Ray Dalio, co-chairman and founder of Bridgewater Associates, recently spoke with CNBC to provide a warning that, in his view, the biggest risk facing investors may be the declining purchasing power of cash. As he has repeatedly warned, in his view, the next financial crisis may be a dollar crisis and people who think that they will be able to ride out the next recession by holding cash (or bonds) could be in for a rude awakening.
Some excerpts from Ray Dalio:
“The question is also ‘What do you jump into when you jump off of the train?’ And the issue is, you can’t jump into cash. Cash is trash… They’re going to print money… What you have to do is have a well diversified portfolio… You have to be global and to have balance… And I think that you have to have a certain amount of gold in your portfolio. You have to have something that’s hard.”
“There are three monetary systems that happen. The first is, in the old days, it had intrinsic value. You’d carry around gold coins. Then we came up with the idea of banks or central banks. And what they do is they create certificates, what we call notes, that are claims on those banks. And we print many more certificates than there is money in the bank. That’s a linked system. So we did that, and we broke that in 1971. Then we have a fiat monetary system, which means that you can print whatever amount of money you want. So we are in that part of the cycle, bigger picture… The depreciation of the exchange rate and the printing of money, I think, over the next few years is going to be the biggest thing…”
“I know this is going to be the headline of gold. I want to emphasize that a bit of gold is a diversifier… I know I am going to come out of (this interview) like ‘Ray Dalio is wild on gold’ and that’s not exactly true. But cash is trash…”
For investors that are worried about the next recession, the trillion dollar question is whether that recession will occur in a declining inflation environment, like the Great Depression and all Western recessions since the early 1980s, or an increasing inflation environment like the late 1960s and 1970s. If it’s the later, the rising inflation (and depreciating currency) can make holding typical safe haven assets like cash and bonds a big loser. Ray Dalio seems to believe we are headed for the later.