There is a lot of speculation about what a rate hike by the Federal Reserve will mean for the economy and financial markets.
The prognosis is not good, says Ray Dalio, founder of Bridgewater Associates, the world’s largest hedge fund manager.
Looking at inflation, Dalio wrote in a LinkedIn comment: “When looking at inflation, my guess is that it will be between 4.5% and 5% over the long term, excluding shocks (eg, worsening economic wars in Europe and Asia, or more). from droughts and floods).
“In the near term, I expect inflation to decline slightly, as previous shocks to some elements (such as energy) disappear.”
Dalio forecasts real or inflation-adjusted interest rates of zero to 1% in the coming years. “It will be relatively high but acceptable to debtors and relatively low but tolerated by creditors,” he said.
Bond yield forecast
Adding inflation numbers and real rates together generates expected nominal bond yields – the numbers that appear on your computer screen. Dalio expects a relatively flat yield curve, “until there is an unacceptable negative impact on the economy.”
So he expects a range of 4.5% to 6% for long- and short-term nominal bond yields.
Given the federal government’s huge debt burden, he believes yields must rise to the upper end of this range to entice investors to buy Treasury securities. Government debt totaled $28 trillion as of September 30.
An increase in yield would mean a “significant reduction in private credit that would reduce spending,” Dalio said. “This will lead to lower private sector credit growth, which will lead to lower private sector spending, and thus the economy with it.”
Dalio predicted that a higher rate would cause stock prices to fall by about 20%. This will also affect the economy, he said.
“When people lose money, they become cautious, and lenders are more careful with their lending, so they spend less,” Dalio said.
“My guessing [is] That a major economic downturn will be required, but it will take some time because monetary levels and wealth levels are now relatively high.”
The Cathy Wood Show
Famous investor Cathy Wood, CEO of Ark Investment Management, looks at inflation and the economy somewhat differently.
She says we are experiencing deflation, not inflation, and we are already in the midst of a recession.
Wood said in a webinar that Federal Reserve Chairman Jerome Powell misread the environment in comparing this period to the late 1970s and early 1980s. That’s when the Fed Chairman at the time, Paul Volcker, pushed interest rates significantly higher to quell inflation.
She said he faced an economy that took 15 years to “avoid a bout of inflation”. “It’s more like a 15-month problem.”
So, Wood said, “Using the same torque this time would prove wrong.” “We think we’re already in a recession.”
It regards consumer price measures as a lagging indicator. She said gold is the best leading indicator of inflation. Wood noted that it has been trading in the $1,700-$2,075 range over the past two years, peaking in August 2020.