Assets could fall another 20% to 25% as the Federal Reserve's drive to tame inflation with tightening hasn't been fully priced in yet, Bridgewater co-Chief Investment Officer Greg Jensen told Bloomberg TV.
Market conditions still reflect assumptions that inflation will slow dramatically toward the Fed's 2% target in the next 18-24 months amid a stable economy and earnings landscape, he said.
But reality will eventually set it, with inflation being more stubborn, the Fed tightening for longer.
Markets still have significant ground to cover to bring the real economy closer to the financial economy, which could mean a steeper downturn in the future, Jensen said.
“We're still something like 25% [to] 30% above the normal relationship between cash flows and asset prices, which means there's a significant decline to come to kind of align the real economy with the financial economy,” he said.
Markets are seemingly in a secular wave of “de-financialization” and “de-globalization”, Jensen added. Meanwhile, labor is growing as a share of the economy, meaning corporate profits will then need to fall as the economy slows.
As the real economy and financial economy converge, prices for stocks and bonds will reflect a big downward trend.
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