Ray Dalio has little positive to say about what’s happening in the US economy, and what that means for the outlook for equities, given that inflation is running well above what most people and central bankers want.

In a note on LinkedIn, the hedge fund billionaire said: “In the near term, I expect inflation will fall slightly as past shocks resolve for some items (e.g., energy) and then will trend back up towards 4.5% to 5% over the medium term.”

“I estimate that a rise in rates from where they are to about 4.5% will produce about a 20% negative impact on equity prices (on average, though greater for longer duration assets and less for shorter duration ones) based on the present value discount effect and about a 10% negative impact from declining incomes.”

Dalio said “when people lose money, they become cautious, and lenders are more cautious in lending to them, so they spend less. My guesstimate that a significant economic contraction will be required, but it will take a while to happen because cash levels and wealth levels are now relatively high, so they can be used to support spending until they are drawn down.