Ray Dalio sees heightened uncertainties ahead in his last interview of the year.
“There is a period of great uncertainty and great risk” said Ray Dalio as the year draws to a close.
Indeed, there is much unpredictability of where next for the post-pandemic global economy. The bullish view is that as COVID/19 vaccination is distributed, the economy will begin to open up, there will be a V-shaped recovery, where the economy returns to the pre-pandemic level in 2021/2022.
But the V-shaped recovery view is losing momentum as public debts skyrocket, a raft of small businesses failures, and unemployment spirals precariously upwards.
It is beginning to look more like a K shaped economic recovery, where different parts of the economy recover at different rates, times, or magnitudes.
“There is a period of great uncertainty and great risk”
Ray Dalio sees heightened uncertainties ahead, and he is recommending investors to avoid putting all their eggs in one basket
“I think there are three words, diversification, liquidity, and differentiation” said Ray Dalio.
Ray Dalio sees heightened uncertainties, but he also believes investors can reduce risk in their portfolio without missing out on the benefits of investing in outperforming higher reward assets
“Reducing risk without reducing opportunity means currency diversification, including the reserve currencies how much exposure is there to the reserve currencies” said Ray Dalio.
Portfolio diversification is the crux to Ray Dalio see heightened uncertainties view
Ray Dalio refers to currency diversification in a portfolio. For example, a portfolio of assets denominated in a combination of emerging market currencies and G7 currencies is an example of currency diversification. Emerging market currencies tend to outperform G7 currencies in a risk-on environment. So, in times of uncertainty, investors tend to reduce their exposure to emerging market currencies.
Asset class diversification, country diversification, currency diversification, should be the starting point for a portfolio, according to Ray Dalio.
Asset diversification means investing a portion of a portfolio in bonds, which are fixed incomes, stocks, real estate, precious metals, and currencies.
“Reducing risk without reducing opportunity means currency diversification, including the reserve currencies how much exposure is there to the reserve currencies”
Ray Dalio sees heightened uncertainties, and he recommends that investors have liquidity at hand
“In terms of liquidity it allows you the flexibility to change as circumstances change” added Ray Dalio.
In a world where Ray Dalio sees heightened uncertainties, the billionaire hedge fund investors also recommend investors to factor into their portfolio differentiation
Differentiation is the most important; there are two different worlds; the world which is orderly and that will prosper, and the other world will be disorderly and chaotic, said Ray Dalio.
“You can see it in the balance sheet and income statements. Every country how well they are will depend on their income relative to expenses” – Ray Dalio
Where does Ray Dalio look to find clues on how best to differentiate?
“You can see it in the balance sheet and income statements. Every country how well they are will depend on their income relative to expenses” said Ray Dalio.
“And how much their assets are relative to their liabilities” he said.
“You can see radical differences in the financial consequences of that” added Ray Dalio.
Ray Dalio sees heightened uncertainties and risks, but he also notes that those assets which are more inclined to attract capital flows from the central banks’ asset purchases, known as the central bank put, are lower risk
“The second is the proximity to those who are printing and distributing money. are you a recipient of that,” said Ray Dalio. For example, a lot of the third world is not a recipient of that, and that is not in a good financial situation” said Ray Dalio.
Then three in order both political and social, according to Ray Dalio.
“You can see that between countries that are controlling the virus and behaving orderly together” said Ray Dalio.
“Then you can see those situations reflected in the market behavior and social-political conditions” he added.
“In my opinion don’t own bonds” – Ray Dalio
Overpriced assets due to excessive multiples fueled by central bank liquidity are also where Ray Dalio sees heightened uncertainties
“When we look at the interest rate market, we look at the earning yields, when we look at stocks, we look at price-earnings. They are yields, and the capacity to let the central banks print money and buy assets has essentially led the bond market to go to multiples, which are sometimes one hundred times” said Ray Dalio.
“You put your dollars out and you get it back in a hundred years, so it has a one hundred time multiple” he said.
When deciding whether asset prices are overvalued Ray Dalio said that we have to
compare bond multiples with stock multiples, so the capacity of central banks to put liquidity into the system and have that liquidity produce higher multiples is very real” he said.
“It also changes the economics of borrowing, so that changes the leverage” said Ray Dalio.
“So, the market behavior is reflective of that” he added.
Ray Dalio sees heightened uncertainties, but this is where I see a contradiction because he recommends not to own cash and bonds
But he also recommends that investors should remain liquid, for opportunistic investments. Cash is the most liquid asset.
But remember, back in February 2020, “cash is trash” said Ray Dalio.
Then, a few weeks later, stocks crashed, only to then make a V-shaped recovery courtesy of the central banks’ liquidity injections. So, in this case, cash was king.
“In my opinion don’t own bonds, don’t own cash because they are producing a lot of money to fund it and so that is changing the nature of capital flows. It is also changing how those flows go to China” said Ray Dalio.
So, Ray Dalio sees heightened uncertainties, and he does not believe that the old multiples use to determine value in times of hyper financialized markets work well anymore. See Ray Dalio sees heightened uncertainties interview here.