Ray Dalio, the billionaire founder of Bridgewater Associates, the world’s largest hedge fund, offered that warning in a Bloomberg webcast on Wednesday, arguing it made no sense to hold bonds when the Federal Reserve and other major central banks are effectively printing money at a rapid clip as part of their effort to backstop a global economy racked by the COVID-19 pandemic.
“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, why would you hold that bond?” Dalio asked.
Bond-buying by the Fed is seen contributing to a fall in Treasury yields this year. The yield on the 10-year Treasury note TMUBMUSD10Y, 0.648% was down 10 basis points at 0.64% on Wednesday. Yields have fallen sharply as the coronavirus pandemic forced the shutdown of most of the U.S. economy and other countries. Stocks plunged from record highs in February into a bear market before stabilizing late last month, to bounce off their March 23 lows.
Stocks were back under pressure Wednesday, with the Dow Jones Industrial Average DJIA, -1.86% down nearly 400 points, or 1.6%, and the S&P 500 falling 2%.
It’s a point Dalio has made before, including last week in a question-and-answer session on social-media platform Reddit, when he argued that the necessary round of stimulus measures would set the stage for an inflation rebound, eroding the real interest-rate returns on bonds.
While Dalio may not like bonds, he thinks governments have to employ every bit of monetary ammunition they can muster to compensate for the collapse in income and spending resulting from the pandemic. While economists are divided on how long and painful the recession will be, Dalio thinks about it differently: as a $20 trillion “hole” in the global economy that needs to be filled.
“There’s no choice,” said Dalio, whose firm manages about $160 billion. “If you don’t do that, the consequences are enormous.”
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Unlike the 2008-09 financial crisis, when the U.S. government had to decide whether to save big banks and help homeowners, the scope of the rescue effort is much wider now. Not only has the Fed started buying junk bonds for the first time, the government is lending to small businesses and sending money directly to tens of millions of Americans whose livelihoods have been devastated by the pandemic.
Downturns of this magnitude are so dramatic that they inevitably produce a “new world order” with a very uneven distribution of winners and losers, including in asset classes, Dalio said. He cited gold and certain stocks, especially those of companies with strong balance sheets, as some of the “beneficiaries.”
Dalio, a billionaire who founded Bridgewater in 1975, believes the economy operates akin to a machine and similar events over the span of history tend to produce similar outcomes. He incorporates those patterns into Bridgewater’s models, helping the firm to anticipate — and profit — as markets react to new developments.
That process also invests Dalio with confidence about the future. He said it’s clear the “paradigm” that supported the economy and asset prices for the past decade, including tax cuts, ultra-low borrowing costs, mergers and stock buybacks, is “not repeatable” in an environment of rising government debt and even greater tensions over the distribution of wealth.
“Interest rates won’t go down the same way,” he said. “You’re not going to have that.”
Dalio’s flagship Pure Alpha II hedge fund ended the first quarter down about 20%, after getting caught on the wrong side of the sell-off that began in late February. He wrote in mid-March that the pandemic hit Bridgewater at the “worst possible moment” because its portfolios were tilted to benefit from buoyant markets.
Dalio explains, “This period, like the 1930-45 period, is a period in which I think you’d be pretty crazy to hold bonds,” Dalio said Wednesday on the Bloomberg Invest Talks 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, why would you hold that bond?”