Ray Dalio warns Feds hands are tied and higher U.S. inflation is sticking around. Democracy, maybe not. – MarketWatch
As an investor, Ray Dalio eyes the rearview mirror to see whats ahead. If this paradox makes sense, then you likely agree with the view of history that those who cannot remember the past are condemned to repeat it.
Put another way, its hard to know where youre going if you dont know where youve been. In his latest book, Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail, Dalio, the founder and co-chairman of hedge fund Bridgewater Associates, shows investors their future by taking them back in time to study the rise and fall of great countries and powerful currencies. Because one question you never want to ask about either your money or your situation in life is: How did I get here?
In almost 600 pages of narrative and charts, the book paints Dalios interpretation of the tectonic shifts now reshaping global politics and financial markets in ways that loudly echo the past but are yet to be determined namely the competitive, complex relationship between the U.S. and China.
See: Ray Dalio says his China human-rights comments were misunderstood
How the worlds two most-formidable nations coexist or not is affecting and will continue to impact not only your wealth and opportunities in the 21st century but your childrens and their childrens as well. Says Dalio: [Americans] have to do three things: Wehave to earn more than we spend by being productive and get our finances in order; we have to work well together economically and politically, and we have to avoid war with China.
In this interview, which has been edited for clarity and length, Dalio offers insights about the similarities between the current economic and political cycle and previous ones, the disturbing external and internal threats to American democracy and influence, and how to and what to hold in your investment portfolio, including bitcoin, as history unfolds.
MarketWatch: Your new book is the latest in a series where you share your fundamental principles for investing in and living with the world as it is essentially ways to accept and play the hand youre dealt. What conditions and circumstances concern the United States right now that you want investors to understand, and why look to the past for answers?
Dalio: In my investing, I learned a lesson that many things that surprised me hadnt happened in my lifetime but had happened before. The first time that happened was inAugust1971 when the U.S. broke its promise to exchange dollars for gold so that it could print a lot of money,which led to the devaluation of the U.S. dollar. I was working on the floor of the New York Stock Exchange. I wassurprised that the stock market rose a lot, so I looked into history and I found that same thing happened in March 1933. And I learned why.
As a result of that, I always study whatdrove major economic and market movements in history. My study of the Great Depression is the reason we anticipated the 2008 financial crisis.
Many people are interested in the news of the day, but theyre not interested in the history and lessons of the past. But you wont understand whats going on if you just react to the news of the day.My approach has always been like [that of] a doctor, that if I havent seen many cases of it before I want to go back and study all the cases in history so I can make decisions today.
There are three things happening now that I needed to study:
These things are big. Almost every day were going to be talking about these three things and whats happening with them. The last time that happened was in the 1930-1945 period. They happened many times in history basically for the same reasons in the same way.
MarketWatch:The political and social divisions in the U.S. affectso much of whatAmericans take for granted,and maybe its because theyre taken for granted that they confront us now.Can this country move forward together?
Dalio: The fundamentals are clear. We have to do three things: Wehave to earn more than we spend by being productive and get our finances in order, we have to work well together economically and politically, and we have to avoid war with China. When I look at different countries, I judge them based on whether they have good finances, internal order and external peace.
If the causes people are behind are more important to them than the system, the system is in jeopardy. I worry thats where the U.S. is now.
We have the ability to do these things, but I worry about us being our own worst enemy.History has shown that if the causes people are behind are more important to them than the system, the system is in jeopardy. I worry thats where the U.S. is now.
There is agreat polarity, afight-and-win-at-all-costs mentality. Looking ahead, inthe 2022 electionswe will see the primary battle between the extremists and the moderates in both political parties and probably see moves to greater extremism. In the general election, thereis a good chance that neither side will accept being the loser.
This type of fight-to-the-death mentality could lead to some form of civil war. What I mean by civil war is a series of battles not resolved by the law or the Constitution, in which power is used instead includingthe failure of our democracy to work.
Barrons on MarketWatch: Ray Dalio on the possibility of U.S. civil war
Also, as I look ahead economically for the U.S., I see a worsening of the situation. Because of all the money that has been pumped out were now on a sugar high, but we are beginning to see that inflationwill pick up, and the stimulus checks that came in wont come in at the same rate, causing conditions to worsen.
It all comes down to a couple of basics.To be successful we have to be financially strong and be good with each other. Thats it.
MarketWatch: Easier said than done. There doesnt seem to be muchpolitical willright now in Washington or among the U.S. states to work together.
Dalio: I know. In these cases the French Revolution, the Russian Revolution, the Chinese Revolution,for example the divides became greater and greater. And then you have to pick a side and fight for that side. We are starting to see this in the U.S. by the movementof Americansto different states. Its not just a tax issue. Its a values issue.
Most likely youre going to see disagreements between the federal government and state governments on the matter of what is states rights that probably wont be all settled legally, so theywill be settled through tests of power. There will be places that people wont want to be because itll be threatening. People will want to be with their own kind.
See: Im done with Illinois! I want to retire in a small town in a neighboring state so where should I go?
Also: I want to move to the South, I want the beach and a liberal mindset. Where should I retire?
I want individuals to understand the mechanics of this,which is why I wrote the book. For example, Id like them to see historical cases and fundamental cause-effect relationships to understand whatit means to produce a lot of debt and a lot of money, so I wrote a chapter on the value of money.
MarketWatch: What could thissituation mean for U.S. investors?Youre describing a very differentAmerica toconsider.
Dalio: Right. I want people to be well-informed and worry about what they should worry about.
I have a principle: If you worry, you dont have to worry. And if you dont worry, you have to worry. If you worry, youll take care of the thing youre worried about. If people worry about the fighting and they worry about the finances, then they can work together and deal with these things.
People think the safest investment is cash, but they dont look at the inflation-adjusted return.
Financially, the way it worksis when the government needs to send out checks,it could either get the money from taxes or from borrowing. If it cant get all the money it needs from borrowing, the central bank can print the money. That devalues the value of money.
Central banks can create a lot more money and debt, but that wont raise living standards. Id like to help people see how money and credit move through the system to drive things. Id like to show people how money and credit are created and how a person who gets the money and creditbuys goods, services and financial assets, which makes those thingsgo up in price.
Id like to help them understand the reasons whycash is so bad in this type of environment. People think the safest investment is cash, but they dont look at the inflation-adjusted return.
Dont hold cash. Its better to hold a liquid, diversified portfolio of assets if its balanced. Make sure youre well-diversified outside of cash stocks SPX, -1.74%, bonds TMUBMUSD10Y, 1.399%, inflation-indexed bonds, commodities and gold GLD, -0.12%, and across many countries, particularly those with stronger income statements and balance sheets. An all-weather portfolio has currency diversification, asset-class diversification, country diversification and industry diversification.
MarketWatch: So youre thinking that higher U.S. inflation is not transitory. Its going to stick.
Dalio: Yes. Theres two types of inflation. Theres inflation when the demand for goods and services rises against the capacity to produce them. Thats normal, cyclical inflation. Then theres monetary inflation the creation of a lot of money and credit relative to the quantity of goods and services. The U.S. is having both.
When I look at the countrys financials going forward, what the size of the deficit will be and how much money is produced, thats a concern. Theres also the risk, or even the probability, that those who are holding cash and bonds will choose to sell those to move into other things. If that happens, the U.S. central bank will have to decide if it raises interest rates, which will hurt the economy and I dont believe they can do that in a significant way. It would be bad for the economy, politics and the markets if they tried to rectify that by allowing interest rates to rise. So theyre probably going to have to print more money, and that causes more monetary inflation.
Dont miss: All those doves at the Fed have suddenly become hawks, writes Rex Nutting
Today it doesnt cost anything to borrow. Right now if you take out debt, you have practically no interest rate andprincipal payments can be deferred, so money is essentially free.With the cost of money negative and below the nominal growth rate, its very profitable to borrow and invest in anything that can grow at the inflation rate or more. Thats whats priced into the markets now. And if they change things raise interest rates to be higher than is priced into the markets asset prices will go down and there will be more of an economic problem.
Central bankers, especially the Fed, are between a rock and a hard place. Theyneed to tighten quite a lot to restrain inflation, yet if they do they will hurt the economy.
Central bankers, especially the Fed, are between a rock and a hard place. Theyneed to tighten quite a lot to restrain inflation, yet if they do they will hurt the economy.Imagine what would happen if there was a tightening of monetary policy in the classic way of first causing asset prices to go down and then the economy to contract.
Politically, imagine what that would be like. People are at each others throats and theyve been given a lot of money. Im afraid of another economic downturn. We cant even get along on whether we can wear masks or not. You cant allow another economic downturn. You cant raise interest rates enough to bite. Interest rates have to be significantly below both the inflation rate and the nominal GDP growth rate.
Its easy to see what type of policy biases will exist by looking at whether circumstances favor debtors or creditors being favored. High real interest rateswill exist when circumstances make it better for the creditor to be helped and credit growth to show while low real rates will exist when central banks want to help debtors and want to stimulate credit growth.
History shows that when countries need more money and dont have other ways of getting it that they will produce more money.Producing money doesnt take money away from anyone so its politically easier because its a hidden tax. Nobodys complaining about where the money came from. If you get it through taxes, everybody squawks. History has shown that the easiest way is to print more money and give it out. If instead you tighten, it has consequences.
MarketWatch:Bitcoin and other cryptocurrencyalso is politicized. Crypto has become a political statement as much as away to make and losemoney.
Dalio: Theres a lot of money chasing all sorts of things,crypto among them. It has been an amazing accomplishment for bitcoin BTCUSD, -1.23% to have achieved what it has done, from writing that program, not being hacked, having it work and having it adopted the way it has been.I believe in the blockchain technology; theres going to be that revolution, so it hasearned credibility.
Im not an expert on bitcoin, but I think it has some merit as a small portion of a portfolio.
Im not an expert on bitcoin,but I think it has some merit as a small portion of a portfolio. Bitcoin is like gold, though gold is the well established blue-chip alternative to fiat money.
Key Words: Feds Powell says he doesnt see cryptocurrencies as financial stability concern
However, bitcoin has a number of other issues. If itis a threat to governments, it will probably be outlawed in some places when it becomes relatively attractive. It may not be outlawed in all places. I dont believe that central banks or major institutions will have a significant amount in it.
I have a little bit of it because I believe a portfolio should start off with, under a worst-case scenario, what assets protect it and make sure its diversified.Its almost a younger generations alternative to gold and it has no intrinsic value, but it has imputed value and it has therefore some merit.
Read on: Can the Federal Reserve taper without causing a tantrum in the markets? So far, so good
Also see: Why it matters that workers feel they matter: Valued employees do a better job for employers and customers
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Ray Dalio warns Feds hands are tied and higher U.S. inflation is sticking around. Democracy, maybe not. - MarketWatch
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