Ray Dalio and the Private Debt Market

Trying to predict where the economy and stock market are going in the short term is a fool’s game and is something I would not bet on. With that disclaimer out of the way I want to point you to two pieces of content I recently consumed that might give us some clues as to where the economy is headed. I would suggest you consume these articles in sequential order.

The first comes from the “Masters in Business” podcast that featured Ray Dalio as the guest, you can find the transcript and links to the podcast here. I suggest you listen to the whole podcast because it is full of great information, but knowing that most of you won’t, according to Mr. Dalio the economic cycle works in the following way:

“Okay, so what happens is in the early part of the cycle, the amount of lending that takes place produces a cash flow which is greater than the debt service payments on that, so that’s a virtuous lending because credit gives buying power.

‘And depending on how you’re using that buying power for using it to create income that’s greater than the debt service payments is a self-reinforcing positive cycle, that normally happens in the early part of the cycle.

Then it pushes asset prices up and what happens is that people start to extrapolate those things going forward. So as the debts continue to rise and they believe this is going to go higher and higher…

‘The bubble stage is also accompanied by the development of shadow banking.

‘There’s a shadow banking system now, you know, in other words it – private lending that takes place outside of the banking system in various ways and it’s not regulated. And there is an incentive to go outside the banking system because the banking system being regulated and being controlled can’t make as much money as going outside the banking system.

‘And so the irony is asset prices are higher, there’s much more leverage in the system, and so why would asset prices be higher or credit spreads be lower when there’s a lot more leverage and the price of everything is higher? It doesn’t make sense but that’s where the bubble is. These are the good times, these are the great times it seems. Right?”

Now, you may or may not agree with Mr. Dalio but I think it would still be worth considering his words when you read this article from ETF.com. Here are a few excerpts:

“Private credit funds invest in nonrated, debtlike instruments that have no readily tradable market or publicly quoted price. Assets under management in such funds were growing rapidly until 2008. However, fundraising activity slowed significantly with the onset of the 2008-2009 financial crisis.

‘The increase of both supply and demand for private credit has resulted in substantial growth in assets under management.”

Again, I would recommend you listen to the entire podcast and read the whole article before making any conclusions.

Where is the economy going in the near term I do not know but I can say with pretty good certainty that at some point we will see a downturn and a recovery. I know…my prediction is bold.

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