Billionaire investor Ray Dalio says the Silicon Valley Bank failure marks a ‘canary in the coal mine’ that will have repercussions beyond the VC world

• Ray Dalio said the Silicon Valley Bank failure is a “canary in the coal mine” for what’s to return. 
• Dalio wrote Tuesday that that is a part of the basic “bubble-bursting part” of the short-term debt cycle. 
• He explained the way it suits into broader historic traits and debt cycles.

Billionaire investing veteran Ray Dalio said the Silicon Valley Bank failure marks a “canary in the coal mine” second that can spark steep repercussions throughout the monetary world. 

In his e-newsletter Tuesday, the Bridgewater Associates founder called the financial institution turmoil a “very classic event in the very classic bubble-bursting part of the short-term debt cycle.”

Regulators shut down Silicon Valley Bank on Friday, with Signature Bank closed down two days later. 

The cycle lasts roughly seven years, Dalio explained. In the present section, inflation and curtailed credit score progress catalyze a debt contraction, in keeping with Dalio, and that causes contagion till the Federal Reserve returns to a coverage of straightforward cash.

“Based on my understanding of this dynamic and what is now happening (which line up), this bank failure is a ‘canary in the coal mine’ early-sign dynamic that will have knock-on effects in the venture world and well beyond it,” Dalio wrote. 

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He said historical past illustrates that it is normally the case for lenders and banks to emerge from an prolonged interval of low rates of interest and straightforward credit score holding leveraged property long, after which for these property to lose value. 

Given that the Fed has hiked rates of interest more than 1,700% over the last year—and will proceed to do s0—more dominoes are poised to fall, in Dalio’s view.

Citing earlier traits, the hedge fund founder said it is doubtless that more companies can be pressured to promote property at low costs for large losses, and that can trigger further decreases in lending volumes. 

“Looking ahead, it’s likely that it won’t be long before the problems pick up, which will eventually lead the Fed and bank regulators to act in a protective way,” Dalio maintained. “So I think we are approaching the turning point from the strong tightening phase into the contraction phase of the short-term credit/debt cycle.”

In response to the autumn of SVB, ranking company Moody’s on Tuesday downgraded its outlook for the US banking system, citing the speedy deterioration of the situations dealing with the sector. 

“Pandemic-related fiscal stimulus along with more than a decade of ultralow interest rates and quantitative easing resulted in significant excess deposit creation in the US banking sector,” Moody’s strategists said. “This has given rise to asset-liability management challenges, with some banks having invested excess deposits in longer-dated fixed-income securities that have lost value during the rapid rise in US interest rates.”