Dalio’s Magic Number for Tanking the Economy

What will it take for the Federal Reserve to contract the economy, in the central bank’s quest to conquer high inflation? Ray Dalio, the founder of hedge fund colossus Bridgewater Associates, has a number: a federal funds rate of 4.5% to 6%.

The billionaire Wall Street kingpin wrote in a LinkedIn post that “interest rates will have to rise a lot (toward the higher end of the 4.5% to 6% range).” Such a hike “will bring private sector credit growth down, which will bring private sector spending and, hence, the economy, down with it.” Collateral damage: The already suffering stock market would lose another 20%, he opined.

Dalio indicated that he expects “that the inflation rate will stay significantly above what people and the Fed want it to be (while the year-over-year inflation rate will fall), that interest rates will go up, that other markets will go down.”

Right now, the benchmark Fed rate is in a band from 2.25% to 2.50%. Inflation has fallen a bit, but still is torrid, with the Consumer Price Index rising 8.3% in August on an annual basis, just a small dip from the month before. Wall Street had hoped for inflation to drop more, and the August CPI news, released earlier this week, sent the market plummeting: The S&P 500 fell 4.3% on Tuesday, its worst day since June. Thus far this year, the index has fallen 18%.

The futures market believes that the benchmark rate will hit Dalio’s 4.5% level by the March 2023 Fed policymaking committee meeting. The betting is that next Wednesday’s Fed session will bring a 0.75 percentage point hike in the rate, to a range of 3.0% to 3.25%.

Some think that the central bank could boost its federal funds rate a full percentage point next week, but the overall Wall Street consensus doesn’t buy that prediction. “Good drivers don’t increase their speed as they get closer to their destination,” remarked Michael Feroli, chief U.S. economist at JPMorgan, in a note to clients.

Dalio’s downbeat take is echoed by strategists who expect that that the stock market will suffer some more as bad news continues. Gene Goldman, CIO of Cetera Investment Management, contended in a statement that market volatility will persist as investors try to predict future economic indicators and the Fed’s response.

In the view of Bank of America Securities, the “risks of a hard landing are rising. This will likely come through projections that show less growth, higher unemployment and a more restrictive policy rate stance.”

The pace of negative economic news is the key, according to Bill Adams, chief economist for Comerica Bank. After the September Fed meeting, he said in a note, the central bank’s actions “will depend on how quickly a softer economy translates into a softer labor market. So far this process has been quite gradual, with the unemployment rate up just two tenths of a percent after returning to a half-century low in July.”

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The Market Slips Due to Fed Signals, Yet Again

Tags: Bridgewater Associates, CPI, Economy, fed funds rate, Federal Reserve, Inflation, Interest Rates, Ray Dalio, S&P 500, Stock Market

Asset manager Janus Henderson is being sued by one of its retirement plan participants, who alleges that the company breached its fiduciary duty by loading its 401(k) plan with poorly performing proprietary funds burdened by high fees.

According to a complaint filed in the U.S. District Court for the District of Colorado by Sandra Schissler, a participant in Janus Henderson’s retirement plan since 2012, the plan’s fiduciaries violated the Employee Retirement Income Security Act by not acting prudently or in the interest of plan participants and beneficiaries. During the class period, which is from 2016 through the end of 2021, the 401(k) plan had between 1,700 and 1,900 participants and approximately $246 million to $512 million in assets.

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“For investment management companies (like Janus Henderson), the potential for disloyal and imprudent conduct is especially high because the plan’s fiduciaries can benefit the company by stocking the plan’s investment menu with proprietary funds that a non-conflicted and objective fiduciary would not choose,” says the complaint.

The lawsuit alleges that rather than acting in the plan participants’ best interest, Janus Henderson used the plan to promote its proprietary investments to earn profits for the firm. According to the complaint, as of the end of 2021 the plan’s menu consisted of 50 investments, 40 of which were Janus Henderson Funds. It also alleges that the Janus Henderson Funds charged higher fees relative to nonproprietary alternatives selected by similarly sized plans. The lawsuit claims that annual investment fees paid by plan participants were at least 0.45% to 0.50% of total plan assets, which it says is “consistently higher” than the figure for the average 401(k) plan of similar size.

“An objective and prudent review of comparable investments in the marketplace would have revealed numerous available investments that were less costly and superior to the Janus Henderson Funds,” says the complaint. “While defendants’ disloyal and imprudent conduct generated significant profits for Janus Henderson, it has cost participants millions of dollars in excessive fees and lost investment returns.”

The lawsuit acknowledges that merely including proprietary funds in a plan’s investment menu is not a breach of fiduciary duty. However, it says that “based on defendants’ retention of proprietary funds over less expensive, superior nonproprietary funds, it is reasonable to infer that defendants’ process for selecting and monitoring the Janus Henderson funds was disloyal and imprudent.”