Ray Dalio sheds light on several issues ranging from inflation, dollar depreciation, and the likely trajectory of monetary policy in his latest interview.
Ray Dalio is the founder of Bridgewater Associates, the world’s largest hedge fund with 140 billion USD of assets currently under management.
“There are different kinds of inflation” explained Ray Dalio. “I am not worried about the demand pressing up against supply inflation although we will find out soon because there is something like 10% of GDP stored in financial assets, which is going to be coming out” he added.
“There is likely to be a big pick-up in demand and that will likely raise prices” said Ray Dalio.
“There are different kinds of inflation”
RAY DALIO
Ray Dalio sheds light on the fact that inflation reading can be altered by changing the components which make by the cost-of-living index
“It Depends how you calculate inflation; housing prices have gone up a lot, rental prices going down a lot” said Ray Dalio
But he added that a 3% inflation rate wouldn’t be something that would make him uneasy.
The real issue for investors, which Ray Dalio sheds light on, is this mismatch of government bonds and the unintended consequence of this leading to monetary inflation
“We have a demand-supply issue of bonds” said Ray Dalio.
Elaborating further Ray Dalio sheds light on the fact that governments are trying to sell a lot of bonds to a finite number of sovereign investors with elevated levels of bond inventories in their portfolio
Moreover, Ray Dalio noted that owning government bonds is not that attractive to investors.
“These bonds have very low-interest rates, negative yields interest rates, and they are overweighted in US bonds and have to buy a lot more” said Ray Dalio.
Moreover, a new rising star China has also entered the bond market.
“That is also coming at a time when Chinese capital markets are becoming more attractive” said Ray Dalio.
“We have a demand-supply issue of bonds”
RAY DALIO
Indeed, China’s 10Y Government Bond has a 3.123% yield. Central Bank Rate is 3.85% (last modification in April 2020).
Meanwhile, The US 10Y Government Bond has a 1.502% yield. Central Bank Rate is 0.25%.
China also has the lowest public debt to GDP ratio at 54.3%, which compares to a US public debt to GDP ratio at 100.72%.
“I don’t think Fed can tighten a lot without having a big negative effect” – Ray Dalio
Ray Dalio sheds light on the changing dynamics of the global bond market, which is leading to an oversupply of US treasuries and better alternatives
“There will be not enough demand to buy these bonds” he said.
Ray Dalio then explains what implication this is likely to have for the USD and the Fed’s monetary policy going forward.
“This is likely why the Fed may not be able to taper or cut back but will have to increase their bond purchases, that is classic monetary inflation” said Ray Dalio. “The Real question for rest of world is what are interest rates relative to inflation and what is happening with all this liquidity because there is a huge amount of liquidity and negative real interest rates and that means it pays not to own any debt instruments, it pays not to own cash where you get no interest rates” said Ray Dalio.
Our fifty cents is that the liquidity is circulating around the financial system, shoring up bank balance sheets in the event of bad debts.
So, while money supply M2 is going to the moon it is having little impact on money velocity, which could explain why inflation fears might be overdone.
“When you look at that I think you are going to get inflation in other assets, to buy houses I am seeing interest-only loans being made when there are no interest rates, in other words, you don’t have to pay back your principal anytime soon interest rates are so low” said Ray Dalio.
“These are things that concern me more because you build up a bubble” he said
“I don’t think Fed can tighten a lot without having a big negative effect” he added.
Ray Dalio explained that an oversupply of treasuries in a negative yield environment means Fed tapering is unlikely because falling bond prices mean that yields rise.
“I am more concerned about a whole shift in terms of quantity of debt money being produced, which goes into creating great bubbles and that will either be meet by rate rise or dollar decline” – Ray Dalio
“They cannot let that happen because that would be bad for the economy and markets” said Ray Dalio.
Ray Dalio sheds light on where we are in the debt cycle
“We have to keep in mind where we are we are in the long-term end of the debt cycle, which means Fed will have to continue with their asset purchase program to prevent the interest rate from going up” said Ray Dalio.
But Ray Dalio notes that it is very non-cyclical which can also put the reserve currency under extreme stress.
“I think the situation we are in is very similar to the late sixties going onto late 70s when there was a different core inflation rate in the US versus Germany and Japan,
We are in a balance of payment deficit they are in surplus” he said.
“I think that is negative for dollar particularly against Asian currencies” said Ray Dalio.
Ray Dalio then sheds light on what concerns him the most
“I am more concerned about a whole shift in terms of quantity of debt money being produced, which goes into creating great bubbles and that will either be meet by rate rise or dollar decline” said Ray Dalio.
But he also noted that financial markets are hypersensitive just a slight touch of Fed putting its brakes on liquidity could have a significant impact on markets.
Ray Dalio sees the rising wealth gap in the US and the rise of China as issues to watch going forward.