Ray Dalio said the other day that he would not want to hold any bonds, and neither any cash. Well, if the doyen of hedge fund investing makes a comment like that, the world better pays attention. Monetary inflation has not just been a phenomenon across the past 10 years, it is to come from here, and in size. No wonder Dalio has little interest in US Treasuries, mortgages, and investment-grade paper, which by the way now yields less than inflation expectations – click here. And no wonder he is shunning the dollar.
What he is implying, and this is my read, is that he is fleeing into other asset classes to largely avoid monetary inflation that will be triggered by the impending and humongous deficit spending of the incoming administration, and the Fed printing the money for it. The most obvious choice would be equities. If newly minted funds actually make their way into the real economy, in incremental size for once as I said in yesterday’s
piece, then corporate numbers should markedly improve.
But even if they didn’t, more excess liquidity is poised to slosh around the system to lift share prices as they have so impressively done over the last decade. And even if the monetary inflation at one point turned into goods price inflation, for which there is no evidence for now, by the way, equities will be a proper hedge. In any case, this can’t be good news for government bonds and mortgages, as in either yields go up but more likely will be controlled by Jay Powell and his colleagues at the Fed.
Cash may long have been dubbed to be an asset class in its own right and not to be dismissed, but it seems like a losing proposition in this era. In all major currencies except for Renminbi depositors either get no yield or even have to pay for holding their money with a bank. The Fed’s, the ECB’s and other central banks’ policies are printing gazillions more of it and making sure that the cash gets diluted fast. At current rates, it seems almost a crime not to borrow heavily instead, as money is virtually freer than ever.
So, what are other alternatives? Commodities for sure if you believe in the economic bounce to come in the wake of successful vaccinations etc. But this is still a big if, and no one can profess to get the timing right. Alternative assets apparently had their day in the sun. Bitcoin almost doubled in three months. This writer must concede that he completely missed it despite friends imploring him to have a closer look. Well, I am still not convinced as long as crypto transaction and custodial issues remain complicated.
That leaves one asset that this space has had full confidence in since the Fed initiated quantitative easing a decade ago. And the confidence hasn’t gone away – quite the contrary. To be sure, the price of gold has taken a hit recently in the wake of vaccine and alleged recovery news. It even briefly dipped below the 1,800 dollars per ounce mark as well as the technically important 200-day moving average, but it has since bounced back convincingly.
Is this the once-in-a-generation chance to get on the bandwagon, at least my generation…? I would think so. Gold as the closest proxy of a non-inflatable good, with the exception of crypto maybe, has only one way to go in a world of monetary flooding. Even the previous demurring that gold wouldn’t pay any yield and incur a cost to holding it is baseless now as it is pretty much the same with cash. The price is lingering close to 1,850 for now, but you wait until Powell has printed his next 3 trillion!
