Kimberly White
Bridgewater founder Ray Dalio says that the inflation rate over the next 10 years will be about double the 2.6% the markets are currently pricing in.
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,” Dalio wrote in post on LinkedIn.
Given his “guesstimates about inflation and real yields,’ he predicts 4.5% to 6% for long and short rates (TBT) (TLT) (SHY).
That, in turn, would produce a bear-market-size drop in the S&P 500 (SP500) (NYSEARCA:SPY).
“I estimate that a rise in rates from where they are to about 4.5 percent will produce about a 20 percent 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 percent negative impact from declining incomes,” Dalio said.
“Now we can estimate what the fall in markets will mean for the economy i.e., the ‘wealth effect,'” he added. “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.”
Dalio has been expecting a sharp drawdown in equities, even before the core CPI print that shook markets on Tuesday.