Hedge Fund Founder Exposes Market Conditions
What is it?
Ray Dalio, founder of the world’s largest hedge fund (Bridgewater Associates) posted an article last week that provides great insight into where the economy is and where it may be going. We added some information about why it matters to you.
“It seems to me that people who received a lot of money and credit and felt richer, central bankers and central government officials who created a lot of money and credit and said that it wouldn’t create a lot of inflation, and people who believed what these officials said would all do well to review the lessons from history.”*
“More specifically, this time around (i.e., since early April 2020) central banks (most importantly the Fed) and central governments (most importantly the US government) gave people, organizations, and state and local governments a huge amount of money and credit, and now most everyone is surprised that there is a lot of inflation. What is wrong with these people’s thinking? Where is the understanding of history and the common sense about the quantity of money and credit and the amount of inflation?”*
Why does it matter?
This brings up a great point. People do not become wealthier from the creation of more money and access to credit. Wealth is created from productivity and adding value to the economy.
“For example, people are just beginning to transition from measuring how rich they are by how much “nominal” (i.e., not inflation-adjusted) money and wealth they have to realizing that how rich they are should be measured in “real” (i.e., inflation-adjusted) money and wealth.”*
“But in moments of crisis, governments can choose where to direct money, credit, and buying power rather than it being allocated by the marketplace, and capitalism as we know it is suspended. This is what happened worldwide in response to the COVID-19 pandemic.”*
“While people tend to believe that a currency is pretty much a permanent thing and that “cash” is the safest asset to hold, that’s not true. All currencies devalue or die, and when they do, cash and bonds (which are promises to receive currency) are devalued or wiped out. That is because printing a lot of currency and devaluing debt is the most expedient way of reducing or wiping out debt burdens.”*
People tend to be more worried about their investment values denominated in dollars than they are with the changing value of the dollar itself. With inflation near historic highs, it helps to understand the difference between returns (on paper) and inflation-adjusted returns.
“Of the roughly 750 currencies that have existed since 1700, only about 20 percent remain, and all of them have been devalued.”*
“When the creation of money sufficiently hurts the actual and prospective returns of cash and debt assets, it drives flows out of those assets and into inflation-hedge assets like gold, commodities, inflation-indexed bonds, and other currencies (including digital). This leads to a self-reinforcing decline in the value of money.”*
In conclusion, many people don’t fully understand the long-term implications of the easy monetary conditions we have experienced lately. While it is helpful in the short term, that easing is detrimental long term. The debts will have to be repaid and the income people receive will be worth less in real (inflation-adjusted) income. When seemingly everyone gets free money such as a stimulus, it lowers the real value of earned income. With less buying power and higher borrowing costs, economic conditions could become much more pessimistic.
Feel free to read the full article by Ray Dalio which is listed in the sources section below.
Other articles I found interesting this week:
Rising Rates ETF “RISR” Unveiled by FolioBeyond and Tidal ETF Services
McCullough: The $1.3 Trillion Fiscal Gap Will Exacerbate A Slowdown
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Sources:
*Ray Dalio. “Where We Are in the Big Cycle of Money, Credit, Debt, and Economic Activity and the Changing Value of Money”. 2/15/2022. https://www.linkedin.com/pulse/where-we-big-cycle-money-credit-debt-economic-activity-ray-dalio/?trk=eml-email_series_follow_newsletter_01-hero-2-image_link&midToken=AQG2zTWxyNb8-w&fromEmail=fromEmail&ut=1OV5Hk7oIelq81
