Che recessione ci attende?

Ricordate il “soft landing”? Ricordate il dibattito tra “soft” ed “hard” landing?

Il dibattito era al centro dell’attenzione nel primo semestre, perché fino all’estate tutte le banche di investimento sostenevano la visione delle Banche centrali, secondo la quale “ce la faremo a frenare l’inflazione senza provocare la recessione”.

Oggi, come dice El Erian nell’immagine che apre il Post, una “recessione profonda” potrebbe essere persino, per tutti quanti noi, la migliore opzione che ci è rimasta.

Ed infatti tutti hanno cambiato idea, negli ultimi mesi: tranne Recce’d che era già più avanti, e da anni. Noi eravamo “contrarian”, fino a qualche mese fa, oggi siamo diventati “il leader della maggioranza”.

Nessuno oggi utilizza più l’espressione “soft landing” e le Banche centrali, tutte, hanno già promesso al pubblico che “ci sarà da soffrire”.

Ben arrivate! Era ora!

Noi avevamo su questo argomento le idee chiarissime già nel 2021, e lo avevamo reso pubblico anche qui nel nostro Blog.

Moltissimi nostri lettori, però, si affidano ancora alle vecchie Reti di promotori finanziari, che oggi si fanno chiamare wealth managers e personal bankers, e che ai loro Clienti hanno fatto perdere parecchi soldi nel 2022 mantenendoli su posizioni totalmente sbagliate, posizioni che nel corso del tempo erano state giustificate prima con il tema della “inflazione transitoria” e poi con il tema del “soft landing”.

Per tutti questi investitori, è utile ancora oggi rivedere, e correggere, le aspettative sul futuro delle economie. Cosa che noi aiutiamo, in questo Post, selezionando e ripubblicando due articoli dedicati proprio a questo argomento.

Argomento che, come leggete qui sotto, nell’ultima settimana ha portato persino le Nazioni Unite a lanciare un allarme, accompagnato dalla richiesta, a tutte le Banche Centrali, di rallentare nella manovra di rialzo dei tassi di interesse. Ragione ulteriore per un approfondimento del nostro tema.

L’argomento è, ovviamente, di massima attualità anche per le banche di investimento: Citigroup una settimana fa ha rivisto al ribasso il proprio target per la Borsa di New York, motivando questo taglio proprio sulla base delle elevate probabilità di una severa recessione.

Nel primo dei due articoli che abbiamo selezionato per questo Post, leggerete l’intervista di Marketwatch ad un noto gestore di portafoglio, che espone una visione di quello che ci aspetta dall’economia molto vicina a quella di Recce’d.

Ritorneremo anche in altri Post, sui temi di questa intervista. in modo particolare, quando tratteremo della prossima stagione delle trimestrali delle Società quotate, e commentando la strategia di gestione dei nostri portafogli modello.

Keith McCullough, founder and CEO of Hedgeye Risk Management, isn’t one to mince words about financial markets, the Federal Reserve or the economy.

Right now he has a few less-than-charitable things to say about how the Fed’s rate hikes have ground up stock and bond investors.

His investment-research firm’s economic models turned bearish on stocks and bonds at the beginning of 2022. Prices have since tumbled, but McCullough is still bearish. He’s now steering investors to defensive positions primarily in cash, the U.S. dollar, gold and income-producing equities.

McCullough is preparing investors for the painful recession he expects for both Wall Street and Main Street in 2023. To anyone expecting the Fed to realize its rate increases have been excessive and rescue the markets, McCullough is blunt: “There’s no dovish pivot,” he says.

Even if the Fed were to relent, McCullough says the damage is done. “They’re far too late,” he says of the Fed. “Just like it was impossible for them to stop inflation, it’s impossible for them to stop the pending U.S. corporate profit recession or the mainline recession.”

In this recent interview, which has been edited for length and clarity, McCullough outlines his base case for the U.S. economy and the financial markets going into 2023, and advises investors to take shelter from a coming storm many of them have never seen.

‘The recessionary economic data keeps getting worse.’

MarketWatch: In a MarketWatch interview last April, you said “the Fed always screws up” and predicted a bear market for U.S. stocks in the summer. That happened. What do you expect now from the Fed — learn from its mistakes or make more?

McCullough: Recession today is what “transitory” inflation was a year ago. The Fed is as wrong on recession risk as they were on inflation.

I’m about as bearish as I’ve been since 2008. Instead of the economy having a soft landing, I think the landing is going to be hard. The recessionary economic data keeps getting worse, not just in the U.S. but in Europe as well.

Free money forever created behavioral problems and a behavioral bubble for the markets and investors. You believe you’ll have unlimited access to easy money and your behavior, whether you’re building profitless growth companies through storytelling or cryptocurrencies that also are just stories. You’re coming from the mother of all behavioral bubbles that now will be addressed with tighter money. When you’re printing money and the economy is accelerating to the fastest growth rate ever, you’re going to have the mother of all bubbles. Now, GDP is going to slow to zero, and you get the opposite.

MarketWatch: A hard landing for the economy and an economic environment echoing the 2008 financial crisis is a pretty damning verdict. You’re not in the perma-bear camp with some forecasters, so what are you seeing now to have such a pessimistic outlook?

McCullough: On a lot of levels it’s worse now than in 2008. If 2008 was about Wall Street collapsing on itself, on all its conflicts of interests and lies, this one is more about Main Street. Main Street is broke. Main Street is taking all this inflation into their cost of living. Main Street has the highest credit-card interest going back to the 1990s. It’s way worse than 2008 on that basis. If you’re trying to pay your bills with credit, it’s getting worse and worse. And then they’re going to lose their jobs. Labor collapsing is always the last thing to go down. We’re right on the cusp of the labor cycle going the wrong way.

That’s what’s going on right now. GDP and profit growth are both going negative. The Fed is going to see all of that and have to change. The big screw-up people will have is that the minute they see Fed dovishness, they’re going to buy stocks and crypto. Then they’re going to realize they’re in a recession, which is an entirely different setup from what got those bubbles to begin with, which was unlimited easing and fiscal support plus GDP growth.

We have economic deceleration irrespective of what the Fed does. It’s impossible for the Federal Reserve to stop gravity. They’re far too late. Just like it was impossible for them to stop inflation, it’s impossible for them to stop the pending U.S. corporate profit recession or the mainline recession.

MarketWatch: It isn’t just the Fed that could miss the recession signs until it’s too late. Stock investors as well might find themselves on the wrong side of the tracks.

McCullough: The Fed first has to realize that what I’m talking about is the high-probability event. That will take time. It’s not going to take them a month. They have to realize we’re in a recession, then make the commensurate policy pivot. Then, when the Fed does go dovish and realize we’re in a recession, that’s bad for the stock market.

The Pavlovian response is the Fed is dovish, buy stocks. That’s true if you’re not in a recession. This next recession — which could be the biggest profits recession of the modern era — will be quite an education for people who are still bullish, with the expectation that the Fed is going to save them.

MarketWatch: Many Fed-watchers and market analysts expect the Fed to pause or slow rate hikes to assess the effects of their inflation-fighting efforts. Do you see a “Powell pivot” coming?

McCullough: There’s no dovish pivot. The level of inflation is nowhere near the Fed’s target. And there’s a midterm election coming up. They’ve already established that the rate hikes are going to go right up to November. Rate hikes are baked into the cake and anybody looking for it to turn into a birthday cake for the bulls will be sadly disappointed.

An entire generation of Americans hasn’t gone through a recession. A lot of companies in Silicon Valley have never been through a recession, for example. My definition of a U.S. corporate profits recession is when the rate of change of revenue growth has gone negative and the rate of change of year-over-year profit growth has gone negative. The Federal Reserve, even if it were to turn dovish on interest rates tomorrow, will have a hard time stopping the profits recession.

When the rate of economic change is accelerating and the Fed is printing money, you buy anything that’s got a good chart and a good story. You’re going to make a lot of money until the music stops.

And it did. Now we’re seeing the opposite. The rate of change of real GDP growth and inflation are slowing at the same time. You can’t own inflation, commodities or growth now. If you’re still long pretend growth or profitless growth or crypto, I recommend prayer.

MarketWatch: Given the grim picture you’ve drawn, where are you directing investors to put their money to weather the storm?

McCullough: There aren’t many places to hide. Our biggest position in equities is utilities.Utilities is a bond proxy. We still like gold .

If you have to own stocks, we like quality balance sheets, profitable companies that have high-quality cash-flow streams. We’re short growth — all of it. We’re short all of tech. Energy stocks are levered up on the long side. I’ll take my time on that. It is a place I’m interested in buying, but currently we’re only long natural gas and solar through the Invesco Solar ETF We’re bearish on oil , copper — every major commodity other than natural gas. We’re short Europe on the equity side and on the euro . I’m in no rush to cover those shorts. The trend is down for stocks and up for the U.S. dollar .

Also Treasury bonds, but you have to wait, watch and act as the game plays out. If the U.S. 10-year Treasury breaks down below 2.95% that’s a pretty obvious green light to make long-term Treasurys one of your top asset allocations. A lot of people are trying to pick bottoms in stocks. I’m much more interested in buying Treasury bonds than anything else.

A questa utile intervista aggiungiamo le considerazioni più recenti di Nouriel Roubini, che non a caso dai media è stato etichettato come “profeta di sventura”. Come abbiamo già scritto, la nostra visione delle cose è spesso distante da quella di Roubini: in questa specifica occasione però, a nostro giudizio, è particolarmente utile leggere i sui argomenti, tanto quanto fu utile negli anni 2006 e 2007.

Come sempre nelle sue analisi, Roubini mette insieme moltissime cose, argomenti di finanza, di economia, di sociologia, insieme con argomenti che riguardano la politica, l’ambiente, ed altro.

Una lettura attenta vi permetterà, comunque, di cogliere spunti importanti, come ad esempio quello della “fiscal capture” che si lega in modo stretto al tema della “financial instability” (al quale Recce’d oggi dedica un altro Post).

Vi segnaliamo poi il riferimento al portafoglio 60/40, che le nostre Reti di promotori finanziari e private bankers chiamano “portafoglio bilanciato ad asset allocation”, del quale Recce’d ha scritto e scriverà nella pagina SCELTE DI PORTAFOGLIO.

NEW YORK (Project Syndicate)—For a year now, I have argued that the increase in inflation would be persistent, that its causes include not only bad policies but also negative supply shocks, and that central banks’ attempt to fight it would cause a hard economic landing.

When the recession comes, I warned, it will be severe and protracted, with widespread financial distress and debt crises. Notwithstanding their hawkish talk, central bankers, caught in a debt trap, may still wimp out and settle for above-target inflation. Any portfolio of risky equities and less risky fixed-income bonds will lose money on the bonds, owing to higher inflation and inflation expectations.

How do these predictions stack up? First, Team Transitory clearly lost to Team Persistent in the inflation debate. On top of excessively loose monetary, fiscal, and credit policies, negative supply shocks caused price growth to surge. COVID-19 lockdowns led to supply bottlenecks, including for labor. China’s “zero-COVID” policy created even more problems for global supply chains. Russia’s invasion of Ukraine sent shock waves through energy and other commodity markets.

Central banks, regardless of their tough talk, will feel immense pressure to reverse their tightening once the scenario of a hard economic landing and a financial crash materializes.

And the broader sanctions regime—not least the weaponization of the dollar and other currencies—has further balkanized the global economy, with “friend-shoring” and trade and immigration restrictions accelerating the trend toward deglobalization.

Everyone now recognizes that these persistent negative supply shocks have contributed to inflation, and the European Central Bank, the Bank of England, and the Federal Reserve have begun to acknowledge that a soft landing will be exceedingly difficult to pull off. Fed Chair Jerome Powell now speaks of a “softish landing” with at least “some pain.” Meanwhile, a hard-landing scenario is becoming the consensus among market analysts, economists, and investors.

It is much harder to achieve a soft landing under conditions of stagflationary negative supply shocks than it is when the economy is overheating because of excessive demand. Since World War II, there has never been a case where the Fed achieved a soft landing with inflation above 5% (it is currently above 8%) and unemployment below 5% (it is currently 3.7%).

And if a hard landing is the baseline for the United States, it is even more likely in Europe, owing to the Russian energy shock, China’s slowdown, and the ECB falling even further behind the curve relative to the Fed.

The recession will be severe and protracted

Are we already in a recession? Not yet, but the U.S. did report negative growth in the first half of the year, and most forward-looking indicators of economic activity in advanced economies point to a sharp slowdown that will grow even worse with monetary-policy tightening. A hard landing by year’s end should be regarded as the baseline scenario.

While many other analysts now agree, they seem to think that the coming recession will be short and shallow, whereas I have cautioned against such relative optimism, stressing the risk of a severe and protracted stagflationary debt crisis. And now, the latest distress in financial markets—including bond and credit markets—has reinforced my view that central banks’ efforts to bring inflation back down to target will cause both an economic and a financial crash.

I have also long argued that central banks, regardless of their tough talk, will feel immense pressure to reverse their tightening once the scenario of a hard economic landing and a financial crash materializes. Early signs of wimping out are already discernible in the United Kingdom. Faced with the market reaction to the new government’s reckless fiscal stimulus, the BOE has launched an emergency quantitative-easing (QE) program to buy up government bonds (the yields on which have spiked).

Monetary policy is increasingly subject to fiscal capture. Recall that a similar turnaround occurred in the first quarter of 2019, when the Fed stopped its quantitative-tightening (QT) program and started pursuing a mix of backdoor QE and policy-rate cuts—after previously signaling continued rate hikes and QT—at the first sign of mild financial pressures and a growth slowdown.

The Great Stagflation

Central banks will talk tough; but there is good reason to doubt their willingness to do “whatever it takes” to return inflation to its target rate in a world of excessive debt with risks of an economic and financial crash.

Moreover, there are early signs that the Great Moderation has given way to the Great Stagflation, which will be characterized by instability and a confluence of slow-motion negative supply shocks.

In addition to the disruptions mentioned above, these shocks could include societal aging in many key economies (a problem made worse by immigration restrictions); Sino-American decoupling; a “geopolitical depression” and breakdown of multilateralism; new variants of COVID-19 and new outbreaks, such as monkeypox; the increasingly damaging consequences of climate change; cyberwarfare; and fiscal policies to boost wages and workers’ power.

Where does that leave the traditional 60/40 portfolio? I previously argued that the negative correlation between bond and equity prices would break down as inflation rises, and indeed it has. Between January and June of this year, U.S. (and global) equity indexes fell by over 20% while long-term bond yields rose from 1.5% to 3.5%, leading to massive losses on both equities and bonds (positive price correlation).

Moreover, bond yields fell during the market rally between July and mid-August (which I correctly predicted would be a dead-cat bounce), thus maintaining the positive price correlation; and since mid-August, equities have continued their sharp fall while bond yields have gone much higher. As higher inflation has led to tighter monetary policy, a balanced bear market for both equities and bonds has emerged.

But U.S. and global equities have not yet fully priced in even a mild and short hard landing. Equities will fall by about 30% in a mild recession, and by 40% or more in the severe stagflationary debt crisis that I have predicted for the global economy. Signs of strain in debt markets are mounting: sovereign spreads and long-term bond rates are rising, and high-yield spreads are increasing sharply; leveraged-loan and collateralized-loan-obligation markets are shutting down; highly indebted firms, shadow banks, households, governments, and countries are entering debt distress.

The crisis is here.

Nouriel Roubini, professor emeritus of economics at New York University’s Stern School of Business, is chief economist at Atlas Capital Team and author of the forthcoming “MegaThreats: Ten Dangerous Trends That Imperil Our Future, and How to Survive Them” (Little, Brown and Company, October 2022).