(Bloomberg) -- Greg Jensen,  co-chief investment officer of Bridgewater Associates, expects that equities are facing a significant drop to align them with the real economy. 

“In aggregate, the asset markets will decline from 20% to 25%,” he said in an interview with Bloomberg Television speaking with Kailey Leinz and Guy Johnson on “Bloomberg Markets.” 

“The market is pricing a decline in inflation to occur in a relatively stable economy,” he said, but isn’t factoring in the impact of higher interested rates and the Federal Reserve’s quantitative tightening. 

Jensen expects that QT and rate hikes will drive down both inflation and economic growth, and “unfortunately the inflation will be more stubborn,” resulting in higher interest rates across the curve, particularly on the long end. 

Asset prices will also fall, he said. “They need to decline,” citing a big disconnect between the financial economy and the real economy. “We’re still 25% to 30% above the normal relationship between cash flows and asset prices.”

If the Fed is forced to tighten longer in the face of stubborn inflation and an expected easing in six to nine months doesn’t materialize, he added, this will make “a tough road for assets” in which liquidity dries up as profits and economic growth are weak.

When asked how to invest in this market, he said that “you are not going to be able to totally avoid this.” For investors who are long only, Jensen advises “lowering risk and being more diversified both globally and environmentally.”

Globally, he expects the Euro area economy will contract 4% in the next 6 to 12 months, with the policy makers facing difficult choices between battling inflation and fostering economic growth.

China is facing a very “dangerous” situation dealing with the economic slowdown, debt and real estate bubble at the same time the nation is dealing with tensions over another Covid-19 outbreak and Taiwan. The fact that China does “supply side stimulus” while refusing to do the “demand side” stimulus is also a problem, he said. 

(Updates with additional comments)

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