Ray Dalio And The Folly Of Claiming Too Much For Oneself

“At the risk of boring you by repeating myself,” Ray Dalio began, in the first of what one certainly imagines will be dozens of blog posts in 2022.

I’d lampoon that, but I repeat myself all the time. And at some length. I’m “not into the whole brevity thing,” as it were.

Dalio explained that it was worth chancing boredom among his readership because it’s a new year, and we’re in a new paradigm. The world order is changing, Ray said, on the way to enumerating what he called “the three biggest issues.”

I didn’t set out to write a lengthy critique, but that’s where I ended up. Increasingly, the only way to cover Dalio is via critique. He’s no longer just weighing in on markets. Rather, he’s claiming ground for himself in multiple disciplines. To the extent he’s successfully claimed any territory in history, economics and sociology, criticism comes with that newly acquired terrain.

I’d be remiss not to note, up front, that Dalio is incorrect to say, as he does in the first sentence under a section on “Big Debt And Debt Monetization” that “the three major reserve currency empires — the United States, Europe, and to a lesser extent Japan — are in poor financial shape.” He bases that on a simplistic (and misguided) view of government finance in developed economies with high levels of monetary sovereignty.

It’s very likely, for example, that Japan could simply cancel the government bonds on the central bank’s balance sheet with no consequences whatsoever for domestic prices. Sure, there are powerful demographic factors that explain inflation outcomes in Japan, but outside of cases where there’s a clear imbalance between supply and demand (i.e., the current situation in the US, where goods demand far outstrips supply due almost entirely to various pandemic dynamics), inflation is a psychological phenomenon. How could it be otherwise when money is inherently valueless?

The dollar is a concept. Same with the euro. Same with the yen. The dollar has no more (or less) intrinsic value if the US is running a double-digit deficit than it does if the country is running a fiscal surplus. The dollar is just a shared myth. In its physical form, it’s just a piece of worthless green (and, more recently, blue) paper. Gold has some intrinsic value, but not much — its industrial applications are limited. Cowrie shells have no applications that I’m aware of beyond necklaces, Bitcoin resides purely in the digital realm and so on. The point is, when it comes to reserve currencies, generally accepted forms of money and tried and true stores of value, it’s always in our heads.

As it turns out, things that actually do have value are usually too cumbersome to adopt as money. Humans have tried. It never works. Oil has value but you’re not going to deliver seven barrels of it to Home Depot in exchange for a new refrigerator. And I’m not going to haul twelve truck loads of oats down to the furniture store when I want a new nightstand.

The point (and I revisit this frequently) is just that the whole conversation (about money and inflation) is usually couched in nonsense terms. Everyone implicitly assumes there’s some underlying reality to all of it — currencies, bonds, stocks and the nations and corporations who issue them — when in fact there isn’t. It’s all made up, and the rules are subject to change whenever we decide to change them. Collapses don’t come about because someone broke a rule or breached a limit. Collapses are attributable to a widespread loss of confidence in a make-believe system.

The situation isn’t “different” for emerging markets and frontier economies. Rather, the reason so-called economic “orthodoxy” appears to apply more stringently to Turkey (to use an example that’s topical right now) than it does to the United States or Japan, is simply because the shared myth of the dollar is stronger than the shared myth of the lira. Circumstances could conspire to change that relationship. It’s not some immutable truth. It’s a function of trust in government, the evolution of global power relationships and any number of other factors which, together, explain why Turks and Turkish corporates sometimes hold their savings and borrow in dollars, while no American citizen would ever voluntarily convert her dollar savings to lira. Re-run history even one time, and monetary relationships would look nothing like they do today, and that’s assuming humans came up with money at all, not necessarily an inevitable development.

That was a long digression (I told you I’m not into brevity), but it’s important we all keep perspective when we start waxing philosophical about money, as Dalio is fond of doing.

Coming back to Ray’s January 4 missive, the headline grabber was yet another exhortation for investors to avoid cash and bonds, which Ray called “stupid.” Here’s the verbatim quote:

This printing of money and buying of debt assets has driven interest rates so low that cash and bonds are stupid to own. You aren’t getting an interest rate — why would you keep your money there? You are guaranteed to get lousy rates, particularly on cash. You are basically going to get the worst interest rates ever in both inflation-adjusted and nominal terms.

That’s true from a big picture, investors’ perspective, but here again, I wonder if we don’t sometimes get stuck in our own bubble, figuratively and literally.

Plainly, rates on cash and (risk-free) bonds are the lowest in hundreds (and probably thousands) of years, but your personal real return necessarily depends on your own personal inflation rate, which varies depending on your circumstances. If you have what, to most people, counts as a fortune to park in cash and you can find a cash-like vehicle that gets you 1%, the interest earned will be sizable. In the absence of nightmarish hyperinflation, 1% on $5 million works out to a lot of groceries, for instance.

If you think that’s a silly way to look at things, I’d tend to agree, but consider a real world example. When Richard Clarida made headlines in October amid scrutiny of Fed officials’ trading activities, his disclosures listed a bevy of bank accounts, trusts, money market funds and brokerage accounts. Powell’s vice chair had at least seven bank accounts, two of which contained between a half million and a million dollars. Note that even in an environment where cash earns nothing, Clarida’s cash hoard still paid him as much as $9,000 in interest in 2020, nearly twice what the average American earned from an entire month of work.

None of the above is to say that Dalio (or any of you) are “wrong” to parrot and otherwise expand upon, the myriad ad nauseam talking points associated with money printing, financial repression, debt monetization, ultra-accommodative monetary policies and the likely ramifications thereof. On the contrary, Dalio (and all of you) are mostly correct.

My point is just that we get so lost in these discussions that we forget to contextualize them. The irony is, we pretend to be adding more context with each successive attempt to analyze a system we created. We pretend to pile context atop context via charts with x-axes going back millennia, annotations purporting to highlight historical parallels and endless editorializing aimed at drawing conclusions about where we’re headed “based on history.”

Almost without exception, the discussion is couched in terms that suggest we don’t understand ourselves as inextricably bound up with what it is we’re attempting to analyze and explain. The history of money and economics is a history of us. And what matters at the end of the day isn’t whether the shaded part of an area chart on a Bloomberg terminal showing real returns is red or green, it’s whether your personal circumstances are such that you can easily obtain the things you need with the resources at your disposal.

It’s not necessarily “stupid” to hold cash. It depends on who you are and what you’re trying to do. Dalio presents a pair of charts that show “the number of years it takes for the money one invests in bonds and cash to be returned before one starts making a profit.” The implication is that the answer is never for both.

But only an extraordinarily rich man (or woman) thinks about things that way. No one gets a paycheck, drives to the bank to deposit it, then, while sitting in the parking lot, has an epiphany: “You know what? I’m never going to turn a profit on this $467.46. Let me get the hell outta here and go find some land to buy.”

Even that humorous assessment assumes Dalio is making sense in the first place, not always a safe assumption. I’ve said this before (more times than regular readers probably care to remember) and after spending a half hour on Wednesday reading Dalio’s latest, I’m compelled to say it again. Over the past several years, Dalio has morphed into a kind of self-styled philosopher-historian. The results are mixed, at best. His writing is too ambitious, needlessly repetitive, sometimes confused and suffers immensely from Ray’s almost complete disregard for paragraph breaks.

There are sections of Dalio’s January 4 piece which are very compelling and worth quoting. Here’s an example:

There is only one purpose of investment assets, and that is to sell them to get cash to buy the real goods and services that one wants. Throughout history, whenever there were far more claims on real assets than there were real assets, a crisis eventually occurred when many holders of these financial assets went to sell them and discovered that there were far too many of them. That led to a “run on the bank”-type dynamic.

He could’ve (and should’ve) left it there. But he didn’t. Instead, he wrote that,

Right now, there are vastly more financial assets than there are real assets, so if there was a move to convert them into real assets, that would lead to a “run on the bank”-type dynamic, which central banks would certainly respond to by printing a lot of money to allow people to get the money, but it would be of much less value. Making financial asset prices go up by creating a lot of money and debt makes people financially richer, but it doesn’t make them actually richer. It also leads to periods of bad real returns.

First of all, it’s not clear Dalio’s distinction about “people” getting “financially richer” versus “actually richer” makes much sense in this context. Certainly, some “people” have become both financially and actually richer in the post-financial crisis environment as a direct result of central banks’ efforts to inflate the value of financial assets. People like Dalio. Try telling the average American household that some one-percenter whose net worth ballooned from $75 million to $300 million over 10 years isn’t “actually richer” and see what kind of response you get.

Further, the excerpted passage suffers (fatally) from a lack of specifics. Who’s selling what? And what is it they want to buy? Are the rich selling bonds and equities? If so, what are they trying to obtain? Wheat? Land? Catalytic converters? How is the Fed going to facilitate that? By buying stocks and bonds? Is the act of doing that going to immediately reduce the value of the newly-created dollars, thereby making it harder for the sellers to get all the sheep, cattle and lumber they need? Will the ranchers quickly get wise to what’s going on and raise prices? Same for the cobblers? And so forth.

I’m (reasonably) sure Dalio has an exhaustive list of sources he can cite for the multitudinous claims he makes in his social media posts, but given the sheer number of times he says “history shows,” I’m also reasonably sure he doesn’t think about that phrase the same way a historian or an academic would.

It pains me to say this, but Dalio’s musings belong in the same category as Howard Marks’s memos. Like Marks, Dalio claims too much for himself in disciplines where he has virtually no claim, and not enough for himself in the realm where he stands as a giant.

Towards the end of his January 4 piece, Dalio recapped what he calls “the archetypical big cycle.” As ever, he seemed completely oblivious to the enormity of the claim he makes for his own frameworks.

He presented readers with a diagram where the x-axis is labeled “time” and the y-axis “standing relative to other powers.” The chart is an upside down boomerang surrounded by a series of double arrows, each forming something like a 90-degree angle. The diagram carries the unassuming title “The Typical Big Cycle Behind Empires’ Rises and Declines.”

Dalio, like Marks, would do well to stay in his own lane. If you’re interested in portfolio construction, talk to Ray. But you can learn more about history, money and the history of money from virtually any bestseller on the subjects that Amazon’s algo cares to surface for you.

Dalio’s transformation from world’s most successful hedge fund manager to writer may have been a success as measured by sales of Principles. But history won’t remember Ray as a writer. Or as a philosopher. Or as a historian. In fact, history won’t remember him at all.

Like Warren Buffett and Howard Marks, Dalio is just a guy who made some money. Assuming humans are still around 1,000 years from now, no one will know he ever existed, just like no one will know you and I were ever here.

Now that’s equality.

Read more: A Question For Ray Dalio

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