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An Update from Our CIOs: Transitioning to Stagflation

@EQUITYMATES|18 August, 2022

Bridgewater is the world’s biggest hedge fund. Founded by Ray Dalio in 1975, the asset manager now manages $140 billion. In this recent update from their joint-Chief Investment Officers they share their view on the macro landscape and the risk that global economy is heading towards stagflation.

Stagflation is a situation in the economy where inflation is high, economic growth is low and unemployment is high. It is the nightmare scenario for policy makers because actions to lower inflation may further increase unemployment and vice versa. Bridgewater’s CIOs believe that markets are not ready for this. They write that markets believe a rise in short-term interest rates to around 3% and a contraction of Central Bank balance sheets will bring inflation down to a manageable level. Bridgewater think this is incorrect. Instead they believe that there will be a tightening cycle (what we’re going through now) followed by a pause and then a second tightening cycle (one they don’t think markets are prepared for).

The reason for this is, to get inflation under control there will need to be some economic pain. As the CIOs write,

“Thus, the degree and duration of the tightening must be strong enough and long-lasting enough to bring credit growth down by enough (roughly by half) for long enough—to bring spending down by enough for long enough—to weaken labor markets by enough—to bring wages down by enough—that NGDP [nominal GDP] growth falls by enough and stays there—to bring inflation down to 2.5%”

If Bridgewater are right, the key takeaway is, there is plenty more pain ahead. Interest rates will go higher, unemployment will need to rise and markets will fall further. But that is the key word – if – because plenty of investors (as well as the general market consensus) disagree with them. Only time will tell.


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