Understanding the 'D-process'

2 posts / 0 new
Last post
fortytwo's picture
fortytwo
Status: Bronze Member (Offline)
Joined: Jan 24 2009
Posts: 35
Understanding the 'D-process'

I am always on the lookout for people who are making money in this market.  This morning I read a great article about Ray Dalio, manager of Bridgewater Associates- a famous hedge fund that actually made money without a ponzi scheme.  Hidden in the article is a great definition of what's happening now to our economy.  I've pulled a couple paragraphs for you to read- but the entire article is well worth the time.  It can be found here:

http://biz.yahoo.com/hftn/090319/031809_okeefe_bridgewater_fortune.html?&.pf=retirement 

 

 Fortune
Inside the world's biggest hedge fund
Thursday March 19, 5:50 am ET 
By Brian O'Keefe, senior editor

Is the current downturn merely a severe slump, or are we facing a second coming of the Great Depression? That's the question everyone is asking these days. But Ray Dalio, founder of Bridgewater Associates and manager of what is now the world's biggest hedge fund, has been preparing to answer it for eight years.

In 2001 he had his investment team build a "depression gauge" into the firm's computer system, line by line in the code, to adjust the portfolio's strategy and risk profile if the economy ever entered a massive deleveraging period - the kind of multiyear process that ricocheted through the world economy in the 1930s and that has eviscerated markets periodically through the ages.

On Sept. 30 of last year, just a couple of weeks after the failure of Lehman Brothers, Dalio logged into his system and saw that the computer had flipped the switch. Bridgewater's black box is now operating on high alert.

---snip---- 

 Out of those four historical examples, Dalio says that our current situation most closely resembles the Great Depression because of the global breadth of the problems. But he doesn't like to use the term "depression." He thinks it's too scary, evoking as it does images of hobos and Hoovervilles, and distracts people from focusing on the mechanics of what is going on. He prefers to use a term he coined: "D-process."

Most people, says Dalio, think that a depression is simply a really, really bad recession. But in reality, the two are distinct, naturally occurring events. A recession is a contraction in real GDP brought on by a central bank tightening monetary policy, usually to control inflation, and ends when the central bank eases. But a D-process occurs when an economy has an unsustainably high debt burden and monetary policy ceases to be effective, usually because interest rates are close to zero, and the central bank has no way to stimulate the economy. To compensate, the value of debt must be written down (risking deflation) or the central bank must print money (a trigger of inflation), or some combination of both.

In recent years the level of debt as a percentage of GDP in the U.S. has skyrocketed past previous highs last seen in the early 1930s. And the Federal Reserve's benchmark rate is now hovering just above zero. To Dalio, therefore, it's clear that a D-process is under way. "It seems very likely that stocks will get materially cheaper," he says. "We have to go through an important debt restructuring process, and a lot of assets are going to be for sale, huge numbers of assets. And there's going to be a shortage of buyers."

Even investors in most hedge funds won't be immune. According to research by Bridgewater, the hedge fund industry in aggregate is 75% correlated to the S&P 500, an issue on which Dalio has been sounding an alarm for a couple of years now. "Too many people have a systematic bias toward positive economic growth," he says. "I think that what we're going to probably have is an economy that's going to get worse, with most people positioned for it to be better." By the end of the D-process, he expects that the reverse may well be the case.
 

strabes's picture
strabes
Status: Diamond Member (Offline)
Joined: Feb 7 2009
Posts: 1032
Re: Understanding the 'D-process'

Yep...this is what Prechter, Keen, Weiss, some bond traders and derivatives market makers have been saying since before this crash started...trying to prepare people for the inevitable deflation.  It's what Irving Fisher described in the Depression. Same thing happening now.  

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments