The US is on the cusp of stagflation and markets are yet to fully realize, hedge fund giant Bridgewater says

• The US economy is on the cusp of stagflation and investors are yet to fully price it in, Bridgewater has said.
• The hedge fund's co-CIO, Bob Prince, told Bloomberg TV that markets are being too optimistic about inflation coming down.

The US economy is on the cusp of stagflation and markets are yet to fully respond, according to the co-chief investment officer of Bridgewater Associates, the world's biggest hedge fund.

Bob Prince told Bloomberg TV on Tuesday investors are being too optimistic about the path for inflation and rates.

When asked if he thinks stagflation will hit the US, Prince said: "We're on the cusp of it, yeah."

Stagflation is a dreaded combination of high inflation and low growth. Inflation is running at its hottest for 40 years in the US, and although growth is still holding up, many economists expect it to slow as the Fed raises interest rates to cool prices.

Prince said the US is currently experiencing a "monetary inflation." He said the huge injections of stimulus from the government and the Fed during the pandemic had boosted spending, but he said this was now pushing up prices rather than adding to real growth in the economy.

He said the bond market showed investors were being too optimistic about inflation, with longer-dated bonds priced as though inflation will cool sharply.

"The markets are under-discounting the inflation picture. The sustainability, the self-reinforcing of the inflation is not discounted. The degree of tightening over time is not discounted," he told Bloomberg at the World Economic Forum in Davos, Switzerland.

On the plus side, Prince said US banks are now far safer than they have been in the past.

"The banking system is not leveraged," he said, adding that the stimulus had helped banks become less risky because they'd invested the money in safe assets such as US Treasuries.

Although predictions of a recession are growing louder, many on Wall Street think fears of a serious slowdown are overblown.

JPMorgan boss Jamie Dimon said the US economy is still strong and that consumers have plenty of savings which should cushion them if a recession were to happen.

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