Lions, Tigers, Bears. But No Recession, No Rate Cuts

In November, we’ve seen mass layoffs, declining profit expectations and credit events. Lions, tigers, bears, oh my!

For the better part of 2022, strategists concerned about false dawns during brief periods of respite for beleaguered equities insisted that in order for stocks to trough, markets would need evidence of capitulation. And not just capitulation on the part of investors, traders and fund managers. Rather, capitulation from management in the form of serious job cuts, capitulation from company analysts in the form of slashed profit forecasts and evidence of credit events, which are generally seen as the only true testament to the “breakage” narrative vis-à-vis policy tightening.

Finally, 375bps of Fed hikes and 10 arduous months for markets later, we have what looks suspiciously like capitulation where it counts. Mark Zuckerberg’s “I got this wrong” letter to Meta employees (current and, now, former) was the defining moment for what’s been dubbed “tech austerity.” Zuckerberg’s lengthy lament felt genuine, or as genuine as it can be considering Mark’s reputation for being an android disguised as a human. Certainly, it was more heartfelt than Sam Bankman-Fried‘s tweeted apologies for FTX’s bankruptcy.

11,000 people (the number of people Zuckerberg let go) is a lot of people. 13% of Meta’s people, in fact, and when you add that figure to all of the employees laid off by other tech companies, large and small, and ongoing staff cuts across the real estate sector, you end up with — well, I don’t know, exactly. Let’s just call it a lot of people looking for new jobs. (Which, incidentally, is fine, assuming their skills are a match for the nearly 11 million openings tipped by the latest JOLTS data.)

On the EPS front, Q3 was disappointing. Just like Q2, the bar was lowered headed into reporting season, but unlike Q2, companies didn’t clear it, let alone hurdle it. Now, analysts see profits declining in Q4 (figure below).

That’s a stark turn. Just three months ago, consensus saw profits rising 5% YoY in the fourth quarter. Last week, you’re reminded, Goldman’s David Kostin cut the bank’s top-down forecast for S&P profits in 2023 to $224, representing no growth from this year.

As for credit events, the crypto equivalent of Lehman probably isn’t what most analysts had in mind. Given the nontraditional nature of the “asset” (note the scare quotes), it’s tempting to write the FTX implosion off, just like every poor sucker with an equity stake wrote it down. But I’d argue it still counts.

Some netizens, not including me, have suggested that FTX’s bankruptcy is more akin to Enron than Lehman. That may be true, or it may not be true, but I’d caution readers who aren’t lawyers against making such claims online. Post-2015, everyone believes “free speech” means anybody can say anything they want, whenever they want, about anything and anyone. That simply isn’t true. If you’re not a lawyer, it’s inadvisable to weigh in publicly with an opinion on whether FTX committed some manner of fraud. Simply put: You’re not entitled to have an opinion on that, because you’re not an attorney. That’s why I’ve been very cautious to confine my fraud allusions to crypto and DeFi as a concept and as an ecosystem, respectively. That, as opposed to making accusations about specific entities.

Even if FTX is more Enron than Lehman, it’s indisputable that Fed tightening is largely responsible for the implosion of sundry tokens and the associated drop in value locked (a measure of participation) across various DeFi protocols. When FDIC-insured savings products offered by America’s largest banks sport 3% (or higher) yields, no one would stake dollar-backed stablecoins for a smaller yield in the cryptoverse — even when there’s no risk of lost principal. (And, by the way, there are places in crypto where the risk of lost principal is not materially different from zero, even amid the chaos). So, whether it’s FTX, or Three Arrows or just 80% routs in popular coins leading to margin calls and forced selling, crypto in 2022 can be aptly described as one giant credit event.

The figure (above) shows the total market cap of all cryptoassets, including stablecoins. This time last year, the space was valued at $2.9 trillion. As of Saturday, it sat at $843 billion. Strip out Bitcoin and the total is $525 billion, down from $1.6 trillion at the highs.

None of the above is to suggest that markets have, in fact, bottomed, or that it’s all gains and glory from here. But it is to say that narratives centered around the “It’s just one CPI report” line miss the broader point.

Obviously, this week’s enormous rally across assets was overwrought, and plainly it was a reaction to October’s inflation data. Behind the scenes, though, the signposts many bears wanted to see prior to sounding the all-clear are visible. And with fund managers under-positioned (remember, nobody “has it on,” so to speak and a record overweight in cash is a de facto short), there’s certainly scope for re-leveraging when the tide turns, although I’d note that the scope for risk deployment may be limited by the proximity of year-end. (Even as there’s not much to “protect” in terms of gains for 2022.)

And yet, in the final analysis, the ultimate green light is a Fed that’s inclined to cut rates. And according to the Fed itself (and when have they ever been wrong lately?) we’re nowhere near that.

“Sentiment remains trading bullish [with] BofA FMS cash at 6.3% last month, and has created a floor for risk, but sentiment requires policy easing to be investment bullish,” BofA’s Michael Hartnett said. “We say ‘rent the pivot’ as ‘no recession, no rate cuts.'”