Profit Sheets

Ray Dalio Warns: Stocks and Bonds will Fall More; Date the Recession

September 22, 2022 03:20 PM

By Laura Sanchez – European markets in the red on Thursday – {, , …- following losses on Wall Street and Asia after the by the U.S. Federal Reserve (Fed).

Bridgewater Associates founder Ray Dalio has issued a warning to anyone still holding out hope that asset prices that continue to fall will soon stop falling.

In Dalio’s estimation, the Fed must continue to raise

interest rates

substantially if it hopes to succeed in controlling inflation. Because of this and other factors such as the ongoing war in Ukraine, Dalio anticipates that stocks and bonds will continue to suffer as the U.S. economy is likely to fall into recession in 2023 or 2024.

“Right now, we’re very close to 0% a year. I think it’s going to get worse in 2023 and 2024, which has implications for the elections,” Dalio explains, in an interview with MarketWatch.

Fed Chairman Jerome Powell has promised that the central bank will do everything in its power to curb inflation, even if it collapses markets and the economy in the process. But to accomplish this, Dalio believes the Fed must raise benchmark interest rates to between 4% and 5%. 

“They need interest rates (short and long rates) up to about 4.5%, and it could be even higher than that level,” Dalio notes. Because the only way the Fed can successfully fight inflation is by doling out “economic pain.”

The Fed’s only way to successfully fight inflation is by doling out “economic pain.”


While Dalio said he expects stocks to suffer more losses, he noted that the bond market is a particular area of concern.

The problem, as Dalio sees it, is that the Fed is no longer monetizing debt issued by the federal government. In September, the Fed plans to double the pace at which Treasury and mortgage bonds will be coming off the central bank’s balance sheet.

“Who’s going to buy those bonds?” asks Dalio, before noting that China’s central bank and pension funds around the world are now less motivated to buy, in part because the real yield that bonds offer when adjusted for inflation has been substantially reduced.

When asked if “cash is still junk,” a characteristic comment Dalio has repeated on several occasions, he says that holding cash is still “a junk investment” because interest rates are still not high enough to fully offset the impact of inflation. However, the true utility of cash depends on “how it compares to others.”

“We are in this mode of ‘reducing financial assets,'” Dalio concludes.

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