Bridgewater sees 20-25% plunge in markets as Fed continues to tighten

Markets will show a decline of 20% to 25% as the actions taken by the Fed to control inflation have not yet fully priced in, estimates the co-Chief Investment Officer of one of the world’s largest hedge funds, Bridgewater Associates of Ray Dalio.

“Overall, asset markets will decline 20% to 25%,” Greg Jensen said in an interview with Bloomberg.

“The market is pricing in that the decline in inflation will occur in a relatively stable economy,” he said, but he did not factor in the broader impact of higher interest rates and the Federal Reserve’s quantitative tightening.

According to Jensen, these two elements will limit inflation as well as economic growth, and “unfortunately inflation will prove to be more persistent,” leading to higher interest rates across the lending spectrum, especially at the longer-term end.

As the Bridgewater executive explained, if the Fed is forced to tighten more in the face of persistent inflation and fails to ease the market expectations within six to nine months, it will open a “difficult road for assets” in which liquidity will dry up as earnings and financial growth will be weak.

Asked how one can invest in such a market, Jensen said it is probably not possible to completely avoid the risks.

For investors who are only long, Jensen advised to “reduce risk and be more diversified, both globally and environmentally.”

Globally, he expects the eurozone economy to contract by 4% over the next 6 to 12 months, and that the region’s policymakers will face tough choices between fighting inflation and boosting economic growth.

For China, he estimated that it is facing a very “dangerous” situation related to the economic slowdown, debt and real estate bubble, at the same time that the country has to manage tensions from another outbreak of the pandemic and Taiwan.

The fact that China is providing “supply-side stimulus” while refusing to provide “demand-side” incentives is also problematic, he added.