Ray Dalio, Bob Prince and Greg Jensen, co-chief investment officers of Bridgewater Associates, warned in an April note that "stagflation is the big risk and the war in Ukraine has added to that".
The war has amplified "pre-existing pressures", with the largest impacts in commodities markets where Russia is a major supplier, they wrote.
"MP3 reflationary policies produced massive injections of money and credit into economies, leading to high nominal growth, leading to self-reinforcing inflation, leading to a tightening of monetary policy which is now just beginning. Stagflation is the big risk and the war in Ukraine has added to that," the note said.
Russia’s alignment with China has made the geopolitical conflict between the US and China worse, and other countries are increasingly being forced to choose sides, deepening and broadening the force of geopolitical conflict, the note said.
“The Fed and other central bankers face a challenging policy dilemma with a collection of uncertainties and risks as great as any since the 1970s,” the Bridgewater co-CIOs said.
The note said that there is an extreme asymmetry between the ability to tighten and the ability to ease. MP3 is no longer available until either economic growth or inflation is much lower, because the high level of inflation is producing political problems.
Recently, the US consumer price inflation surged to 8.5% year over year, the hottest since January 1982. Some economists expect inflation to rise even more going forward.
Last year, as it became clear that reflationary MP3 policies had produced a level of nominal spending growth that was far in excess of the capacity to produce, the natural result would likely be an increasing probability of a self-reinforcing inflation cycle, which would bring us to a transition in monetary policy from extremely stimulative to restrictive, the note said.