Ray Dalio: Cash Is Still Trash

Bridgewater's boss says holding cash is a bad idea, even with the global economy in turmoil

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Apr 21, 2020
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With the global economy in a tailspin, it is unsurprising that many risk averse investors have shifted resources into cash. However, not everyone thinks this is a good idea.

Ray Dalio (Trades, Portfolio), founder and CEO of Bridgewater Associates, the world’s biggest hedge fund, has never been a fan of cash. According to Dalio, the economic downturn has not shifted his opinion.

A consistent voice against holding cash

In recent years, Dalio has decried investors who “keep their powder dry” when it can be put to work profitably in the stock market. In January 2018, Dalio spoke at the World Economic Forum in Davos, Switzerland, where he expressed his continued distaste for holding cash in no uncertain terms:

“There is a lot of cash on the sidelines...We're going to be inundated with cash. If you're holding cash, you're going to feel pretty stupid.”

As markets surged throughout 2018, Dalio’s opinion seemed justified. However, during the brief market turmoil at the start of 2019, some commentators began to openly doubt the Bridgewater boss. Indeed, in a January 2019 article, Business Insider claimed that Dalio had goofed, comparing him unfavorably to Warren Buffett, whose Berkshire Hathaway (BRK.A)(BRK.B) was sitting on $128 billion at the time.

Yet, markets came roaring back to life in short order, thanks in large part to the Federal Reserve’s course reversal on monetary tightening. Dalio appeared to have been vindicated, and the critics quickly faded away.

Dalio’s opposition to sitting on cash continued into 2020. In January, almost exactly two years after making his prediction that investors holding cash would feel stupid, Dalio declared his opinion to be unchanged. Indeed, his criticism of cash had, if anything, intensified:

"Everybody is missing out, so everybody wants to get in. Cash is trash. Get out of cash. There's still a lot of money in cash."

Instead of cash, Dalio advised investors to focus on building global, well-diversified portfolios. According to him, cash was the last place investors should be placing their capital.

The downturn has not changed Dalio’s opinion

In late February, capital markets went into a veritable freefall. This was exacerbated in March as the global economy ground to a halt. In response, central banks and national governments have pulled out all the stops to shore up market confidence.

The Fed has injected record levels of liquidity into capital markets and has experimented with a range of novel policy tools, including direct intervention in the corporate bond market. Thus far, these interventions have worked as intended. Asset prices have recovered substantially. Stocks have rallied about 30% from lows.

In spite of the market rally, many investors have remained apprehensive. Allocations to money market funds have reached a record $4.5 trillion, while institutional investors have moved 6% of assets under management to cash – the highest level since 2001.

While many investors have moved to de-risk their holdings by increasing their cash positions, Dalio has remained adamantly opposed. Indeed, he has argued that the aggressive monetary policy interventions undertaken by central banks have made cash extremely unappealing as a defensive asset. On April 7, Dalio elaborated on this position:

“Please remember that while it doesn’t move around in value as much as other assets, there is a costly negative return to it. So I still think that cash is trash relative to other alternatives, particularly those that will retain their value or increase their value during reflationary periods.”

As central banks run their printing presses, inflationary pressures are likely to mount. Therefore, the value of cash is now even more likely to deteriorate. We are living through a period of unprecedented monetary policy intervention, which could well distort currency values in unexpected ways.

My verdict

I concur with Dalio’s assessment of cash, up to a point. Investors looking for safe havens are likely better off taking positions in other low-risk assets and traditional stores of value, such as gold. While hardly a perfect hedge, gold offers some downside protection from market uncertainty, as well as a store of value that sidesteps the inflation risk of holding cash outright.

Disclosure: Author is long Berkshire Hathaway.

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