Dalio sees end of long-term debt cycle, prefers gold

Bloomberg Markets/Katia Porzecanski/10-10-2016

“Dalio has warned for some time that the economy is at the end of a long-term debt cycle, characterized by a lack of spending despite interest rates near zero or even negative. He said at a seminar last week at the Federal Reserve Bank of New York that while central banks around the world will probably extend bond-buying programs, making higher-yielding assets seem attractive relative to bonds and cash, those investments are still expensive relative to their inherent risk. I[f] that persists, betting on gold could prove preferable, he said.

‘Investment returns will be very low going forward,’ he said, according to a copy of his remarks.”

MK note:  The smartest guy in the room offers a short-version opinion on where we are headed.  The factors that drove gold higher from the beginning of the year, in other words, remain in place.  It is interesting that Dalio foresees central bank’s going back to quantitative easing (bond-buying programs).  One big factor that might drive the United States back to quantitative easing is the lack of demand for Treasury paper from overseas investors and central banks as summarized in this chart:

Lindsay Group’s Peter Boockvar recently pointed out in a CNBC interview that foreigners have not only refrained from buying U.S. Treasury paper, they are net sellers to the tune of $156 billion thus far in 2016 – an unprecedented level. “Foreign flows were a big part of Treasury bond buying. Take that away and central banks take away the stimulus that was affecting long-term interest rates. Deficits are expected to head higher. This is a process that takes time to see these things play out,” he told CNBC.

As long as domestic demand fills the gap left by the departure of former debt buying stalwarts China and Japan, QE can remain on the back burner.  Should that demand dry up. . . . . . . . . .Meanwhile, the United States federal government added $1.422 trillion to the national debt in fiscal year 2016 just ended in September – the fourth largest such addition in history.