Ray Dalio’s Economic Machine vs The Narrative Machine by Ben Hunt

 

Alex: There was me, that is Alex, and my three droogs, that is Pete, Georgie, and Dim, and we sat in the Korova Milkbar trying to make up our rassoodocks what to do with the evening. The Korova Milkbar sold milk-plus, milk plus vellocet or synthemesc or drencrom, which is what we were drinking. This would sharpen you up and make you ready for a bit of the old ultra-violence.
 “A Clockwork Orange” (1971). Society is a clockwork, with gears constructed of language and guns.

 

A house is a machine for living in.

? Le Corbusier (1887 – 1965), pioneer of modern architecture.

We live our lives inside machines, visible and invisible, tangible and intangible.

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HATE. LET ME TELL YOU HOW MUCH I’VE COME TO HATE YOU SINCE I BEGAN TO LIVE. THERE ARE 387.44 MILLION MILES OF PRINTED CIRCUITS IN WAFER THIN LAYERS THAT FILL MY COMPLEX. IF THE WORD HATE WAS ENGRAVED ON EACH NANOANGSTROM OF THOSE HUNDREDS OF MILLIONS OF MILES IT WOULD NOT EQUAL ONE ONE-BILLIONTH OF THE HATE I FEEL FOR HUMANS AT THIS MICRO-INSTANT. HATE. HATE.

 ? Harlan Ellison, “I Have No Mouth and I Must Scream” (1967). In Ellison’s post-apocalyptic horror, the last five humans on earth live inside a giant omnipotent machine where the only escape is death. It’s The Matrix 30 years before The Matrix was written, and 1,000x nastier.

Mathematics, which most of us see as the most factual of all sciences, constitutes the most colossal metaphor imaginable.

 

It is easy to make a simple machine which will run toward the light or away from it, and if such machines also contain lights of their own, a number of them together will show complicated forms of social behavior.

? Two quotes from Norbert Wiener (1894 – 1964). Wiener received his Ph.D. in mathematics from Harvard at age 17, volunteered to fight in World War I as an enlisted man, but couldn’t get a teaching job at Harvard because he was a Jew. Wiener found a home at MIT, where he became the father of cybernetic theory, aka the mathematics of machine behavior.

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How does the economy really work?

This simple but not simplistic video by Ray Dalio, Founder of Bridgewater Associatesshows the basic driving forces behind the economy, and explains why economic cycles occur by breaking down concepts such as credit, interest rates, leveraging and deleveraging.

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? Ray Dalio, “How the Economic Machine Works”. In the three years since Dalio released this short-form film, it has been viewed more than 3 million times.

Machines were the ideal metaphor for the central pornographic fantasy of the nineteenth century, rape followed by gratitude.

? Robert Hughes, “The Shock of the New” (1980). A writer’s writer and a critic’s critic. As honest in his self-assessment as his assessment of art and society. It’s a bit uncomfortable, isn’t it? Honesty always is.

 

Self-operating napkin

Many of the younger generation know my name in a vague way and connect it with grotesque inventions, but don’t believe that I ever existed as a person. They think I am a nonperson, just a name that signifies a tangled web of pipes or wires or strings that suggest machinery.

? Rube Goldberg (1883 – 1970)

So, in the interests of survival, they trained themselves to be agreeing machines instead of thinking machines. All their minds had to do was to discover what other people were thinking, and then they thought that, too.

? Kurt Vonnegut, “Breakfast of Champions” (1973). If there’s a better description of modern markets, I have yet to find it. We have become agreeing machines. Because our survival requires it.

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For God’s sake, let us be men

not monkeys minding machines

or sitting with our tails curled

while the machine amuses us.

Monkeys with a bland grin on our faces.

? D.H. Lawrence (1885 – 1930). Yes. For God’s sake.

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Antonie Van Leeuwenhoek (1632 – 1723), the father of microbiology, alongside a schematic of his microscope and drawings of the “animalcules” he found in a drop of water. Van Leeuwenhoek was a hobbyist lens maker, and he discovered a process for making very small, very high quality glass spheres which provided unparalleled magnification. He never shared his most powerful lenses, nor his manufacturing process, in order to maintain a monopoly on his discoveries. The glass-thread-fusing process died with him and was not rediscovered until 1957, long since supplanted by ground lenses.

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Copernicus gets all the credit, but his 1543 theory of a heliocentric solar system with circular planetary orbits was a practical dud compared to Ptolemy’s earth-centric theory from 1,400 years earlier. The Copernican model just didn’t work very well. It took better data through new instruments (Tycho Brahe’s observatory) plus better theory through new math (Johannes Kepler’s elliptical orbits) before we finally got it right. But even then, the idea of a heliocentric solar system with elliptical planetary orbits didn’t find popular acceptance until powerful institutions in Northern Europe found it useful to champion this new idea as part of their fight with the Catholic Church and other powerful European institutions.

Modern portfolio theory = Ptolemaic theory. Are powerful institutional investors ready to fight?

Every successful institution, from a marriage to a superhero to a firm to a nation, needs an origin story.

The origin story of arguably the most successful hedge fund institution of the modern world – Bridgewater Associates – is that of Ray Dalio, working out of a small New York apartment in 1975 and publishing a newsletter of “Daily Observations.” The newsletter came first, not the hedge fund, and it was the compelling strength of Dalio’s writings about markets and what he would later term “the Economic Machine” that convinced a few institutional investors to give him some actual capital to invest. The rest, as they say, is history.

In 1975, Dalio struck just the right chord at just the right time with his metaphor of an Economic Machine – the idea that macroeconomic reality across time and place could be understood as a cybernetic system, with rules and principles and behaviors stemming from those rules and principles (essentially, lots and lots of if-then statements and recursive loops, with observable inputs from real-world economic fundamentals). As importantly as being an effective communicator, Dalio was actually right. Bridgewater has translated the metaphor of the Economic Machine into actionable investments for 40 years, with a track record that speaks for itself.

Today I want to propose a new metaphor for the world as it is – a Narrative Machine – where macroeconomic reality is still understood as a cybernetic system, but where the translation of “reality” (all of those economic fundamentals and if-then statements of the Economic Machine) into actual human behaviors and actual investment outcomes takes place within a larger Machine of strategic communication and game playing.

The Narrative Machine isn’t a rejection of the Economic Machine, any more than the theory of relativity rejects Newton’s Laws of Motion. In most places and most times, good old Newtonian physics is all you need

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