Ray Dalio Warns That the US Dollar is Facing Significant Risk
Billionaire investor Ray Dalio believes the Federal Reserve’s actions are putting the US dollar at serious risk, according to Markets Insider.
Dalio believes the Federal Reserve has artificially inflated markets, making typical valuation metrics obsolete and putting serious pressure on the US dollar.
"The capital markets are not free markets allocating resources in the traditional ways," said Dalio. "The economy and the markets are driven by the central banks in coordination with the central government."
The Fed has printed and spent trillions of dollars on bonds and other assets to boost liquidity in financial markets and bolster the US economy as it weathers the coronavirus pandemic.
However, Dalio is not knocking the Fed for their unprecedented actions. He believes these moves were justified given the actions taken during the 2008 financial crisis that involved specifically bailing out the financial sector.
"The whole economy is systemically important," he said. "If they didn't go out and lend to companies ... we would lose large parts of our economy."
Dalio does believe these actions might have some blowback. "You are going to see central banks' balance sheets explode," he said.
“Moreover, the flood of cash into markets has detached them from the real economy, meaning valuations no longer reflect fundamentals.”
Investors might be confused when they see price-to-earnings ratios greater than 40, but this is "no less implausible than zero interest rates," he said. "Multiples shouldn't be used in the traditional way of a frame of reference."
Dalio has said “cash is trash” in the past, and he reaffirmed that in this interview. He believes investors should steer clear of cash and bonds because low interest rates lead to no returns or negative returns after taxes are paid.
Dalio continued stating that the Fed’s moves could lead to a new dollar alternative that could boom. Investors could eliminate bond holdings from their portfolios in search of positive returns.
"That would be terrible for the United States," Dalio said. "It would be probably the biggest disruptor not only to the markets but to the whole world geopolitical system."
Hiking rates to prevent this from happening is not possible at the moment. That move would hurt asset prices and lead to a massive wave of defaults due to the massive amount of debt in the economy.