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In this video, I cover why Ray Dalio believes that the entire bond bubble is about to collapse, which will have serious implications for all investors.

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Unless if you’ve been living under a rock, you’d know that the Federal Reserve has been printing substantial amounts of money over the past few months. Ultimately, this money printing has increased financial assets all across the board and is culminating to create an unprecedented situation. Ray Dalio, the founder, and CIO of the largest hedge fund in the world, Bridgewater Associates, recently spoke about how he thinks the Fed has forced the financial markets into a corner. Dalio is an expert in macroeconomics, which has helped him successfully manage $150 billion dollars over the past few decades. Countries have literally gone to Dalio for his economic insight, because of his renowned expertise. Now, this isn’t just a trap for the Federal Reserve, but also for investors like you and me. This video will go in-depth into what these changes are, and how the Fed just trapped themselves in a major way. Welcome to Casgains Academy. If you’re new to the channel, please consider subscribing for more content.
First of all, this isn’t going to be one of those doom and gloom videos that tell you that a crash is coming precisely on August 13th, 2021 at 11 am eastern time. Correctly timing market crashes is basically impossible, and I’m not here just to spread fear as some others have done. With that being said, our current situation is very strange, and there will be some serious implications from these events. Over the past few months, the Federal Reserve has been enacting high levels of quantitative easing, or essentially, the purchasing of massive amounts of bonds. This additional buying power from the government has artificially inflated bond prices. As some of you may already know, bond prices and bond yields are inversely related. When bond prices go up, bond yields must go down. And when bond prices go down, bond yields must go up (Do a swinging scale animation, with bond prices on one side and bond prices on the other side). As a result, bond yields have been suppressed to incredibly low levels. As of right now, the 10-year treasury yield is roughly 1.5%. At the same time, the inflation rate is easily much higher than 2%. Essentially, while bond investors might think that they’re still going to make money, the truth is that their real returns are negative. Nominal returns, which are the returns before inflation, are positive at 1.5% per year, but real returns, which are the returns that account for inflation, are literally negative. Because of this, bonds are a joke of a financial instrument right now. The logical move right now would be to have the Federal Reserve sell some of its bonds in order to combat the artificially high bond prices. We’ve already seen this start to happen. In fact, the Fed has already made the decision to start selling off corporate bonds and corporate bond ETFs that it purchased during the middle of the pandemic. Additionally, the Fed has already begun inching towards the discussion of slowing down bond purchases. With the information that you just saw, you might think that the Fed may be tapering off on bond purchases. However, Ray Dalio thinks that the Fed is actually in a completely different situation. He believes that instead of the Fed selling bonds, the Fed will soon be forced to purchase bonds. That might sound crazy at first, but a deeper dive shows that it actually makes a lot of sense. As I covered earlier, bonds are not attractive at all right now. One of the reasons why bond prices are so high is that large institutions have loaded up treasury bonds in order to stay conservative. That way, if the pandemic worsens, then these institutions can sell those bonds and support their businesses. Once these large institutions and investors begin selling bonds to purchase other financial assets like domestic stocks, real estate, and international stocks, bond prices will collapse. This is because nobody wants to purchase bonds when there are inflationary pressures because inflation guarantees negative real returns at the current rate. Not only that, but other financial assets have the potential to generate significantly higher returns. In order to prevent this selling power from leading to a crash in bond prices, the Fed will have to buy bonds, which artificially increases the money supply.

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