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 stated.
Bond Yield Forecast
Adding the inflation and actual charges numbers collectively generates projected nominal bond yields — the numbers that present up in your pc display. Dalio expects a comparatively flat yield curve, “until there is an unacceptable negative effect on the economy.”
So he forecasts a spread 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 buyers 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 stated. “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 charge rise will produce a few 20% drop in inventory costs, Dalio predicted. That too will depress the financial system, he stated.
“When people lose money, they become cautious, and lenders are more cautious in lending to them, so they spend less,” Dalio stated.
“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 government of Ark Investment Management, views inflation and the financial system considerably in a different way.
She says we’re struggling deflation relatively than inflation and are already within the midst of a recession.
Federal Reserve Chairman Jerome Powell has misinterpret the atmosphere in evaluating this era to the late Nineteen Seventies and early ‘80s, Wood said in a webinar. That’s when then-Fed Chairman Paul Volcker pushed rates of interest manner greater to quell inflation.
He confronted an financial system that took 15 years to “work up an inflation frenzy,” she stated. “This is more like a 15-month problem.”
So, “to use the same resolve this time will prove to be a mistake,” Wood stated. “We think we’re already in a recession.”
She considers consumer-price gauges a lagging indicator. Gold is the very best main indicator for inflation, she stated. And it has traded at a spread of about $1,700 to $2,075 over the previous two years, peaking in August 2020, Wood famous.
Source: www.thestreet.com”