Tuesday, March 15, 2011

Ray Dalio on Stocks & Commodities

An interview with Ray Dalio of Bridgewater Associates in Barron's.

In the Barron's interview, Dalio says that China will continue the commodity-buying spree and that the commodity bubble probably goes on well into 2012.

He ultimately sees the following:

"...a seismic shift, very similar to the Bretton Woods breakup in 1971, in which linked monetary policies and linked exchange-rate policies come undone."

One of the outcomes of all this, in his view, is that China will also be buying commodity manufacturers and other companies. In other words, buy assets trusted more than bonds denominated in depreciating money.

Dalio is long gold and in the interview he explains his thinking.

Productive assets like a good business happens to be my focus so owning shares in the right stocks makes sense to me. We know that the U.S. currency lost value massively over the past century yet partial or full ownership of shares in a good business performed just fine (along with a 6-7x increase in the standard of living). I don't plan on the dollar doing that much better going forward. Fortunately it doesn't need to.

For me, a non-productive asset like gold is of little interest though I think I understand Dalio's point of view.

Gold will certainly go up from time to time and especially in periods when fear is prevalent and paper money is not trusted.

"I don't have the slightest interest in gold. I like understanding what works and what doesn't in human systems. To me that's not optional; that's a moral obligation. If you're capable of understanding the world, you have a moral obligation to become rational. And I don't see how you become rational hoarding gold. Even if it works, you're a jerk." - Charlie Munger at the University of Michigan in 2010

"...Gold is a way of going long on fear, and it has been a pretty good way of going long on fear from time to time. But you really have to hope people become more afraid in a year or two years than they are now." - Warren Buffett in a recent CNBC Interview

In the same interview Buffett also added the following...

"...If you took all the gold in the world, it would roughly make a cube 67 feet on a side…Now for that same cube of gold, it would be worth at today's market prices about $7 trillion. That's probably about a third of the value of all the stocks in the United States...Now, for $7 trillion, there are roughly a billion of farm-acres of farmland in the United States. They're valued at about $2 1/2 trillion. It's about half the continental United States, this farmland. You could have all the farmland in the United States, you could have about seven ExxonMobils (XOM), and you could have $1 trillion of walking around money." - Warren Buffett

In the interview, Dalio added the following about how printing money and currency devaluations will likely impact assets:

"Currency devaluations are good for stocks, good for commodities and good for gold. They are not good for bonds."

Makes sense.

Adam

Related posts:
Financialization of Copper

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