To Ray Dalio, founder of the world’s largest hedge fund organization, investors would be “crazy” to hold Treasury and other government bonds now. Reason: They don’t pay much in interest.
“This period, like the 1930-45 period, is a period in which I think you’d be pretty crazy to hold bonds,” Bridgewater Associates Co-Chairman Dalio said in an interview with a Bloomberg News webcast.
“If you’re holding a bond that gives you no interest rate, or a negative interest rate, and they’re producing a lot of currency and you’re going to receive that,” he declared, “why would you hold that bond?”
Certainly, governments across the face of the earth will be issuing enormous amounts of debt to combat the coronavirus-related economic plunge. The central banks like the Federal Reserve will be buying a lot of it, and that means a load of money—which the central banks pay for the bonds—will be in circulation.
The standard fear about this process is that it would spark inflation. But inflation is as rare these day as a crowded bar. What is the bigger risk for bond buyers is that bonds will grow increasingly undesirable with interest rates near zero (as in the US) or negative (as in Europe), where investors actually pay issuers for the privilege of holding their paper.
During the Depression and World War II in the US, rates were low, Treasury issuance was high, and nobody saw bonds as a means of gaining capital appreciation. Contrast that with the bond bull market that began in the early 1980s. Since that time, yields have come down from double digits, and so prices rose, a wonderful thing for bond buyers.
This bull market seems destined to reach its end very soon. And Dalio’s sour view of the bond market is a reflection of that trend. “Interest rates won’t go down the same way,” he said. “You’re not going to have that.”
That said, Dalio certainly backs the steps that the US and others are taking to counter the baleful effects of the coronavirus pandemic through big spending. As he put it, the world economy’s need for support is a $20 trillion “hole” that needs to be filled.
In Dalio’s view, the “paradigm” that previously buoyed the economy and the capital markets—namely, tax cuts, ever-lower borrowing costs, mergers, and stock buybacks—is “not repeatable.” Climbing government debt and the resentment over wealth distribution will see to that, he contended.
What’s left to invest in? Gold and select stocks with strong balance sheets should thrive, he said.
Dalio has learned to value this more conservative approach the hard way. Until recently, he depended on the old model that produced an ever-rising stock market. His flagship Pure Alpha II hedge fund ended the first quarter down about 20%, thanks to its wager on surging stocks overall. The virus-fueled market sell-off that started in late February ended the equity bull market with a vengeance.