Ray Dalio’s latest research on bonds, and why in his view, “the economics of owning bonds has become stupid.” The piece explains that if you buy bonds in many developed economies today, including the US, Europe, and Japan, you will be guaranteed to have less buying power in the future due to inflation.
The Issue With Owning Bonds
In the research, Ray outlines how we got here and why this issue with bonds is part of the classic money cycle:
- The world is substantially overweight in bonds (and other financial assets, especially US bonds) at the same time that governments are producing enormous amounts of debt and bonds and other assets
- The cycle of becoming a reserve currency, overborrowing, and being overindebted threatening the reserve currency status is classic. As part of this cycle there is the emergence of the currency and capital markets of the rising and competing empire. Consistent with this classic cycle there is now a shifting from US bonds to Chinese bonds going on.
- If bond prices fall significantly, that will produce significant losses for holders of them which could encourage more selling. This is one of the markers of a bubble.
- History and logic show that central banks, when faced with the supply/demand imbalance situation that would lead interest rates to rise to more than is desirable in light of economic circumstances, will print the money to buy bonds and create “yield curve controls” to put a cap on bond yields and will devalue cash. That makes cash terrible to own and great to borrow.
- The most recent fiscal stimulus bill created a lot of funding and a lot of debt that is many times that which is needed to cover the financing hole. These circumstances created a lot of government debt and now there is so much money injected into the markets and the economy that the markets are like a casino with people playing with funny money.
Ray goes on to outline how we are in the late stage of a big debt cycle in which it pays to borrow cash rather than hold it as an asset and buy higher-returning, non-debt investment assets. For these reasons, Ray believes that a well-diversified portfolio of non-debt and non-dollar assets along with a short cash position is preferable to a traditional stock/bond mix that is heavily skewed to US dollars. Additionally, mature developed reserve currency countries will underperform the Asian emerging market currencies.