Speculation abounds as to what the Federal Reserve’s interest-rate hikes will imply for the financial system and monetary markets.
The prognosis isn’t good, says Ray Dalio, founder and co-chief funding officer of Bridgewater Associates, the world’s greatest hedge-fund supervisor
Looking at inflation, “my guesstimate is that it will be around 4.5% to 5% long term, barring shocks (e.g., worsening economic wars in Europe and Asia, or more droughts and floods),” Dalio wrote in a commentary on LinkedIn.
“In the near term, I expect inflation will fall slightly, as past shocks resolve for some items (e.g., energy).”
Dalio foresees actual, or inflation-adjusted, rates of interest of zero to 1% in coming years. “That would be relatively high but tolerable for debtors and relatively low but tolerable for creditors,” he mentioned.
Bond Yield Forecast
Adding the inflation and actual charges numbers collectively generates projected nominal bond yields — the numbers that present up in your laptop display screen. Dalio expects a comparatively flat yield curve, “until there is an unacceptable negative effect on the economy.”
So he forecasts a variety of 4.5% to six% for long- and short-term nominal bond yields.
Given the federal authorities’s hefty debt load, he thinks yields should rise to the upper finish of that vary to entice traders to purchase Treasury securities. Government debt totaled $28 trillion as of Sept. 30.
The yield enhance implies “a significant fall in private credit that will curtail spending,” Dalio mentioned. “This will bring private-sector credit growth down, which will bring private-sector spending and, hence, the economy down with it.”
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The fee rise will produce a couple of 20% drop in inventory costs, Dalio predicted. That too will depress the financial system, he mentioned.
“When people lose money, they become cautious, and lenders are more cautious in lending to them, so they spend less,” Dalio mentioned.
“My guesstimate [is] that a significant economic contraction will be required, but it will take a while to happen because cash levels and wealth levels are now relatively high.”
Cathie Wood’s View
Famed investor Cathie Wood, chief govt of Ark Investment Management, views inflation and the financial system considerably in another way.
She says we’re struggling deflation reasonably than inflation and are already within the midst of a recession.
Federal Reserve Chairman Jerome Powell has misinterpret the surroundings in evaluating this era to the late Seventies and early ‘80s, Wood said in a webinar. That’s when then-Fed Chairman Paul Volcker pushed rates of interest approach larger to quell inflation.
He confronted an financial system that took 15 years to “work up an inflation frenzy,” she mentioned. “This is more like a 15-month problem.”
So, “to use the same resolve this time will prove to be a mistake,” Wood mentioned. “We think we’re already in a recession.”
She considers consumer-price gauges a lagging indicator. Gold is the most effective main indicator for inflation, she mentioned. And it has traded at a variety of about $1,700 to $2,075 over the previous two years, peaking in August 2020, Wood famous.
Source: www.thestreet.com