- Ray Dalio, Jamie Dimon, and other market experts are deeply worried about the global economy.
- They fear stubborn inflation, surging unemployment, shrinking economies, and tumbling asset prices.
Several of the world's shrewdest investors, executives, academics, and analysts are sounding the alarm on the global economic outlook. They're warning that countries face a devastating combination of brutal inflation, shrinking output, plunging asset prices, and soaring unemployment.
They blame years of debt-fueled buying and borrowing, pandemic disruptions, and Russia's ongoing invasion of Ukraine. They also point the finger at misguided thinking from the central banks and governments in charge of shepherding the global economy.
The easy-money era
Freewheeling government spending and near-zero interest rates over the past decade have spurred people to rack up debt, "Dr. Doom" economist Nouriel Roubini has said. That easy money lifted the prices of stocks, houses, cryptocurrencies, and other assets to unsustainable highs, he believes.
The problem got worse during the pandemic, when authorities rushed to mail out stimulus checks, buy corporate bonds, and bail out struggling businesses, Roubini said.
Insatiable demand met widespread shortages as the COVID-19 virus choked production and disrupted supply chains, and that boosted inflation. Later, the Russia-Ukraine conflict led to cuts in oil and gas supply, and rises in energy prices — which drove food and fuel prices higher, darkening the outlook for European growth.
The upshot? US inflation spiked to a 40-year high of 9.1% in June. The Federal Reserve responded by hiking interest rates from virtually zero in March to a range of 3% and 3.25% today, and has signaled they could approach 5% next year.
Currency swings and market mayhem
The Fed's aggressive hikes and a robust US economy have propeled the US dollar to a 20-year high, as investors swap their pounds and yen for greenbacks in pursuit of larger returns.
Goldman Sachs' Kamakshya Trivedi recently explained why that's a problem. The dollar's breathless rise has put pressure on other central banks to shore up their currencies by hiking rates too — even if their country has tougher economic challenges or lower inflation than the US, he said.
Its strength is causing debt crises in Sri Lanka, Pakistan, and other vulnerable developing countries with large amounts of dollar-denominated debt, Goldman's head of global foreign-exchange research noted.
Trivedi emphasized the dollar's gains are reflected in falls for rival currencies. The British pound recently tanked after the new UK government unveiled tax cuts that threaten to drive up inflation and the national debt.
The yields on long-dated UK government bonds (gilts) also soared. That spurred the Bank of England to launch and repeatedly expand an emergency bond-buying program, as it feared a credit crunch and the potential collapse of UK pension funds.
Economic woes in Europe and China
Europe is similarly under the cosh. People there are bracing for an energy crisis this winter, while worries grow about a prolonged recession and the political and fiscal impact of the Russia-Ukraine war.
Meanwhile, the continent's big banks like Credit Suisse have been forced to defend their solidity, fanning fears of a Lehman Brothers-style collapse that could spark a financial crisis.
"The euro, are you kidding me?" Ray Dalio said this week. "We can go on about Europe's situation. Wow. Oh my God."
The Bridgewater Associates founder also sounded the alarm on another key global player — China.
"China has a debt crisis they've allowed to go too far into the bones of the economy," he said, singling out its heavily leveraged real estate sector.
The billionaire investor underscored the supply disruptions caused by the country's ongoing lockdowns in response to virus breakouts.
The US may be in a better position, but its economy still faces a grim future. The country is "the center of a financial bubble" and "most at risk from liquidity being pulled," Bridgewater co-chief investor Greg Jensen recently said.
Jensen expects a tumble in US asset prices, stubborn inflation, slower growth, and a deep, prolonged recession.
A gloomy global outlook
These challenges mean that if the Fed raises rates too high, it "would slay inflation, but create a global depression," Bill Gross has warned.
"Recent events in the UK, cracks in the Chinese property-based economy, war and a natural-gas freeze in Europe, and a super-strong dollar accelerating inflation in emerging-market economies, point to the conclusion that today's 2022 global economy in no way resembles Volcker's in 1979," the billionaire cofounder of bond giant Pimco recently said.
Gross was suggesting the remedies of the 1980s won't work today — Paul Volcker is a former Fed chair who conquered runaway US inflation in that decade.
Another Wall Street heavyweight, JPMorgan CEO Jamie Dimon, has underscored the likely global fallout from mounting pressures. He has said those forces will likely plunge the US economy into a recession within the next nine months.
Roubini has gone even further, saying the global stage is set for "the mother of stagflationary debt crises over the next few years." He was referring to economies shrinking for several quarters, battling stubborn inflation, and suffering higher unemployment.
The economics professor at NYU Stern also said central banks are "damned if they do and damned if they don't," as they could trigger a wave of defaults and crush economic growth if they tighten their policies further, but might face double-digit inflation if they maintain their easy-money approach.
Government debt
David Einhorn echoed that sentiment this week, noting that governments are already highly leveraged and may struggle to service their debts, finance bailouts, and shore up their economies if markets crash and a global recession takes hold.
"The systemic risks have built up in the government bond markets all around the world," the Greenlight Capital boss said. "When you have a down cycle is when these things tend to metastasize."