One thing I've learned about professional investors is that no matter what, at the end of the day they're talking their book.
So whether you buy these arguments or not, Ray Dalio is simply promoting a position that Bridgewater no doubt has taken. So when he says:
"I believe a well-diversified portfolio of non-debt and non-dollar assets along with a short cash position is preferable to a traditional stock/bond mix that is heavily skewed to US dollars. I also believe that assets in the mature developed reserve currency countries will underperform the Asian (including Chinese) emerging countries’ markets."
It's not his avuncular advice. He has millions (billions?) of dollars committed to this bet and he wants to convince others that it's correct so it pays off.
I don’t know a whole lot about professional investing, but if watching The Big Short has taught me anything it’s that the pros will say one thing publicly but do the opposite in private until it’s to their advantage to do a 180 and make their private stance actually public.
Recently this was Jamie Dimon lambasting Bitcoin all the while a cryptocurrency trading desk was being set up at Chase.
The following exchange from The Big Short stuck with me. It’s Dr. Burry’s response to Goldman Sachs when they finally returned his numerous calls:
Deeb: Dr. Burry?
Burry: Yeah.
Deeb: Deeb Winston, Goldman Sachs. Listen, I've been reviewing your position. I wanted to discuss your marks and make sure they're fair.
Burry: Yeah, I think you mean that you've secured a net short position yourselves. So you're free to mark my swaps accurately for once because it's now in your interest to do so.
Deeb: I'm not sure what you want me to say.
Burry: I think that...I think that you've already said it.
It's great that you recognize professional investing isn't something you know a lot about.
It's a bit concerning that people believe a hollywood movie has taught them how the industry works. Keep in mind how hollywood portrays "hackers" or "scientists" or "Russians" or whatever group is an outsider or opposition to the protagonist and realize they're doing the same to finance.
While clearly not all of Hollywood portrays the industry accurately, from my perspective the movie was incredibly reflective of the players in the space, and the dynamics.
I worked in the mortgage/CDO/CDS industry for 10yrs during that period (2005-2015).
If anything, the movie was too positive. There aren't as many players like Steve Carell's character who are worried about the world, they are usually worried about how to liquidate their book at the right time.
The bit about getting marked the wrong way was especially spot on.
I recommend 3 movies to every family member willing to deal with financial topics as a form of edutainment. The Big Short and Margin Call are two of them.
The 3rd one is 99 Homes. The key line is: "Don't get emotional about real estate." What is sold as a place for family memories for some, is just another asset class for others.
Certainly the movie is a bit exaggerated, but I'm not sure what your exact point of contention is with that scenario?
OTC or seldom traded securities may not operate in the same way that a highly traded stock like Apple does from a price standpoint. For a boutique security that is created for a customer, the price is whatever the market is willing to pay - but the discovery of that price can quite literally happen over the phone because in the market there might only be one customer and if you sell to them... that's the price!
So assuming that Michael Burry (in this instance) actually had Goldman Sachs create a boutique security, price discovery may very well have happened over the phone in just such a manner. I don't know the details but I'm also not sure why you would think that this can't happen? Please feel free to educate me. I don't know much about professional investing either.
He's right though. Most public-facing statements from big banks and trading firms can be taken with a heavy serving of salt. Many times they are either doing the opposite or telling their actual big whales to do the opposite. Bill Ackermann going on CNBC crying and causing people to panic sell stocks near the March 2020 lows comes to mind.
This is sort of an inverse situation, as those with industry experience are recognizing truth in that scene and someone outside the industry is scoffing at it.
What they said is a basic property of humans who value money (object of value) over morals, it's hardly limited to wall street. Whether it's depicted in a hollywood flick or medieval morality play. It's as old as humanity
> Recently this was Jamie Dimon lambasting Bitcoin all the while a cryptocurrency trading desk was being set up at Chase.
Did he change his position, though. Having a negative opinion of something is one thing; and profiting from selling shovels for the gold rush is another thing. The trading desk is not a long position.
In the case of bitcoin, it probably is. Legitimising bitcoin as an investment for institutionals pushes the price higher, and also increases trading volumes and thereby trading profits. In contrast with stocks, where a sell off generally brings volatility and good news to trading desks.
Just because adds some legitimacy and pushes bitcoin prices higher doesn't have to mean that JPM (let alone Dimon himself) has a long position nor a longterm positive belief in bitcoin. Maybe they do! But maybe they just want to make some money selling shovels.
Generally investors want to convince other investors of the truth (as they see it) once they've already made the bet.
The exception to that rule is if you have trouble getting OUT of an illiquid position (as in the example you quote) - then you don't want to panic other investors before you've successfully taken the other side.
Big fund holdings (without knowing their full strategy) are insightful, but only in the sense that you can see how many big funds are holding a particular stock.
Looking just at holdings of any one fund can be pointless since you never know how these holding are part of some bigger strategy especially when you don't know what other derivatives they're holding like options / futures and other non publicly traded products. Any particular holding might also be part of a bigger ploy. It can be part of a hedge / bet / short / or acquisition strategy. Any single holding can also be part of multiple portfolios within one fund each with their own diverse investment goals.
I think this is quite normal for larger corporations. At any given time they operate on multiple layers and they may not even be compatible with each other: there's the public image of the company, revenue targets, political pirouette,or internal battles between departments. Even in a small company I had enough situations where I have to say one thing but do the opposite.
It's critical to explaining that investment banks can be wrong, stupid, or both for very long periods of time, and that can make the whole world worse off.
Considering he said in 2017 [0] that he would fire anyone trading Bitcoin for being "stupid", yes, the GP's astonishment about Jamie Dimon is well placed.
Do you understand the difference between brokering trades for clients, and what you allow employees to trade using the banks capital?
There are all sorts of arbitrage and correlation trades to be made in bonds, stocks and similar securities (mortgages) because they all have intrinsic values or maturity dates, etc. To protect the banks capital it’s important to restrict the types of trades allowed, and to disallow pure speculation.
Jamie in that article describes cryptocurrencies as pure speculation because they have no intrinsic value, which is why he said he’d never allow employees to trade them.
But one thing I believe about Jamie Dimon is that he has a sharp and flexible mind. If the newer innovations in the DeFi markets around crypto convince him he’s wrong about cryptocurrencies, he will turn on a dime. While still putting in adequate safeguards for his banks capital.
I’ve been watching WSB with interest for a bit. This has not been what they’ve been about until January of this year. Before it was basically a place where the one eyed were leading the blind: someone would post their research on a particular play, like buying TSLA options for a particular date at a particular price because they think the phase of the moon and the mood of the CEO will line up to give the stock price a bump, and then everyone putting their 401k savings all into that play because it sounded plausible. Sometimes it would pay off, often it resulted in people losing lots of money. The “specialness” of the community came from when people posted “loss porn” aka screenshots of their accounts with huge losses, people would basically be really encouraging towards the poster. It was a sort of sign of respect that you risked it all and lost.
Actually buying stock and not just options is brand new to that group, and they have nearly doubled in size since January so it seems to be going through serious transitions. Now they are doing what they can to put the thumb on the scale to squeeze hedge funds out of their GME positions. The crux of it is whether enough shorts have been made to make this possible and the rumor de jour is that hedge funds misreport their positions. Whether this is true or not, well if you look at WSB posts they’ll say it’s obviously true. I am not convinced personally.
To be clear, WSB to me appears to be doing absolutely nothing illegal or wrong to manipulate the market. The only coordinated effort is to buy GME and AMC and not sell the stock unless it seriously goes up in value (current posts think it’ll go to $10k-100k). They suspect hedge funds are performing ladder attacks to lower the price, so every time the price dips the advice is to buy more. I don’t see how simply buying stock at market price is market manipulation except that it does have an effect on the volume of a particular stock.
WSB is an "extreme" example. I think it happens ALL the time in very common places (including HN).
Some types of market manipulation are truly a bad thing. I'm sure someone engaging in some of the more egregious cases could rationalize their behavior as "it's just guerilla marketing, everybody does that".
That's not wholly wrong -- the intent is really more important than the action in these cases. Were people buying GME because they legit thought the fundamentals of the company were good now or were they riding a bubble?
I'm already too far down the river though, because now we could argue about whether there is something fundamentally wrong about speculating on pricing alone.
From what I can tell, currently WSB is riding the bubble. Or rather their thesis is that a short squeeze will happen. In some conversations they try to justify that the company will actually turn itself around using the capital raised from selling the new generation of consoles, but quickly the conversation turns to the prospect of the squeeze. In other words, most people who are buying GME from WSB advice aren't there to hold the stock long term because they think it'll grow 2-5% per year because of the company doing well. They are in it to overnight have it grow by 10,000% or some such because "when the squeeze happens every single investor can name their price for the shares they own because hedge funds will need to buy every share available".
I am not a financial expert, but to me this seems extremely bogus. I am not certain where exactly the math is wrong, but it seems like a hedge fund can just buy the shares from the people they borrowed from, and those people will be willing to sell because the price had risen a bit. WSB on the other hand has no strategy beyond "a squeeze will happen". There is no agreed up on price at which to sell, which will lead to some people going right past, say, $10k/share price point holding out for $100k/share, and then the price falling back down to earth while they are left holding the bag, having bought in at $300/share or whatever.
> but it seems like a hedge fund can just buy the shares from the people they borrowed from
That's not how it works. A short position is basically the contract to deliver a stock regardless of its price at that point, so neither the short holder nor the party that gave them the stock in the first place actually hold that stock anymore.
Now I don't know this exactly and I am not an expert, but I wouldn't be surprised if short positions can exist absolutely independently from the existence of any actual stock. In principle, there can be agreements that only deal with the price of the stock. And something that can exist in principle probably also exists in the financial markets.
So whether or not an actual short squeeze will occur depends on the technicalities of the short positions.
The crux of the situation I don't understand is (a) where does the claim that hedge funds would have to buy all the available shares on the market comes from? and (b) what exactly happens if [a] is true, but I'm not selling my 1 share that they need to return to you the share they borrowed? In this case, do they pay a penalty, does they go out of business and you don't get your share back, or does the whole system collapse on itself?
a) (hopefully) comes from an analysis of standardized and published contracts ("short positions"). Presumably, a hedge fund has to publicly announce which such positions they hold. So in theory, you should be able to dog through the data and sum up all the positions. If people on wsb did this, if it even works that way, I don't know.
Regarding b) I presume some clauses of said contracts are going to be used. Probably there is a part about some additional payments. Alternatively, the short positions could be extended (for a hefty price, I assume) or in the worst case courts and lawyers will get involved. Interestingly, some of the lenders don't even own the stock they lend. Sometimes they manage other people's stock. When these owners notice that they cannot sell their stock during a short squeeze, then things will get interesting.
When you know CompanyA fires a bunch of people, the price goes up because of the perception that the company will have more capital to leverage. Knowing that an event has happened or expect the consequence of an event (CompanyA gets sued for patent violation) to have an effect on the company, changes the stock price through participation. GME is an interesting case where the event is perceived to be a complex situation with an outcome that is believed to be good for participants, increasing participation and driving the price up. I don't see how it's special, other than someone with a lot of money made a plan that motivated participants to believe in that plan, then play against it.
The difference is that the value of GME isn't in any way connected to its fundamentals here. It is only valuable because of the (supposed) overshorting. Basically, the way I understand it is that everyone is playing poker with tin poker chips. By themselves the poker chips are nearly worthless (tin is cheap), but because suddenly someone owes someone else a whole lot of these chips and there are real green dollars attached to that IOW, the tin chips suddenly are worth a lot. Once that debt is repaid, they become worth only what the tin is worth.
In other words, when the guy that started it all (Roaring Kitty/DFV) testified before congress that the only reason he was buying GME was because he fundamentally thought they were going to be a profitable corporation, that was bullshit. He talks a whole lot about short squeezing the stock elsewhere, so his denial that that's why he did it seems to me to be a lie. On a personal level, he seems shady as hell and the whole thing seems like a setup for others to be left holding the bag.
I think this has been going on longer, but the players are different now. It looks like it used to be a forum for smaller players and well capitalized individuals to pump small volume options positions, because you can make a few k off of retail investors following your bait in a tiny pocket of the market. Now it’s something that bigger investors noticed and are now participating in.
Not an expert at all but the way WSB explains it, it’s where hedge funds trade GME back and forth between each other, gradually lowering the price with each trade. It’s a coordinated effort toy manipulate the market and is illegal. According to WSB the SEC either doesn’t care or fines hedge funds so little for stuff like this that it’s worth it to them to do it anyways (as well as selling naked short and under reporting short interest). As I said, I have been watching what WSB is doing for entertainment value so all of this is suspect.
I’m 90% sure that this is just something WSB made up and isn’t actually evidence of manipulation. Seeing as you can look at the order books for almost all exchange traded stocks and see similar trading patterns. (Unless you believe that all stocks are being manipulated, which is a stretch.)
How do they sell a public stock back and forth between each other? How could one fund put shares up at a given price (especially one below the current bid price) and ensure their partner fund is matched as the buyer?
Wouldn’t a market maker need to collude as well?
Not saying it’s not true, I genuinely curious as to the mechanics.
But what about all the other bids and asks in the book? If you’re trying to drive the price down, there will be buy orders at higher prices your sell order will be matched with first.
The SEC is on the hook to investigate anything reported to them. If they aren't investigating, then it's not being reported. Additionally, there is an incentive to report shady behavior(such as wash sales to lower price, as you described): https://www.sec.gov/whistleblower
tldr; the SEC pays you a portion of any fine they levy against an entity.
Jamie Dimon has a reputation for brilliance. His Bitcoin comments were spot on, people criticizing them don’t understand the regulations banks live under.
BTC may be great, but it has no intrinsic value and trading it is pure speculation. That’s not appropriate use of bank capital. It’s probably not an appropriate use of most peoples capital.
I'm not pointing to his commentary on Bitcoin or whatever. I was just stating a fact, that Dimon isn't considered brilliant by any Mark by industry insiders in finance, just lucky during 08. He has been wrong on a lot of things, even though I actually agree with his crypto thesis.
I’m not sure what you mean, his bank was the strongest and most highly capitalized during 2008. He famously had to be brow beaten into accepting federal bailout money.
And brilliant doesn’t mean perfect. he’s had his share of mistakes, but his business record is one of the best.
a.) Jamie Dimon had nothing to do with JPMorgan's strong financial position in 2008. He just lucked into the fact that JPM was not exposed to MBSs as heavily as the others. JPM did get exposed mightily in the flash crash of 2012 though, and that was under his watch.
2.) Where do you get this info that he was "brow-beaten" into accepting Fed money? Many of the banks, including others such as Wells Fargo and Boa didn't need the money either. That was just Hank Paulson's way of compensating them for the really expensive acquisitions, which none of the banks wanted to do really (JPM got Chase, Wells Fargo got Wachovia, BoA got Merrill Lynch, Buffett got Goldman Sachs and Lehman was left to die).
3.) There are way more brilliant bankers and financiers than Dimon in the financial industry. Steven Schwarzman and Peter Peterson built a behemoth investment firm from the ground up. Sergio Ermotti just engineered one of the best turnarounds for a big bank at UBS. Blankfein and now Solomon effectively shifted GS from their S&T desks to give more power to the Strats Tech teams, effectively changing the culture at GS, a sector where JPM is effectively lagging in spite of being the largest bank with the biggest resources. And this is not even taking into account some of the more brilliant bankers abroad.
Compared to nitwists like Thain or Corbat or whoever, sure Jamie Dimon beats them. But there are way more brilliant bankers who actually built something. Jamie is the classic example of happened to be at the right place at the right time.
I honestly don't know how this hero-worship of Dimon came to be - maybe it's those memes they have running around.
1.) It's standard practice for COOs to take over when CEOs leave. Jamie Dimon's COO position was a result of the merger between Bank One and JPMorgan. Nothing unique.
2.) Different banks had different focus areas, and not everyone jumped into the MBS bandwagon. If you notice, all investment-banking oriented banks got rekted while all the consumer banks stayed afloat, bar some exceptional risky bets by the likes of Wachovia and Chase. All the survivors were consumer banks eating up investment banks.
3.) A profit that can be attributed from the consumer banking side.
4.) Most of the annualized return you mentioned comes from 2017 on, when the tax cuts came. Not the 15 years you mention. Before that, it was lagging at 50$ per share.
1) yes he was second in command got 4 years, and in total control for two more, how is that not give him huge influence on the banks capital structure?
2) So for 6 years he could have had his team chase bigger profits like Wachovia, Bear Stearns, et al by making risky bets on MBS but didn’t.
3) he’s not responsible for the consumer banking side?
4) Everyone in the S&P 500 all got the same tax cuts, yet he finished over 50% ahead of the average. And they are all up big since 2017, but he’s still way ahead.
1.) Do you think upper management in banks even care about what happens in individual teams? Pre-2008, upper management was significantly detached from the individual departments in every bank. Its only now that they are being regulated to take a much closer look. Second-in-command does not mean he's at the trenches dictating trading rules - thats up to individual product teams. And back then, JPMorgan wasn't even comparable to the Bear, ML, GS in S&T. JPMorgan's bread and butter was and continues to be Corporate Financing and Consumer Finance.
2.) Who knows, if 2008 hadn't happened, he might have joined the bandwagon too. Not to mention that JPMorgan's S&T was nothing compared to those players in 2008, so obviously their "risky bets" were minimal.
3.) You're going to attribute consumer side banking to him? Consumer banking is literally a safe-side cash cow for most banks, and you can literally see a number of institutions engaging in it continue to stay safe. He cannot be credited for that.
5.) There are n other companies that have grown even more than JPM. If you're going to use stock prices as a proxy for your argument (which is flawed in itself), GS is currently at 350, almost half of which was gained in the past month. Compared to GS, JPM does seem like a crapper here.
I don't know what's your motivation behind defending Dimon or something, but I'm just echoing the common sentiment in the industry, that he plays it too safe, his cautiousness (often attributed to his ignorance of newer tech) has made JPM a laggard before, and that he was lucky to be loyal dog at Bank One. There are far more brilliant bankers in the industry, for instance Kovacevich who actually changed the face of consumer finance (worse for the consumer eventually, but still changed the face of the industry) or the Blankfein-Solomon duo who brought tech from the backburner and made it one of the most elite teams in the world banking scene (cue Strats and Marcus). Dimon is just like Stumpf (pre-WF scandal) in that he was given one of the biggest banks to play with. I agree, it's not an easy task in itself, but it's certainly not a hard enough one to call him a "brilliant" banker for that.
Perhaps a few quants in the bank have higher IQ, but you don't make it to CEO of a large bank by being stupid. A carefully cultivated image of being "not the smartest bulb" can be a powerful advantage. Making dumb mistakes when it doesn't matter can make people underestimate you at more crucial moments.
I didn't mean the CEOs of large financial institutions are stupid( at least not most of them). To get to such positions by only being smart is never enough: there's a plethora of skills and personal traits that play their part.
Lol, this is some nth order thought going on here. Simon's dimness isn't proofed by some bullshit crafted image but by how laggardly JPMorgan is due to Dimon's innate cautiousness. Dimon is just lucky to be head of America's largest bank at the turn of '08. Next you'll tell me IBM is a highly innovative company, I reckon.
On this topic, I've seen news reports that the GME short squeeze will happen 'any day now' according to analysts. Now, that initially makes me believe they're attempting to encourage buying, which raises prices. (In prior weeks, financial media implored retail to get out; there has been a very apparent shift in sentiment). Assuming financial media is a mouthpiece for key market participants, I found the reports surprising. Unless it's a 3D chess move: since we all so publicly are aware their statements have negative correlation to their securities positions, perhaps the rules for interpreting public statements have changed.
If they always act as predictably as stated, there's too obvious of an arbitrage opportunity.
Don't overthink it. They just want to sell to retail at the highest price possible. Either they want to short GME or they want to unload their current positions.
> One thing I've learned about professional investors is that no matter what, at the end of the day they're talking their book.
That doesn't make them wrong. It's basically just a tautology. If you believe X is a great investment, and you aren't investing in it, that would be a far stranger situation.
He has tremendous respect for professional investors that understand risk, which is a small minority. He speaks very highly of Soros's investment record.
Only if it going to actually hurt to lose it... when did these guys every really get hurt... they hedge their bets exactly so they never put themselves in a position to literally loose their house(s).
Unfortunately, there's a catch. People can say things they don't believe, especially if there is a large amount of money to be made. If I'm holding a large amount of X, and can convince enough other people to buy X that the price rises (hopefully by a lot), I can sell my shares of X for a (large) profit. Pump and dump schemes have been common forever, popularized in the the 2000 movie Boiler Room as well as Wolf of Wall St.
Far stranger schemes exist, the most recently to hit popular culture is gamma squeeze. Just because a scheme is strange has little bearing on whether or not it'll end up working out with them having your money.
At the end of the day, the point is they're trying to sell their book, which is not the same as trying to sell investment X (although they may be very closely related).
> Unfortunately, there's a catch. People can say things they don't believe, especially if there is a large amount of money to be made. If I'm holding a large amount of X, and can convince enough other people to buy X that the price rises (hopefully by a lot), I can sell my shares of X for a (large) profit. Pump and dump schemes have been common forever, popularized in the the 2000 movie Boiler Room as well as Wolf of Wall St.
Or most recently Gamestop investors.
> At the end of the day, the point is they're trying to sell their book, which is not the same as trying to sell investment X (although they may be very closely related).
My point it is almost never going to be possible to distinguish between good investment advice and self-serving investment advice. Sure, there is some fungibility there for people with different investment needs, like pension funds vs young income earners. But! we should think about what we would think if the reverse was true. If investors were advocating for investments that they weren't personally invested in, then I would be far more skeptical than if they did.
Investors are subject to the sunk cost fallacy, whereby they hold a stock they currently believe is a bad investment, because to sell it is to admit it was a bad choice.
Sure, are they also subject to a lost profits fallacy, where if they believe an investment is good but don't invest in it, they would be entirely rational? I don't see it.
It doesn't make them wrong, but nothing can exclude the possibility that an investor believes that they have the ability to convince others via their media platform that X is a great investment without actually believing X is /otherwise/ a great investment. In which case the investment thesis could be purely "access to greater fools"...
Ok, but how should we treat someone's investment advice if they are advising for investments that they are not personally committed to? I find far more reasons for skepticism there. If you see an opportunity to make money for yourself or your clients, and aren't doing it, then... what are you doing?
We should be skeptical of all investment advice. For a specific fact to make us more skeptical of investment advice, we need to consider the alternative where that was not true. I don't see situations where large investors advising people to put money not where their mouth is gives someone more confidence in their advice.
> If you see an opportunity to make money for yourself or your clients, and aren't doing it, then... what are you doing?
Most other industries have a clear separation between the people who make and sell the product, and the people who publicly opine on the product.
Film journalists aren't film makers, car journalists aren't car makers, games journalists aren't game makers. And if the CEO of EA Games announces the next Madden game is their best ever, you'd take that with a pinch of salt.
Of course, conflict-of-interest-free journalism ain't exactly a growth industry these days, so this probably isn't the model of future stock tips.
Mostly agree, but that logic breaks down when investments are not just liquid entries on a spreadsheet.
One example: I recommended real estate rentals through the 2008-2015 range to several friends despite having none myself. Why? Because it was possible for them to generate significant leverage otherwise unavailable to them and they were in a much better position than me to work the second job of being a landlord.
The idea that Dalio published this in order to move markets in his favor is patently absurd if you know anything at all about the markets in question. The markets that would have to move here are the world's most liquid by a mile. Retail investors reading this blog post are not going to move them at all. And institutional managers are not getting their market takes from blogs like this.
The only purpose of this essay is PR, for hiring and attracting capital. If you want to do the cynical self-interest take, that's the one you should be going with.
The ideas and narratives put forth by Bridgewater/Dalio over the past 1-3 years are permeating markets and shaping investor sentiment more than you think. Both retail and institutional.
This could also be because he's right, and as more information comes out, the rest of the market is coming around to his line of thinking.
I made a number of bets on the tech industry early on in my career (2005-08): that the Web and Javascript would become increasingly more important, that Python would be a major language both for web development and for scientific computing, that Google and other new tech companies would continue growing until they were bigger than we could imagine, that startups would become a more respectable way of spending your career. I would happily crow about them to anyone that would listen, while also arranging my professional life to benefit from them. They happened. Did I cause the ascendancy of Javascript, or Python, or Google, or startups? Of course not. I called it, and then lots of other people, as events progressed, independently made the same call and jumped on the bandwagon.
So it is with Dalio (and Buffett, and other thought leaders in the financial industry). It's unlikely that their words are moving markets, particularly since their bets are often contrarian and unremarkable at the time they start publicly stating them, and financial markets often take years to catch up. Rather, they spot the trend, understand the implications, and then position themselves to benefit when everyone else spots the trend and understands the implications.
The definition of "right" within market dynamics isn't simple - prices will increase with the increased flow of capital regardless of whether the underlying ideas are sound. Changing the opinions of money managers can change the flow of capital. Just saying it is possible.
Your anecdote isn't equivalent here. You weren't broadcasting your idea to millions of people managing billions of dollars. If you did have that kind of power, it could have helped javascript/python/Google/startups get adopted faster.
The people making these investing decisions are actually experts in their fields. If you're managing the kind of money that moves these markets, you are a world recognized expert in what you do. These people are not materially being influenced by Ray Dalio's blog posts and books, and Dalio isn't trying to influence them to move markets, because he knows this. This idea is just not at all based in reality.
This sort of thing does actually happen in other domains, like short selling, and maybe you're reasoning by analogy with that activity. But that logic simply does not apply here. The amounts involved are too large, the liquidity moves too slowly, and the people involved have too much expertise. All the stuff Dalio is saying here is already known to them, and far more.
His articles and books are not innovative. They are not designed to educate experts. They are designed to popularize his ideas, among the general public.
Sorry I disagree - I am not saying they are purposefully influencing the flow of capital but their ideas are brought up for discussion by the so-called experts a lot more often because of who he is and how much they manage. Most managers are also not experts in making macro plays
I don't really know what to tell you here other than that that is incorrect. Not all asset managers are macro experts, you're right. But all asset managers that make market-relevant macro trades sure are.
The kinds of people you would have to influence to move these markets are phd macro economists working for central banks, and portfolio managers at places like Pimco. These kinds of people are not reading Dalio's books and thinking "oh man, never thought about these debt cycles before, better go short treasuries".
You will not struggle to find Bridgewater/Dalio talking about the following themes:
- The concept of "Debt cycles" (From Dalio's book "Principles for Navigating Big Debt Crises")
- Interpretation of monetary policy effects on markets
- Emerging markets (Mainly China) and the rise and fall of "reserve currencies"
He doesn't recommend particular companies. Are you suggesting that Ray Dalio thinks he's so powerful that he can make Asian equities in general do better, just because he says he likes them?
He scares readers of the potential for a rug pull of bonds and then tells readers to pull the rug. He might not be powerful but he clearly is trying to create a self fulfilling prophecy.
I once spoke to a commodities trader who (half-jokingly) explained his job as: predicting the market in the morning, then letting his clients bet and make this happen during the day. Repeat.
Good. Any idiot can say something online, and many do. Ray Dalio is putting his money where his mouth is, aka staking his opinion like numerai does with erasure. That makes it more credible, not less.
Unless you think he's actually trying to pump and dump the entirety of all the Asian stock markets? He doesn't have that kind of influence.
They are trying to explain it to the world, or to sub-consciously justify their position. BridgeWater has $100bn of AUM; which is not a small amount but peanuts comparing to these institutional sovereign funds. So while they can profit from the market by being smarter, they cannot move the market (neither can their readers).
I usually err towards the side of distrust due to obvious potential conflicts of interest when large institutional investors make public statements but from a lot of his talks and interviews, I've gotten the impression that Ray Dalio is less bad than most. It could be a con that I fell for, but he seems to push against bubbles to make sure the market is priced closer to actual valuation and he tries to educate retail investors some. This is a video[1] he put out about the economy. I think it is the best tldr summary out there and is incredible. It is short and amazing at conveying the principles of the economy. I think his lex fridman interview was good as well [2].
That’s what a “Pump and Dump” is: buy bad investment, talk it up, sell to bigger fools. (Not that this is what’s going on here; think GameStop perhaps.)
Sure, but I’ve no idea how that would apply to this strategy, there are no prescribed purchases, and what could they possibly go short on if nobody buys bonds, the government? Then they’d have bigger problems.
That would be much more fitting, but does that apply to bonds? My understanding was that the whole point of bonds is that they're more or less immune to market forces, and run on their own schedule?
Actually the bond market is larger than the stock market and the bond market can impact stock prices -- sometimes an unexpected spike in interest rates i.e. a bond market sell-off can drive the stock market lower (literally happening in real-time as we speak).
The price of bonds with a long duration varies with the prevailing interest rate (and inflation expectations). Even if the solvency of the issuer is beyond doubt.
Yes, this is honestly one of the most bizarre criticisms I can imagine of fund managers like Dalio. Their entire reason for existing is that they have viewpoints and express them in the market.
The book he has coming out this year The Changing World Order: Why Nations Succeed and Fail certainly seems to touch on some similar themes from the brief description I found online.
Yes, it seems he's betting against the Western financial growth and stability. I wonder if he thinks the days of the dollar's reserve currency status are numbered.
It is not that simple. Right now interest rates are extremely low, so what you said is likely to be the case. On the other hand, as the economy improves credit risk will decline, and lower credit risk can drive bond yields lower (this is exactly what happens in the high yield market), which is more or less what happened for three decades beginning in the 1980s.
It is way too early to get out of dollars. When the dollar inevitably spikes, these emerging market funds are all going to suffer. If you were to sit on cash and wait to buy emerging markets at a discount, you’d do better over 20 years than buying now.
This "theory" has been pretty obvious since the 80s. Not really sure who this is written for (probably his clients) but investment firms are always going to buy bonds regardless. It doesn't matter if equities will be higher in the long term, your performance is measured in the short term, and a firm is going to hedge against short-term equity swings.
I think the causation is different - investors believe something and both invest that way themselves and preach it. It's not normally to try to juice the prices of what they own with the exception of stuff like crypto and meme stocks.
I've recently entered the space and I find that I cannot talk my book, because some trades get better when other people follow you into them and some trades get a lot worse when that happens.
I am invested on margin. That is for every dollar I own, my broker lends me two, so I can buy stock for three.
It's in my interest to keep interest rates low. So I want other people to invest in bonds long, rather than buy on margin (ie sort-of invest in bonds short).
Of course, my influence is so small that it doesn't really make a difference.
But I can imagine there are much smaller markets, where your voice can make a difference.
We seem to have an entire generation of people who think "stonks can only go up". Similar views were expressed about houses/real estate in 2007. At 47, I'm probably substantially older than the average HN poster, but having lived through the 2001 dotcom implosion and the 2008 financial crisis has given me some perspective. I'm getting some really bad vibes about the sustainability of the the economy and asset markets. Seeing all of the "SWE, BSCS, 4 YOE, $800K TC, am I underpaid?" posts on Blind certainly doesn't help my feeling that a crash is coming.
I mean it isn't that people actually think "stocks only go up", it's that the donor class own stocks and that then means political landscape is designed to always bail them out.
I'm closer to your age and experienced those recessions but my take away isn't that stocks go down, it's that the government will pull every tool it has to keep the wealthy wealthy.
This. I don't doubt that there's going to be a crisis and a reckoning, but I changed my mind in 2020 on what that crisis will look like. The Fed & government's actions (both during the pandemic and, in retrospect, in 2018) show that they're not going to let a financial crisis happen. Instead, we're going to get a currency crisis, since whenever asset values go down the Fed prints to restore them.
The fact that a currency crisis and hyperinflation seems unthinkable to many people pours fuel on this. A number of people are pushing the idea that we can and should print as much money as we can to get back to full employment (and even beyond that - "living wage" is the bar now), and they're being taken seriously in government. This has somewhat predictable results - other governments have believed it throughout history, and (like with many things market-related) the point at which people believe it is the point at which it's no longer true.
My prediction is that thanks to the stimulus checks the USA will start growing much faster and leave the EU in the dust. Meanwhile the Euro zone is unable to engage even in the tiniest bit of fiscal stimulus.
Heaven forbid we demand an economic system built upon the notion that everyone who works should have the ability to live a decent life with secure food and housing.
It's telling that many see spending and regulating toward this goal as "printing money" unscrupulously, yet when similar orders of magnitude spends are casually allocated toward the Department of Defense on an annual basis not a word is uttered about their utility.
You can "demand" it all you want. If supply doesn't meet that demand, you get inflation.
Ultimately living conditions are set by real goods & services, not by the amount of money flowing into a sector. If more money flows in and the supply of real goods remains fixed, it just makes everything cost more. I'd agree that most military spending is a waste of money - why does an F-22 cost $334M? But directing that spending into housing, education, and health care without addressing the supply bottlenecks in those industries will just make housing, health care, and college cost more. We should be building more housing (and particularly, streamlining zoning/permitting requirements so that more developers can enter the market), breaking up big health insurers so that there's more competition in the market and you don't need to put up with Anthem's bullshit, and developing lower-cost alternatives to a 4-year college degree.
On a societal level "more money" is never the answer - "more goods and services" is. You fix shortages by fixing shortages, not by letting everybody pay more for the same musical chairs.
It is the answer when the shortage is an abrupt, acute disruption in the money supply. A massive number of people were made unemployed by the pandemic. We had lines at food pantries stretching miles long.
If you recall, at the beginning of the pandemic we we had farms ploughing under crops for lack of demand. Potatoes stacking up to high heavens, farmers offering them free to anyone who'd arrive with a bag to transport them.
The author actually mentions the traditional knobs of monetary policy don't impact the distribution of money at the bottom of the economy where it is needed. That's why the direct stimulus and now family UBI is so different, and should be looked at as imperfect but necessary for addressing the need at hand.
We didn't have an abrupt, acute disruption in the money supply, though - at least not a negative one. The quantity of money available went up by 40% in March 2020, and velocity went down correspondingly. We had an abrupt, acute disruption in the labor supply: people were unable to work. We also had large disruptions in trade and in demand.
This is not 2009, when there were plenty of people available to work, there was plenty of consumer demand, but there was no money to pay them because the banks gambled it all away. The primary feature of the COVID recession was a massive supply shock and demand shift. We had potatoes piling up not because there were too many potatoes, but because there were no truck drivers and warehouse workers needed to move them from farm to table. We also had record hunger and record food assistance during that time period.
The money supply at the bottom of the economy was disrupted. Mass unemployment disrupts the velocity of money at the bottom of the economy. The labor supply is there, the jobs that allow laborers to be paid for doing work are not. As these laborers are no longer able to buy goods from retailers that serve them, the demand evaporates. So you agree, there's not a disruption in the "supply of real goods" so we shouldn't see inflation as stimulus checks and family UBI relieve money supply issues exactly where that supply issue exists.
The quantity of money might have gone up for large companies, banks and those positioned correctly, but that's inaccessible to the majority of the American population. The majority of 2020 stimulus was delivered to private banks that prioritized their largest strictly for-profit customers. 2021 stimulus, in contrast, shifts the balance toward direct aid and city/state aid.
>We didn't have an abrupt, acute disruption in the money supply, though - at least not a negative one. The quantity of money available went up by 40% in March 2020, and velocity went down correspondingly.
I will abuse this opportunity to talk about why inflation is necessary and why the current way of merely increasing the money supply did not cause inflation.
Dollars are like flour. Just another commodity that can be bought. Instead of benchmarking assets against the dollar we start benchmarking the dollar against a theoretical benchmark currency that always retains its value perfectly and never changes. I will call this benchmark "Effort".
For simplicity we will assume that on day one the value of the dollar is exactly 1 effort until the value of the dollar changes (either through a reduction or increase in money supply).
If the dollar is deflationary and the supply goes down over time then it will become worth more than 1 Effort. As I said earlier the dollar is a commodity just like anything else. This means that if the supply of the dollar shrinks then there is a shortage of dollars, exactly the same way there could be a shortage of houses or a shortage of food. We must create more dollars until the dollar is worth around 1 Effort again.
The question is, where is that supposed shortage of dollars? Who exactly is desperate for liquid cash? Definitively not publicly traded companies and their owners. Holders of cryptocurrencies? Maybe but we are reaching deep into trickle down economics because of the small portion of retail traders. There is a case to be made for infrastructure investments and maybe unemployment benefits/stimulus checks but even then the amount of money that is truly needed isn't enough to explain why the quantity should be increased by 40%.
The only thing that is certain is that the wealth transfer effect is not considered undesirable by the Fed and that they would do it again, even if it doesn't solve any real problems.
House construction is such a lucrative industry in the US, too bad they banned it. Imagine banning farms that produce more than a set amount of wheat or corn per acre. Absolutely ridiculous.
It's a good counterpoint. Every developed country will end up as Japan eventually [1], and timing won't help you; where else would you put your investment assets to get exposure to similar risk adjusted returns (developing country returns expose you to greater risk)? Waiting for values to decline will be ineffective, as central banks will acquire assets to prop them up (Bank of Japan is the largest owner of the Nikkei [2]). Returns will decline, and the cost to obtain those declining returns will rapidly increase as trillions of fiat worth of capital chases it.
Over a long enough period, stonks only go up because that is what we've collectively agreed on, and government will backstop at all costs [2] while population and productivity extracted from that population declines over time [3].
I recommend "Shrinking-population Economics: Lessons From Japan" [3] on this topic.
Markets do seem to only go up, but the stocks on the market today are very different from 10, 20, 30+ years ago. I know that poorly performing stocks are eventually removed from indices and exchanges and they are replaced with new ones. Is it the case the market always going up in the long run is actually due to survivorship bias?
Say you confidently bought the roaring Eurostox 600 in March 2000.
You saw it coming back to its value in July 2007.
Then reach 1% gain in March 2015. And a 7% gain in Feb 2020.
Buying S&P, or the Apple, Amazon and Tesla ones is another story.
Looking at the average can be misleading.
FYI that's just closer to periodically investing. Dollar Cost averaging is more along the lines of "I already have $100 in my account and will invest $10/month for 10 months."
According to Investopedia: "A perfect example of dollar cost averaging is its use in 401(k) plans...an employee can select a pre-determined amount of their salary..."
Exactly. Look at the stock market from 1970 to today. 2001 and 2008 are a blip on the radar.
What this is missing is the amount of time investors are investing in. Day traders don’t care about tomorrow, they care about the difference between 9 am and 4 pm. Options traders might care about the next few weeks. If you are investing for 20+ years in a retirement account, you don’t care about the bubble. It will self correct over a year and by the time you withdraw, stocks are significantly up.
Bonds make sense if you are investing for 1 month to say 3 years.
It certainly didn't go nowhere. Obviously, if someone bought and sold their entire portfolio on those (VERY cherry-picked - just look at the graph, lol) days, they would have made 0 dollars.
But look on either side of that blip and there is plenty of profit.
We still live in a generation where people think "real estate only goes up." I have so many people bragging about how they've nearly doubled the equity in their home around here in Nashville. 2007 didn't change anything, it was just a blip. People are still flipping houses and leveraging their existing homes to buy new ones. In the long run though, the saying hasn't really been proven false, asset prices tend to always increase.
Real estate is a bit different because the government actively restricts the supply of developable land and legally-buildable housing units on that land.
The crash will come once average suburbanites stop protesting everything denser than a half-acre single-family home and city councils realize that mixed-zoning is far more sustainable.
This is true in many areas (California), but not in others. There are ghost residential areas in many countries. In 2004 in Spain 675.000 house starts - more than UK, Germany and France combined (45 millions citizens in Spain vs 80+65+65).
There were not unsurmountable government restrictions (obviously). There was no real demand for it. The housing demand was largely speculative, people investing in houses because "prices never go down". Often, they didn't even get rented - why bother, if the valuation of your "investment" grows faster than what you can get from rent?
In markets like these, huge increases in supply don't drive the prices down. Hoarding, speculation and housing flipping absorb everything that gets built. We still have insanely high housing prices today.
>The crash will come once average suburbanites stop protesting everything denser than a half-acre single-family home and city councils realize that mixed-zoning is far more sustainable.
So conversely, the crash will never come as long as average suburbanites continue to protest everything denser than a half-acre single-family home? Because I wouldn't bet on human nature changing any time soon.
I think geography also restricts the supply of developable land. Real estate is a finite commodity, while the human population doubles every 33 years. Even if you build up and with a higher density, there is a fixed limit to habitable space on earth. With a fixed supply and increasing demand, you will see increasing prices over time.
In a world where WeWork can be valued at 47B USD by professional capitalists, there's something to be said for acknowledging that the stock market and stock valuations can be untethered to reality. I think the sentiment you mentioned is a combination of that and a bit of a humorous/nihilistic attitude towards the same.
Valuations simply don't matter right now, Tesla is bigger than every car company combined and makes less than virtually all of them. I don't get it, but that's how it is. There is no end in sight, if there were a moment to burst any bubble it would have been last March...and it didn't.
That’s because it’s about future earning potential for “growth stocks”, not current reality. The other car makers have reached a kind of equilibrium, while Tesla keeps putting out new products in a class they essentially invented.
That said, I also don’t own Tesla because I think it’s crazy overvalued.
That's why F/PE exists, even on that basis the current market doesn't make sense and valuation doesn't matter. Frankly, I think when/if SpaceX goes public, Tesla will start going down and people will plow into SpaceX (which IMO has more of a strong future and also what people investing in Tesla now are kind of thinking they have a part of)
The way I view it is this. Given inflationary currency, if the overall world market is actually going downwards for a prolonged period of time, say a few decades, the events having lead to this are of such magnitude that the return of my investments is very likely the least of my concerns.
Not that you are necessarily wrong, but I am not sure your examples really show that. The Dow Jones is at an all time high, even adjusting for inflation, and not by a little. Yes, there are dips, but over the long term it seems to hold. As far as I can tell, the following holds true, ∀ t ∈ [1930, now], V(t) > V(t - 30) where V is the inflation-adjusted value of Dow Jones that year.
Certainly, but as Keynes said, "in the long term we're all dead". Less dramatically, average annual returns over long periods of time depend dramatically on when you start and stop the calculation. At some point, people want to retire and live off their savings and "wait another 10 years and you'll recover your principal loss" isn't a comforting message.
That's why one keeps 10 years of cash (or equivalent) as a cache to weather those downturns. I'd recommend 6 years, but something that you could draw from while markets recover. It seems as if the cadence of market downturns and recoveries is increasing.
You could likely write the list, billionaire or not, on a Post-It(tm). I mean maybe billionaires keep 10 years of billionaire lifestyle in cold hard, but that would seem to be a poor use of such a huge chunk of cash.
I have 10 years in cash/short term bonds, and 40 years of expenses in stocks. It’s basically roughly a 80/20 portfolio, nothing unheard of, especially for retirees (though I’m still working).
I have 10 years in cash/short term bonds, and 40 years of expenses in stocks. It’s basically roughly a 80/20 portfolio, nothing unheard of, especially for retirees (though I’m still working).
I have 10 years in cash/short term bonds, and 40 years of expenses in stocks. It’s basically roughly a 80/20 portfolio, nothing unheard of, especially for retirees (though I’m still working).
Is that notation really easier to parse than "Since 1930, the Dow Jones has always held greater inflation-adjusted value than it did 30 years ago"? Seems like obscurantism.
Even older and studied investment a bit. I'd say most people don't think "stonks can only go up" but do think the markets are a random walk with an expected return of 7% or so pretty much regardless of when you buy. But that's not true - markets swing between expensive (say 25 PE) and cheap (say 7 PE) and they mean revert. As a result if you buy expensive your expected 10 year return is not much (say 0%) and if you buy cheap it's a lot (say 12%). Jeremy Grantham / GMO are good on that stuff.
You were like 25 during the dotcom crash and 35 during the housing crash. It’s possible these events were timed in a way that inflicted maximum psychological damage for you. I know at 25 I had just started my first “good” job and my first child was born at 35.
The 401k concept has created a demand/supply imbalance and will continue to do so until as many people start cashing out as putting in. Massive government spending and, low interest rates, and other incentives have also dumped a lot of money in the market. Once these demand-increasing trends end, it will be all over. I'm amazed at how long the fiction has been sustained.
Since the beginning of 401ks, the yearly amount being locked away exceeded the amount being cashed out. Thanks to baby boomers retiring, a couple of years ago that reversed, and will stay reversed for the rest of our lives.
The first condition creates a natural headwind to increase stock values. The current condition will reverse that.
I'm definitely far younger than you; however, I agree. The problem is that there's no timing it. So positioning yourself such that you leverage other factors to make money in a market (e.g. delta-neutral positions that are long/short time/volatility) are all you can do if you want to play the game without having high directional risk.
So, I actually have an MS in Quant Finance despite having worked in tech my whole career. There's an old saying, "during a time of crisis all correlations go to 1". People found this out the hard way in 2008. There are all sorts of risks that you can't hedge for or that negate hedges you have in place for other risks, counterparty risk being one of the better known ones.
This hit home for me during the mini-crash a year ago. I was convinced assets like bitcoin or gold or bonds would hold value when the stock market tanked but instead saw everything fall at the same time.
I understand the concept of undiversifiable risk, but seeing it play out in practice was eye opening.
This is good to know. I think most of the modelling I looked at in the past used medium duration bonds as a proxy for the bond market as a whole.
I wonder what TIPS did during the same timeframe actually.
EDIT: I looked at VGLT and the mean annual return is extremely low, roughly 0.75%. I like the seemingly negative correlation with equities but I'll need to do some modelling to see if it's worth the massive hit in average expected return.
The best estimated guess for a bond ETF’s returns going forward are it’s SEC yield, not past returns. This is because efficient market hypothesis postulates that the aggregate of bond buyers and sellers has reached equilibrium at its current interest rate. So it’s our best guess at the average of interest rate increases and decreases and their likelihood of happening. Given that, we assume the return going forward is what it’s currently yielding, and in VGLT’s case, it’s 2.15%. When cash is yielding 0.5% max, these can be a useful way of further protecting against equity downturns (assuming VGLT increases in downturns, negatively correlated to equities, true the past 30 years, mixed truth over 70 years), while still providing much better yield than cash.
Found this out last year after waiting patiently since 2008. Volatility ruined the prospect of large quick gains. I now have no specific strategy to trade the next crash except buy and hold the fundamentally sound stocks (same strategy as normal investing heh)
I don’t buy the “you can’t time it” argument. For short time periods yes, but we are at monumental levels of overextended. Longer trades like these people do time.
> Similar views were expressed about houses/real estate in 2007.
Don't they always go up on average though? Even the much hyped 'housing crash' of 2008 only last for all of 3 yrs till 2011 after which they went zooming past the previous highs.
([3] is inflation-adjusted. For [2] see the second chart for inflation-adjusted prices. [1] is not inflation-adjusted but there wasn’t much inflation in Amsterdam back then.)
On average they always go up. However, with their upswing comes the occasional big downswings.
This is why having a good asset mix is important. You shouldn't have no stocks, because they have really good returns on average. But on the flip side, having only stocks is somewhat risky because it's impossible to tell if you are buying on the topside or bottom side of a bubble.
It's not too far off to say that, in the long term, their real value does not go up, they just track inflation. Of course in recent years we live in Weird Times financially.
All markets stop eventually. There's no natural law saying they need to go up forever.
Maybe you think they should keep going up, for whatever reason, and you might be right. But that's different than the fact that they increased on average in the past.
That was with a large injection of money though. Maybe they will do the same thing next time, maybe not. Maybe it will have the same effect, maybe not. No one really knows.
Your point is anecdotal. I actually ran the analysis and found that if you are long term investor - stocks beat bonds hands down. See it here: https://www.investingrus.com/blog/safest-bet/
"Even if you had to sell your stocks at the bottom of the Great Depression, but held them for more than 20 years before that, you would not suffer a loss in value of your portfolio"
With Quantitative Easing to numb the pain of a downturn stocks, real estate, and other assets can literally only go up. The Fed will directly purchase other asset classes to ensure that this remains true.
Now every stock market jitter leads to the Fed announcing an asset purchase program.
The thing is, in general stocks do go up. If you are young, your money should be in stocks, letting the risk average out over time. However, unless you really enjoy investing for its own sake, your time is better spent elsewhere while some sort of index or autotrading fund manages it for you. As time goes on you should switch more and more over into lower and lower risk investments.
The roaring 20's are typically left out of evaluations because it was ten years of boom to bust cycles. look it up, it'll look familiar. The market can remain irrational and that was before all the stimulus and QE and now what ever interest rate shenanigans we're about to model off of Japan.
Guessing: Bachelor of Science (degree) in Computer Science, 4 years of experience...
The other 2, no idea.
As a counterpoint, I have a BSCS, and closer to 35 YOE, and I have never, nor will ever in my lifetime see $800K/year. To date, not even a quarter that.
Download the Blind app and read some of the posts, you'll get a kick out of it. I'm honestly not sure what to make of all the 25 year olds claiming >$500K TC. Near as I can tell 1) it's largely a FAANG/SV echo chamber 2) 80% of the TC claimed consists of an initial grant of RSUs divided over a 4 year vesting period with an assumption that "refreshers" are coming and 3) people include price appreciation in unvested stock as part of the TC. Either that or I'm seriously underpaid with 25 YOE despite being well within the top decile of US income earners.
> I'm honestly not sure what to make of all the 25 year olds claiming >$500K TC
I have browsed the app and don't recall many 25 year olds claiming >$500K TC (except those who were part of particularly lucky IPOs). 30+ year olds, definitely.
Not mutually exclusive. Inflation could tick up to 5-6% per annum, forcing the Fed to get back to positive real rates, and in the process bring about an economic crash. I actually think that's the most likely sequence of events.
I too have lived through many crashes (87-08). In those days it seemed like we took our medicine no matter how bad it tasted and lived with the outcome. Today it seems different, there is no limit to what the Gov and the FED will do to keep the wheels on the wagon. Although it seems like a clown world economy, it is nothing compared to what is happening in Canada/Toronto. I just got off the phone with family in Toronto and they were telling me their house is going up $3000 - $4000 a week in value (on the low end). They bought it in 2005 for $440k and now can expect at least 2.2 -2.5 million without any improvements. What I find interesting is the experts talk like this is all normal and the market is fine. What do I know.....
Trying to speculate on the commercial bond market is exceedingly difficult and risky. Even the experts often take a beating. But using certain sectors of the bond market as a savings and retirement mechanism can be quite effective. Consider US tax-free municipal bonds (munies). They are safe, with defaults at a miniscule percentage of corporate bonds. And many are backed with third party insurance against defaults. Their returns are multiples of US Treasuries, CDs, money markets and savings accounts. And all distributions are tax exempt with the exception of any capital gains. Not very exciting. Sort of like watching grass grow. But it grows and grows. My own investments in this area are with: https://investor.vanguard.com/mutual-funds/profile/overview/...
edit: And by investing in munies you're also investing in US infrastructure. Munies fund all that stuff. Bridges, fire stations, schools, roads, water treatment plants, ports, electrical grids, etc, etc, etc. Might even make you feel like a good citizen...
Keep in mind there's a hidden gotcha with bond funds like vwalx in that the price of bonds changes over time roughly correlated with expected inflation. If you've been paying attention to vwalx and other bonds over the last month, you'll have seen the price go down significantly as treasury yields have gone up. So there's a risk that while your %yield on invested capital remains the same, the value of your invested capital itself can still drop since you don't own the bonds themselves and aren't holding them to maturity.
That is perhaps only relevant if you plan on selling them. I have no such plans. For me they are an ever accruing "money hose" I can turn off or on as needed...
I don't know. Have we averaged greater than 3.5 to 4.0 percent inflation recently? Those are the current returns from my munies, not counting the tax exemption...
You are likely confusing yield with coupon. The current yield of munis are below inflation. However their coupon rates are determined at time of issue so bonds issued a while ago tend to have coupon rates above inflation. What this means is one can sell these bonds now significantly above face value (and possibly incur capital gain tax). What it also means is that new investors in today's bonds will get below inflation return. This last point is what matters and is what people mean when they say that bonds have negative real yield.
Right. It’s a surprisingly common fallacy that holding to maturity somehow makes one whole despite rising inflation.
One way to expose the fallacy is perhaps by the thought experiment of selling on the secondary market a day or a week before maturity. Prices of any highly liquid bond will have converged toward redemption value, differing by no more than some small epsilon.
Not certain. Many if not most munies are supported by third party insurance, such as Lloyds of London in case of default. And all are supported by the power to tax. COVID is a temporary disruption that will hopefully soon pass. We'll see...
And AIG insured many mortgages. Remember 2008? Insurance is good for small-scale disasters, not large-scale ones like 2008 Mortgage bubble or COVID19.
--------
For most city level governments, things like Theater, Restaurants, Sport-events, Conferences, Gambling, Malls, Tourism, Hotels, Gasoline Tax (aka Driving), serve as a major leg of their tax revenue.
All of which has been severely restrained by current events.
Are you talking about the recent $1.9T stimulus package? Because there are strings attached to it. Republicans are angry because they aren't allowed to use the money to finance tax cuts. Democrats are angry because they aren't allowed to use the money to pay pension contributions.
Fair enough — I’d wager large city bankruptcies remain quite possible under the next GOP Administration. The most liberal Republican POTUS of my own lifetime said “No” to NYC:
McConnell is on the record saying he doesn't think the government should be bailing out blue states for what he has deemed profligate spending, so no need to look back to 1975.
> “I said yesterday we’re going to push the pause button here, because I think this whole business of additional assistance for state and local governments needs to be thoroughly evaluated. You raised yourself the important issue of what states have done, many of them have done to themselves with their pension programs. There’s not going to be any desire on the Republican side to bail out state pensions by borrowing money from future generations.”
> But using certain sectors of the bond market as a savings and retirement mechanism can be quite effective.
> returns are multiples of US Treasuries, CDs, money markets
Multiples of tiny numbers are still tiny. What role should a muni bond yielding 2% and maturing in twenty five years play in my retirement portfolio? That might not even beat inflation.
Probably none. That's why my link is to a high yield municipal bond fund with low fees. I roll over my monthly distributions and buy more shares. I've never sold or traded a single share. I took Warren Buffett's advice to heart:
"Wall Street makes its money on activity. You make your money on inactivity."
If you look at the price (not total return) history of your selected fund it has significant growth, about 20%, over the last ten years. Bond prices increase when the risk free rate (i.e. treasuries) decreases.
Over the last forty years treasury rates have been more or less steadily decreasing. The ten year treasury was paying over 15% in 1981 and now it’s paying a little over 1.5%.
What this means is that bond investors over that 40 year period have gotten juiced returns—-they got whatever the bonds were yielding plus price appreciation from falling interest rates.
This dynamic was in place for the adult lives of everyone under the age of 60 today. Our intuitions, rules of thumb, and understandings of how bonds contribute to a portfolio we’re all developed in the shadow of this phenomenon.
But now interest rates have nowhere left to fall. The zero bound forces an end to this dynamic.+ From now on not only will bond returns not be juiced they could well be reduced by the opposite effect. From 80 to 40 years ago interest rates more or less steadily increased over that period, causing bond prices to constantly be falling.
+ Negative nominal rates could extend it a few more years but the cash cost of carry is a hard bottom.
"Juiced returns" is a consequence of some investment strategies, but not all. For example, if you aimed to hold a constant-maturity bond portfolio then that involves a degree of enforced trading - you need to sell shorter maturities and buy longer ones as time passes so that you don't end up with a year less maturity for each year the passes (or worse if defaults or other events lead to early calls or early payments without make-whole compensation). Likely you'd have got better than expected returns doing this (but then it was always a bet on falling rates).
But if you'd just bought a portfolio of bonds to give you a fixed bucket of maturities (which is what by far the larger part of the market has usually tended to do) and only reinvested cashflows as you received them from the issuers, you'd have likely underperformed your initial expectations because you faced reinvestment risk.
That lower return probably would have been compensated by inflation also falling for some of that time. But real yields have now been negative for quite a while, so to maintain returns you'd have been forced to accept more risk.
I’d guess that holding bonds until maturity in the form of a bond ladder was more common from 1980-2000, but since then bond funds have become more common.
I think large institutional investors buying credit (as opposed to treasuries - not sure what really happens there now) are still mostly following a buy and hold strategy. But yes, I'd agree that's likely the case for individuals (including through retirement accounts).
People like Ray Dalio keep saying this, and scores of others have been talking about how fiat currency will fail, but it won't. Globally, no one that matters wants it to fail, therefore it won't. People like Paul Tudor Jones have been saying that the USD will fail for decades and people should buy gold. Even Peter Schiff has been talking about gold and hyperinflation since before the Great Recssion.
All the bears have been completely wrong, except for short periods of time. And they will continue to be wrong. Again, no one that matters wants the USD and UST to fail. Bond vigilantes can't defeat the Fed.
Naive? People on the opposite side of the argument have been wrong consistently for decades. The last time they were right was the Great Depression, almost 100 years ago. I think policy makers like the Federal Reserve have learned a lot since then.
Precisely. And it's important to forget those actions aren't just about interest rates and issuing currency.
The US dollar will continue to be supreme so long as the United States controls the US Agency for International Development, the Office of Foreign Asset Control, and the US Marine Corps.
But it's not house prices that are important. It's housing affordability, which is better measured by monthly mortgage payments (and rents).
However, that was not what happened in and after 2008.
Availability of credit collapsed. So owning housing got cheaper for people who could still get credit, but renting did not become cheaper. Have a look at the backlog of https://www.idiosyncraticwhisk.com/ for more than you ever wanted to know about the topic. (Or splurge on the author's book.)
He's not saying it's going to fail, whatever that means. He's saying it's going to lose value. Not only can that happen, but historically it happens with 100% probability. We can only argue about how much and how quickly.
At some point the US will lose reserve currency status. It's happened to every reserve currency before the USD and will happen again with probability of 1. The question is only how soon.
1. Bond prices are inversely related to interest rates. Interest rates have been declining for 50 years. They are now near 0. They probably can't go much lower, so they can really only go up.
2. If they go up, bond prices go down.
3. Institutional asset managers with obligations (e.g. pensions, budgets) already cannot meet their obligations with the yield from bonds and the bonds are unlikely to appreciate in value.
4. Therefore, it makes no sense for institutional asset managers to be invested in bonds because thta will pretty much guarantee that they will be unable to meet their obligations.
Dalio takes a long view. His fund looks at the sort of vast structural changes that have regularly occurred over the past 500 years of financial history. It's not a great rebuttal to say he's wrong because the last few decades have been great.
When investing the same amount every month (dollar-cost averaging), the difference becomes even larger. Using your portfolios, but adding $250/month in addition to the initial investment of $10k, you end up with $128k with gold and $207k with SPY (total investment ~$85k): https://www.portfoliovisualizer.com/backtest-portfolio?s=y&t... (with QQQ, it'd be $380k)
Comparing one-off investments is very dependent on the start date, and dollar-cost averaging more accurately models what people can actually do and which returns one may be able to expect. Who has a large lump sum laying around to invest rather than investing a portion of one's income every month/quarter?
Yes that is a good point, and is something to think about when comparing investments. Everyone's investment goals are different so make sure you understand what your goals are when reading research!
Though looking at the low correlation between gold and the rest of the market, it looks like you did make an argument there for gold as part of a diversified portfolio.
This is not amazing, and false for almost any other 15-year period. Gold's value fluctuates a lot over any 20-year span, but the long-term trend is not really comparable to the S&P 500 with reinvested dividends. (At least, since it became legal to own in the US in 1974.)
Of course it’s amazing that a pile of rocks can outperform the world’s best companies as an investment vehicle.
2008 was a sea change in fiscal policy that unleashed worldwide money printing. It isn’t surprising that gold has done very well during this period. And I don’t see that trend changing anytime soon.
But in the long-term, I agree with you. Which is why precious metals are a small part of my portfolio.
> Of course it’s amazing that a pile of rocks can outperform the world’s best companies as an investment vehicle
I guess it depends on your definition of amazing.
If you assume -- and I'm not saying this is true -- that the value of "the world's best companies" trends at 8%/year with a +/-15% "variance", while the value of "a pile of rocks" trends at 0%/year with a +/-15% "variance", you would totally expect to see long periods where they yield comparable returns.
Personally, I don't find that particularly amazing, but to each their own!
If you bought gold in 2005, you would have peaked in 2011, and not recovered until mid-2020. If you have the nerve/patience to do that, you have a stronger stomach than I.
I am constantly reminded of Buffett's 2011 take:
> Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?
> Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion. Call this cube pile A.
> Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual production of gold command about $160 billion. Buyers – whether jewelry and industrial users, frightened individuals, or speculators – must continually absorb this additional supply to merely maintain an equilibrium at present prices.
> A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops – and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.
Of course, farmland might get confiscated from you. Or you might have to pay taxes on it, etc.
A small amount of gold might get lost or stolen and it's usually more annoying to sell than stocks. But otherwise, you can just keep it in a sock under your pillow and be reasonably sure it's still there in a few decades.
This is not even to mention the prospect of “constructive” land reform, e.g. squeezing landowners (or certain disfavored types of landowners) with policy and then increasing property or income taxes to the point where they have no choice but to sell at a loss.
> In what area of the world do you live in that these scenarios are actually keeping you up at night?
Canada is on that list. I live in Canada. This is not something anyone I know is losing sleep over.
They may be buying gold for other reasons, but it is not for the possibility of losing their land.
This HN thread is about Ray Dalio and bonds, and the sub-thread is about the S&P 500 versus gold returns, and gold returns in general. Bringing in farmland is quite the curve ball.
This analysis appears to have been done while only looking at prices. Since a very material portion of equity returns over time comes from dividends, if you don't count reinvested dividends over such a long period you are going to end up dramatically undercounting equity returns.
TL;DR; gold didn't beat the S&P 500 over the past 15 years.
The reason you own bonds - particularly government bonds - is because they are better than the alternative.
At the point somebody is bidding in a primary government bond auction, they are either a pension fund with a bank deposit, and/or the bank backing that deposit with central bank reserves.
Even with all the investment options available, somebody always has to end up in that position in aggregate. Asset prices rise across the board until this indifference level is reached.
Central Bank reserves are remunerated at a fraction of one percent at the moment. Bank deposits even less. Bank deposits also suffer from the risk that the bank will fail.
Therefore relative to the only options left, government bonds represent a good investment. Particularly if you are a pension fund under regulatory instructions to fix your income with certainty.
What's particularly interesting is that the bid for the bond will come from two places - the pension fund, and the bank itself - using essentially the same money. The sale to either is settled with precisely the same set of central bank reserves. If the bank wins the auction it will end up backing the bank deposit with the bond rather than reserves. If the pension fund wins the auction, the deposit and the bank reserves are deleted from the bank's books.
I think pension funds are the bag holders here. They require 6% yield or so to function, and real yields are still negative or near zero. Yet their investment mandates often dictate they need to have bonds or a mix of equities and bonds.
They require a 6% yield to function over the long term. However you can solve that by transfer from the young - which is what we are seeing.
Hence Compulsory Pension Contributions in certain jurisdictions. Which when you follow it through is just a privatised tax where some financial middlemen get to skim off the top.
Life insurers are the other big "forced" buyers of long bonds. Regulation tends to be stricter on them in terms of requiring a certain portfolio vs pension funds too.
The conclusion kind of scares me, especially coming from Dalio.
> so they could very well impose prohibitions against capital movements to other assets (e.g., gold, Bitcoin, etc.) and other locations. These tax changes could be more shocking than expected.
Who truly believes this is a likely scenario? A number of folks I know are already considering fleeing the US but if this was to pass, that number would skyrocket and I can't imagine a good outcome in the next few decades from capital flight in the US.
Far fewer people than imagined even flee to different states within the US because of higher taxes. The notion that everyone's going to go live in the Caribbean and eschew their social lives and their kids' fancy schools seems unlikely.
This was the part that caught my attention as well, it would be super interesting to see it play in real-time.
For one, how would they even put capital movements controls on crypto? For example, I just have to remember my 12 word seed and I can hop on a plane to another country and my crypto comes with me.
The other part is, wouldn't those capital controls be the last nail in the coffin of "we lost complete control of the situation"?
If the USG (or Europe, or China) still have a strong military, or a lot of influence over the financial sector at that point, you may have a tough time finding a bank to convert your crypto into Fiat. At that point, you’d have to find a country that accepts Bitcoin directly as a payment method or whose financial system can shrug off regulations.
That might be harder to find than you think, or might require a significant haircut on the conversion.
If cryptocurrency exchanges don't exist in good public standing, the price of bitcoin will collapse. This is a risk that does not exist with precious metals.
The real problem with bitcoin is you cannot physically transfer it. I can sell you a USB drive with a wallet on it, but you shouldn't buy it because you can't know if I have a copy of that USB drive in my other pocket. The only way to transfer bitcoin for-real is to submit it to the network and to make sure it's confirmed.
My take is that the censorship-resistant qualities of bitcoin are highly overstated.
The problem is that if you can’t easily convert it, the OTC price is going to plummet.
Since the ledger is public, if the government knows which wallet is linked to you (easy if you’ve done KYC in order to use an exchange), they could also sanction any wallets that transact with your wallet, severely limiting who will be willing to do P2P/otc with you
The minute they try to impose those controls on crypto is the ultimate Streisand Effect moment that will confirm to everyone that they definitely need this asset. I suspect this is why they have avoided it so far.
> The minute they try to impose those controls on crypto is the ultimate Streisand Effect moment that will confirm to everyone that they definitely need this asset.
I'm not convinced. Your scenario relies on people having some deep conviction about the value and usefulness of cryptocurrencies. I think that this is true only for a very small vocal minority of users/buyers. Most people just want to make easy money with it - that's why I think heavy regulation/bans will simply crash the prices instead of leading to a Streisand effect.
I think they avoided it because they were asleep at the wheel when it started getting traction and now limiting it would make a lot of people angry. It's a mess of epic proportions. It's probably the best strategy for regulators to wait for some major collapse (like Tether being exposed as a scam) and use that to introduce counter measures. Meanwhile the negative sum arm race continues sucking more people in.
The Indian government is going to ban it entirely. I'm unconvinced that many Indian investors will want to hold on to an asset which can land them in jail.
in the world where you have heavy capital control, enough to warrant using crypto to escape, the fiat will be worthless to you (hence the capital control!), and thus, others will be willing to accept your crypto instead of fiat!
So, assuming the USG is serious about this, you're probably looking at China, Iran, Russia, Venezuela, or North Korea. Color me skeptical that the captains of industry are headed there.
Depends. Corpors might want to offload, but then again perhaps not, since it would still be valuable in countries that chose to not impose restrictions. Then there's the ability to avoid middle men (both authorities and bankers) while making trades and purchases abroad. For everyone else, it matters little, unless they really need to get on a plane, and fast. But then whatever assets you have to trade for that seat matters less anyway.
The fiat on/off-ramps are the choke points of the whole crypto world. Yes, you could use your BTC to buy Teslas and drugs, but that's it. You can't pay at the supermarket or on the web directly, it all goes through payment providers who are regulated.
Someone needs to cash it out in the end to buy raw materials or bulk purchase food. That's the idea of hyper-Bitcoinization that this step would go away, but I don't see any indication for that.
Regarding localbitcoins or other OTC in person deals I certainly wouldn't want to meet with a stranger and carry $1000 with me in cash to buy his Bitcoins. And localbitcoins was forced to implement KYC, so if Bitcoin gets outlawed or heavily taxed, the state will have a look into their customers.
Where would you go? The EU and Japan are already in a worse position than the US and if the US decides to commit to capital controls, they would probably follow. That only leaves China which already has capital controls.
>A lot of crypto-expats are going to carribean island nations.
Are they going to buy Lamborghinis in pesos? More seriously, yes, some people are content with living like a rich native in the global south but for anyone else who plans to participate in the global economy (and I assume they do, because capital controls would likely only affect high net worth individuals), they would need to convert to EUR/JPY/CNY/USD.
Yes but it happened then because the dollar was backed by gold, and the Fed needed more gold to back the new dollars they wanted to make, to bail out the economy. Now they can print as many dollars as they like.
Likewise. Hearing Michael Burry recently talk about hyperinflation as a possibility, albeit a small one, is also frightening.
I don't know if gold is under threat, but there's certainly historical precedent for it, as mentioned in the article.
For Bitcoin, India and China have both been taking small steps toward limiting or banning it. Western media and influential figures (Bill Gates) have been recently talking about how wasteful it is.
No matter your arguments on either topic, the fact remains that governments can limit their own citizenry, by threat of force, from transacting with any instrument.
Look at the rationale section. The Fed needed more gold so it could print more dollars. Since today's dollar isn't backed by gold or crypto, the same reasoning wouldn't apply.
In fact, if crypto were used more as money in the real economy, banning it would have the reverse effect, shrinking the amount of money in the economy.
I don't think they need to go as far as prohibit crypto, all they have to do is increase taxes for crypto since we already have to pay taxes on capital gains for crypto. If this tax rate increases, people will be less likely to use crypto.
I actually believe something far scarier. I think we're going to see a worldwide disintegration of governments and then sort of a feudal anarchy - basically the Syrian Civil War, but spread across the globe. People will stop taking the government seriously and just go do what they want, with a lot of local bullies and warlords springing up to take their place.
The financial picture Dalio paints is the first stage of this, but it merges with a lot of other trends to make something horrible. There's the ongoing migration crisis; conditions are becoming inhospitable in areas like Central America and the Middle East, which is driving migrants to developed nations like the U.S. and Europe and destabilizing those countries. There's the climate crisis, which is the root cause of the migration crisis. There's a trust crisis propagated by the Internet and Big Tech, where nobody knows what to believe anymore. There's a pending military technology shift where cheap autonomous weaponry fundamentally changes the power balance between large nation states and small insurgencies. And then there's a population that's just fed up, as evidenced by the Capitol Riots and lockdown protests (as well as plenty of Internet vitriol).
Unfortunately fleeing the U.S. won't do anything for this, because if the U.S. goes, the whole world will erupt in flames. Better to put down roots in a community whose values you agree with, ideally one in a well-defensible location with plenty of natural resources.
While interesting, I have a feeling that your prediction may be subject to recency and availability bias. If I picture myself looking from within the US, your scenario sure resonates. But looking from outside, I'm not convinced it does. From the other side of the planet, it looks like the US is having a moment but the other governments aren't sitting idle and letting entropy increase.
I'm also not sure that 50 years from now, the Capital Riot will be recorded as being a majorly significant event in US history. It'll probably be mentioned in history books but I'm doubtful it'll be referred to as a pivot point in US history.
Migration crisis: I feel there's been larger migration events in the past. Doubtful the climate crisis will actually be creating a massive scale migration crisis.
I do think climate change will change the dynamic in various areas.
I otherwise also agree on the paradigm shift in military technology.
In Bangladesh alone 150 million people are projected to be displaced by rising sea levels by 2050. Many South American countries are suffering from spiking rates of kidney failure as the climate warms, which is already a factor in the US border crisis as an increasing proportion of migrants suffer from kidney disease.
I think there will be displacement, but over many years/decades as opposed to a single large event. That's why I'm not strongly confident in a migration crisis. I don't say this with confidence, but it doesn't seem likely to be as bad as say, a World War forcing 150M refugees overnight.
I think there will be a few levels of displacement and migration waves from climate change.
Things like sea level rise, rising temperatures, and more frequent blizzards or cold snaps act over decades. That'll be a gradual shift in migration patterns, not a crisis.
But a lot of the second-order effects operate on much smaller timescales. Hurricanes can cause large dislocation on the timescale of a week: look at Rita & Katrina in 2005, which cut the population of New Orleans in half and gridlocked all the freeways out of Houston for days. Wildfires also can trigger large migrations within a matter of weeks. We've been lucky that most of the West Coast wildfires have been in relatively unpopulated areas, but if one were ever to jump highway 280 in the Bay Area or get into the Pasadena/Glendale/Burbank area by LA, we could have a mass evacuation crisis. Crop failures too: that's what's driving a lot of the Middle East migration. If it happened in the U.S. or China millions of people would starve.
There's also violence caused by resource constraints. We see that in Central America now, in the Middle East, and increasingly in the middle of U.S. cities.
I've been predicting something like this since about 2005, long before recent events. It just it felt like it was far off in the future, not something happening right now.
The other major factor is a demographic crisis: worldwide, we have a large bulge in the number of people who are just about hitting 30 in 2020. Historically, when a lot of people reach reproductive years and there aren't the resources needed to support all of them having families, violence and social instability tends to result. This has been predictable since all these kids were born in the 90s, but obviously I'd hoped it'd go differently and technology would find some way to alleviate resource limits. Now we're here and seeing all the discontent from peoples' lives not turning out quite how they envisioned as kids.
Ah, so you read what you want to hear into current events and seek confirmation bias. Your whole world-view comes off as a bit prepper / Great Replacement-crank.
It's the nature of negative black swan events that there's always a reason to believe they won't happen right up until they do. If you hold these beliefs over a long-period of time, based on long-term societal trends, "your whole world-view comes off as a bit prepper / Great Replacement-crank". If recent events bear you out, it's Availability / Recency bias. If the events actually come true, then we won't be discussing it on an Internet message board, we'll either be dead or spending our effort trying to survive, in a perverse form of Survivorship Bias.
Nevertheless, we know from history that these events do occur, and they occur much more frequently than those of us alive now believe (again a form of survivorship bias - folks that don't live in a time of peace tend not to survive). The 250-year stability of the United States - and the 75-year Pax Americana after WW2 - is a historical anomaly. The article gives a bunch of reasons why the 2020s will be different, financially, from the 1980-2020 period, and I gave a bunch of reasons why it'll be different sociopolitically. You can choose to believe them or not, but I (and Dalio) at least explained the dynamics that lead me to believe them.
> There's a pending military technology shift where cheap autonomous weaponry fundamentally changes the power balance between large nation states and small insurgencies.
It would seem to me that this shift towards remote weapons would favor the military, not insurgents in the event of civil strife.
Autonomous/remote weapons let you take the human out of the weapon system, which lets you drastically shrink the weapon system. We haven't really seen the full effect of this yet, because we haven't expanded along the dimensions of freedom this allows: cost, quantity, expendability, scalability, and taking the human out of the kill loop. So far our remote weapons look basically like our piloted weapons, just with a computer and a data uplink in the driver's seat. But imagine that you make your remote weapons 1/100th the size, 1/100,000th the cost, and build 100,000x more of them. That fundamentally changes the nature of warfare. The goal is to overwhelm the enemy's decision-making and manufacturing capabilities as much as it is to outmaneuver them.
Shrinking the weapon system usually results in physics limitations on range and speed - a 20-ton plane can carry enough fuel to go 2000 miles, but a 1 kg drone might have enough charge to go 2 miles. This favors the defender and prevents the use of these weapons for power-projection. Drone swarms are great for close air support, field defense, and urban warfare, but you can't do precision strikes across a continent (but you can defend against precision strikes, as long as your drones are accurate enough to intercept a missile). That fundamentally changes the balance of power toward smaller political entities.
I wonder what is actual realistic minimum size and mass for effective drone in warfare. We are still using essentially projectile weapons, be it bullets or missiles. These have minimum effective mass not to forget delivery system. Even theoretical energy weapons have to get the power from somewhere...
> I think we're going to see a worldwide disintegration of governments and then sort of a feudal anarchy - basically the Syrian Civil War, but spread across the globe.
Your perspective on this seems to be a bit U.S.-centric. No developed country in the world botched its national response to Covid-19 as badly as the United States did. In several countries — like Australia and New Zealand — public trust in government has grown as the public benefited greatly from its government’s world class results in handling the Covid pandemic.
Granted, it does seem that most people these days consider their own government to be at the very least incompetent. But I don’t get the sense countries like Australia have anywhere near the same level of anti-government resentment to contend with. It seems to me a good deal of the blame for the dysfunction of modern America falls on American culture.
> There's the climate crisis, which is the root cause of the migration crisis.
I’d think quality of life factors and economic opportunity would be the primary drivers for migration from the global south to North America and Western Europe. Am I misreading your take on this? It’s a bit of a leap to pin it all onto climate change.
I know the US press has been busy telling you that your country handled this uniquely terribly compared to everyone else, and this idea has spread to the rest of the planet just like all your other politics. Meanwhile in the real world, the country everyone was pointing to as the big European success story that proved everyone else had fucked it up not so long ago - the Czech Republic - is actually the one with a worse Covid death rate than pretty much everywhere else on the planet, and the other countries in the region aren't doing too great either. (Also, all along the comparisions used misleading tricks like comparing the number of detected Covid cases when the US had much more widespread testing for it than Europe.)
I’m curious, since you seem to have thought a lot about this - any suggestions for defensible locations with plenty of natural resources? I’m guessing suburbia generally doesn’t meet that definition.
When I looked into it the top locations were in the Pacific Northwest (extending down to the Lost Coast in California) or Northern New England. Ample rainfall, surrounded by mountains, lots of timber, sea routes to reestablish trade or for fishing, and potentially farmable.
Some runners-up included the Bay Area & Coastal California (easily defensible & fertile, but has overpopulation, water issues and limited timber), the Great Salt Lake valley (ditto), and the Colorado & Wyoming foothills (pretty dry, but a great mining/oil shale area). The worst areas were in the Southwest (which already has a migrant crisis and is going to get totally screwed by global warming) and the Great Lakes area (overpopulated relative to its natural carrying capacity).
Suburbia could be a decent place, if the population density is low enough and it's surrounded by arable land and resources. Livermore, for example, wouldn't be a bad place. But the rows upon rows of tract houses (say San Jose or LA) would become a miserable place without the rest of society to support it, as would the inner cities. I think that the ideal density would be a small self-contained city of say 50-80K people: small enough to maintain social cohesion, but large enough to support some division of labor and have enough of a workforce to support & defend the region.
Not the Great Salt Lake valley - too many people for the available food supply. That's not going to go well.
My own answer is Delta/Montrose, Colorado. It has water, good farmland, nearby mountains (timber) and coal fields. You could even do some hydro power from the river. It's somewhat defensible - an attacker would have to cross a fair amount of inhospitable terrain to get there, unless they came from the south, and the San Juans would not be that difficult to defend.
The one issue would be oil - there's oilfields around Aztec, New Mexico, but that's kind of a long way in a collapsed society.
Thanks for the comprehensive reply! I hope you’re wrong, but I can’t say that I haven’t considered a lot of the same things, and I had similar thoughts about PNW and New England being relatively good options. Hard to really look at this kind of scenario and come to any conclusions with enough confidence to act on them, though - so many unknowns and fundamentally different rules.
People are just going to set your house on fire unless you have a 24-hour patrol. A bit of a fantasy to imagine you can just escape the total collapse of society.
Oh well in that case New England can't feed itself so you're still kind of fucked. Kind of hard to parse this out though since all of these regions have suburbs.
New England can feed itself minus the cities. That's what they did for hundreds of years - New England was almost entirely farmland until the 20th century. A lot of folks still have small-scale subsistence farms or vegetable gardens in Vermont, New Hampshire, even central/western Massachusetts.
And in this collapse scenario the cities -- incidentally where a lot of wealth and power tend to be concentrated -- simply consent to starve to death? Or are you defending against them too?
The cities are absolutely going to invade the surrounding countryside. Mobs and gangs of hungry people banding together to take what they can from weaker neighbors has been a feature of nearly every instance of state failure.
As a city-dweller, your strategy for surviving this is to join one. As a wealthy suburb dweller, you better hope you have a private security advantage where you can kill the whole mob before it kills you. As a rural dweller, your strategy is to be far enough away, high enough up, and insignificant enough that it's not worth going after you. Gas will be in short supply after a collapse; it's not worth driving 100 miles to take food from a farm that you don't know exists. Most of the towns and small cities in the regions I mentioned are easily that far away from the nearest city.
It's pretty likely that the dominant political organization after a national collapse would be city-states. However, that doesn't mean that it's best for an individual to be within them. We might see 75% depopulation within cities, but people in rural areas can go on about their normal business, if they don't get conquered entirely by the local city. It's a choice between living in privilege in the aftermath of the collapse but having a good chance of not making it there, vs. a higher chance of survival but you'll be a vassal state to the local city.
I'm not sure that the life of a subsistence farmer is necessarily one of privilege, especially if we're imagining there's no gas and presumably the recurrent drought issues in MA aren't getting better. Seems like you might be better off getting in the pod.
You might want to define unfree markets because American lives with regards to some key metrics seemed to improve more notably when it's markets were comparatively less free in the post ww2 era and china is also doing quite well and manage to get trough the 2008 financial crisis unscathed with it's application of Keynesian economics compared to US/EU.
The United States is the only major power with a strong ideological belief in unrestricted capital flows. The EU and China have both implemented capital controls in the modern era, sometimes repeatedly. (U.K. currently stands out, too.) All it takes is a populist “the rich are fleeing with their capital” trope to take hold on the far left and/or the right, and the centre to crumble, for such policy to become politically palatable. At that point, there really isn’t anyone else defending free market capitalism.
Put another way, do you really think you couldn’t get a lot of people in e.g. San Francisco to sign onto a mandate that requires the rich to register outgoing capital flows?
> The United States is the only major power with a strong ideological belief in unrestricted capital flows.
Doesn't seem that way for citizens considering we still have to pay US taxes when living abroad (there are some tax agreements but still), have to pay an exit tax if we want to renounce our citizenship, and the US requires foreign banks to report US citizens assets to the US government.
unrestricted capital flow is not the same as untaxed earnings.
I don't like it, but the US is free to decide to want to tax their citizens even if the income is earned outside the borders - and they have the capability to enforce it.
>Put another way, do you really think you couldn’t get a lot of people in e.g. San Francisco to sign onto a mandate that requires the rich to register outgoing capital flows?
Your example is poor; there are 10s of millions of people in California who have been trying to get healthcare reform passed for nearly a decade now and the trend so far has been Obamacare being slowly unwound. It's unclear if the far left/right is anything more than a boogeyman at this point considering the glacier pace of the Senate in the last 20 years. The media would have you believe the democrats are well on their way full blown communism, but the reality is the party self-sabotaged their own $15 minimum wage proposal and managed to be less generous than Trump on stimulus checks.
If the Federal Reserve decided to implement capital controls, I doubt it would happen democratically. It's more likely that you would wake up one day and all the major banks would have limits on how much gold you could purchase in a year for "liability reasons". I'm sure a Senator or two would scream, but the next week there would be the next culture war story with Ted Cruz complaining about MTV.
> there are 10s of millions of people in California who have been trying to get healthcare reform passed
I was responding to "who...believes this is a likely scenario?" The argument isn't "this will happen." Just that it shouldn't be beyond the pale of reasonable debate. (Like universal healthcare.)
> If the Federal Reserve decided to implement capital controls, I doubt it would happen democratically
Capital controls are populist. They shift power away from the wealthy to those at the political levers. The Fed would almost certainly not do this; the Treasury could under emergency powers. The potential for popular support would give them cover to do so.
>Capital controls are populist. They shift power away from the wealthy to those at the political levers.
No? Capital controls in western history is hardly populist. When I think of populist economic movements, the Bretton Woods System doesn't come to mind. And it's clear China's capital control serve to keep power in the hands of the autocracy; not the other way around.
If the value of the dollar was spiraling to zero it's the Fed, and their clients, that would have the most to lose.
> The United States is the only major power with a strong ideological belief in unrestricted capital flows.
This belief in ideological attachment to policy sounds so silly to me. It can change and it can change quite quickly in fact. It's like saying the US has a strong ideological belief in democracy that guides all it's geopolitical moves abroad.
Embrace and extinguish would be American way of imposing restrictions on capital movement. Make something so superior to Bitcoin (a la FedCoin), and have it be the unquestionably superior choice. Bitcoin has a huge usability, "did I enter the right public address" problem. Point is, there's a lot of ways regulators could manufacture the behavior. A great deal of market behavior is already manufactured through the the Federal Funds rate.
What i find particularly scary is the run on the banks scenario the author outlines. this really smashes the idea that bonds are the safe thing to get your money back.
I know a lot of bonds have been selling, that's why the fed needs to buy so much every month, to make up for all that selling people are doing. Personally, i'm surprised even more people haven't been selling bonds.
With the threat of inflation looming so large, and the enormous money supply that has increased in the last year. All those country's debt problems for which the only solution is inflation: it's the only thing that's politically feasible.
I'm a totally risk averse investor and as such, I avoid cash and bonds like the plague with the exception of a modest emergency cash reserves.
Of course this is all linked to the rise of all the other assets classes. when the 100 trillion dollar bond markets sell off, all that money has to go somewhere: equities, real estate, gold and now bitcoin.
This is not a guarantee at all; if inflation is sufficiently high then you could be actively losing money holding a bond that fewer and fewer people want.
True but losing 5% on a bond investment might be better than losing 10% in a savings account or 50% in the market. You have to think about your timelines and risk tolerance.
that may be so but most people can't have a 30 year commitment so they buy ETFs. And ETFs need a buyer for that bond to have value. if those buyers don't exist then the bond could be worth a lot less than 1000$. this is what the author was talking about with the comparison to run on the banks for bonds.
If by total market you mean the total world market (i.e. MSCI ACWI), that's about as risk averse as you can be while still being in equities. Total US market alone is a higher risk choice: https://www.aqr.com/Insights/Perspectives/The-Long-Run-Is-Ly...
i mostly invest in inflation protected assets. there's really only 4 categories of investments: equities (stocks), fixed income (bonds), real estate and commodities. And, one of those categories (bonds) has been eliminated by the governments and feds of the world. So, that only leaves: equities, real estate and commodities (gold and bitcoin).
The signs of inflation have already presented. There are regular anecdotal reports in urban housing markets nationwide for homes selling for tens or hundreds of thousands of dollars over appraisal (which is meaningfully different enough from 'over list', as some agents in extremely hot markets intentionally underlist to attract bidding wars).
Some of this is due to interest rates, but those have already bottomed out. At this point, it's a near certainty Covid will continue impacting markets for quarters to come.
As mentioned, a little inflation is a good thing. If we think of the financial system like a rube goldberg machine or some heavy enterprise SaaS application --things you can't just tear down and start over-- the most viably peaceful way out of our problems is inflating the debt.
> homes selling for tens or hundreds of thousands of dollars over appraisal
Except appraisal is an estimate of what a house will sell for, not any intrinsic notion of value. Selling over appraisal implies that the appraisers expect the value of the house to drop in nominal terms, not inflate.
That makes sense, but when I took the real estate appraiser courses a couple decades ago, none of it was about market expectations. It was entirely about recent sale prices of comparable properties.
Maybe experienced appraisers do more than that, but my state at least doesn't expect them to.
Could also be that appraisers are being conservative (their "customers" are the banks, after all, not the buyers) in their estimates and haven't caught up with the higher bidding?
But isn't "recent sale prices of comparable properties" about market expectations though? Like isn't the implication of an appraisal that if you were forced to sell the house you could get the appraised amount for it?
You're right, and in a bull market it's inherently conservative since you're looking at past prices. What I mean is, if houses are selling more than appraisal it's mainly because prices are up compared to recent sales, not because appraisers are accounting for any particular view about how that will play out over the next few years.
It was surprisingly subjective though. It wasn't like you were feeding lots of data into big statistical models. You'd only pick the few closest comp houses that sold recently. They'd still have different features, so you'd try to figure out the value of the features by comparing the comp houses. It was a simple mechanical procedure but you could work it out different ways and get different numbers. Our instructor admitted there was a lot of opportunity to make it come out however you wanted, and even said that experienced appraisers did so consciously.
So I wouldn't be surprised if an appraiser who thought the market was in for decline actually did write lower appraisals, though they'd justify it entirely by recent comps.
The main difference between bonds and cash is mostly based on the fact that cash is the means of settlement.
But in fact what we call cash can also have two main forms: federal reserves (debt of the feds) that can be dealt with only by banks and regular bank depositories (debt of the particular bank). And there is even a third layer of Euro Dollar which is debt of non-US banks who cannot hold federal reserves and who can only rely on deposits at 'correspondent banks' in the US who can hold federal reserves.
The fed reserves is the most liquid form of money - but it cannot be held by individuals, only by US banks. Bank depositories are less liquid because there can be a bank run - in that respect US government bonds are in fact less risky even though they are not used as a settlement or accounting mechanism. They are less risky because the US government will always pay them back, because they are USD denominated and there is no gold parity any more. Non rhetorical question: are there any scenarios where the US defaults on their debts?
It is only 50 years that we can a complete fiat based money - before that the system was based on gold (and silver and other resources like shells) - so the current USD based system is really incomparable with the past reserve currencies. Somehow Ray Dalio in his essays with historical comparisons completely misses that - but of course it only makes his thesis stronger.
Non US bonds denominated in USD are completely different - because they can default. In gold based system all bonds used to be like that, because in the end no government could print gold.
Maybe 50 years is not enough to have any full cycle and there is no way to extrapolate.
The economists base their inflation and similar models mostly on the US economy and fiscal mechanisms - but because of globalisation the share of USD transactions outside of the US economy is probably growing. I would love to see stats on that.
"Non rhetorical question: are there any scenarios where the US defaults on their debts?"
No. Since it is just a bond swap. To anybody not in the US (like me), the US dollar is just a 0% permanent bearer bond. When a bond matures it is swapped for central bank reserves (floating debt). When one is sold it is swapped back (fixed rate term debt).
The monetary system is reflexive. No financial institution is going to hold central bank reserves when there is a near identical government bond available paying a higher interest rate.
"Non rhetorical question: are there any scenarios where the US defaults on their debts?"
1) Technically they have defaulted in '79, though it was more of a delay.
2) See how divided politics has become. What happens if the US hits the debt ceiling and the other party decide enough is enough and wont approve appropriate borrowing capacity and all budget. Given divisive politics of recent does this seem that far fetched?
3) US debt is getting to 110% of GDP and growing fast. If this isn't controlled it will hit a point where it becomes to a point where people lose confide3nce. And sure the US govt can print money given own currency as is often touted, but currency need confidence. If people feel they are just a printing machine and decide to head for lower risk waters, they can print all they want but money will become increasingly worthless and they may beed to 'reset' which means possible default .
4) Interest rates. What if these go up? The government can influence but ultimately the market has to want to take on that risk too. If economic times get rocky its not unforeseeable the fed cant set interest rates as easily as they do today. This could flow into serious payment/cost issues on the budget.
5) Not to fear monger, but China hold a bunch of debt. What if they decide to drop a trillion onto the market while US has other crisis compounding value issues and currency runs?
6) On the flip side of foreign debt holders like china, what if some rouge president said "we are not paying you because you stole our IP" or whatever rationale. Unlikely but recent politics shows us extreme statements/positions like this can happen. Even to threaten this in an unthought statement could have serious consequence and flow-on.
7) What if we have another pandemic or natural disaster and the economy drops 30% and stays there... good luck serving the debt on a drastically shrunk economy without serious consequence.
8) What if the next generation decides they are sick of previous generations debt limiting their countries future and a movement starts 'not my debt' and some hard left/right politions take power on disgruntled citizens
Etc
And yes the US can always print money, but money can lose worth too if people dont want it because they feel too much is being printed.
And to be clear, Im not saying the US will default, but there are many reasons that could trigger it to. Personally I think short term risk (sub 20 years?) is negligible, but if they stay on the current path we either need to find MMT works (whole other discussion), or there doesn't seem to be a positive end.
> What if they decide to drop a trillion onto the market while US has other crisis compounding value issues and currency runs?
And sell it to whom? What happens to every other currency in the world when that happens? Including all those countries who relying upon exports to the USA.
If China dropped a trillion onto the market, then they would probably get Mexican Pesos in return as the Mexicans hoovered then up to stop their currency getting into nosebleed territory.
The currency system is like a waterbed. You can't just jump on one end and not expect a systemic response and feedback that will throw you off just as hard.
Well in the cases of number 3, 5, 6 and 7 in these cases the Feds will just print the money - technically it is just a flip in their computer system and also in practice the difference is not that big - it changes a fixed term debt to a on-demand debt. The only thing stopping it can be a political will - but I think the stigma of not paying debts is higher than the stigma of inflation - so most probably it will be done every time.
> I think the stigma of not paying debts is higher than the stigma of inflation
This would depend on the level of inflation. Higher than normal, probably. Extremely high, like ~30%+ its reset time I would suspect.
With the printing money, there has to be a limit. Were in the middle of something far beyond normal at any other time. Maybe we'll get through it cleanly but I also suspect todays debt fuelled can kicking events will get taught to students in ~50 years time and they'll sit there going 'what were they thinking'.
"With the printing money, there has to be a limit."
Banks do it every time they lend, so that can't be the limiting factor can it.
You're looking at the system incorrectly. Try it this way.
To spend you have to have two things - liquidity to complete the purchase and something available to buy.
Which gives you the obvious limit - spending stops when you run out of things to buy available for sale in the denomination at a price worth paying.
So it stops automatically - largely because the pejorative "printing money" line has nothing to do with the control mechanism in the system. Money is a dynamic thing. Systemically it pops into being and disappears as required.
"printing money" is just the accounting counterparty of "saving money". If you want to stop it or reduce it, simply delete everybody's monetary savings. That will cause all national debt to disappear by accounting identity.
You make it sound as if that swap was something that happens automatically - but it is not. It is something easy to do and it has been done so far consistently - but there must be circumstances where they stop doing it at least temporarily (a stalemate in the Congress or something).
It may do in the US Congress due to interaction with the debt ceiling legislation and the like and, of course, it being the US it will no doubt end up in court.
Here in the UK, by contrast, it is a 'standing service' on the Consolidated Fund that is governed by two acts of Parliament (The National Loans Act 1968 and the Exchequer and Audit Departments Act 1866). It is entirely automatic and mandated by statute. Nothing can stop it happening. Nothing can even delay it happening - short of a technical failure in the computer systems. Gilts will always be deleted, and the replacement bank reserves created by the Bank of England on the date of maturity.
FDIC insurance maxes out at $250,000, so it won't cover you if you're super rich or a foreign government. In that case bonds still make sense. US bonds are currently more stable and have better interest rates than any other bonds from developed countries, so people will continue buying them for the time being.
For context, Dalio’s current thesis is that bonds and any debt instruments are dangerous to own right now. Why? Because he thinks the dollar will collapse and lose its reserve status. Uncontrolled inflation is a big danger.
The text answers the question: The central banks are buying the bonds in a scheme that essientially boils down to print money until debt levels no longer matter.
The money printing causes:
- Inflation (as in rising consumer prices)
- Massive swings and bubbles in the financial markets
- Increasing wealth inequality
This has happened until now in a global coordinated manner. This was also the policy after 2008.
However it seems that challenge today is that China is not willing to print money at same level as Europe and USA. The question is what happens then?
Yes. The Chinese currency will go up compared to the dollar and the euro. However I think effects will go much further than that. The stability of the west will be challenged and the dominance of our financial markets will decay.
In the end, the existance of a big economy, that does not embark in the same aggressive monetary policy as we do, will put a hard limit on how far we can go.
Great counterpoint. I knew the Fed was purchasing a lot of bonds, but I had not grasped the scale of it. I didn’t think it would be that much higher than 08.
The Brigewater article would have been a lot stronger with that $7 T figure.
That's not how the U.S. financial system works. The government doesn't "get money from the Fed" - it gets money from the Treasury, which either collects it from taxes or issues government debt to raise funds.
The Fed participates in open market operations, and one of the markets they participate in is the Treasury bond auction. But they participate in others as well: notably, they've recently been major participants in mortgage-backed securities and corporate debt markets. When they participate, they effectively inject cash into the system, since the amount they can pay is unlimited and subject only to their mandate to get full employment and limited inflation.
There's a lot of other subtleties involved as well; this isn't intended to be an exhaustive explanation.
> When they participate, they effectively inject cash into the system, since the amount they can pay is unlimited and subject only to their mandate to get full employment and limited inflation
In the case where they buy Treasury bonds, the government itself gets money that they can use as they see fit (I.e. stimulus checks), right? Whereas in this case they just "inject cash into the system" in general.
But if the Fed hadn't bought the Treasury bonds, some other investor would've, just at a worse price. That's the thing about markets: participants are fungible, as is the money itself.
There's a big difference in dynamics between one firm giving money to another in a non-competitive situation (say, a union bargaining with a monopsony corporation) vs. a market of buyers trading with a market of sellers (say, the commodity or stock markets). You get efficient price discovery in the latter situation, you don't in the former. And the concern up-thread about the sheer scale of Fed purchases is that when the Fed becomes the only market participant, it starts to look an awful lot like the former situation, and market mechanisms break down.
Mind you, this is all before “yield curve control” has been implemented! What a joke.
And when it’s not the fed, it’s (increasingly) just financial institutions buying their required allotments. We’re well on the path to a market like Japan, where nobody in their right mind actually goes out and invests in bonds, they just are required by law to have a certain amount on their balance sheets. This is why SLR is a big deal and if the fed does or doesn’t address it tomorrow, you can expect real chaos.
What happens to a bond when the Fed buys treasuries? Are they "cancelled"? Or does the Fed actually hold those bonds? The latter sounds nonsensical, but I don't know enough about how the Fed works.
they hold the bonds. the fed has a balance sheet with whatever assets it holds. the fed just doesn't hold cash. any money it spends is created, any money paid to it ceases to exist.
the fed buys bonds from the treasury department, which must slowly repay them as if the fed were any other bondholder.
this provides a mechanism to reverse the creation of money, when bonds the fed holds are redeemed slightly more money than was created will be destroyed. Or they can destroy money by selling bonds on the open market earlier than that.
The Fed isn't part of the US government. They are a private bank with special powers granted by Congress. When they purchase USG bonds, they hold them and receive interest.
But the Fed pays earnings back to the Treasury. And while the Fed is independent, it's certainly deeply intertwined with the US government. The Fed holding US government debt seems intuitively counterproductive to me.
> And while the Fed is independent, it’s certainly deeply intertwined with the US government.
The Fed is…complicated.
The Federal Reserve Board of Governors is an agency of the executive branch (an “independent” agency, but not independent of the government, independent within the government, like the FCC, FTC, and a number of other boards, commissions, etc.)
The Federal Reserve System consists of a network of Federal Reserve Banks, each of which has a nine member board of directors, six of which are elected by member commercial banks, and three of which are selected by the Board of Governors.
But the actual setting of monetary policy is done by the Federal Reserve Open Market Committee, which has 12 members — the seven members of the Board of Governors, the President of the Federal Reserve Bank of New York, and four of the other Federal Reserve Bank Presidents.
They don't pay all earnings to the USG, only everything above a certain threshold IIRC. It's only counterproductive if you think like a normal person instead of a central bank. Their mission is to keep the dollar stable. They are doing that by keeping the USG stable. All the central banks are acting in concert right now to save the global financial system. My guess is that we are being slowly transitioned to removing the USD as the world reserve currency and replacing it with a World Bank electronic one.
The US has been trying to reduce the usage of the USD as a reserve currency (it's the largest such currency but not the only one - EUR, GBP and JPY are also used) due to it not having any real benefit to the US while exposing its economy to the effects of financial crises around the world, which tend to lead to countries purchasing dollars and driving the price up which makes imports more expensive.
---
Ben Bernanke (ex-FED Chairman) - The dollar’s international role: An “exorbitant privilege”?
> A great deal of U.S. currency is held abroad, which amounts to an interest-free loan to the United States. However, the interest savings are probably on the order of $20 billion a year, a small fraction of a percent of U.S. GDP, and that “seigniorage,” as it is called, would probably still exist even if the dollar lost ground to other currencies...
> The safe haven aspect of the dollar is actually a negative for U.S. firms, since it implies that they become less competitive (the dollar is stronger) at precisely the times that global economic conditions are most difficult.
---
The ‘reserve currency’ myth: The US dollar’s current and future role in the world economy
> This safe-haven bid for US dollar assets means that the US dollar often behaves in ways that seem counter-intuitive relative to US economic fundamentals. As Figure 2 shows, the US dollar appreciates in response to economic policy uncertainty. A 1 per cent increase in the Global Economic Policy Uncertainty Index raises the real value of the US dollar by 0.2 per cent, controlling for relative interest rate, inflation and economic growth differentials with the rest of the world.
> The appreciation exacerbates trade tensions between the United States and the rest of the world by weighing on US export competitiveness, setting in train a protectionist spiral.
---
The IMF already has a global reserve asset called the Special Drawing Rights:
The Fed only owns some percent of Treasury bonds. It's never been anything close to a majority. It's about 16.5% at the moment, which is unusually high.
> …The economics of investing in bonds (and most financial assets) has become stupid ... Rather than get paid less than inflation why not instead buy stuff—any stuff—that will equal inflation or better?
That is indeed the point of driving interest rates low or negative - to force people into economic activity. If holding a bond makes you negative money, you might as well buy something with it, which goes back into the economy.
It seems like there's this sense that putting your money into the market should always generate a return, and yet we have an economy that is driven by spending. The interest rate is how those are reconciled.
Also note that you can save by buying stuff. Materialize your savings for a 2% a year compounding tax free return. Get discounts by buying in bulk.
Urban dwellers might be more limited but for people who have unused or underused space, this is a way to get a return on that space. Buy all you will need for the next decade of:
Salt, sugar, socks, underwear, under-shirts, vinegar, soap bars, toothbrushes, razor blades, feminine products, toilet paper, paper towels, napkins, trash bags, freezer bags, sandwich bags, foil paper, parchment paper, plastic wrap, wax paper, candles, matches, diapers, pet supplies (litter, etc.), gardening supplies, building supplies, repair supplies, medical supplies, fire wood, wood pellets, long lasting appliances and furniture, kitchenware, dinnerware, sheets and pillowcases, blankets,comforter,bedspreads, maintenance, renovations, efficiency upgrades, land, bigger house.
Some liquid soaps and chemicals have a limited shelf life of just a couple of years so it might be better to avoid unless you know the shelf life. Also be careful buying more than you need which can lead to waste. Be careful being wasteful just because you have lots of stuff at home. Buying alcohol ahead of time in bulk works if you have the discipline not to drink more. Also to get a good return you need to use the full life of your stuff before replacing from your stash, not replace early because it's right there.
There is also a macroeconomic benefit to this approach. It can get the economy out of Keynesian recessions when people save by buying.
You are however limited in total value by the free space you have.
I was trying to figure this out myself. I don't think you need to stockpile 10 years worth of firewood because firewood may be too expensive in 9 years. I think this is insane on a few levels, but to each their own.
I mean wood would be for a small minority but after being loaded on stocks the alternative is often speculative zero sum type assets where people's savings are indirectly debt or liabilities to other people.
Buying stuff you're going to need later is the opposite of speculation, not zero sum because it puts people to work to create something tangible and right now you get a better return than a lot of safe assets like bonds.
This raises an interesting point in the inflation discussion: Inflation is always relative to the things you purchase now and in the future.
Standardized measurements of inflation might not apply to your situation at all. Instead why not track the inflation of the things you actually purchase?
I discovered awhile ago that so-called "junk bonds" are in fact very rewarding investments that are actually only risky by comparison to other bonds, and not by comparison to other popular asset classes like stocks. Been making $120/year off an $800 bond I bought that has grown in value to $950. Win!
Someone should brand junk bonds like they did with peer-to-peer lending. The latter was a bust (time and time again, I've read about the ills of P2P lending returns), but there could be a great dual-sided market opportunity for the former.
I can't say that I do-- I mostly learn about investment things by googling a question or a term and then reading all the results that come up and mentally aggregating what they have to say.
I will add that The Balance and Investopedia have been the leading sources of my education, all in all.
Are there any counterarguments disagreeing with this assessment?
Certainly those at the Fed and the Treasury speak confidently that the debt is manageable and inflation is easily cooled, but I imagine they have to project confidence.
That's not actually better, as long as interest rates keep falling. If you're holding 30-year bonds at zero interest, and the 30-yr rates go to -1%, then you get a capital gain of 35%. If rates go from -1% to -2%, that's a 40% capital gain.
Of course the reverse is true as well. If rates go up, you get equivalent capital losses. (You can avoid taking the loss by holding to maturity, but you'll have the same result as if you sold your low-interest bond, taking the loss, and invested your remaining money in a new higher-interest bond that matures at the same time.)
If it's in a bank account then welp, $250k FDIC limit. If it's physical then welp, gotta rent and secure a warehouse that is literally chock full of cash for anyone to steal. Etc etc.
Zero/negative interest rates are supposed to encourage productive activity, or at least spending.
>If it's in a bank account then welp, $250k FDIC limit.
Yeah I see people mention this a lot on HN. That particular number ($250k) has been increased over the years. It was partially upped in response to the S&L crisis. So do you really think T. Rowe Price is going to go under and you'll lose all your savings above $250k? Charles Schwab? Morgan Stanley? Even back when Lehman Brothers collapsed, no one lost cash holdings.
Unless you're with a mom and pop bank down the street, this doesn't strike me as a real threat.
Yes, but the comment you’re replying to points to the fact that your yield on cash can also be negative due to (for example) having to pay to store the cold hard cash somewhere safe.
FDIC insurance doesn't cover large balances (above 250k) so that's not free either.
If you're talking about holding a vault full of physical cash, that's not free either. It has to be physically secured in a building and someone wants to be paid for the building and the security.
All of which I said above. Holding cash isn't free at a macro scale, holding cash already has a negative return.
Have you seen $100 million dollars? It can fit in the average closet. How macro are we talking? Any small town with a few banks could hold billions in physical cash. It’s not a problem.
AFAIK the larger denominations are quite rare as they're only used for federal-reserve interbank transfers (which are almost entirely done digitally nowadays). Again, that's a solution that works for one entity, it doesn't work for the economy as a whole.
From an article:
* $1k bill: 165,372 in existence
* $5k bill: "fewer than 400 believed to exist", valued at significantly more than $5k
* $10k bill: "only a few hundred survive" (also valued at significantly more than face value)
* $100k bill: 42,000 ever printed and can only legally be used for transfers between federal reserve banks, illegal for private entities to hold
So no, not really enough physical large-denomination bills for everybody to hoard physical cash.
The FDIC commits to ensuring bank liquidity, it covers retail withdrawals, I don't think it's ever committed to printing specific combinations of bills to make it easy to hoard physical cash. In fact, they have already argued they don't need to, in order to discourage money laundering. The existing bills are mostly leftovers from the 1890s-1930s.
If they choose to give you a billion dollars in all 100s, well, sucks to be you. And again, they don't even really need to do that since only $250k per account is actually covered.
So I mean, to wit, have you ever seen 100 million dollars in a single bundle? Unless you work for the Federal Reserve doing inter-reserve settlement I doubt it, seeing as there’s only $165 million of $1k bills in existence. That would be over half of the $1k bills in existence and there's no other large bills in private hands in any significant quantities. Maybe you saw it as a movie plot point somewhere?
Regardless, not something that can be executed at scale. There are $21 trillion of treasures in private hands alone, there are only $165 million of $1k bills in existence.
Only if acquiring, storing and handling cash is cheaper and less risky. Which when we start talking about large sums of money might not be the case anymore. As it does get quite complicated.
This article does a great job of laying out the end-game of the global quantitative easing program. Today the following occurs
1) Central banks print currency to buy debt that no one wants to buy at negative interest rates.
2) Debt issuers (the government/corporations) increase debt issuance
3) Debt issuers purchase any hard assets available in the local currency at the fastest possible rate and earn profits off of the delta between asset inflation and the bond rates.
All western economies assets are being inflated, and all western economies bonds have negative interest rates. There is no alternative until.
4) Debt buyers convert printed dollars to RMB and purchase chinese debt.
5) Debt issuers convert borrowed dollars to RMB and purchase chinese debt
6) The Fed prints more money to meet it's market stability objectives
7) The dollar falls relative to RMB, triggering consumer price inflation on items of Chinese origin. Limiting the effectiveness of printing money.
The more Dalio gets public, the more I'm doubting his game.
His book ''principles'' is interesting, however with time its starting to look like an elaborate marketing plan. I have no doubt that he his serious about his principles and business culture, but there are second order effects to make everyting public. In the case of his firm culture (which claims to be an idea meritocracy), it will attract certain kind of people.
The same can be said about marketing his financial views. The guy is already rich. He is smart. Why does he needs to post everything on linkedin, suddenly?
I have a hard time understanding the underlying strategy of his public persona. Earlier this year he made a long post about the way he used his principles to deal with the accidental death of his son. I mean, why would he do that?
Ray Dalio (age 71) stepped down from the Bridgewater co-CEO position in 2017. He is now a active retiree who has time in his hand. It's typical for elderly gentlemen to focus on their legacy.
Since he moved his home office to Singapore and is heavily invested in China, he has become very careful about talking negative about China and is more prone to paint negative picture on the US and the West.
I see it as him trying to leave a positive legacy. He realizes he's done fantastically as an investor, is aging, and wants to leave a non-financial legacy to the world.
What does this sentence mean: «The charts below show these payback periods for holding cash» What's the payback period for holding cash? By definition if you hold cash you can be "paid back" immediately in full.
Why own bonds? Let's say you are into derivatives trading and you need to keep a pile of cash lying around as collateral. Bonds are better than cash as long as the nominal yields are positive, so you buy bonds (and hopefully not find yourself needing to sell them) which give you almost as much collateral.
Or maybe you are into high-yield bonds, which if traded correctly can have better returns than stocks. Not that I am personally interested in playing that game...
For me this type of analysis is always suspicious because it doesn't consider timing. How do I know that when I buy stocks I'm not buying at a peak, or when I need to sell them I'm not going to sell at the bottom. So I ran an analysis [1] where I just used random timing and checked what distribution would be. Turns out if you are long term investor (> 10 years holding period) it is more beneficial to hold stocks than bonds.
"Even if you had to sell your stocks at the bottom of the Great Depression, but held them for more than 20 years before that, you would not suffer a loss in value of your portfolio"
The problem with this is it assumes the macroeconomic conditions stay constant. But the macroeconomic conditions since 2008/2009 have been wildly different than ever before.
This is almost 150 years of data. There were regimes with very different macroeconomic conditions (great depression, wars). However I do agree with you that there is a chance that we will see something even more exotic.
Your data is only for the US though. What happens if you try the Weimar Republic? That's an extreme case, but I imagine other countries have had similar, but less severe events, and certainly the US in in uncharted territory right now.
I'm close with someone at Bridgewater and have read Dalio's books, obviously he's a smart person, but he does have positions and his public views tend to shift, which is understandable. I remember when he was negative on crypto.
For retirees, consider replacing some of your bond holdings in your portfolio with annuities [1]. A million dollars will buy you a ~$50,000/year annuity for life. That said, annuities have major downsides too (i.e., they are degraded by inflation).
During the Covid market crash my bonds barely changed. If I had rolled it all into small caps at the bottom there I could have doubled its value by now. (And then rolled it back into bonds at the top here.)
Additionally for bonds, the percent of earnings looks low on my positions statement but a few times a year I get some fat dividends on my bond holdings which I do not think it reflects.
> Real yields of reserve currency sovereign bonds are negative and the lowest ever. Real yields of cash are even worse though not as negative as they were in the 1930-45 and 1915-20 great monetization periods.
This I cannot comprehend. Can someone explain to me how holding cash yields less than holding a bond at negative rates that will return me less cash?
Let's say inflation is 2%, and and bonds are returning 1%. That means real (that is, accounting for inflation) bond returns are -1%. But holding cash returns -2% (again after accounting for inflation).
Holding cash costs money too since interest is negative. If you're talking about actually physical cash, you will have to pay for a vault and security to store and move the cash.
"If history and logic are to be a guide, policy makers who are short of money will raise taxes and won’t like these capital movements out of debt assets and into other storehold of wealth assets and other tax domains so they could very well impose prohibitions against capital movements to other assets (e.g., gold, Bitcoin, etc.)"
> For these reasons I believe a well-diversified portfolio of non-debt and non-dollar assets along with a short cash position is preferable to a traditional stock/bond mix that is heavily skewed to US dollars.
What exactly is he proposing? I think he is proposing to borrow cash, but can somebody ELI5 what is meant by non-debt, non-dollar assets?
Goverment bonds yields are quite low. You get can Non-Governmental Bonds that have better yields. However, make sure the issuer has physical assets so if they go belly up your not left holding the entire bag.
The other annoying thing about bonds as each bond tends be a fair amount of capital, so you need a lot of capital to properly diversify.
...because yields may continue going down. Other countries have shown us that 0% yield isn't even the floor.
A couple years ago, 30 year treasury yield was around 3% and people were saying the same thing...why would you own bonds. People who bought bonds at that time made good money as the yield fell further.
Because when every corp/muni bond folds - government issued bonds do not(and never have). Also, because they skyrocket in value during government-to-government conflict. Military action? 150% bond prices. It's a low risk instrument that turns into a winning lottery ticket for events such as.. North Korea launching a ballistic missile ~2 years ago, Donald Trump being accused of Russian collusion 3 years ago, and every military conflict ever.
Note, I'm not saying "govt bonds are great! buy them!"...I'm saying there are very old and valid reasons to own bonds of the government-backed variety.
I think you have a fundamental misunderstanding of how bonds work. What you are saying is mostly true, BUT the coupon rate is set at bond issuance. Meaning if you own a bond now, and coupon rates go up because of an event, your rate does not magically adjust. When event like you describe happens, it means it's a good time to enter the bond market.
What Dalio is saying is that currently real returns on bond are rock bottom or even negative. So why would you own them? He's not saying to NEVER own bonds, just that it currently does not make sense. If in the future, bond coupon rates increase, then it will once again make sense to own bonds.
The article makes the point that bonds don't even achieve this. At best, they decay in value less fast than cash in an inflation scenario. But because of yield rate fluctuations, they're significantly less liquid than cash (if you don't want to lose extra on top of inflation losses). Which is an issue because if the inflation rate is suddenly 7%, you can take your cash and put it in something much safer like real estate or foreign currencies. Holding long-term bonds mitigates inflation, but also makes weds you to it.
>> The United States could become perceived as a place that is inhospitable to capitalism and capitalists.
USA is already perceived as the most restrictive government in the world for citizen participation in any non-bank finance. And I have news for regulators: the banks are an anachronism. They are not making loans anymore. They only exist to sell loans to the government and buy them back as treasury-backed assets at a lower price. The difference comes from taxes. It’s a direct transfer of wealth from citizens to banks. They will probably be nationalized because citizens will realize how useless and parasitic they are. All business activity will abandon the banks and all investment will go into stateless financial systems. There is nothing anybody can do to stop this. The ‘protections’ (restrictions) offered by regulators now have negative value to US citizens. This is not some far-out warning. This is happening now. US financial startups are like rats abandoning ship to organize in Canada, Switzerland, Singapore etc. And they are all led by non-citizen US residents, because citizens take that regulation with them anywhere in the world. The best deal in the world right now is to be a permanent US resident with some other citizenship. That seems wrong.
Bonds exist because people want to lay off risk. Its not about the yield, as much as its about the risk. Sure, you want an upside, and the yield is about the upside. But the motivation in the first place, is about the risk.
"as safe as houses" turns out, not to be that safe.
"as good as gold" is still pretty good, but the next unobtanium is out there.
by and large, absent revolution, governments make good on their financial promises. Even the Soviets paid up on the baku oil shares, in the end. So sometimes, even WITH a revolution you get back some money.
Bonds are about risk. Why would you want to lay off risk? Because thats what risk avoidance is.
Benjamin Graham and Warren Buffett would disagree, they don’t exactly recommend buying and holding bonds until maturity but instead to buy bonds on the market, when the bond yield is say at 6% any bond with a coupon value less than that will be worth less than its face value, when those rates drop the bond will be worth more than its face value, if you buy bonds when interest rates are high and then sell them when they are low you can make a very sizable chunk off of them that is greater than the coupon value
I read it and I feel like the author does not understand how government debt works. And this makes them not understand bonds as well.
But to answer the original question, disregarding any logic of how state debt or bonds work, why would you own bonds? Two possible answers:
1) Because they serve as a deflation hedge. This is interesting for people with lots of money who need some more security
2) Because it is guaranteed money (at least bonds for countries like US, UK, JPN, DE).
Maybe he does, but his post does not show it. Best reading is that he does it because he is interested in return-on-investment money. In which case his title should be "bonds are not useful for high return-on-investment". But no, he chose "Why in the world would you own bonds?". And then he doesn't even really answer that question, he just goes on about his investment strategies. His result: Don't own bonds.
This pretty much explains his "…The economics of investing in bonds (and most financial assets) has become stupid" paragraph.
I already answered why bonds are still valid to be owned by institutions with lots of money and also why big banks still buy them (happily, I should add).
> The world is a) substantially overweighted in bonds (and other financial assets, especially US bonds) at the same time that b) governments (especially the US) are producing enormous amounts more debt and bonds and other debt assets
Yes and no. Why are there so many bonds? Well, lots of countries have policies to not issue money directly to the finance ministry which then gives the money to whatever the government wants to fund, but instead for every spending of the government issue bonds that are sold to banks and put that money on the finance ministries balance sheet. It's an entirely political concept, but it's reality. As such, bonds and state debt are just the money handed out by the state. If they would not hold debt and/or issue bonds, there would be no money for anybody. Period.
>…If bond prices fall significantly that will produce significant losses for holders of them, which could encourage more selling
This leaves out the political dimensions in its entirety. Bond prices will not fall significantly UNLESS the state's resources (technology, work-force, ...) also drop significantly. If that is not the case, the state can just uphold the bond's values.
> …Imagine what would happen if, for any or all of these reasons, the holders of these debt assets wanted to sell them. There is now over $75 trillion of US debt assets of varying maturities.
This is just wrong. I already explained why, in brief, above. I won't shed anymore words on this, except that it is fear-mongering.
> …History and logic show that central banks, when faced with the supply/demand imbalance situation that would lead interest rates to rise to more than is desirable in light of economic circumstances, will print the money to buy bonds and create “yield curve controls” to put a cap on bond yields and will devalue cash. That makes cash terrible to own and great to borrow.
There are more sides to that coin. This is often used to create fear for inflation. Because history has also shown that unless there is hyper-inflation people always love to own cash, regardless of the economic circumstances. And better borrowing conditions should enable economic growth, and over-borrowing should be kept in check anyways (re: financial crisis 2008) so there is no real issue here. And as explained above, unless the resources of a state drop significantly, there is no trigger for hyper-inflation.
All in all, he is just arguing from an invester's perspective, but even then not a very holistic approach.
So whether you buy these arguments or not, Ray Dalio is simply promoting a position that Bridgewater no doubt has taken. So when he says:
"I believe a well-diversified portfolio of non-debt and non-dollar assets along with a short cash position is preferable to a traditional stock/bond mix that is heavily skewed to US dollars. I also believe that assets in the mature developed reserve currency countries will underperform the Asian (including Chinese) emerging countries’ markets."
It's not his avuncular advice. He has millions (billions?) of dollars committed to this bet and he wants to convince others that it's correct so it pays off.