Ray Dalio: Is He Saying Bonds Are Done?

[Leesbro63]

Perhaps this has been posted elsewhere, but in this July 2nd video, it seems that Ray Dalio is saying that "bonds are done". And that "it's different this time" or that "the Fed has jumped the shark". So should I give up on fixed income and only invest in equities now?

https://www.youtube.com/watch?v=7WxfQ2zKXeA

[HomerJ]

Ray Dalio can't predict the future any better than anyone else. What does it matter what he thinks?

As of December 2019, Dalio’s flagship had returned an annualized 3.8% since the start of 2012

https://www.bloomberg.com/news/articles ... ar-returns

[KlangFool]

OP,

A more interesting question to you is

Is your investment strategy based on your ability to predict the future?

A) Yes. Why do you think you can predict the future?

B) No. Why should you care about any prediction about the future? You are prepared for any possibility, it won't matter to you.

So, what is your answer? (A) or (B)?

KlangFool

[Hector]

10-year government bonds in some countries are at these rates right now:
Germany: -0.521
U.K.: 0.105
Japan: 0.015
France: -0.200
Spain: 0.333

You get a higher rate in the US compare to these countries right now.

[midareff]

10-year government bonds in some countries are at these rates right now:
Germany: -0.521
U.K.: 0.105
Japan: 0.015
France: -0.200
Spain: 0.333

You get a higher rate in the US compare to these countries right now.

Just saw the USA 10 Tear Treasury at .556% ....deduct CPI-U and IRS rates. ROC now means the cost of return of capital rather than the return on capital.

As far as Dalio... "nobody knows nothing" and that certainly includes him.

[atdharris]

I'm riding our rates down to 0% before I dump my bond fund. I expect we will get there like other developed countries.

[Robot Monster]

So should I give up on fixed income and only invest in equities now?

Impossible to answer if you don't give us more context as to your circumstances.

[Munir]

Among short term Vanguard bond funds, the Short Term Federal Fund (VSGDX) has an SEC rate of 1.10%. Among the Vanguard Intermediate bond funds, the Core Bond Fund (VCOBX) has an SEC rate of 1.46%. Total Bond Market Index (VBTLX) has a rate of 1.17%.

[Broken Man 1999]

Perhaps this has been posted elsewhere, but in this July 2nd video, it seems that Ray Dalio is saying that "bonds are done". And that "it's different this time" or that "the Fed has jumped the shark". So should I give up on fixed income and only invest in equities now?

https://www.youtube.com/watch?v=7WxfQ2zKXeA

Depends on what you want from your bonds.

Do you want yield? If you want yield, you are going to have to go way out on the risk limb.

Do you want safety? If you want safety, I wouldn't expect to get much yield, if any at all. I hold bonds/bond funds for safety. I'm definitely not seeing yield, seems my expectations are being met.

However, some people sell shares of equities for their expenses. Given the price of quality bonds/bond funds, there should be some $$$ appreciation available for sale. Do you have some nice gains on your bonds/bond funds? I sure have some nice gains in my treasury bond funds. Intermediate-term Treasury Index bond fund is hovering right around the 52 week high.

I would much rather sell some of my bond fund shares for expenses than to invest in bonds that are riskier but might have better yield.

Broken Man 1999

[000]

I guess the "All Weather" portfolio with 50%+ in Treasury Bonds really was just a "Fair Seasons" portfolio.

[nedsaid]

Ray Dalio can't predict the future any better than anyone else. What does it matter what he thinks?

As of December 2019, Dalio’s flagship had returned an annualized 3.8% since the start of 2012

https://www.bloomberg.com/news/articles ... ar-returns

Dalio knows a lot more about risk and markets than I do. He also has run a successful hedge fund. He also is very well connected. So if he has an opinion, my ears will perk up and I will sit up and listen. I suppose the same way that I listen to Jim Cramer. It doesn't mean that I will rearrange my portfolio every time Dalio or Cramer speaks but I will try to learn from them. I try to learn from Cramer even if I sometimes regard him as a screaming maniac. It is pretty well known that I am a fan of Larry Swedroe, I take what he says into consideration but I can't say that I invest like him.

[Robot Monster]

Disappointed we're all gliding past the "the Fed has jumped the shark" comment. The Fed hasn't jumped the shark till:
1. They start buying stocks, and stock ETFs especially QQQ.
2. They formally toss aside their 2% inflation target.
3. The Fed money printing machine is formally switched into "ludicrous speed" with the brrr sound resounding across the continental United States causing cats and dogs to explode while elevators mercilessly go up and down, up and down.

[Grt2bOutdoors]

Perhaps this has been posted elsewhere, but in this July 2nd video, it seems that Ray Dalio is saying that "bonds are done". And that "it's different this time" or that "the Fed has jumped the shark". So should I give up on fixed income and only invest in equities now?

https://www.youtube.com/watch?v=7WxfQ2zKXeA

Would you take advice from a person who's own hedge funds have exhibited terrible performance themselves this year? Sure, put your money in equities, this is just like 1999, we all know how that played out in 2000. History doesn't repeat itself, but it does rhyme.

[Grt2bOutdoors]

Ray Dalio can't predict the future any better than anyone else. What does it matter what he thinks?

As of December 2019, Dalio’s flagship had returned an annualized 3.8% since the start of 2012

https://www.bloomberg.com/news/articles ... ar-returns

Dalio knows a lot more about risk and markets than I do. He also has run a successful hedge fund. He also is very well connected. So if he has an opinion, my ears will perk up and I will sit up and listen. I suppose the same way that I listen to Jim Cramer. It doesn't mean that I will rearrange my portfolio every time Dalio or Cramer speaks but I will try to learn from them. I try to learn from Cramer even if I sometimes regard him as a screaming maniac. It is pretty well known that I am a fan of Larry Swedroe, I take what he says into consideration but I can't say that I invest like him.

Sure he does, that's why his funds have tanked this year. Not only have they tanked, but he's letting staff go at his shop. Remember, past performance is not indicative of future performance.

[JBTX]

"Bonds are done" >>> future bond returns will be non existent

Current Expected return of 10 year bond = almost zero, nominal.

Why is this controversial?

[tibbitts]

I skipped through the video - was there any part I missed where he wasn't saying the entire world is doomed?

[nedsaid]

Ray Dalio can't predict the future any better than anyone else. What does it matter what he thinks?

As of December 2019, Dalio’s flagship had returned an annualized 3.8% since the start of 2012

https://www.bloomberg.com/news/articles ... ar-returns

Dalio knows a lot more about risk and markets than I do. He also has run a successful hedge fund. He also is very well connected. So if he has an opinion, my ears will perk up and I will sit up and listen. I suppose the same way that I listen to Jim Cramer. It doesn't mean that I will rearrange my portfolio every time Dalio or Cramer speaks but I will try to learn from them. I try to learn from Cramer even if I sometimes regard him as a screaming maniac. It is pretty well known that I am a fan of Larry Swedroe, I take what he says into consideration but I can't say that I invest like him.

Sure he does, that's why his funds have tanked this year. Not only have they tanked, but he's letting staff go at his shop. Remember, past performance is not indicative of future performance.

Yep. There is the old saying about strategies that work until they don't.

[Hatch Batten]

Smart guys Jeremy Siegel And Jeremy Schwartz wrote an opinion piece titled "The Great American Bond Bubble" in August 2010. FUAMX (intermediate term Treasury bond fund) annual total returns for 2011 through YTD 2020, per Morningstar, are:

2011: 13.04
2012: 3.41
2013: -4.70
2014: 6.41
2015: 1.67
2016: 0.97
2017: 2.20
2018: 1.23
2019: 7.25
2020: 10.36

There's a stay-the-course article about the 'bond bubble' at https://www.thebalance.com/the-bond-mar ... ion-416864

It lays out some arguments for why similar predictions have proven wrong for the past 10 years or so, as well as why a bubble in bonds is likely to deflate slowly and not with the sort of bang that can take the air out of equities.

Ask yourself why you hold bonds. How well have they served that purpose to date? How are your other holdings likely to perform if the 'bond bubble' does deflate?

I'm planning to diversify a significant portion of my bond fund holdings into gold (or possibly TIPS) and real estate. This is because I'm approaching retirement age and I'm concerned about sequence-of-returns-risk. If things go to plan I'll move those holdings back into bonds in 10 years or so. I'd never make a move like that based on an opinion piece, only as the result of extensive information gathering and analysis.

The Fed's actions can be a data point in your decision-making. However, shooting from the hip is the antithesis of Boglehead-style investing (work from a plan, don't time the market, stay the course), and don't forget that diversification is another pillar of the style. Equities aren't the only option when reducing bond exposure.

[Nate79]

Expected return does not equate to actual return. No different that expected inflation doesnt equate to actual inflation. No one, including the entirety of the market can predict the future and that includes for the bond market.

[HomerJ]

Ray Dalio can't predict the future any better than anyone else. What does it matter what he thinks?

As of December 2019, Dalio’s flagship had returned an annualized 3.8% since the start of 2012

https://www.bloomberg.com/news/articles ... ar-returns

Dalio knows a lot more about risk and markets than I do. He also has run a successful hedge fund. He also is very well connected. So if he has an opinion, my ears will perk up and I will sit up and listen. I suppose the same way that I listen to Jim Cramer. It doesn't mean that I will rearrange my portfolio every time Dalio or Cramer speaks but I will try to learn from them. I try to learn from Cramer even if I sometimes regard him as a screaming maniac. It is pretty well known that I am a fan of Larry Swedroe, I take what he says into consideration but I can't say that I invest like him.

From 2012 to the end of 2019, Dalio's "successful" hedge fund has earned 3.8% annually. Are you sure he knows more about markets than you do?

He is now abandoning his "All Weather" portfolio.

It wasn’t until he was interviewed by motivational speaker and life coach Tony Robbins, though, that he revealed his All Weather Portfolio to the world.

Let’s take a look at the exact asset allocation in that portfolio now and see the reasons behind why it works.

What’s in the All Weather Portfolio?
The asset allocation of the portfolio is broken up like this:

40% long-term bonds
30% stocks
15% intermediate-term bonds
7.5% gold
7.5% commodities

And now he's saying "Bonds are done" three years later. He may be right now, but that means he was wrong before.

I'm not sure if you should be listening to these guys.

[DonIce]

Personally I don't see the point of holding investments with 0% or lower expected real return. Yes, actual returns vary from expected ones, but investing hoping that that's what happens (and in the advantageous direction) is just speculation. On a portfolio level LTT can still provide some diversification benefit with equity, but there are plenty of other assets with negative expected real return that also have low correlation... gold, commodities, "liquid alts", heck even cryptos, etc. Bonds used to be "special" because they provided good diversification to equities AND positive expected real return; but no longer.

[JBTX]

Expected return does not equate to actual return. No different that expected inflation doesnt equate to actual inflation. No one, including the entirety of the market can predict the future and that includes for the bond market.

Holding an asset that has no structural return, but hoping it goes up, is the definition of a bubble.

[tdub]

Done as far as real yields go.
Either bond funds trade at current prices with a negative real yield or prices fall a lot to re-establish a positive yield. I imagine central banks will keep bond yields low to support the economy.

https://twitter.com/charliebilello/stat ... 8810396675

[steve321]

yes, Ray teaches that we are the end of the long debt cycle. One has to be crazy to hold bonds (in his own words) at this time.

[AerialWombat]

Bond yields could be zero for a decade just as easily as equity returns could be zero for a decade.

For all the posters saying they won’t hold bonds anymore because yield is going to be zero forever... Well, you don’t know that. Nobody does.

Just as you don’t know if the S&P500 will be up, down, or sidewise on Monday. YOU don’t actually know. Neither do I.

Heck, you don’t even know if humanity will even exist when time for the trading floor to open on Monday rolls around. Earth could get clobbered by an asteroid tomorrow or slurped into a wormhole or demolished by a construction crew to make way for a hyperspace bypass. Nobody knows.

So any speculation about bond yields in the future is exactly that — speculation. Seeing this strange slew of threads recently on this same topic on BH has just been bewildering to me.

Whatever role bonds held in your portfolio 12 months ago is the exact same role they hold today. Yield speculation is immaterial to that role.

I guess I’m becoming one of the crotchety ol’ “Nobody knows nothin’, so get off my lawn!” types around here.

[steve321]

Bond yields could be zero for a decade just as easily as equity returns could be zero for a decade.

For all the posters saying they won’t hold bonds anymore because yield is going to be zero forever... Well, you don’t know that. Nobody does.

if you think yields will go up, why hold bonds now? They will go down in value.
if you don't think yields will go up, why hold bonds at such low yields?
Either way, it doesn't make sense.
In Japan, as Gundlach noted, nobody holds bonds except the Central Bank.

[AerialWombat]

Bond yields could be zero for a decade just as easily as equity returns could be zero for a decade.

For all the posters saying they won’t hold bonds anymore because yield is going to be zero forever... Well, you don’t know that. Nobody does.

if you think yields will go up, why hold bonds now? They will go down in value.
if you don't think yields will go up, why hold bonds at such low yields?
Either way, it doesn't make sense.
In Japan, as Gundlach noted, nobody holds bonds except the Central Bank.

You skipped the most important part of my post. I have no opinion about bond prices/yields. I think nothing, either direction.

I hold fixed income securities for capital preservation. That’s their role in a portfolio. I can neither afford nor psychologically withstand the potential of losing 50% or more in a stock market crash. Bonds are for safety. Yield is just honey on the toast.

[InvestInPasta]

I hold fixed income securities for capital preservation. That’s their role in a portfolio. I can neither afford nor psychologically withstand the potential of losing 50% or more in a stock market crash. Bonds are for safety. Yield is just honey on the toast.

Yes, but why do you hold bonds for safety, and not just cash?
I'm not being sarcastic, I'm only trying to understand.

[Robot Monster]

I hold fixed income securities for capital preservation. That’s their role in a portfolio. I can neither afford nor psychologically withstand the potential of losing 50% or more in a stock market crash. Bonds are for safety. Yield is just honey on the toast.

Yes, but why do you hold bonds for safety, and not just cash?
I'm not being sarcastic, I'm only trying to understand.

I'm grappling with that same question. The way I tackle the problem is I run a competition between cash and bonds through various what-if scenarios. For example,

What-if we go from our current 10-yr inflation expectation of 1.5% inflation to 0% inflation, causing yields to plummet and go negative on the entire curve. --> bonds win, cash loses

[White Coat Investor]

Perhaps this has been posted elsewhere, but in this July 2nd video, it seems that Ray Dalio is saying that "bonds are done". And that "it's different this time" or that "the Fed has jumped the shark". So should I give up on fixed income and only invest in equities now?

https://www.youtube.com/watch?v=7WxfQ2zKXeA

If you had followed his advice on July 2nd, you would have missed out on 4.22% returns in long term treasuries and 1.56% returns on Total Bond Market this month. The market can remain irrational longer than you can remain solvent.

[White Coat Investor]

OP,

A more interesting question to you is

Is your investment strategy based on your ability to predict the future?

A) Yes. Why do you think you can predict the future?

B) No. Why should you care about any prediction about the future? You are prepared for any possibility, it won't matter to you.

So, what is your answer? (A) or (B)?

KlangFool

Very well stated.

[AerialWombat]

I hold fixed income securities for capital preservation. That’s their role in a portfolio. I can neither afford nor psychologically withstand the potential of losing 50% or more in a stock market crash. Bonds are for safety. Yield is just honey on the toast.

Yes, but why do you hold bonds for safety, and not just cash?
I'm not being sarcastic, I'm only trying to understand.

I do hold cash. Cash is the largest “holding” in my “securities” portfolio. My fixed income allocation is mostly high yield savings and a CD ladder, with slightly less in muni bonds, and even less in corporate bonds (whatever ones Wellesley owns). I’m diversified, but mostly cash.

My target AA is 30/70, but I’m currently 15/85 because of recent cash influx (which will stay in cash).

[Tarkus]

So I'm hearing that you shouldn't hold bonds because they have a negative expected real return. Ok, fair enough. But what is the alternative? Cash? The expected real return of cash is even *more* negative. Equities? I've got all the equities I want. I want something else. What?

Bonds may be a crappy investment right now, but I'll only move from bonds if I can find something better...

[beyou]

Gonna sound like a heretic, but bonds are complicated,
there are many types. There are valid reasons most Vanguard bond funds are actively managed.

That said, diversification is the key to lack of ability to know the future. We can have massive inflation (if the gov prints their way out of economic downturn). We can have deflation (when people simply cant or wont purchase goods and services and prices fall). You have long and intermediate and short term goals. You have taxable and tax exempt accts. There are different bonds sold for different purposes, and you can’t say one type is best.

Total Bond is a favorite because it is a simple way to buy more than one type of bond (long and short term, fed gov and corporate). But it does not have all the bases covered. No international, no tax free, no inflation specific bonds (though short term bonds will
help with inflation and long term deflation so Total Bond is ok in this respect).

Personally I use active bond funds in my 401k (lucky to have good ones with low fees and a good track record of global diversification in taxable bonds). I have a global fund that has int-long term global corp and gov bonds, including TIPS as the active manager sees value. I split my bond portion of 401k 50/50 in this active global bond and another domestic short term bond. I rebalance between the 2 just as people reval eq vs bonds. I buy low and sell high as bonds move. If they had one bond fund that had it all, would have let them do that for me but this is easy. I keep an overall AA across all accts. This helps me use my 401k to take gains without taxes, so I target a certain % stocks and bonds then split the bonds between these 2 active bond funds. Someday I may simplify for the family and use same AA in each acct despite tax ramifications, but ensuring rebalancing across all types of bonds and equities with balanced funds that have the spectrum of bonds.

I do worry about the relative value of bonds vs the past, but compare to value vs other asset classes ? Dividends are low on stocks too, prices are high during worst economy in years. What type of investments make you comfy and why fear bonds more than stocks ?

[arcticpineapplecorp.]

guess there's no other choice but to buy dividend stocks instead.

[nedsaid]

Ray Dalio can't predict the future any better than anyone else. What does it matter what he thinks?

As of December 2019, Dalio’s flagship had returned an annualized 3.8% since the start of 2012

https://www.bloomberg.com/news/articles ... ar-returns

Dalio knows a lot more about risk and markets than I do. He also has run a successful hedge fund. He also is very well connected. So if he has an opinion, my ears will perk up and I will sit up and listen. I suppose the same way that I listen to Jim Cramer. It doesn't mean that I will rearrange my portfolio every time Dalio or Cramer speaks but I will try to learn from them. I try to learn from Cramer even if I sometimes regard him as a screaming maniac. It is pretty well known that I am a fan of Larry Swedroe, I take what he says into consideration but I can't say that I invest like him.

From 2012 to the end of 2019, Dalio's "successful" hedge fund has earned 3.8% annually. Are you sure he knows more about markets than you do?

He is now abandoning his "All Weather" portfolio.

It wasn’t until he was interviewed by motivational speaker and life coach Tony Robbins, though, that he revealed his All Weather Portfolio to the world.

Let’s take a look at the exact asset allocation in that portfolio now and see the reasons behind why it works.

What’s in the All Weather Portfolio?
The asset allocation of the portfolio is broken up like this:

40% long-term bonds
30% stocks
15% intermediate-term bonds
7.5% gold
7.5% commodities

And now he's saying "Bonds are done" three years later. He may be right now, but that means he was wrong before.

I'm not sure if you should be listening to these guys.

I listen to these guys to get insight into how the markets work and to learn more about the hedge fund world. It is sort of finding out what you are up against and planning accordingly. My conclusion is that investors should more or less buy, hold, and rebalance. Reduce risk with more bonds and less stocks as you get older. You need a long term view if you are going to succeed. I am pretty skeptical that trading strategies for an individual work, even if you use Liquid Alt funds like AQR.

A big problem that these guys have is that being wrong even once when you have a big bet can be disastrous. That is what can happen when you use leverage and derivatives. It helps to be really, really smart if you attempt to do this but we can see that things caught up with even Ray Dalio. The markets are pretty efficient though not perfectly so. The thing is, Jim Cramer and Ray Dalio accomplished something that I never have, they are very rich and I am not. They also accomplished really good investment returns, at least for a while. As they say, it was fun while it lasted.

I just think people should learn wherever they can and be open minded enough to listen. I recognize that everything has its limitations. In another thread, lots of people pointed out that Dr. Wade Pfau's research is largely paid for by insurance companies. Doesn't mean the guy doesn't have good things to say, we should consider who funds the research. In other words, no one is 100% objective. We have to be discerning enough to separate the wheat from the chaff.

[nedsaid]

As of December 2019, Dalio’s flagship had returned an annualized 3.8% since the start of 2012

Shoot, I have done better than that. Perhaps you ought to listen to me.

[JackoC]

"Bonds are done" >>> future bond returns will be non existent

Current Expected return of 10 year bond = almost zero, nominal.

Why is this controversial?

Yes if that's the message it's not a 'prediction' it's reality you can easily see by pulling up a page of the treasury yield curve. 'Maybe rates will get more attractive in the future'. OK, maybe they'll get less attractive. If the likelihoods weren't seen as (broad side of the barn) comparable, then rates would be higher now. The 30 yr TIPS yields ~-0.45%, 5 yr(arguably the real world 'riskless asset') -1.2%. TBM is around 70 bps above the treasury curve but you're taking risk to get that, roughly equivalent to 'riskless' on bond side and a little more in stocks. TBM isn't necessarily a bad real world investment (not a particularly good one IMO, but it is an opinion) but it doesn't change the fact that expected 'riskless' return is now well below zero real pre tax.

The controversial aspect would be, sorry I didn't listen to that particular clip but Dalio has intimated it before, whether there's now real credit risk in long term US obligations with fully out of control fiscal deficit. Which is different than already worrying fiscal path pre-COVID. That is controversial, but do a thought experiment: assume a world where that could be a prescient observation. The first people to reach that correct conclusion would never be able to prove it. You could always say 'look at the yield curve, the market doesn't believe that!' Doesn't mean it's wrong, and unlike whether rates will go up or down some in the future, a US debt crisis would be the ultimate 'Black Swan', not in the same category as normal rate prognostication. It's another reason I don't like the 30 yr US bond, besides being able to handily beat it in yield with best 5 yr CD's. A US debt crisis *is* IMO extremely unlikely within 5 yrs. I don't think it's extremely unlikely in 30 yrs, still unlikely but not extremely.

Anyway, treasuries return distinctly negative real pre tax: non-controversial I agree. But I also expect to get lower returns on my stocks than past average returns. Boo hoo, but not a reason to take more stock risk, for me, nor a reason to abandon (basically, I'm not 100%) buy and hold.

[Boglegrappler]

I watched the whole video. It struck me that Dalio's observations fit pretty well with Buffett's observations from the 2011 letter on pages mid 17 to the end of page 19. I've posted links to that repeatedly because of how valuable I think the thought process is.

So here it is again. Page 17-19.

https://www.berkshirehathaway.com/letters/2011ltr.pdf

[nedsaid]

"Bonds are done" >>> future bond returns will be non existent

Current Expected return of 10 year bond = almost zero, nominal.

Why is this controversial?

Yes if that's the message it's not a 'prediction' it's reality you can easily see by pulling up a page of the treasury yield curve. 'Maybe rates will get more attractive in the future'. OK, maybe they'll get less attractive. If the likelihoods weren't seen as (broad side of the barn) comparable, then rates would be higher now. The 30 yr TIPS yields ~-0.45%, 5 yr(arguably the real world 'riskless asset') -1.2%. TBM is around 70 bps above the treasury curve but you're taking risk to get that, roughly equivalent to 'riskless' on bond side and a little more in stocks. TBM isn't necessarily a bad real world investment (not a particularly good one IMO, but it is an opinion) but it doesn't change the fact that expected 'riskless' return is now well below zero real pre tax.

The controversial aspect would be, sorry I didn't listen to that particular clip but Dalio has intimated it before, whether there's now real credit risk in long term US obligations with fully out of control fiscal deficit. Which is different than already worrying fiscal path pre-COVID. That is controversial, but do a thought experiment: assume a world where that could be a prescient observation. The first people to reach that correct conclusion would never be able to prove it. You could always say 'look at the yield curve, the market doesn't believe that!' Doesn't mean it's wrong, and unlike whether rates will go up or down some in the future, a US debt crisis would be the ultimate 'Black Swan', not in the same category as normal rate prognostication. It's another reason I don't like the 30 yr US bond, besides being able to handily beat it in yield with best 5 yr CD's. A US debt crisis *is* IMO extremely unlikely within 5 yrs. I don't think it's extremely unlikely in 30 yrs, still unlikely but not extremely.

Anyway, treasuries return distinctly negative real pre tax: non-controversial I agree. But I also expect to get lower returns on my stocks than past average returns. Boo hoo, but not a reason to take more stock risk, for me, nor a reason to abandon (basically, I'm not 100%) buy and hold.

The risk with Treasuries isn't that that Uncle Sam will not make promised principal and interest payments on its debt or an outright default. The Fed can always expand its balance sheet. The risk is that the payments will be made with dollars that have decreased in purchasing power. Monetizing of debt through money printing and inflation is a technical form of default, we financed World War II this way. So perhaps, inflation will be rekindled and the Fed will keep interest rates below inflation as they are right now. Or interest rates could go negative even as inflation stays very low. Either way, the purchasing power of Federal debt will decrease.

[JackoC]

"Bonds are done" >>> future bond returns will be non existent

Current Expected return of 10 year bond = almost zero, nominal.

Why is this controversial?

The controversial aspect would be, sorry I didn't listen to that particular clip but Dalio has intimated it before, whether there's now real credit risk in long term US obligations with fully out of control fiscal deficit. Which is different than already worrying fiscal path pre-COVID. That is controversial, but do a thought experiment: assume a world where that could be a prescient observation. The first people to reach that correct conclusion would never be able to prove it. You could always say 'look at the yield curve, the market doesn't believe that!' Doesn't mean it's wrong, and unlike whether rates will go up or down some in the future, a US debt crisis would be the ultimate 'Black Swan', not in the same category as normal rate prognostication. It's another reason I don't like the 30 yr US bond, besides being able to handily beat it in yield with best 5 yr CD's. A US debt crisis *is* IMO extremely unlikely within 5 yrs. I don't think it's extremely unlikely in 30 yrs, still unlikely but not extremely.

The risk with Treasuries isn't that that Uncle Sam will not make promised principal and interest payments on its debt or an outright default. The Fed can always expand its balance sheet. The risk is that the payments will be made with dollars that have decreased in purchasing power.

This is the predominant conventional wisdom, but it's not unassailable. In the 1990's Russia could in theory have just printed more Rubles and never outright defaulted on its Ruble debt. But it did (also on some of its hard currency debt). At a certain point the bad side effects from higher and higher inflation, and the escalating yield premium investors demand because they know the issuer will try to inflate away the next round of debt too, can reach a point where the path of least resistance becomes simply to admit you can't pay promised real value and make it official via a forced exchange into longer term bonds which are worth less. IOW maintaining the fiction that you are paying, via lower value currency, has its own costs which can grow to the point of making that no longer the path of least political resistance. And a forced exchange is a default.

I believe there is an eventual risk of a US default along the current fiscal path. I don't think this out of lack of understanding that the US has a lot of leeway to avoid it because the debt is issued in US's own fiat currency. It's not impossible for that leeway to effectively run out. I don't think it's likely, but no longer extremely unlikely IMO.

And as to very long term TIPS's this is mainly the risk one need care about. In case of very long term nominal treasuries even somewhat higher inflation with no credit implication could cause big negative real return. But the Black Swan for rich country inflation indexed debt is actual default. Which is not close enough to impossible anymore to neglect in case of very long term issues IMO. And as suggested not a risk limited to the US.

[JBTX]

"Bonds are done" >>> future bond returns will be non existent

Current Expected return of 10 year bond = almost zero, nominal.

Why is this controversial?

Yes if that's the message it's not a 'prediction' it's reality you can easily see by pulling up a page of the treasury yield curve. 'Maybe rates will get more attractive in the future'. OK, maybe they'll get less attractive. If the likelihoods weren't seen as (broad side of the barn) comparable, then rates would be higher now. The 30 yr TIPS yields ~-0.45%, 5 yr(arguably the real world 'riskless asset') -1.2%. TBM is around 70 bps above the treasury curve but you're taking risk to get that, roughly equivalent to 'riskless' on bond side and a little more in stocks. TBM isn't necessarily a bad real world investment (not a particularly good one IMO, but it is an opinion) but it doesn't change the fact that expected 'riskless' return is now well below zero real pre tax.

The controversial aspect would be, sorry I didn't listen to that particular clip but Dalio has intimated it before, whether there's now real credit risk in long term US obligations with fully out of control fiscal deficit. Which is different than already worrying fiscal path pre-COVID. That is controversial, but do a thought experiment: assume a world where that could be a prescient observation. The first people to reach that correct conclusion would never be able to prove it. You could always say 'look at the yield curve, the market doesn't believe that!' Doesn't mean it's wrong, and unlike whether rates will go up or down some in the future, a US debt crisis would be the ultimate 'Black Swan', not in the same category as normal rate prognostication. It's another reason I don't like the 30 yr US bond, besides being able to handily beat it in yield with best 5 yr CD's. A US debt crisis *is* IMO extremely unlikely within 5 yrs. I don't think it's extremely unlikely in 30 yrs, still unlikely but not extremely.

Anyway, treasuries return distinctly negative real pre tax: non-controversial I agree. But I also expect to get lower returns on my stocks than past average returns. Boo hoo, but not a reason to take more stock risk, for me, nor a reason to abandon (basically, I'm not 100%) buy and hold.

Agree 100%. Today I finally listened to the video. It is definitely worth the listen. Not as investment advice, which it isn't. But as an explanation of the economic world we live in, to the extent one cares, which I do. I find his explanations from a macro level to be more clear and coherent than anybody else I can think of.

As to trying to gleam investment wisdom from it, it isn't easy to do. He basically said in such an economic paradigm bonds will return nothing, and other stores of value will "reflate", like stocks gold etc. That isn't saying don't put money in conventional bonds. It is saying they will almost definitely lose value on a real basis, which is a near mathematical certainty.

People here keep saying "but what if rates go negative", as if it is a certainty. I suspect they will before all is said and done. But it isn't a certainty. But even if they do, the real long term return will likely be below zero.

Like you, just because bonds will return negative real yields doesn't mean I'm going 100% stocks. I will continue to hold some conventional bonds. But I'm also buying modest allocations of gold and silver. moved some bonds to TIPS. Continue to buy ibonds. If I have liquidity to do so, maybe EE bonds. Either refi or pay down mortgage, if I can make those work (currently haven't). I wouldn't mind having real estate exposure, but I'm really not of the mindset to be a landlord. I already have some reits, but I'm not sure if they accomplish the same thing, but perhaps looking into.

[JBTX]

I watched the whole video. It struck me that Dalio's observations fit pretty well with Buffett's observations from the 2011 letter on pages mid 17 to the end of page 19. I've posted links to that repeatedly because of how valuable I think the thought process is.

So here it is again. Page 17-19.

https://www.berkshirehathaway.com/letters/2011ltr.pdf

Thanks for sharing that again. It is one of the most logical articulations of how to invest long term. I absolutely love the explanation of the fallacy of gold as an investment. Nonetheless in this environment I will probably play the gold game too, to a limited extent. And the explanation of bonds is spot on, to expect long term positive returns from conventional bonds in this environment requires unnatural mental contortions.

[texasfight]

The reason stocks are up is because bonds are up. The reason gold is up is because bonds are up. The reason housing is up is because bonds are up.

IMO bonds are overpriced in the short term, but if they perform badly nominally over say the next 10 years, it is gonna be ugly for a lot of assets. If they do bad on a real basis due to real rates falling due to increased inflation, which is what is happening recently (actually a double whammy, inflation expectations rising and nominals falling is cause real rates to be in free fall). Which is why we are seeing strong gold performance and dollar weakness, along with growth vs. value outperformance (growth loves falling real yields i.e. slow/no growth). Real rates need to rise to see value, cyclicals, financials, etc. to outperform.

I see a short term recovery and outperformance for value vs. growth once we get on the other side of this due to increased real interest rates, as people sell their deflation protection in treasury bonds and go into riskier banks, airlines, industrials, etc., but over the longer term I expect continued growth outperformance in developed economies due to deflationary forces due to debt, demographics, and a finite plane we are living on.

[Starfox]

.....

[steve321]

I hold fixed income securities for capital preservation.

you won't preserve your capital with bonds; after taxes and inflation it's pretty clear that you'll lose some of your capital.

[AerialWombat]

I hold fixed income securities for capital preservation.

you won't preserve your capital with bonds; after taxes and inflation it's pretty clear that you'll lose some of your capital.

You are speculating. You have absolutely ZERO way of knowing that, unless you have a time machine. In which case, I'd love to know who takes the Gold in men's skeleton in the next winter Olympics.

Edit: In addition, this is why you have an AA that includes some equities. Even a super-conservative portfolio like mine needs to have some equity exposure. This theoretically "gooses" the return to (hopefully) keep pace with inflation. A portfolio must be viewed as a whole. Looking at only the bond portion in isolation is ludicrous.

Also, my portfolio, for MY purposes only, is designed to keep purchasing power pace with inflation -- and nothing more. My total portfolio goal is a real return of ZERO. Your desires may be different. Personal finance is personal.

[000]

The reason stocks are up is because bonds are up. The reason gold is up is because bonds are up. The reason housing is up is because bonds are up.

So what you're really saying is the USD is down?

[texasfight]

The reason stocks are up is because bonds are up. The reason gold is up is because bonds are up. The reason housing is up is because bonds are up.

So what you're really saying is the USD is down?

Yes. Which is why I hold absolutely zero cash. My portfolio has similarities to the permanent portfolio, but with no cash - rising real rates due to liquidity are not allowed to happen, and the Fed has the tools to prevent that from happening for more than a few days - some may disagree (dollar milkshake theory and all). We saw what happened in March of 2020. Biggest liquidity event in US history since modern monetary policy's inception and the end of bretton woods system. Treasury bonds have never been hit like that before, unreal bid/ask spreads, ETF's trading at 10% discounts to NAV, but the Fed was able to step in and stop the DXY rise. Leveraged risk parity strategies got slaughtered. Unlevered 60/40 VTI/EDV bounced back and is crushing it. MGK/EDV even better. MGK or QQQ is the equity everyone should have been holding going into this.

[000]

The reason stocks are up is because bonds are up. The reason gold is up is because bonds are up. The reason housing is up is because bonds are up.

So what you're really saying is the USD is down?

Yes. Which is why I hold absolutely zero cash. My portfolio has similarities to the permanent portfolio, but with no cash - rising real rates due to liquidity are not allowed to happen, and the Fed has the tools to prevent that from happening for more than a few days - some may disagree (dollar milkshake theory and all). We saw what happened in March of 2020. Biggest liquidity event in US history since modern monetary policy's inception and the end of bretton woods system. Treasury bonds have never been hit like that before, unreal bid/ask spreads, ETF's trading at 10% discounts to NAV, but the Fed was able to step in and stop the DXY rise. Leveraged risk parity strategies got slaughtered. Unlevered 60/40 VTI/EDV bounced back and is crushing it. MGK/EDV even better. MGK or QQQ is the equity everyone should have been holding going into this.

Sorry, I'm having trouble understanding. I thought March 2020 showed the value of cash when liquidity in everything else dried up. Is your opinion that future liquidity crises will be tolerable without cash due to Fed management?