Worthwhile article by Ray Dalio

[Kwirk]

In a sense we already have considerable inflation but it's limited to the price of investments and desirable real estate. It now costs more, I think, to "buy" a certain amount of return from stocks or bonds. This seems to be driven by the Fed's expansion of the money supply through low interest rates and purchase of debt. The Fed has not chosen to greatly pull back on its actions so returns remain relatively low.

I imagine that some of the money will eventually make its way down to largely unskilled workers and manufacturing workers who have to compete with international labor. Until the money makes it to these workers there isn't a lot to drive the CPI higher.

(These are just my impressions, being too lazy to go search for the data.)

 

[gcgang]

Thanks for the link to the article, kevink.

https://mebfaber.com/2019/07/08/i-dont-feel-overweight/

Above is a link to an article, while not real similar, preaches the same gospel of Diversification. The main point, most people have a very strong "home country bias". Those of us who are in the USA don't believe we need to diversify because our performance has been so good and so many companies are global. But valuations here are higher than nonUS. In the article he states in the last 70 years $10k has grown to $14mm in the S&P while nonUS only grew to $8mm. BUT ALL OF THIS OUTPERFORMANCE HAS OCCURED IN THE LAST TEN YEARS!

No one knows when this will change, but for those who believe that valuations matter, it provides additional food for thought.

 

[NW-Bound]

^^^ Still patiently holding my ex-US stock/MF/ETF, and waiting for the tide to change.

 

[ERD50]

Thanks for the link to the article, kevink.

https://mebfaber.com/2019/07/08/i-dont-feel-overweight/

Above is a link to an article, while not real similar, preaches the same gospel of Diversification. The main point, most people have a very strong "home country bias". Those of us who are in the USA don't believe we need to diversify because our performance has been so good and so many companies are global. But valuations here are higher than nonUS. In the article he states in the last 70 years $10k has grown to $14mm in the S&P while nonUS only grew to $8mm. BUT ALL OF THIS OUTPERFORMANCE HAS OCCURED IN THE LAST TEN YEARS!

No one knows when this will change, but for those who believe that valuations matter, it provides additional food for thought.

^^^ Still patiently holding my ex-US stock/MF/ETF, and waiting for the tide to change.

So allow me to add a little 'color' to this discussion.

We probably all subscribe to the idea that our AA should be looked at from a 'big picture' view, and don't worry about maintaining that AA in each account, as long as it is covered overall, on average.

Well... I decided years ago I should have some international/emerging market exposure. Seems prudent, right? So out of convenience, I started adding international/emerging to my Roth accounts, each contribution went totally to international/emerging funds. This brought me up to an allocation I was happy with. All in my Roth accounts.


Well... seems that international/emerging has dragged far behind US, and since the Roths are totally tax free withdrawals, this is exactly the place I would want my highest gain to be. Que Sera, Sera.

And I don't want to change that allocation, maybe things will cycle and international/emerging will be the next big growth area? So if I pull out now, I miss that.

I'm not complaining, not worried about it, it just kinda sucks a little bit .

-ERD50

 

[NW-Bound]

I do not follow international markets and trade them like I do with US equities. And being busy with some sectors of US stocks I hardly look at my international holdings, and only look at the total portfolio value. Ex-US portion is currently 22% of all equities positions, so is substantial.

The other day, it occurred to me to look at my performance since 2012, when I retired and started to keep better records of spending to account for withdrawal. It was not as good as I thought, even though I had decent gains with my trades. It turned out that the lousy ex-US equities have been holding me back.

 

[daylatedollarshort]

I think the worldwide diversification is a good idea. These days it is pretty easy to do with mutual funds. I started switching over the 401Ks but this thread has been a good reminder to do a bit more on that front.

 

[cyber888]

You will need to add real Gold ... not the index kind.

 

[NW-Bound]

For what it's worth:

Dalio's Bridgewater flagship fund is down -1.45% YTD through mid-July, vs. the S&P being up nearly 20%.

In 2018, the fund was up 14.6%, vs. the S&P being down -4.5%.

See: https://finance.yahoo.com/news/bridgewater-pure-alpha-fund-lost-201311453.html.

Combining the numbers, we see that from 1/1/2018 till now Pure Alpha Fund is up 12.9%, while the S&P is up 14.6%.

 

[Dtail]

For what it's worth:

Dalio's Bridgewater flagship fund is down -1.45% YTD through mid-July, vs. the S&P being up nearly 20%.

In 2018, the fund was up 14.6%, vs. the S&P being down -4.5%.

See: https://finance.yahoo.com/news/bridgewater-pure-alpha-fund-lost-201311453.html.

Combining the numbers, we see that from 1/1/2018 till now Pure Alpha Fund is up 12.9%, while the S&P is up 14.6%.

Is the 12.9% gross or net of fees?

 

[OldShooter]

Expected return for Treasuries and TIPs of the same maturity has to be similar, otherwise it will be arbitraged away by the Fed or bond traders. If expected return for nominal treasuries is negative and the same maturity TIPs is positive, who would buy the Treasuries? They would be bought by the Fed at a price high enough to push the real rate negative until it matches the nominal Treasury rate.

I think you're right on this. The market seems to value TIPS as just another kind of treasury issue.

Recently I was talking to the investment advisor for a nonprofit I'm involved with and asked him about his decision process in buying TIPS. Basically what you said: Look at the coupon and at expected inflation and compare to other government offerings.

This has been a puzzle to me for a long time and basically I think it is crazy. The market assigns insignificant value to the "Inflation Protected" feature of the bonds. Good for us, I guess. That's what our headlights are shining on and we can be happy when the market underprices that feature.

IMO this is due to short-term thinking about inflation as you pointed out in another post. The advisor I mentioned is probably about 40, so he has no memory of a world with US inflation very far above zero. The fixed income part of the portfolio he is running is $2-3M and IIRC he has only about $250K in TIPS. A meaningless position.

 

[NW-Bound]

Is the 12.9% gross or net of fees?

Not sure, but I think it is net.

 

[Jerry1]

So, I was surfing the net dreaming about buying some gold and then I remember one of the things I really hate about buying gold. There is typically a 5% premium over the spot gold price to buy a gold eagle. With good around $1,430, that’s about $70 per coin/ounce. I found it a little less, but when you buy gold, you pay at both ends. They sell to you for a premium and the buy from you at a discount. Gold has to move about 10% for you to even break even.

 

[Spock]

So, I was surfing the net dreaming about buying some gold and then I remember one of the things I really hate about buying gold. There is typically a 5% premium over the spot gold price to buy a gold eagle. With good around $1,430, that’s about $70 per coin/ounce. I found it a little less, but when you buy gold, you pay at both ends. They sell to you for a premium and the buy from you at a discount. Gold has to move about 10% for you to even break even.

The premiums have come down quite a bit. I just checked and the dealer sell premium is just under 2.8% for maple leafs and krugs for small qtys... its cheaper if you buy in bulk

 

[NW-Bound]

I think I will buy more of the defensive stocks that pay dividends. These stocks should not go down as much as the growth stocks when there is no more growth. Duh. And the dividends will cushion the fall of stock prices.

 

[MichaelB]

I think you're right on this. The market seems to value TIPS as just another kind of treasury issue.

Recently I was talking to the investment advisor for a nonprofit I'm involved with and asked him about his decision process in buying TIPS. Basically what you said: Look at the coupon and at expected inflation and compare to other government offerings.

This has been a puzzle to me for a long time and basically I think it is crazy. The market assigns insignificant value to the "Inflation Protected" feature of the bonds. Good for us, I guess. That's what our headlights are shining on and we can be happy when the market underprices that feature.

IMO this is due to short-term thinking about inflation as you pointed out in another post. The advisor I mentioned is probably about 40, so he has no memory of a world with US inflation very far above zero. The fixed income part of the portfolio he is running is $2-3M and IIRC he has only about $250K in TIPS. A meaningless position.

I agree. However, if we reach a scenario where debt is monetized as described in the OP link, those actions will affect TIPs just as much as other US Treasuries.

If there were to be CPI inflation and debt monetizing together over the next decade, buying TIPs now would be safer, as they still have a real positive rate.

 

[steelyman]

FYI: TV listings show that Dalio is scheduled on tonight’s 60 Minutes (7/28/19).

 

[nwsteve]

I think the worldwide diversification is a good idea. These days it is pretty easy to do with mutual funds. I started switching over the 401Ks but this thread has been a good reminder to do a bit more on that front.

Keep in mind the internationals in tax sheltered accounts (IRA) are NOT eligible for foreign tax credits on your federal return.

 

[target2019]

FYI: TV listings show that Dalio is scheduled on tonight’s 60 Minutes (7/28/19).

Video is here:

https://www.cbsnews.com/video/ray-d...s-a-national-emergency-60-minutes-2019-07-28/

Seems like a concerned, very involved citizen.

 

[Montecfo]

FYI: TV listings show that Dalio is scheduled on tonight’s 60 Minutes (7/28/19).

I watched it, but it certainly was not very valuable. Basically, you have a billionaire who bashes capitalism and thinks we need massive wealth redistribution. Not sure why I would have hoped for anything more.

 

[Dtail]

I watched it, but it certainly was not very valuable. Basically, you have a billionaire who bashes capitalism and thinks we need massive wealth redistribution. Not sure why I would have hoped for anything more.

Well if the tax code somehow gets adjusted, let's see how willing he is to pony up some $$$.

 

[samclem]

What I do think will happen in the event of high inflation is that Treasury will stop issuing TIPS aka pouring gas on a fire. When that happens, the value of those in circulation will skyrocket far beyond the usual YTM arithmetic as panic-stricken buyers will take them at any price. So I expect we'll be quite happy with our TIPS in that scenario, though overall it will be a very unpleasant experience.

One other thought--if US inflation takes off (due to a decision to monetize the US debt or any other reason), as you note, TIPS would become very desirable, especially if the duration or ultimate magnitude of the inflation is highly uncertain. Rather than stop issuing TIPS, the Treasury might find a lot of value in continuing to sell them if auctions drive real rates to zero or even negative. Individuals/entities that need some degree of certainty in a situation like this--even a certainty of a limited real loss of value as opposed to a bigger loss or a default, might bid them up to zero or negative real interest rates. If the USG is seeking funds to pay interest on existing obligations, a huge influx of cash loaned at negative real rates might be pretty appealing.

I'm not sure which products (fixed rate bonds/bills or TIPS) would be ultimately more advantageous for the Treasury in a game like this --it probably depends on the degree of panic/demand by the public, the expected inflation rates, and the actual inflation rates. But continuing to issue TIPS might be seen as an important step by the Treasury to bolster confidence, and confidence will be a very desirable commodity at that point.

On a related point--I-bonds, even ones issued at today's low real rates, would look fairly good in a situation like this. The down side is that they are nontradable, so there's no chance to read a huge windfall from any panic/demand due to rising inflation (so they aren't a true hedge). But they'll keep ahead of CPI-U inflation (whatever it is), can be bought right now and keep earning interest for 30 years (that's as long as any TIPS), there's no troublesome interest payment every 6 months that would need to be reinvested (and to be taxed, if held in a taxable account), and no state and local taxes. I sure wouldn't want to put all my dough into them, but they could have a place in a portfolio.

 

[RenoJay]

I've read Dalio's complete Paradigm Shift LinkedIn article four times since it came out a couple weeks ago. I think he's onto something. By way of background, I was a scream-from-the-rooftops buy and hold index fund guy from 1994 (when I first invested in Vanguard 500) until around 2016 when I started to question things. In the fall of 2018, I sold off most of my long held stock positions. That was right before the Q4 drop, which was great. Obviously I missed most of this year's run up. Net net, I lost out on about 5% of stock market gain thus far. Around the same time (fall of last year), I started buying gold/silver related ETFs. Those investments have thus far outperformed the broad stock indices and I plan to hold them for some time.

The big thesis, as my signature line implies, is that I believe that central banks are the big story for the past 20 years. They've pushed rates to near zero, sometimes negative. This creates an incentive among people to search for yield. In most asset classes (gold being an exception) there's a method to estimate expected 10 year returns by looking at things like earnings yield, or coupon rate, or rental yield, etc. depending on the asset. Today, most of these ten year expected forecasts are somewhere between pathetic and scary.

But, there's record debt sloshing around the world. Part of Dalio's argument is that central banks are more likely to help debtors (i.e. continued puny rates and additional QE) vs. creditors. By printing money and essentially monetizing debts, they'll devalue their currencies, hence the belief that gold/silver will be a better store of value than any fiat currency. Japan is a cautionary tale. They've been providing monetary "stimulus" for a very long time, and yet their main stock market index is HALF of where it was 30 years ago. THIRTY YEARS AGO!!

All that said, I only have 5-6% of net worth in these kind of gold/silver assets. The majority has gone into private lending (i.e. hard money) where borrowers will pay 8% - 9% and secure those loans with a first deed on property in which the loan to value ratio is pretty safe, like 50%. It strikes me that this is about as safe as I can find in today's environment for that kind of yield, since the collateral can fall in value by half before a borrower will think about stiffing me. Though I still think index funds will outperform most expert stock pickers in the future, I think we're in for a very lousy 10 - 15 years of stock market performance, especially in America.

 

[HI Bill]

For me the takeaway is that 'paradigm shifts' are the reason for the need for diversification. The chart showing which asset classes performed best during which decades demonstrated the point most clearly, IMHO.

I once plotted the annual budgets for the State of California versus their income. The plot was like two lines chasing each other. Seems like the same for performance in the financial markets. Up and down, just not as regular as California's income and budgets.

Betting on gold is betting on any single asset. Except, IMHO, in the long term, gold is less likely to appreciate than most others. Gold only true economic value now is in the manufacturing of electronics, and to a lesser extent, for jewelry. It's no longer used as a currency, and therefore, it's almost akin to Bitcoin. It's worth exactly what the market will bear.

If we have a world economic collapse, will those who are starving sell their homes, land, and possessions for gold? Maybe I've been watching too much of the Falling Skies show, but during that armageddon, money is worthless, and only food, weapons, vehicles (and horses), fuel, and medicine are trade-worthy.

VTI!

 

[Spock]

..
If we have a world economic collapse, will those who are starving sell their homes, land, and possessions for gold? Maybe I've been watching too much of the Falling Skies show, but during that armageddon, money is worthless, and only food, weapons, vehicles (and horses), fuel, and medicine are trade-worthy.

VTI!

My view of gold is not to buy a sandwich during a collapse, but to buy whatever currency comes to the stage post-collapse. Sort of an asset bridge from the old system to whatever new system rises from the ashes (to use apocalyptic terms). The guessing game is how big a pantry is needed until the new system emerges.