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we've already seen some of the impact at least some of the impact in financial markets of all the massive fiscal spending and all the massive monetary stimulus stock prices at record levels negative real yields on treasuries negative nominal yields on sovereign debt around the world where does it go from here ray well first i want to convey the mechanics of that when there's more you run a larger deficit and there's printing and buying of financial assets it drives down real yields and as a result of this it drives money into alternative assets there's a supply demand problem for bonds but there when the central banks at the end of the day print and much the same as roosevelt did in march of 1933 that causes financial asset prices to rise and supports the economy but diminishes the value of debt the real value of debt so that's the dynamic where we can expect it to go from here is always that way in a greater degree so we know that if a big bill is passed or if on next year we have a larger deficit we know that the federal reserve will be faced with the choice of either allowing interest rates to rise or buying that and monetizing that debt and that diminishes the value of those bonds because it's just supply demand when you have that debt you have to sell it and when we look at who are the buyers of that debt and what how much do they have of it we're dealing with a situation like in the 30s that could be threatening even to the reserve currency status in any way it diminishes the value of that which is being produced that means money and credit and it drives money into those other assets so it's that kind of market action is there a real threat right now to the us dollar status as the world's reserve currency yes there is a there is a threat it's an evolutionary type of process there's not yet a good alternative in the form of a currency per se but people are not investors big large institutional investors don't run out necessarily to alternative currency because the three major reserve currencies all have the same basic problem that's why they move into a new storehold of wealth and you see that the storehold of wealth like in 1933 reaction is equities is gold is other asset classes that go up so when you buy a company and you have low returns on your bonds and so on that is that kind of movement but the same is true for gold and other asset classes if that gets too far and it has and it's standing the risk of it's very dangerous it looks like a currency defense in other words if those who are holding bonds which are a lot choose to sell the bonds because they're not providing a good return and they're not and because there's so much debt production and debt monetization that puts the federal reserve or other central banks in the very difficult position of operating like a currency defense mechanistically as money leaves that debt that means either interest rates would rise which would be terrible for the economy and markets or they're forced to buy more and more and that is how a spiral could occur well i think we have to realize we're in a period of great risk and and the most important thing is to know how to diversify well to diversify by asset class to achieve balance to diversify by country and to diversify by currency diversification well is the most important thing to achieve that balance so if i'm understanding you correctly if an investor were to have the plurality of his or her assets in in the united states u.s domiciled assets u.s dollar denominated assets now sounds like a good time to think about diversifying into other currencies and other domiciles that's right and also for example uh does gold be is it part of your portfolio are inflation index bonds part of your portfolio you know how to balance those asset classes i think there's a bias that's a dangerous bias and that bias is that the recent past that we've experienced is representative of the future and if you go through history when you have some of these conflicts you might have a different result and diversification doesn't cost you anything because when your asset classes are going to if you balance them right have approximately equal expected risk adjusted returns so you can balance them because they all compete with each other so no not one is necessarily clearly better so diversification is a wonderful mechanical good way to reduce risk without reducing expected return
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