‘The Most Chaotic Macroeconomic Times In Decades’

“We live in the most chaotic, hard-to-predict macroeconomic times in decades,” Morgan Stanley’s Chief Global Economist, Seth Carpenter, wrote Sunday.

Carpenter’s assessment was simultaneously remarkable and rote. Notwithstanding a few well-known exceptions, sell-side  analysts avoid the appearance of hyperbole and write as though past is usually precedent. Declarations of new epochs or impending calamity are rare and to be sure, Carpenter ventured neither. But his tacit admission that, at least in some respects, the current macro conjuncture has no modern precedent, was notable.

And yet, we’ve become numb to chaos over the past half-dozen years. Perhaps we’ve unconsciously reverted to our natural, Hobbesian condition and now recognize it for what it is: The norm for our species. I’ve been on about this before. Lamentations for our seemingly dour plight are the product of recency bias to the extent they suggest challenging circumstances are somehow the exception rather than the rule. The 80s, 90s and, to a lesser extent, the 2000s, lured countless citizens in advanced economies into a false sense of security. Historically speaking, humanity’s default condition isn’t peace and prosperity. On the contrary, it’s been a long, arduous, violent, volatile journey, with sporadic, albeit sometimes long-lasting, periods of relative tranquility. The era of hyper-globalization and Pax Americana was one of those tranquil periods, and even that characterization demands we forget multiple wars and focus entirely on developed, Western economies and their allies in Southeast Asia.

If the process of rediscovering our ageless condition has rendered us numb to chaos and inured to turmoil, weekly nods to “new” macro uncertainty and “unprecedented” ambiguity are received as clichéd and formulaic at best. Perhaps the assumption of recession is a function of the same rediscovery process.

Of course, Wall Street economists are usually reluctant to adopt a global recession as their base case, just as equity strategists are loath to predict bear markets. Contrary to what you’d be inclined to believe if you frequent web portals that revel in tabloid fodder, the Street’s “bias” against recession calls and bear market predictions is entirely rational. Consider the time frame with which analysts are concerned. It overlaps with the same historically anomalous period of relative tranquility in developed economies mentioned above. In the grand scheme of things, 70 years is the blink of an eye. Even if we were always destined to revert to a more “natural” state of chaos and turmoil, the odds of that reversion playing out in any given year were very low considering how brief our experiment in peace and prosperity was in a historical context. Throw in the starry-eyed notion that perhaps humanity had finally transcended war, famine and generalized chaos, and the better bet over any near-term horizon was relative economic stability and rising stock prices. If you don’t believe that, you can check the record: How many years since World War II were defined by a US recession? And how many by negative total returns for US stocks?

Even now, recession calls remain in the minority. Deutsche Bank was brave enough to adopt a downturn as its base case, and even went so far as to suggest groupthink needs a rethink. Morgan Stanley isn’t there yet, or at least not if “there” means embracing the inevitability of a near-term recession.

“Fears of a global recession abound, and in the past three months we have revised our global growth forecast down 170bps while inflationary pressures have risen,” Carpenter went on to say, in the same Sunday note cited here at the outset. “Avoiding a recession is our base case, but markets will have to confront the rising probability of one regardless,” he added.

The bank cited the “sharp” slowdown in China where COVID restrictions have “throttled household spending.” “The risk of an extended contraction is plain to see,” Carpenter wrote, before suggesting the back half of 2022 is likely to be “decidedly worse” for Europe as the war, high inflation and ECB tightening together constitute a daunting headwind. “While ending QE and bringing the depo rate to zero are highly unlikely to pitch Europe into recession, markets are forward looking, and the selloff in euro area sovereigns is likely just the start of tightening financial conditions,” Carpenter suggested.

His assessment of the US economy was cautious. He cited rising mortgage rates, “fairly aggressive” Fed tightening and warned that “we have yet to see the hit to consumer spending from the surge in food and energy prices.” Morgan called the world’s largest economy “strong,” but said “the direction of travel is clear.”

Carpenter explained why the bank isn’t yet calling for a global recession. Fiscal policy should help bolster China, Europe’s embargo on Russian crude should be “manageable” and although the Fed is “trying to slow the economy to rein in inflation,” US policymakers would likely be “willing to reverse course at the first sign of doing too much.”

I spoke to my oldest friend on Saturday evening. I’m considering buying some property in the city where he and I lived for more than a decade. It’s a third-tier US city, but it’s not difficult to imagine it vaulting into second-tier status over the next decade. I made a few calls in March. Everything was a bidding war — a frantic land grab.

“I’m actually excited to see rates rise,” I told him. “If it keeps going like it’s going, the market is going to cool off.”

“Yeah, these food and gas prices…,” he sighed.

“The Fed may need to engineer a recession to get it under control.” I had to stop myself. No one wants to listen to someone else recite an economics treatise. I got to the point. “I don’t think everything’s going to fall apart tomorrow or anything.”

“Yeah. It could definitely be a lot worse,” he said.