For those who believe that the stock market, bonds and other investments in the stock market and risk assets will recover soon, I am sorry to tell you that – in addition to our analysis in Top Money Report-, even Wall Street investment gurus have bad news for you: The prices of those assets will continue to fall.
For example, the founder of Bridgewater Associates, Ray Dalio, believes that there is a cocktail of elements that will continue to put pressure on the prices of risk assets, being the monetary policy of the Federal Reserve (interest rate hikes) and the war in Ukraine the most important ones, which would push the US economy into a recession in 2023 or 2024.
During an interview with MarketWatch, Dalio anticipated that The Fed will raise benchmark interest rates to between 4 and 5 percent to curb inflation in the United States, which would cause an additional 20 percent market decline. Now that the Fed has made its third hike of 75 basis points, the upper limit of its interest rate target range has risen above 3 percent for the first time.
For Dalio, the only way the Fed can successfully fight inflation is by creating “economic pain,” and he’s right. Using some of the most basic principles of corporate finance, he explained why rising interest rates are a curse on financial assets, as well as real assets like real estate.
Simply put, when Fed rates rise, investors must increase the discount rate they use to determine the present value of future cash flows, or interest payments, tied to a given stock or bond. Since rising interest rates and inflation are a tax on these future income streams, investors often compensate by assigning a lower valuation to those assets.
Although Dalio expects stocks to suffer more losses, he pointed out that the bond market is where there is more concern, since the problem is that the Fed is no longer monetizing the debt issued by the federal government (that is, it is no longer buying expensive bonds). to “print” and massively inject dollars into the economy). In September, the Federal Reserve is scheduled to double the rate at which Treasuries and mortgage bonds will roll off the central bank’s balance sheet, meaning that the “shortage” of dollars will worsen around the world.
And if that was not enough, the Chinese central bank and pension funds around the globe are now less motivated to buy, in part because the real return offered by bonds when adjusted for inflation has fallen significantly. Now not only are there negative real yields on bonds, but they continue to decline in real terms. It is worth noting that even with the rate hike, the Fed’s benchmark rate itself is lower than inflation.
Another big investor who agrees with Dalio is Jeff Gundlach, founder of DoubleLine Capital, who believes that ehe S&P500 stock index could plummet to around 3,000 pointsthat is, a drop of 20 to 25 percent from current levels.
From his point of view, investors should start to be more bearish in their forecasts, since the bond and stock markets are reflecting the economic weakness and the problems of the slowing economy in general.
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Pessimism reigns not only among the “gurus”
According to the results of Bank of America’s Global Fund Manager Survey for September, investors are increasingly pessimistic, with the vast majority seeing profits falling next year.
Of the 240 fund managers surveyed, who oversee a total of $695 billion in assets, 92 percent expect earnings in global markets to decline over the next month, well up from 72 percent in the August survey. . This places pessimism at the highest level since October 2008, that is, after the outbreak of the financial crisis of that time that led to the “Great Recession” of 2009.
When asked how they see the world economy trending in the next 12 months, 92 percent said they expected stagflation (status of economic stagnation with high inflation), above 90 percent in August and the highest percentage in the history of the survey.
To leave no room for doubt: we are witnessing what will perhaps be the worst “bear” market (bear market) in history, and when everything sinks, the only thing left to do is hold on to safe haven assets that, after an initial fall that they also tend to suffer at the beginning, they will inflate into bubble. Pay special attention to gold, silver and the dollar in Mexican pesos, which are all at historic buying opportunity prices that will not last long.
Editor’s note: This text belongs to our Opinion section and reflects only the author’s vision, not necessarily the High Level point of view.
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William Beard Master in Economics from the Austrian School; liberal, gold market specialist and editor of the investment newsletter Top Money Report