Welcome to our #131 weekly newsletter.
“For women taking control of their financial future”
-Jana Hlistova
From The Purse
In this week’s newsletter, we highlight Ray Dalio’s Linkedin post where he calculates that the US Federal Reserve will have to raise interest rates to at least 4.5% in order to get inflation under control. This will have an impact on equities and the economy.
Meanwhile economists believe that Europe and the UK will tip into a recession in Q4 of this year. The Bank of England (BoE) is expected to announce yet another interest rate hike this week to 2.25-2.5%.
Don’t forget to listen to The Purse Podcast interview with Anna Poberezhna. She is a sustainable development and technology entrepreneur and the founder of ClearHub. We talk about cleantech, regenerative economies and investing for net positive outcomes.
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And you can review the news in brief so you stay on top of global financial, economic and investing trends.
I hope you enjoy this week’s newsletter.
Until next week,
Jana
Ray Dalio: rising interest rates and its impact on US equities and the economy
Are investors too complacent about inflation?
Ray Dalio, the billionaire founder of Bridgewater Associates LP, on Tuesday shared a gloomy outlook for US equities and the economy on Linkedin.
Inflation continues to rise and according to Dalio ‘..it looks like interest rates will have to rise a lot (toward the higher end of the 4.5% to 6% range)…This will bring private sector credit growth down, which will bring private sector spending and, hence, the economy down with it.’
An increase in rates to 4.5% (from the current range of 2.25% to 2.5%) ‘would lead to a plunge of around 20% in equity prices based on the present value discount effect’. In addition to that, Dalio estimates a 10% negative impact from declining incomes.
Dalio also stated that investors may be too complacent about long-term inflation. Bond traders are expecting an average annual inflation rate of 2.6% over the next decade, but he estimates that inflation will rise to around 4.5% to 5%. And with economic shocks, it may be even significantly higher.
As reported by Bloomberg, investors who are speculating that the Fed will tip the economy into recession next year in the fight to curb inflation, already see policy makers easing rates in the later stages of 2023.
Meanwhile, Europe and the UK is expected to tip into recession in Q4 (Oct-Dec), according to some economists, as per the Financial Times.
On Wednesday this week, the market is pricing in the Bank of England (BoE) raising interest rates by 0.5%-0.75% in the UK. This will take the base rate from 1.75% to 2.25% or 2.5% respectively, matching the Fed.
Sterling has been one of the worst performing major currencies this year as investors are anxious about inflation, the economic outlook, and political uncertainty.
And the S&P 500 is heading for its biggest annual loss since 2008, while Treasuries have suffered one of their worst beatings in decades, as reported by Bloomberg.
What next? (Re) Listen to:
Rising inflation and the cost of living crisis on The Purse Podcast with Shaun Richards
Inflation, stagflation and are we headed for a recession on The Purse Podcast with Vicky Pryce
News in Brief
Financial news
Fed to keep interest rates above 4% beyond 2023, economists predict. FT-IGM Survey forecasts central bank will prolong its aggressive campaign against decades-high inflation.
US inflation shows persistent US retail inflation with acceleration at August core. Headline drops less than forecast to 8.3%, while Core CPI rose to 6.3%.
Markets roiled by inflation leave investors with nowhere to hide: S&P 500 tumbled 5% this week, down 18% ytd. BBG commodity index has plunged 3% since Tuesday. Treasury yields climbed, pushing US government debt to loss of >11% year to date, worst since BBG index starts in 1973.
Tech selloff on Tueday has been particularly costly for Apple. World’s most-valuable comp lost $154bn in market value - a wipeout that ranks among top 10 worst single-day market value losses in US stock market history. That’s more than market cap of ~90% of S&P 500 comps.
Nasdaq 100 plunges 5.8% for worst week since January as investors learn that there is such a thing as time value of money.
To put things into perspective: in a high-inflationary world, gold has now fallen into a bear market. The bullion price falls with the rise in real interest rates.
UK consumer price index (CPI) inflation fell to 9.9% in the 12 months to August, according to the Office for National Statistics (ONS) on Wednesday.
FTSE 100 hit by growth concerns as the pound sinks as UK retail sales crumble. Concerns that the UK is headed for a recession intensifies.
30 years after the Pound was forced out of the European Monetary Mechanism, UK currency slides to its weakest level in almost four decades as mounting evidence of a UK recession combines with rising Dollar. The Pound has fallen around 16% this year.
US mortgage rates top 6% for the first time since the 2008 Great Financial Crisis. A year ago, they were less than half that. For home buyers, that can add up to hundreds more dollars on monthly payments.
Crypto: bitcoin, ethereum, DeFi & NFTs
The Ethereum network smoothly transitioned to proof-of-stake, but its native cryptocurrency depreciated more than most leading coins. ETH is trading at circa $1,426, down 17% over the last seven days. It took the biggest losses among the top thirty cryptocurrencies by market capitalisation this week. (Read more: What the merge means).
After Ethereum, the second biggest losses—of a little over 10%—were posted by Near Protocol (NEAR), which trades at $4.24; Avalanche dropped to $18.06, and Polkadot fell to $6.87, all of which are so-called “Ethereum killers," aka layer-1 blockchains with high-functionality smart contracts.
Market leader Bitcoin (BTC) also fell this week. BTC is trading approximately is trading 7% lower than it was last week, hovering at $20,000 at the time of writing.
ETH staking could trigger securities laws. Staking is 1 of 2 ways in which crypto networks verify transactions. It allows investors to lock up their tokens for specified amount of time to receive bond-like return. Issuers stocks & bonds required to disclosures with SEC since 1930s.
Following U.S. President Biden’s executive order, the White House published a framework for CBDC development and strict regulation of the ecosystem.
The Purse Podcast
We cover the following in our conversation:
Cleantech & why should we care?
Underlying values & principles in the industry
Regenerative economies
Investing for net positive outcomes
And more
Please enjoy! Listen on Apple Podcasts and Spotify+
Coffee Break? Read This
We’d love to hear from you. Get in touch with Jana via the The Purse website or tweet @jointhepurse and @janicka.
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