# Book Name Author: [[Charles Gave]] ## Review This is a short booklet relating Charles Gave's 'Four Quadrant' framework to the work of Knut Wicksell, a mathematician and economist from the 19th century. The premise of the four quadrants is the same as bridgewater's four quadrants. There are four states the economy can be in: Inflationary Boom & Bust, and Disinflationary Boom & Bust. Assets are effected differently by each of these four states, and investors should either own assets contingent on the state the economy is in, or diversify based on these quadrants. Charles Gave was looking for a real-time way to measure what quadrant the economy is in. He found help through the work of Wicksell. Wicksell believed that inflation and growth result from changes in the spread between the cost and return on capital. Gave walks the reader through his construction of an indicator based on Wicksell's insight. He divides economic periods, since the 50s, into the four quadrants and overlays asset class performance. I am a fan of Charles Gave, but there are a few glaring problems with this work: - The thresholds he uses in constructing the indicator are known in hindsight, and they are somewhat arbitrary. - Survivorship bias in the asset classes. This is a more general problem than just his writing. Everybody uses S&P 500 and treasuries and rationalizes it because it 'makes sense' but my guess is that people use these because they are two of the best performing asset classes over the past 40 years. - Some of the claims he makes about relationship are tenuous at best. I don't mean that it doesn't make sense by my standards. Rather, his own charts don't prove what he wants it to prove. The correlations just aren't that strong. He has a chapter at the end arguing that low administrative rates lead to financial engineering and misallocation of capital. Eventually that system will break due to the large amount of leverage in the system, and the economy will have to return to market-based pricing. I agree with his conclusion but the arguments seemed to take a roundabout trip. I would probably skip this book, unless you are a Charles Gave fanboy, in which case: welcome to the club. ## Key Ideas ## Related - [[Four Economic Quadrants]]