Dalio: How the Economic Machine Works in 30 Minutes (and a Cartoon)

(September 25, 2013) — Find the financial markets confusing? Wish someone would explain it in a way you would understand? Ray Dalio, CEO of risk parity pioneers Bridgewater has explained it all in an animated video.

The 30-minute cartoon shows how the system works, detailing its participants and their actions.

“I also constantly hear people argue about what economic policies would be best,” Dalio said in an email to Bridgewater clients. “I believe that if people first explored how the economy works and could agree on that, they would find it easier to make better decisions, and the world will be a better place.”

The video looks at the printing of money and its relationship to inflation, what deleveraging is and how it works, and the impact of the budget deficits on the economy.

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It might be a little basic for many of aiCIO’s readers, but we think it is worth a watch—and Dalio would like to hear your feedback.

Click here to access the video on Economicprinciples.org.

(September 25, 2013) — Investors should measure results on what they need and recognize the institutional investor framework works, according to three of the world’s most experienced CIOS experienced CIOs.

Chris Ailman, CIO of the California State Teachers’ Retirement System, Bob Maynard, CIO of the Public Employee Retirement System of Idaho, and Adriaan Ryder, CIO of the QIC, spoke to attendees at the Hermes Investment Conference in London yesterday.

All three are members of the coveted 300 Club, a group of leading investment professionals from across the globe.

“We’ve lost historical perspective,” Ailman said. “We have gotten into the mind-set of measuring quarterly performance, which is taking away our view of the long term.”

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“As an investor, when you are looking at sustainability and governance of companies, you have to look at the long term. These things matter. But when you’re referring just to quarterly earnings, company CEOs will cut corners.”

Maynard said he was “bored, but nervous” about the current state of the financial world, but urged investors not to throw the baby out with the bathwater when trying to mend the system.

“We don’t need a new framework,” he said. “Or at least not until we find something that works as well as the last one. The numbers we used were for long-term investment—and if we look through to the 1900s, that’s long-term enough.”

He said investors were fooled by the calmness of the 1990s, whereas the volatility witnessed over the past 10 years was more normal.

“What was the annualised standard deviation we used—10% to 13%? We got about 11%. And the annualised real return rate—4% to 6%? We got around that too. We expected—or we should have expected this.

“You might be down 20% one year, but it rebalances and it gives you a base to work from.”

Ryder at QIC told investors to look after their own business, before comparing it with that of their peers.

“We need discussion around objectives, rather than peer measurement,” he said. “We need to manage all risks, both in our assets and liabilities.”

Ryder said investors needed to be given the flexibility to manage their portfolios by setting a range within which they could move allocations to certain asset classes.

“This way investors can take advantage of crises; they can be opportunistic and tactical,” he said.