BijaAdvisors

Seeds of Thought
Actionable Intelligence for Those Who Seek Growth
Issue 15-12
March 24, 2015

With All Due Respect, Mr. Dalio

A conclusion is the place where you got tired of thinking. - Steven Wright
When faced with a difficult question, we often answer an easier one instead, usually without
noticing the substitution. - Daniel Kahneman; Thinking, Fast and Slow
Bridgewater recently released a piece to its investors that also received attention from the
Financial Times. As a result, it has garnered many rebuttals, wherein other analysts and
economists have pointed out a detail or two that Mr. Dalio failed to consider. I wont do that
here. To be honest, the details are the least of my concerns. The entire argument, not just Dalios,
but also that of every other analyst trying to make sense of the current situation by comparing it
to the period surrounding the Great Depression, is flawed.
To see what I mean, ask yourself this simple question. Why are we comparing the current global
macroeconomic environment to the period surrounding the Great Depression at all? You can pull
up all the graphs youd like showing similarities between today and some moment that occurred
back in the 1920s and 1930s, but no matter what chart you use to prove representativeness, it
must be acknowledged that the only reason you searched that period in the first place is because
of magnitude. We did the same thing on Black Monday, during the tech bubble, the Asian Crisis,
9/11 and so on. In each crisis, the magnitude reaches a level so great that any recent event pales
by comparison, encouraging us to reach further back in history for comparable scale. Then the
comparisons are made on the minutiae between the current situation and that moment in history.
(Its interesting to note that with the benefit of hindsight, it has become obvious to everyone how
all those other crises were so clearly different from the Great Depression.)
So on the basis of magnitude alone, we have simplified our field of vision, creating a frame from
within which we can find patterns. Actually, there is more to it. We are constantly pulled back to
the Great Depression, because it wasnt until then that we began collecting so many of the
statistics upon which we currently rely. I mean, why not pull the charts back to the Renaissance,
the Dark Ages, or the Black Plague? The answer is simple. The data isnt available. Of course,
we dont say that. Instead, we chalk it up to the fact that there are so many differences between
now and those other times that it isnt really relevant anyway. Truth is, the same could potentially
be said about the period surrounding the Great Depression, but because data is available, we grab
onto it like a warm blankie.
With so many data points to choose from, it would be nearly impossible not to find numerous
patterns which will create beautiful, comforting narratives that set our mind at ease at a moment
of great uncertainty. Mr. Dalio has anchored his expectations to his thesis on credit cycles and
now seeks confirmation from the data. Fact is, there is no way he will not find it. Unfortunately,
there is also no way that those who disagree with his thesis wont also find compelling patterns
in the data to support their view. And that is where we find ourselves today. Yet another moment
when experts are arguing back and forth over which set of coincidental data is less irrelevant.
!
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Seeds of Thought

What is ignored in all of this analysis of data and tools is what lies beneath it all. You see, data is
meant to be representative of behaviors and the policymakers tools are merely behavior
modifiers. Throughout history, the data gathered and the tools employed are changed when they
are no longer representative and/or effective. In other words, what we really need to recognize is
that the correlations between behaviors and the data meant to represent them, and between
behaviors and the tools meant to modify them, may have broken down. The problem is, if the
data isnt meaningful and the tools are impotent, we are left searching for alternatives. That is a
much harder problem to solve and as Dr. Kahneman so eloquently stated, when faced with a
difficult question, we often answer an easier one instead, usually without noticing the
substitution.

Test
What follows is a question often used to show how we replace difficult questions with those
whose answers are more readily available.
Question: If it takes 5 machines 5 minutes to make 5 widgets, how long would it take 100
machines to make 100 widgets ?
Click Here for the answer.

About the Author

Over a 28 year career in finance and economics, Stephen Duneier has headed global investment
businesses for Bank of America and AIG International, launched two hedge funds and generated
average annualized returns of 20.3% on a portfolio approaching $1 billion in AuM. In addition to
publishing Bija Advisors unique brand of actionable intelligence for the institutional investment
community, key policymakers and business leaders, he regularly speaks around the world on
macroeconomic related topics, as well as how to improve performance through a more mindful
approach to decision making.
Mr. Duneier teaches Decision Analysis at the University of California, Santa Barbaras College
of Engineering and is an accomplished artist whose work has been featured in numerous
international publications and is represented by the world-renowned gallery, Sullivan Goss. He
received his masters degree in finance and economics from New York Universitys Stern School
of Business.
In publishing research, Bija Advisors LLC is not soliciting any action based upon it. Bija Advisors LLCs publications contain material based
upon publicly available information, obtained from sources that we consider reliable. However, Bija Advisors LLC does not represent that it is
accurate and it should not be relied on as such. Opinions expressed are current opinions as of the date appearing on Bija Advisors LLCs
publications only. All forecasts and statements about the future, even if presented as fact, should be treated as judgments, and neither Bija
Advisors LLC nor its partners can be held responsible for any failure of those judgments to prove accurate. It should be assumed that, from time
to time, Bija Advisors LLC and its partners will hold investments in securities and other positions, in equity, bond, currency and commodities
markets, from which they will benefit if the forecasts and judgments about the future presented in this document do prove to be accurate. Bija
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Issue No. 15-12

March 24, 2015