Ray Dalio is the founder, co-Chief Investment Officer and co-Chairman of Bridgewater Associates, which is a global macro investment firm and is the world’s largest hedge fund. Ray Dalio Bloomberg is the world's 58th wealthiest person, worth an estimated $19 billion. Ray Dalio accumulated his wealth because he thought differently about the Markets.
While at Bridgewater Ray invented several investment strategies including: Risk Parity, Currency overlay and Portable alpha. Risk parity is a conceptual approach that attempts to equalize risk by allocating funds to a wider range of categories such as stocks, government bonds, credit-related securities and inflation hedges (including real assets, commodities, real estate and inflation-protected bonds), while maximizing gains through financial leveraging.
So I was rather disappointed when I learned that Bridgewater lost money during the COVID-19 market carnage in late February and early March. Bridgewater, the largest hedge fund manager and often takes a macro approach to things, so when Ray talks, people listen, so what gives?
In the first half of March the flagship hedge fund, Pure Alpha II, declined roughly 13% and at the time was down 20% for the year. Ray later went on to say, they didn’t know how to trade around COVID-19 and chose not to do anything as they felt they didn’t have an edge and thus stayed in their positions.
Ray said globally, corporations will lose $12 trillion due to COVID-19 and the US, COVID-19 will cost corporations up to $4 trillion. Ray is making headlines again by double down on the “cash is trash” theme.
“Now, like in the 1930-1945 period, interest rates have hit 0% and printing money and buying financial assets doesn’t get the money and credit to go where policy makers want it to go, so the central government borrows a lot and the central bank prints a lot of money and creates a lot of credit to buy this debt.
“I think that the [low-inflation] paradigm that we are in will most likely end when a) real interest rate returns are pushed so low that investors holding the debt won’t want to hold it and will start to move to something they think is better and b) simultaneously, the large need for money to fund liabilities will contribute to the ‘big squeeze,” he wrote.
“At that point, there won’t be enough money to meet the needs for it, so there will have to be some combination of large deficits that are monetized, currency depreciations, and large tax increases,”
Because the US dollar is the world's reserve currency, several weeks ago we saw a dash for cash. The demand was coming from banks, issuers of dollar-denominated debt; investors selling dollar-based assets; companies looking for cash for U.S. operations; and foreign banks looking to help customers. If you follow the currency markets, you saw the US dollar skyrocket, while other currencies drop. It's the reason why the US Federal Reserve expanded existing swap lines and adding lines to more central banks. Swap lines improve liquidity conditions, not just around the world, but also in the US credit markets as well.
So where is the dollar heading short term, the chart suggests we could see another run up to the $104 level? So for now, cash isn't trash, it's the prettiest, ugliest woman in the room.
This post is my personal opinion. I’m not a financial advisor, this isn't financial advice. Do your own research before making investment decisions.
