Ray Dalio is a chill billionaire. The son of a jazz musician, he recently told an interviewer with Bloomberg that teaching someone transcendental meditation is the greatest gift he could give someone.
Perhaps it is his meditation practice that helps puts him in tune with the movements of the markets. One of the most successful hedge-fund mangers in the world, Dalio has amassed a fortune of more than $18 billion. Part of those riches stem from the fact that in 2007 he predicted that the world was about to experience a global financial crisis.
Now, once again, Dalio has issued a stern warning that something is seriously not right with the global financial system and that a paradigm shift is not only needed, but inevitable.
The good news for startups, however, is that until this paradigm shift occurs, we are in the midst of one of the best times ever for startup founders to raise capital.
Because of policies put in place by the Federal Reserve in the aftermath of the Great Recession, wealthy investors have plenty of cash sitting around earning paltry returns just waiting to be put to work funding ideas and dreams that may turn out to be the next Facebook or Uber.
From the point of view of startup founders, our broken financial system presents what may be a once in a lifetime opportunity to raise capital. Not surprisingly, 2019 was a banner year for IPOs.
As Dalio points out, not since the original dot com bubble of the early 1990s has there been so much money available for tech startups seeking capital on the basis of nothing more than dreams and ideas.
Time to Dream Big
If Dalio is right, Wall Street will continue to unleash waterfalls of money upon founders with big dreams to sell.
Here is the “money” quote:
Because investors have so much money to invest and because of past success stories of stocks of revolutionary technology companies doing so well, more companies than at any time since the dot-com bubble don’t have to make profits or even have clear paths to making profits to sell their stock because they can instead sell their dreams to those investors who are flush 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 startups that don’t want more money because they already have more than enough; but the investors are threatening to harm these companies by providing enormous support to their startup competitors if they don’t take the money.
But it gets even better. Dalio believes that the market distortions that are producing the unprecedented glut of capital will magnify and get worse, (thus generating more available investment capital for startups) before the whole financial system collapses and a “paradigm shift” occurs.
So dream big all you startup founders! The good times shall continue, until they don’t.
If you have a time horizon longer than the short-term though, you may be interested in why Dalio believes the financial world has gone mad.
Too Much Capital
First, there is simply too much capital in the system. The federal reserve has pumped too much money into the system through quantitative easing and other financial gimmicks.
Dalio points to investor’s willingness to accept negative interest rates as Exhibit A that investors have too much money chasing to few viable investments.
Paying someone for the privilege of using your money is not how capitalism is supposed to work. Negative interest rates violate a bedrock principle of economics – namely, the time value of money, which holds that a dollar today is worth more than a dollar tomorrow.
In a healthy functioning financial system, investors are supposed to get a return for investing and and lending capital not pay a price.
Shakespeare might have written “neither a borrow nor a lender be,” but governments around the world have not heard this message because central banks continue to purchase large amounts of debt and keep interest rates artificially low.
Under normal circumstances, capital markets have a built in safety mechanism to restrain governments from borrowing more than they should. When the supply of government bonds exceeds investor demand, bond prices drop and interest rates rise, making it more expensive for governments to borrow and discourage them from issuing more debt. Under the current financial regime, central banks around the world keep interest rates artificially low by serving as the buyer of last resort for government bonds and other securities.
Dalio says that the whole concept of central banks buying large quantities of bonds is simply “sound finance being thrown out the window” and cannot last forever.
Corporations and governments have not set aside enough money to pay for the pension and retiree medical benefits that they have promised to their workers.
Low and negative interest rates have exacerbated this problem, because benefit plan managers have assumed expected rates of return that are far greater than their actual investment results in the low and negative interest rate environment that currently reigns supreme.
Dalio expects that governments around the world will eventually monetize their underfunded pension and healthcare obligations. “Monetization of debt” is a euphemism that has been en vogue since the Financial Crisis and is just a fancy way of saying “money printing.”
Dalio does not mince words in warning about how big a problem printing money out of thin air to satisfy pension obligations and retiree medical benefits. He says that governments printing money on such a large scale “threatens the viability of the three major world reserve currencies as viable storeholds of wealth.” Yikes. Bitcoin anyone?
Trickle Down Has Dried Up
Economic policy makers justify showering money on the financial system by saying that the wealth will “trickle down” to the working class as the investor class puts its money to work.
Dalio believes that the trickle is not enough to maintain social order. The gap between those who benefit from our crazy financial system and everyone else is just too big to last foreover.
How it all ends though, and, perhaps more importantly when it ends, is anyone’s guess.
Bottom line – until our financial system collapses, the good times for startup founders should continue and may get even better as the distortions increase. Just don’t forget that we live in a financial world that has “gone mad” — Dalio’s words — and could collapse on a dime.
Also be sure to save some of your pennies for a rainy day, because you may need them when the inevitable paradigm shift shuffles in.