Ray Dalio is the founder of one of the largest investment firms in the world and has amassed a personal fortune nearing $20 billion from his business and investment acumen.
In short, he understands money and finance in way that most people never will. And it’s for this reason that his latest insights are so noteworthy.
In a recent, self-published article entitled “Why in the World Would You Own Bonds When. . .”, Dalio makes some blunt assertions about the alarming US national debt, the decline of the dollar, and other negative trends in the Land of the Free.
Here’s a summary of the major points:
1) Interest rates are now so low that “investing in bonds (and most financial assets) has become stupid.”
Dalio points out that bond yields are so low today that investors would essentially have to wait more than 500 years to break even on their bond investments after adjusting for inflation.
That’s why sensible people are already ditching the bond market.
JP Morgan’s CEO Jamie Dimon recently said he wouldn’t touch a US government 10-year Treasury Note “with a ten foot pole.” Neither would Dalio, as he told Bloomberg this month.
2) This is a big problem for Uncle Sam. Investors are ditching US government bonds at a time when the US is “overspending and overborrowing”.
They just passed a $1.9 trillion stimulus, and they have another $3 trillion spending package ready to go, plus plenty of momentum for Universal Basic Income, health care, Green New Deal, and just about everything else.
In short, the government is going to have to sell a LOT of bonds (i.e. increase the debt) at a time when investing in bonds has become stupid.
3) This creates a huge problem for the US dollar.
“The frightening thing about this,” Dalio says, is that many investors have already come to the conclusion that bonds are terrible investments.
So these investors could decide to dump the bonds they already own “at the same time as the [US] government has to sell a lot bonds.”
Just imagine– the US government could easily have to sell another $4 trillion worth of bonds over the next 12-months to cover its massive budget deficit, plus all these wild spending programs.
But then on top of that, investors who currently own US government bonds may decide to dump another $3 trillion of worth of the bonds in their portfolios.
This would mean that $7 trillion worth of bonds flood the market at a time when few people want to buy them.
4) As Dalio explains, this would cause one of two things to happen:
“Either interest rates will rise,” in order to entice investors to buy bonds, or the Federal Reserve “will have to print substantial amounts of money to buy [the bonds] that the free-market buyer won’t buy.”
And it’s pretty clear they’re going with option B.
Last year, the Fed was by far the single largest buyer of all the newly issued US government bonds. Yet as Dalio writes, “when they print money and buy those bonds. . . that lowers real rates and it accelerates a depreciation in the value of the dollar, and it also raises inflation pressures.”
5) So what are the potential consequences?
“The real risk, the big risk,” Dalio told Bloomberg, “is of a monetary inflation . . . and that monetary inflation means that even when the economy weakens, inflation rates rise.”
This is essentially stagflation, i.e. rising inflation coupled with a sluggish economy.
6) When does Dalio see these consequences starting to arise? “Late this year.”
7) There are plenty of bigger picture issues too. Dalio acknowledges that the US government is going to need a LOT of money to finance all this spending, so taxes will likely rise. A lot.
As Dalio writes, tax increases “could be more shocking than expected.”
He also believes that “the chances of a sizable wealth tax bill passing over the next few years are significant.”
8) Dalio writes that, as a result of such tax policy and other destructive rules, “the United States could be perceived as a place that is inhospitable to capitalism and capitalists.”
And the combination of high taxes, high inflation, and hostility towards capitalism may compel many investors and businesses to shift their capital and operations overseas and “run from less hospitable places to more hospitable places.”
9) But don’t expect the US government to sit idly by while capital leaves the country. Dalio believes there is “the possibility of capital controls” to prevent money from exiting the United States, as well as “prohibitions against capital movements to other assets” outside of the US dollar like “gold, Bitcoin, etc.”
So, in short: too much debt and money printing leads to a declining value of the US dollar, and potentially stagflation.
As a result, the government is likely to drastically raise taxes and chase business and capital away from the United States, leading to capital controls and prohibitions on alternative investments.
This is not some wild conspiracy theory or crazy conjecture. This is one of the wealthiest, most successful fund managers in human history bluntly calling the end of the US-dollar debt supercycle.
We’ve been writing about this theme for more than a decade, so our readers will not be surprised by either Dalio’s comments, or the solutions he proposes.
His top recommendation, for example, is “a well-diversified portfolio of non-debt and non-dollar assets.”
And in Dalio’s view, diversification means “currency diversification, country diversification, as well as asset class diversification.”
In other words, don’t keep all of your eggs in one basket, one country, or one currency.