The present economic situation is quite exceptional, with a widespread value mismatch between assets and liabilities in the financial sector, Ray Dalio, the founder of the world's largest hedge fund, said Monday.
The Bridgewater Associates founder appeared on his YouTube channel to discuss the Silicon Valley Bank crisis and its economic ramifications.
"There has been a lot of creation of debt," Dalio said. Banks and insurance companies borrowed money at a certain rate and made investments, such as stocks and bonds, that provided lower-than-expected returns because they lost value or do not provide adequate yields relative to the cost of funding anymore, according to the expert.
Dalio On The Fed: "You have everybody losing money here," Dalio said. "The world is leveraged long, meaning that investors have borrowed money to hold those positions."
The Federal Reserve faces a very difficult balancing act, according to the billionare.
The Fed is attempting, with much difficulty, to produce an interest rate that is high enough to provide real returns after inflation that are adequate to pay investors for keeping an asset, while preventing higher interest rates from harming those who have borrowed money, Dalio said.
Related Link: Market Now Expects Fed Interest Rate Cuts In The Second Half Of 2023, But That Could Be Bad News For Stocks
A supply-demand imbalance exists at the federal government level, he said: "They run big deficits to deal with this situation, which means issuing more debt."
Investors would purchase government debt only if they have high enough real returns, the hedge fund manager said; otherwise, they will sell the debt, causing a terrible imbalance.
"That imbalance is the nature of what's going on," Dalio said, adding that many entities are already in financial difficulties if they mark to market their bond holdings.
Latest Bridgewater Associates Portfolio Statistics: According to Hedgefollow.com data, the Procter & Gamble Company (NYSE:PG) is the biggest single stock holding in the Bridgewater portfolio, with a 4.13% stake.
The firms with the greatest increase in shares in Bridgewater's Portfolio since the beginning of the year are Bank of America Corp (NYSE:BAC), with a 152% rise, and Berkshire Hathaway Inc. (NYSE: BRK-A) (NYSE: BRK-B), with a 44% increase.
Mastercard Inc. (NYSE:MA) saw the greatest reduction, with the amount of shares cut in half year-to-date.
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