Billionaire investor Ray Dalio was interviewed by CNBC last week and stated cash is now more attractive than stocks and bonds. Dalio is the founder of Bridgewater, a hedge fund that requires a net worth of $7.5 billion to open an account. He is the 32nd wealthiest American and 86th richest person in the world. The market listens when Ray Dalio speaks, and he is saying something
vital.
For more than a decade, interest rates have been near zero percent. Holding money in the bank was a losing proposition. The banks were paying 0.1% interest, and inflation was around 1.6% or so. Real interest rates are determined by subtracting the inflation rate from the interest rate. The real interest rate was -1.5%, so many prominent financial experts said, “cash is trash.” Most banks currently pay around 0.3% interest, but some online banks are now paying more than 4% on savings accounts. Is cash still trash, or has the game changed?
The current CPI (inflation rate) is 6.5%. Even if someone receives 5% interest, it is still a negative real interest rate. Why is Dalio saying cash is more attractive than stocks and bonds? The simple answer is that he believes stocks and bonds will lose more than 1.5% this year. Cash is still trash but is less trashy than stocks and bonds.
Is he talking about liquidity?
Despite the market’s wishful thinking, the Fed has repeatedly said there will not be a pivot on interest rates in 2023. At the FOMC meeting last week, Chairman Powell stated, “It's going to take some time for disinflation to spread through the economy and given our outlook, I just don't see us cutting rates this year [sic]."
The market's pivot towards optimism does not reflect where the economy is in the inflation cycle. The chart here shows the official government numbers from the Bureau of Labor Statistics webpage. The chart is from the John Williams Shadow Government Stats webpage. It shows what the chart would look like if the U.S. measured inflation the same as in 1980. The red line is how it currently looks, but the blue line is what it would look like if the government measured inflation similarly to 1980. The U.S. government had changed how inflation is determined multiple times since 1980, when the Federal Reserve raised interest rates to 20%. If the government measured inflation the same way as in 1980, 2022 inflation exceeded the 1980 number.
Fed Chairman Jerome Powell has repeatedly said Chairman Volker's model of raising interest rates is the model the Fed follows. History has shown that raising interest rates higher than the inflation rate was necessary to bring inflation to the desired level. If history is the teacher, interest rates will need to climb at least another 3-4% from current levels. Dalio is pointing to this fact saying cash is more attractive than stocks and bonds. Raising interest rates decimated investment accounts in 2022. On average, the typical 60/40 portfolio lost between 16-20% in 2022. Dalio is predicting that 2023 returns will follow 2022. How bad could this year get if Dalio says that losing -1.5% is the attractive option?
There are two ways to interpret his recommendation.
Either he is saying to play defense to lose as little as possible or be liquid to buy into the down market later this year.
There is a way to do both without taking on the risks of holding too many Dollars. Gold bullion is highly liquid (easy to turn into cash) and, on average, has returned 7.78% per year since 1971.
According to the money manager of ultra-wealthy billionaires, Ray Dalio, cash will outperform stocks and bonds this year. History shows that gold consistently outperforms cash. Last year, gold finished the year positive at 0.44%, whereas stocks finished double-digit negative. Central banks have been buying record amounts of gold. If there is a market crash, it is easy to liquidate gold. Gold is a time-tested inflation hedge if there isn't a market crash. Where does it make sense to store wealth this year? Stocks, cash, or gold? Have you thought about getting your excess out of the bank and rebalancing your portfolio into a heavier gold position?
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byRyan Watkins, Op-Ed Contributor