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Wall Street Titans Foresee the Coming of a Debt-Driven Crisis

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Two Wall Street heavyweights: Larry Fink, CEO of BlackRock, and Ray Dalio, founder of the Bridgewater Associates, the largest hedge fund in the world.

When two of the most powerful Wall Street titans warn us about the same symptomatic conditions, it’s time to take such warnings seriously.

There’s a high probability that an economic disaster is about to unfold. It consists not of one trigger, but several. And they’re all tied to our national debt level, a condition that is not only increasing but accelerating at an alarming rate.

Fink sees the scenario in this way: the current deficits will increase the US debt load, triggering a higher premium demand from investors; a highly problematic issue as it may lead to “interest rates becoming too high to sustain the economy with its growth rates,” as Fink said during a Bloomberg conference in Singapore a few weeks ago.

Dalio, on the other hand, foresees a scenario in which increased Treasury borrowing may weaken the dollar to such an extent that foreign investors (of US debt) may opt to pull back.

The US federal debt is currently larger than our country’s GDP; a debt-to-GDP ratio of 104.17. Only once had it soared beyond this level (during World War II, when the ratio stood at 121.70).

So, now you have to ask yourself:

  • Does the national debt matter?
  • Will bond buyers jump in en masse in 2019, and if so, what would motivate them to do so?
  • Do you think that the dollar’s strength will eventually weaken, as per Dalio’s projection?

The truth is, nobody knows what the future holds. Although our scenario is very different from that of the last crisis in 2008, on a general level, they’re quite similar:

  • 2008 was a debt crisis. And now, we have even more debt.
  • We get rid of our debt by generating income. We can’t generate income fast enough to service our debts.
  • We can also abolish debt by cutting spending. We’re not cutting spending.

So what’s to stop another (possibly worse) full-blown debt crisis?

Though it would be foolish to predict in order to act, it would be even more foolish not to act to compensate for our inability to predict.

In other words, if you can’t predict, then be prepared to hedge. Here’s another way to look at the scenario, borrowing slightly from the classic example of Pascal’s Wager.

Let’s say you are hedged (for example, 25% gold, 25% stocks, 25% bonds, and 25% cash):

If you are hedged

Economic Scenario

Your Wealth

Debt crisis unfolds

Safe with the prospect for growth

Debt crisis doesn’t unfold

Safe with the prospect for growth

If you are NOT hedged

Economic Scenario

Your Wealth

Debt crisis unfolds

Severe losses across your portfolio

Debt crisis doesn’t unfold

Safe with the prospect for growth

If you are hedged, you can protect your assets from being wiped out while retaining your capacity for portfolio growth. If you are unhedged, you are gambling to achieve portfolio growth at the risk of allowing your assets to be wiped out. Hedging puts you in a win/win scenario. Not hedging puts you in a win/lose scenario.

But here’s the kicker: in an unhedged scenario, the losses are significantly greater than the wins. And although this potential loss scenario can hit every American investor or saver, its impact on retirees can be exceedingly brutal.

So, if you are a retiree or about to become one, these warnings shouldn’t be taken lightly.

Bank Failure Scenario Kit - sm2



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All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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