Bridgewater Executive Says Markets Pricing In "Magical Scenario"
Comment of the Day

March 17 2022

Commentary by Eoin Treacy

Bridgewater Executive Says Markets Pricing In "Magical Scenario"

This article from Bloomberg may be of interest to subscribers. Here is a section:

stock and bond markets are betting on a “magical scenario” where economic expansion continues even while the Federal Reserve raises rates to combat inflation, said Bridgewater Associates executive Karen Karniol-Tambour. 

“If you look at history, that looks pretty unlikely,” Karniol-Tambour, the firm’s co-chief investment officer for sustainability, said Thursday in a Bloomberg Television interview.

She recommended that investors buy Treasury inflation-protected securities as well as commodities to hedge against rising prices and said nominal bonds are the “worst possible thing” investors can hold. 

Last month, Karniol-Tambour said the Fed would struggle to contain inflation even if it decided to raise rates five times this year. The central bank hiked by a quarter of a point Wednesday and signaled it would raise rates at each of its six remaining meetings this year. 

She added that current economic and financial conditions echo those of the 1970s, when high inflation was coupled with a geopolitical shock. 

“It’s just not pleasant to be in the Fed’s shoes and tighten into an exogenous supply shock in commodities that has to do with geopolitical events,” she said.

Eoin Treacy's view

If the Fed begins to reduce the size of its balance sheet next month at a faster pace than the last time they attempted it, deflation will follow. There have only been a couple of examples of central banks reducing the size of their balance sheets. Every one has resulted in deflationary fears and sharply lower growth.

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