Ray Dalio sees Fed conceding to recession in their next Jackson Hole economic policy meeting on August 25-27.
Jackson Hole is where central bankers, policymakers, academics, and economists from around the world meet annually to discuss the economic issues, implications, and policy options. Inflation and the rapidly decelerating global economy is most likely going to be hot-button topics at this Jackson Hole meeting.
Consumers feel the pinch at the grocery store and the petrol pumps. Moreover, not a week goes by with a string of dismal economic data. The rate and pace of the economic slowdown have taken everyone by surprise. Demand has suddenly vanished.
“Consumers feel the pinch at the grocery store and the petrol pumps”
WEALTH TRAINING COMPANY
In early 2022 people were buying so much stuff, as lockdowns and pent-up demand led to shortages.
Fast forward five months, and retailers are struggling with the inverse of shortages, which is inventory bloat.
The post-pandemic pent-up demand did not trigger a boom, which many, including retailers banked on. So now Target and Amazon have realized they order too much stock.
Amazon’s total inventories increased 47%, compared to the same period last year. But the retail online giant North America net sales increased by just 8%. So Amazon is now looking to sublet and end its warehouse lease as online sales cool.
Target is also experiencing inventory bloat. So as retailers cut their orders with manufacturers, this is also likely to have downward pressure on inputs prices, such as energy and raw materials.
Perhaps the commodity boom could be over as the economic cycle contractionary phase begins.
“Fast forward five months, and retailers are struggling with the inverse of shortages, which is inventory bloat”
WEALTH TRAINING COMPANY
Ray Dalio sees Fed conceding to recession, and that comes as no surprise to regular readers of this blog and economic data watchers
We could be a few quarters away from the data confirmation of a recession.
Ray Dalio is now calling for central bank rate cuts in 2024.
The billionaire hedge fund manager said in his latest interview with Australian Financial Review that central banks across the globe will be required to cut interest rates in 2024 after periods of stagflation constrains their economy, now all but likely to enter a recession.
“We believe that we are in a tightening mode that can cause corrections or downward moves to many financial assets” – Ray Dalio
With a recession imminent, Ray Dalio believes central banks will concede to inflation and start easing again
“We believe that we are in a tightening mode that can cause corrections or downward moves to many financial assets,” Dalio, the founder of Bridgewater Associates LP, said in an interview with the newspaper. “The pain of that will become great, and that will force the central banks to ease again probably somewhere close to the next presidential elections in 2024.”
But Ray Dalio calling for central bank rate cuts in 2024 is nothing new.
Indeed, markets are pricing US rate cuts two years from now, and also in other developed economies, including the UK, according to futures.
Since the beginning of 2022, 60 monetary authorities have already raised borrowing costs with the aim of fighting inflation.
Energy and food prices have accelerated since the Russian-Ukrainian war. Approximately one quarter of the world’s soft commodities are supplied by Ukraine and Russia. Furthermore, with the main logistic ports in Ukraine blocked, mined, and too dangerous for commercial ships to navigate, world food stock supplies are dwindling. Transporting Ukrainian soft commodities by rail and road would increase the cost fourfold.
Sanctions on Russian gas have also cut world stock supplies sending prices spiraling for energy. So supply-side shocks due to war and sanctions have contributed to cost-push inflation. Moreover, as we have noted, which was later amplified by Fed chair Powell, the Fed has no tools to fight spiraling prices due to supply-side shocks.
Continuing a path of rate hikes could collapse the supply chains as logistics companies and retailers are highly leveraged. Higher costs for servicing debt could tip some companies into bankruptcy.
But for now, much of the focus is on the speed of the tightening as more than 60 monetary authorities have already raised borrowing costs in a bid to tackle accelerating inflation.
“It is a structural inflation situation that is going to produce stagflation,” Dalio told the AFR.
Even if a global recession is ultimately averted, stagflation could persist for several years, warned the World Bank in June. The Washington-based lender cut its forecasts for global growth and said the world economy could enter a period of stagflation reminiscent of the 1970s.
“As each week passes, we are getting further evidence of a slowdown which could be faster and steeper than many forecasted” – Wealth Training Company
Stagflation is stagnant economic growth plus high inflation and high unemployment.
In the short-medium terms, there may be no safe place to hide, bearing in mind that stocks and bonds perform poorly in an inflationary environment.
But that, of course, depends on what central banks do. After all, these are central bank driven markets.
So the takeaway from Ray Dalio sees Fed conceding to recession is that central banks will revert to easing in 2024.
Two years is a long time, bearing in mind just five months ago, in early 2022, the economy appeared to be entering a boom phase.
As each week passes, we are getting further evidence of a slowdown which could be faster and steeper than many forecasted.
In Europe, the widening peripheral bonds yields are again becoming an issue, and US bankruptcy filings are creeping back up in early 2022.
So the central bank’s next great pivot will probably come when the banks start feeling stressed from a recession. Rising bankruptcies in the US and another eurozone widening yields crisis in the peripheral countries suggest we could be here.
Ray Dalio sees Fed conceding to recession and easing in 2024, but it could also be sooner.
