Why The Fed May Have To Relent, According To Marko Kolanovic

"Until late summer, we thought corporate and consumer resilience [would] be able to withstand the significant increase of interest rates, wealth destruction and global geopolitical uncertainty," JPMorgan's Marko Kolanovic said Wednesday, explaining what, until late September, was a generally constructive outlook on risk assets, including stocks. Two months ago (to the day), Kolanovic turned decisively cautious, citing, among other things, the risk of policy mistakes and geopolitical escalations

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6 thoughts on “Why The Fed May Have To Relent, According To Marko Kolanovic

  1. I wonder if there has ever been a time where the outlook for a recession has been as clear as it is now, and at the same time the stock market has been as bullish as it has been recently.

    I guess the assumption is that we live in an inflationary world. The Fed must start printing money again, sooner rather than later, otherwise the entire economy will break.

    Although stocks may dip now, they will be MUCH higher two years from now (e.g. SPX 8000). So if you can simply wait it out, you will be well rewarded.

    I don’t know how the Fed is supposed to control inflation, if they can’t also control leverage in the economy.

    1. Yeah, I think it goes back to a combination of the dynamics described in “The Tragedy Of America’s $3.5 Trillion In ‘Extra’ Savings” and the ones above that Kolanovic is describing. The wealthy have done very well the past couple years. If the Fed is forced to cut interest rates due to some event even in the face of continued inflation or solid employment, the sky is the limit for the market. All that money will come flooding back in and I think it’ll be in search of solid companies (e.g. big tech) and real estate. I’d bet that the more speculative companies that have dropped 75%+ will have a much longer road back and many will still face bankruptcy.

      Longer term, I think we are going to get whiplash from interest rates going up and down rapidly over the next decade as the Fed swings between trying to prevent economic collapse and fighting inflation. The only way I see us avoiding that is a significantly more progressive tax structure and a national housing policy, but I don’t see either of those two things happening.

  2. Other than housing (admittedly not an insignificant sector) and various uber-speculative plays like crypto, SPACs, and 30X revenue stocks, where do we see severe pain or unbearable stress in the US economy? I mean, severe and unbearable to the Fed?

  3. H-Man, I agree with Marko there will be a swoon but not this year or Q1 23. A better time candidate is Q2 or Q3 for the swoon when the earnings picture will be very clear and gloomy while inflation will appear to be very sticky with the market wondering how many 50 point bumps will it take. As we all know, it is all a matter of timing.

  4. Seems likely to me the Fed will continue to hike methodically, albeit at smaller increments, until a market forces them to pivot. The Fact the Mr. Kolanovic has turned more cautious and sees a re-test of recent lows brings the view of many prominent analysts into somewhat consensus for 2023, higher rates and a hit to corporate earnings should provide fertile ground for more volatility, probably exacerbated by CTA and automated strategies. I personally expect we will breach recent lows in stock indices but I am betting longer duration US bonds have bottom here, recession fears and reality should dominate the narrative and create dispersion among companies and sectors as we see who gets hit harder. Anyway, I am not deploying cash in any meaningful way until the Fed actually pivots, nothing wrong with patience, cash and bonds the rest of 2022.

NEWSROOM crewneck & prints