Economists, analysts, and market participants are divided on whether the U.S. is headed for a recession but the world’s biggest hedge fund is betting that the U.S. is the epicenter of a global financial bubble, making it the country most at risk for a crushing recession when the bubble bursts.
Greg Jensen, co-chief investor of Bridgewater Associates, predicted that asset prices won’t bounce back to pre-pandemic highs. He spoke Monday, Sept. 12 at the SALT hedge fund conference in New York.
Bridgewater was founded in 1975 by Ray Dalio, whose real time net worth is $19.1 billion. Bridgewater manages $154 billion.
The hedge fund’s co-CIO warned that investors are overestimating the Federal Reserve’s ability to curb inflation, meaning current market prices understate the risk of a deep, broad, and lengthy recession, Reuters reported.
“The biggest mistake right now is the belief we’re going to return to essentially prices similar to the pre-covid (period),” Jensen said.
In August, Jensen estimated that asset prices were as much as 30 percent higher than they should be, based on their historical relationship to corporate cash flows. He predicted asset prices would fall as much as 25 percent as a result.
Bridgewater has much to gain if the prediction comes true.
The company can create profits for its clients amid the market downturn by shorting or betting against the stocks of select companies, Jensen noted, according to Fortune. The hedge fund shorted 28 European companies for a total of up to $10.5 billion in June, according to Bloomberg data. But it cut its disclosed short positions on European firms to $845 million in August.
In 2018, Bridgewater founder Dalio changed ownership of his hedge fund to a partnership and gave employees more of a stake in the firm. Dalio has given about $1 billion to philanthropic causes. His Dalio Foundation has supported inner-city education and microfinance.
In May, Dalio predicted that the Federal Reserve wouldn’t be able to raise interest rates high enough to offset inflation, resulting in negative real returns for stock portfolios.
In June, the billionaire investor warned that Fed’s interest rate hikes could lead to stagflation – an economic condition marked by high inflation, but without the robust economic growth and employment that usually come with it.
A Reuters poll of economists in late August showed how divided respondents are when it comes to a recession. Respondents put the chance of a U.S. recession within a year at 45 percent. Most said it would be short and shallow. A Bloomberg survey put the probability of a recession at 47.5 percent.
Nobel Prize-winning economist Richard Thaler said he doesn’t see “anything that resembles a recession” in the U.S. and he cited recent low unemployment, high job vacancies, and the fact that the economy is growing — just not as fast — as proof.
Steen Jakobsen, chief investment officer at Saxo Bank, told CNBC that the U.S. is not heading for a recession in nominal terms, even if it is in real terms.
Technically, the U.S. was in a recession after its real gross domestic product (GDP)—the most-watched indicator of economic activity—contracted for two consecutive quarters in the first half of 2022. However, the continued strength in the job market is helping to hold back an official declaration.
Recessions in the U.S. are officially called by the National Bureau of Economic Research (NBER), “which likely won’t make a judgment on the period in question for some time,” CNBC reported.
In calling a recession, the NBER looks at the labor market, unemployment, real income for households, real spending and industrial production. Those variables aren’t giving clear recession signals, said William Foster, senior credit officer at Moody’s, in a phone interview with CNBC.
Predicting a recession is not easy when the economic performance of a highly developed country such as the U.S. depends heavily on external factors, according to Alexander Nutzenadel, professor of social and economic history at the Humboldt University of Berlin.
“We live in a period of multiple shocks – from Covid 19 over energy prices to political deglobalization – which make predictions extremely difficult,” Nutzenadel told CNBC.