Why in the world would you own bonds?
bridgewater.com
bridgewater.com
So whether you buy these arguments or not, Ray Dalio is simply promoting a position that Bridgewater no doubt has taken. So when he says:
"I believe a well-diversified portfolio of non-debt and non-dollar assets along with a short cash position is preferable to a traditional stock/bond mix that is heavily skewed to US dollars. I also believe that assets in the mature developed reserve currency countries will underperform the Asian (including Chinese) emerging countries’ markets."
It's not his avuncular advice. He has millions (billions?) of dollars committed to this bet and he wants to convince others that it's correct so it pays off.
If the US economy is going to do well, bond yields will be going up. That means a bond short position will pay off.
Being short on bonds is basically financially almost exactly the same thing as borrowing money.
(The US treasury is 'short' on T-bills. They have to essentially 'buy them back' when they become due.)
Might point was just that a short position in the bond market is not automatically 'betting against the Western financial growth and stability.'
(And, of course, the Western world is bigger than the US.)
That's what he's been saying in his book "The Changing World Order". I believe it's not finished yet, but the chapters are published on his LinkedIn newsletter one by one: https://www.linkedin.com/newsletters/principled-perspectives...
edit: For the record, i wrote this because it was fun. I'm not endorsing that this is the case.
small Ray Dalio
flaps his wings in the U. S.
asian small caps soar
The price of bonds with a long duration varies with the prevailing interest rate (and inflation expectations). Even if the solvency of the issuer is beyond doubt.
That doesn't make them wrong. It's basically just a tautology. If you believe X is a great investment, and you aren't investing in it, that would be a far stranger situation.
>"Don’t Tell Me What You Think, Tell Me What You Have In Your Portfolio"
(I'm not sure whether I agree with the point, but I think that is the point Taleb was making.)
Far stranger schemes exist, the most recently to hit popular culture is gamma squeeze. Just because a scheme is strange has little bearing on whether or not it'll end up working out with them having your money.
At the end of the day, the point is they're trying to sell their book, which is not the same as trying to sell investment X (although they may be very closely related).
Or most recently Gamestop investors.
> At the end of the day, the point is they're trying to sell their book, which is not the same as trying to sell investment X (although they may be very closely related).
My point it is almost never going to be possible to distinguish between good investment advice and self-serving investment advice. Sure, there is some fungibility there for people with different investment needs, like pension funds vs young income earners. But! we should think about what we would think if the reverse was true. If investors were advocating for investments that they weren't personally invested in, then I would be far more skeptical than if they did.
We should be skeptical of all investment advice. For a specific fact to make us more skeptical of investment advice, we need to consider the alternative where that was not true. I don't see situations where large investors advising people to put money not where their mouth is gives someone more confidence in their advice.
One example: I recommended real estate rentals through the 2008-2015 range to several friends despite having none myself. Why? Because it was possible for them to generate significant leverage otherwise unavailable to them and they were in a much better position than me to work the second job of being a landlord.
Most other industries have a clear separation between the people who make and sell the product, and the people who publicly opine on the product.
Film journalists aren't film makers, car journalists aren't car makers, games journalists aren't game makers. And if the CEO of EA Games announces the next Madden game is their best ever, you'd take that with a pinch of salt.
Of course, conflict-of-interest-free journalism ain't exactly a growth industry these days, so this probably isn't the model of future stock tips.
Unless you think he's actually trying to pump and dump the entirety of all the Asian stock markets? He doesn't have that kind of influence.
Recently this was Jamie Dimon lambasting Bitcoin all the while a cryptocurrency trading desk was being set up at Chase.
The following exchange from The Big Short stuck with me. It’s Dr. Burry’s response to Goldman Sachs when they finally returned his numerous calls:
Deeb: Dr. Burry? Burry: Yeah. Deeb: Deeb Winston, Goldman Sachs. Listen, I've been reviewing your position. I wanted to discuss your marks and make sure they're fair. Burry: Yeah, I think you mean that you've secured a net short position yourselves. So you're free to mark my swaps accurately for once because it's now in your interest to do so. Deeb: I'm not sure what you want me to say. Burry: I think that...I think that you've already said it.
Looking just at holdings of any one fund can be pointless since you never know how these holding are part of some bigger strategy especially when you don't know what other derivatives they're holding like options / futures and other non publicly traded products. Any particular holding might also be part of a bigger ploy. It can be part of a hedge / bet / short / or acquisition strategy. Any single holding can also be part of multiple portfolios within one fund each with their own diverse investment goals.
But Jamie Dimon also has a reputation of not being the smartest bulb in the block, and also being overly cautious so....
I think the GP statement is more correct though. A lot of fund managers love to gloat about their positions rather than talk the inverse.
Being overly cautious makes you a smart banker. You do not move fast and break things in insurance or banking.
BTC may be great, but it has no intrinsic value and trading it is pure speculation. That’s not appropriate use of bank capital. It’s probably not an appropriate use of most peoples capital.
And brilliant doesn’t mean perfect. he’s had his share of mistakes, but his business record is one of the best.
2.) Where do you get this info that he was "brow-beaten" into accepting Fed money? Many of the banks, including others such as Wells Fargo and Boa didn't need the money either. That was just Hank Paulson's way of compensating them for the really expensive acquisitions, which none of the banks wanted to do really (JPM got Chase, Wells Fargo got Wachovia, BoA got Merrill Lynch, Buffett got Goldman Sachs and Lehman was left to die).
3.) There are way more brilliant bankers and financiers than Dimon in the financial industry. Steven Schwarzman and Peter Peterson built a behemoth investment firm from the ground up. Sergio Ermotti just engineered one of the best turnarounds for a big bank at UBS. Blankfein and now Solomon effectively shifted GS from their S&T desks to give more power to the Strats Tech teams, effectively changing the culture at GS, a sector where JPM is effectively lagging in spite of being the largest bank with the biggest resources. And this is not even taking into account some of the more brilliant bankers abroad.
Compared to nitwists like Thain or Corbat or whoever, sure Jamie Dimon beats them. But there are way more brilliant bankers who actually built something. Jamie is the classic example of happened to be at the right place at the right time.
I honestly don't know how this hero-worship of Dimon came to be - maybe it's those memes they have running around.
2) if JP Morgan Chase wasn’t as exposed to the MBS meltdown as other banks, how is that not to his credit?
3) The $6B in trading losses in 2012 didn’t stop JPMorgan from posting a record profit of $21B for the year.
Anyone looks bad if you attribute all their accomplishments to luck but doggedly hold them responsible for every mistake.
I did confuse Dimon with Kovacevich, but Jamie also didn’t need the TARP funding.
In the end a 12%+ annualized return and total return 50% higher than the S&P500 over 15 years is nothing to sneeze at.
2.) Different banks had different focus areas, and not everyone jumped into the MBS bandwagon. If you notice, all investment-banking oriented banks got rekted while all the consumer banks stayed afloat, bar some exceptional risky bets by the likes of Wachovia and Chase. All the survivors were consumer banks eating up investment banks.
3.) A profit that can be attributed from the consumer banking side.
4.) Most of the annualized return you mentioned comes from 2017 on, when the tax cuts came. Not the 15 years you mention. Before that, it was lagging at 50$ per share.
2) So for 6 years he could have had his team chase bigger profits like Wachovia, Bear Stearns, et al by making risky bets on MBS but didn’t.
3) he’s not responsible for the consumer banking side?
4) Everyone in the S&P 500 all got the same tax cuts, yet he finished over 50% ahead of the average. And they are all up big since 2017, but he’s still way ahead.
2.) Who knows, if 2008 hadn't happened, he might have joined the bandwagon too. Not to mention that JPMorgan's S&T was nothing compared to those players in 2008, so obviously their "risky bets" were minimal.
3.) You're going to attribute consumer side banking to him? Consumer banking is literally a safe-side cash cow for most banks, and you can literally see a number of institutions engaging in it continue to stay safe. He cannot be credited for that.
5.) There are n other companies that have grown even more than JPM. If you're going to use stock prices as a proxy for your argument (which is flawed in itself), GS is currently at 350, almost half of which was gained in the past month. Compared to GS, JPM does seem like a crapper here.
I don't know what's your motivation behind defending Dimon or something, but I'm just echoing the common sentiment in the industry, that he plays it too safe, his cautiousness (often attributed to his ignorance of newer tech) has made JPM a laggard before, and that he was lucky to be loyal dog at Bank One. There are far more brilliant bankers in the industry, for instance Kovacevich who actually changed the face of consumer finance (worse for the consumer eventually, but still changed the face of the industry) or the Blankfein-Solomon duo who brought tech from the backburner and made it one of the most elite teams in the world banking scene (cue Strats and Marcus). Dimon is just like Stumpf (pre-WF scandal) in that he was given one of the biggest banks to play with. I agree, it's not an easy task in itself, but it's certainly not a hard enough one to call him a "brilliant" banker for that.
If they always act as predictably as stated, there's too obvious of an arbitrage opportunity.
Did he change his position, though. Having a negative opinion of something is one thing; and profiting from selling shovels for the gold rush is another thing. The trading desk is not a long position.
The exception to that rule is if you have trouble getting OUT of an illiquid position (as in the example you quote) - then you don't want to panic other investors before you've successfully taken the other side.
I mean, the entire WSB subreddit is basically dedicated to this.
Actually buying stock and not just options is brand new to that group, and they have nearly doubled in size since January so it seems to be going through serious transitions. Now they are doing what they can to put the thumb on the scale to squeeze hedge funds out of their GME positions. The crux of it is whether enough shorts have been made to make this possible and the rumor de jour is that hedge funds misreport their positions. Whether this is true or not, well if you look at WSB posts they’ll say it’s obviously true. I am not convinced personally.
To be clear, WSB to me appears to be doing absolutely nothing illegal or wrong to manipulate the market. The only coordinated effort is to buy GME and AMC and not sell the stock unless it seriously goes up in value (current posts think it’ll go to $10k-100k). They suspect hedge funds are performing ladder attacks to lower the price, so every time the price dips the advice is to buy more. I don’t see how simply buying stock at market price is market manipulation except that it does have an effect on the volume of a particular stock.
Wouldn’t a market maker need to collude as well?
Not saying it’s not true, I genuinely curious as to the mechanics.
tldr; the SEC pays you a portion of any fine they levy against an entity.
I think this has been going on longer, but the players are different now. It looks like it used to be a forum for smaller players and well capitalized individuals to pump small volume options positions, because you can make a few k off of retail investors following your bait in a tiny pocket of the market. Now it’s something that bigger investors noticed and are now participating in.
Some types of market manipulation are truly a bad thing. I'm sure someone engaging in some of the more egregious cases could rationalize their behavior as "it's just guerilla marketing, everybody does that".
That's not wholly wrong -- the intent is really more important than the action in these cases. Were people buying GME because they legit thought the fundamentals of the company were good now or were they riding a bubble?
I'm already too far down the river though, because now we could argue about whether there is something fundamentally wrong about speculating on pricing alone.
I am not a financial expert, but to me this seems extremely bogus. I am not certain where exactly the math is wrong, but it seems like a hedge fund can just buy the shares from the people they borrowed from, and those people will be willing to sell because the price had risen a bit. WSB on the other hand has no strategy beyond "a squeeze will happen". There is no agreed up on price at which to sell, which will lead to some people going right past, say, $10k/share price point holding out for $100k/share, and then the price falling back down to earth while they are left holding the bag, having bought in at $300/share or whatever.
That's not how it works. A short position is basically the contract to deliver a stock regardless of its price at that point, so neither the short holder nor the party that gave them the stock in the first place actually hold that stock anymore.
Now I don't know this exactly and I am not an expert, but I wouldn't be surprised if short positions can exist absolutely independently from the existence of any actual stock. In principle, there can be agreements that only deal with the price of the stock. And something that can exist in principle probably also exists in the financial markets.
So whether or not an actual short squeeze will occur depends on the technicalities of the short positions.
Regarding b) I presume some clauses of said contracts are going to be used. Probably there is a part about some additional payments. Alternatively, the short positions could be extended (for a hefty price, I assume) or in the worst case courts and lawyers will get involved. Interestingly, some of the lenders don't even own the stock they lend. Sometimes they manage other people's stock. When these owners notice that they cannot sell their stock during a short squeeze, then things will get interesting.
In other words, when the guy that started it all (Roaring Kitty/DFV) testified before congress that the only reason he was buying GME was because he fundamentally thought they were going to be a profitable corporation, that was bullshit. He talks a whole lot about short squeezing the stock elsewhere, so his denial that that's why he did it seems to me to be a lie. On a personal level, he seems shady as hell and the whole thing seems like a setup for others to be left holding the bag.
JPM Chase has 250K employees. Do you think Jamie was made aware every time the markets division took a hard look at crypto?
[0] - https://www.bloomberg.com/news/articles/2017-09-12/jpmorgan-...
There are all sorts of arbitrage and correlation trades to be made in bonds, stocks and similar securities (mortgages) because they all have intrinsic values or maturity dates, etc. To protect the banks capital it’s important to restrict the types of trades allowed, and to disallow pure speculation.
Jamie in that article describes cryptocurrencies as pure speculation because they have no intrinsic value, which is why he said he’d never allow employees to trade them.
But one thing I believe about Jamie Dimon is that he has a sharp and flexible mind. If the newer innovations in the DeFi markets around crypto convince him he’s wrong about cryptocurrencies, he will turn on a dime. While still putting in adequate safeguards for his banks capital.
It's a bit concerning that people believe a hollywood movie has taught them how the industry works. Keep in mind how hollywood portrays "hackers" or "scientists" or "Russians" or whatever group is an outsider or opposition to the protagonist and realize they're doing the same to finance.
I worked in the mortgage/CDO/CDS industry for 10yrs during that period (2005-2015).
If anything, the movie was too positive. There aren't as many players like Steve Carell's character who are worried about the world, they are usually worried about how to liquidate their book at the right time.
The bit about getting marked the wrong way was especially spot on.
Another very accurate movie: "Margin Call"
Jeremy Irons is fantastic in this film. The entire board room scene is amazing.
The 3rd one is 99 Homes. The key line is: "Don't get emotional about real estate." What is sold as a place for family memories for some, is just another asset class for others.
OTC or seldom traded securities may not operate in the same way that a highly traded stock like Apple does from a price standpoint. For a boutique security that is created for a customer, the price is whatever the market is willing to pay - but the discovery of that price can quite literally happen over the phone because in the market there might only be one customer and if you sell to them... that's the price!
So assuming that Michael Burry (in this instance) actually had Goldman Sachs create a boutique security, price discovery may very well have happened over the phone in just such a manner. I don't know the details but I'm also not sure why you would think that this can't happen? Please feel free to educate me. I don't know much about professional investing either.
The only purpose of this essay is PR, for hiring and attracting capital. If you want to do the cynical self-interest take, that's the one you should be going with.
I made a number of bets on the tech industry early on in my career (2005-08): that the Web and Javascript would become increasingly more important, that Python would be a major language both for web development and for scientific computing, that Google and other new tech companies would continue growing until they were bigger than we could imagine, that startups would become a more respectable way of spending your career. I would happily crow about them to anyone that would listen, while also arranging my professional life to benefit from them. They happened. Did I cause the ascendancy of Javascript, or Python, or Google, or startups? Of course not. I called it, and then lots of other people, as events progressed, independently made the same call and jumped on the bandwagon.
So it is with Dalio (and Buffett, and other thought leaders in the financial industry). It's unlikely that their words are moving markets, particularly since their bets are often contrarian and unremarkable at the time they start publicly stating them, and financial markets often take years to catch up. Rather, they spot the trend, understand the implications, and then position themselves to benefit when everyone else spots the trend and understands the implications.
Your anecdote isn't equivalent here. You weren't broadcasting your idea to millions of people managing billions of dollars. If you did have that kind of power, it could have helped javascript/python/Google/startups get adopted faster.
This sort of thing does actually happen in other domains, like short selling, and maybe you're reasoning by analogy with that activity. But that logic simply does not apply here. The amounts involved are too large, the liquidity moves too slowly, and the people involved have too much expertise. All the stuff Dalio is saying here is already known to them, and far more.
His articles and books are not innovative. They are not designed to educate experts. They are designed to popularize his ideas, among the general public.
The kinds of people you would have to influence to move these markets are phd macro economists working for central banks, and portfolio managers at places like Pimco. These kinds of people are not reading Dalio's books and thinking "oh man, never thought about these debt cycles before, better go short treasuries".
I am invested on margin. That is for every dollar I own, my broker lends me two, so I can buy stock for three.
It's in my interest to keep interest rates low. So I want other people to invest in bonds long, rather than buy on margin (ie sort-of invest in bonds short).
Of course, my influence is so small that it doesn't really make a difference.
But I can imagine there are much smaller markets, where your voice can make a difference.
[1] https://m.youtube.com/watch?v=PHe0bXAIuk0 [2] https://m.youtube.com/watch?v=M95m2EFb7IQ
I understand the concept of undiversifiable risk, but seeing it play out in practice was eye opening.
I wonder what TIPS did during the same timeframe actually.
EDIT: I looked at VGLT and the mean annual return is extremely low, roughly 0.75%. I like the seemingly negative correlation with equities but I'll need to do some modelling to see if it's worth the massive hit in average expected return.
https://www.bloomberg.com/news/articles/2021-02-12/warren-bu...
I keep seeing that graph when I even entertain the idea of being in the stock market right now.
I'm not denying the existence of bubbles, busts, and crashes, but historically and on average, the stock market does only go up.
This market is overvalued and will likely correct, but that doesn't mean it won't continue to rise on the aggregate.
More value is created over time than lost.
When does this become unsustainable?
Over a long enough period, stonks only go up because that is what we've collectively agreed on, and government will backstop at all costs [2] while population and productivity extracted from that population declines over time [3].
I recommend "Shrinking-population Economics: Lessons From Japan" [3] on this topic.
[1] https://ourworldindata.org/uploads/2014/02/World-population-...
[2] https://www.bloomberg.com/news/articles/2020-12-06/boj-becom...
And even if DCA weren't factored in, how would the returns compare?
Buying S&P, or the Apple, Amazon and Tesla ones is another story. Looking at the average can be misleading.
What this is missing is the amount of time investors are investing in. Day traders don’t care about tomorrow, they care about the difference between 9 am and 4 pm. Options traders might care about the next few weeks. If you are investing for 20+ years in a retirement account, you don’t care about the bubble. It will self correct over a year and by the time you withdraw, stocks are significantly up.
Bonds make sense if you are investing for 1 month to say 3 years.
I don't think it is fair to call 2001 and 2008 "blips". Their combined effect was we lost 20 years worth of potential growth.
But look on either side of that blip and there is plenty of profit.
Certainly, but as Keynes said, "in the long term we're all dead". Less dramatically, average annual returns over long periods of time depend dramatically on when you start and stop the calculation. At some point, people want to retire and live off their savings and "wait another 10 years and you'll recover your principal loss" isn't a comforting message.
It's not a binary choice.
Taking a haircut after 30years of gains is OK.
Whether that would crash stocks or the economy is more questionable. Probably stocks.
The first condition creates a natural headwind to increase stock values. The current condition will reverse that.
"Even if you had to sell your stocks at the bottom of the Great Depression, but held them for more than 20 years before that, you would not suffer a loss in value of your portfolio"
Don't they always go up on average though? Even the much hyped 'housing crash' of 2008 only last for all of 3 yrs till 2011 after which they went zooming past the previous highs.
This is why having a good asset mix is important. You shouldn't have no stocks, because they have really good returns on average. But on the flip side, having only stocks is somewhat risky because it's impossible to tell if you are buying on the topside or bottom side of a bubble.
[1]: https://www.forbes.com/sites/johnwake/2019/03/30/new-study-o... "Old Real Estate Bubbles (1582-1810)"
[2]: https://globalfinancialdata.com/seven-centuries-of-real-esta... "Seven Centuries of Real Estate Prices"
[3]: https://observationsandnotes.blogspot.com/2011/07/housing-pr... "100 Years of Inflation-Adjusted Housing Price History"
([3] is inflation-adjusted. For [2] see the second chart for inflation-adjusted prices. [1] is not inflation-adjusted but there wasn’t much inflation in Amsterdam back then.)
Maybe you think they should keep going up, for whatever reason, and you might be right. But that's different than the fact that they increased on average in the past.
It's not too far off to say that, in the long term, their real value does not go up, they just track inflation. Of course in recent years we live in Weird Times financially.
https://www.multpl.com/case-shiller-home-price-index-inflati...
Quite possibly you’re being too pessimistic.
Only time will tell I suppose.
STONKS can only go up if you're 30 and don't plan to touch the money for 35 years, this is basically a fact(I'm just a SWE not a financial advisor).
If you're 55 and looking to retire in the next decade you normally shift a larger portion of your assets into more stable investments.
That said, I also don’t own Tesla because I think it’s crazy overvalued.
The crash will come once average suburbanites stop protesting everything denser than a half-acre single-family home and city councils realize that mixed-zoning is far more sustainable.
There were not unsurmountable government restrictions (obviously). There was no real demand for it. The housing demand was largely speculative, people investing in houses because "prices never go down". Often, they didn't even get rented - why bother, if the valuation of your "investment" grows faster than what you can get from rent?
In markets like these, huge increases in supply don't drive the prices down. Hoarding, speculation and housing flipping absorb everything that gets built. We still have insanely high housing prices today.
So conversely, the crash will never come as long as average suburbanites continue to protest everything denser than a half-acre single-family home? Because I wouldn't bet on human nature changing any time soon.
https://twitter.com/SellFiat/status/1347958257642569730/phot...
Above graph is only about Bitcoin, people have made a shit ton more on Alt..
I'm closer to your age and experienced those recessions but my take away isn't that stocks go down, it's that the government will pull every tool it has to keep the wealthy wealthy.
The fact that a currency crisis and hyperinflation seems unthinkable to many people pours fuel on this. A number of people are pushing the idea that we can and should print as much money as we can to get back to full employment (and even beyond that - "living wage" is the bar now), and they're being taken seriously in government. This has somewhat predictable results - other governments have believed it throughout history, and (like with many things market-related) the point at which people believe it is the point at which it's no longer true.
Heaven forbid we demand an economic system built upon the notion that everyone who works should have the ability to live a decent life with secure food and housing.
It's telling that many see spending and regulating toward this goal as "printing money" unscrupulously, yet when similar orders of magnitude spends are casually allocated toward the Department of Defense on an annual basis not a word is uttered about their utility.
Ultimately living conditions are set by real goods & services, not by the amount of money flowing into a sector. If more money flows in and the supply of real goods remains fixed, it just makes everything cost more. I'd agree that most military spending is a waste of money - why does an F-22 cost $334M? But directing that spending into housing, education, and health care without addressing the supply bottlenecks in those industries will just make housing, health care, and college cost more. We should be building more housing (and particularly, streamlining zoning/permitting requirements so that more developers can enter the market), breaking up big health insurers so that there's more competition in the market and you don't need to put up with Anthem's bullshit, and developing lower-cost alternatives to a 4-year college degree.
On a societal level "more money" is never the answer - "more goods and services" is. You fix shortages by fixing shortages, not by letting everybody pay more for the same musical chairs.
If you recall, at the beginning of the pandemic we we had farms ploughing under crops for lack of demand. Potatoes stacking up to high heavens, farmers offering them free to anyone who'd arrive with a bag to transport them.
The author actually mentions the traditional knobs of monetary policy don't impact the distribution of money at the bottom of the economy where it is needed. That's why the direct stimulus and now family UBI is so different, and should be looked at as imperfect but necessary for addressing the need at hand.
This is not 2009, when there were plenty of people available to work, there was plenty of consumer demand, but there was no money to pay them because the banks gambled it all away. The primary feature of the COVID recession was a massive supply shock and demand shift. We had potatoes piling up not because there were too many potatoes, but because there were no truck drivers and warehouse workers needed to move them from farm to table. We also had record hunger and record food assistance during that time period.
I will abuse this opportunity to talk about why inflation is necessary and why the current way of merely increasing the money supply did not cause inflation.
Dollars are like flour. Just another commodity that can be bought. Instead of benchmarking assets against the dollar we start benchmarking the dollar against a theoretical benchmark currency that always retains its value perfectly and never changes. I will call this benchmark "Effort".
For simplicity we will assume that on day one the value of the dollar is exactly 1 effort until the value of the dollar changes (either through a reduction or increase in money supply).
If the dollar is deflationary and the supply goes down over time then it will become worth more than 1 Effort. As I said earlier the dollar is a commodity just like anything else. This means that if the supply of the dollar shrinks then there is a shortage of dollars, exactly the same way there could be a shortage of houses or a shortage of food. We must create more dollars until the dollar is worth around 1 Effort again.
The question is, where is that supposed shortage of dollars? Who exactly is desperate for liquid cash? Definitively not publicly traded companies and their owners. Holders of cryptocurrencies? Maybe but we are reaching deep into trickle down economics because of the small portion of retail traders. There is a case to be made for infrastructure investments and maybe unemployment benefits/stimulus checks but even then the amount of money that is truly needed isn't enough to explain why the quantity should be increased by 40%.
The only thing that is certain is that the wealth transfer effect is not considered undesirable by the Fed and that they would do it again, even if it doesn't solve any real problems.
The quantity of money might have gone up for large companies, banks and those positioned correctly, but that's inaccessible to the majority of the American population. The majority of 2020 stimulus was delivered to private banks that prioritized their largest strictly for-profit customers. 2021 stimulus, in contrast, shifts the balance toward direct aid and city/state aid.
What is this supposed to mean to mere mortals?
The other 2, no idea.
As a counterpoint, I have a BSCS, and closer to 35 YOE, and I have never, nor will ever in my lifetime see $800K/year. To date, not even a quarter that.
I have browsed the app and don't recall many 25 year olds claiming >$500K TC (except those who were part of particularly lucky IPOs). 30+ year olds, definitely.
Now every stock market jitter leads to the Fed announcing an asset purchase program.
edit: And by investing in munies you're also investing in US infrastructure. Munies fund all that stuff. Bridges, fire stations, schools, roads, water treatment plants, ports, electrical grids, etc, etc, etc. Might even make you feel like a good citizen...
One way to expose the fallacy is perhaps by the thought experiment of selling on the secondary market a day or a week before maturity. Prices of any highly liquid bond will have converged toward redemption value, differing by no more than some small epsilon.
Lately almost certainly yes. The tax benefits might still make it worthwhile but inflation is most definitely higher than than 4% at the moment
Are they?
COVID19 has destroyed the tax-budgets of many states and cities. Deficit spending / stimulus is the current plan, but how long can States keep it up?
I know there's been a stimulus bill just passed. But is it enough to get state budgets back in order after a tough year?
--------
For most city level governments, things like Theater, Restaurants, Sport-events, Conferences, Gambling, Malls, Tourism, Hotels, Gasoline Tax (aka Driving), serve as a major leg of their tax revenue.
All of which has been severely restrained by current events.
https://www.nydailynews.com/new-york/president-ford-announce...
https://www.mcconnell.senate.gov/public/index.cfm/pressrelea...
> “I said yesterday we’re going to push the pause button here, because I think this whole business of additional assistance for state and local governments needs to be thoroughly evaluated. You raised yourself the important issue of what states have done, many of them have done to themselves with their pension programs. There’s not going to be any desire on the Republican side to bail out state pensions by borrowing money from future generations.”
As the article mentions that paradigm is probably over.
> returns are multiples of US Treasuries, CDs, money markets
Multiples of tiny numbers are still tiny. What role should a muni bond yielding 2% and maturing in twenty five years play in my retirement portfolio? That might not even beat inflation.
"Wall Street makes its money on activity. You make your money on inactivity."
Over the last forty years treasury rates have been more or less steadily decreasing. The ten year treasury was paying over 15% in 1981 and now it’s paying a little over 1.5%.
What this means is that bond investors over that 40 year period have gotten juiced returns—-they got whatever the bonds were yielding plus price appreciation from falling interest rates.
This dynamic was in place for the adult lives of everyone under the age of 60 today. Our intuitions, rules of thumb, and understandings of how bonds contribute to a portfolio we’re all developed in the shadow of this phenomenon.
But now interest rates have nowhere left to fall. The zero bound forces an end to this dynamic.+ From now on not only will bond returns not be juiced they could well be reduced by the opposite effect. From 80 to 40 years ago interest rates more or less steadily increased over that period, causing bond prices to constantly be falling.
+ Negative nominal rates could extend it a few more years but the cash cost of carry is a hard bottom.
But if you'd just bought a portfolio of bonds to give you a fixed bucket of maturities (which is what by far the larger part of the market has usually tended to do) and only reinvested cashflows as you received them from the issuers, you'd have likely underperformed your initial expectations because you faced reinvestment risk.
That lower return probably would have been compensated by inflation also falling for some of that time. But real yields have now been negative for quite a while, so to maintain returns you'd have been forced to accept more risk.
All the bears have been completely wrong, except for short periods of time. And they will continue to be wrong. Again, no one that matters wants the USD and UST to fail. Bond vigilantes can't defeat the Fed.
This is amazing given that it’s literally just an inert metal vs the 500 biggest American Corporations.
(Comparing GLD vs SPY starting around 2005.)
2008 was a sea change in fiscal policy that unleashed worldwide money printing. It isn’t surprising that gold has done very well during this period. And I don’t see that trend changing anytime soon.
But in the long-term, I agree with you. Which is why precious metals are a small part of my portfolio.
I guess it depends on your definition of amazing.
If you assume -- and I'm not saying this is true -- that the value of "the world's best companies" trends at 8%/year with a +/-15% "variance", while the value of "a pile of rocks" trends at 0%/year with a +/-15% "variance", you would totally expect to see long periods where they yield comparable returns.
Personally, I don't find that particularly amazing, but to each their own!
* https://fred.stlouisfed.org/series/GOLDAMGBD228NLBM
If you bought gold in 2005, you would have peaked in 2011, and not recovered until mid-2020. If you have the nerve/patience to do that, you have a stronger stomach than I.
I am constantly reminded of Buffett's 2011 take:
> Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?
> Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion. Call this cube pile A.
> Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual production of gold command about $160 billion. Buyers – whether jewelry and industrial users, frightened individuals, or speculators – must continually absorb this additional supply to merely maintain an equilibrium at present prices.
> A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops – and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.
* https://www.berkshirehathaway.com/letters/2011ltr.pdf
Gold has not been a very useful 'investment' over the long-term:
* https://www.pwlcapital.com/will-gold-save-the-day/
What are the expected returns of gold given that it has no earnings?
A small amount of gold might get lost or stolen and it's usually more annoying to sell than stocks. But otherwise, you can just keep it in a sock under your pillow and be reasonably sure it's still there in a few decades.
In what area of the world do you live in that these scenarios are actually keeping you up at night?
This is not even to mention the prospect of “constructive” land reform, e.g. squeezing landowners (or certain disfavored types of landowners) with policy and then increasing property or income taxes to the point where they have no choice but to sell at a loss.
> In what area of the world do you live in that these scenarios are actually keeping you up at night?
Canada is on that list. I live in Canada. This is not something anyone I know is losing sleep over.
They may be buying gold for other reasons, but it is not for the possibility of losing their land.
This HN thread is about Ray Dalio and bonds, and the sub-thread is about the S&P 500 versus gold returns, and gold returns in general. Bringing in farmland is quite the curve ball.
I'm not invested in gold, and I mostly agree with Buffett here. I just want to point out that the argument ain't watertight.
(I try to be especially critical of arguments that support positions I agree with. Have to be careful not to bullshit yourself too much.)
I mostly agree with the conclusions of the Dalio piece, too. But I don't agree with all the arguments.
My main takeaway was to get inspired to look into how to short US bonds.
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&t...
Though looking at the low correlation between gold and the rest of the market, it looks like you did make an argument there for gold as part of a diversified portfolio.
https://www.reuters.com/article/us-gold-swiss-fakes-exclusiv...
https://www.celticgold.eu/en/gold-university/fake-gold-bars....
Comparing one-off investments is very dependent on the start date, and dollar-cost averaging more accurately models what people can actually do and which returns one may be able to expect. Who has a large lump sum laying around to invest rather than investing a portion of one's income every month/quarter?
TL;DR; gold didn't beat the S&P 500 over the past 15 years.
I’ve seen this argument before, and can’t help to think how naive it sounds.
Can you name one other case where the fact that we don’t want something to fail results in it being unable to fail?
Actions have consequences. No matter how much we don’t want a particular set of consequences to occur, they will if we perform the wrong actions.
See https://www.goodreads.com/book/show/43062766-shut-out for more detail than you ever wanted to know, or check out the author's blog at https://www.idiosyncraticwhisk.com/
I would prefer reasonable home prices, which means neither collapse nor bubble mania.
But it's not house prices that are important. It's housing affordability, which is better measured by monthly mortgage payments (and rents).
However, that was not what happened in and after 2008.
Availability of credit collapsed. So owning housing got cheaper for people who could still get credit, but renting did not become cheaper. Have a look at the backlog of https://www.idiosyncraticwhisk.com/ for more than you ever wanted to know about the topic. (Or splurge on the author's book.)
The US dollar will continue to be supreme so long as the United States controls the US Agency for International Development, the Office of Foreign Asset Control, and the US Marine Corps.
Unfortunately, those short periods of time are enough to bankrupt people. I don't think anybody is claiming fiat currencies will go away forever.
Maybe. But that just means that being a bull is tricky business, too. It doesn't mean that being a bear is good business.
[1] https://apnews.com/article/84ee301c404539d8731da34128330752
Currencies have failed before from eg incompetence, without anyone bearing the ill will.
(For what it's worth, I essentially agree with your conclusion. But I think this is not a good argument.)
And Dalio has not always been saying this. He used to advocate an "All-Weather" portfolio that was 55% US treasury bonds: https://ofdollarsanddata.com/ray-dalio-all-weather-portfolio...
At some point the US will lose reserve currency status. It's happened to every reserve currency before the USD and will happen again with probability of 1. The question is only how soon.
He's saying this:
1. Bond prices are inversely related to interest rates. Interest rates have been declining for 50 years. They are now near 0. They probably can't go much lower, so they can really only go up.
2. If they go up, bond prices go down.
3. Institutional asset managers with obligations (e.g. pensions, budgets) already cannot meet their obligations with the yield from bonds and the bonds are unlikely to appreciate in value.
4. Therefore, it makes no sense for institutional asset managers to be invested in bonds because thta will pretty much guarantee that they will be unable to meet their obligations.
At the point somebody is bidding in a primary government bond auction, they are either a pension fund with a bank deposit, and/or the bank backing that deposit with central bank reserves.
Even with all the investment options available, somebody always has to end up in that position in aggregate. Asset prices rise across the board until this indifference level is reached.
Central Bank reserves are remunerated at a fraction of one percent at the moment. Bank deposits even less. Bank deposits also suffer from the risk that the bank will fail.
Therefore relative to the only options left, government bonds represent a good investment. Particularly if you are a pension fund under regulatory instructions to fix your income with certainty.
What's particularly interesting is that the bid for the bond will come from two places - the pension fund, and the bank itself - using essentially the same money. The sale to either is settled with precisely the same set of central bank reserves. If the bank wins the auction it will end up backing the bank deposit with the bond rather than reserves. If the pension fund wins the auction, the deposit and the bank reserves are deleted from the bank's books.
Hence Compulsory Pension Contributions in certain jurisdictions. Which when you follow it through is just a privatised tax where some financial middlemen get to skim off the top.
Before you have some pieces of paper (bonds) that the US issued. Afterwards you have some pieces of paper (cash) that the US issued.
And the US can create arbitrary amounts of cash, if they really have to.
(Obviously, these days it's all entries in databases. But you get my drift.)
Alas, thanks to widespread government deposit insurance, that's not really much of a risk.
There are additional informal expectations about bailouts.
Too-big-too-fail is a thing for a reason.
> so they could very well impose prohibitions against capital movements to other assets (e.g., gold, Bitcoin, etc.) and other locations. These tax changes could be more shocking than expected.
Who truly believes this is a likely scenario? A number of folks I know are already considering fleeing the US but if this was to pass, that number would skyrocket and I can't imagine a good outcome in the next few decades from capital flight in the US.
There are 195 different nations on earth. That leaves a lot more options than the EU, Japan, and China.
A lot of crypto-expats are going to carribean island nations.
No.
Are they going to buy Lamborghinis in pesos? More seriously, yes, some people are content with living like a rich native in the global south but for anyone else who plans to participate in the global economy (and I assume they do, because capital controls would likely only affect high net worth individuals), they would need to convert to EUR/JPY/CNY/USD.
In fact, if crypto were used more as money in the real economy, banning it would have the reverse effect, shrinking the amount of money in the economy.
For one, how would they even put capital movements controls on crypto? For example, I just have to remember my 12 word seed and I can hop on a plane to another country and my crypto comes with me.
The other part is, wouldn't those capital controls be the last nail in the coffin of "we lost complete control of the situation"?
That might be harder to find than you think, or might require a significant haircut on the conversion.
It’s like cash but even more effective for this purpose.
The real problem with bitcoin is you cannot physically transfer it. I can sell you a USB drive with a wallet on it, but you shouldn't buy it because you can't know if I have a copy of that USB drive in my other pocket. The only way to transfer bitcoin for-real is to submit it to the network and to make sure it's confirmed.
My take is that the censorship-resistant qualities of bitcoin are highly overstated.
Since the ledger is public, if the government knows which wallet is linked to you (easy if you’ve done KYC in order to use an exchange), they could also sanction any wallets that transact with your wallet, severely limiting who will be willing to do P2P/otc with you
I'm not convinced. Your scenario relies on people having some deep conviction about the value and usefulness of cryptocurrencies. I think that this is true only for a very small vocal minority of users/buyers. Most people just want to make easy money with it - that's why I think heavy regulation/bans will simply crash the prices instead of leading to a Streisand effect.
Government can very easily control almost all of those channels.
It’s like cash but even more effective for this purpose.
It’s like cash but even more effective for this purpose.
Regarding localbitcoins or other OTC in person deals I certainly wouldn't want to meet with a stranger and carry $1000 with me in cash to buy his Bitcoins. And localbitcoins was forced to implement KYC, so if Bitcoin gets outlawed or heavily taxed, the state will have a look into their customers.
The United States is the only major power with a strong ideological belief in unrestricted capital flows. The EU and China have both implemented capital controls in the modern era, sometimes repeatedly. (U.K. currently stands out, too.) All it takes is a populist “the rich are fleeing with their capital” trope to take hold on the far left and/or the right, and the centre to crumble, for such policy to become politically palatable. At that point, there really isn’t anyone else defending free market capitalism.
Put another way, do you really think you couldn’t get a lot of people in e.g. San Francisco to sign onto a mandate that requires the rich to register outgoing capital flows?
Your example is poor; there are 10s of millions of people in California who have been trying to get healthcare reform passed for nearly a decade now and the trend so far has been Obamacare being slowly unwound. It's unclear if the far left/right is anything more than a boogeyman at this point considering the glacier pace of the Senate in the last 20 years. The media would have you believe the democrats are well on their way full blown communism, but the reality is the party self-sabotaged their own $15 minimum wage proposal and managed to be less generous than Trump on stimulus checks.
If the Federal Reserve decided to implement capital controls, I doubt it would happen democratically. It's more likely that you would wake up one day and all the major banks would have limits on how much gold you could purchase in a year for "liability reasons". I'm sure a Senator or two would scream, but the next week there would be the next culture war story with Ted Cruz complaining about MTV.
I was responding to "who...believes this is a likely scenario?" The argument isn't "this will happen." Just that it shouldn't be beyond the pale of reasonable debate. (Like universal healthcare.)
> If the Federal Reserve decided to implement capital controls, I doubt it would happen democratically
Capital controls are populist. They shift power away from the wealthy to those at the political levers. The Fed would almost certainly not do this; the Treasury could under emergency powers. The potential for popular support would give them cover to do so.
No? Capital controls in western history is hardly populist. When I think of populist economic movements, the Bretton Woods System doesn't come to mind. And it's clear China's capital control serve to keep power in the hands of the autocracy; not the other way around.
If the value of the dollar was spiraling to zero it's the Fed, and their clients, that would have the most to lose.
This belief in ideological attachment to policy sounds so silly to me. It can change and it can change quite quickly in fact. It's like saying the US has a strong ideological belief in democracy that guides all it's geopolitical moves abroad.
Doesn't seem that way for citizens considering we still have to pay US taxes when living abroad (there are some tax agreements but still), have to pay an exit tax if we want to renounce our citizenship, and the US requires foreign banks to report US citizens assets to the US government.
I don't like it, but the US is free to decide to want to tax their citizens even if the income is earned outside the borders - and they have the capability to enforce it.
https://www.reuters.com/article/uk-india-cryptocurrency-ban/...
The financial picture Dalio paints is the first stage of this, but it merges with a lot of other trends to make something horrible. There's the ongoing migration crisis; conditions are becoming inhospitable in areas like Central America and the Middle East, which is driving migrants to developed nations like the U.S. and Europe and destabilizing those countries. There's the climate crisis, which is the root cause of the migration crisis. There's a trust crisis propagated by the Internet and Big Tech, where nobody knows what to believe anymore. There's a pending military technology shift where cheap autonomous weaponry fundamentally changes the power balance between large nation states and small insurgencies. And then there's a population that's just fed up, as evidenced by the Capitol Riots and lockdown protests (as well as plenty of Internet vitriol).
Unfortunately fleeing the U.S. won't do anything for this, because if the U.S. goes, the whole world will erupt in flames. Better to put down roots in a community whose values you agree with, ideally one in a well-defensible location with plenty of natural resources.
It would seem to me that this shift towards remote weapons would favor the military, not insurgents in the event of civil strife.
Shrinking the weapon system usually results in physics limitations on range and speed - a 20-ton plane can carry enough fuel to go 2000 miles, but a 1 kg drone might have enough charge to go 2 miles. This favors the defender and prevents the use of these weapons for power-projection. Drone swarms are great for close air support, field defense, and urban warfare, but you can't do precision strikes across a continent (but you can defend against precision strikes, as long as your drones are accurate enough to intercept a missile). That fundamentally changes the balance of power toward smaller political entities.
The transistor is the only physical process that I know of that has improved at that pace. What makes you think drones can improve to that magnitude?
I'm also not sure that 50 years from now, the Capital Riot will be recorded as being a majorly significant event in US history. It'll probably be mentioned in history books but I'm doubtful it'll be referred to as a pivot point in US history.
Migration crisis: I feel there's been larger migration events in the past. Doubtful the climate crisis will actually be creating a massive scale migration crisis.
I do think climate change will change the dynamic in various areas.
I otherwise also agree on the paradigm shift in military technology.
The other major factor is a demographic crisis: worldwide, we have a large bulge in the number of people who are just about hitting 30 in 2020. Historically, when a lot of people reach reproductive years and there aren't the resources needed to support all of them having families, violence and social instability tends to result. This has been predictable since all these kids were born in the 90s, but obviously I'd hoped it'd go differently and technology would find some way to alleviate resource limits. Now we're here and seeing all the discontent from peoples' lives not turning out quite how they envisioned as kids.
Nevertheless, we know from history that these events do occur, and they occur much more frequently than those of us alive now believe (again a form of survivorship bias - folks that don't live in a time of peace tend not to survive). The 250-year stability of the United States - and the 75-year Pax Americana after WW2 - is a historical anomaly. The article gives a bunch of reasons why the 2020s will be different, financially, from the 1980-2020 period, and I gave a bunch of reasons why it'll be different sociopolitically. You can choose to believe them or not, but I (and Dalio) at least explained the dynamics that lead me to believe them.
Things like sea level rise, rising temperatures, and more frequent blizzards or cold snaps act over decades. That'll be a gradual shift in migration patterns, not a crisis.
But a lot of the second-order effects operate on much smaller timescales. Hurricanes can cause large dislocation on the timescale of a week: look at Rita & Katrina in 2005, which cut the population of New Orleans in half and gridlocked all the freeways out of Houston for days. Wildfires also can trigger large migrations within a matter of weeks. We've been lucky that most of the West Coast wildfires have been in relatively unpopulated areas, but if one were ever to jump highway 280 in the Bay Area or get into the Pasadena/Glendale/Burbank area by LA, we could have a mass evacuation crisis. Crop failures too: that's what's driving a lot of the Middle East migration. If it happened in the U.S. or China millions of people would starve.
There's also violence caused by resource constraints. We see that in Central America now, in the Middle East, and increasingly in the middle of U.S. cities.
Some runners-up included the Bay Area & Coastal California (easily defensible & fertile, but has overpopulation, water issues and limited timber), the Great Salt Lake valley (ditto), and the Colorado & Wyoming foothills (pretty dry, but a great mining/oil shale area). The worst areas were in the Southwest (which already has a migrant crisis and is going to get totally screwed by global warming) and the Great Lakes area (overpopulated relative to its natural carrying capacity).
Suburbia could be a decent place, if the population density is low enough and it's surrounded by arable land and resources. Livermore, for example, wouldn't be a bad place. But the rows upon rows of tract houses (say San Jose or LA) would become a miserable place without the rest of society to support it, as would the inner cities. I think that the ideal density would be a small self-contained city of say 50-80K people: small enough to maintain social cohesion, but large enough to support some division of labor and have enough of a workforce to support & defend the region.
My own answer is Delta/Montrose, Colorado. It has water, good farmland, nearby mountains (timber) and coal fields. You could even do some hydro power from the river. It's somewhat defensible - an attacker would have to cross a fair amount of inhospitable terrain to get there, unless they came from the south, and the San Juans would not be that difficult to defend.
The one issue would be oil - there's oilfields around Aztec, New Mexico, but that's kind of a long way in a collapsed society.
As a city-dweller, your strategy for surviving this is to join one. As a wealthy suburb dweller, you better hope you have a private security advantage where you can kill the whole mob before it kills you. As a rural dweller, your strategy is to be far enough away, high enough up, and insignificant enough that it's not worth going after you. Gas will be in short supply after a collapse; it's not worth driving 100 miles to take food from a farm that you don't know exists. Most of the towns and small cities in the regions I mentioned are easily that far away from the nearest city.
It's pretty likely that the dominant political organization after a national collapse would be city-states. However, that doesn't mean that it's best for an individual to be within them. We might see 75% depopulation within cities, but people in rural areas can go on about their normal business, if they don't get conquered entirely by the local city. It's a choice between living in privilege in the aftermath of the collapse but having a good chance of not making it there, vs. a higher chance of survival but you'll be a vassal state to the local city.
The driver of that is more like unfree markets which always result in mass poverty and misery.
Your perspective on this seems to be a bit U.S.-centric. No developed country in the world botched its national response to Covid-19 as badly as the United States did. In several countries — like Australia and New Zealand — public trust in government has grown as the public benefited greatly from its government’s world class results in handling the Covid pandemic.
Granted, it does seem that most people these days consider their own government to be at the very least incompetent. But I don’t get the sense countries like Australia have anywhere near the same level of anti-government resentment to contend with. It seems to me a good deal of the blame for the dysfunction of modern America falls on American culture.
> There's the climate crisis, which is the root cause of the migration crisis.
I’d think quality of life factors and economic opportunity would be the primary drivers for migration from the global south to North America and Western Europe. Am I misreading your take on this? It’s a bit of a leap to pin it all onto climate change.
I don't know if gold is under threat, but there's certainly historical precedent for it, as mentioned in the article.
For Bitcoin, India and China have both been taking small steps toward limiting or banning it. Western media and influential figures (Bill Gates) have been recently talking about how wasteful it is.
No matter your arguments on either topic, the fact remains that governments can limit their own citizenry, by threat of force, from transacting with any instrument.
Consider: https://www.bloomberg.com/news/articles/2021-03-10/wall-stre...
I know a lot of bonds have been selling, that's why the fed needs to buy so much every month, to make up for all that selling people are doing. Personally, i'm surprised even more people haven't been selling bonds.
With the threat of inflation looming so large, and the enormous money supply that has increased in the last year. All those country's debt problems for which the only solution is inflation: it's the only thing that's politically feasible.
I'm a totally risk averse investor and as such, I avoid cash and bonds like the plague with the exception of a modest emergency cash reserves.
Of course this is all linked to the rise of all the other assets classes. when the 100 trillion dollar bond markets sell off, all that money has to go somewhere: equities, real estate, gold and now bitcoin.
Some of this is due to interest rates, but those have already bottomed out. At this point, it's a near certainty Covid will continue impacting markets for quarters to come.
As mentioned, a little inflation is a good thing. If we think of the financial system like a rube goldberg machine or some heavy enterprise SaaS application --things you can't just tear down and start over-- the most viably peaceful way out of our problems is inflating the debt.
Except appraisal is an estimate of what a house will sell for, not any intrinsic notion of value. Selling over appraisal implies that the appraisers expect the value of the house to drop in nominal terms, not inflate.
Maybe experienced appraisers do more than that, but my state at least doesn't expect them to.
But isn't "recent sale prices of comparable properties" about market expectations though? Like isn't the implication of an appraisal that if you were forced to sell the house you could get the appraised amount for it?
It was surprisingly subjective though. It wasn't like you were feeding lots of data into big statistical models. You'd only pick the few closest comp houses that sold recently. They'd still have different features, so you'd try to figure out the value of the features by comparing the comp houses. It was a simple mechanical procedure but you could work it out different ways and get different numbers. Our instructor admitted there was a lot of opportunity to make it come out however you wanted, and even said that experienced appraisers did so consciously.
So I wouldn't be surprised if an appraiser who thought the market was in for decline actually did write lower appraisals, though they'd justify it entirely by recent comps.
The main difference between bonds and cash is mostly based on the fact that cash is the means of settlement.
But in fact what we call cash can also have two main forms: federal reserves (debt of the feds) that can be dealt with only by banks and regular bank depositories (debt of the particular bank). And there is even a third layer of Euro Dollar which is debt of non-US banks who cannot hold federal reserves and who can only rely on deposits at 'correspondent banks' in the US who can hold federal reserves.
The fed reserves is the most liquid form of money - but it cannot be held by individuals, only by US banks. Bank depositories are less liquid because there can be a bank run - in that respect US government bonds are in fact less risky even though they are not used as a settlement or accounting mechanism. They are less risky because the US government will always pay them back, because they are USD denominated and there is no gold parity any more. Non rhetorical question: are there any scenarios where the US defaults on their debts?
It is only 50 years that we can a complete fiat based money - before that the system was based on gold (and silver and other resources like shells) - so the current USD based system is really incomparable with the past reserve currencies. Somehow Ray Dalio in his essays with historical comparisons completely misses that - but of course it only makes his thesis stronger.
Non US bonds denominated in USD are completely different - because they can default. In gold based system all bonds used to be like that, because in the end no government could print gold.
Maybe 50 years is not enough to have any full cycle and there is no way to extrapolate.
The economists base their inflation and similar models mostly on the US economy and fiscal mechanisms - but because of globalisation the share of USD transactions outside of the US economy is probably growing. I would love to see stats on that.
No. Since it is just a bond swap. To anybody not in the US (like me), the US dollar is just a 0% permanent bearer bond. When a bond matures it is swapped for central bank reserves (floating debt). When one is sold it is swapped back (fixed rate term debt).
The monetary system is reflexive. No financial institution is going to hold central bank reserves when there is a near identical government bond available paying a higher interest rate.
Here in the UK, by contrast, it is a 'standing service' on the Consolidated Fund that is governed by two acts of Parliament (The National Loans Act 1968 and the Exchequer and Audit Departments Act 1866). It is entirely automatic and mandated by statute. Nothing can stop it happening. Nothing can even delay it happening - short of a technical failure in the computer systems. Gilts will always be deleted, and the replacement bank reserves created by the Bank of England on the date of maturity.
1) Technically they have defaulted in '79, though it was more of a delay.
2) See how divided politics has become. What happens if the US hits the debt ceiling and the other party decide enough is enough and wont approve appropriate borrowing capacity and all budget. Given divisive politics of recent does this seem that far fetched?
3) US debt is getting to 110% of GDP and growing fast. If this isn't controlled it will hit a point where it becomes to a point where people lose confide3nce. And sure the US govt can print money given own currency as is often touted, but currency need confidence. If people feel they are just a printing machine and decide to head for lower risk waters, they can print all they want but money will become increasingly worthless and they may beed to 'reset' which means possible default .
4) Interest rates. What if these go up? The government can influence but ultimately the market has to want to take on that risk too. If economic times get rocky its not unforeseeable the fed cant set interest rates as easily as they do today. This could flow into serious payment/cost issues on the budget.
5) Not to fear monger, but China hold a bunch of debt. What if they decide to drop a trillion onto the market while US has other crisis compounding value issues and currency runs?
6) On the flip side of foreign debt holders like china, what if some rouge president said "we are not paying you because you stole our IP" or whatever rationale. Unlikely but recent politics shows us extreme statements/positions like this can happen. Even to threaten this in an unthought statement could have serious consequence and flow-on.
7) What if we have another pandemic or natural disaster and the economy drops 30% and stays there... good luck serving the debt on a drastically shrunk economy without serious consequence.
8) What if the next generation decides they are sick of previous generations debt limiting their countries future and a movement starts 'not my debt' and some hard left/right politions take power on disgruntled citizens
Etc
And yes the US can always print money, but money can lose worth too if people dont want it because they feel too much is being printed.
And to be clear, Im not saying the US will default, but there are many reasons that could trigger it to. Personally I think short term risk (sub 20 years?) is negligible, but if they stay on the current path we either need to find MMT works (whole other discussion), or there doesn't seem to be a positive end.
And sell it to whom? What happens to every other currency in the world when that happens? Including all those countries who relying upon exports to the USA.
If China dropped a trillion onto the market, then they would probably get Mexican Pesos in return as the Mexicans hoovered then up to stop their currency getting into nosebleed territory.
The currency system is like a waterbed. You can't just jump on one end and not expect a systemic response and feedback that will throw you off just as hard.
This would depend on the level of inflation. Higher than normal, probably. Extremely high, like ~30%+ its reset time I would suspect.
With the printing money, there has to be a limit. Were in the middle of something far beyond normal at any other time. Maybe we'll get through it cleanly but I also suspect todays debt fuelled can kicking events will get taught to students in ~50 years time and they'll sit there going 'what were they thinking'.
Banks do it every time they lend, so that can't be the limiting factor can it.
You're looking at the system incorrectly. Try it this way.
To spend you have to have two things - liquidity to complete the purchase and something available to buy.
Which gives you the obvious limit - spending stops when you run out of things to buy available for sale in the denomination at a price worth paying.
So it stops automatically - largely because the pejorative "printing money" line has nothing to do with the control mechanism in the system. Money is a dynamic thing. Systemically it pops into being and disappears as required.
"printing money" is just the accounting counterparty of "saving money". If you want to stop it or reduce it, simply delete everybody's monetary savings. That will cause all national debt to disappear by accounting identity.
That's PER checking account, and if they are joint checking accounts, then the max is $500,000 per account.
So you could have:
* individual account
* revocable trust account
* joint revocable trust account
* etc
each with a separate $250k limit at the bank (and in the case of the trusts, the limit can be $250k per beneficiary of the trust).
The money printing causes:
- Inflation (as in rising consumer prices)
- Massive swings and bubbles in the financial markets
- Increasing wealth inequality
This has happened until now in a global coordinated manner. This was also the policy after 2008.
However it seems that challenge today is that China is not willing to print money at same level as Europe and USA. The question is what happens then?
Yes. The Chinese currency will go up compared to the dollar and the euro. However I think effects will go much further than that. The stability of the west will be challenged and the dominance of our financial markets will decay.
In the end, the existance of a big economy, that does not embark in the same aggressive monetary policy as we do, will put a hard limit on how far we can go.
If this is true, maybe it makes more sense to invest in Chinese currency than the huge risk of investing in Chinese companies?
They now own $7 TRILLION of US govt bonds. This number was less than $100 billion before the GFC.
https://www.pgpf.org/blog/2021/01/the-federal-reserve-holds-...
So, yes, no investor wants bonds. Why would you buy something that's a guaranteed loss? It's increasingly just the Fed.
The Brigewater article would have been a lot stronger with that $7 T figure.
The government gets money from the Fed by selling them bonds in exchange for cash.
The Fed participates in open market operations, and one of the markets they participate in is the Treasury bond auction. But they participate in others as well: notably, they've recently been major participants in mortgage-backed securities and corporate debt markets. When they participate, they effectively inject cash into the system, since the amount they can pay is unlimited and subject only to their mandate to get full employment and limited inflation.
There's a lot of other subtleties involved as well; this isn't intended to be an exhaustive explanation.
> When they participate, they effectively inject cash into the system, since the amount they can pay is unlimited and subject only to their mandate to get full employment and limited inflation
In the case where they buy Treasury bonds, the government itself gets money that they can use as they see fit (I.e. stimulus checks), right? Whereas in this case they just "inject cash into the system" in general.
There's a big difference in dynamics between one firm giving money to another in a non-competitive situation (say, a union bargaining with a monopsony corporation) vs. a market of buyers trading with a market of sellers (say, the commodity or stock markets). You get efficient price discovery in the latter situation, you don't in the former. And the concern up-thread about the sheer scale of Fed purchases is that when the Fed becomes the only market participant, it starts to look an awful lot like the former situation, and market mechanisms break down.
Actually, by law the Fed can't buy bonds from the Treasury [1]. It has to buy them on the secondary market.
There seem to be way more bonds around than what the fed owns.
And when it’s not the fed, it’s (increasingly) just financial institutions buying their required allotments. We’re well on the path to a market like Japan, where nobody in their right mind actually goes out and invests in bonds, they just are required by law to have a certain amount on their balance sheets. This is why SLR is a big deal and if the fed does or doesn’t address it tomorrow, you can expect real chaos.
---
Ben Bernanke (ex-FED Chairman) - The dollar’s international role: An “exorbitant privilege”?
https://www.brookings.edu/blog/ben-bernanke/2016/01/07/the-d...
> A great deal of U.S. currency is held abroad, which amounts to an interest-free loan to the United States. However, the interest savings are probably on the order of $20 billion a year, a small fraction of a percent of U.S. GDP, and that “seigniorage,” as it is called, would probably still exist even if the dollar lost ground to other currencies...
> The safe haven aspect of the dollar is actually a negative for U.S. firms, since it implies that they become less competitive (the dollar is stronger) at precisely the times that global economic conditions are most difficult.
---
The ‘reserve currency’ myth: The US dollar’s current and future role in the world economy
https://www.ussc.edu.au/analysis/the-reserve-currency-myth-t...
> This safe-haven bid for US dollar assets means that the US dollar often behaves in ways that seem counter-intuitive relative to US economic fundamentals. As Figure 2 shows, the US dollar appreciates in response to economic policy uncertainty. A 1 per cent increase in the Global Economic Policy Uncertainty Index raises the real value of the US dollar by 0.2 per cent, controlling for relative interest rate, inflation and economic growth differentials with the rest of the world.
> The appreciation exacerbates trade tensions between the United States and the rest of the world by weighing on US export competitiveness, setting in train a protectionist spiral.
---
The IMF already has a global reserve asset called the Special Drawing Rights:
https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/14...
The Fed is…complicated.
The Federal Reserve Board of Governors is an agency of the executive branch (an “independent” agency, but not independent of the government, independent within the government, like the FCC, FTC, and a number of other boards, commissions, etc.)
The Federal Reserve System consists of a network of Federal Reserve Banks, each of which has a nine member board of directors, six of which are elected by member commercial banks, and three of which are selected by the Board of Governors.
But the actual setting of monetary policy is done by the Federal Reserve Open Market Committee, which has 12 members — the seven members of the Board of Governors, the President of the Federal Reserve Bank of New York, and four of the other Federal Reserve Bank Presidents.
There is a predetermined amount of the Fed dividends which gets payed to the constituent banks, and the rest is given back to the treasury.
The same happens for the European Central Bank, and AFAICT, most central banks.
the fed buys bonds from the treasury department, which must slowly repay them as if the fed were any other bondholder.
this provides a mechanism to reverse the creation of money, when bonds the fed holds are redeemed slightly more money than was created will be destroyed. Or they can destroy money by selling bonds on the open market earlier than that.
Or something like that
That is indeed the point of driving interest rates low or negative - to force people into economic activity. If holding a bond makes you negative money, you might as well buy something with it, which goes back into the economy.
It seems like there's this sense that putting your money into the market should always generate a return, and yet we have an economy that is driven by spending. The interest rate is how those are reconciled.
Try telling that to the pensions.
Urban dwellers might be more limited but for people who have unused or underused space, this is a way to get a return on that space. Buy all you will need for the next decade of:
Salt, sugar, socks, underwear, under-shirts, vinegar, soap bars, toothbrushes, razor blades, feminine products, toilet paper, paper towels, napkins, trash bags, freezer bags, sandwich bags, foil paper, parchment paper, plastic wrap, wax paper, candles, matches, diapers, pet supplies (litter, etc.), gardening supplies, building supplies, repair supplies, medical supplies, fire wood, wood pellets, long lasting appliances and furniture, kitchenware, dinnerware, sheets and pillowcases, blankets,comforter,bedspreads, maintenance, renovations, efficiency upgrades, land, bigger house.
Some liquid soaps and chemicals have a limited shelf life of just a couple of years so it might be better to avoid unless you know the shelf life. Also be careful buying more than you need which can lead to waste. Be careful being wasteful just because you have lots of stuff at home. Buying alcohol ahead of time in bulk works if you have the discipline not to drink more. Also to get a good return you need to use the full life of your stuff before replacing from your stash, not replace early because it's right there.
There is also a macroeconomic benefit to this approach. It can get the economy out of Keynesian recessions when people save by buying.
You are however limited in total value by the free space you have.
Buying stuff you're going to need later is the opposite of speculation, not zero sum because it puts people to work to create something tangible and right now you get a better return than a lot of safe assets like bonds.
Standardized measurements of inflation might not apply to your situation at all. Instead why not track the inflation of the things you actually purchase?
> * Bonds hedge stock market volatility.
> * Bonds can be used to rebalance.
> * Bonds can be used for spending purposes.
> * Bonds protect against deflation.
> * There are other options but not many.
* https://awealthofcommonsense.com/2020/08/why-would-anyone-ow...
I will add that The Balance and Investopedia have been the leading sources of my education, all in all.
If you want less risk than stocks, just titrate to your desired risk level using a ratio of treasuries and stocks.
Fore example, 80% stock, 20% bond gets you the same risk as 100% junk bonds, but you get a 9.5% return instead of 5.3%.
Certainly those at the Fed and the Treasury speak confidently that the debt is manageable and inflation is easily cooled, but I imagine they have to project confidence.
I'm not sure I can recall an EULA on an analysis article.
View Source bypasses the EULA directly.
Seems to be common on websites for asset management companies. If you go to vanguard or blackrock's site you get one too.
If it's in a bank account then welp, $250k FDIC limit. If it's physical then welp, gotta rent and secure a warehouse that is literally chock full of cash for anyone to steal. Etc etc.
Zero/negative interest rates are supposed to encourage productive activity, or at least spending.
If you're talking about holding a vault full of physical cash, that's not free either. It has to be physically secured in a building and someone wants to be paid for the building and the security.
All of which I said above. Holding cash isn't free at a macro scale, holding cash already has a negative return.
From an article:
* $1k bill: 165,372 in existence
* $5k bill: "fewer than 400 believed to exist", valued at significantly more than $5k
* $10k bill: "only a few hundred survive" (also valued at significantly more than face value)
* $100k bill: 42,000 ever printed and can only legally be used for transfers between federal reserve banks, illegal for private entities to hold
https://www.investopedia.com/6-famous-discontinued-and-uncom...
So no, not really enough physical large-denomination bills for everybody to hoard physical cash.
The FDIC commits to ensuring bank liquidity, it covers retail withdrawals, I don't think it's ever committed to printing specific combinations of bills to make it easy to hoard physical cash. In fact, they have already argued they don't need to, in order to discourage money laundering. The existing bills are mostly leftovers from the 1890s-1930s.
If they choose to give you a billion dollars in all 100s, well, sucks to be you. And again, they don't even really need to do that since only $250k per account is actually covered.
So I mean, to wit, have you ever seen 100 million dollars in a single bundle? Unless you work for the Federal Reserve doing inter-reserve settlement I doubt it, seeing as there’s only $165 million of $1k bills in existence. That would be over half of the $1k bills in existence and there's no other large bills in private hands in any significant quantities. Maybe you saw it as a movie plot point somewhere?
Regardless, not something that can be executed at scale. There are $21 trillion of treasures in private hands alone, there are only $165 million of $1k bills in existence.
Yeah I see people mention this a lot on HN. That particular number ($250k) has been increased over the years. It was partially upped in response to the S&L crisis. So do you really think T. Rowe Price is going to go under and you'll lose all your savings above $250k? Charles Schwab? Morgan Stanley? Even back when Lehman Brothers collapsed, no one lost cash holdings.
Unless you're with a mom and pop bank down the street, this doesn't strike me as a real threat.
https://portfoliocharts.com/2019/05/27/high-profits-at-low-r...
Of course the reverse is true as well. If rates go up, you get equivalent capital losses. (You can avoid taking the loss by holding to maturity, but you'll have the same result as if you sold your low-interest bond, taking the loss, and invested your remaining money in a new higher-interest bond that matures at the same time.)
1) Central banks print currency to buy debt that no one wants to buy at negative interest rates.
2) Debt issuers (the government/corporations) increase debt issuance
3) Debt issuers purchase any hard assets available in the local currency at the fastest possible rate and earn profits off of the delta between asset inflation and the bond rates.
All western economies assets are being inflated, and all western economies bonds have negative interest rates. There is no alternative until.
4) Debt buyers convert printed dollars to RMB and purchase chinese debt.
5) Debt issuers convert borrowed dollars to RMB and purchase chinese debt
6) The Fed prints more money to meet it's market stability objectives
7) The dollar falls relative to RMB, triggering consumer price inflation on items of Chinese origin. Limiting the effectiveness of printing money.
His book ''principles'' is interesting, however with time its starting to look like an elaborate marketing plan. I have no doubt that he his serious about his principles and business culture, but there are second order effects to make everyting public. In the case of his firm culture (which claims to be an idea meritocracy), it will attract certain kind of people.
The same can be said about marketing his financial views. The guy is already rich. He is smart. Why does he needs to post everything on linkedin, suddenly?
I have a hard time understanding the underlying strategy of his public persona. Earlier this year he made a long post about the way he used his principles to deal with the accidental death of his son. I mean, why would he do that?
Does he wants people to think like him? Why?
https://www.linkedin.com/pulse/your-life-journey-exercise-ra...
Since he moved his home office to Singapore and is heavily invested in China, he has become very careful about talking negative about China and is more prone to paint negative picture on the US and the West.
Or maybe you are into high-yield bonds, which if traded correctly can have better returns than stocks. Not that I am personally interested in playing that game...
"Even if you had to sell your stocks at the bottom of the Great Depression, but held them for more than 20 years before that, you would not suffer a loss in value of your portfolio"
[1] https://www.wsj.com/articles/the-case-for-replacing-some-bon...
Additionally for bonds, the percent of earnings looks low on my positions statement but a few times a year I get some fat dividends on my bond holdings which I do not think it reflects.
This I cannot comprehend. Can someone explain to me how holding cash yields less than holding a bond at negative rates that will return me less cash?
What exactly is he proposing? I think he is proposing to borrow cash, but can somebody ELI5 what is meant by non-debt, non-dollar assets?
The other annoying thing about bonds as each bond tends be a fair amount of capital, so you need a lot of capital to properly diversify.
A couple years ago, 30 year treasury yield was around 3% and people were saying the same thing...why would you own bonds. People who bought bonds at that time made good money as the yield fell further.
Because when every corp/muni bond folds - government issued bonds do not(and never have). Also, because they skyrocket in value during government-to-government conflict. Military action? 150% bond prices. It's a low risk instrument that turns into a winning lottery ticket for events such as.. North Korea launching a ballistic missile ~2 years ago, Donald Trump being accused of Russian collusion 3 years ago, and every military conflict ever.
Note, I'm not saying "govt bonds are great! buy them!"...I'm saying there are very old and valid reasons to own bonds of the government-backed variety.
What Dalio is saying is that currently real returns on bond are rock bottom or even negative. So why would you own them? He's not saying to NEVER own bonds, just that it currently does not make sense. If in the future, bond coupon rates increase, then it will once again make sense to own bonds.
USA is already perceived as the most restrictive government in the world for citizen participation in any non-bank finance. And I have news for regulators: the banks are an anachronism. They are not making loans anymore. They only exist to sell loans to the government and buy them back as treasury-backed assets at a lower price. The difference comes from taxes. It’s a direct transfer of wealth from citizens to banks. They will probably be nationalized because citizens will realize how useless and parasitic they are. All business activity will abandon the banks and all investment will go into stateless financial systems. There is nothing anybody can do to stop this. The ‘protections’ (restrictions) offered by regulators now have negative value to US citizens. This is not some far-out warning. This is happening now. US financial startups are like rats abandoning ship to organize in Canada, Switzerland, Singapore etc. And they are all led by non-citizen US residents, because citizens take that regulation with them anywhere in the world. The best deal in the world right now is to be a permanent US resident with some other citizenship. That seems wrong.
Buy bonds instead. They have no carbon footprint, and they are guaranteed by our governments, which only act in our best interests.
* Very low interest rates currently
* Risk of inflation in the future leading to negative real returns
Bonds exist because people want to lay off risk. Its not about the yield, as much as its about the risk. Sure, you want an upside, and the yield is about the upside. But the motivation in the first place, is about the risk.
"as safe as houses" turns out, not to be that safe.
"as good as gold" is still pretty good, but the next unobtanium is out there.
by and large, absent revolution, governments make good on their financial promises. Even the Soviets paid up on the baku oil shares, in the end. So sometimes, even WITH a revolution you get back some money.
Bonds are about risk. Why would you want to lay off risk? Because thats what risk avoidance is.
because anything less is corporate welfare. if you can’t pay your way well then...
Oh, wait, I thought the title was “Why would you short bonds”
But to answer the original question, disregarding any logic of how state debt or bonds work, why would you own bonds? Two possible answers:
1) Because they serve as a deflation hedge. This is interesting for people with lots of money who need some more security 2) Because it is guaranteed money (at least bonds for countries like US, UK, JPN, DE).
I already answered why bonds are still valid to be owned by institutions with lots of money and also why big banks still buy them (happily, I should add).
> The world is a) substantially overweighted in bonds (and other financial assets, especially US bonds) at the same time that b) governments (especially the US) are producing enormous amounts more debt and bonds and other debt assets
Yes and no. Why are there so many bonds? Well, lots of countries have policies to not issue money directly to the finance ministry which then gives the money to whatever the government wants to fund, but instead for every spending of the government issue bonds that are sold to banks and put that money on the finance ministries balance sheet. It's an entirely political concept, but it's reality. As such, bonds and state debt are just the money handed out by the state. If they would not hold debt and/or issue bonds, there would be no money for anybody. Period.
>…If bond prices fall significantly that will produce significant losses for holders of them, which could encourage more selling
This leaves out the political dimensions in its entirety. Bond prices will not fall significantly UNLESS the state's resources (technology, work-force, ...) also drop significantly. If that is not the case, the state can just uphold the bond's values.
> …Imagine what would happen if, for any or all of these reasons, the holders of these debt assets wanted to sell them. There is now over $75 trillion of US debt assets of varying maturities.
This is just wrong. I already explained why, in brief, above. I won't shed anymore words on this, except that it is fear-mongering.
> …History and logic show that central banks, when faced with the supply/demand imbalance situation that would lead interest rates to rise to more than is desirable in light of economic circumstances, will print the money to buy bonds and create “yield curve controls” to put a cap on bond yields and will devalue cash. That makes cash terrible to own and great to borrow.
There are more sides to that coin. This is often used to create fear for inflation. Because history has also shown that unless there is hyper-inflation people always love to own cash, regardless of the economic circumstances. And better borrowing conditions should enable economic growth, and over-borrowing should be kept in check anyways (re: financial crisis 2008) so there is no real issue here. And as explained above, unless the resources of a state drop significantly, there is no trigger for hyper-inflation.
All in all, he is just arguing from an invester's perspective, but even then not a very holistic approach.