Ray Dalio is confused about your behavior.
Specifically, he doesn’t understand “why in the world” you would want to own bonds considering “real yields of reserve currency sovereign[s] are negative and the lowest ever.”
Dalio’s latest missive comes across as a rant, of sorts, although thanks to his colloquial cadence, it’s not overtly abrasive.
Ray writes for mass appeal these days and credit where it’s due: He does an admirable job of engaging an American public that’s notoriously disengaged when it comes to the topics Dalio likes to write about.
On the other hand (and I’d be remiss not to mention this for context), it’s still far from clear that Ray’s well-meaning effort to enshrine himself into the pantheon of great philosophers and historians is going to work out, the success of “Principles” notwithstanding.
He made a number of forceful and ostensibly convincing arguments in a piece dated Monday, but his almost obsessive focus on “empires,” “cycles” and the cycle of empires, always ends up leading him to the same conclusion which, generally speaking, is that the US is in decline and China is ascendant.
It’s not that Ray is “wrong.” It’s just that, for real historians, some of what he says probably comes across as unduly simplistic despite the length and amount of effort expended. If often feels like he’s trying to pen the definitive account of empires, money, economics and human history all at once. There are thinkers who have managed to pull off such feats (Bertrand Russell’s “A History of Western Philosophy” comes to mind), but unless you enjoy experiencing acute intellectual inadequacy, you don’t aspire to such things. It’s good to hold yourself to a high standard but it always feels like Ray is setting the bar impossibly high with his writing. You don’t “become” one of history’s great thinkers. You either are one or you aren’t. And with but a few exceptions to account for epochs, there are usually only a handful of such people alive at any given time.
Going too far down that road often dilutes the message for Dalio. His latest is no exception. It starts out as a useful primer on the potential pitfalls of 60/40 and balanced portfolios going forward. Dalio is one of history’s foremost experts on that, at least. Here’s Ray:
Nominal bond yields are just off the lowest ever made a couple of weeks ago. These extremely low or nonexistent yields do not meet… asset holders’ funding needs. For example, pension funds, insurance companies, sovereign wealth funds, and savings accounts cannot meet their financial needs with these investments so holding bonds assures their failure to meet their obligations. At the same time, while there is some room for diversification benefit, because of limitations of how low interest rates can go, bond prices are close to their upper limits in price, which makes being short them a relatively low-risk bet.
That’s all well and fine, but what will immediately stick out to traders is the bit about it being a “relatively low-risk bet” to short bunds and JGBs, which, if you read Ray’s entire post, is what he seems to imply. Shorting bunds and JGBs has proven to be a suicide mission. Could that change? Sure. But if I had $100 for every time someone suggested bunds can’t possibly rally any further, I’d be as rich as… well, as someone like Ray.
Dalio, whose biggest shortfall as a writer is undoubtedly his inability to discern when one paragraph ends and the next begins, delivered a breathless recap of reserve currency “cycles” in the course of suggesting that “there is now a shifting from US bonds to Chinese bonds going on.”
I think it’s fair to say that Ray is unwittingly engaged in a near constant search for confirmation bias when it comes to China supplanting the US as the global hegemon. It becomes a bit repetitive, mostly because you don’t need to study thousands of years of history or develop your own “cycle” framework to make that case. All you have to do is read a newspaper.
Anyway, Ray then posited a kind of bond apocalypse. There’s little utility in trying to paraphrase what he wrote in that regard, so below are the relevant excerpts:
If bond prices fall significantly that will produce significant losses for holders of them, which could encourage more selling. Bonds have been in a 40-year bull market that has rewarded those who were long and penalized those who were short, so the bull market has produced a large number of comfortable longs who haven’t gotten seriously stung by a price decline. That is one of the markers of a bubble.
…Imagine what would happen if, for any or all of these reasons, the holders of these debt assets wanted to sell them. There is now over $75 trillion of US debt assets of varying maturities. US Treasury bonds and notes account for $16 trillion of this and US Treasury securities of other maturities account for another $5 trillion. Holders of these debt assets will either hold them until maturity and endure the previously described terrible returns or sell them. Most holders of debt assets believe that they can sell them to get cash and to buy goods and services with. After all, the only purpose of holding financial assets is to be able to convert them into the buying of goods and services. The problem is that, at current valuations, there is way too much money in these financial assets for it to be a realistic expectation that any significant percentage of that bond money can be turned into cash and exchanged for goods and services. If any significant amount tried to make that shift a “run on the bank”-type dynamic would ensue. When such a dynamic—which I call a “reverse wave”—occurs there is no stopping it.
From there, Dalio went what I would describe as full-on tabloid fodder. The following additional excerpts (from the same post, obviously) could have walked right out of some advertisement for physical gold. Here’s Ray:
History and logic show that central banks, when faced with the supply/demand imbalance situation that would lead interest rates to rise to more than is desirable in light of economic circumstances, will print the money to buy bonds and create “yield curve controls” to put a cap on bond yields and will devalue cash. That makes cash terrible to own and great to borrow. Through their powers central banks can, at least temporarily, put a lid on interest rates and keep short-term interest rates low relative to long-term rates so that it becomes profitable to buy bonds with cash, which central banks abundantly provide which makes real interest rates very negative. For example, during the 1930-45 period the Fed kept the bond yield around 2.5% and the cash yield around 1%, which made it profitable to borrow cash and use it to buy and own bonds. While that can make holding bonds financed with cash profitable at low rates, under such circumstances both the cash rate and the bond rate are bad. Naturally, because cash rates are so low it pays to borrow cash and invest it in investments that are higher-returning. Back in the 1930-45 period, the Fed was able to keep yields there, and the way they did that was also through outlawing gold and the movement of capital elsewhere. So, when I look at it, while I want to be short bonds (because they have the most terrible fundamentals), I do know that central bankers can keep cash more terrible, and I do know that they might have to prevent the movement to other storehold of wealth assets and other countries.
Such moves would signal the beginning of the very last and most disruptive stage of the long-term debt cycle. So, watch central bankers’ actions—i.e., see if they increase their bond buying when interest rates are rising led by long-term interest rates and when the markets and economy are strong—because that action would signal that they are experiencing supply/demand problems. Also, watch the rates of change in the injections of these stimulants in relation to the effects they are having on the economy’s vigor because the more stimulants that are being applied per unit of growth, the less effective they are and the more serious the situation is.
Again, that sounds like something you may have accidentally started reading before you finally spotted the “sponsored post” tag at the top.
Whatever the big picture merits of Dalio’s musings about the debt cycle end game, the passages (above) border on aimless rambling. That’s not to say there aren’t flashes of brilliance. At times, Dalio is sharp and poignant. But there are also moments when he’s almost incoherent. Some of what he subjected the world to on Monday (when the piece was originally published) was just Ray’s internal monologue. Just Dalio talking to himself. Almost pure stream-of-consciousness.
And look, he knows it. The very next line following the last excerpted passage (above) read: “I know this all sounds crazy to you. It sounds pretty crazy to me, too.”
But even as Dalio suspected he might be telling “crazy” stories, he reminded himself (and you) that not only does he have first-hand experience with this (in the 70s), he’s “seen this confluence of circumstances leading to this sort of dynamic many times” while studying “the last several hundred years.”
He’s lost in history. That can be a good thing. But it can also be bewildering, confusing and conducive to spurious conclusions, especially when you assume past is precedent, which Ray does habitually.
He did offer some suggestions. One idea, Dalio ventured, is to “buy any stuff” because investing in “most financial assets” is “stupid.”
“The economics of investing in bonds (and most financial assets) has become stupid. Think about it,” Ray said. “Rather than get paid less than inflation why not instead buy stuff—any stuff—that will equal inflation or better?”
He also expressed some concern about higher taxes and the possibility that the government might confiscate gold and Bitcoin. “Policymakers who are short of money… won’t like these capital movements out of debt assets and into other tax domains so they could very well impose prohibitions against… gold, Bitcoin, and other locations,” he said, warning that these potential changes “could be more shocking than expected.”
Ray called all of the above “the new paradigm,” and said that in his view, investors would be better off replacing their traditional stock/bond portfolio with non-dollar assets and short cash positions.