Next financial crisis ‘will be more severe’ socially and politically… The biggest red flag for the next recession? Corporate debt to cash ratios

The next financial crisis ‘will be more severe’ socially and politically, says billionaire investor Dalio

Investors should be playing some defense, says Bridgewater founder

‘I think it will be more severe in terms of the social, political problems. And I think it will be more difficult to handle … It won’t be the same in the terms of the big-bang debt crisis. It’ll be a slower growing, more constricting sort of debt crisis that I think will have bigger social implications and bigger international implications.’

Ray Dalio, founder and co-CIO, Bridgewater Associates
That’s billionaire Ray Dalio, the founder of the world’s largest hedge fund, Bridgewater Associates, expounding on what the next financial crisis, which he sees as inevitable, will look like.

In a Tuesday interview with CNBC, Dalio said he believes the current economic cycle is in the seventh inning, which he extrapolated to mean it probably has another two years or so to run.

 

It’s now time, however, to start thinking about what the next downturn will be like, he said. To that effect, Dalio on Monday published a book, “A Template for Big Understanding Debt Crises,” that’s available as a free PDF.

In the interview, Dalio likened the current environment to 1935-1940, while the 2008-2009 crisis period echoed the start of the Great Depression in 1929-1932. Like the start of the Depression, the financial crisis left monetary policy makers no choice but to print money and buy financial assets, pushing the prices of those assets up and exacerbating the wealth gap.

The biggest red flag for the next recession? Corporate debt to cash ratios, top economist says

  • The roots of the next recession could lie in U.S. corporates’ debt-to-cash ratios, a top U.S. economist warned Wednesday.
  • The cash-to-debt ratio of speculative-grade borrowers reached a record low of 12 percent in 2017, below the 14 percent level in 2008 — meaning that for every dollar they have in cash, they have $8 of debt.
  • Corporations are borrowing against their net worth, as opposed to borrowing against cash flow and income, which is effectively what households were doing in 2004, 2005 and 2006.
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Corporate debt in the U.S. is now higher than it’s ever been.

This is typically manageable if companies have a lot of cash to service that debt. But a looming problem, many economists are warning, is that — excluding the country’s biggest companies — debt-to-cash ratio is now higher than it was in 2008 during the financial crisis.

Ten years on from the crash of Lehman Brothers that heralded the Great Recession, market watchers are looking for clues as to where the root of the next crisis might lie. Steve Blitz, chief U.S. economist at TS Lombard, sees a giant red flag in corporations’ debt versus their means to pay that debt off.

“The real biggest problem lies, if I’m looking at the U.S., I look at debt-to-cash ratios, and I take out the top ten companies,” Blitz told CNBC’s Squawk Box Europe on Wednesday, noting his exclusion of highly capitalized companies like major tech and pharmaceutical firms who are well-stocked to service their debts.

“Debt to cash is very very high, but debt equity is very very low. What that tells me is corporations are borrowing against their net worth, as opposed to borrowing against cash flow and income, which in effect is the same thing households were doing in 2004, 2005 and 2006.”

 

Financial crisis made banks less risk taking, chief economist from CNBC.

 

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