We’re heading into a recession that’s ‘twice the normal length,’ according to Bridgewater Associates chief investment officer

The world’s largest hedge fund is sounding the alarm about the potential for a prolonged multi-year recession.

Bridgewater Associates co-chief investment officer Greg Jensen warned this week that during periods of high inflation like the one the US economy is experiencing today, recessions tend to last longer unless central banks cut interest rates. quickly.

and Federal Reserve Chairman Jerome Powell was cleared this week that rate cuts are not on the cards.

“We would expect sort of twice the normal length of a recession because the Fed isn’t going to support it for a long time, and that’s a big problem,” Jensen. told Bloomberg on Friday.

The Bridgewater co-CIO said the “good news” is that there is much less leverage in the financial system compared to the period before the 2008 Great Recession, which he believes will prevent a “cascading effect” in markets that causes a deep recession.

“Instead, you have this long routine that’s probably a couple of years,” he said.

Jensen expects inflation to ease next year when the recession hits, but argued that there will be a mix of good and bad inflation reports that could weigh on stocks.

Not everyone on Wall Street agrees. economists in Bank of America It cut its inflation forecast for next year to just 2.8% on Friday, citing a “sharp drop” in goods prices. Y Goldman Sachs it expects inflation of just 2.7% by the end of 2023.

But it may be wise to listen to Bridgewater’s co-CIO.

Jensen, who worked his way up at Bridgewater for 26 years under the fund’s billionaire founder Ray Dalio, was one of the few CIOs on Wall Street to spot rising inflation in 2021.

Faced with the carnage the markets experienced this year, he warned that inflation would be a persistent problem and that things would “bad for investors in the future.”

Reiterating that forecast on Friday, Jensen argued that investors have yet to assess the upcoming multi-year recession and inflation that will remain above the Fed’s 2% target for some time.

“No bottom has been seen in risk assets,” he warned. “It’s going to be a cycle of a couple of years here.”

The effects of the reopening of China and advice for investors

China’s economic reopening is one of the main reasons Jensen is worried about inflation next year.

Throughout 2022, the strict COVID-zero The policies have been in stark contrast to the gradual relaxation of pandemic-era restrictions seen in the West.

But in recent weeks, officials in China have begun going back some COVID restrictions after strict and long lockdowns were triggered rare public protests through the country.

The reopening of China “will be beneficial” for some countries, but for the US and Europe it could be a problem, according to Jensen.

“This is not a big deal for the United States and Europe,” he said. “China has been a blessing … because it has been a great disinflationary force.”

With Chinese factories and consumers shuttered, demand for China’s raw materials and goods has fallen in recent years. That helped keep inflation at bay globally.

Now, with China reopening, commodity prices are expected to raiseexacerbating inflation in the West just as a recession hits.

That will make the “dilemma” for central banks — fighting inflation even as a recession looms or pausing or cutting rates and dealing with higher inflation — even worse, Jensen said.

For investors, Jensen warned, this means there aren’t many solid places “to hide” right now.

“In general, it’s not very good out there, and cash isn’t a terrible thing,” he said. “Assets don’t always go up even though we’ve had that feeling for the last decade.”

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