The worlds biggest hedge fund is sounding the alarm about the potential for a protracted multi-year recession.
Bridgewater Associates co-chief investment officer, Greg Jensen, warned this week that during periods of high inflation like what the U.S. economy is experiencing today, recessions tend to last longerunless central banks slash interest rates quickly.
And Federal Reserve Chair Jerome Powell made it clear this week that rate cuts arent in the cards.
Wed expect kind of double the normal length of a recession because the Feds not going to be at your back for a long time and thats a big deal, Jensen told Bloomberg on Friday.
The Bridgewater co-CIO said that the good news is that there is far less leverage in the financial system compared to the period before the Great Recession of 2008, which he believes will prevent a cascading effect in markets that causes a deep recession.
Instead, you have this long grind thats probably a couple years, he said.
Jensen expects inflation will come down next year as a recession hits, but he argued that there will be a mixed bag of good and bad inflation reports that could weigh on stocks.
Not everyone on Wall Street agrees. Economists at Bank of America cut their inflation forecast for next year to just 2.8% on Friday, citing a sharp drop in goods prices. And Goldman Sachs is expecting just 2.7% inflation by the end of 2023.
But it may be wise to listen to Bridgewaters co-CIO.
Jensenwho worked his way up the ranks at Bridgewater for 26 years under the tutelage of the funds billionaire founder, Ray Daliowas one of the few CIOs on Wall Street to spot the rise of inflation in 2021.
Before the carnage that markets experienced this year, he warned that inflation would be a persistent issue and things would be bad for investors going forward.
Reiterating that forecast on Friday, Jensen argued that investors have yet to price in the coming muti-year recession and inflation that will remain above the Feds 2% target for some time.
You havent seen the bottom in risky assets, he warned. Its going to be a couple year downcycle here.
The effects of Chinas reopening and advice for investors
Chinas economic reopening is one of the main reasons Jensen is worried about inflation next year.
Throughout 2022, Beijings strict COVID zero policies have stood in stark contrast to the gradual easing of pandemic-era restrictions seen in the West.
But in recent weeks, officials in China have begun rolling back some COVID restrictions after strict, extended lockdowns sparked rare public protests across the country.
Chinas reopening will be beneficial for some countries, but for the U.S. and Europe it could be an issue, according to Jensen.
This is not a great thing for the U.S. and Europe, he said. China has been a blessingbecause it has been such a disinflationary force.
With the Chinese factories and consumers locked down, demand for raw materials and goods from China was reduced over the past few years. That helped keep inflation at bay globally.
Now, as China reopens, commodity prices are expected to rise, exacerbating inflation in the West just as a recession hits.
That will make the dilemma for central banksto fight inflation even as a recession looms or to pause or cut rates and deal with higher inflationeven worse, Jensen said.
For investors, Jensen warned that this means there arent many solid places to hide at the moment.
Overall its not great out there, and cash is not a terrible thing, he said. Assets dont always go up even though weve had that feeling over the last decade.
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