Why in the World Would You Own Dollar Debt? - Dalio

Discussion of the Bond portion of the Permanent Portfolio

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Why in the World Would You Own Dollar Debt? - Dalio

Post by Kevin K. » Tue Mar 16, 2021 5:51 pm

A good post receiving much discussion on Linkedin, Bogleheads, etc.:

https://www.linkedin.com/pulse/why-worl ... ray-dalio/

As usual with Dalio it's debatable how much actionable info this analysis offers to a regular "retail" investor.
One of the comments on Bogleheads perhaps bears repeating:

"If you are a person who is not prone to myopic loss aversion Reserve Currency Bonds should rationally be avoided due to as Ray Dalio pointed out 0-negative real return of them. All Weather Portfolio, Permanent Portfolio are going to be the biggest hit from this scenario as they are investing 70-75% of their assets in 0-negative real return assets whereas 60/40 is only investing 40% of assets into 0-negative real return assets."
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Re: Why in the World Would You Own Dollar Debt? - Dalio

Post by Hal » Tue Mar 16, 2021 8:11 pm

Thanks for an interesting read Kevin,

However I still remember Benjamin Grahams quote which was roughly "Shares cannot be preferable to bonds at any price".
He recommended a minimum of 25% in Shares or Bonds no matter how much you disliked them
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Re: Why in the World Would You Own Dollar Debt? - Dalio

Post by Kriegsspiel » Wed Mar 17, 2021 8:05 am

So Ray Dalio wants to buy Chinese bonds, and he wants to convince others to buy them too.

Maybe he's on to something, but I'm not on that train ;D I mean, I'm sure a lot of us here read about Chinese economic topics fairly regularly. What has anyone read that leads them to be confident in China? I know vincent hit around this point in the thread about money. Personally, I haven't seen anything to convince me that China is a good place to invest in. Hell, the Chinese themselves don't keep their own money in China. Plus, some of the problems he associates with American bonds are similar in Chinese ones. Some quotes from Zeihan (granted, from 6-7 years ago):
The Chinese government starkly limits what its citizens can do with their savings. Rather than allowing a wealth of investment options as exists in the capital-rich American or British systems, private savings are instead funneled to state goals in a manner somewhat similar to the German system. Specifically, there are very few banks in China, with some 3/4 of all deposits held in four large state-owned institutions. . . Those four banks have very clear mandates. They are to use the citizenry's deposits to maximize bank lending to the economy as a whole. The goal of the policy is a simple one: maximum possible employment. While this is technically a lending model, it is more accurately thought of as a system of subsidization. Since Chinese citizens have so few investment options, the banks have access to their deposits at rates that are ridiculously low. Consequently, internal interest rates in China are artificially held well below global norms and are certainly far below what they would normally be in an economy at China's level of development.
So, Dalio is saying he wants to forego the safe US Treasury bonds for more-risky-than-they-seem Chinese ones. Zeihan goes on to point out that in China, lending criteria are pretty much nonexistent, so people can get loans for anything, and at unreasonably low interest. I'm sure we all remember the articles about ghost cities built in China that nobody lives in. China subsidizes the costs of the inputs, so their growth looks impressive. Of course, credit isn't available to everyone, only those with the right political connections (Jack Ma's ANT financial is running into problems because the wrong political players backed him), which reduces the efficient deployment of capital.
So how big is this problem? Pretty big. In 2007, total Chinese lending topped 3.6 trillion RMB ($600 billion). How much is that really? Well, that's more than the total lending into the US economy when the US sub-prime bubble was at its maximum inflation, and that in a year when the Chinese economy was less than one-third the size of the US economy.
In other countries, that global demand for goods was killing companies and employment, but in China, they encouraged their companies to borrow more, tripling in 2 years. The Chinese government tried to dial back the credit expansion, but this just expanded the types of shady shit they were doing to get around the limits.
banks, firms, and retail investors, appalled by the idea that the government might actually deny them credit because of something as silly as a lending quota, built their own financial network to run in parallel to the existing system. This shadow system includes everything from loan-sharking to financial products with even fewer quality controls than official bank lending (after all, they were formed expressly to bypass government authority). By the first quarter of 2013, China's own central bank estimated that such shadow lending was exceeding all other forms of credit combined.
That puts total financing at around $5 trillion for an economy only worth about $8 trillion. Not only is that an absolute volume of capital more than seven times new lending in the United States, it is the equivalent of an Obama stimulus package (that's $800 billion over two years) about every twenty-nine days.
Compare that to what Dalio wrote:
Also, watch the rates of change in the injections of these stimulants in relation to the effects they are having on the economy’s vigor because the more stimulants that are being applied per unit of growth, the less effective they are and the more serious the situation is.
So in all, if one is concerned about the issues he brings up vis-à-vis American debt, then they should be equally or more concerned about China's.

I definitely agree with his thoughts on taxes at the end of the article, as I've said here before.
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Re: Why in the World Would You Own Dollar Debt? - Dalio

Post by dualstow » Wed Mar 17, 2021 8:45 am

Ray Dalio created the All Weather Portfolio. I guess he’s going to have to change the name.
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Re: Why in the World Would You Own Dollar Debt? - Dalio

Post by Kbg » Wed Mar 17, 2021 9:29 am

A no value add comment...but yeah, this negative real yields thing sucks. It's a tough problem.

I've been spending a bit of time lately looking at selling premium in a less volatile fashion. It most definitely isn't the same as holding bonds or cash and takes a lot of time to do, but if you can play long ball then I think there is some merit from an income perspective.

BigErn writes some interesting stuff on options and post really good work on retirement funding sequence risk. https://earlyretirementnow.com/
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Re: Why in the World Would You Own Dollar Debt? - Dalio

Post by Kevin K. » Wed Mar 17, 2021 9:52 am

dualstow wrote:
Wed Mar 17, 2021 8:45 am
Ray Dalio created the All Weather Portfolio. I guess he’s going to have to change the name.
This comes up all the time. "All Weather" is the name of Bridgewater's hedge fund, which Dalio of course started and ran until he retired from Bridgewater in 2017. Like any hedge fund "All Weather" changes its allocations frequently in response to its analysis of opportunities and economic conditions. All Seasons meanwhile - which is what you're referring to - is the Dalio-inspired "retail" investing portfolio popularized by Tony Robbins:

https://portfoliocharts.com/portfolio/a ... portfolio/

And yeah, given the allocation, "All Seasons" is an even worse name than "Permanent" for a portfolio given its 40% allocation to LTT's.

Switching gears, I agree completely with your cautions on Chinese bonds Kriegsspiel. A huge hedge fund like Bridgewater has the resources to get into and out of investments in China at the right time but I think it'd be ridiculous for typical investors to get involved in them - and that's not Dalio's audience anyway. Someone on Bogleheads recommended this unhedged int'l bond ETF:

https://www.ssga.com/us/en/individual/e ... nd-etf-bwx

I'm not sold on the need for something like that but I can certainly see good arguments for equally-weighting U.S. and international equities, keeping plenty of gold (which, interestingly, Dalio didn't even talk about this time) and having only iBonds, online bank CDs and perhaps short-term TIPS (e.g. VTIP) on the cash/bond side in a variable portfolio. Perhaps better still, borrowing cash (as Dalio recommends) to buy income real estate? Much to think about.
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Re: Why in the World Would You Own Dollar Debt? - Dalio

Post by dualstow » Wed Mar 17, 2021 10:09 am

^ I appreciate the clarification above, Kevin. ^

Sounds like both names should be changed. Perhaps All Weather should be changed to something that implies rapid adaptability and All Seasons, which is based on All Weather should.. -

actually, my problem is the combination of "All" anything and broadcasting statement like "why would anyone own bonds right now." I don't follow Tony Robbins* but as far as I know, Harry Browne never gave any "this time it's different" recommendations.

How about Permanent Portfolio and Some Seasons.

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
*liked him in Shallow Hal
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Re: Why in the World Would You Own Dollar Debt? - Dalio

Post by Kriegsspiel » Wed Mar 17, 2021 10:41 am

Kevin K. wrote:
Wed Mar 17, 2021 9:52 am
Switching gears, I agree completely with your cautions on Chinese bonds Kriegsspiel. A huge hedge fund like Bridgewater has the resources to get into and out of investments in China at the right time but I think it'd be ridiculous for typical investors to get involved in them - and that's not Dalio's audience anyway.
Whoops, I wanted to comment that I thought you were right about the financiers vs retail people dichotomy. When the big financiers get involved with this stuff, I think they're on a completely different wavelength than us retail people. They're over there making deals, talking with people, negotiating exit strategies and special treatment, building relationships with people who can sound an early alarm for them, etc. IMO, dumb money investors like me probably don't want to get involved in that kind of thing any more than we have to.
I'm not sold on the need for something like that but I can certainly see good arguments for equally-weighting U.S. and international equities, keeping plenty of gold (which, interestingly, Dalio didn't even talk about this time) and having only iBonds, online bank CDs and perhaps short-term TIPS (e.g. VTIP) on the cash/bond side in a variable portfolio.
When I first started I had a slug of international stocks within my stock allocation, but I eventually transitioned to straight US stocks in the PP bucket. I'm down with all that except TIPS.
Perhaps better still, borrowing cash (as Dalio recommends) to buy income real estate? Much to think about.
I'm looking to do that in the next year or two. It sucks that my personal timeline didn't quite match up with the low interest rates we've had recently, but oh well.
You there, Ephialtes. May you live forever.
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Re: Why in the World Would You Own Dollar Debt? - Dalio

Post by Tyler » Wed Mar 17, 2021 11:14 am

I respect Dalio a lot, but I'd be remiss if I didn't point out that he's also a salesman. You can see it all the way up in the first paragraph:

These extremely low or nonexistent yields do not meet these asset holders’ funding needs. For example, pension funds, insurance companies, sovereign wealth funds, and savings accounts cannot meet their financial needs with these investments so holding bonds assures their failure to meet their obligations.

The article is classic content marketing:

1. Identify a target market (high-dollar institutional investors that are prime customers for Bridgewater products).
2. Explain a grave problem (changing debt markets that threaten your ability to meet your obligations).
3. Propose a solution that is too complex for them to accomplish on their own (Bitcoin and gold could be banned! Have you considered Chinese bonds?)
4. Build yourself up as someone they can trust to solve their problem.

Dalio doesn't write for fun -- he clearly knows what he's doing.

Now his underlying point about bonds certainly merits discussion. I just believe that individual investors should not reflexively change their own portfolios based on the marketing materials of major hedge funds. If the information benefitted you more than them, they wouldn't be giving it away for free.
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Re: Why in the World Would You Own Dollar Debt? - Dalio

Post by Kevin K. » Wed Mar 17, 2021 1:39 pm

Your timing is impeccable Tyler as I just read this post on Bloomberg that's so close to what you said I think you have a case for telepathic plagiarism of your intellectual property ;) .

https://www.bloomberg.com/opinion/artic ... g-own-book

Thanks so much for your wise and balanced perspective!
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Re: Why in the World Would You Own Dollar Debt? - Dalio

Post by dualstow » Wed Mar 17, 2021 2:23 pm

Kevin K. wrote:
Wed Mar 17, 2021 1:39 pm
*
Tyler wrote:
Wed Mar 17, 2021 11:14 am
*

These are the kind of posts that new investors and frankly everyone should be reading instead of worrying about TLT’s plunge.

Can this also be applied to the recently discussed Jeremy Grantham interviews or no?
I mean, bright guy/no slouch/ not necessarily wrong ✓
The bubble is going to burst any time now ✓
Only emerging value looks cheap ✓
I happen to have emerging value funds for sale ✓
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Re: Why in the World Would You Own Dollar Debt? - Dalio

Post by Tyler » Wed Mar 17, 2021 3:47 pm

dualstow wrote:
Wed Mar 17, 2021 2:23 pm
Can this also be applied to the recently discussed Jeremy Grantham interviews or no?
I mean, bright guy/no slouch/ not necessarily wrong ✓
The bubble is going to burst any time now ✓
Only emerging value looks cheap ✓
I happen to have emerging value funds for sale ✓
Yep. And it also applies to the "Allegory of the Hawk and the Serpent" article by Chris Cole that has made the rounds.

> Smart guy who makes a compelling argument about economic cycles.
> Markets are due for a major correction. Be prepared!
> Advocates for diversifying your portfolio into exotic assets like long volatility.
> Cant find a long volatility fund? That just happens to be the specialty of his asset management firm.

Note that there's nothing wrong with offering compelling marketing for your own products. Readers just need to be aware that it's marketing and approach it with their eyes open to the underlying business motivations.
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Re: Why in the World Would You Own Dollar Debt? - Dalio

Post by glennds » Wed Mar 17, 2021 6:45 pm

Tyler wrote:
Wed Mar 17, 2021 11:14 am
I respect Dalio a lot, but I'd be remiss if I didn't point out that he's also a salesman. You can see it all the way up in the first paragraph:

These extremely low or nonexistent yields do not meet these asset holders’ funding needs. For example, pension funds, insurance companies, sovereign wealth funds, and savings accounts cannot meet their financial needs with these investments so holding bonds assures their failure to meet their obligations.

The article is classic content marketing:

1. Identify a target market (high-dollar institutional investors that are prime customers for Bridgewater products).
2. Explain a grave problem (changing debt markets that threaten your ability to meet your obligations).
3. Propose a solution that is too complex for them to accomplish on their own (Bitcoin and gold could be banned! Have you considered Chinese bonds?)
4. Build yourself up as someone they can trust to solve their problem.

Dalio doesn't write for fun -- he clearly knows what he's doing.

Now his underlying point about bonds certainly merits discussion. I just believe that individual investors should not reflexively change their own portfolios based on the marketing materials of major hedge funds. If the information benefitted you more than them, they wouldn't be giving it away for free.
Totally agree.
In between 3 and 4 I might insert "Firmly embed fear of disaster if the target market does nothing". Ideally the disaster should be existential, as in game changing.

A recent politician rode this very formula very successfully all the way to the White House.
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Re: Why in the World Would You Own Dollar Debt? - Dalio

Post by Kevin K. » Fri Mar 19, 2021 2:49 pm

Another excellent perspective on Dalio:

https://awealthofcommonsense.com/2021/ ... -optimism/
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Re: Why in the World Would You Own Dollar Debt? - Dalio

Post by dualstow » Sat Mar 20, 2021 12:03 pm

Kevin K. wrote:
Fri Mar 19, 2021 2:49 pm
Another excellent perspective on Dalio:

https://awealthofcommonsense.com/2021/ ... -optimism/
I don't quite know what the author means when he uses default as a verb:
I’m a huge advocate for default settings as an investor.

You should default your savings rate. Default increases to that savings rate over time. Default your investment choices. Default your bill payments. Automating good decisions ahead of time is one of the most important steps you can take to meaningfully improve your finances.
Clearly, it is a positive connotation, something to put importance on, but I have never seen default used like that.
Default your savings rate?
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Re: Why in the World Would You Own Dollar Debt? - Dalio

Post by vnatale » Sat Mar 20, 2021 12:07 pm

dualstow wrote:
Sat Mar 20, 2021 12:03 pm

Kevin K. wrote:
Fri Mar 19, 2021 2:49 pm

Another excellent perspective on Dalio:

https://awealthofcommonsense.com/2021/ ... -optimism/


I don't quite know what the author means when he uses default as a verb:

I’m a huge advocate for default settings as an investor.

You should default your savings rate. Default increases to that savings rate over time. Default your investment choices. Default your bill payments. Automating good decisions ahead of time is one of the most important steps you can take to meaningfully improve your finances.

Clearly, it is a positive connotation, something to put importance on, but I have never seen default used like that.
Default your savings rate?


It seems like this definition is closest to the way the author used it above:

computers : to make a selection automatically in the absence of a choice made by the user
The program defaults to a standard font.
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
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Re: Why in the World Would You Own Dollar Debt? - Dalio

Post by dualstow » Sat Mar 20, 2021 12:52 pm

Right, but how do you default your savings rate or your bills?
Default to paying your bills, ok.
Default your savings rate?
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Re: Why in the World Would You Own Dollar Debt? - Dalio

Post by Tyler » Sat Mar 20, 2021 12:57 pm

Kevin K. wrote:
Fri Mar 19, 2021 2:49 pm
Another excellent perspective on Dalio:

https://awealthofcommonsense.com/2021/ ... -optimism/
That's really good. Thanks for sharing! Ben Carlson is definitely one of the better investing writers out there, IMO. I really appreciate his balanced perspective.
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Re: Why in the World Would You Own Dollar Debt? - Dalio

Post by buddtholomew » Sat Mar 20, 2021 7:34 pm

dualstow wrote:
Sat Mar 20, 2021 12:52 pm
Right, but how do you default your savings rate or your bills?
Default to paying your bills, ok.
Default your savings rate?
I think we can substitute automate for default as that is the message he is trying to convey. Automate 15% to 401K, automate bill pay, etc so it becomes routine.
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Re: Why in the World Would You Own Dollar Debt? - Dalio

Post by ppnewbie » Sun Mar 21, 2021 12:16 am

Did not read the article - skimmed very fast - but I can think of one big reason to own bonds, a deflationary event like a market crash. I believe that is what it’s for in the PP.
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Re: Why in the World Would You Own Dollar Debt? - Dalio

Post by dualstow » Sun Mar 21, 2021 6:58 am

buddtholomew wrote:
Sat Mar 20, 2021 7:34 pm
dualstow wrote:
Sat Mar 20, 2021 12:52 pm
Right, but how do you default your savings rate or your bills?
Default to paying your bills, ok.
Default your savings rate?
I think we can substitute automate for default as that is the message he is trying to convey. Automate 15% to 401K, automate bill pay, etc so it becomes routine.
Ok, I think you and Vinny are right. I think he means set it and then stick to it, and where possible, make it an automated transaction. I guess you could save by automating a transfer to a savings account or investment account.
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Re: Why in the World Would You Own Dollar Debt? - Dalio

Post by ppnewbie » Mon Mar 22, 2021 11:03 am

Tyler wrote:
Wed Mar 17, 2021 3:47 pm
dualstow wrote:
Wed Mar 17, 2021 2:23 pm
Can this also be applied to the recently discussed Jeremy Grantham interviews or no?
I mean, bright guy/no slouch/ not necessarily wrong ✓
The bubble is going to burst any time now ✓
Only emerging value looks cheap ✓
I happen to have emerging value funds for sale ✓
Yep. And it also applies to the "Allegory of the Hawk and the Serpent" article by Chris Cole that has made the rounds.

> Smart guy who makes a compelling argument about economic cycles.
> Markets are due for a major correction. Be prepared!
> Advocates for diversifying your portfolio into exotic assets like long volatility.
> Cant find a long volatility fund? That just happens to be the specialty of his asset management firm.

Note that there's nothing wrong with offering compelling marketing for your own products. Readers just need to be aware that it's marketing and approach it with their eyes open to the underlying business motivations.
I was initially interested in Chris Cole's thesis but my interest fell off when I realized he could not answer questions about his own fund construction because it was too complicated.
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