Ray Dalio (Trades, Portfolio) appeared on CNBC last week to talk about the current crisis and how the U.S. government is likely to try to mitigate it. His hedge fund, Bridgewater Associates, has approximately $160 billion in assets under management, but has not escaped unscathed from the recent market rout. Here’s what Dalio had to say.
Who will lend the money?
“We estimate right now that the corporate losses would be in the vicinity, in the U.S., of about $4 trillion, globally around $12 trillion...So there’ll be big losses to corporations and individuals, so there’s a need for the government to spend a lot more money. [How much?] I would say somewhere in the vicinity of $1.5 trillion, maybe $2 trillion, as a minimum. Where does the government get that money? Who are the lenders now? The way it’s worked historically, is that they get the money from the Federal Reserve.”
The problem with government borrowing in times of crisis is that private entities are not really in a position to lend to the Treasury - pension funds, endowments and hedge funds are hardly going to be lending right now. This leaves the Federal Reserve as the last resort lender for the government. The idea of the government loaning trillions of dollars to itself might cause some people to raise their eyebrows, but it’s really no different to various quantitative easing policies that central banks have pursued since the financial crisis of 2008. The much bigger problem is something that Dalio also talked about: whether the Fed has the ammunition to keep order in the market.
We are in a crisis that has health, economic and monetary aspects to it, and this is happening in a context where interest rates are hitting zero. In theory, in a downturn, central banks are able to stimulate spending by lowering interest rates and giving consumers and investors credit, which increases demand and spending and the economy is able to recover.
But with rates so low, it doesn’t seem like the Federal Reserve and other central banks will have the capacity to stimulate spending in a way that they would like. To make matters worse, the current crisis is not just a demand crisis (like in 2008), it is a supply crisis due to the fact that global production and trade supply chains have been disrupted.
Cash is trash?
The irony of these remarks will not be lost on investors who watched Dalio proclaim that “cash is trash” at the Davos World Economic Forum back in January. Since then, Bridgewater’s flagship Pure Alpha fund has lost 20% (as of March 15) by betting on rising equities and Treasury yields (both have cratered over the last month), with Dalio admitting that in retrospect they should have cut their positions rather than tried to navigate the coronavirus.
Perhaps Dalio wishes he had followed Warren Buffett (Trades, Portfolio)’s lead and stockpiled some cash instead. Buffett’s Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) had accumulated more than $120 billion at the end of 2019, and he is no doubt looking at potential targets.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Morgan Stanley: Markets May Have Fully Priced in a Recession
- Howard Marks: This Is the Essential Investing Subject
- Lessons That Value Investors Can Learn From Traders
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