As regular readers are apprised, I have no “heroes,” and to the extent I revere any human beings other than myself, none of them are in the money management business.
That said, I do admire Warren Buffett (standard-bearer for adult men and women inexplicably disposed to worshipping other adults for the “heroic” feat of amassing large sums of money), for one thing: Acknowledging that he generally hasn’t the slightest clue where equities are going in the near- to medium-term, such things being completely unknowable.
With apologies to whomever they’re due, it’s helpful to confess ignorance occasionally, even if our day jobs require us to make “tactical” judgments about the direction of asset prices based on how we think hair-trigger algos and emotionally unstable, carbon-based traders might behave during a given week.
But ignorance isn’t a condition to which humans readily concede, even as the old adage tells us it’s synonymous with bliss, and even as we’re all (every, single one of us) possessed of it to a greater or lesser degree. So, we pretend to know the unknowable.
Despite being especially cruel to humanity, the 2020s have at least compelled us to drop some of our pretensions to knowledge and prescience. I can’t remember a time when so many market participants so readily admitted to being bereft of foresight.
Take Bill Gross who, bless his heart, is still penning “investment outlooks” in retirement. “We now have bear markets in most financial assets and a strong possibility of recession — duration and magnitude uncertain,” Gross wrote, in a short post published Monday on his website.
He quoted Jim Cramer. “‘There’s always a bull market somewhere,’ but I’m straining to find one now,” Gross mused, before advising patience. “12-month Treasurys at 2.7% are better than your money market fund and almost all other alternatives,” he remarked. He’s right about that. Bills (T-bills, not Gross clones), have outperformed 90% of global assets over the last six months, a threshold rarely breached in 120 years (figure below).
Goldman is Overweight cash in their asset allocation and, as Gross will attest, they aren’t alone.
BlackRock Investment Institute, meanwhile, described “a new world of heightened macro volatility and higher risk premia for both bonds and equities.” That headline-friendly soundbite comes from a mid-year outlook piece which some mainstream financial news portals quoted without links, as though it’s some kind of top secret document. (It has an all-caps “FOR PUBLIC DISTRIBUTION” stamp at the top of all 16 pages.)
I digress. BlackRock sees the end of the Great Moderation, a bold call delivered just two years too late to count as predictive. “We are bracing for volatility in this new regime,” the firm declared, adding that “central banks are rushing to raise rates to contain inflation that’s rooted in production constraints [but] are not acknowledging the stark trade-off: Crush economic growth or live with inflation.” BlackRock also warned of “sharp and short swings in economic activity,” a theme readers will recognize from countless articles published here, including Sunday’s “Markets Are Obsessed With A Term No One Can Define.”
The upshot is that nobody, not Bill Gross, not me, not you and not someone called Natalie Gill at BlackRock, knows what to expect going forward. “A higher volatility regime means even strategic allocations will likely have to be more dynamic than before,” Gill said.
Investors are staring down a daunting data docket in the coming days, and recession fears were evident to kick off the new week. US equities were under pressure and the 2s10s flattened sharply, taking that sector of the curve deeper into inversion territory (figure below).
“The spike in yields following Friday’s payrolls data appears to have had a shorter shelf life than one might have otherwise assumed — although given the compressed timeline for trading in this cycle, the quickness with which investors have moved on from the notoriously lagging indicator of economic health isn’t as surprising as it might once have been,” BMO’s Ian Lyngen and Ben Jeffery wrote Monday.
“Whether it’s as simple as the risk of overtightening that triggers a recession or as nuanced as the Fed’s adaptive response to higher consumer prices serving to improve confidence and credibility that the FOMC can successfully battle inflation — it’s still a flattener,” they added.
In his latest, Deutsche Bank’s Aleksandar Kocic said that “no matter how hawkish or dovish the Fed might be in the near-term, it seems the long-end might resist moving materially higher, either on the back of a higher probability of recession and toned-down Fed, or due to an overly hawkish Fed that would engineer a recession through rate hikes.” He also mentioned the possibility that “additional complications with energy supply in Europe could trigger a bullish knee-jerk reaction in US rates.”
About the only thing anyone can say is that one way or another, it all comes back to inflation. Gross, despite being unable to identify any bull markets, was able to point to what he called “responsible culprits” for America’s inflation problem. They include D.C. deficits, the Fed (who Gross called “ignorant”) and “a willing investment public characterized by ‘meme apes.'”
As a Bloomberg columnist pointed out over the weekend, there’s one other factor behind the inflation the world is experiencing: the end of, or at least slow demise, of globalization. Brexit, Trump, Putin’s invasion of Ukraine, the deepening clash between Team Democracy and Team Autocracy. Call it what you will, but the Great Moderation we enjoyed for twenty years thanks largely in part to a high degree of global economic integration appears to be one for the history books. I don’t know what comes next, but we should all hope it doesn’t look like the 1920s and ’30s.
I think we could be heading back to revisit the 20’s- 30’s period. It seems like the West bought on to this fantasy that if China and Russia could be integrated into our system than eventually they would open their societies to become democratic. It did seem that in the 90’s the world was heading in that direction. But unfortunately it seems now with Xi and Putin in power that they have turned the power dynamics of their countries back to the way it was in the 50’s. But the West refuses to believe it. If the citizens of Europe freeze this winter because Putin shuts off the gas and oil, I can see Russia putting up a wall again.
H-Man, Occam’s Razor suggests it is simply the business cycle and when it runs it course, those who have powder will hunt and those who don’t will go hungry.
I love the willful ignorance of the “experts”: Germany does not have “DC deficits”, the ECB is not the Fed, and blaming retail investors (gamblers) for inflation is as ad-hominem as Biden’s silly misdirections about corporate price gouging. Inflation and a subsequent Recession are circumnavigating the globe much like this covid pandemic.
I’m actually not surprised that a former super power with nuclear weapons starting a land-war in Europe is a catalyst for a Recession (perversely triggered by sanctions and Inflation)… I just hope populists (and isolationists) don’t get much real power with their knee-jerk reactions as I’d hate to see another 1914 or 1939.