You laugh. Mostly because it’s funny.
Depending on your predisposition for finding Omaha grandpas adorable and/or your penchant for Stanley Druckenmiller hero worship, Ray Dalio is arguably the greatest investor of all time.
And yet, Ray managed to accidentally call the top in stocks in two of the last three Januarys, both times with derisive references to cash.
“We are in this Goldilocks period right now. Inflation isn’t a problem. Growth is good, everything is pretty good with a big jolt of stimulation coming from changes in tax laws”, Dalio famously said, on the eve of the February 2018 equity correction. “[You’re] going to feel pretty stupid” if you’re holding cash”, he chided.
Cash outperformed some 97% of global assets in 2018, a year that ended with the worst December for US equities since the Great Depression.
On January 21 of this year, speaking to the exact same CNBC anchors, Dalio asked: “What do you jump into when you jump off the [equities] train?”. He was responding to Andrew Ross Sorkin, who asked whether it’s a good idea to jump aboard along with the rest of humanity amid what was quite clearly a 2018-esque melt-up in stocks.
“You can’t jump into cash”, Dalio exclaimed. “Cash is trash”.
Two months later, stocks were down 33%. March’s market mantra was, quite simply, “sell everything that’s not tied down to raise USD cash”. Government money market funds saw nearly $900 billion in inflows over a five-week period, while money fled prime funds as the commercial paper froze.
If you keep up with Dalio, you probably know where this is headed. Ray held another one of his “Ask Me Anything” sessions on Reddit Tuesday afternoon and the whole “cash is trash” call came up.
“Hi Ray, big fan of yours. A few months ago you said cash is trash. But now cash is king. What gives?”, wondered Reddit user “cwwang”.
Ray was glad to have the opportunity to clarify. Here’s how he responded:
I’m glad you asked so that I can clarify. Back then, and still now, I believe that central banks will print a lot of money and keep cash interest rates at such low levels that they will have negative real returns and negative returns relative to assets that behave well in times of reflation. When the virus hit and it had its negative impact on earnings and balance sheets, asset values plummeted which made cash look comparatively attractive. However, what did the central banks do? They created a ton more cash to buy debt and push interest rates lower which is having the effect of pushing those assets that will be better suited for the new environment up. When you think about what assets are safe to own, and you think of cash, please remember that while it doesn’t move around in value as much as other assets, there is a costly negative return to it in relation to goods and services and other financial assets that amounts to about a couple of percent a year, which adds up. So I still think that cash is trash relative to other alternatives, particularly those that will retain their value or increase their value during reflationary periods (e.g., some gold and some stocks).
Contrary to the headlines you may have read Wednesday, that doesn’t really represent a “doubling down” by Dalio, even as those aiming to extract the most comedic value from the ill-timed “cash is trash” soundbites will certainly present it as such.
Dalio is speaking in broad strokes, whereas everyone (including myself) who has had a bit of fun at the timing of his “cash” musings is looking at the performance of asset prices over very short time frames.
And yet, Dalio himself admitted in remarks last month that Bridgewater should have navigated the virus scare more deftly. “We did not know how to navigate the virus and chose not to because we didn’t think we had an edge in trading it. So, we stayed in our positions and in retrospect we should have cut all risk”, Dalio told FT.
Bridgewater’s Pure Alpha II was down around 20% in the first quarter, falling 16% in March alone. The firm’s Pure Alpha Major Markets fund dropped around 3% last month, bringing its losses for 2020 to around 8.5%.
Asked about Michael Burry’s contention that the pandemic may accelerate the bursting of what Burry (and others) have called a “bubble” in passive investing, Dalio declined to weigh in specifically on Burry, but offered his own take.
Here is Ray’s answer to a question from a fan named “Charley”:
You’ll have to speak to Michael Burry about what he means as I wouldn’t presume to know. However, concerning passive vs. active investing and ETFs, I think smart active investors will now have a great opportunity to outperform them because of how different the conditions of the companies and items in them are from one another. I think we have entered a period in which the usual generalizations that index trackers and ETFs are created around will be much less important than the individual conditions within them. I think that the ETFs and index funds contribute to the inefficiencies because the selling and buying of them effects all of the items in them without regard for those item’s differences.
Earlier this month, Burry told Bloomberg that “a global pandemic is absolutely a potential trigger for the unwinding of the passive investing bubble”. In a preview of controversial comments delivered on Twitter earlier this week, Burry went on to say that “the hysteria appears to me worse than the reality, but after the stampede, it won’t matter whether what started it justified it”.
Other highlights from Dalio’s Reddit session can be found below.
Those who surprised and inspired me the most pertaining to the crisis were those who ran into the fire to help. We each have contact with different people who do this so I will only touch on the ones that I’ve had direct contact with. They include healthcare workers (because I’m on a hospital board which allows me to have an inside picture), teachers of the poorest students who are finding ways to educate them despite the obstacles presented by poverty (because of the work that my wife, teachers, and others are doing for disengaged and disconnected high schoolers in CT), small merchants (through my window in microfinance through Grameen America), and people, companies, and even other countries, who are significantly contributing but remaining anonymous (partially because of their preference for anonymity and partially because of their fears of being attacked).
However, I am most impressed by folks who are on the front lines and in often cases suffering financially but are unwaveringly doing the right things to help others.
I think that pursuing peace and savoring life, rather than fighting over wealth and power, is much wiser. I don’t believe that most people in most places where the culture habituates fighting over wealth and power truly appreciate the alternative. I think a lot about what money is worth and believe that it has no intrinsic value, so to answer this, one must look beyond it to ask oneself what is most important to have that money can buy. I believe that for most people, it starts with taking care of oneself and one’s family–i.e., their basic health, education, and maintenance needs – then the needs of those who are closest around them, and increasingly those beyond them, which includes the greater community. The more that happens and the more important these others become relative to oneself, the more peaceful and harmonious the society is. For these reasons, I believe that how we will behave with each other will determine our society’s fate. There is more than enough wealth to go around to take care of most people’s basic health and education needs which, if done well, will raise the society’s productivity and increase the size of the pie.
I believe that because the dollar is now the world’s currency and most people borrow, save, and transact in it, that the world desperately needs dollars and, as a result, there is a global shortage of them, which supports the dollar. Having the world’s printing press to produce the world’s currency is the equivalent of having the world’s most important asset, especially in times when so many people need the world’s money. So, we are now having a short squeeze on the dollar. Eventually, that will end because either that shortage of dollars will be satisfied by enough creation of dollars or it won’t be satisfied in which case there will be debt defaults and restructurings that will reduce the need for dollars. When that happens, the dollar will weaken. It will also weaken when those who are holding dollar-denominated debt no longer want to hold that debt because interest rates are inadequate and so much dollar-denominated debt and money is being created that its value is undermined.
“I think that pursuing peace and savoring life, rather than fighting over wealth and power, is much wiser. I don’t believe that most people in most places where the culture habituates fighting over wealth and power truly appreciate the alternative.” — can never be reminded often enough, given our culture. And the rest of the post as well. Thank you.
The funny thing is Stanley Druckenmiller pretty much did the same thing in his two Bloomberg interviews in December 2018 and December 2019, if I recall correctly.
Good point.