In his latest book, How Countries Go Broke, Dalio purports to lay bare the key elements of his uber-profitable investing strategy, especially how to look for the risks of once-in-a-generation shifts that most investors — and policymakers — are oblivious to until is it is too late.
Critically, he emphasises the importance of looking at very long historical data sets in order to be able to distinguish epoch waves, sometimes a century long — including what he calls the “Big Debt Cycle” — from typical cyclical business ups and downs which are smaller and less consequential.
“Big debt crises are inevitable,” Dalio writes in his opening chapter, pointing an accusatory finger at poor and imperfect lending decisions that result in too much credit. “Throughout history only a very few well-disciplined countries have avoided them.” Others have been destroyed by them.
To avoid such a fate, Dalio claims that by using metrics — which involve debt, income, interest rates, savings, growth and so on — one can go a long way to calling the timing of crises. The book is packed with charts, equations and highlighted action points illustrating just how a country might “go broke”. Data geeks will not go unrewarded. Yet it is thin on concrete case studies or statistical tests. Instead, the book largely appeals to the fact that whatever exactly the strategies are, they made the author a lot of money.
It is also curious that Dalio sees no need to reference well-known earlier books — including, full disclosure, my 2009 book with Carmen Reinhart, This Time Is Different — that predate his, employ extensive archival data research and reach broadly similar conclusions regarding the critical importance of looking at very long multi-country time series if one wants to assess the probability of rare debt, financial crisis and inflation events.
It would have been interesting to know more. Indeed, a recurrent theme of the empirical literature is that financial and debt crises are hard to predict with any kind of precision until close to the event. There are some well-known indicators. In the case of a country debt crisis, these include an overvalued exchange rate, sustained large government budget deficits and current account deficits, and high indebtedness to foreigners. Even so, such indicators, which by the way all apply to the US today, do not yield the kind of precision on timing an investor needs to really score a big killing.