next crash (bubble) reading room: Ray Dalio, Jim Rogers, Grantham

Ray Dalio: Don't own bonds, don't own cash

https://www.youtube.com/watch?v=A-noFNHcrlM

6:08

Bloomberg new economy

Nov 18, 2020

printing and distributing money

do asset price and valuation make sense?

yields

bond market

the capacity of the central bank(s) to put liquidity into the system

economics of borrowing

leveraging

the financial flow, the market behavior is reflective of that

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Ray Dalio breaks down his "Holy Grail"

https://www.youtube.com/watch?v=Nu4lHaSh7D4

4:42

investopedia

Apr 27, 2019

the "Holy Grail" is a sweet spot between diversification and correlation.

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Why Grantham Says the Next Crash Will Rival 1929, 2000

https://www.youtube.com/watch?v=RYfmRTyl56w

38:26

Bloomberg Markets and Finance

Jan 22, 2021

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([bubble market have I seen this before])

Jim Rogers warns stock bubble will grow in 2021: “I’ve seen this movie before”

Leisha Chi-Santorelli

Dec 29, 2020

https://www.marketplace.org/2020/12/29/jim-rogers-warns-stock-bubble-will-grow-in-2021-ive-seen-this-movie-before/

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Bridgewater's Ray Dalio

Vanguard Emerging Markets ETF (VWO)

http://www.institutionalinvestor.com/blogarticle/3433519/blog/bridgewaters-ray-dalio-explains-the-power-of-not-knowing.html

Bridgewater’s Ray Dalio Explains the Power of Not Knowing

By Raymond Dalio

March 06, 2015 at 1:00 PM EST

To make money in the markets, you have to think independently and be humble. You have to be an independent thinker because you can’t make money agreeing with the consensus view, which is already embedded in the price. Yet whenever you’re betting against the consensus, there’s a significant probability you’re going to be wrong, so you have to be humble.

Early in my career I learned this lesson the hard way — through some very painful bad bets. The biggest of these mistakes occurred in 1981–’82, when I became convinced that the U.S. economy was about to fall into a depression. My research had led me to believe that, with the Federal Reserve’s tight money policy and lots of debt outstanding, there would be a global wave of debt defaults, and if the Fed tried to handle it by printing money, inflation would accelerate. I was so certain that a depression was coming that I proclaimed it in newspaper columns, on TV, even in testimony to Congress. When Mexico defaulted on its debt in August 1982, I was sure I was right. Boy, was I wrong. What I’d considered improbable was exactly what happened: Fed chairman Paul Volcker’s move to lower interest rates and make money and credit available helped jump-start a bull market in stocks and the U.S. economy’s greatest ever noninflationary growth period.

This episode taught me the importance of always fearing being wrong, no matter how confident I am that I’m right. As a result, I began seeking out the smartest people I could find who disagreed with me so that I could understand their reasoning. Only after I fully grasped their points of view could I decide to reject or accept them. By doing this again and again over the years, not only have I increased my chances of being right, but I have also learned a huge amount.

There’s an art to this process of seeking out thoughtful disagreement. People who are successful at it realize that there is always some probability they might be wrong and that it’s worth the effort to consider what others are saying — not simply the others’ conclusions, but the reasoning behind them — to be assured that they aren’t making a mistake themselves. They approach disagreement with curiosity, not antagonism, and are what I call “open-minded and assertive at the same time.” This means that they possess the ability to calmly take in what other people are thinking rather than block it out, and to clearly lay out the reasons why they haven’t reached the same conclusion. They are able to listen carefully and objectively to the reasoning behind differing opinions.

When most people hear me describe this approach, they typically say, “No problem, I’m open-minded!” But what they really mean is that they’re open to being wrong. True open-mindedness is an entirely different mind-set. It is a process of being intensely worried about being wrong and asking questions instead of defending a position. It demands that you get over your ego-driven desire to have whatever answer you happen to have in your head be right. Instead, you need to actively question all of your opinions and seek out the reasoning behind alternative points of view.

This approach comes to life at Bridgewater in our weekly research meetings, in which our experts on various areas openly disagree with one another and explore the pros and cons of alternative views. This is the fastest way to get a good education and enhance decision-making. When everyone agrees and their reasoning makes sense to me, I’m usually in good shape to make a decision. When people continue to disagree and I can’t make sense of their reasoning, I know I need to ask more probing questions or get more triangulation from other experts before deciding.

I want to emphasize that following this process doesn’t mean blindly accepting the conclusions of others or adopting rule by referendum. Our CIOs are ultimately responsible for our investment decision-making. But we all make better decisions by maintaining an independent view and the conflicting possibilities in our minds simultaneously, and then trying to resolve the differences. We’re always in the place of holding an opinion and simultaneously stress-testing the hell out of it.

Operating this way just seems like common sense to me. After all, when two people disagree, logic demands that one of them must be wrong. Why wouldn’t you want to make sure that that person isn’t you?

Raymond Dalio is founder, chairman and co-CIO of Bridgewater Associates, the world’s largest hedge fund firm.

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GMO quarterly letter

first quarter 2014

Looking for bubbles

https://drive.google.com/file/d/1x4wDHj_Da46CQqMIGpde3x2LhzEcqtne/view?usp=sharing

https://drive.google.com/drive/folders/1IW9zNqBlhZxMkjb4r-pq-k0a83aFv4r7?usp=sharing

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Jeremy Grantham, Looking for Bubbles, First Quarter 2014 [ ]

GMO

quarterly letter

Looking for Bubbles

part one: a statistical approach

Jeremy Grantham

... [...] ...

What is a bubble? 17 years ago in 1997, when GMO was already fighting what was to become the biggest equity bubble in U.S. history, we realized that we needed to define bubbles. By mid-1997 the price earning ratio on the S&P 500 was drawing level to the peaks of 1929 and 1965 - around 21 times earnings - and we had the difficult task of trying to persuade institutional investors that times were pretty dangerous. We wanted to prove that most bubbles had ended badly. In 1997, the data we had seemed to show that ALL bubbles, major bubbles anyway, had ended VERY badly: all 28 major bubbles we identified had eventually retreated all the way back to the original trend that had existed prior to each bubble, a very tough standard indeed.

Having plenty of quants back then, it was no time before it was suggested that a two-standard-deviation (or 2-sigma) event might be a useful boundary for a bubble. In a normally distributed world, a 2-sigma event would occur every 44 years.

GMO had spent a lot time during the last 17 years making a considerable review of minor bubbles as well as the 28 major ones that we covered orginally in 1997. One thing that was clear from the 330 examples we had studied: 2-sigma events in our real world have tended to occur not every 44 years, but about 31 years. This was quite a bit closer to the 44 years of a random world than we originally would have guessed given that the world is fat-tailed but, frankly, it is convenient: once every 31 years, which would be a longish career in investing, feels like it perfectly fits the title of “bubble”.

In my opinion, time has been kind to this definition in the intervening 17 years. A 2-sigma event now seems to me to be perfectly reasonable even if I have to admit it is completely arbitrary. Having a useful and practical definition of a bubble is important for I have come to believe that the forming and bursting of the great investment bubbles are by ar the most important things that happen in investing. So, how do the great events of the past score on this 2-sigma definition? The 6 most important asset bubbles in modern times (in my opinion) are shown in Exhibit 1 and, as you can see, each of them qualifies on the 2-sigma definition, although the 1965-72 peak, known in the trade then as the “Nifty-Fifty” event, did so by a modest margin, the very definition of the Nifty Fifty as “one decisions stocks” may have qualified it, with one extremely crazy theme substituting for many smaller ones, for “one decision stocks” were so named because you only had to make one decision: to buy. These stocks were generally believed then to be so superior that once brought they would be held for life. (Most, like Coca-Cola and Merck, stood the test of time well enough, but unfortunately several then unchallengeable examples like Eastman Kodak and Polaroid went the way of all flesh, or all film.)

SEE

Exhibit 1: The six most important asset bubbles in modern times

U.S. stocks: 1929

1925 to 1931

U.S. stocks: 1965

1954 to 1970

Japanese stocks: 1990

1982 to 1994

Japanese commercial property: 1991

1965 to 1997

U.S. stocks: 2000

1991 to 2007

U.S. residential property: 2005

May-2001 to Nov-2008

Source: GMO, Global financial data

There is one very important event that influenced our lives, financial and otherwise: 2008. The U.S. housing market leaped past 2-sigma all the way to 3.5-sigma (a 1 in 5,000-year event!). The U.S. equity market, though, was overshadowed by the then recent record bubble of 2000, although it still made it to a 2-sigma event on some definitions. But what was unique about 2008 was the near universality of its asset class overpricing: every equity market, almost all real estate markets (Japan and Germany abstained), and, of course, a fully-fledged bubble in oil and many other commodities. The GMO Quarterly of April 2007 (“It's Everywhere, in Everything: The First Truly Global Bubble”) started out: “From Indian antiquities to Chinese modern art; from land in Panama to Mayfair; from forestry, infrastructure, and the junkiest bonds to mundane blue chips; its bubble time.” But it took until month for the penny to drop about how to make the point statistically. Using just the 40 countries for whom we have the best long-term equity data, we asked how many of these markets have been over one standard deviation at any given time together and Exhibit 2 provides the answer: that in 2008 a higher percentage of the 40 equity markets were over that hurdle (a 1-sigma is the kind of event that occurs about once every 6-years in a random world) than ever before in our data, which starts in 1925. Interestingly, 1929 came the closest. I must say I had not at all expected that. I have been carrying the quite false impression for almost 50 years that 1929 was overwhelmingly a U.S. market event, although I knew the crash was more universal. However, 2008 in contrast is unique in other ways too -- in 1929, the housing markets was more or less normal and the commodity markets were curiously very depressed.

... [...] ...

So 2008, particularly if you can imagine adding real estate and commodities, was indeed a true global asset bubble, being the most extreme collective outlier in not just 30 years, but in at least 88 years of our data and probably forever, given the much lower correlations of earlier times.

... [...] ...

source: GMO_QtlyLetter_1Q14_FullVersion.pdf

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next crash (bubble) reading room

Saturday, January 8, 2022

Ray Dalio, Jim Rogers, Grantham

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