Brendan McDermid/File Photo/Reuters
- Investors are losing money as assets acquired on borrowed funds have lost value, Ray Dalio said.
- The collapse of Silicon Valley Bank is indicative of a global problem, he said this week.
- “And that is a pervasive situation that exists throughout the economy, the world economy, the US economy.”
Assets acquired on borrowed funds have lost value, and the collapse of Silicon Valley Bank is indicative of a global problem, Bridgewater Associates founder Ray Dalio said this week.
As the Federal Reserve kept rates low, banks were able to borrow cheaply and invest, he explained in a video posted on Monday. But as the Fed turned to aggressive rate hikes, those investments lost value or produced lower returns.
And when that happens, “you have everybody losing money. And that is a pervasive situation that exists throughout the economy, the world economy, the US economy,” he said.
That has set up a difficult balancing act that requires an interest rate that’s high enough to provide a return after accounting for inflation, but not so high that it hurts people who borrowed to invest, Dalio added.
Meanwhile, markets will see more borrowing in the coming years as the federal government grapples with massive budget deficits, he said. In order to fill the deficit hole, the government must borrow money by selling debt, such as US Treasurys, but debt investors need to have a high enough real return.
“If they don’t have a high enough real return, they can sell the debt or the debt that they’re holding, rather than buying that debt. And that creates a terrible imbalance,” he warned.
But higher rates also weigh on bond holdings, creating problems when they must be valued or sold at market rates rather then held to maturity.
This was the case with Silicon Valley Bank, which suffered a $1.8 billion loss on the sale of a bond portfolio in the face of tightening policy.
“If you mark to market, a lot of entities are in financial difficulty,” Dalio concluded.