Ray Dalio Nikkei interview “ more inflation and higher gold prices”

[ToushiTime]

We've just had a period of some of the highest inflation rates in decades, over the last 2-3 years. Consumers have cut back on spending - has this held equities back from making record profits and delivering stellar returns for investors?



We've just seen the highest interest rates in most of the developed world for twenty years. Has this hurt equities? No.

If you are worried about deflation, buy bonds. If you are worried about inflation, buy equities. Gold offers nothing - it just sits there, earning no returns and hoping for a Greater Fool to come along and pay more than someone else did yesterday. That's not my sort of investing.

Inflation has been relatively muted and short-lived compared to previous decades. As you know equities have mainly been driven by the big Tech stocks due to AI expectations over the past 2-3 years, which has disguised weaker performance by the other companies. Likewise interest rates have been super low for the past 20 years. They are still low by historical levels, and yet debt and spending is a major concern for many economists and investors. Check those links I posted by Ray Dalio, or recent articles by Bill Gross, or many other commentators that believe bonds are not the hedge they once were due to massive debt levels.

If you’re worried about the US government defaulting on its debt then you want farmland, guns and a stable water supply rather than gold. Get prepping!

By the way, people have been fretting about developed countries debt loads for decades now. If one had sat out investing in equities during that time then the result would be suboptimal for one’s personal wealth. What makes you think the next few decades will be different?

Much more likely is the debt is inflated away, as we’ve seen countless times in history. In this environment, equities for the win.

It's not an immediate question of the US defaulting. More an issue of declining credit standing causing investors to demand higher rates, which increased the debt burden, and requires more "money printing" more money supply more inflation, more concerns, higher rates, more "money printing" etc etc..

As you know, US debt has already been downgraded by ratings agencies.

Yes, the US will have to endure painful tax increases and/or tax cuts which will hurt equities, or long sustained inflation to reduce its debt load, given how much debt has built up. Labor shortages due to unprecedented population aging will exacerbate that inflation through higher wages.

Debt build-up over the past few decades was not so much an issue when interest rates were low. This makes me think the next few decades very well could be different.

Equities don't do well during stagflation. Nor do bonds.

I'm not against equities at all. They make up 75% of my portfolio. I am just saying have a mix of assets with different correlations - not just bonds, given these issues- helps.

[ChapInTokyo]

Whew--it's good that you've decided (figured it out). And by page two at that.

Good luck. (esp. if you're listening at all to dalio)

I feel pretty good about having that stash of inflation protected JGB funds in there. Gold, I guess makes sense for real financial melt down of a country, like after losing a major war when even soverign bonds become worthless....

I'm not a Ray Dalio follower by any means, but I do find his main premise that we seem to be reaching the end of the American era and entering the era of Chinese resurgence quite good to have at the back of my mind when thinking about how the future might unfold. Interesting times.

Those JGBi may not be hurt by inflation but they are by interest rate increases. Also, I know only 15% or so of JGBs are owned by foreigners but aren't you worried that the Japanese banks, pension funds, insurers etc etc might reduce their holdings substantially, as the debt-to-GDP ratio goes even higher than 260%, while Japan's capacity to pay it back shrinks due to aging? That is not rhetorical question. I am still considering JGBi but this worries me.

For me the inflation linked JGBs are for the unlikely case scenario of runaway inflation so in which case demand for those types of bonds should increase greatly and thus make that investment valuable.

I’m not able to judge whether banks and other financial organizations might divest themselves of their JGB holdings substantially but I think that as far as there are no better way for them to earn ‘safe’ returns I believe that they won’t be in a position to do anything like that. If it came to it, the government can always print more money after all…

[ToushiTime]

I feel pretty good about having that stash of inflation protected JGB funds in there. Gold, I guess makes sense for real financial melt down of a country, like after losing a major war when even soverign bonds become worthless....

I'm not a Ray Dalio follower by any means, but I do find his main premise that we seem to be reaching the end of the American era and entering the era of Chinese resurgence quite good to have at the back of my mind when thinking about how the future might unfold. Interesting times.

Those JGBi may not be hurt by inflation but they are by interest rate increases. Also, I know only 15% or so of JGBs are owned by foreigners but aren't you worried that the Japanese banks, pension funds, insurers etc etc might reduce their holdings substantially, as the debt-to-GDP ratio goes even higher than 260%, while Japan's capacity to pay it back shrinks due to aging? That is not rhetorical question. I am still considering JGBi but this worries me.

For me the inflation linked JGBs are for the unlikely case scenario of runaway inflation so in which case demand for those types of bonds should increase greatly and thus make that investment valuable.

I’m not able to judge whether banks and other financial organizations might divest themselves of their JGB holdings substantially but I think that as far as there are no better way for them to earn ‘safe’ returns I believe that they won’t be in a position to do anything like that. If it came to it, the government can always print more money after all…

The trillion dollar question is can central banks, especially the Bank of Japan, keep printing money eternally, even with 260% debt to GDP?
Ray Dalio, Bill Gross and others say no. I cannot dismiss that risk easily.
Also, most inflation at the moment is due to the weak yen, which lifts your overseas investments. In other words, imported inflation would be offset by the rise in your foreign funds.
And given the aging economy, I find it hard to imagine an explosion in wage-driven inflation even with worker shortages. The Japanese economy doesn't generate enough to offer high pay. That is why Japan is struggling to find people.
I'm not convinced by the argument for "JGBi"s, as the government calls them, but I see your desire for a yen-based, inflation proof investment.

[ChapInTokyo]

Those JGBi may not be hurt by inflation but they are by interest rate increases. Also, I know only 15% or so of JGBs are owned by foreigners but aren't you worried that the Japanese banks, pension funds, insurers etc etc might reduce their holdings substantially, as the debt-to-GDP ratio goes even higher than 260%, while Japan's capacity to pay it back shrinks due to aging? That is not rhetorical question. I am still considering JGBi but this worries me.

For me the inflation linked JGBs are for the unlikely case scenario of runaway inflation so in which case demand for those types of bonds should increase greatly and thus make that investment valuable.

I’m not able to judge whether banks and other financial organizations might divest themselves of their JGB holdings substantially but I think that as far as there are no better way for them to earn ‘safe’ returns I believe that they won’t be in a position to do anything like that. If it came to it, the government can always print more money after all…

The trillion dollar question is can central banks, especially the Bank of Japan, keep printing money eternally, even with 260% debt to GDP?
Ray Dalio, Bill Gross and others say no. I cannot dismiss that risk easily.
Also, most inflation at the moment is due to the weak yen, which lifts your overseas investments. In other words, imported inflation would be offset by the rise in your foreign funds.
And given the aging economy, I find it hard to imagine an explosion in wage-driven inflation even with worker shortages. The Japanese economy doesn't generate enough to offer high pay. That is why Japan is struggling to find people.
I'm not convinced by the argument for "JGBi"s, as the government calls them, but I see your desire for a yen-based, inflation proof investment.

Truth be told, it's not so much that I feel that there is a significant possibility of run away inflation in Japan, but more a matter of wanting to have something put away in yen just in case something unexpected happens. Who knows, perhaps it will become too hot on earth for agricultural workers to work or for existing cultivars to be grown productively and food prices skyrocket, or perhaps there's a huge spike in military tension in the Asia Pacitifc region disrupting supply chains and value chains, requiring substantial allocation of available government funding to defense spending, perhaps with a huge payment to the US government for defending Japan. I guess you could say that JGBi's for me are one of the ways of hedging against some of those unknown unknowns.

[ToushiTime]

For me the inflation linked JGBs are for the unlikely case scenario of runaway inflation so in which case demand for those types of bonds should increase greatly and thus make that investment valuable.

I’m not able to judge whether banks and other financial organizations might divest themselves of their JGB holdings substantially but I think that as far as there are no better way for them to earn ‘safe’ returns I believe that they won’t be in a position to do anything like that. If it came to it, the government can always print more money after all…

The trillion dollar question is can central banks, especially the Bank of Japan, keep printing money eternally, even with 260% debt to GDP?
Ray Dalio, Bill Gross and others say no. I cannot dismiss that risk easily.
Also, most inflation at the moment is due to the weak yen, which lifts your overseas investments. In other words, imported inflation would be offset by the rise in your foreign funds.
And given the aging economy, I find it hard to imagine an explosion in wage-driven inflation even with worker shortages. The Japanese economy doesn't generate enough to offer high pay. That is why Japan is struggling to find people.
I'm not convinced by the argument for "JGBi"s, as the government calls them, but I see your desire for a yen-based, inflation proof investment.

Truth be told, it's not so much that I feel that there is a significant possibility of run away inflation in Japan, but more a matter of wanting to have something put away in yen just in case something unexpected happens. Who knows, perhaps it will become too hot on earth for agricultural workers to work or for existing cultivars to be grown productively and food prices skyrocket, or perhaps there's a huge spike in military tension in the Asia Pacitifc region disrupting supply chains and value chains, requiring substantial allocation of available government funding to defense spending, perhaps with a huge payment to the US government for defending Japan. I guess you could say that JGBi's for me are one of the ways of hedging against some of those unknown unknowns.

Good points. I might consider a combination of JGBIs plus overseas TIPs to cover that scenario nearer retirement. Your situation is different to mine. At the moment I am trusting in equities, which generally but not always handle inflation fairly well, as the other poster mentioned, plus a small bit of gold, which tends to work when real rates crater but not in other inflationary scenarios. I have a regular bond fund too.

For balance, I have been looking for arguments against Ray Dalio and Bill Gross views on government bond risk.
Ken Fisher only addresses Treasury issues but made some good points:

I didn't realize that foreigners only own 23% of US debt, despite the huge holdings by Japan and China.
His main point is that we shouldn't worry so much about outstanding debt levels as long as 1) the interest payments as a proportion of tax revenue and 2) debt interest payments to GDP are under control.

They are both currently still below their historical peaks, and the same goes for debt interest payments to GDP, but Goldman and the Peterson Foundation forecast that they will reach or break through these levels this year or next year. Of course, aging populations, rising healthcare costs, increased defense spending etc are likely to push the balance of debt higher.

Fisher also made the point that long-term / ultra-long-term US rates haven't "exploded" so the market doesn't seem too concerned, but he said elsewhere that bond markets only price in things four to five years out (??).
https://www.fisherinvestments.com/en-us ... nt/us-debt

Edit:
BTW, Japan's debt is still pilling up but at a slower pace. Its yearly fiscal deficit (cumulative debt) is actually shrinking relative to GDP.
https://tradingeconomics.com/japan/government-budget