Don't celebrate the death of inflation yet, Bridgewater's co-chief investor warns
- Investors may be prematurely celebrating the end of inflation, Bridgewater's Bob Prince says.
- The hedge fund's co-chief investor expects stubborn price growth, and the Fed to keep rates high.
Reports of inflation's death are greatly exaggerated, the co-chief investor of the world's largest hedge fund says.
"Inflation has come down but it is still too high, and it is probably going to level out where it is," Bob Prince of Bridgewater Associates told the Financial Times. "We're likely to be stuck around this level of inflation."
Over the last 12 months, price growth has slowed from a 40-year high of 9.1% to a two-year low of 3%, which isn't far off the Federal Reserve's 2% target. The US central bank has raised interest rates from almost zero to north of 5% since last spring to achieve that result.
With the inflation threat receding, investors anticipate the Fed will begin cutting rates soon, providing a boost to asset prices and economic growth. As a result, they've piled into stocks in recent weeks, and futures markets are pricing in a bunch of rate reductions by the end of next year.
However, Prince predicted that core inflation (which excludes volatile food and energy prices) will remain elevated, and the Fed will defy expectations and keep rates around their current level. He also raised the prospect of prices surging again, and suggested that holding cash might be a shrewd way to weather the upcoming volatility.
"The big risk right now is that you get a bounce in energy prices when wages are still strong," he said. "It's just not a good environment to be holding assets generally in bonds or stocks."
One of Prince's two co-chiefs, Greg Jensen, struck a similar note in May. He warned that inflation might remain higher than investors expect, and cautioned that could weigh on stocks and bonds and potentially trigger a recession.
Ray Dalio, Bridgewater's billionaire founder, also issued a bearish outlook during a recent appearance. He flagged the risk of a "balance-sheet recession," where consumption and investment fall because households and businesses are spending more of their income repaying their debts. "Things are going to get worse in the economy," he said.