Chief investment officer of the world’s largest hedge fund says we’re heading for a ‘twice the normal length’ recession – and it has a lot to do with China

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

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

Federal Reserve Chairman Jerome Powell made it clear this week that rate cuts are not on the table.

“We were expecting kind of twice the normal length of a recession because the Fed isn’t going to be on your back for long, and that’s a big deal,” Jensen told Bloomberg on Friday.

Bridgewater’s CIO said the “good news” is that there is much less leverage in the financial system than there was before the Great Recession of 2008, which he believes will prevent a “cascading effect” in markets causing profound effects. Recession.

“Instead, you have this long grind that maybe takes two years,” he said.

Jensen expects inflation to fall next year as a recession enters, but said there will be a mixed bag of good and bad inflation reports that could weigh on stocks.

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

But it might be wise to hear from Bridgewater’s assistant CIO.

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

Before the carnage the markets have experienced this year, he warned that inflation would be an ongoing problem and that things were going to be “bad for investors going forward.”

Underscoring that outlook on Friday, Jensen argued that investors are not yet seeking the next multiyear recession and inflation that will remain above the Fed’s 2% target for some time.

“You haven’t seen the lowest level of risky assets,” he warned. “It will be a two-year course here.”

Effects of reopening China and advice for investors

The reopening of the Chinese economy is one of the main reasons Jensen worries about inflation next year.

Throughout 2022, Beijing’s strict COVID-zero policies 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 to roll back some Covid restrictions after a strict and extended lockdown sparked rare public protests across the country.

Reopening China “would be beneficial” for some countries, but for the United States and Europe that could be problematic, according to Jensen.

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

With the closure of factories and Chinese consumers, the demand for raw materials and commodities from China has decreased over the past few years. This helped keep inflation at bay.

Now, as China reopens, commodity prices are expected to rise, exacerbating inflation in the West once a recession hits.

Jensen said that would make central banks’ “dilemma” — fighting inflation even as a recession looms, stopping or cutting interest rates and dealing with rising inflation — worse.

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

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

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