These documents have been floating around the blogosphere, but I figured I should post them nonetheless since many likely haven’t seen them.  I haven’t read them in their entirety yet, but if they’re on par with Dalio’s usual work then they’ll be very good.  Hopefully more insights will come when I get around to reviewing them in full (thanks to Meb Faber for the links):

A Template for Understanding

Risk Parity is About Balance

Engineering Targeted Returns and Risks

** And if you haven’t read the Economist piece and my comments on Dalio then see here….


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. Cullen,

    thanks for the link. Eagerly waiting for your comments on “How the machine works” and “Deleveraging”. Here two comments from me

    1. Bwater: Prices are determined by money + credit, with credit being about 15x bigger than money. And economic activity is determined by: a) productivity growth; b) the long-term leveraging / deleveraging cycle (“long wave”); c) the short-term business cycle. The only critique I could make here is that they assume productivity growth is driven only by knowledge and productivity growth is a given. Over the very LT (30-50 years)this seems to be true, but I would like to see more evidence on that from other countries than the US.

    2. On Deleveraging: The most interesting observation is that they claim that (counting both government and private debt) the U.S. is currently deleveraging, while having positive GDP growth, and nominal GDP growth is higher than the govt bond yield (they do not explain why this is important, but probably it means that govt debt / GDP would be sustainable). This would be a “beautiful deleveraging”, whereas Japan and Spain are in “ugly deleveragings”, similar to the state of the US after the Lehman default. To me the surprise is that the US is deleveraging (I thought that the govt debt increase offsets the smallish decrease in private debt –> needs to be further checked).


  2. Cullen: i would be very curious to know your thougths on the “template for..” paper

  3. In “A Template for Understanding”: “[...] while seemingly complex, an economy is really just a zillion simple things working together, which makes it look more complex than it really is.”

    Replace “economy” by “human brain” in the above, and you realize that this statement is rather absurd.

    I would say that the economy looks quite exactly as complex as it actually is…

  4. In US, people start saving when it is getting worse and stop when it is getting better.
    The savings rate increase precedes recessions, so the drop is bullish.
    my 2¢

  5. Thanks for the reading list. I’ve got to read Mebane’s book. I just read Jackass Investing by Daver. Some good ideas there but he sells too hard what he does (managed futures). I have read Mebane’s papers, I don’t think the book will add much to them but I think the book is around 10 bucks for the kindle/IPad. She is the author of the Ivy portfolio, a momentum based strategy. The numbers look great S&P 500 like returns with a fraction of the drawdown but I have a hard time going from value to momentum. My brain cannot digest it….

  6. Hi Rick. I’m no longer associated with MMT. We started MMR a few months back in case you’re unaware. We take a pretty different approach on several things, one of which is pvt debt. See our new site here:

    As you probably know, I’ve been working under the balance sheet recession theory for the last few years. That means that spenders have turned into savers as they’ve diverted spending to pay down debt. I think Jerry is right that the fiscal consolidation remains a huge risk here. I’ve recently noted that the effects of the BSR are waning, but remain. A quick fiscal retrenchment would crater pvt saving and could even exacerbate the debt issue again. See here for details:

  7. Thanks for the links Cullen.

    I don’t think there are enough observations in the chart Jerry posted to prove causation in this case.

  8. @ OR

    FYI Mebane is male and you can follow him here

    Also you may be interested in the real time signals on the IVY Portfolio that is here
    Look at the right side and click on IVY PORTFOLIOS. They are updated daily and there is the adjusted and unadjusted( dividends not added ?) spreadsheets.
    On his site he is starting some presentations you may like

  9. I am very disappointed!:-) I was hoping he was a girl:-) thanks for the links I will check them.

  10. Just read the Dalio papers on how to engineer a portfolio with a much higher sharpe ratio by using leverage to increase the expected return of “safe” but low expected return asset classes and then letting negative covariance (I.e., poor correlation) take care of the rest.

    But I have a big problem. This is for institutional investors who can borrow at the risk free rate,i.e., short 3-mo Ts. How can a little guy do this? Fidelity’s margin rates are very high, even if you were capable of borrowing over half a million bucks! (note to borrow $100,000 to 499,000 on margin they charge 6.75%! I am sure this is more than Dalio is promising his clients for the next ten years!

    If you follow Hussman/GMO, equities are now priced to yielding expected nominal returns in the vicinity of 4% for the next 10 years. I think GMO is even lower.

    PIMCO offers leveraged ETFs/close end funds that invest in a variety of fixed income and use leverage. They ain’t cheap and are usually priced at a significant premium vs asset value.

    CR, do you have any suggestions for the little guy? Or are we, as usual, totally screwed?:-)

  11. You said it yourself – he uses the leverage of futures, you do not need to borrow for that.

    As an alternative, you can buy such a futures fund.

  12. @ nominal GDP growth is higher than the govt bond yield (=’financial repression’?)

    This is not just about deleveraging of govt debt:GDP ratio, which occurs under this circumstance.

    It’s also about deleveraging of private sector debt:GDP ratio, since interest rates that banks charge are highly influenced by the govt bond yields.

    See this post at Rortybomb saying that the ‘long credit cycle’ of leveraging up was caused by a nominal growth rate lower than the interest rate.

    The WW2 deleveraging was clearly assisted by massive fiscal stimulus – large enough to cause not only sustained GDP growth but also a good level of inflation.

  13. Alberto, great article! Excellent complement to the Dalio stuff. Didn’t know La Profesora is originally from Cuba. (I attended Columbia U. For my B.S. in Chem. E. and MBA. My PHD in Operations Research is from MIT. I am originally from Venezuela; of Italian – Abruzzo, and Spain – Canary Islands descent)

  14. Wanna c some xpensive gas?

    Multiply by 3.8Liters/Gallon and then by 1.31 USD/€ to get the price I. USD/Gallon. So gas at 1.70 Euros/liter translates to $8.52/Gallon.

    Gas has always been more expensive in Europe, and they do drive smaller cars – but at much higher speeds; but I can tell you this is a killer! ZH is right. Gas used to be a lot cheaper in Greece than in the rest of Europe. I have driven many times from Italy to Greece via Ferryfrim BariNd I always left italy on an empty tank and returned full from Greece. I guess I will have to reverse strategy:-)

  15. Very good papers …

    seems in the 2008-09 cycle through today, the FED tried to skip the “Ugly” de-leveraging process which has left too much private sector debt in place. Combined with the multi-trillion dollar housing asset deflation and continued twin deficits we have yet seen the ‘Ugly’ . The twin stimulus/QE engine looks to be delaying the day of reckoning by driving the short term business cycle up inside of the long term (depression) cycle. Ugly is ugly no matter how much lipstick you put on the pig.

  16. doesn’t seem to use leverage so my guess is the return will be more “bond like” rather than targeted to be “equity like”.

  17. Dalio’s statement, “So, while seemingly complex, an economy is really just a zillion simple things working together, which makes it look more complex than it really is.”, is absolutely the truth; otherwise I wouldn’t still be trading after 40 years! Read the whole paragraph, it’s all there. For me, all that is important is the TRUTH! EXAMPLE: The FED GOV sponsored, “everyone in America deserves a HOUSE,” was a LIE! Although it took a while, the TRUTH prevailed as it always has and always will. TODAY, the FED is going to make the tax payer bail out the idiots that bought homes they couldn’t afford based on a bull market in real estate that was a LIE… therefore, the FEDS are perpetuating the LIE! I absolutely LOVE it! The GAME goes on!

  18. @ BT

    Thanks for the answer and link.

    Yes, I thought that nominal GDP > UST yield would mean that dovt debt / GDP may delever (unless there is an icrease in the primary deficit).

    Now my issue is that private lending is at a higher interest rate than UST yield, because of a credit risk premium. So it is not clear that this condition is sufficient for the whole economy. It is not clear that it is even sufficient for the govt sector either (see comment in brackets above).

    Now, I went to the Fed’s website and looked at total credit market debt to GDP. The only reason total debt / GDP is declining is because the FINANCIAL sector debt is decreasing, all other sectors are increasing (especially federal govt). I personally think that adding financial sector debt to HH, federal, and corporate debt is wrong, because most of it is double-counting (i.e. the financial sector is the source of the debt, besides foreign financing and securities markets). So excluding financial sector debt, the US debt/GDP has been slightly down to flat and has started to slowly rise in the last couple of months.

  19. Sorry, the HH sector is also delevering, but slowly and involuntarily. Offset by rising federal, state& muni, and corporate debt.

  20. What would really help reduce the total debt:GDP ratio would be borrowing (public or private) for real investments that boost Nominal GDP more than debt. A dollar more of debt is fine if it leads to two dollars of NGDP growth. Bailing out GM is probably an example of this. But the US could use some more private investment that actually creates jobs in the USA, not just in Asia. Maybe a weaker dollar would help.

    Could total debt:GDP actually start rising again? Sure. Especially if the US returns to its model of credit creation for speculation and job creation outside of the USA. But at some point debt has to be serviced with income. And that income is reflected in the level of GDP. So the more likely outcome is a failure of total debt:GDP to rise like it did from 1956-2006 and instead a slow deleveraging. It’s rare for debt:GDP ratios to remain constant.

  21. My points are:

    – The U.S. may actually not be deleveraging (if you exclude FINANCIALS debt, which I think is the correct thing to do). That is why this “deleveraging” feels so good. Of course this is assuming that Federal Debt is debt (unlike MMT, but like Bridgewater).

    – Even if NGDP > UST rate, I am not sure this leads to deleveraging or has any such big importance as there are credit spreads for the rest of the economy.

    Now what is the best thing to do? Take over the banks (keep operating entities intact), cut bad debt down, install regulation like Glass Steagall, disallow TBTF to exist, disallow lobbying, put fraudsters in jail (like during the S&L crisis) etc.