Raw materials in this article
Forex in this article
Investing in the bond market is no longer economical
Dollar reserve currency status has led to US debt levels
Markets now resemble a casino
Bridgewater Associates founder Ray Dalio is an expert on the stock, bond market and the like and has built his company into the world’s largest hedge fund with his knowledge of market mechanisms. In his most recent blog post, which he published on LinkedIn, he made a sweeping attack against investing in the bond market – at least under the current conditions. So he introduces his post appropriately with the heading “Why in the world would you own bonds when” and ends this thought in the first sentence: “Bond markets offer ridiculously low returns”. What follows is an in-depth analysis of the current market environment, particularly in the US, in terms of high government debt and the extremely loose Monetary policy the Fed. The financial expert arrives at these conclusions.
According to Dalio, investing in the bond market has lost its economic benefits. The stock market expert calculates how long government bonds would have to be held in the USA, Europe, Japan or China in order to get the initial investment out again – without any return. The result is not very convincing: while China is still doing best with a waiting period of 25 years, Europe is at the bottom with 450 years. If you include inflation in this calculation, however, you would never have the same purchasing power for your initial investment in Europe or Japan as you did before you started investing in government bonds. In fact, you would even lose purchasing power. In the USA, it would take more than 500 years, as Dalio calculates. Accordingly, “the economic aspect of bond investments (and most financial assets) has become stupid”. Instead of investing in bonds, Dalio said it was much smarter to “buy something – anything – that is worth as much as inflation or more”.
USA in the vicious debt cycle
The topics of inflation and debt are two more key words that the star investor explains in his post. Thus Ray Dalio concludes that the world is overweighted on the one hand “in bonds (and other financial assets, especially US bonds)” and on the other “governments (especially in the US) enormous amounts of more debt and bonds and others Debt capital assets “produce. This trend would have shown itself over decades, especially in the USA, since the US dollar has the status of a reserve currency. US bonds would make up more than a third of all bonds held by central banks, sovereign wealth funds and international investors in the world. Then euro bonds would come. This would have given the US the ability to take on too much debt over a long period of time. A state of affairs caused by the corona pandemic and the associated Rate cut and economic stimulus packages would have tightened.
This poses a problem as US bonds become increasingly unattractive to investors due to low yields. Dalio is already noticing that China bonds are finding more and more interested parties because the Chinese market is developing faster and is increasingly opening up to borrowed capital. Should it come to the fact that investors flee massively from US bonds, the Fed would be forced to print more money and use this in turn to buy up the debt itself in order to prevent too high a rise in yields.
“Cash is and will remain trash”
The accompanying inflation would, however, mean that holding cash reserves would be even less attractive than it already is. Ray Dalio is already known as a determined opponent of building up large cash positions and confirms in his most recent blog post: “Cash is and remains trash”. In his opinion, it would make more sense to borrow money in order to hold it as an asset, or to invest in asset classes that are not financed through debt capital and offer higher returns.
The extremely loose monetary policy of the global central banks would already have far-reaching consequences: “Now there is so much money that is being injected into the markets and economies that the markets are like a casino in which people play with play money. They buy everything and squeeze the returns on everything down. Now there are stocks that have shot up and bubble dynamics in so many different asset classes, “said Dalio.
Tax increases ahead?
Another consequence of less attractive bonds would be that governments could increase taxes in order to prevent capital from escaping from debt instruments into other asset classes that serve to store value. Dalio explicitly mentions the example of gold and bitcoin here. Such taxation, in turn, should it be introduced in the US, would mean that more investors would withdraw from the US and instead invest their money in other more investor-friendly countries.
So what does the star investor recommend in view of this difficult market environment? “I believe a well-diversified portfolio of equity instruments and dollar-independent assets and a short-term cash position is preferable to a traditional mix of stocks / bonds that is heavily dependent on the US dollar.” In addition, the stock exchange expert assumes that “assets from the developed reserve currency countries will underperform the Asian emerging markets (including China)”.
Finanzen.net editorial team
Image sources: CNBC / Getty Images, Michel Euler / AP
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