Ray Dalio (Trades, Portfolio) is the founder and chairman of Bridgewater Associates, which many consider to be the world's premier hedge fund. Bridgewater's Pure Alpha has made 11.5% per year in its 28-year history. In the past 18 years from 2000-2018, its funds had been profitable. Only last year did Pure Alpha lose a small amount, with the All-Weather finishing2019 up 14.6%.
Dalio recenlty talked to CNBC at the Davos forum. I love to watch the Davos videos; you have a lot of bigshots talking about their books and being perhaps a bit less outspoken given the political environment, but it is an event that always results in a lot of great interviews with smart investors.
Dalio starts off on the monetary policy, as he believes it is at the end of its life. It has reached a point where the Fed can no longer stimulate the economy the same way it did historically.
It is very much like other periods in time. There are going to have larger deficits. The U.S. is going to print money to finance those deficits. This doesn’t necessarily produce inflation, but it does produce inflation in financial assets.
At some point in the future, are we going to think about what’s is a store hold of wealth? Dalio likely means that when financial assets finally start selling off, people will wake up and start searching for a true safe asset. If that is not treasuries, that's a tough situation.
The U.S. is going to have to deal with a period where the question becomes who’s going to finance the debt as it's rolled over. Dalio sees four big issues in the world:
- Wealth gap and polarity in politics can force countries into a political extreme (a global problem).
- Monetary policy needs to be able to be stimulative when needed. If there is a downturn, there is no effective monetary policy that could help.
- The rise of China as a world power.
- Fiscal policy will be in the hands of politicians. Will that money be well spent?
Dalio believes there is a 20% chance of a recession in any given year. A lot of wealth is still in cash. People want to get into the markets. Likely nothing will happen in the next 12 months, so we have to think beyond the election.
Dalio also comments on the idea of jumping on the runaway train. If you jump into a runaway train you need to know what you jump into when you jump out. You can’t jump into cash. Dalio's literal message is "Cash is trash". Instead, you need a diversified portfolio, and you need a certain amount of gold.
When you are holding bonds and you have a negative interest rate how much further can that go? Maybe the next five years are going to be similar to the last. But in addition, we have an increasing deficit (which makes bonds more risky).
In a downturn, the Fed on average cuts interest rates by 500bps. Then they go to quantitative easing. But currently, we don’t have that firepower. Dalio also points out that people are already at each other's throats over the wealth gap.
Whether the Chinese will buy the bonds is a question Dalio approaches by thinking about it from a Chinese perspective. The Chinese hold a trillion dollars in bonds already. The President can unilaterally say I’m not going to pay that debt. How appealing is that debt from a country's perspective?
The emerging power (China) is challenging the existing power (the U.S.). That doesn’t go away after an election. That’s just how things happen. There are four fronts of conflict between the U.S. and China:
- trade
- technology
- geopolitical
- capital war
Dalio likes gold but he doesn't argue against tech or disruptive technology. Instead, he believes that if you oversimplify a portfolio, you want both tech stocks and some gold.
Disclosure: no positions
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