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John Engle
John Engle
Articles (525) 

Ray Dalio: Don’t Buy Government Bonds

Bridgewater's CEO says it would be 'crazy' to buy government bonds while central banks continue to stoke inflation

April 28, 2020 | About:

Having spent decades at the helm of Bridgewater Associates, the world’s largest hedge fund, Ray Dalio (Trades, Portfolio) has earned a reputation for accurate macroeconomic prognostication and profitable investment allocation. With capital markets unsettled by the global economic crisis, Dalio’s insights have been sought after more than ever. He has been happy to oblige.

While Dalio is hardly likely to share Bridgewater’s proprietary trading strategies or positions with the investing public, he has been willing to offer some advice. Specifically, he has cautioned investors on one asset to avoid like the plague: government bonds.

If cash is trash, what’s the value of money?

To understand Dalio’s antipathy to government bonds, one must first consider his feelings about the value of money. As I discussed last week, Dalio has repeatedly said that “cash is trash” – sometimes in direct counterpoint to Berkshire Hathaway’s (NYSE:BRK.A)(NYSE:BRK.B) long-standing proclivity to hoard immense quantities of cash as dry powder. In that discussion, I focused largely on Dalio’s opinion that the opportunity cost of holding cash rather than earning, or accretive, assets. According to Dalio, this makes cash an unattractive proposition. But Dalio’s negativity has a deeper root cause.

On April 7, the macro hedge fund guru took part in a Reddit “Ask Me Anything” forum, in which he explained his core thinking about the value of money:

“Having the world’s printing press to produce the world’s currency is the equivalent of having the world’s most important asset, especially in times when so many people need the world’s money...I think a lot about what money is worth and believe that it has no intrinsic value.”

In other words, money is truly valuable as an asset only if you are the one with the power to print more of it. For those simply reacting to the growth of the money supply, money is not truly an asset. Money is only as valuable as what it can buy. When money’s buying power fluctuates, so does its value. Hence, Dalio assigns it no intrinsic value at all.

Are government bonds any better?

With the global economy still mostly in lockdown, and with fears mounting about the stability of capital markets mounting, many investors have flocked to safer asset classes, including government bonds. Yet, even money managers have gotten increasingly bearish on stocks in recent weeks, Dalio has warned against piling into government bonds as a defensive strategy.

According to Dalio, government bonds are not a useful hedge under current market conditions, as central banks continue to run their printing presses in a frantic effort to maintain capital market stability. On April 14, Dalio told Bloomberg that, under such economic circumstances, buying government bonds would be a “crazy” financial move:

“This period, like the 1930-45 period, is a period in which I think you’d be pretty crazy to hold bonds. If you’re holding a bond that gives you no interest rate, or a negative interest rate, and they’re producing a lot of currency and you’re going to receive that, why would you hold that bond?”

According to Dalio, while government bonds may be “safe” in the sense that they preserve a currency-denominated amount of money, the value of that money and attendant cash flows is not fixed. With high inflation, the value of safe, low-interest – sometimes even no-interest – government bonds is highly questionable.

My verdict

There is a compelling logic to Dalio’s argument. Just as cash may be a poor hedge when central banks are rapidly expanding the money supply (and thus producing inflationary pressures), government bonds – which pay fixed interest rates on assets with fixed cash face value – can see their value inflated away.

Under such economic circumstances as are now prevailing, I would recommend following Dalio’s advice.

Disclosure: Author is long Berkshire Hathaway.

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About the author:

John Engle
John Engle is president of Almington Capital Merchant Bankers and chief investment officer of the Cannabis Capital Group. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin, a diploma in finance from the London School of Economics and an MBA from the University of Oxford.

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