Ray Dalio has little positive to say about what’s happening in the US economy, and what that means for the outlook for equities, given that inflation is running well above what most people and central bankers want.
In a note on LinkedIn, the hedge fund billionaire said: “In the near term, I expect inflation will fall slightly as past shocks resolve for some items (e.g., energy) and then will trend back up towards 4.5 per cent to 5 per cent over the medium term.”
Ray Dalio warns equity investors. Getty
Mr Dalio said investors should therefore brace themselves for an ever more aggressive Federal Reserve.
“I estimate that a rise in rates from where they are to about 4.5 per cent will produce about a 20 per cent negative impact on equity prices (on average, though greater for longer duration assets and less for shorter duration ones) based on the present value discount effect and about a 10 per cent negative impact from declining incomes.”
Dalio said “when people lose money, they become cautious, and lenders are more cautious in lending to them, so they spend less. My guesstimate 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, so they can be used to support spending until they are drawn down.
“We are now seeing that happen.”
Mr Dalio said he sees no immediate resolution.
“The upshot is that it looks likely to me that the inflation rate will stay significantly above what people and the Fed want it to be (while the year-over-year inflation rate will fall), that interest rates will go up, that other markets will go down, and that the economy will be weaker than expected, and that is without consideration given to the worsening trends in internal and external conflicts and their effects.”
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