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Ray Dalio Says Get Ready for a Paradigm Shift; Buy Gold!

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Hedge fund king Ray Dalio says we are on the cusp of a “paradigm shift” and investors should buy gold.

In a post at LinkedIn, Dalio described paradigms as relatively long periods when markets and market relationships operate in a certain way. Eventually, the paradigms become “overdone” and we see a major shift.

In paradigm shifts, most people get caught overextended doing something overly popular and get really hurt. On the other hand, if you’re astute enough to understand these shifts, you can navigate them well or at least protect yourself against them.”

Dalio wrote that “big, unsustainable forces” drive paradigms. They go on long enough for people to assume they will never end. He describes debt growth blowing up asset bubbles, similar to the cycle we’re in now, as a classic paradigm.

[Debt] drives asset prices up, which leads people to believe that borrowing and buying those investment assets is a good thing to do. But it can’t go on forever because the entities borrowing and buying those assets will run out of borrowing capacity while the debt service costs rise relative to their incomes by amounts that squeeze their cash flows.”

The economy is currently drowning in debt. Consumer debt set another record in May. The US government continues to rack up big budget deficits month after month. And corporate debt has also ballooned.

Dalio said he doesn’t know when, but he thinks this bubble has to burst. His thinking is similar to Peter Schiff’s. Peter predicted that the Federal Reserve would pivot back to an easy money policy (it has), that the next step is cut rates and that eventually, the central bank will relaunch QE in an effort to keep the bubble inflated. The problem is that this time around it won’t work.

Dalio also believes the Fed monetary stimulus train will soon reach the end of the tracks.

I think that it is highly likely that sometime in the next few years, 1) central banks will run out of stimulant to boost the markets and the economy when the economy is weak, and 2) there will be an enormous amount of debt and non-debt liabilities (e.g., pension and healthcare) that will increasingly be coming due and won’t be able to be funded with assets. Said differently, I think that the paradigm that we are in will most likely end when a) real interest rate returns are pushed so low that investors holding the debt won’t want to hold it and will start to move to something they think is better and b) simultaneously, the large need for money to fund liabilities will contribute to the ‘big squeeze.’ At that point, there won’t be enough money to meet the needs for it, so there will have to be some combination of large deficits that are monetized, currency depreciations, and large tax increases.

Dalio noted the approximately 13 trillion dollars’ worth of investors’ money is held in negatively-yielding debt. That means that these investments are worthless for producing income. Right now, investors seem to be OK with this because they are paying more attention to the price gains that result from falling interest rates than the falling future rates of return.

That will end when interest rates reach their lower limits (slightly below 0%), when the prospective returns for risky assets are pushed down to near the expected return for cash, and when the demand for money to pay for debt, pension, and healthcare liabilities increases. While there is still a little room left for stimulation to produce a bit more of this present value effect and a bit more of shrinking risk premiums, there’s not much.”

As Dalio put it, the big question is which investments will perform well in a reflationary environment accompanied by large liabilities coming due. He said most investors think the best “risky investments” will continue to be equity-like investments, such as leveraged private equity, leveraged real estate, and venture capital.

I think these are unlikely to be good real returning investments and that those that will most likely do best will be those that do well when the value of money is being depreciated and domestic and international conflicts are significant, such as gold.”

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