Ray Dalio, the founder of Bridgewater Fund, believes that under the current macro environment, the proportion of non-debt and non-dollar assets should increase, and diversified allocation will be better than traditional 60% US stocks and 40% bonds.
Original title: “Is it OK to Invest in Bonds | What is the trend behind Dalio’s “bond stupidity”? 》
Source: ABMedia
In the past few decades, U.S. Treasury bonds have been regarded as the safest assets. Allocation of 40% of assets in Treasury bonds to hedge against the risks of “currency depreciation” or “inflation” has become a regular allocation. However, the recent bond market has not been quiet, especially since the sell-off of ten-year Treasury bonds has led to a rapid increase in yields. Although most investors think this is a short-lived phenomenon, Ray Dalio (达里欧), the founder of the world’s largest hedge fund, Bridgewater Fund, pointed out in his article ” Why In The World Would You Own Dollar Debt? ” on the 16th that this may be possible. Not a short-term phenomenon.
Fools buy bonds
Bonds may have gone from safe assets to stupid assets.
Ray Dalio believes that the current real interest rate (nominal interest rate − inflation rate) of “reserve currency” (US dollar, euro, Japanese yen) bonds is already negative. These extremely low interest rate assets can no longer meet the needs of investors, including pension funds, Insurance companies, sovereign wealth funds, savings accounts.
Not only bonds, but the real yield on cash is already negative. In this case, borrowing cash and shorting bonds seems to be a reasonable choice. The data from the Bridgewater Fund can explain why not long ago, the yield of US 10-year bonds rose sharply (bond prices fell), and even “negative interest rates” appeared in the repo market.
“Repurchase market” means that when a financing party sells securities, it also signs a repurchase agreement, and then repurchases the assets within a predetermined period with interest. At the beginning of March, the phenomenon was that the party who sold/lended ten-year U.S. Treasury bonds was able to obtain interest from the other party when repurchasing. This indicated that the repurchase market had changed and became a place where institutional investors borrowed ten-year U.S. Treasury bonds to short-lived. .
How stupid is it to invest in bonds now? Ray Dalio explained it in a very intuitive way.
Suppose I bought a 100 yuan reserve currency bond today. When will I wait until I can pay back the cost and start charging interest? The U.S. debt requires 42 years, the European debt takes 450 years, the Japanese debt takes 150 years, and the Chinese national debt takes 25 years.
If the inflation rate is taken into account, it will take another 500 years to start making profits in the United States, but it will never be possible in Europe and Japan. The chart below shows the time required for the nominal interest rate (left) and actual interest rate (right) of U.S. Treasuries to start making profits.
The time required for the nominal interest rate (left) and actual interest rate (right) of the US Treasury to start making profits
The sectors of the global economy are changing
The current situation is like this. Everyone holds a large amount of bonds, and the governments of various countries are desperately producing bonds, debts, and debt assets. Among them, the US government has the most. The article pointed out that U.S. bonds accounted for one-third of the bond positions of central banks, sovereign wealth funds, and investors.
This is because the United States was and is the strongest country in the world. The U.S. dollar has always been the world’s reserve currency. U.S. dollar-denominated assets have naturally become the safest assets. This allows the U.S. to enjoy privileges and continue to borrow excessively. It is worth mentioning that due to continuous excess borrowing and debt, the reserve currency will be threatened. At the same time, emerging markets are on the rise.
When one sovereignty begins to weaken, another sovereign will rise. Ray Dalio specifically pointed out that the holding rate of Chinese bonds is increasing. Although the current proportion of international investors holding Chinese bonds is about 6%, with the revaluation of the size of the Chinese economy, the weighted proportion of Chinese debt holdings will Will increase.
On the other hand, if reserve currency bonds continue to be issued and supply exceeds demand, bond prices will fall and yields will rise. The government has to increase the scale of quantitative easing to purchase these bonds, which will cause the dollar, euro, and yen to weaken; In contrast, Chinese bonds offer relatively attractive interest rates, which also drives demand for the renminbi.
A possible bubble in the 40-year bull market
In the past 40 years, the bond market has been in a bull market thanks to economic development and trade internationalization. Therefore, although bonds have fallen recently, this has not really hurt most investors.
But just imagine, if there is a reason that people who hold bonds want to sell, what will happen?
At present, the debt assets of U.S. debts with various maturities are more than 75 trillion U.S. dollars, of which U.S. Treasury bonds and bills account for about 16 trillion U.S. dollars, of which Treasury bonds of different maturities account for another 5 trillion U.S. dollars. And if the yield continues to fall, then investors have two options, hold the bond until the maturity date, and then receive a pitiful interest. Or sell bonds to exchange for other goods and services.
Unfortunately, these funds are too large to be sold in their entirety. In other words, once the final bottom line is triggered, everyone will start to sell, forming a negative strengthening process, and Ray Dalio believes that once triggered, things will become irreversible.
Is reducing quantitative easing a profit?
Historical data shows that the central bank is facing an imbalance between supply and demand, and bond yields may exceed what is needed for economic recovery. As a result, the central bank needs to purchase more treasury bonds in order to achieve “yield rate curve control”, but this will produce additional One problem is that cash will depreciate.
Ray Dalio used an interesting analogy. He likened the economy to human beings and the government as doctors. When the patient’s pulse drops sharply, the doctors start emergency treatment, and the first aid takes effect, so that the life index begins to recover. These indexes are stocks, index bonds, gold and other assets.
This kind of injection of currency and credit expansion into the system will push up the price of financial assets. When interest rates are lower than the growth rate of inflation, this makes it easier to repay debts, that is, “borrowing money to invest” is smart, pushing up the prices of various assets, even if the real economy is weak, the economy also has bubbles. Therefore, after the real economy begins to recover and inflation expectations begin to rise, the dosage of drugs should be reduced.
Ray Dalio believes that investors can observe the central bank’s next move to see if they will increase the scale of quantitative easing; if so, it means that they are facing an imbalance between supply and demand; in other words, if the central bank reduces the scale of quantitative easing, it will be truly profitable. : The real economy is recovering.
The long-term debt cycle has come to an advanced stage
The problem with decades of economic stimulus measures is that these stimulus continue to increase debt and leave unhealthy effects. In the large debt cycle, when debt grows faster than income growth, it will cause problems. People who borrow money want better purchasing power than the yield rate of bonds, but people who lend to others bear an additional burden because their interest is far behind the principal.
During the credit/debt collapse, everyone will begin to realize that purchasing power is lost, financial and economic conditions are deteriorating, and tax increases are needed because of excessive debt. In Ray Dalio’s view, we are in a credit/debt cycle (not yet touching the bottom line).
In this cycle, the new coronary pneumonia (COVID-19) has also worsened the situation. In order to save liquidity, the government had to inject large amounts of credit into the market. Having said that, Ray Dalio also understands that the government must do this. Only during this period, it is obvious that financial assets are going up.
Even so, asset bubbles are happening. To make matters worse, during this epidemic, the US government’s debt has increased substantially, and the US government’s deficit has reached World War II levels.
The debt of the U.S. government has increased substantially, and the U.S. government deficit has reached World War II level
What to do
Ray Dalio believes that we are now in the late stages of the big debt cycle, so people who borrow cash don’t treat it as an asset, but instead use it in non-debt investments (non-bonds) with higher investment yields.
In order to allow these funds to flow into the real economy, the government may start to increase taxes or increase restrictions to prevent the initial flow of assets from abroad or transfer to other assets such as gold and bitcoin.
Finally, Ray Dalio stated that the portfolio may change.
The proportion of non-debt assets and non-dollar assets should be increased. The diversified allocation will be better than the traditional 60% US stocks and 40% bonds. At the same time, he also believes that the assets of developed currency reserve countries will not catch up with Asia (including China’s Inside) the performance of emerging markets.
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