Submitted by PM Fund Manager Dave Kranzler, Investment Research Dynamics:
When I saw this comment from Ray Dalio I said to myself, “this isn’t someone trying to be a prognosticator or compassionate person, this is someone that has had an epiphany that his huge success probably had more to do with his rolodex and endless supply of free money more than anything else and is becoming depressed over that realization.” His All Asset fund was down 7% in 2015 and negative 2 of the past 3 years. – A colleague who manages money in an email to IRD today
Ray Dalio has achieved “rock star” status in the hedge fund world. Per a report sourced by Zerohedge, Dalio appears to be frightened by the prospects of the “normalization” of Central Bank monetary policy. In fact, he penned an op-ed in the Financial Times in which he states: “Since the dollar is the world’s most important currency, the Fed is the most important central bank for the world as well as the central bank for Americans, and as the risks are asymmetric on the downside, it is best for the world and for the US for the Fed not to tighten.”
What has Ray frightened? There are several highly problematic assertions embedded in that comment by Dalio. First and foremost is the idea that the dollar is the world’s most important currency. I wonder how China might respond to that comment? China has been methodically getting rid of its use of the dollar. In fact, it can be argued that the world’s most important currency is gold, which is why China and Russia have been accumulating gold on a daily basis with both hands. I find it interesting that Dalio can discuss currencies and monetary policy and not utter one word about gold.
Dalio has been making the argument that economic vitality is dependent on asset levels. This idea is endemic to the hubris behind Wall Street’s financialization of the monetary system. The truth is the only outcome accomplished by a system based on fiat currency, fractional banking and the financialization of assets is the monarchical enrichment of money skimmers like Dalio and his Wall Street bank cohorts. If the Fed were to begin raising interest rates in earnest, it would remove Dalio’s ability to skim the system.
As I discussed in a blog post last week – LINK – contrary to Dalio’s assertion, financial assets do not create real economic growth. If anything, the proliferation of financial assets creates nothing more than Wall Street-enriching bubbles which culminate with a systemic collapse that destroys everything. To correlate the trading level of financial assets with the creation and support of economic growth is either an intentional misrepresentation of the truth for the purpose of self-interested preservation or naive ignorance. My inclination is to dismiss the latter as beyond probable.
A collapsing global financial system will take away Wall Street’s continued enrichment from QE and ZIRP. This is what has Dalio frightened and this is why he is urging the Fed to refrain from raising interest rates. Perhaps he’s also making an appeal for more QE. What better way to re-inflate monetary assets than for the Fed to print more money?
Unfortunately QE will eventually lose its effectiveness as an asset inflator. The old law of diminishing returns. I have no doubt Mr. Dalio is familiar with that law of economics. But he’s lost sight of this reality because he’d been blinded by wealth-induced hubris. At some point that proverbial can being kicked by the Fed and the U.S. Government will no longer move. That’s when the real fun begins and that’s when people will wonder why Dalio never discussed gold.