Stefano Sciacca

Fri, Nov 8

Mad Money…Market Collapse

Ray Dalio, CEO and Founder of Bridgewater Associates, the biggest hedge fund by Asset Under Management, recently published a very insightful post on how “free” money will likely be the trigger for the next financial markets collapse. The focal point of the article is on the huge pile of money, cumulated by investors who could now be willing to lend their money for low or even negative interest rates as Central Banks continue to feed them by buying financial assets at the current high pace.


That said, many would argue that this should be the right move to stimulate both growth and inflation. Unfortunately, this is not the case, as investors are investing more instead of spending it. As-a-consequence, we are seeing financial assets priced at all-time-highs, dragging down not only the expected return of Fixed-Income securities, but also equities, which by definition should offer higher extra returns and risk premium.


Investors have so much disposable money that even loss-making companies without any clear paths to making profits nowadays do not struggle to raise capital, selling “dream” potential returns to those with money and borrowing power. There is now so much money wanting to buy these dreams that in some cases venture capital investors are pushing money onto start-ups, that don’t want more money because they already have more than enough; but the investors are threatening to support the direct competitors if they don’t take the money.


At the same time, large government deficits exist and will almost certainly increase substantially, which will require huge amounts of more debt to be sold by governments—amounts that cannot naturally be absorbed without driving up interest rates, at a time where an interest rate rise would be devastating for markets and economies because the world is so leveraged long (indebted).


Where will the money come from to buy these bonds and fund these deficits? It will almost certainly come from Central Banks, who will buy the debt that is produced with freshly printed money. This whole dynamic where sound finance is being thrown out the window, will continue and probably accelerate, especially in the reserve currency countries and their currencies—i.e., in the US, Europe, and Japan, and in the Dollar, Euro, and Yen.


At the same time, pension and healthcare liability payments will keep coming, while many of those who are obligated to pay them don’t have enough money to meet their obligations. Right now, many pension funds that have investments intended to meet their pension obligations, use assumed returns that are agreed with their regulators. They are typically much higher (around 7%) than the market returns that are built into the pricing, and that are likely to be produced. As a result, many of those who have obligations to deliver the money payable to these pensions are unlikely to have enough money to meet their obligations. While pension obligations at least have some funding, most healthcare obligations are funded on a pay-as-you-go basis, and because of the shifting demographics in which fewer earners are having to support a larger population of baby boomers needing healthcare, there isn’t enough money to fund these obligations either. There will likely be an ugly battle to determine how much of the gap will be bridged by 1) cutting benefits, 2) raising taxes, and 3) printing money (which would have to be done at the federal level and pass to those at the state level who need it). This will exacerbate the wealth gap battle.


This set of circumstances is unsustainable and certainly can no longer be pushed as it has been pushed since 2008. That is why I believe that the world is approaching a big paradigm shift.


Next week our macro spotlight will be on?


  • Machinery Orders – Japan
  • Vehicles Sales – China
  • GDP Growth Rate Preliminary – UK
  • Industrial Production – UK
  • Construction Output – UK



  • Employment Change – UK
  • ZEW Economic Sentiment – Eurozone
  • ZEW Economic Sentiment – Germany
  • Redbook - US



  • Inflation Rate – UK
  • PPI – UK
  • Retail Price Index – UK
  • Industrial Production – UK
  • 10-yr Bund Auction – Germany
  • Inflation - US


  • GDP Growth Rate – Japan
  • Unemployment Rate – Australia
  • Industrial Production – China
  • Retail Sales – China
  • GDP Growth Rate – Germany
  • Retail Sales – UK
  • GDP Growth Rate – Eurozone
  • Continuing & Initial Jobless Claims - US


  • House Price Index – China
  • Industrial Production – Japan
  • Inflation Rate – Eurozone
  • Retail Sales – US
  • Manufacturing Production – US
  • Capacity Utilization – US
  • NY Empire State Manufacturing Index – US


Chart of the week



Fact of the week


Around 78% of the 355 companies in the S&P 500 that reported third calendar quarter earnings through the end of October exceeded Wall Street's estimates. As-a-whole, the expected blended year-over-year EPS growth rate for the S&P 500 is negative 1.5%, led by a 38.7% drop in the energy sector.


Quote of the week


“The World Has Gone Mad And The System Is Broken”

Ray Dalio, CEO and Founder of Bridgewater Associates, Biggest Hedge Fund by Asset Under Management