- Greg Jensen warned that the Fed’s rate hikes could trigger a market downturn and a deep recession.
- The Bridgewater Associates chief predicted stubborn inflation, slower growth and weaker earnings.
- Jensen said the US is at the center of a global financial bubble that is about to burst.
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Greg Jensen of Bridgewater Associates warned investors if they think the Federal Reserve can beat inflation without lowering asset prices and plunging the US economy into a deep recession.
Ray Dalio’s co-chief investor in hedge funds forecast stubborn gains, slowing growth and a decline in corporate earnings at this week’s SALT hedge fund conference in New York.
He also said the US is at the heart of a global financial bubble, argued the pandemic has changed the world forever and highlighted regions and markets where he sees bargains.
Here are Jensen’s top 10 quotes, slightly edited for length and clarity:
1. “The biggest mistake currently being priced into markets is the belief that we will return to similar pre-COVID prices. This inflation is expected to fall to just under 3% over the next 18 months. and that will happen without a big recession.”
2. “Markets are not pricing in how constrained policymakers are – how impossible it will be to achieve the combination of reasonably good earnings growth and low inflation that markets expect.”
3. “It is a mistake to think that things can return to normal, that we are past the drawdown and that the worst is behind us. We are still in the early stages of dealing with a radically different world than before COVID.” (Jensen highlighted examples of what has changed: less globalization, a declining role for financial markets, and more government influence.)
4. “You will have inflation that remains stubbornly higher than markets are expecting as growth slows. That’s when it gets really difficult, and that’s going to create the riskier part of the downturn — when it becomes clear that earnings are falling and interest rates are still rising.”
5. “The downturn feels big, but asset prices are still quite high by historical standards. The decline is relatively small compared to the change in underlying fundamental conditions. There’s a lot more to come, and it gets scary when everyone thinks it’s not a temporary outlier, but a more permanent phenomenon. Then the bottom will come.”
6. “The recession will likely last longer, more unnerving than a crash. It’s not easy to say whether it will take three years or one year, but the scale is likely to be large and difficult.”
7. “There is a good chance that the market will not react to the European crisis until it has hit us deep, which I think will happen in the next few months.” (Jensen was referring to Russia’s invasion in Ukraine, which pushed up food and energy prices, eroded economic growth and increased political and fiscal pressures on European governments.)
8. “The worst thing for the US is that it’s priced in as the biggest economy and doesn’t have big problems. The US is at the center of a financial bubble and is most at risk when liquidity is withdrawn.” (Jensen noted that assets that don’t generate cash flows to support their valuations — like cryptocurrencies — are most at risk of falling if the Fed raise interest rates and reduce the money supply.)
9. “Bear markets can last a long time. You can be in Japan and have a 25 year bear market. You need to know that this is possible and you need to prepare for it now.”
10. “There are places in the world that have very different cycles than the US, UK and Europe. It’s tough in a tightening world, with risk premia rising and liquidity falling, but there are areas that look relatively attractive.” (Jensen pointed to parts of Latin America and commodities that are underinvested and less sensitive to growth than other assets.)
Continue reading: Wall Street is warning that stock valuations are too high after August’s 8.3% inflation rate – meaning the market is in for more pain
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