Dalio Says Investors ‘Crazy’ to Hold Government Bonds Now

(Bloomberg) -- Bridgewater Associates’ Ray Dalio, founder of of the world’s largest hedge fund, said investors would be “crazy” to hold government bonds now and possibly for years because of money-printing by central banks to rescue the global economy.

“This period, like the 1930-45 period, is a period in which I think you’d be pretty crazy to hold bonds,” Dalio said Wednesday on the Bloomberg Invest Talks webcast. “If you’re holding a bond that gives you no interest rate, or a negative interest rate, and they’re producing a lot of currency and you’re going to receive that, why would you hold that bond?”

Central bankers around the world are playing the most instrumental role trying to keep the coronavirus recession from deepening into a depression. Already, the Federal Reserve balance sheet has ballooned by almost 50% since the end of February to a record $6 trillion, and there may be trillions more in stimulus spending from the U.S., Europe and Asia.

So far, the Fed’s buying has helped to push Treasury yields down.

While Dalio may not like bonds, he thinks governments have to employ every bit of monetary ammunition they can muster to compensate for the collapse in income and spending resulting from the pandemic. While economists are divided on how long and painful the recession will be, Dalio thinks about it differently: as a $20 trillion “hole” in the global economy that needs to be filled.

“There’s no choice,” said Dalio, whose firm manages about $160 billion. “If you don’t do that, the consequences are enormous.”

Unlike the 2008-09 financial crisis, when the U.S. government had to decide whether to save big banks and help homeowners, the scope of the rescue effort is much wider now. Not only has the Fed started buying junk bonds for the first time, the government is lending to small businesses and sending money directly to tens of millions of Americans whose livelihoods have been devastated by the pandemic.

Downturns of this magnitude are so dramatic that they inevitably produce a “new world order” with a very uneven distribution of winners and losers, including in asset classes, Dalio said. He cited gold and certain stocks, especially those of companies with strong balance sheets, as some of the “beneficiaries.”

Dalio, a billionaire who founded Bridgewater in 1975, believes the economy operates akin to a machine and similar events over the span of history tend to produce similar outcomes. He incorporates those patterns into Bridgewater’s models, helping the firm to anticipate -- and profit -- as markets react to new developments.

That process also invests Dalio with confidence about the future. He said it’s clear the “paradigm” that supported the economy and asset prices for the past decade, including tax cuts, ultra-low borrowing costs, mergers and stock buybacks, is “not repeatable” in an environment of rising government debt and even greater tensions over the distribution of wealth.

“Interest rates won’t go down the same way,” he said. “You’re not going to have that.”

Dalio’s flagship Pure Alpha II hedge fund ended the first quarter down about 20%, after getting caught on the wrong side of the sell-off that began in late February. He wrote in mid-March that the pandemic hit Bridgewater at the “worst possible moment” because its portfolios were tilted to benefit from buoyant markets.

Among his other comments:

• The economic and social impact of the coronavirus will be “worse” than the financial crisis and more analogous to the Great Depression.
• It’s critical to consider how government programs affect the value of money and what becomes the “storehouse of wealth.”
• Bridgewater will be conservative in deciding when to bring employees back to its offices in Westport, Connecticut. The firm has had no issues operating digitally during this period.

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