Ray Dalio, Stan Druckenmiller, Bill Gross, … to name a few. They not only became personally wealthy to through properly assess financial markets, they made their customers rich too. But one by one the smart money sees a great danger approaching.

With interest rates on debts this low the limits are reached fast. Assets such as bonds, real estate and stocks have historically high valuation. In addition, central banks have lost control over the financial markets. It is therefore not unreasonable the smart money is sounding the alarm bell.

Ray Dalio:

“It’s the end of the supercycle. It’s the end of the great debt cycle. The process of lowering interest rates causing higher levels of debt, debt service and spending, I think is coming to an end.”

Bill Gross:

“In the past 20 to 30 years, credit has grown to such an extreme globally that debt levels and the ability to service that debt are at risk, relative to the private investment world. Why doesn’t the debt supercycle keep expanding? Because there are limits.”

Stan Druckenmiller:

“Corporate debt was $3.5 trillion– in 2007, arguably a period and– many would describe as bubbly. It’s 7 trillion now. So it’s gone from 3.5 trillion to 7 trillion. As you know, most of that mix has been in more highly leveraged stuff, Covenant-Lite loans– high yield, that’s where the majority of the rise has been. And if you look at corporations have been using it for, it’s all financial engineering.”

The big debt boom over the past decades has running the markets on steroids. The financial markets are addicted to cheap money. But what happens when you take away the steroids? Rates are at or near zero and everyone borrowed as much as possible.

Ray Dalio:

“The process of lowering interest rates causing higher levels of debt, debt service and spending, I think is coming to an end.”

Bill Gross:

“The implications are much lower growth, less inflation, lower interest rates, and less profit growth.”

With corporate debt levels twice what they were before the financial crisis, the covenants on much of that debt weaker than ever before and liquidity in the bond market disappearing, the next downturn could present a unique challenge for the Fed. And their traditional tool to address these sorts of challenges is now essentially impotent. No wonder the smart money is worried.