EC Is The World’s Largest Hedge Fund Wrong About Stock Assets?

Bridgewater Associates has roughly $160 billion under management, making it the largest hedge fund on the planet. Exchange traded funds like Vanguard FTSE Emerging Markets (VWO) the SPDR Gold Trust (GLD) and the S&P 500 SPDR Trust (SPY) head the list of top holdings.

Last week, Bridgewater said, “We are bearish on financial assets as the U.S. economy progresses toward the late cycle, liquidity has been removed, and the markets are pricing in a continuation of recent conditions despite the changing backdrop.”  What are Bridgewater executives chiefly worried about? A market that is entirely reliant on higher duration bonds like the 10-year U.S. Treasury bond.

In particular, should bonds with longer maturities rise much more than they already have, scores of corporate borrowers would struggle to repay debts. Meanwhile, consumers would have difficulty gaining access to credit and/or qualifying for loans. According to Ray Dalio, founder of Bridgewater, the credit-dependent financial system would reprice assets significantly lower.

Could the world’s largest hedge fund be wrong? Certainly. On the flip side, the typical company is more leveraged today that at any time in recent memory. The sharp increase in debt at the corporate level means that companies are more vulnerable to rising borrowing costs, Federal Reserve policy error and/or a weakening global economy.

debt-to-ebitda

Making matters more tenuous, corporations have largely swapped equity for debt in the form of stock buybacks. Did this help the asset balloon inflate in the short-term? Without a doubt. At the same time, the process has rerouted capital away from more productive expenditures over the longer-term (e.g., research/development, employee training, computer networking, land, office, etc.).

Stock buybacks may be a tax-efficient way to return capital to shareholders. The process may or may not be a form of stock manipulation to drive up prices. (Note: Buybacks were illegal prior to 1982 because the Securities and Exchange Commission regarded them as manipulation.)

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Disclosure: ETF Expert is a web log (“blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered ...

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Jacob Paterson 2 years ago Member's comment

Excellent read.

Moon Kil Woong 2 years ago Contributor's comment

Rather than a pullback or collapse money should move from highly leveraged balance sheets to low levered balance sheets. This implies rotation more than a collapse. A collapse will not be caused by debt alone, but rater a drop in growth or in earnings. This will make it hard or impossible for some companies to cover their debt load and justify it to investors.