US is on the cusp of stagflation, markets haven’t caught on yet: Bridgewater

  • The US economy is on the verge of stagflation and has yet to be fully priced in by investors, Bridgewater said.
  • The hedge fund’s co-CIO, Bob Prince, told Bloomberg TV that markets are being too optimistic about reducing inflation.
  • Fears about the economy are growing on Wall Street, with analysts increasingly talking of a recession.

The US economy is on the verge of stagflation and markets have yet to fully respond, according to the co-chief investment officer of Bridgewater Associates, the world’s largest hedge fund.

Bob Prince told Bloomberg TV on Tuesday that investors are being too optimistic about the path of inflation and rates.

Asked if he thinks stagflation will hit the US, Prince said, “We’re on the cusp, yes.”

Stagflation is a dreaded combination of high inflation and low growth. Inflation is at its highest point in 40 years in the US, and while growth is still holding up, many economists expect it to slow as the Federal Reserve raises interest rates to cool prices.

Prince said the United States is currently experiencing “monetary inflation.” He said huge stimulus injections from the government and the Federal Reserve during the pandemic had boosted spending, but said this was now driving up prices rather than contributing to real growth in the economy.

He said the bond market showed investors were being too optimistic about inflation, with longer-dated bonds priced as if inflation cooled off sharply.

“Markets are underestimating the inflation picture. Sustainability, self-reinforcing inflation is not ruled out. Degree of tightening over time is not ruled out,” he told Bloomberg at the World Economic Forum in Davos, Switzerland.

On the plus side, Prince said that US banks are now much safer than in the past.

“The banking system is not leveraged,” he said, adding that the stimulus helped banks become less risky because they put the money in safe assets like US Treasuries.

Although the predictions of a


are getting stronger, many on Wall Street think fears of a serious slowdown are overblown.

JPMorgan boss Jamie Dimon said the US economy remains strong and consumers have plenty of savings that should protect them if a recession strikes.

Read more: Buy these 11 undervalued stocks that squashed earnings forecasts even as fears of a market downturn continue to intensify, according to Morningstar

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