Recently in an interview with Bloomberg, investing legend Ray Dalio, the founder of one of the largest hedge funds in the world with a personal net worth of $20 billion give or take, shares his insight on the state of the financial industry and the economy.
It’s worth paying attention to some of the assertions he’s making, because it’s very likely that life in the future is going to look much much different from what we have known up until this point in our lives. Emerging trends such as the staggering US national debt and the decline of the US dollar are a few of the key factors to consider moving forward.
Dalio recently published an article titled “Why in the World Would You Own Bonds When . . .”, where the Bridgewater Associates founder & co-chairman highlights the simple fact that it is complete lunacy to make an investment into the bond market these days. Interest rates are so low, that according to Dalio, investing in most financial assets “has become stupid.” He explains that bond yields are so minimal that an investor would be stuck waiting more than 500 years to recoup their initial investment on US bonds after adjusting for inflation, and in European or Japanese bonds you will never recover your buying power. “In fact, if you buy bonds in these countries now you will be guaranteed to have a lot less buying power in the future.” The image below compares real and nominal bond yields in the US, Europe, and Japan going back to 1900.
Given the reality of the situation, sensible investors are ditching the bond market because it makes 0 sense, and practically guarantees a net loss with no hope of preserving your capital over time after accounting for inflation.
This is all happening at a time where the US government is overseeing a massive expansion of debt and the issuance of new bonds. Trillions upon trillions of dollars are being printed and spent on huge stimulus packages, while the US finances the budget deficit with ever increasing amounts of debt. What this means is that the US government is flooding the market with a large increase in US bonds at a time where investors are already fleeing the bond market in search of better options, and this is going to create problems for the US dollar.
As this situation plays out, where investors are dumping bonds at the same time the market is being flooded with new bonds, according to Dalio this will cause one of things to happen:
- Either interest rates will rise to become more appealing to investors
- The Federal Reserve will print incredible amounts of new money to buy up this large surplus of bonds
Dalio tells us that when the Fed prints money to buy all the excess bonds on the market, this accelerates the depreciation of the dollar and brings about rising inflation pressure. Already over the past year, the Federal Reserve has been the single largest buyer of US bonds. Expect for this year to be no different, leading to a sharp increase in the real inflation rate.
The real risks we are likely to see play out, will be rising inflation even during times where the US economy is stagnant, otherwise known as stagflation. These effects are expected to start taking place later in 2021.
Aside from just inflation risks, Dalio recognizes that in addition to printing money there is a strong likelihood we will see tax increases across the US. The Biden administration is already talking higher taxes, with Democrats discussing the introduction of wealth taxes. Dalio believes that the “tax increases could be more shocking than expected.”
As a result of such burdensome policies, there is the possibility that the “United States could be perceived as a place that is inhospitable to capitalism and capitalists.” This combination of high taxes, hostility towards capitalism, high inflation, and other unnerving factors could spark a surge of capital flight where investors and businesses would rather operate overseas from more hospitable places. This trend would lead to restrictions on capital on investment, such as “the possibility of capital controls seeking to prevent money from exiting the United States.”
Prohibitions on capital movements, such as bans on putting money into other assets such as gold or Bitcoin, assets that are outside of the US dollar, would be disastrous for US investors and would compel anyone with the means to seek safer and less restrictive places to live and invest. To prevent from being ‘stuck’ inside the US with no other option but to allow the Federal Reserve to cause your savings to deteriorate, its imperative to begin thinking about a Plan B and weighing options for what course of action may be most prudent in the case that a ‘worst case scenario’ situation takes place.
To summarize, after a large expansion of US debt and unprecedented money printing, it is reasonable to predict a decline in the US dollar, both its value and its status as the world reserve currency. This will lead to stagflation in a waning US economy that’s experiencing rising inflation and a widening wealth gap as the prices of assets get inflated by endless Fed stimulus.
Dalio’s solution for these emerging issues are to have “a well-diversified portfolio of non-debt and non-dollar assets.” In his view, diversification means currency diversification, country diversification, and asset class diversification. The same strategies we advise to our clients are being echoed by one of the world’s top fund managers, so its time to consider diversifying out of the dollar and looking to emerging markets for some of the world’s best opportunities.