Kolanovic Warns On War, Policy Risks

“The most recent increase of geopolitical and monetary policy risks puts our 2022 price targets at risk,” JPMorgan’s Marko Kolanovic said Friday.

For most of 2022, JPMorgan maintained a generally constructive, if increasingly cautious, view, predicated in part on the notion that central banks wouldn’t commit an egregious policy error while attempting to tame the hottest inflation in a generation.

With the Fed bent on what some, including Jeremy Siegel and Jeff Gundlach, worry may be an overzealous rates path, that notion looks increasingly tenuous. In fact, it’s not clear that Jerome Powell would view a deep recession as a mistake at all. Officials are avowedly prepared to countenance a downturn if it means slaying the inflation dragon. The only question is how deep.

“We’ve been tightening now for a while and the impact… is going to be cumulative into a recession,” Gundlach said last week. “I do think the Fed should be slowing down on these rate hikes.” For his part, Siegel said the Fed is now “talking way too tough.”

For Kolanovic, the risks of a policy mistake are rising materially. “We are increasingly worried about central banks making a policy error,” he said Friday, adding that JPMorgan is also wary of geopolitical tensions following “unprecedented” damage to the Nord Stream links, which European officials say was likely purposeful — the product of Russian “sabotage.”

“Since 2018 we have seen several errors that increased macroeconomic volatility,” Kolanovic lamented, citing over-tightening in Q4 of 2018, too much easing last year which culminated in “the crypto/NFT/innovation bubble” and “now again in 2022 with unprecedented tightening into a slowing economy and the war.”

The cracks, Marko cautioned, are starting to show, particularly in rates and FX. If central banks do commit an error, intentionally or otherwise, it’d have “global ” consequences, Kolanovic warned, adding that “even if a mistake is avoided, a delay will likely be introduced for the global market and economic recovery.”

As to the war, Kolanovic likened the Nord Stream escalation to the Cuban Missile Crisis. “The ramifications of this event are hard to fully assess,” he said, noting that tail risks have “significantly increased.” It’s now “very difficult to de-escalate” in the near-term,” he added.

The bottom line from Kolanovic is that the bank’s targets “may not be realized until 2023” or later, depending on when policy and geopolitical risks abate.

“Most of the risks in 2022 are a result of policies,” he went on to write, citing the “escalation of geopolitical tensions and violence, mismanagement of the energy crisis, damaging (instead of nurturing) of global trade relationships and supply chains, fanning internal political divisions and more.”

At the end of the day, Marko sighed, “it all amounts to throwing rocks in glass houses.”


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14 thoughts on “Kolanovic Warns On War, Policy Risks

  1. Bad news, bad news, bad news. It is what it is. Markets are not looking at all favorable for the next year. It will be helpful if Russia doesn’t use atom bombs on the battlefield, and when the war in Ukraine finds some form of resolution. Maybe by January of 2024 we’ll begin to see some of the mess getting picked up and set straight?

    Lehman was a huge mess, but with a different scope. This thing we’re looking at today involves the entire civilized world and its markets. At the moment, all I can do is take a deep and throw up my hands – and realize that I’m going to have to be very patient.

  2. Contrarian indicator for me. :/ Sorry.

    I am buying stocks that have defensible double digit annual growth over a 3-5 year time horizon with 4-5+% free cash flow yields and moats.

    I also have a longer term time horizon that is a huge competitive advantage imo.

    Is Powell Bernanke? I think not……………………………….. I can’t believe the Fed is not shaking in their boots. Inflation is not going to be an issue in 6-9 months whereas an ’08 dislocation will be felt for a decade.

    Even if he is Bernanke a lot of the names I am buying are doubles in 4-6 years.

    I don’t buy the “market” I buy stocks.

    1. It’s a ride … or you might call it a jaunt through the fun house. I enjoy it. I don’t get cocky about it because I was bitten on the fanny a few times when I was younger. In recent years, holding small-cap tech or fintech for 12-24 months entertains me pretty well.

    1. Hmmmmmmmmmmm

      Do you really think his prior calls were based on stubbornness?

      Maybe my memory is selective but it seems for a while now his calls have not been great.

      I don’t see anything in this latest that is “new”. That many stocks were already pricing this in.

      Feels like reading last month’s paper today………………………..

      Personally, he is just not all that insightful. But few on the sellside are. :/

  3. IMHO The fed needs to strike the right balance between what they say and what they do. They can continue to raise if they talk a little less hawkish. Clearly hawkish talk and 75bp raises will lead to problems.

  4. With Kolanovic (finally) rolling over, I seriously have to think about going long on the market. Hell, if Tom Lee joins him (he won’t) then it is time for the market to turn up for 10-15% jaunt.

    To be fair, Kolanovic had some great calls during the long bull market, including some periods in which his forecasts for pullbacks were timely. But he seemed not catch on to either the regime change or its ramifications. His reasoning for the change seem cosmetic.

  5. H-Man, somewhat ominous that K seems to be throwing in the towel. The market will eventually rebound, as it has done in the past, but when it rebounds you don’t want to be a pauper with no powder.

  6. Still heading to 12 P/E. Margin calls are just getting started. When we start hearing people are ditching stocks in their 401(k)s we may have hit bottom.
    S&P500 at 2200 is looking feasible.

  7. I think we need some serious training in risk management – if investors understand PMBOK risk management module, we’d have better dialogue and possibly outcomes

  8. Spent the morning reading all about LDIs and mounting credit risk. Given the elevated inflation readings from, well, everywhere, I think the Fed is desperate to avoid a BoE-style pivot. It has to remain its inflation-fighting credibility, but it doesn’t want to precipitate a run on the global financial system. A slow-ish unwind of the leverage that has built up in the system since the GFC would be its Goldilocks scenario. Which suggests to me it may take its foot off the gas a bit in November, opting for a 50bps hike instead of 75 while hoping for the best, on both the inflation and global systemic-risk fronts.

NEWSROOM crewneck & prints