Ray Dalio Foresees an Economic Apocalypse As Market Sinks To New Lows – (Weekly Market Report)

s&p 500 9-19

US equities sank on Friday as investors digested new earnings data that painted an increasingly bleak image of the economy’s status. Last week Goldman Sachs announced job cuts, while General Electric acknowledged persistent supply chain concerns.

These troubling indicators from large US corporations and the Fed’s tightening monetary policy have heightened recessionary worries.

The Dow Jones Industrial Average plummeted by more than 3,000 points, or 9.34 percent, in the previous month.

The S&P 500 is on track for its worst yearly loss since the Great Recession of 2008.

Bears are running wild….

Inflation Reality & Fed Hikes

Many investors believed that US inflation had begun to fall, and the numbers for August demonstrated that it had not.

The gap between market enthusiasm and macroeconomic reality triggered an earthquake on Tuesday, with the S&P 500 dropping more than 4% and the Nasdaq dropping more than 5%.

The declining annualized rate of inflation, as measured by the Consumer Price Index, has been the narrative for the previous few months (CPI). The normal caution applies: CPI is a short-term assessment tool that does not reflect the real inflation rate.

Personally, I look at Truflation, which tracks actual costs in real time to give me a better idea of inflation.

The CPI annualized inflation rate declined from 9.1 percent in June to 8.3 percent in August, which is just part of the story. I’m most concerned with monthly inflation, which jumped 0.1 percent in August.

It may not appear to be much, but consider the context: Most prices are still growing, but dropping oil and gas costs are the sole reason we saw a 0.1 percent month-over-month increase.

My point is that inflation is far from over, and the Fed still has a long way to go. Since last year, the conventional wisdom has held that the Fed must undermine demand.

Inflation will not fall considerably unless we witness a prolonged reversal in property prices and higher unemployment.

Brack yourself; the stock market is setting up for a very RED October.

Ray Dalio Foresees an Economic Apocalypse

Ray Dalio, the founder of the Bridgewater Associates investment firm, mentioned last week in a LinkedIn post stated that the upcoming Federal Reserve interest rate rises would cause the stock market to fall by 20%.

“The process begins with inflation.” Then it moves on to interest rates, other markets, and the economy.”

“With inflation well above what people and central banks want (e.g. today’s CPI report showed a monthly change in the core CPI of 0.6 percent, which equates to an annualized rate of 7.4 percent) and the unemployment rate low (3.7 percent), it’s obvious that inflation is the targeted problem, so it’s obvious that the central banks should tighten monetary policy.”

Dalio predicted that the central bank would raise interest rates by another customary 75 basis points. That interest rate would conclude at 4.5 percent to 5%.

“As explained, it starts with what the inflation rate will be. Pick your number based on what you can see ahead. Right now, the markets are discounting inflation over the next 10 years of 2.6 percent in the US. My guesstimate is that it will be around 4.5 percent to 5 percent long term, barring shocks (e.g., worsening economic wars in Europe and Asia, or more droughts and floods) and significantly higher with shocks. In the near term, I expect inflation will fall slightly as past shocks resolve for some items (e.g., energy) and then will trend back up towards 4.5 percent to 5 percent over the medium term.”

Now, we can estimate what that rise in rates will mean for market prices and economic growth. The rise in interest rates will have two types of negative effects on asset prices: 1) the present value discount rate and 2) the decline in incomes produced by assets because of the weaker economy. We have to look at both. What are your estimates for these? I estimate that a rise in rates from where they are to about 4.5 percent will produce about a 20 percent negative impact on equity prices (on average, though greater for longer duration assets and less for shorter duration ones) based on the present value discount effect and about a 10 percent negative impact from declining incomes.”

Key Events, Market Movers & Calendar

  • Tuesday, September 20 – Building Permits (August)
  • Wednesday, September 21 – Fed Interest Rate Decision
  • Railroad Strike?

The market is also bracing for this week’s central bank policy meeting, likely resulting in a rate rise of at least 75 basis points. The yield on the 2-year US Treasury note increased to conclude the week, remaining near its 2007 peak.

There appears to be the possibility of a railroad strike in the coming weeks. Last week Biden announced that a deal had been reached; however, 1 union has voted against the deal. A strike could cause further supply disruptions and price increases.

RATES

In August, the revelation of higher-than-expected inflation in the United States pushed 10-year Treasury rates back to 3.47 percent. The 2-year yield has risen to 3.9 percent. An equally hostile ECB has served to elevate the stakes in Europe. Ten-year interest rates in Greece range from 4.25 percent to 1.03 percent in Switzerland. The Bund is currently at 1.77 percent, and the OAT is at 2.32 percent.

COMMODITIES

OIL

Investor mood is still affected by the current economic downturn and its influence on oil demand, notably in China. According to the International Energy Agency’s latest monthly market analysis, Chinese oil demand is predicted to decline by 420,000 barrels per day. As a result, oil prices are set to fall for the third week and are trading at year lows, with European Brent at USD 91 and US WTI at USD 84 per barrel.

In Europe, the European Union’s energy ministers are still working on a strategy to keep gas prices from rising. A ceiling on Russian gas prices was eventually abandoned in favor of a tax on super-profits made by oil firms and an energy-saving strategy for the coming winter.

GOLD & PRECIOUS METALS

The return of risk aversion dragged on copper, the global economy’s gauge, which fell this week to USD 7730. Aluminum performed better owing to supply-side concerns, as Chinese smelters may reduce output further due to energy shortages in several Chinese areas.

On the LME, aluminum is trading slightly above USD 2300. Gold fell below USD 1,700 per ounce in precious metals. The inflationary environment is obviously not helping Gold, which is being punished by the Federal Reserve’s tightening of monetary policy and the rise in bond yields that comes with it.

CRYPTOCURRENCY

Tuesday’s risk-ass setback wiped away last week’s rally in cryptocurrencies, and Bitcoin is trading below the USD 20,000 level once more. The last few days have been rough for Ether: this week’s critical technical shift on the Ethereum network went smoothly, but speculators opted to “sell the news” instead.

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