Stocks, bonds fall further, says Ray Dalio, sees US recession in 2023

As the world waits for the Federal Reserve to deliver its third “jumbo” interest-rate hike, Bridgewater Associates founder Ray Dalio shared a cautionary tale for anyone who is still hanging on to the hope that beaten-down assets. Prices may bounce back soon.

In Dalio’s estimation, if the Fed is expected to be successful in containing inflation, it should continue to raise interest rates substantially. Because of this, and other factors such as the ongoing war in Ukraine, Dalio predicts that stocks and bonds will continue to suffer as the US economy heads into recession in 2023 or 2024.

“Right now, we are very close to 0% year. I think it is going to be worse in 2023 and 2024, which has implications for the elections,” Dalio said in a conversation with Mark DeCambre, editor-in-chief of Marketwatch. said during the interview during the inaugural MarketWatch “Best New Ideas in Money” festival, which began Wednesday morning in Manhattan.

Fed Chairman Jerome Powell has pledged that the central bank will do everything in its power to curb inflation, even if it crashes markets and the economy in the process. But to accomplish this, Dalio believes the Fed should raise benchmark interest rates to between 4% and 5%. Now that the Fed has raised its interest rate for its third 75 basis points, the fed funds rate will climb above 3% for the first time since the financial crisis.

“They need to get interest rates – short rates and long rates – up to around 4.5%-ish, it could be even higher than that,” he said. Because the only way the Fed can successfully fight inflation is to relieve “economic pain.”

Futures traders are speculating that the Fed may raise the benchmark rate, which reduces trillions of dollars in assets, as high as 4.5% by July, according to CME’s Fedwatch Tool. But traders see only an outside chance that the rate will reach 5% before the Fed starts cutting rates again.

In the US, inflation has moderated slightly over the summer after reaching its highest level in more than 40 years. But a report on consumer-price pressures in August sent financial markets into a tailspin last week as elements of “core” inflation, such as housing costs, appeared more stubborn than economists expected last month. But the ongoing energy crisis in Europe has raised the cost of everything from heat to consumer goods even more.

Using some of the most fundamental principles of corporate finance, Dalio explained why high interest rates are a curse for financial assets as well as real assets like the housing market.

Simply put, when interest rates rise, investors must increase the discount rate used to determine the present value of future cash flows, or the interest payments tied to a given stock or bond. Since higher interest rates and inflation are essentially taxes on these future revenue streams, investors typically compensate by specifying a lower valuation.

“When someone makes an investment, pays a lump sum for future cash flows, then to say what they were worth, we take the present value and we use the discount rate. And that’s why all Boats rise and fall simultaneously,” Dalio said.

“When you bring interest rates down to zero or almost zero, what happens is that it drives up the prices of all assets,” Dalio said. “And when you go to the other side, it has the opposite effect.”

While Dalio said he expected stocks to suffer more, he pointed to the bond market as a particular area of ​​concern.

The problem, as Dalio sees it, is that the Fed is no longer monetizing debt issued by the federal government. In September, the Fed plans to double the speed at which Treasury and mortgage bonds will close off central bank balance sheets.

“Who will buy those bonds?” Dalio asked, before noting that Chinese central banks and pension funds around the world are now less motivated to buy, partly because the bonds’ real return when adjusted for inflation has dropped significantly.

“We had a 40-year bull market in bonds … everybody who held bonds made
The price went up, and it was going to reinvent itself for 40 years,” Dalio said. “Now you have negative real returns in bonds… and you’re seeing them go down.”

When asked whether “cash is still garbage,” a signature quip that Dalio has repeated on several occasions, he said that keeping cash is still “a garbage investment” because interest rates have yet to fully offset the effects of inflation. Not enough to offset from. However, the actual usefulness of cash depends on “how it compares to others.”

“We’re in this ‘write off financial assets’ mode,” Dalio said.

Asked if he is still bullish on China, Dalio replied that he is, but clarified that it is a risky time to invest in the world’s second-largest economy, which could lead to long-term investors. Opportunities may arise for

“Property prices are low,” he said.

When asked to share his thoughts on how the markets move forward, Dalio gave a humorous reply.

“There is a saying: ‘He who lives near a crystal ball is destined to eat a glass of ground’.”

Find out about investing and managing your finances. Speakers include investors Josh Brown and Vivek Ramaswamy; Plus, topics like ESG investing, EVs, space and fintech. The Best New Ideas in the Money festival continues Thursday. Register to participate in person or virtually.

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