In his recent interview with CNBC, Ray Dalio explained why everything can’t continue to go up. Here’s an excerpt from the interview:
Dalio: We’re in a paradigm shift I think. A paradigm is something happens for ten years, an environment for 10 years, and at the end of that ten years people believe everything that happened in the prior ten years, and then they get a surprise and then they start to change.
And something like for example, do I leave cash is a safe investment, or bonds are a safe investment, after a 40-year bull market in those types of things.
That begins to shift as they start to think am I getting a real return. So there’s going to be a supply demand balance. Most importantly the federal reserve is going to sell, individuals are selling, foreigners are selling, and the U.S government is selling because it has to fund its deficit.
So there’s going to be a supply demand problem that means that it produces a squeeze because so much money was put out at such cheap rates and so much financing was taken that it will be difficult to achieve that balance.
Host: So I remember when you would tell us that cash is trash. Is cash still trash?
Dalio: Of course cash is still trash. You know how fast you’re losing buying power in cash?
Host: I feel that in inflation every day, however for those that own equities out there, they’re feeling it even worse.
Dalio: Equities are trashier!
The question is what’s going to get you a real return. So we’ve shifted into an environment where assets that do well, like in the ’70’s, and those type of things, real assets, real return assets in its various ways are the best investments. I think the world is long.
Here’s the dynamic that I think is a problem. Everybody’s long equities and so on, and everybody wants everything to go up, and the federal reserve wants everything to go up.
So what they do is they give you money in credit, lots of money in credit, that helps hyping it. And when the more they hype it, the more it becomes somebody else’s financial asset they’re holding.
So the world is holding all these financial assets and so on, you can’t have that! So you’re going to have an environment of negative real returns, and so as you think about how do you diversify your portfolio, or even be short those things, everything can’t go up all the time! That system won’t work that way.
You can watch the entire discussion here:
https://youtu.be/hSM1p6PUGXk?t=111
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