Bridgewater Associates’ Ray Dalio on Gold, Bonds, and Money Printing
Below is an excerpt of a Barron’s interview with Bridgewater Associates’ Ray Dalio which I first highlighted in February 2009 in A conversation with Bridgewater Associates’ Ray Dalio. Back then I highlighted the first part which concentrated on the private sector debt problem. Today, I want to highlight the last part which talks about sovereign debt crises. Remember, this is from 15 months ago. It reads like today. Notice he talks about gold and bonds, not either or.
[Barron’s:] Where is the U.S. and the rest of the world going to keep getting money to pay for these stimulus packages?
[Dalio:] The Federal Reserve is going to have to print money. The deficits will be greater than the savings. So you will see the Federal Reserve buy long-term Treasury bonds, as it did in the Great Depression. We are in a position where that will eventually create a problem for currencies and drive assets to gold.
[Barron’s:] Are you a fan of gold?
[Barron’s:] Have you always been?
[Dalio:] No. Gold is horrible sometimes and great other times. But like any other asset class, everybody always should have a piece of it in their portfolio.
[Barron’s:] What about bonds? The conventional wisdom has it that bonds are the most overbought and most dangerous asset class right now.
[Dalio:] Everything is timing. You print a lot of money, and then you have currency devaluation. The currency devaluation happens before bonds fall. Not much in the way of inflation is produced, because what you are doing actually is negating deflation. So, the first wave of currency depreciation will be very much like England in 1992, with its currency realignment, or the United States during the Great Depression, when they printed money and devalued the dollar a lot. Gold went up a whole lot and the bond market had a hiccup, and then long-term rates continued to decline because people still needed safety and liquidity. While the dollar is bad, it doesn’t mean necessarily that the bond market is bad.
I can easily imagine at some point I’m going to hate bonds and want to be short bonds, but, for now, a portfolio that is a mixture of Treasury bonds and gold is going to be a very good portfolio, because I imagine gold could go up a whole lot and Treasury bonds won’t go down a whole lot, at first.
Ideally, creditor countries that don’t have dollar-debt problems are the place you want to be, like Japan. The Japanese economy will do horribly, too, but they don’t have the problems that we have — and they have surpluses. They can pull in their assets from abroad, which will support their currency, because they will want to become defensive. Other currencies will decline in relationship to the yen and in relationship to gold.
[Barron’s:] And China?
[Dalio:] Now we have the delicate China question. That is a complicated, touchy question.
The reasons for China to hold dollar-denominated assets no longer exist, for the most part. However, the desire to have a weaker currency is everybody’s desire in terms of stimulus. China recognizes that the exchange-rate peg is not as important as it was before, because the idea was to make its goods competitive in the world. Ultimately, they are going to have to go to a domestic-based economy. But they own too much in the way of dollar-denominated assets to get out, and it isn’t clear exactly where they would go if they did get out. But they don’t have to buy more. They are not going to continue to want to double down.
From the U.S. point of view, we want a devaluation. A devaluation gets your pricing in line. When there is a deflationary environment, you want your currency to go down. When you have a lot of foreign debt denominated in your currency, you want to create relief by having your currency go down. All major currency devaluations have triggered stock-market rallies throughout the world; one of the best ways to trigger a stock-market rally is to devalue your currency.
But there is a basic structural problem with China. Its per capita income is less than 10% of ours. We have to get our prices in line, and we are not going to do it by cutting our incomes to a level of Chinese incomes.
And they are not going to do it by having their per capita incomes coming in line with our per capita incomes. But they have to come closer together. The Chinese currency and assets are too cheap in dollar terms, so a devaluation of the dollar in relation to China’s currency is likely, and will be an important step to our reflation and will make investments in China attractive.
[Barron’s:] You mentioned, too, that inflation is not as big a worry for you as it is for some. Could you elaborate?
[Dalio:] A wave of currency devaluations and strong gold will serve to negate deflationary pressures, bringing inflation to a low, positive number rather than producing unacceptably high inflation — and that will last for as far as I can see out, roughly about two years.
[Barron’s:] Given this outlook, what is your view on stocks?
[Dalio:] Buying equities and taking on those risks in late 2009, or more likely 2010, will be a great move because equities will be much cheaper than now. It is going to be a buying opportunity of the century.
[Barron’s:] Thanks, Ray.
Dalio was spot on about nearly everything from this interview. I wonder how he is positioned now after an 80% rally in shares. A lot of people are warning of a sell-off: Albert Edwards, Seth Klarman, and Richard Russell to name a few wise investors.
While Dalio speaks about debasing the currency from a purely American perspective to reduce the real burden of debt, the desire to devalue currencies is now being felt in Europe too. And Dalio is not the only non-gold bug talking about buying the barbarous relic. Jeremy Grantham is buying gold too.
As for gold, you might not want to make any decisions based on Grantham’s recent purchases, but you should take his cynicism seriously. “I hate gold. It does not pay a dividend, it has no value, and you can’t work out what it should or shouldn’t be worth,” he said. “It is the last refuge of the desperate.”
What does that tell you?