Recession Uncertainties Drive Markets back to March Lows!
April 30, 2022
Recession Uncertainties Drive Markets back to March Lows! By Mitchell Anthony April 29, 2022 Fears of recession have returned to investor’s minds over the last few weeks as inflation data has remained stubbornly high and the already heightened interest-rate environment has taken its toll on demand for housing and autos. The equity markets are now off 13% year to date as measured by the S&P 500 with NASDAQ and secular growth companies nearing a 20% correction or more. This is the same level that markets fell to just after the invasion by Russia into Ukraine and the subsequent problems with food and energy. That sell off ended after calm words from the central bank about the likelihood of a soft landing and their ability to control inflation without a deep recession. While this is still the perspective being offered by Chairman Powell investors can’t help but notice that inflation measures have not rolled over yet despite interest rates of 3% on treasuries and over 5% on mortgages. Chairman Powell is set to speak again next week. Calming words will be well received by the markets. Are the markets set to break to new lows? While this is possible it still seems that we will not get a substantial correction from what we have already seen. There is simply nowhere for money to go that leaves the stock market. It will move to cash temporarily as we have done with almost 15% of our portfolio over the last month but those yields are not high enough to keep money there of any size or substance. This has been the case for a very long period of time and Stock investors have enjoyed a very long period of stability in prices and steady growth since the 2009 recession. Interest rates have been near zero for a decade making fixed income a trap for defensive investors. There was volatility in stocks and bonds when interest rates threatened to rise to compete with money in stocks and real estate. However the return on bonds never got high enough to be a real competitor for stock market money. This volatility and associated rise in rates occurred in 2018 after substantial increases in rates by the Fed. It is occurring again now as investors worry about inflation and the 2.7% rates achievable in US treasuries today. Markets will move back to highs as they did previously once inflation is re-anchored and treasury rates return to 1-2% levels associated with the type of consumption that is expected in America. Recession and/or economic slowdown will be mild If we get a recession it will be mild but the length is hard to forecast. The US economy has a great foundation with a sound banking system and just-in-time capacity. Unemployment is very low and money is still cheap. There is very little excess capacity in the economy and no visible rot of any sort that would bring the economy to its knees. Markets today are merely discounting the possibility of much higher fixed income rates if inflation fails to subside and the attractions of bonds if rates were to rise from 3% to over 5% on treasuries. The current inflation environment could well drive that rise in rates which is highly unlikely but would be devastating for the equity market. 5% treasury rates would be strong competition for stock market money. This however is not likely as consumer demand is already waning with the current level of rates and inflation seems destined to subside and re-anchor at much lower levels. The size of the equity market correction we could get now seems to hinge on investor’s expectations for the size and length of the economic slowdown that’s on the horizon. If the slowdown is perceived to be shallow and short no further downside is likely of any magnitude for stocks. If the recession is perceived to be shallow but long, prices may have to fall a bit further to the downside but likely are still close to their lows. If the recession starts to look like it will be deep and long it’s reasonable for another 10 to 20% decline in stock prices to occur. As stated above growth equities are now testing their March Lows and now we note a break in defensive equity areas such as consumer staples, healthcare, and utilities which are all suddenly off 5 to 10% in just over a week. This is generally a sign of the end of a correction. Inflation seems set to subside As inflation continued to push higher over the last few months treasury rates rose from 1 ½% to just under 3%. However this rise in rates has stabilized as visibility of a pause in demand has become somewhat evident. Demand seems poised to fall as softness in housing and autos is beginning to materialize as 5% mortgages and auto loans take their toll on consumption. Inflation has not subsided yet but it appears to be on the immediate horizon. Food and energy prices are still high but have stabilized and demand for services is clearly on the rise both contributing to the high level of prices. Raw materials are still capacity constrained but prices have been stable for several months now. Oil has declined from $130 a barrel to $100 a barrel. This will show up in gas prices soon. However, headline inflation prints may remain high as food and energy prices remain well above prior year levels. Recession seems almost undoubtedly to be on the horizon. This is defined by two consecutive quarters of negative growth in GDP. First quarters GDP was -1.5% and while the second quarter is forecast to be positive that could well slip negative as consumption continues to wane despite record low levels of unemployment and trends in retail sales to all time high levels. The depth and length of this recession is clearly up for debate. How much overcapacity needs to be trimmed from corporate America as consumption eases? Mortgage originators are already announcing some layoffs but employment in the sector was never even close to record levels and hence layoffs will likely be mild to moderate in size. There is lots of uncertainty about what other industries in corporate America are fat with overcapacity. After careful analysis is difficult to find the fat if it exists? E-commerce giants like Amazon added more capacity recently than was needed for the near term but will likely stick with this capacity and avoid any layoffs and the associated costs of bringing those people back after a brief pause in demand. The auto and housing industries would typically be areas you would look to for rot and overcapacity however both of these areas have struggled to get capacity even close to existing demand let alone have excess capacity. It would seem that capacity will finally meet demand in those areas and inflation will subside or turn into outright deflation over the next year. Economic and Market Outlook Equities appear to have already priced in a long but mild recession that re-anchors inflation back under 3% within 1 year. Inflation is peaking now and will likely rollover as recession and the related decline in demand unfolds this quarter. Equities are positioned for a substantial rally as softer inflation data and consumption data arrive. Equity markets may tilt a bit lower as consumer demand ebbs and flows over next month but will ultimately turn higher. Fixed income areas of the market are still not high enough in yield to draw money out of equities. This could change soon if rates have another jump higher but it is still not the case. Fixed income has performed poorly as rates rose and are still not an option for defensive investors, particularly if rates rise further. As inflation subsides, the Fed will nurture the economy forward and help it avoid deep recession as inflation ebbs lower and his hands free up for policy action. Stocks are still the most attractive asset class! We remain optimistic but ready to adapt and change if needed!Fed Handcuffed after 30 Years of Freewheeling Use of Printing Press
April 13, 2022
Fed Handcuffed after 30 Years of Freewheeling Use of Printing Press April 12, 2022 By Mitchell Anthony. The Most Significant Economic Event of the Quarter was not the War While most of us thought the most significant economic event thus far in 2022 was the impact of the war in Ukraine on consumer confidence. However inflation really remains the most significant economic problem in the world today and its impact that it has on central bank’s ability to monetize our way out of economic problems. The war has only aggravated this problem with food and energy prices still rising. The Federal Reserve has had freewheeling use of its printing press for over 30 years enabled by inflationary expectations that were anchored at 2 to 2 ½%. Every single recession encountered since 1990 was easily resolved with the Fed’s ability to pour new credit into the markets and monetize our way out of virtually every economic problem we encountered over the last 30 years. With the dollar being the reserve currency of the world combined with ultra low inflationary expectations the Fed acted without hesitation to print money and run its press as often as needed. Unfortunately America has encountered what appears to be a very difficult inflationary environment that may take several years to resolve with tight monetary policy. This is contrary to the belief that was embraced by central bankers around the world in 2021 as the economy emerged from the pandemic lows. Capacity was largely the driver of inflation in the beginning as producers shut down during the pandemic and were very slow to return their factories and facilities to full-scale. At the same time demand ramped up considerably for durable goods and housing as consumer spent a tremendous amount of time at home instead of traveling. Read moreWill The War End this Economic and Market Cycle Suddenly ?
March 9, 2022
Will The War End this Economic and Market Cycle Suddenly ? 15% Equity Market Correction Takes A Bite Out of Investor Wealth and Confidence! March 9, 2022 By Mitchell Anthony WILL THE WAR END THE ASSET BUBBLE, ENTRENCHED INFLATION, AND THE RECKLESS CONSUMER? This economic cycle has been wrought with problems. At the top of the list are consumption and consumer confidence issues which have been dealt with through easy monetary policy and fiscal stimulus. However the solutions had collateral damage and we now have entrenched inflation, a consumer that spends with unbridled optimism, and asset bubbles in real estate and financial assets. Now to add insult to injury we have a wild man at the helm of a nuclear enabled superpower that is acting reckless and has declared war on the Ukraine. Historically war has destroyed consumer confidence and pushed the economy into recession quickly. However this war is like none other and the world has to fight Mr. Putin with economic warfare rather than military warfare. This has only exacerbated our problem with inflation because it has been rooted in capacity problems for raw materials of all types and now we add to it things produced by Russia and the Ukraine like oil, natural gas, and some agriculture like wheat. This war will undoubtedly effect consumer confidence along with the higher price of gasoline and soften the demand side of inflation. However the US consumer is not entirely rational and the central bank and Congress left the punch bowl out far too long and the US consumer is addicted to free money and has bankrolled much of it for continued use and spends recklessly as a result. Hopefully a more sober price conscious consumer will emerge?Read moreRussian Aggression Risks Global Recession
February 14, 2022
Russian Aggression Risks Global Recession By Mitchell Anthony February 14, 2022 Russia is seeking concessions from the Western world that will enable them to expand their socialistic culture onto previous members of the Soviet Alliance. Russia has not been successful in the democratic world that many members of the Soviet Union embraced after the 1991 breakup of the USSR. As a result they have returned to a more authoritative form of socialism. As such they have aggressively tried to re-annex former USSR Members including Georgia and the Crimea. Their next target is the Ukraine who has resisted and has sought refuge from NATO and the Western World. The Ukraine was promised entrance into NATO in 2014 after the takeover/annexation of Crimea by Russia. This promise has not been delivered as it seems that it would lead to an invasion of the Ukraine by Russia. There is a tug-of-war going on between Russia and the western world. Russia would like to see socialism return similar to the Cold War era that existed in the 80s. America and the West conversely want to see these former Soviet republics become stable productive economies with democracies running their governments. Read moreAre Stocks and Real Estate Poised for a Bust
January 26, 2022
Are Stocks and Real Estate Poised for a Bust January 25, 2022 By Mitchell Anthony The equity market has been going through an extreme period of volatility over the last few months as investors fret about whether a soft landing or a recession is on the horizon. This volatility has everyone nervous because of substantial amounts of wealth that Americans have in our financial markets. If there is a meaningful recession then markets undoubtedly will correct 20% or more from past highs. Conversely if there is a soft landing for the problems that we are having with inflation and growth than the markets will get back on a path to higher prices as soon as this becomes visible. The market is clearly worried about inflation and much higher interest rates and as a result equity prices have already fallen 10 to 15% on equities and demand for homes has softened. This equity correction seems overdone and it would seem that prices will stabilize very soon as we await more data on inflation. We have never had a lasting substantial correction of more than 10% in equity markets that wasn’t driven by a substantial economic event. We have not yet had an economic event and do not believe one is upon us now, however we do recognize we are close to the amount we are willing to lose from a previous high before making sales to protect our assets. We also recognize that the equity Market has had a substantial move over the last two years (over 50% appreciation see figure 1 &2) that must be considered when identifying a stop loss point for the equity market. We believe that it is not time to panic and sell equities aggressively and move to cash but will do so soon if selling persists. Read more