Ray Dalio Expects Interest Rates Over 4.5% and Stocks Down 20%

Ray Dalio, founder of Bridgewater on Tuesday penned on his LinkedIn a bearish outcome for the US economy and with it stocks and bonds after August’s U.S. CPI came in much hotter than expected. Core CPI rose to 6.3% y/y vs 6.1% expected and 5.9% prior. “It looks like interest rates will have to rise a lot (toward the higher end of the 4.5% to 6% range) … The process starts with inflation. Then it goes to interest rates, then to other markets, and then to the economy.” Dalio wrote

Ray Dalio Blog

It Starts with Inflation: How Inflation, Interest Rates, Markets, and Economic Growth Relate to Each Other and What That Means for What’s Ahead – Ray Dalio

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.

Ray Dalio

Highlights

  • My guesstimate (on inflation) is that it will be around 4.5 percent to 5 percent long term, barring shocks (e.g., worsening economic wars in Europe and Asia, or more droughts and floods) and significantly higher with shocks.
  • It looks like interest rates will have to rise a lot (toward the higher end of the 4.5% to 6% range)”
  • This will bring private sector credit growth down, which will bring private sector spending and, hence, the economy down with it.
  • What’s your guesstimate? Mine is that the yield curve will be relatively flat until there is an unacceptable negative effect on the economy.
  • 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
Stocks Wrecked after Hot U.S. August Inflation with Food, Electricity and Rent Prices Soaring

Now, we can estimate what that rise in rates will mean for market prices and economic growth.

The rise in interest rates will have two types of negative effects on asset prices:

  • The present value discount rate and
  • The decline in incomes produced by assets because of the weaker economy. We have to look at both.

What are your estimates for these? 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’s Conclusion

The upshot is that 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.

Source: Ray Dalio LinkedIn

From The TradersCommunity Research Desk