Correlation and macro analysis

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Earlier this week, I wrote a quick LinkedIn post about correlation analysis, with reference to Ray Dalio's “ban” on such analysis when at Bridgewater Associates during the Global Financial Crisis. This post, which went semi-viral, is posted below:I have since been asked many questions about this “ban” and what was behind it. Hence, the longer version of the story is this. Money: Inside and Out is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.What not to do?In 2008, I was a Managing Director at Goldman Sachs, in charge of currency analysis. And when I joined Bridgewater Associates in early 2009, I learned (to my surprise) that use of correlation analysis was frowned upon, and generally discouraged.Specifically, Bridgewater had an internal course for new analysts that used Goldman Sachs research (a tool to track correlations dynamically) as the type of research not to do.The arguments were the familiar ones (my interpretation):Correlations are inherently unstable;They change as the interaction between structural forces in the economy evolve (and time is better spent understanding the underlying forces);Spending too much time on correlations also means that focus drifts away from understanding underlying drivers, and more towards “market sentiment” (which can be wrong and typically a waste of time for medium-term investing);Hence, paying too much attention to market correlations may risk a bias towards “trend following” (as opposed to true contrarian independent thinking.)But Ray Dalio is not the first mac…