Bridgewater Associates co-CIO Bob Prince said on Tuesday he believes the economy is “on the cusp of” stagflation during an interview at the World Economic Forum in Davos, Switzerland.
The term “stagflation” refers to sluggish economic growth coupled with high inflation — and is especially characteristic of the economy of the late 1970s, in which an oil shock that occurred under the leadership of President Jimmy Carter induced a recession amid rising price levels.
When asked by Bloomberg TV if he believes stagflation will hit the United States, Prince responded “we’re on the cusp of it” — and argued that the bond market has not properly recognized the threat. After being pressed on the timing of the stagflation, Prince appeared to avoid making a prediction.
“The markets are under-discounting the inflation picture,” Prince explained during the interview. “The sustainability, the self-reinforcing of the inflation is not discounted. The degree of tightening over time is not discounted.”
However, Prince said that the banking system has the most “low-risk asset portfolio in ages” because newly-printed money led to higher deposits, which banks used for stable investments such as Treasury bonds.
“Even if the Fed tightens, the banking system can sustain the flow of credit into the economy, and household balance sheets are much better than they’ve been in decades,” Prince remarked.
In an effort to curb inflation, the Fed increased interest rates by a half-point earlier this month — which marked the largest rate hike since May 2000 and followed a quarter-point increase from near-zero levels two months ago.
Alongside Prince, other investors — including Pershing Square Capital Management CEO Bill Ackman — are wary about soaring inflation. “If the Fed doesn’t do its job, the market will do the Fed’s job, and that is what is happening now,” Ackman argued on Tuesday.
“The only way to stop today’s raging inflation is with aggressive monetary tightening or with a collapse in the economy,” Ackman continued. “There is no prospect for a material reduction in inflation unless the Fed aggressively raises rates, or the stock market crashes, catalyzing an economic collapse and demand destruction.”
Though a stock market crash is by no means desirable, an aggressive rate hike would increase the cost of borrowing money — likely slowing economic activity as a result.
Ackman condemned “various current and former Fed members” refraining from an aggressive stance on inflation over the past few days. Atlanta Fed President Raphael Bostic affirmed on Tuesday, for example, that the central bank should exercise caution while raising rates.
“The Fed has already lost credibility for its misread and late pivot on inflation,” Ackman asserted. “Current Fed policy and guidance are setting us up for double-digit sustained inflation that can only be forestalled by a market collapse or a massive increase in rates.”
Meanwhile, President Joe Biden is portraying optimism about the state of the economy. During a press conference earlier this week, a reporter pressed Biden on “record-high inflation” and “enormously high gas prices” in the United States.
“Should Americans be prepared for a recession? In your view, is a recession in the United States inevitable?” the reporter asked. Biden replied “no” before listing gains in employment and a handful of large foreign projects in the United States, among other phenomena.