Dalio Tells ‘Crazy’ Story, Is Bullish ‘Stuff,’ Bearish ‘Stupid,’ Short Cash
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
Dalio has refused to acknowledge the Chinese history of money being any different than the West. A gloss over.
Tunnel vision. In their past he may envision a different future. Living historians are like old Generals. In Dalios case he refuses to acknowledge what anyone can plainly see. The Chinese have many centuries of Fiat currency. They will make a dagger of his beloved gold and help prove him right.
Perhaps, but it does appear from my reading of older Chinese literature that they did like silver and regularly produced silver “cash” coins.
Ray is right, even if his dissertation here is a bit on the long side.
He writes for a general audience. And he’s pretty much in the target zone for the highly-probably (~40-50%) outcomes. The sad aspect is that even if Ray here were a particulary gifted writer, his musings would still not gain the attention of people.
What I do not understand is why the ruling elites of the US have chosen to crash the country. There’s a history extending back to the early 1970s, and certainly no later than the early 1980s, that lead us to where we are today. But for what?
We worry about losing out to China. Maybe what we should worry about is being the next Soviet Union to collapse. Ray, thoughts?
What is if all ends up on the Fed balance sheet? What if just $40T of it ends up on the Fed balance?
It’s either this thing keeps going and going, or there is a deflationary collapse with unknowable, but surely unsavory to us, societal and political outfall.
So basically Dalio is saying “cash is trash” again. Maybe he can top tick the market for the 3rd time in 4 years.
“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.””
If cash is yielding far less, yield curves and steep and cash rates are unlikely to rise, why wouldn’t you own bonds, especially if you can expect to finance them at zero over the duration of the exposure?
“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. ”
Despite claiming bonds are terrible, the above paragraph screams “buy bonds” with leverage to me. Don’t think many yield starved investors would turn down 1.5%+ of near risk-free carry (plus rolldown)
“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.”
Ok, without taking on FX risk, where can you earn a significantly higher sovereign carry than USTs aside from ACGBs? If anything, long-end YCC would see massive buying of USTs from Japanese and European investors as the ensuing volatility suppression would make the FX-hedged pickup way too hard to resist.
“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.”
Same thing in the mid-70s and 80s. It was a cinch to buy discount treasuries on a 25-30% margin, just what was required to balance the interest paid and received and make a ton of money from sure-fire capital gains. In those days this beat the crap out of the stock market and was much safer. I did this for nearly 20 years. I’m living off this strategy now and I still have leftovers, a huge strip I sold a few months ago and a nice bunch of 6.75% USTs due in ’26. Back in the day family-owned 100 mil sized country bank could go to the Fed window and lock in a 2.5% NIM without any risk. What a country! The didn’t even bother lending money except to their besties.
I saw his article and had asked my self if i needed to read it. Glad I decided against.