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Why in the world would you own bonds?

355 points by nkurz 6y ago

ohiovr 6y ago
Why buy a 10 year bond today when 24 hours from now its value will drop significantly?
tonfreed 6y ago
Two popups before I even begin the article, gross.
mrb 6y ago
What does this sentence mean: «The charts below show these payback periods for holding cash» What's the payback period for holding cash? By definition if you hold cash you can be "paid back" immediately in full.
valuearb 6y ago
As a hedge against inflection and higher interest rates. Oh, wait, I thought the title was “Why would you short bonds”
ISL 6y ago
Clicked the "X". Article looked a lot like the homepage. I'm not sure I can recall an EULA on an analysis article. View Source bypasses the EULA directly.
- ZephyrBlu 6y ago
  I did the same. You have to accept it instead of clicking "X" to see the article.
- gruez 6y ago
  >I'm not sure I can recall an EULA on an analysis article. Seems to be common on websites for asset management companies. If you go to vanguard or blackrock's site you get one too.
- AgentOrange1234 6y ago
  Reader mode solved it for me.
Aunche 6y ago
FDIC insurance maxes out at $250,000, so it won't cover you if you're super rich or a foreign government. In that case bonds still make sense. US bonds are currently more stable and have better interest rates than any other bonds from developed countries, so people will continue buying them for the time being.
- mandelbrotwurst 6y ago
  The wealthy generally keep a very small fraction of their holdings in cash, also you can have accounts with multiple banks.
- TedDoesntTalk 6y ago
  > FDIC insurance maxes out at $250,000 That's PER checking account, and if they are joint checking accounts, then the max is $500,000 per account.
  - paxys 6y ago
    Slight correction – it is for all your accounts at a single institution combined.
    - dmoy 6y ago
      If we're going to be pedantic, it's per institution per ownership category. So you could have: * individual account * revocable trust account * joint revocable trust account * etc each with a separate $250k limit at the bank (and in the case of the trusts, the limit can be $250k per beneficiary of the trust).
- chaostheory 6y ago
  For context, Dalio’s current thesis is that bonds and any debt instruments are dangerous to own right now. Why? Because he thinks the dollar will collapse and lose its reserve status. Uncontrolled inflation is a big danger.
- jl2718 6y ago
  Default risk for demand deposits is near-zero: https://fred.stlouisfed.org/series/EXCSRESNS https://fred.stlouisfed.org/series/EXCSRESNS
vecinu 6y ago
The conclusion kind of scares me, especially coming from Dalio. > so they could very well impose prohibitions against capital movements to other assets (e.g., gold, Bitcoin, etc.) and other locations. These tax changes could be more shocking than expected. Who truly believes this is a likely scenario? A number of folks I know are already considering fleeing the US but if this was to pass, that number would skyrocket and I can't imagine a good outcome in the next few decades from capital flight in the US.
- nemothekid 6y ago
  Where would you go? The EU and Japan are already in a worse position than the US and if the US decides to commit to capital controls, they would probably follow. That only leaves China which already has capital controls.
  - toomim 6y ago
    > That only leaves China There are 195 different nations on earth. That leaves a lot more options than the EU, Japan, and China. A lot of crypto-expats are going to carribean island nations.
    - nemothekid 6y ago
      >A lot of crypto-expats are going to carribean island nations. Are they going to buy Lamborghinis in pesos? More seriously, yes, some people are content with living like a rich native in the global south but for anyone else who plans to participate in the global economy (and I assume they do, because capital controls would likely only affect high net worth individuals), they would need to convert to EUR/JPY/CNY/USD.
    - calt 6y ago
      But on the topic of market impacting capitol flight, is that a real possibility? No.
    - frongpik 6y ago
      Small nations can't risk to offend the US.
pascalxus 6y ago
What i find particularly scary is the run on the banks scenario the author outlines. this really smashes the idea that bonds are the safe thing to get your money back. I know a lot of bonds have been selling, that's why the fed needs to buy so much every month, to make up for all that selling people are doing. Personally, i'm surprised even more people haven't been selling bonds. With the threat of inflation looming so large, and the enormous money supply that has increased in the last year. All those country's debt problems for which the only solution is inflation: it's the only thing that's politically feasible. I'm a totally risk averse investor and as such, I avoid cash and bonds like the plague with the exception of a modest emergency cash reserves. Of course this is all linked to the rise of all the other assets classes. when the 100 trillion dollar bond markets sell off, all that money has to go somewhere: equities, real estate, gold and now bitcoin.
- ISL 6y ago
  Bonds are a safe way to get your money back. It just might not buy as many cheeseburgers as you expected.
  - mc10 6y ago
    This is not a guarantee at all; if inflation is sufficiently high then you could be actively losing money holding a bond that fewer and fewer people want.
    - 01100011 6y ago
      True but losing 5% on a bond investment might be better than losing 10% in a savings account or 50% in the market. You have to think about your timelines and risk tolerance.
    - ISL 6y ago
      A $1000 T-Bill will yield $1000 at maturity, every time.
      - pascalxus 6y ago
blacksqr 6y ago
It's possible for bond rates to go negative. Just because rates are near zero now doesn't mean there isn't room for further movement.
- thoughtstheseus 6y ago
  Just hold cash...
  - paulmd 6y ago
    At a macro scale, holding cash isn't free either. If it's in a bank account then welp, $250k FDIC limit. If it's physical then welp, gotta rent and secure a warehouse that is literally chock full of cash for anyone to steal. Etc etc. Zero/negative interest rates are supposed to encourage productive activity, or at least spending.
    - thoughtstheseus 6y ago
      Cash is making money if your alternative is a negative yielding asset.
      - jkulubya 6y ago
        Yes, but the comment you’re replying to points to the fact that your yield on cash can also be negative due to (for example) having to pay to store the cold hard cash somewhere safe.
        thoughtstheseus 6y ago
        Banks? Seems like an obvious choice, given they have vaults and guards, etc.
        paulmd 6y ago
        FDIC insurance doesn't cover large balances (above 250k) so that's not free either. If you're talking about holding a vault full of physical cash, that's not free either. It has to be physically secured in a building and someone wants to be paid for the building and the security. All of which I said above. Holding cash isn't free at a macro scale, holding cash already has a negative return.
adeelk93 6y ago
“Nobody wants bonds because the yields are too low” is basically the same statement as “nobody goes to that restaurant because it’s too crowded.”
- dannyw 6y ago
  This argument doesn't work when the Federal Reserve, an entity unconcerned about ROI, is purchasing bonds out of thin air. They now own $7 TRILLION of US govt bonds. This number was less than $100 billion before the GFC. https://www.pgpf.org/blog/2021/01/the-federal-reserve-holds-more-treasury-notes-and-bonds-than-ever-before https://www.pgpf.org/blog/2021/01/the-federal-reserve-holds-... So, yes, no investor wants bonds. Why would you buy something that's a guaranteed loss? It's increasingly just the Fed.
  - adeelk93 6y ago
    Great counterpoint. I knew the Fed was purchasing a lot of bonds, but I had not grasped the scale of it. I didn’t think it would be that much higher than 08. The Brigewater article would have been a lot stronger with that $7 T figure.
    - ZephyrBlu 6y ago
      I believe that every dollar the Fed has "printed" went into bonds because that is how the US financial system works. The government gets money from the Fed by selling them bonds in exchange for cash.
      - nostrademons 6y ago
        That's not how the U.S. financial system works. The government doesn't "get money from the Fed" - it gets money from the Treasury, which either collects it from taxes or issues government debt to raise funds. The Fed participates in open market operations, and one of the markets they participate in is the Treasury bond auction. But they participate in others as well: notably, they've recently been major participants in mortgage-backed securities and corporate debt markets. When they participate, they effectively inject cash into the system, since the amount they can pay is unlimited and subject only to their mandate to get full employment and limited inflation. There's a lot of other subtleties involved as well; this isn't intended to be an exhaustive explanation.
every 6y ago
Trying to speculate on the commercial bond market is exceedingly difficult and risky. Even the experts often take a beating. But using certain sectors of the bond market as a savings and retirement mechanism can be quite effective. Consider US tax-free municipal bonds (munies). They are safe, with defaults at a miniscule percentage of corporate bonds. And many are backed with third party insurance against defaults. Their returns are multiples of US Treasuries, CDs, money markets and savings accounts. And all distributions are tax exempt with the exception of any capital gains. Not very exciting. Sort of like watching grass grow. But it grows and grows. My own investments in this area are with: https://investor.vanguard.com/mutual-funds/profile/overview/vwalx https://investor.vanguard.com/mutual-funds/profile/overview/... edit: And by investing in munies you're also investing in US infrastructure. Munies fund all that stuff. Bridges, fire stations, schools, roads, water treatment plants, ports, electrical grids, etc, etc, etc. Might even make you feel like a good citizen...
- mdorazio 6y ago
  Keep in mind there's a hidden gotcha with bond funds like vwalx in that the price of bonds changes over time roughly correlated with expected inflation. If you've been paying attention to vwalx and other bonds over the last month, you'll have seen the price go down significantly as treasury yields have gone up. So there's a risk that while your %yield on invested capital remains the same, the value of your invested capital itself can still drop since you don't own the bonds themselves and aren't holding them to maturity.
  - every 6y ago
    That is perhaps only relevant if you plan on selling them. I have no such plans. For me they are an ever accruing "money hose" I can turn off or on as needed...
    - ericd 6y ago
      Haven’t munis had negative real (ie after inflation) returns for a while now?
emodendroket 6y ago
I suppose a forty-year bubble is possible but it seems like a novel idea to my mind.
- DennisP 6y ago
  Dalio takes a very long view. He mentions "my study of markets and economies over the last several hundred years."
ggm 6y ago
Why in the world would you want capitalism? Bonds exist because people want to lay off risk. Its not about the yield, as much as its about the risk. Sure, you want an upside, and the yield is about the upside. But the motivation in the first place, is about the risk. "as safe as houses" turns out, not to be that safe. "as good as gold" is still pretty good, but the next unobtanium is out there. by and large, absent revolution, governments make good on their financial promises. Even the Soviets paid up on the baku oil shares, in the end. So sometimes, even WITH a revolution you get back some money. Bonds are about risk. Why would you want to lay off risk? Because thats what risk avoidance is.
- dkdk8283 6y ago
  > Why in the world would you want capitalism? because anything less is corporate welfare. if you can’t pay your way well then...
  - ggm 6y ago
    You understand this was a rhetorical device, right? Bonds exist because people want capitalism. It's implictly about money, interest, risk and return.
nlh 6y ago
One thing I've learned about professional investors is that no matter what, at the end of the day they're talking their book. So whether you buy these arguments or not, Ray Dalio is simply promoting a position that Bridgewater no doubt has taken. So when he says: "I believe a well-diversified portfolio of non-debt and non-dollar assets along with a short cash position is preferable to a traditional stock/bond mix that is heavily skewed to US dollars. I also believe that assets in the mature developed reserve currency countries will underperform the Asian (including Chinese) emerging countries’ markets." It's not his avuncular advice. He has millions (billions?) of dollars committed to this bet and he wants to convince others that it's correct so it pays off.
- optimalsolver 6y ago
  Is that worse than recommending one course of action to retail investors while personally doing something completely different?
- ac29 6y ago
  The book he has coming out this year The Changing World Order: Why Nations Succeed and Fail certainly seems to touch on some similar themes from the brief description I found online.
  - riffraff 6y ago
    well, the book is cited 3 times in this piece, it's almost advertisement for it :)
  - shostack 6y ago
    Yes, it seems he's betting against the Western financial growth and stability. I wonder if he thinks the days of the dollar's reserve currency status are numbered.
    - eru 6y ago
      Huh, why? If the US economy is going to do well, bond yields will be going up. That means a bond short position will pay off. Being short on bonds is basically financially almost exactly the same thing as borrowing money. (The US treasury is 'short' on T-bills. They have to essentially 'buy them back' when they become due.)
tlbsofware 6y ago
Benjamin Graham and Warren Buffett would disagree, they don’t exactly recommend buying and holding bonds until maturity but instead to buy bonds on the market, when the bond yield is say at 6% any bond with a coupon value less than that will be worth less than its face value, when those rates drop the bond will be worth more than its face value, if you buy bonds when interest rates are high and then sell them when they are low you can make a very sizable chunk off of them that is greater than the coupon value
- anm89 6y ago
  Sure. Let us know when Bonds are at 6% again. The point is the number of narratives where bonds can go lower is getting smaller and smaller.
paulmd 6y ago
> …The economics of investing in bonds (and most financial assets) has become stupid ... Rather than get paid less than inflation why not instead buy stuff—any stuff—that will equal inflation or better? That is indeed the point of driving interest rates low or negative - to force people into economic activity. If holding a bond makes you negative money, you might as well buy something with it, which goes back into the economy. It seems like there's this sense that putting your money into the market should always generate a return, and yet we have an economy that is driven by spending. The interest rate is how those are reconciled.
- anm89 6y ago
  > force people into economic activity Try telling that to the pensions.
- BenoitEssiambre 6y ago
  Also note that you can save by buying stuff. Materialize your savings for a 2% a year compounding tax free return. Get discounts by buying in bulk. Urban dwellers might be more limited but for people who have unused or underused space, this is a way to get a return on that space. Buy all you will need for the next decade of: Salt, sugar, socks, underwear, under-shirts, vinegar, soap bars, toothbrushes, razor blades, feminine products, toilet paper, paper towels, napkins, trash bags, freezer bags, sandwich bags, foil paper, parchment paper, plastic wrap, wax paper, candles, matches, diapers, pet supplies (litter, etc.), gardening supplies, building supplies, repair supplies, medical supplies, fire wood, wood pellets, long lasting appliances and furniture, kitchenware, dinnerware, sheets and pillowcases, blankets,comforter,bedspreads, maintenance, renovations, efficiency upgrades, land, bigger house. Some liquid soaps and chemicals have a limited shelf life of just a couple of years so it might be better to avoid unless you know the shelf life. Also be careful buying more than you need which can lead to waste. Be careful being wasteful just because you have lots of stuff at home. Buying alcohol ahead of time in bulk works if you have the discipline not to drink more. Also to get a good return you need to use the full life of your stuff before replacing from your stash, not replace early because it's right there. There is also a macroeconomic benefit to this approach. It can get the economy out of Keynesian recessions when people save by buying. You are however limited in total value by the free space you have.
aerovistae 6y ago
I discovered awhile ago that so-called "junk bonds" are in fact very rewarding investments that are actually only risky by comparison to other bonds, and not by comparison to other popular asset classes like stocks. Been making $120/year off an $800 bond I bought that has grown in value to $950. Win!
- 55555 6y ago
  Do you have any recommended reading on this?
  - aerovistae 6y ago
    I can't say that I do-- I mostly learn about investment things by googling a question or a term and then reading all the results that come up and mentally aggregating what they have to say. I will add that The Balance and Investopedia have been the leading sources of my education, all in all.
- mNovak 6y ago
  I'd be curious to see a comparison of the return on junk bonds of a given company against the actual stock return of the same company.
- kccqzy 6y ago
  Well you get compensated for increased default risk so certainly.
- hellbannedguy 6y ago
  How many years? What junk bond?
- JMTQp8lwXL 6y ago
  Someone should brand junk bonds like they did with peer-to-peer lending. The latter was a bust (time and time again, I've read about the ills of P2P lending returns), but there could be a great dual-sided market opportunity for the former.
- tryptophan 6y ago
tomerbd 6y ago
Buy bond get interest on it where is the problem?
- freetime2 6y ago
  The current problems with buying bonds (from my perspective as an individual investor) are: * Very low interest rates currently * Risk of inflation in the future leading to negative real returns
kgin 6y ago
Are there any counterarguments disagreeing with this assessment? Certainly those at the Fed and the Treasury speak confidently that the debt is manageable and inflation is easily cooled, but I imagine they have to project confidence.
anfilt 6y ago
Goverment bonds yields are quite low. You get can Non-Governmental Bonds that have better yields. However, make sure the issuer has physical assets so if they go belly up your not left holding the entire bag. The other annoying thing about bonds as each bond tends be a fair amount of capital, so you need a lot of capital to properly diversify.
boyka 6y ago
> Real yields of reserve currency sovereign bonds are negative and the lowest ever. Real yields of cash are even worse though not as negative as they were in the 1930-45 and 1915-20 great monetization periods. This I cannot comprehend. Can someone explain to me how holding cash yields less than holding a bond at negative rates that will return me less cash?
- CorrectHorseBat 6y ago
  Holding cash costs money too since interest is negative. If you're talking about actually physical cash, you will have to pay for a vault and security to store and move the cash.
- AnimalMuppet 6y ago
  Let's say inflation is 2%, and and bonds are returning 1%. That means real (that is, accounting for inflation) bond returns are -1%. But holding cash returns -2% (again after accounting for inflation).
fwert 6y ago
Demand pull inflation which is worsened by stimulus because of foolish decisions of subjects.
zby 6y ago
Some loose threads: The main difference between bonds and cash is mostly based on the fact that cash is the means of settlement. But in fact what we call cash can also have two main forms: federal reserves (debt of the feds) that can be dealt with only by banks and regular bank depositories (debt of the particular bank). And there is even a third layer of Euro Dollar which is debt of non-US banks who cannot hold federal reserves and who can only rely on deposits at 'correspondent banks' in the US who can hold federal reserves. The fed reserves is the most liquid form of money - but it cannot be held by individuals, only by US banks. Bank depositories are less liquid because there can be a bank run - in that respect US government bonds are in fact less risky even though they are not used as a settlement or accounting mechanism. They are less risky because the US government will always pay them back, because they are USD denominated and there is no gold parity any more. Non rhetorical question: are there any scenarios where the US defaults on their debts? It is only 50 years that we can a complete fiat based money - before that the system was based on gold (and silver and other resources like shells) - so the current USD based system is really incomparable with the past reserve currencies. Somehow Ray Dalio in his essays with historical comparisons completely misses that - but of course it only makes his thesis stronger. Non US bonds denominated in USD are completely different - because they can default. In gold based system all bonds used to be like that, because in the end no government could print gold. Maybe 50 years is not enough to have any full cycle and there is no way to extrapolate. The economists base their inflation and similar models mostly on the US economy and fiscal mechanisms - but because of globalisation the share of USD transactions outside of the US economy is probably growing. I would love to see stats on that.
- neilwilson 6y ago
  "Non rhetorical question: are there any scenarios where the US defaults on their debts?" No. Since it is just a bond swap. To anybody not in the US (like me), the US dollar is just a 0% permanent bearer bond. When a bond matures it is swapped for central bank reserves (floating debt). When one is sold it is swapped back (fixed rate term debt). The monetary system is reflexive. No financial institution is going to hold central bank reserves when there is a near identical government bond available paying a higher interest rate.
neilwilson 6y ago
The reason you own bonds - particularly government bonds - is because they are better than the alternative. At the point somebody is bidding in a primary government bond auction, they are either a pension fund with a bank deposit, and/or the bank backing that deposit with central bank reserves. Even with all the investment options available, somebody always has to end up in that position in aggregate. Asset prices rise across the board until this indifference level is reached. Central Bank reserves are remunerated at a fraction of one percent at the moment. Bank deposits even less. Bank deposits also suffer from the risk that the bank will fail. Therefore relative to the only options left, government bonds represent a good investment. Particularly if you are a pension fund under regulatory instructions to fix your income with certainty. What's particularly interesting is that the bid for the bond will come from two places - the pension fund, and the bank itself - using essentially the same money. The sale to either is settled with precisely the same set of central bank reserves. If the bank wins the auction it will end up backing the bank deposit with the bond rather than reserves. If the pension fund wins the auction, the deposit and the bank reserves are deleted from the bank's books.
- Bancakes 6y ago
  Owning gov't bonds also boosts your ego. "The US owes me money, and they better pay up when I say, or else..."
  - chii 6y ago
    or else what? You gonna point your gun at them to pay up? They got a bigger gun than you, and almost every other entity in the world.
    - ben509 6y ago
      Or else you and other bondholders take away their credit card.
    - eru 6y ago
      Also, getting paid doesn't do you much good nor does it put much pressure on the US: Before you have some pieces of paper (bonds) that the US issued. Afterwards you have some pieces of paper (cash) that the US issued. And the US can create arbitrary amounts of cash, if they really have to. (Obviously, these days it's all entries in databases. But you get my drift.)
ping_pong 6y ago
People like Ray Dalio keep saying this, and scores of others have been talking about how fiat currency will fail, but it won't. Globally, no one that matters wants it to fail, therefore it won't. People like Paul Tudor Jones have been saying that the USD will fail for decades and people should buy gold. Even Peter Schiff has been talking about gold and hyperinflation since before the Great Recssion. All the bears have been completely wrong, except for short periods of time. And they will continue to be wrong. Again, no one that matters wants the USD and UST to fail. Bond vigilantes can't defeat the Fed.
- runeks 6y ago
  > Globally, no one that matters wants it to fail, therefore it won't. I’ve seen this argument before, and can’t help to think how naive it sounds. Can you name one other case where the fact that we don’t want something to fail results in it being unable to fail? Actions have consequences. No matter how much we don’t want a particular set of consequences to occur, they will if we perform the wrong actions.
  - koonsolo 6y ago
    Globally, no one wants a pandemic, therefore...
    - TheAdamAndChe 6y ago
      Globally, no one wants a housing price collapse and global recession, therefore...
      - eru 6y ago
        Actually, the general public kept demanding a housing price collapse around 2008. It's rather tragic. See https://www.goodreads.com/book/show/43062766-shut-out https://www.goodreads.com/book/show/43062766-shut-out for more detail than you ever wanted to know, or check out the author's blog at https://www.idiosyncraticwhisk.com/ https://www.idiosyncraticwhisk.com/
teraku 6y ago
I read it and I feel like the author does not understand how government debt works. And this makes them not understand bonds as well. But to answer the original question, disregarding any logic of how state debt or bonds work, why would you own bonds? Two possible answers: 1) Because they serve as a deflation hedge. This is interesting for people with lots of money who need some more security 2) Because it is guaranteed money (at least bonds for countries like US, UK, JPN, DE).
- jamesgreenleaf 6y ago
  I would bet with certainty that Ray Dalio understands how government debt works.
  - teraku 6y ago
    Maybe he does, but his post does not show it. Best reading is that he does it because he is interested in return-on-investment money. In which case his title should be "bonds are not useful for high return-on-investment". But no, he chose "Why in the world would you own bonds?". And then he doesn't even really answer that question, he just goes on about his investment strategies. His result: Don't own bonds. This pretty much explains his "…The economics of investing in bonds (and most financial assets) has become stupid" paragraph. I already answered why bonds are still valid to be owned by institutions with lots of money and also why big banks still buy them (happily, I should add). > The world is a) substantially overweighted in bonds (and other financial assets, especially US bonds) at the same time that b) governments (especially the US) are producing enormous amounts more debt and bonds and other debt assets Yes and no. Why are there so many bonds? Well, lots of countries have policies to not issue money directly to the finance ministry which then gives the money to whatever the government wants to fund, but instead for every spending of the government issue bonds that are sold to banks and put that money on the finance ministries balance sheet. It's an entirely political concept, but it's reality. As such, bonds and state debt are just the money handed out by the state. If they would not hold debt and/or issue bonds, there would be no money for anybody. Period. >…If bond prices fall significantly that will produce significant losses for holders of them, which could encourage more selling This leaves out the political dimensions in its entirety. Bond prices will not fall significantly UNLESS the state's resources (technology, work-force, ...) also drop significantly. If that is not the case, the state can just uphold the bond's values. > …Imagine what would happen if, for any or all of these reasons, the holders of these debt assets wanted to sell them. There is now over $75 trillion of US debt assets of varying maturities. This is just wrong. I already explained why, in brief, above. I won't shed anymore words on this, except that it is fear-mongering. > …History and logic show that central banks, when faced with the supply/demand imbalance situation that would lead interest rates to rise to more than is desirable in light of economic circumstances, will print the money to buy bonds and create “yield curve controls” to put a cap on bond yields and will devalue cash. That makes cash terrible to own and great to borrow. There are more sides to that coin. This is often used to create fear for inflation. Because history has also shown that unless there is hyper-inflation people always love to own cash, regardless of the economic circumstances. And better borrowing conditions should enable economic growth, and over-borrowing should be kept in check anyways (re: financial crisis 2008) so there is no real issue here. And as explained above, unless the resources of a state drop significantly, there is no trigger for hyper-inflation. All in all, he is just arguing from an invester's perspective, but even then not a very holistic approach.
throwaway4good 6y ago
The text answers the question: The central banks are buying the bonds in a scheme that essientially boils down to print money until debt levels no longer matter. The money printing causes: - Inflation (as in rising consumer prices) - Massive swings and bubbles in the financial markets - Increasing wealth inequality This has happened until now in a global coordinated manner. This was also the policy after 2008. However it seems that challenge today is that China is not willing to print money at same level as Europe and USA. The question is what happens then? Yes. The Chinese currency will go up compared to the dollar and the euro. However I think effects will go much further than that. The stability of the west will be challenged and the dominance of our financial markets will decay. In the end, the existance of a big economy, that does not embark in the same aggressive monetary policy as we do, will put a hard limit on how far we can go.
- wintermutestwin 6y ago
  >Yes. The Chinese currency will go up compared to the dollar and the euro. If this is true, maybe it makes more sense to invest in Chinese currency than the huge risk of investing in Chinese companies?
throw0101a 6y ago
Ben Carlson gives a few reasons: > * Bonds hedge stock market volatility. > * Bonds can be used to rebalance. > * Bonds can be used for spending purposes. > * Bonds protect against deflation. > * There are other options but not many. * https://awealthofcommonsense.com/2020/08/why-would-anyone-own-bonds-right-now/ https://awealthofcommonsense.com/2020/08/why-would-anyone-ow...
iSnow 6y ago
Help out someone who is not very versed in finance: what on earth are "non-debt and non-dollar assets"? Are those stocks from non-USD economies?
- dash2 6y ago
  Commodities, global property, Bitcoin....
jl2718 6y ago
>> The United States could become perceived as a place that is inhospitable to capitalism and capitalists. USA is already perceived as the most restrictive government in the world for citizen participation in any non-bank finance. And I have news for regulators: the banks are an anachronism. They are not making loans anymore. They only exist to sell loans to the government and buy them back as treasury-backed assets at a lower price. The difference comes from taxes. It’s a direct transfer of wealth from citizens to banks. They will probably be nationalized because citizens will realize how useless and parasitic they are. All business activity will abandon the banks and all investment will go into stateless financial systems. There is nothing anybody can do to stop this. The ‘protections’ (restrictions) offered by regulators now have negative value to US citizens. This is not some far-out warning. This is happening now. US financial startups are like rats abandoning ship to organize in Canada, Switzerland, Singapore etc. And they are all led by non-citizen US residents, because citizens take that regulation with them anywhere in the world. The best deal in the world right now is to be a permanent US resident with some other citizenship. That seems wrong.
clipradiowallet 6y ago
> Why in the world would you own bonds? Because when every corp/muni bond folds - government issued bonds do not(and never have). Also, because they skyrocket in value during government-to-government conflict. Military action? 150% bond prices. It's a low risk instrument that turns into a winning lottery ticket for events such as.. North Korea launching a ballistic missile ~2 years ago, Donald Trump being accused of Russian collusion 3 years ago, and every military conflict ever. Note, I'm not saying "govt bonds are great! buy them!"...I'm saying there are very old and valid reasons to own bonds of the government-backed variety.
- popcat 6y ago
  I think you have a fundamental misunderstanding of how bonds work. What you are saying is mostly true, BUT the coupon rate is set at bond issuance. Meaning if you own a bond now, and coupon rates go up because of an event, your rate does not magically adjust. When event like you describe happens, it means it's a good time to enter the bond market. What Dalio is saying is that currently real returns on bond are rock bottom or even negative. So why would you own them? He's not saying to NEVER own bonds, just that it currently does not make sense. If in the future, bond coupon rates increase, then it will once again make sense to own bonds.
DebtDeflation 6y ago
We seem to have an entire generation of people who think "stonks can only go up". Similar views were expressed about houses/real estate in 2007. At 47, I'm probably substantially older than the average HN poster, but having lived through the 2001 dotcom implosion and the 2008 financial crisis has given me some perspective. I'm getting some really bad vibes about the sustainability of the the economy and asset markets. Seeing all of the "SWE, BSCS, 4 YOE, $800K TC, am I underpaid?" posts on Blind certainly doesn't help my feeling that a crash is coming.
- nealdotpy 6y ago
  I'm definitely far younger than you; however, I agree. The problem is that there's no timing it. So positioning yourself such that you leverage other factors to make money in a market (e.g. delta-neutral positions that are long/short time/volatility) are all you can do if you want to play the game without having high directional risk.
  - DebtDeflation 6y ago
    So, I actually have an MS in Quant Finance despite having worked in tech my whole career. There's an old saying, "during a time of crisis all correlations go to 1". People found this out the hard way in 2008. There are all sorts of risks that you can't hedge for or that negate hedges you have in place for other risks, counterparty risk being one of the better known ones.
    - o-__-o 6y ago
      Found this out last year after waiting patiently since 2008. Volatility ruined the prospect of large quick gains. I now have no specific strategy to trade the next crash except buy and hold the fundamentally sound stocks (same strategy as normal investing heh)
    - alasdair_ 6y ago
      This hit home for me during the mini-crash a year ago. I was convinced assets like bitcoin or gold or bonds would hold value when the stock market tanked but instead saw everything fall at the same time. I understand the concept of undiversifiable risk, but seeing it play out in practice was eye opening.
brenner100 6y ago
"If history and logic are to be a guide, policy makers who are short of money will raise taxes and won’t like these capital movements out of debt assets and into other storehold of wealth assets and other tax domains so they could very well impose prohibitions against capital movements to other assets (e.g., gold, Bitcoin, etc.)"
okprod 6y ago
I'm close with someone at Bridgewater and have read Dalio's books, obviously he's a smart person, but he does have positions and his public views tend to shift, which is understandable. I remember when he was negative on crypto.
jplr8922 6y ago
The more Dalio gets public, the more I'm doubting his game. His book ''principles'' is interesting, however with time its starting to look like an elaborate marketing plan. I have no doubt that he his serious about his principles and business culture, but there are second order effects to make everyting public. In the case of his firm culture (which claims to be an idea meritocracy), it will attract certain kind of people. The same can be said about marketing his financial views. The guy is already rich. He is smart. Why does he needs to post everything on linkedin, suddenly? I have a hard time understanding the underlying strategy of his public persona. Earlier this year he made a long post about the way he used his principles to deal with the accidental death of his son. I mean, why would he do that? Does he wants people to think like him? Why?
- TuringNYC 6y ago
  I see it as him trying to leave a positive legacy. He realizes he's done fantastically as an investor, is aging, and wants to leave a non-financial legacy to the world.
  - jplr8922 6y ago
    hmm you are right : https://www.linkedin.com/pulse/your-life-journey-exercise-ray-dalio/?trackingId=toH6RWcT18sHZRENni2KmQ%3D%3D https://www.linkedin.com/pulse/your-life-journey-exercise-ra...
- nabla9 6y ago
  Ray Dalio (age 71) stepped down from the Bridgewater co-CEO position in 2017. He is now a active retiree who has time in his hand. It's typical for elderly gentlemen to focus on their legacy. Since he moved his home office to Singapore and is heavily invested in China, he has become very careful about talking negative about China and is more prone to paint negative picture on the US and the West.
moralsupply 6y ago
Bitcoin is evil as it burns forests and kills turtles in the oceans due to its energy consumption. Buy bonds instead. They have no carbon footprint, and they are guaranteed by our governments, which only act in our best interests.
betterunix2 6y ago
Why own bonds? Let's say you are into derivatives trading and you need to keep a pile of cash lying around as collateral. Bonds are better than cash as long as the nominal yields are positive, so you buy bonds (and hopefully not find yourself needing to sell them) which give you almost as much collateral. Or maybe you are into high-yield bonds, which if traded correctly can have better returns than stocks. Not that I am personally interested in playing that game...
skolos 6y ago
For me this type of analysis is always suspicious because it doesn't consider timing. How do I know that when I buy stocks I'm not buying at a peak, or when I need to sell them I'm not going to sell at the bottom. So I ran an analysis [1] where I just used random timing and checked what distribution would be. Turns out if you are long term investor (> 10 years holding period) it is more beneficial to hold stocks than bonds. "Even if you had to sell your stocks at the bottom of the Great Depression, but held them for more than 20 years before that, you would not suffer a loss in value of your portfolio" [1] https://www.investingrus.com/blog/safest-bet/ https://www.investingrus.com/blog/safest-bet/
- jeffreyrogers 6y ago
  The problem with this is it assumes the macroeconomic conditions stay constant. But the macroeconomic conditions since 2008/2009 have been wildly different than ever before.
  - skolos 6y ago
    This is almost 150 years of data. There were regimes with very different macroeconomic conditions (great depression, wars). However I do agree with you that there is a chance that we will see something even more exotic.
    - jeffreyrogers 6y ago
      Your data is only for the US though. What happens if you try the Weimar Republic? That's an extreme case, but I imagine other countries have had similar, but less severe events, and certainly the US in in uncharted territory right now.
deleted 6y ago
[deleted]
qwerty456127 6y ago
Perhaps people use bonds to overcome inflation without adding risk?
- norswap 6y ago
  The article makes the point that bonds don't even achieve this. At best, they decay in value less fast than cash in an inflation scenario. But because of yield rate fluctuations, they're significantly less liquid than cash (if you don't want to lose extra on top of inflation losses). Which is an issue because if the inflation rate is suddenly 7%, you can take your cash and put it in something much safer like real estate or foreign currencies. Holding long-term bonds mitigates inflation, but also makes weds you to it.
_ink_ 6y ago
> For these reasons I believe a well-diversified portfolio of non-debt and non-dollar assets along with a short cash position is preferable to a traditional stock/bond mix that is heavily skewed to US dollars. What exactly is he proposing? I think he is proposing to borrow cash, but can somebody ELI5 what is meant by non-debt, non-dollar assets?
mikeInAlaska 6y ago
During the Covid market crash my bonds barely changed. If I had rolled it all into small caps at the bottom there I could have doubled its value by now. (And then rolled it back into bonds at the top here.) Additionally for bonds, the percent of earnings looks low on my positions statement but a few times a year I get some fat dividends on my bond holdings which I do not think it reflects.
lumost 6y ago
This article does a great job of laying out the end-game of the global quantitative easing program. Today the following occurs 1) Central banks print currency to buy debt that no one wants to buy at negative interest rates. 2) Debt issuers (the government/corporations) increase debt issuance 3) Debt issuers purchase any hard assets available in the local currency at the fastest possible rate and earn profits off of the delta between asset inflation and the bond rates. All western economies assets are being inflated, and all western economies bonds have negative interest rates. There is no alternative until. 4) Debt buyers convert printed dollars to RMB and purchase chinese debt. 5) Debt issuers convert borrowed dollars to RMB and purchase chinese debt 6) The Fed prints more money to meet it's market stability objectives 7) The dollar falls relative to RMB, triggering consumer price inflation on items of Chinese origin. Limiting the effectiveness of printing money.
julienchastang 6y ago
For retirees, consider replacing some of your bond holdings in your portfolio with annuities [1]. A million dollars will buy you a ~$50,000/year annuity for life. That said, annuities have major downsides too (i.e., they are degraded by inflation). [1] https://www.wsj.com/articles/the-case-for-replacing-some-bonds-with-annuities-11612454401 https://www.wsj.com/articles/the-case-for-replacing-some-bon...
snikeris 6y ago
...because yields may continue going down. Other countries have shown us that 0% yield isn't even the floor. A couple years ago, 30 year treasury yield was around 3% and people were saying the same thing...why would you own bonds. People who bought bonds at that time made good money as the yield fell further.

355 points by nkurz 6y ago

ohiovr 6y ago

Why buy a 10 year bond today when 24 hours from now its value will drop significantly?

tonfreed 6y ago

Two popups before I even begin the article, gross.

mrb 6y ago

What does this sentence mean: «The charts below show these payback periods for holding cash» What's the payback period for holding cash? By definition if you hold cash you can be "paid back" immediately in full.

valuearb 6y ago

As a hedge against inflection and higher interest rates. Oh, wait, I thought the title was “Why would you short bonds”

ISL 6y ago

Clicked the "X". Article looked a lot like the homepage. I'm not sure I can recall an EULA on an analysis article. View Source bypasses the EULA directly.

ZephyrBlu 6y ago
I did the same. You have to accept it instead of clicking "X" to see the article.
gruez 6y ago
>I'm not sure I can recall an EULA on an analysis article. Seems to be common on websites for asset management companies. If you go to vanguard or blackrock's site you get one too.
AgentOrange1234 6y ago
Reader mode solved it for me.

Aunche 6y ago

FDIC insurance maxes out at $250,000, so it won't cover you if you're super rich or a foreign government. In that case bonds still make sense. US bonds are currently more stable and have better interest rates than any other bonds from developed countries, so people will continue buying them for the time being.

mandelbrotwurst 6y ago
The wealthy generally keep a very small fraction of their holdings in cash, also you can have accounts with multiple banks.
TedDoesntTalk 6y ago
> FDIC insurance maxes out at $250,000 That's PER checking account, and if they are joint checking accounts, then the max is $500,000 per account.
- paxys 6y ago
  Slight correction – it is for all your accounts at a single institution combined.
  - dmoy 6y ago
    If we're going to be pedantic, it's per institution per ownership category. So you could have: * individual account * revocable trust account * joint revocable trust account * etc each with a separate $250k limit at the bank (and in the case of the trusts, the limit can be $250k per beneficiary of the trust).
chaostheory 6y ago
For context, Dalio’s current thesis is that bonds and any debt instruments are dangerous to own right now. Why? Because he thinks the dollar will collapse and lose its reserve status. Uncontrolled inflation is a big danger.
jl2718 6y ago
Default risk for demand deposits is near-zero: https://fred.stlouisfed.org/series/EXCSRESNS https://fred.stlouisfed.org/series/EXCSRESNS

vecinu 6y ago

The conclusion kind of scares me, especially coming from Dalio. > so they could very well impose prohibitions against capital movements to other assets (e.g., gold, Bitcoin, etc.) and other locations. These tax changes could be more shocking than expected. Who truly believes this is a likely scenario? A number of folks I know are already considering fleeing the US but if this was to pass, that number would skyrocket and I can't imagine a good outcome in the next few decades from capital flight in the US.

nemothekid 6y ago
Where would you go? The EU and Japan are already in a worse position than the US and if the US decides to commit to capital controls, they would probably follow. That only leaves China which already has capital controls.
- toomim 6y ago
  > That only leaves China There are 195 different nations on earth. That leaves a lot more options than the EU, Japan, and China. A lot of crypto-expats are going to carribean island nations.
  - nemothekid 6y ago
    >A lot of crypto-expats are going to carribean island nations. Are they going to buy Lamborghinis in pesos? More seriously, yes, some people are content with living like a rich native in the global south but for anyone else who plans to participate in the global economy (and I assume they do, because capital controls would likely only affect high net worth individuals), they would need to convert to EUR/JPY/CNY/USD.
  - calt 6y ago
    But on the topic of market impacting capitol flight, is that a real possibility? No.
  - frongpik 6y ago
    Small nations can't risk to offend the US.

pascalxus 6y ago

What i find particularly scary is the run on the banks scenario the author outlines. this really smashes the idea that bonds are the safe thing to get your money back. I know a lot of bonds have been selling, that's why the fed needs to buy so much every month, to make up for all that selling people are doing. Personally, i'm surprised even more people haven't been selling bonds. With the threat of inflation looming so large, and the enormous money supply that has increased in the last year. All those country's debt problems for which the only solution is inflation: it's the only thing that's politically feasible. I'm a totally risk averse investor and as such, I avoid cash and bonds like the plague with the exception of a modest emergency cash reserves. Of course this is all linked to the rise of all the other assets classes. when the 100 trillion dollar bond markets sell off, all that money has to go somewhere: equities, real estate, gold and now bitcoin.

ISL 6y ago
Bonds are a safe way to get your money back. It just might not buy as many cheeseburgers as you expected.
- mc10 6y ago
  This is not a guarantee at all; if inflation is sufficiently high then you could be actively losing money holding a bond that fewer and fewer people want.
  - 01100011 6y ago
    True but losing 5% on a bond investment might be better than losing 10% in a savings account or 50% in the market. You have to think about your timelines and risk tolerance.
  - ISL 6y ago
    A $1000 T-Bill will yield $1000 at maturity, every time.
    - pascalxus 6y ago

blacksqr 6y ago

It's possible for bond rates to go negative. Just because rates are near zero now doesn't mean there isn't room for further movement.

thoughtstheseus 6y ago
Just hold cash...
- paulmd 6y ago
  At a macro scale, holding cash isn't free either. If it's in a bank account then welp, $250k FDIC limit. If it's physical then welp, gotta rent and secure a warehouse that is literally chock full of cash for anyone to steal. Etc etc. Zero/negative interest rates are supposed to encourage productive activity, or at least spending.
  - thoughtstheseus 6y ago
    Cash is making money if your alternative is a negative yielding asset.
    - jkulubya 6y ago
      Yes, but the comment you’re replying to points to the fact that your yield on cash can also be negative due to (for example) having to pay to store the cold hard cash somewhere safe.
      - thoughtstheseus 6y ago
        Banks? Seems like an obvious choice, given they have vaults and guards, etc.
        paulmd 6y ago
        FDIC insurance doesn't cover large balances (above 250k) so that's not free either. If you're talking about holding a vault full of physical cash, that's not free either. It has to be physically secured in a building and someone wants to be paid for the building and the security. All of which I said above. Holding cash isn't free at a macro scale, holding cash already has a negative return.

adeelk93 6y ago

“Nobody wants bonds because the yields are too low” is basically the same statement as “nobody goes to that restaurant because it’s too crowded.”

dannyw 6y ago
This argument doesn't work when the Federal Reserve, an entity unconcerned about ROI, is purchasing bonds out of thin air. They now own $7 TRILLION of US govt bonds. This number was less than $100 billion before the GFC. https://www.pgpf.org/blog/2021/01/the-federal-reserve-holds-more-treasury-notes-and-bonds-than-ever-before https://www.pgpf.org/blog/2021/01/the-federal-reserve-holds-... So, yes, no investor wants bonds. Why would you buy something that's a guaranteed loss? It's increasingly just the Fed.
- adeelk93 6y ago
  Great counterpoint. I knew the Fed was purchasing a lot of bonds, but I had not grasped the scale of it. I didn’t think it would be that much higher than 08. The Brigewater article would have been a lot stronger with that $7 T figure.
  - ZephyrBlu 6y ago
    I believe that every dollar the Fed has "printed" went into bonds because that is how the US financial system works. The government gets money from the Fed by selling them bonds in exchange for cash.
    - nostrademons 6y ago
      That's not how the U.S. financial system works. The government doesn't "get money from the Fed" - it gets money from the Treasury, which either collects it from taxes or issues government debt to raise funds. The Fed participates in open market operations, and one of the markets they participate in is the Treasury bond auction. But they participate in others as well: notably, they've recently been major participants in mortgage-backed securities and corporate debt markets. When they participate, they effectively inject cash into the system, since the amount they can pay is unlimited and subject only to their mandate to get full employment and limited inflation. There's a lot of other subtleties involved as well; this isn't intended to be an exhaustive explanation.

every 6y ago

Trying to speculate on the commercial bond market is exceedingly difficult and risky. Even the experts often take a beating. But using certain sectors of the bond market as a savings and retirement mechanism can be quite effective. Consider US tax-free municipal bonds (munies). They are safe, with defaults at a miniscule percentage of corporate bonds. And many are backed with third party insurance against defaults. Their returns are multiples of US Treasuries, CDs, money markets and savings accounts. And all distributions are tax exempt with the exception of any capital gains. Not very exciting. Sort of like watching grass grow. But it grows and grows. My own investments in this area are with: https://investor.vanguard.com/mutual-funds/profile/overview/vwalx https://investor.vanguard.com/mutual-funds/profile/overview/... edit: And by investing in munies you're also investing in US infrastructure. Munies fund all that stuff. Bridges, fire stations, schools, roads, water treatment plants, ports, electrical grids, etc, etc, etc. Might even make you feel like a good citizen...

mdorazio 6y ago
Keep in mind there's a hidden gotcha with bond funds like vwalx in that the price of bonds changes over time roughly correlated with expected inflation. If you've been paying attention to vwalx and other bonds over the last month, you'll have seen the price go down significantly as treasury yields have gone up. So there's a risk that while your %yield on invested capital remains the same, the value of your invested capital itself can still drop since you don't own the bonds themselves and aren't holding them to maturity.
- every 6y ago
  That is perhaps only relevant if you plan on selling them. I have no such plans. For me they are an ever accruing "money hose" I can turn off or on as needed...
  - ericd 6y ago
    Haven’t munis had negative real (ie after inflation) returns for a while now?

emodendroket 6y ago

I suppose a forty-year bubble is possible but it seems like a novel idea to my mind.

DennisP 6y ago
Dalio takes a very long view. He mentions "my study of markets and economies over the last several hundred years."

ggm 6y ago

Why in the world would you want capitalism? Bonds exist because people want to lay off risk. Its not about the yield, as much as its about the risk. Sure, you want an upside, and the yield is about the upside. But the motivation in the first place, is about the risk. "as safe as houses" turns out, not to be that safe. "as good as gold" is still pretty good, but the next unobtanium is out there. by and large, absent revolution, governments make good on their financial promises. Even the Soviets paid up on the baku oil shares, in the end. So sometimes, even WITH a revolution you get back some money. Bonds are about risk. Why would you want to lay off risk? Because thats what risk avoidance is.

dkdk8283 6y ago
> Why in the world would you want capitalism? because anything less is corporate welfare. if you can’t pay your way well then...
- ggm 6y ago
  You understand this was a rhetorical device, right? Bonds exist because people want capitalism. It's implictly about money, interest, risk and return.

nlh 6y ago

One thing I've learned about professional investors is that no matter what, at the end of the day they're talking their book. So whether you buy these arguments or not, Ray Dalio is simply promoting a position that Bridgewater no doubt has taken. So when he says: "I believe a well-diversified portfolio of non-debt and non-dollar assets along with a short cash position is preferable to a traditional stock/bond mix that is heavily skewed to US dollars. I also believe that assets in the mature developed reserve currency countries will underperform the Asian (including Chinese) emerging countries’ markets." It's not his avuncular advice. He has millions (billions?) of dollars committed to this bet and he wants to convince others that it's correct so it pays off.

optimalsolver 6y ago
Is that worse than recommending one course of action to retail investors while personally doing something completely different?
ac29 6y ago
The book he has coming out this year The Changing World Order: Why Nations Succeed and Fail certainly seems to touch on some similar themes from the brief description I found online.
- riffraff 6y ago
  well, the book is cited 3 times in this piece, it's almost advertisement for it :)
- shostack 6y ago
  Yes, it seems he's betting against the Western financial growth and stability. I wonder if he thinks the days of the dollar's reserve currency status are numbered.
  - eru 6y ago
    Huh, why? If the US economy is going to do well, bond yields will be going up. That means a bond short position will pay off. Being short on bonds is basically financially almost exactly the same thing as borrowing money. (The US treasury is 'short' on T-bills. They have to essentially 'buy them back' when they become due.)

tlbsofware 6y ago

Benjamin Graham and Warren Buffett would disagree, they don’t exactly recommend buying and holding bonds until maturity but instead to buy bonds on the market, when the bond yield is say at 6% any bond with a coupon value less than that will be worth less than its face value, when those rates drop the bond will be worth more than its face value, if you buy bonds when interest rates are high and then sell them when they are low you can make a very sizable chunk off of them that is greater than the coupon value

anm89 6y ago
Sure. Let us know when Bonds are at 6% again. The point is the number of narratives where bonds can go lower is getting smaller and smaller.

paulmd 6y ago

> …The economics of investing in bonds (and most financial assets) has become stupid ... Rather than get paid less than inflation why not instead buy stuff—any stuff—that will equal inflation or better? That is indeed the point of driving interest rates low or negative - to force people into economic activity. If holding a bond makes you negative money, you might as well buy something with it, which goes back into the economy. It seems like there's this sense that putting your money into the market should always generate a return, and yet we have an economy that is driven by spending. The interest rate is how those are reconciled.

anm89 6y ago
> force people into economic activity Try telling that to the pensions.
BenoitEssiambre 6y ago
Also note that you can save by buying stuff. Materialize your savings for a 2% a year compounding tax free return. Get discounts by buying in bulk. Urban dwellers might be more limited but for people who have unused or underused space, this is a way to get a return on that space. Buy all you will need for the next decade of: Salt, sugar, socks, underwear, under-shirts, vinegar, soap bars, toothbrushes, razor blades, feminine products, toilet paper, paper towels, napkins, trash bags, freezer bags, sandwich bags, foil paper, parchment paper, plastic wrap, wax paper, candles, matches, diapers, pet supplies (litter, etc.), gardening supplies, building supplies, repair supplies, medical supplies, fire wood, wood pellets, long lasting appliances and furniture, kitchenware, dinnerware, sheets and pillowcases, blankets,comforter,bedspreads, maintenance, renovations, efficiency upgrades, land, bigger house. Some liquid soaps and chemicals have a limited shelf life of just a couple of years so it might be better to avoid unless you know the shelf life. Also be careful buying more than you need which can lead to waste. Be careful being wasteful just because you have lots of stuff at home. Buying alcohol ahead of time in bulk works if you have the discipline not to drink more. Also to get a good return you need to use the full life of your stuff before replacing from your stash, not replace early because it's right there. There is also a macroeconomic benefit to this approach. It can get the economy out of Keynesian recessions when people save by buying. You are however limited in total value by the free space you have.

aerovistae 6y ago

I discovered awhile ago that so-called "junk bonds" are in fact very rewarding investments that are actually only risky by comparison to other bonds, and not by comparison to other popular asset classes like stocks. Been making $120/year off an $800 bond I bought that has grown in value to $950. Win!

55555 6y ago
Do you have any recommended reading on this?
- aerovistae 6y ago
  I can't say that I do-- I mostly learn about investment things by googling a question or a term and then reading all the results that come up and mentally aggregating what they have to say. I will add that The Balance and Investopedia have been the leading sources of my education, all in all.
mNovak 6y ago
I'd be curious to see a comparison of the return on junk bonds of a given company against the actual stock return of the same company.
kccqzy 6y ago
Well you get compensated for increased default risk so certainly.
hellbannedguy 6y ago
How many years? What junk bond?
JMTQp8lwXL 6y ago
Someone should brand junk bonds like they did with peer-to-peer lending. The latter was a bust (time and time again, I've read about the ills of P2P lending returns), but there could be a great dual-sided market opportunity for the former.
tryptophan 6y ago

tomerbd 6y ago

Buy bond get interest on it where is the problem?

freetime2 6y ago
The current problems with buying bonds (from my perspective as an individual investor) are: * Very low interest rates currently * Risk of inflation in the future leading to negative real returns

kgin 6y ago

Are there any counterarguments disagreeing with this assessment? Certainly those at the Fed and the Treasury speak confidently that the debt is manageable and inflation is easily cooled, but I imagine they have to project confidence.

anfilt 6y ago

Goverment bonds yields are quite low. You get can Non-Governmental Bonds that have better yields. However, make sure the issuer has physical assets so if they go belly up your not left holding the entire bag. The other annoying thing about bonds as each bond tends be a fair amount of capital, so you need a lot of capital to properly diversify.

boyka 6y ago

> Real yields of reserve currency sovereign bonds are negative and the lowest ever. Real yields of cash are even worse though not as negative as they were in the 1930-45 and 1915-20 great monetization periods. This I cannot comprehend. Can someone explain to me how holding cash yields less than holding a bond at negative rates that will return me less cash?

CorrectHorseBat 6y ago
Holding cash costs money too since interest is negative. If you're talking about actually physical cash, you will have to pay for a vault and security to store and move the cash.
AnimalMuppet 6y ago
Let's say inflation is 2%, and and bonds are returning 1%. That means real (that is, accounting for inflation) bond returns are -1%. But holding cash returns -2% (again after accounting for inflation).

fwert 6y ago

Demand pull inflation which is worsened by stimulus because of foolish decisions of subjects.

zby 6y ago

Some loose threads: The main difference between bonds and cash is mostly based on the fact that cash is the means of settlement. But in fact what we call cash can also have two main forms: federal reserves (debt of the feds) that can be dealt with only by banks and regular bank depositories (debt of the particular bank). And there is even a third layer of Euro Dollar which is debt of non-US banks who cannot hold federal reserves and who can only rely on deposits at 'correspondent banks' in the US who can hold federal reserves. The fed reserves is the most liquid form of money - but it cannot be held by individuals, only by US banks. Bank depositories are less liquid because there can be a bank run - in that respect US government bonds are in fact less risky even though they are not used as a settlement or accounting mechanism. They are less risky because the US government will always pay them back, because they are USD denominated and there is no gold parity any more. Non rhetorical question: are there any scenarios where the US defaults on their debts? It is only 50 years that we can a complete fiat based money - before that the system was based on gold (and silver and other resources like shells) - so the current USD based system is really incomparable with the past reserve currencies. Somehow Ray Dalio in his essays with historical comparisons completely misses that - but of course it only makes his thesis stronger. Non US bonds denominated in USD are completely different - because they can default. In gold based system all bonds used to be like that, because in the end no government could print gold. Maybe 50 years is not enough to have any full cycle and there is no way to extrapolate. The economists base their inflation and similar models mostly on the US economy and fiscal mechanisms - but because of globalisation the share of USD transactions outside of the US economy is probably growing. I would love to see stats on that.

neilwilson 6y ago
"Non rhetorical question: are there any scenarios where the US defaults on their debts?" No. Since it is just a bond swap. To anybody not in the US (like me), the US dollar is just a 0% permanent bearer bond. When a bond matures it is swapped for central bank reserves (floating debt). When one is sold it is swapped back (fixed rate term debt). The monetary system is reflexive. No financial institution is going to hold central bank reserves when there is a near identical government bond available paying a higher interest rate.

neilwilson 6y ago

The reason you own bonds - particularly government bonds - is because they are better than the alternative. At the point somebody is bidding in a primary government bond auction, they are either a pension fund with a bank deposit, and/or the bank backing that deposit with central bank reserves. Even with all the investment options available, somebody always has to end up in that position in aggregate. Asset prices rise across the board until this indifference level is reached. Central Bank reserves are remunerated at a fraction of one percent at the moment. Bank deposits even less. Bank deposits also suffer from the risk that the bank will fail. Therefore relative to the only options left, government bonds represent a good investment. Particularly if you are a pension fund under regulatory instructions to fix your income with certainty. What's particularly interesting is that the bid for the bond will come from two places - the pension fund, and the bank itself - using essentially the same money. The sale to either is settled with precisely the same set of central bank reserves. If the bank wins the auction it will end up backing the bank deposit with the bond rather than reserves. If the pension fund wins the auction, the deposit and the bank reserves are deleted from the bank's books.

Bancakes 6y ago
Owning gov't bonds also boosts your ego. "The US owes me money, and they better pay up when I say, or else..."
- chii 6y ago
  or else what? You gonna point your gun at them to pay up? They got a bigger gun than you, and almost every other entity in the world.
  - ben509 6y ago
    Or else you and other bondholders take away their credit card.
  - eru 6y ago
    Also, getting paid doesn't do you much good nor does it put much pressure on the US: Before you have some pieces of paper (bonds) that the US issued. Afterwards you have some pieces of paper (cash) that the US issued. And the US can create arbitrary amounts of cash, if they really have to. (Obviously, these days it's all entries in databases. But you get my drift.)

ping_pong 6y ago

People like Ray Dalio keep saying this, and scores of others have been talking about how fiat currency will fail, but it won't. Globally, no one that matters wants it to fail, therefore it won't. People like Paul Tudor Jones have been saying that the USD will fail for decades and people should buy gold. Even Peter Schiff has been talking about gold and hyperinflation since before the Great Recssion. All the bears have been completely wrong, except for short periods of time. And they will continue to be wrong. Again, no one that matters wants the USD and UST to fail. Bond vigilantes can't defeat the Fed.

runeks 6y ago
> Globally, no one that matters wants it to fail, therefore it won't. I’ve seen this argument before, and can’t help to think how naive it sounds. Can you name one other case where the fact that we don’t want something to fail results in it being unable to fail? Actions have consequences. No matter how much we don’t want a particular set of consequences to occur, they will if we perform the wrong actions.
- koonsolo 6y ago
  Globally, no one wants a pandemic, therefore...
  - TheAdamAndChe 6y ago
    Globally, no one wants a housing price collapse and global recession, therefore...
    - eru 6y ago
      Actually, the general public kept demanding a housing price collapse around 2008. It's rather tragic. See https://www.goodreads.com/book/show/43062766-shut-out https://www.goodreads.com/book/show/43062766-shut-out for more detail than you ever wanted to know, or check out the author's blog at https://www.idiosyncraticwhisk.com/ https://www.idiosyncraticwhisk.com/

teraku 6y ago

I read it and I feel like the author does not understand how government debt works. And this makes them not understand bonds as well. But to answer the original question, disregarding any logic of how state debt or bonds work, why would you own bonds? Two possible answers: 1) Because they serve as a deflation hedge. This is interesting for people with lots of money who need some more security 2) Because it is guaranteed money (at least bonds for countries like US, UK, JPN, DE).

jamesgreenleaf 6y ago
I would bet with certainty that Ray Dalio understands how government debt works.
- teraku 6y ago
  Maybe he does, but his post does not show it. Best reading is that he does it because he is interested in return-on-investment money. In which case his title should be "bonds are not useful for high return-on-investment". But no, he chose "Why in the world would you own bonds?". And then he doesn't even really answer that question, he just goes on about his investment strategies. His result: Don't own bonds. This pretty much explains his "…The economics of investing in bonds (and most financial assets) has become stupid" paragraph. I already answered why bonds are still valid to be owned by institutions with lots of money and also why big banks still buy them (happily, I should add). > The world is a) substantially overweighted in bonds (and other financial assets, especially US bonds) at the same time that b) governments (especially the US) are producing enormous amounts more debt and bonds and other debt assets Yes and no. Why are there so many bonds? Well, lots of countries have policies to not issue money directly to the finance ministry which then gives the money to whatever the government wants to fund, but instead for every spending of the government issue bonds that are sold to banks and put that money on the finance ministries balance sheet. It's an entirely political concept, but it's reality. As such, bonds and state debt are just the money handed out by the state. If they would not hold debt and/or issue bonds, there would be no money for anybody. Period. >…If bond prices fall significantly that will produce significant losses for holders of them, which could encourage more selling This leaves out the political dimensions in its entirety. Bond prices will not fall significantly UNLESS the state's resources (technology, work-force, ...) also drop significantly. If that is not the case, the state can just uphold the bond's values. > …Imagine what would happen if, for any or all of these reasons, the holders of these debt assets wanted to sell them. There is now over $75 trillion of US debt assets of varying maturities. This is just wrong. I already explained why, in brief, above. I won't shed anymore words on this, except that it is fear-mongering. > …History and logic show that central banks, when faced with the supply/demand imbalance situation that would lead interest rates to rise to more than is desirable in light of economic circumstances, will print the money to buy bonds and create “yield curve controls” to put a cap on bond yields and will devalue cash. That makes cash terrible to own and great to borrow. There are more sides to that coin. This is often used to create fear for inflation. Because history has also shown that unless there is hyper-inflation people always love to own cash, regardless of the economic circumstances. And better borrowing conditions should enable economic growth, and over-borrowing should be kept in check anyways (re: financial crisis 2008) so there is no real issue here. And as explained above, unless the resources of a state drop significantly, there is no trigger for hyper-inflation. All in all, he is just arguing from an invester's perspective, but even then not a very holistic approach.

throwaway4good 6y ago

The text answers the question: The central banks are buying the bonds in a scheme that essientially boils down to print money until debt levels no longer matter. The money printing causes: - Inflation (as in rising consumer prices) - Massive swings and bubbles in the financial markets - Increasing wealth inequality This has happened until now in a global coordinated manner. This was also the policy after 2008. However it seems that challenge today is that China is not willing to print money at same level as Europe and USA. The question is what happens then? Yes. The Chinese currency will go up compared to the dollar and the euro. However I think effects will go much further than that. The stability of the west will be challenged and the dominance of our financial markets will decay. In the end, the existance of a big economy, that does not embark in the same aggressive monetary policy as we do, will put a hard limit on how far we can go.

wintermutestwin 6y ago
>Yes. The Chinese currency will go up compared to the dollar and the euro. If this is true, maybe it makes more sense to invest in Chinese currency than the huge risk of investing in Chinese companies?

throw0101a 6y ago

Ben Carlson gives a few reasons: > * Bonds hedge stock market volatility. > * Bonds can be used to rebalance. > * Bonds can be used for spending purposes. > * Bonds protect against deflation. > * There are other options but not many. * https://awealthofcommonsense.com/2020/08/why-would-anyone-own-bonds-right-now/ https://awealthofcommonsense.com/2020/08/why-would-anyone-ow...

iSnow 6y ago

Help out someone who is not very versed in finance: what on earth are "non-debt and non-dollar assets"? Are those stocks from non-USD economies?

dash2 6y ago
Commodities, global property, Bitcoin....

jl2718 6y ago

>> The United States could become perceived as a place that is inhospitable to capitalism and capitalists. USA is already perceived as the most restrictive government in the world for citizen participation in any non-bank finance. And I have news for regulators: the banks are an anachronism. They are not making loans anymore. They only exist to sell loans to the government and buy them back as treasury-backed assets at a lower price. The difference comes from taxes. It’s a direct transfer of wealth from citizens to banks. They will probably be nationalized because citizens will realize how useless and parasitic they are. All business activity will abandon the banks and all investment will go into stateless financial systems. There is nothing anybody can do to stop this. The ‘protections’ (restrictions) offered by regulators now have negative value to US citizens. This is not some far-out warning. This is happening now. US financial startups are like rats abandoning ship to organize in Canada, Switzerland, Singapore etc. And they are all led by non-citizen US residents, because citizens take that regulation with them anywhere in the world. The best deal in the world right now is to be a permanent US resident with some other citizenship. That seems wrong.

clipradiowallet 6y ago

> Why in the world would you own bonds? Because when every corp/muni bond folds - government issued bonds do not(and never have). Also, because they skyrocket in value during government-to-government conflict. Military action? 150% bond prices. It's a low risk instrument that turns into a winning lottery ticket for events such as.. North Korea launching a ballistic missile ~2 years ago, Donald Trump being accused of Russian collusion 3 years ago, and every military conflict ever. Note, I'm not saying "govt bonds are great! buy them!"...I'm saying there are very old and valid reasons to own bonds of the government-backed variety.

popcat 6y ago
I think you have a fundamental misunderstanding of how bonds work. What you are saying is mostly true, BUT the coupon rate is set at bond issuance. Meaning if you own a bond now, and coupon rates go up because of an event, your rate does not magically adjust. When event like you describe happens, it means it's a good time to enter the bond market. What Dalio is saying is that currently real returns on bond are rock bottom or even negative. So why would you own them? He's not saying to NEVER own bonds, just that it currently does not make sense. If in the future, bond coupon rates increase, then it will once again make sense to own bonds.

DebtDeflation 6y ago

We seem to have an entire generation of people who think "stonks can only go up". Similar views were expressed about houses/real estate in 2007. At 47, I'm probably substantially older than the average HN poster, but having lived through the 2001 dotcom implosion and the 2008 financial crisis has given me some perspective. I'm getting some really bad vibes about the sustainability of the the economy and asset markets. Seeing all of the "SWE, BSCS, 4 YOE, $800K TC, am I underpaid?" posts on Blind certainly doesn't help my feeling that a crash is coming.

nealdotpy 6y ago
I'm definitely far younger than you; however, I agree. The problem is that there's no timing it. So positioning yourself such that you leverage other factors to make money in a market (e.g. delta-neutral positions that are long/short time/volatility) are all you can do if you want to play the game without having high directional risk.
- DebtDeflation 6y ago
  So, I actually have an MS in Quant Finance despite having worked in tech my whole career. There's an old saying, "during a time of crisis all correlations go to 1". People found this out the hard way in 2008. There are all sorts of risks that you can't hedge for or that negate hedges you have in place for other risks, counterparty risk being one of the better known ones.
  - o-__-o 6y ago
    Found this out last year after waiting patiently since 2008. Volatility ruined the prospect of large quick gains. I now have no specific strategy to trade the next crash except buy and hold the fundamentally sound stocks (same strategy as normal investing heh)
  - alasdair_ 6y ago
    This hit home for me during the mini-crash a year ago. I was convinced assets like bitcoin or gold or bonds would hold value when the stock market tanked but instead saw everything fall at the same time. I understand the concept of undiversifiable risk, but seeing it play out in practice was eye opening.

brenner100 6y ago

"If history and logic are to be a guide, policy makers who are short of money will raise taxes and won’t like these capital movements out of debt assets and into other storehold of wealth assets and other tax domains so they could very well impose prohibitions against capital movements to other assets (e.g., gold, Bitcoin, etc.)"

okprod 6y ago

I'm close with someone at Bridgewater and have read Dalio's books, obviously he's a smart person, but he does have positions and his public views tend to shift, which is understandable. I remember when he was negative on crypto.

jplr8922 6y ago

The more Dalio gets public, the more I'm doubting his game. His book ''principles'' is interesting, however with time its starting to look like an elaborate marketing plan. I have no doubt that he his serious about his principles and business culture, but there are second order effects to make everyting public. In the case of his firm culture (which claims to be an idea meritocracy), it will attract certain kind of people. The same can be said about marketing his financial views. The guy is already rich. He is smart. Why does he needs to post everything on linkedin, suddenly? I have a hard time understanding the underlying strategy of his public persona. Earlier this year he made a long post about the way he used his principles to deal with the accidental death of his son. I mean, why would he do that? Does he wants people to think like him? Why?

TuringNYC 6y ago
I see it as him trying to leave a positive legacy. He realizes he's done fantastically as an investor, is aging, and wants to leave a non-financial legacy to the world.
- jplr8922 6y ago
  hmm you are right : https://www.linkedin.com/pulse/your-life-journey-exercise-ray-dalio/?trackingId=toH6RWcT18sHZRENni2KmQ%3D%3D https://www.linkedin.com/pulse/your-life-journey-exercise-ra...
nabla9 6y ago
Ray Dalio (age 71) stepped down from the Bridgewater co-CEO position in 2017. He is now a active retiree who has time in his hand. It's typical for elderly gentlemen to focus on their legacy. Since he moved his home office to Singapore and is heavily invested in China, he has become very careful about talking negative about China and is more prone to paint negative picture on the US and the West.

moralsupply 6y ago

Bitcoin is evil as it burns forests and kills turtles in the oceans due to its energy consumption. Buy bonds instead. They have no carbon footprint, and they are guaranteed by our governments, which only act in our best interests.

betterunix2 6y ago

Why own bonds? Let's say you are into derivatives trading and you need to keep a pile of cash lying around as collateral. Bonds are better than cash as long as the nominal yields are positive, so you buy bonds (and hopefully not find yourself needing to sell them) which give you almost as much collateral. Or maybe you are into high-yield bonds, which if traded correctly can have better returns than stocks. Not that I am personally interested in playing that game...

skolos 6y ago

For me this type of analysis is always suspicious because it doesn't consider timing. How do I know that when I buy stocks I'm not buying at a peak, or when I need to sell them I'm not going to sell at the bottom. So I ran an analysis [1] where I just used random timing and checked what distribution would be. Turns out if you are long term investor (> 10 years holding period) it is more beneficial to hold stocks than bonds. "Even if you had to sell your stocks at the bottom of the Great Depression, but held them for more than 20 years before that, you would not suffer a loss in value of your portfolio" [1] https://www.investingrus.com/blog/safest-bet/ https://www.investingrus.com/blog/safest-bet/

jeffreyrogers 6y ago
The problem with this is it assumes the macroeconomic conditions stay constant. But the macroeconomic conditions since 2008/2009 have been wildly different than ever before.
- skolos 6y ago
  This is almost 150 years of data. There were regimes with very different macroeconomic conditions (great depression, wars). However I do agree with you that there is a chance that we will see something even more exotic.
  - jeffreyrogers 6y ago
    Your data is only for the US though. What happens if you try the Weimar Republic? That's an extreme case, but I imagine other countries have had similar, but less severe events, and certainly the US in in uncharted territory right now.

deleted 6y ago

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qwerty456127 6y ago

Perhaps people use bonds to overcome inflation without adding risk?

norswap 6y ago
The article makes the point that bonds don't even achieve this. At best, they decay in value less fast than cash in an inflation scenario. But because of yield rate fluctuations, they're significantly less liquid than cash (if you don't want to lose extra on top of inflation losses). Which is an issue because if the inflation rate is suddenly 7%, you can take your cash and put it in something much safer like real estate or foreign currencies. Holding long-term bonds mitigates inflation, but also makes weds you to it.

_ink_ 6y ago

> For these reasons I believe a well-diversified portfolio of non-debt and non-dollar assets along with a short cash position is preferable to a traditional stock/bond mix that is heavily skewed to US dollars. What exactly is he proposing? I think he is proposing to borrow cash, but can somebody ELI5 what is meant by non-debt, non-dollar assets?

mikeInAlaska 6y ago

During the Covid market crash my bonds barely changed. If I had rolled it all into small caps at the bottom there I could have doubled its value by now. (And then rolled it back into bonds at the top here.) Additionally for bonds, the percent of earnings looks low on my positions statement but a few times a year I get some fat dividends on my bond holdings which I do not think it reflects.

lumost 6y ago

This article does a great job of laying out the end-game of the global quantitative easing program. Today the following occurs 1) Central banks print currency to buy debt that no one wants to buy at negative interest rates. 2) Debt issuers (the government/corporations) increase debt issuance 3) Debt issuers purchase any hard assets available in the local currency at the fastest possible rate and earn profits off of the delta between asset inflation and the bond rates. All western economies assets are being inflated, and all western economies bonds have negative interest rates. There is no alternative until. 4) Debt buyers convert printed dollars to RMB and purchase chinese debt. 5) Debt issuers convert borrowed dollars to RMB and purchase chinese debt 6) The Fed prints more money to meet it's market stability objectives 7) The dollar falls relative to RMB, triggering consumer price inflation on items of Chinese origin. Limiting the effectiveness of printing money.

julienchastang 6y ago

For retirees, consider replacing some of your bond holdings in your portfolio with annuities [1]. A million dollars will buy you a ~$50,000/year annuity for life. That said, annuities have major downsides too (i.e., they are degraded by inflation). [1] https://www.wsj.com/articles/the-case-for-replacing-some-bonds-with-annuities-11612454401 https://www.wsj.com/articles/the-case-for-replacing-some-bon...

snikeris 6y ago

...because yields may continue going down. Other countries have shown us that 0% yield isn't even the floor. A couple years ago, 30 year treasury yield was around 3% and people were saying the same thing...why would you own bonds. People who bought bonds at that time made good money as the yield fell further.