Bob Prince from Bridgewater - 2022 Was a Tightening Year; In 2023 We Will See Its Effects
Latest CIOs update from Bridgewater Associates:
"The dominant driver of markets last year was the historically large and rapid rise in interest rates. This year, the major story is likely to be the impact of higher rates as the tightening flows through to economic conditions."
"We see a number of changes that must occur for inflation to rest sustainably near the 2% level, most of which are not priced in.
Nominal spending growth must fall back to the range of 3-5%, as it was during the past couple of decades when inflation oscillated around central bank targets. But that will not be enough on its own.
To achieve sustainable equilibriums, you need that level of nominal spending growth while at the same time having near-target real growth rates. That requires wage inflation to move back into the 1-3% range, similar to the past few decades.
Given nominal spending growth of 3-5% and wage inflation around 2%, it is possible to achieve the dual mandate of full employment with stable prices; i.e., at-potential real GDP growth, at-potential output, and near-target 2% inflation.
But given the current starting point, restoring equilibrium conditions will require an extended adjustment period of low nominal spending growth, negative real growth, and rising unemployment.
Back of the envelope, that implies at least a 2% rise in unemployment sustained over a long enough period of time to adjust the supply/demand balance for labor, a 2% decline in real GDP, and about a 20% decline in operating earnings as an inducement for the necessary layoffs."