🏭Ray Dalio’s Economic Machine🏭
In 1983, McDonalds struggled to launch the McNugget. Chicken volatility was too high.
"How can we set fixed prices w/out risking billions?"
Hedge funder Ray Dalio cracked the code.
Here's how his economic machine solved McDonald's 🐥problem.👇
In 1983, McDonalds struggled to launch the McNugget. Chicken volatility was too high.
"How can we set fixed prices w/out risking billions?"
Hedge funder Ray Dalio cracked the code.
Here's how his economic machine solved McDonald's 🐥problem.👇
1/ What is the Economic Machine?
Before talking about 🐥s, let's take a quick intro ride through Dalio's core macroeconomic insight:
While seemingly complex, the economy is mechanically & predictably driven by human nature.
i.e. Everything from debt cycles to GDP is a machine.
Before talking about 🐥s, let's take a quick intro ride through Dalio's core macroeconomic insight:
While seemingly complex, the economy is mechanically & predictably driven by human nature.
i.e. Everything from debt cycles to GDP is a machine.
3 Forces drive Dalio’s economic machine:
#1 Productivity growth
#2 Long Term Debt Cycle
#3 Short Term Debt Cycle
The diagram above shows these 3 forces together in action.
#1 is shown by the monotonically increasing curve.
#2 wiggles sinusoidally along #1.
#3 wiggles along #2.
#1 Productivity growth
#2 Long Term Debt Cycle
#3 Short Term Debt Cycle
The diagram above shows these 3 forces together in action.
#1 is shown by the monotonically increasing curve.
#2 wiggles sinusoidally along #1.
#3 wiggles along #2.
All this means:
While productivity growth is ultimately what matters for long-term prosperity & debt cycles cancel out over time...
They cancel out over SUCH LONG time frames (like 100yrs) that ACTUALLY the #1 driver of any realistic investment portfolio is the ST debt cycle.
While productivity growth is ultimately what matters for long-term prosperity & debt cycles cancel out over time...
They cancel out over SUCH LONG time frames (like 100yrs) that ACTUALLY the #1 driver of any realistic investment portfolio is the ST debt cycle.
2/ ST Debt Cycles (5-8yrs)
Phase 1: Expansion
Fed sets low rates; spending ⬆️ which boosts income & asset prices; spurs inflation
Phase 2: Curtailment
to manage inflation, Fed raises rates, which makes credit expensive & decreases borrowing; spurs deflation
Phase 3: Recession
Phase 1: Expansion
Fed sets low rates; spending ⬆️ which boosts income & asset prices; spurs inflation
Phase 2: Curtailment
to manage inflation, Fed raises rates, which makes credit expensive & decreases borrowing; spurs deflation
Phase 3: Recession
3/ LT Debt Cycles (75-100yrs)
A bit too long in "irrational exuberance" and...
1. Debt burden increases over decades; hits peak.
2. Incomes drop, stock markets tank, social unrest-- i.e. "deleveraging."
3. Fed can't lower interest rates anymore b/c already at zero.
😩Now what?
A bit too long in "irrational exuberance" and...
1. Debt burden increases over decades; hits peak.
2. Incomes drop, stock markets tank, social unrest-- i.e. "deleveraging."
3. Fed can't lower interest rates anymore b/c already at zero.
😩Now what?
4/ Beautiful Deleveraging
4 levers can pull the economy back to its feet when sh*t hits free-fall.
1. Cut Spending (esp. biz)
2. Reduce Debt (via defaults & restructuring)
3. Redistribute $$
4. Print Money (Brrr!)
Balancing all 4 is what Dalio calls a "beautiful deleveraging."
4 levers can pull the economy back to its feet when sh*t hits free-fall.
1. Cut Spending (esp. biz)
2. Reduce Debt (via defaults & restructuring)
3. Redistribute $$
4. Print Money (Brrr!)
Balancing all 4 is what Dalio calls a "beautiful deleveraging."
5/ Dalio's 3 Rules of Thumb For Investors & Business Operators
1. Don’t let debt rise faster than income
2. Don’t let income rise faster than productivity — you'll eventually lose competitiveness
3. Do all you can to raise productivity — in the long run that’s what matters most
1. Don’t let debt rise faster than income
2. Don’t let income rise faster than productivity — you'll eventually lose competitiveness
3. Do all you can to raise productivity — in the long run that’s what matters most
6/ Now back to chickens... 🐥🍗🧆
The year was 1983.
What the hell was going on w/ the economy back then?
- 1982: a secular bear market had just ended. A strong rally took S&P 500 to new all-time highs.
- 1983: stocks began a long sideways phase; it felt like we hit a local max
The year was 1983.
What the hell was going on w/ the economy back then?
- 1982: a secular bear market had just ended. A strong rally took S&P 500 to new all-time highs.
- 1983: stocks began a long sideways phase; it felt like we hit a local max
aka 1983 was a "Late Upswing" year...
Now go back to the ST debt cycle diagram. You'll notice that "rising commodities prices" is characteristic of this period.
So, McDonalds didn't want to sell fixed-price 🧆 knowing that raw materials would keep rising & squeeze its margins.
Now go back to the ST debt cycle diagram. You'll notice that "rising commodities prices" is characteristic of this period.
So, McDonalds didn't want to sell fixed-price 🧆 knowing that raw materials would keep rising & squeeze its margins.
Dalio solved the conundrum by breaking the chicken into a "sum of its parts."
i.e. 🐔 (adult) = 🐥 (baby) + corn + soymeal
By trading corn & soybean futures, the chicken supplier could hedge its costs and provide a fixed cost to $MCD for the price of McNuggets.
💡🤯 Genius!!
i.e. 🐔 (adult) = 🐥 (baby) + corn + soymeal
By trading corn & soybean futures, the chicken supplier could hedge its costs and provide a fixed cost to $MCD for the price of McNuggets.
💡🤯 Genius!!
And with that key insight, the poultry producer sealed the deal with Dalio's guidance and McDonalds launched its first chicken McNugget.
Fast forward to 2021.
'Til this day, the McNugget remains the chain's most popular menu item.
See... hedge funds are good for the world!! 🤣
Fast forward to 2021.
'Til this day, the McNugget remains the chain's most popular menu item.
See... hedge funds are good for the world!! 🤣
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