As titles for LinkedIn posts go, “The World Has Gone Mad and the System is Broken” is always likely to be on the eye-catching side. It will certainly raise eyebrows – and perhaps even alarms – when the person behind it is a billionaire investor and fund manager.
Ray Dalio, founder of investment management firm Bridgewater Associates, has been having thoughts, and they are hardly reassuring ones. In nearly 1,200 words posted earlier this week, Dalio lamented how central banks' fondness for pushing "an enormous amount" of cheap money on investors was creating an unsustainable dynamic.
Investors are now more willing than ever to lend at ultra-low or even negative interest rates to companies in the game of “selling ambitions” rather than the tedious business of actually making a profit or even demonstrating a clear path to a profit. So far, so Silicon Valley. Actual returns “are left to investors’ imaginations”.
“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,” Dalio wrote. “But the investors are threatening to harm these companies by providing enormous support to their start-up competitors if they don’t take the money.”
That’s quite incredible. At the same time, however, credit is “essentially unavailable” to those who don’t have money and creditworthiness, he noted.
Credit divide
Indeed, the dream-like craziness surrounding a high-profile initial public offering (IPO) like that of Uber or attempted IPO like that of WeWork has been much commented on in the financial media. But it’s not just the small business down the road that finds itself on the other side of the credit divide. For many established, profitable companies, the credit environment has never recovered from the financial crisis of a decade ago.
Charles Gallagher, executive chairman of housebuilder Abbey, recently expanded on this subject at the company's agm in Dublin. "If you're Nestlé, people will pay you to borrow money, but if you're not in that super-prime size, then money is expensive in reality, and it's less easily available." A company like Abbey can still get credit, "but it's expensive".
For Dalio, the situation is contributing to “rising wealth, opportunity and political gaps”. A “big paradigm shift” for the world economy is coming, he predicted. And if there’s one thing we know about paradigm shifts, it’s that they tend to be miserable for most.
