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Ray Dalio Details ‘The Coming Paradigm Shift’

There’s a saying in the markets that “he who lives by the crystal ball is destined to eat ground glass.

There’s a saying in the markets that “he who lives by the crystal ball is destined to eat ground glass.
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8 comments on “Ray Dalio Details ‘The Coming Paradigm Shift’

  1. The logic of diversifying into gold escapes me. Why not real estate instead? Even if the RE prices won’t rise you still get renal income, unlike gold where you can simply get burned.

    • No return on gold. But the fees to hold it are well below what you pay in property taxes, liability insurance etc. And if the author is correct, property taxes are bound to move much higher.

      • And if you think about how much the value of real estate depends on the ready access to debt… Real Estate as an investment could well severely under perform even the cash being devalued as demand for it plummets. Gold may tend to hold it value but that’s precisely the point, every gold bug knows that some day the government will find the can they have been kicking stuck firmly in place. The crazy thing about gold bugs is simply that they always think it’s about to happen just because the government’s debt is high or the government is printing too much money or real interest rates are higher than CPI. Ultimately the driver of high gold prices will be what we started to see in 08-09 which was a complete lack of interest in lending money at current interest rates. Creditors were taking their ball and going home. That’s when the shit will hit the fan and that’s exactly what will come if they get abused enough… provided the government doesn’t go full tilt totalitarianism first and simply seize capital and close markets.

      • In theory, the owner is able to charge the taxes to renters.. And in practice too because everyone needs to live/work somewhere. Outside of serious depression scenario, it seems to me that the RE has better risk/return profile.

        • Put up a chart showing the performance of traded REITS in 2009. Interest rates fell, but access to credit was severely curtailed.

          • This is what troubles me about REITs as a proxy for physical real estate. REITs are equities that embed growth expectations that are highly sensitive to credit availability and economic outlook. They are traded like equities subject to sector flows, liquidity, risk-on/off sentiment, etc.

            The value of physical real estate has significant volatility with substantial correlation to equities. E.g. chart of CRE value:

            And you can’t assume your occupancy rate, and hence revenue, won’t be affected by a depression or very very severe recession. E.g. chart of multi-familiy occupancy rate.

  2. talk about a low returning investment- gold…… agree with sashka…. if you want to invest in hard assets why not real estate, or some sort of infrastructure play as opposed to a commodity with no return other than projected price increases?

  3. Anonymous

    Suppose: You anticipate a cycle top followed by a depression (or very very severe recession), so you liquidate your equities and bonds. Do you buy real estate or gold?

    Real estate: it brings revenue, but how much actual income after expenses? At the inflated cycle top, the “cap rate” on real estate (income divided by purchase cost) is low, maybe 3-4%. When the depression takes hold, vacancy rates rise and revenue declines. The expenses of owning real estate are in large part fixed (taxes, fees, maintenance, debt service). If the depression leads to income redistribution, “wealthy landowners” get taxed and fee-ed more. It is quite likely that your income will decline. It is possible that it will go to zero or negative. You’re not going to get bailed out by capital appreciation. Real estate values fall as income streams decline and potential buyers get poorer. You may barely scrape by, or you may lose money (negative income) or you may even lose your real estate asset. Loss is less likely if you bought without incurring debt, but still possible. Real estate has a high carrying cost.

    Gold: it brings no revenue. But it also brings no expenses, beyond a (usually tiny) storage fee. If the depression (or very very severe recession) isn’t too bad, the shrunken income stream from real estate will still beat zero income from gold. If the depression gets bad, losing money in real estate is worse than making no money in gold. Gold value may also rise in a depression, that’s at least likelier than for gold values to decline, since depressions usually lead to low interest rate policy and more money printing.

    So I’d guess the logical choice is buy real estate if you’re relatively optimistic about the coming depression, and buy gold if you’re relatively pessimistic.

    I do wonder about the practicality of Ray Dalio’s gold recommendation, because the supply of gold is relatively tiny. Only a very small percentage of stocks and bonds can be moved into gold before gold price rises so much that you’re now selling low to buy high. Or maybe I’m just anchoring on current prices. Anyway, if you’re early to the gold, that’s not a problem.

    I do know that from historically zero, the weight of gold in the portfolios I am familiar with, let’s put it that way, has risen to LSD-MSD% over the past year. And so has the weight of real estate, although I’m very troubled by the difference between real estate and REITs.

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