d Andrew Lo, an economist at M.I.T. who runs his own hedge fund, says. \u201cAt the same time, they create systemic risks that have to be weighed against those positives.\u201d<\/p>\n Because hedge funds use a lot of borrowed money to magnify their bets, they are subject to rapid reversals: the history of the industry is littered with blowups. This wouldn\u2019t matter much if other parts of the economy weren\u2019t affected by the actions of hedge funds, but sometimes they are. In 2008, hedge funds had hundreds of billions of dollars on deposit at investment banks, which acted as their brokers and counterparties on many trades. When the Wall Street firms got into trouble, a number of other hedge funds demanded their money back immediately. These demands amounted to a virtual run on the banks and helped to bring down Bear Stearns and Lehman Brothers. Dalio acknowledged to me that Bridgewater was one of the funds that pulled a lot of money out of Lehman and other Wall Street firms, but he said he had little choice. \u201cI\u2019m a fiduciary to my clients. My responsibility is to know where it\u2019s risky and where it\u2019s not risky, and to get out of the risks.\u201d<\/p>\n Hedge funds have also contributed to the radical increase in income inequality. Fifteen years ago on Wall Street, remuneration packages of five or ten million dollars a year were rare. Today, C.E.O.s and star traders routinely demand vastly higher sums to keep up with their counterparts at hedge funds. In addition to distorting salary structures elsewhere, the rewards that hedge-fund managers reap draw some of the very brightest science and mathematics graduates to the industry. Can it really be in America\u2019s interest to have so much of its young talent playing a zero-sum game?<\/p>\n Rather than confronting these issues, Dalio, like all successful predators, is concentrating on the business at hand\u2014the markets and the global economic outlook. This spring, he told me that economic growth in the United States and Europe was set to slow again. This was partly because some emergency policy measures, such as the Obama Administration\u2019s stimulus package, would soon come to an end; partly because of the chronic indebtedness that continues to weigh on these regions; and partly because China and other developing countries would be forced to take drastic policy actions to bring down inflation. Now that the slowdown appears to have arrived, Dalio thinks it will be prolonged. \u201cWe are still in a deleveraging period,\u201d he said. \u201cWe will be in a deleveraging period for ten years or more.\u201d<\/strong><\/p>\n Dalio believes that some heavily indebted countries, including the United States, will eventually opt for printing money as a way to deal with their debts, which will lead to a collapse in their currency and in their bond markets. \u201cThere hasn\u2019t been a case in history where they haven\u2019t eventually printed money and devalued their currency,\u201d he said. Other developed countries, particularly those tied to the euro and thus to the European Central Bank, don\u2019t have the option of printing money and are destined to undergo \u201cclassic depressions,\u201d Dalio said. The recent deal to avoid an immediate debt default by Greece didn\u2019t alter his pessimistic view. \u201cPeople concentrate on the particular thing of the moment, and they forget the larger underlying forces,\u201d he said. \u201cThat\u2019s what got us into the debt crisis. It\u2019s just today, today.\u201d<\/p>\n Dalio\u2019s assessment sounded alarmingly plausible. But when one plays the global financial markets a thorough economic analysis is only the first stage of the game. At least as important is getting the timing right. I asked Dalio when all this would start to come together. \u201cI think late 2012 or early 2013 is going to be another very difficult period,\u201d he said. \u2666<\/p>\n Read this book. <\/strong>My friends rave about it.<\/span> This is Barnes and Noble’s writeup on the book:<\/p>\n On a May afternoon in 1943, an Army Air Forces bomber crashed into the Pacific Ocean and disappeared, leaving only a spray of debris and a slick of oil, gasoline, and blood. Then, on the ocean surface, a face appeared. It was that of a young lieutenant, the plane\u2019s bombardier, who was struggling to a life raft and pulling himself aboard. So began one of the most extraordinary odysseys of the Second World War.<\/p>\n The lieutenant\u2019s name was Louis Zamperini. In boyhood, he\u2019d been a cunning and incorrigible delinquent, breaking into houses, brawling, and fleeing his home to ride the rails. As a teenager, he had channeled his defiance into running, discovering a prodigious talent that had carried him to the Berlin Olympics and within sight of the four-minute mile. But when war had come, the athlete had become an airman, embarking on a journey that led to his doomed flight, a tiny raft, and a drift into the unknown.<\/p>\n Ahead of Zamperini lay thousands of miles of open ocean, leaping sharks, a foundering raft, thirst and starvation, enemy aircraft, and, beyond, a trial even greater. Driven to the limits of endurance, Zamperini would answer desperation with ingenuity; suffering with hope, resolve, and humor; brutality with rebellion. His fate, whether triumph or tragedy, would be suspended on the fraying wire of his will.<\/p>\n In her long-awaited new book, Laura Hillenbrand writes with the same rich and vivid narrative voice she displayed in Seabiscuit. Telling an unforgettable story of a man\u2019s journey into extremity, Unbroken is a testament to the resilience of the human mind, body, and spirit.<\/p>\n Hollywood Squares seems appropriate for today. <\/strong><\/span><\/p>\n Q. Paul, what is a good reason for pounding meat?<\/p>\n A. Paul Lynde: Loneliness!<\/p>\n Q. If you’re going to make a parachute jump, at least how high should you be?<\/p>\n A. Charley Weaver: Three days of steady drinking should do it.<\/p>\n Q. You’ve been having trouble going to sleep. Are you probably a man or a woman?<\/p>\n A. Don Knotts: That’s what’s been keeping me awake.<\/a><\/strong><\/p>\n
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