Investors are delusional if they think the Federal Reserve can beat inflation without driving down asset prices and plunging the U.S. economy into a major recession, warned Greg Jensen of Bridgewater Associates.
Hedge fund co-principal investor Ray Dalio predicted stubborn price rises, a slowdown in growth and a drop in corporate profits when he spoke at the SALT hedge fund conference in New York this week.
He also said the US is at the heart of a global financial bubble, argued the pandemic has permanently changed the world and highlighted regions and markets where he sees bargains.
Here are 10 of Jensen’s best quotes, slightly edited for length and clarity:
1. “The biggest mistake being made in the markets right now is the belief that we will return to pre-Covid prices. Inflation is expected to fall to just under 3% over the next 18 months, and that will happen without a major recession.”
2. “Markets don’t price in how constrained policymakers are — how impossible it will be to have the market-expected combination of reasonably good earnings growth and low inflation.”
3. “It’s a mistake to think that things can go back to normal, that we’re in decline and the worst is behind us. We’re still in the early stages of dealing with a radically different world than before COVID.” (Jensen highlighted examples of what has changed: less globalization, the shrinking role of financial markets, and greater government influence.)
4. “You’re going to have inflation stubbornly higher than markets expect because growth starts to slow. That’s when it gets really tricky, and that creates the riskier part of the downturn – when it becomes clear.” that earnings are falling and rates are still rising.’
5. “The decline is big, but asset prices are still pretty high by historical standards. The decline is relatively small, given the change in underlying fundamentals. There’s a lot more to come, and it’s going to be scary if everyone thinks that not a temporary blip, but a more permanent phenomenon. That’s when the bottom starts to come in.”
6. “The recession will probably be longer, it will be more crushing than the crash. It is not easy to say whether it will be three years or one year, but the scale will probably be large and difficult.”
7. “There’s a decent chance the market won’t react to the European crisis until it’s deep upon us, which I think will be in the next few months.” (Jensen was referring to Russia’s invasion of Ukraine, which has raised food and energy prices, disrupted economic growth and put political and fiscal pressure on European governments.)
8. “The worst thing for the US is that it has the value of being the largest economy in the future and not having major problems. The US is at the center of the financial bubble and is most at risk of liquidity withdrawal.” (Jensen noted that assets that don’t generate cash flows to support their valuations — such as cryptocurrencies — are most at risk of falling when the Fed raises interest rates and shrinks the money supply.)
9. “Bear markets can last a long time. You can be in Japan and you can have a 25-year bear market. You have to know that there is a possibility and you have to prepare for it now.”
10. “There are places in the world that have very different cycles to the US, UK and Europe. It’s tough in a tightening world of rising risk premiums and falling liquidity, but there are areas that look relatively attractive.” (Jensen pointed to parts of Latin America and commodities that have received insufficient investment and are less sensitive to growth than other assets.)
Read more: Wall Street warns stock valuations are too high after August inflation of 8.3% means market faces more pain