An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today. Predicting the economy is one of the most difficult tasks to undertake in the financial world and the results are usually wrong. Nevertheless, comments from economists gathered investors’ attention during the past months. There is a robust agreement, that the global economy is heading for a recession. The simplest indication in the US is the stubbornly inverted yield curve, which has a 100% success rate, that a recession will occur after an inversion. Due to the fact, that the last two instances occurred from February to November 2000 and from February 2006 until May 2007, dates that preceded hair-raising downturns in equities, bad memories return and the crowd fearing a similar debacle is growing solidly. Additionally, a good recession indicator in the US is the year-on-year change of new home sales, which stands at minus twenty percent this year. Together with the current restrictive monetary policy, a recession in 2023 is baked in the cake. In a strong contrast, Federal Reserve Chairman Jerome Powell is convinced, that the US economy is strong and that it can easily afford the draconian rate regime he is currently advocating. He even believes, that with the current setup, the FED can orchestrate a soft landing, meaning the economy will slow, but will not have to endure a recession. Unfortunately, the FED is full of economists. As mentioned in previous comments, inflation is also a result of the current supply side issues. In fact, higher interest rates reduce investments, and therefore supply. The current interest rate policy could turn out to be long term inflationary. While the US Central Bank confirmed that it will remain stubborn in fighting inflation, investors will have to wait for clear damage appearing in economic data to get confident to buy bonds. For equities, it would mean, that we will enter a short period of “good news is bad news”, where equities tend to rebound, until bad news turn out to be so bad, that investors throw in the towel, usually during the last leg down in a bear market. The most worrying part of the stock market is currently the NYSE Fang Plus Index, which represents the largest growth companies in the US. It is a flabbergasting example how the so-called “smart money” got stuck in a trade and now runs for the exit doors, all together at once. In our view, this is just the beginning of a great rotation in asset allocation, which has started this year and will continue in the years to come. Simply speaking, it is the return of value outperforming growth. Due to the FED meeting, the market got a bumpy start into the month of November and the risk-off trade dominates once again. There is no doubt, that monetary policy will leave its marks on economic data, the question is how soon.
top of page
bottom of page
Comments